Erie Indemnity Co (ERIE) 2014 Q3 法說會逐字稿

Good morning and welcome to the Erie Indemnity Company's third quarter 2014 earnings conference call. I would like to introduce your host for today's conference, Scott Beilharz, Vice President of Investor Relations. Please go ahead.

Thank you, Danielle, and welcome, everyone. We appreciate you joining us for today's discussion about our third quarter 2014 results. Joining me are Terry Cavanaugh, President and Chief Executive Officer; Marcia Dall, Executive Vice President and Chief Financial Officer and Sean McLaughlin, Executive Vice President, Secretary and General Counsel.

Our earnings release and financial supplement were issued yesterday afternoon after the market closed and are available within the Investor Relations section of our website, www.erieinsurance.com. As we typically do, we will start the call today with opening remarks from Terry and Marcia and then we will open the call for your questions.

Before we begin, I would like to remind everyone that today's discussion may contain forward-looking remarks that reflect the Company's current views about future events. These remarks are based on assumptions subject to known and unexpected risks and uncertainties. These risks and uncertainties may cause results to differ materially from those described in these remarks.

For information on important factors that may cause such differences, please see the Safe Harbor Statements in our latest Form 10-Q filing with the SEC dated October 30, 2014 and in the related press release. Also during this call we may discuss non-GAAP measures. A reconciliation to the GAAP based results can be found in our latest Form 10-Q.

This call is being recorded and the recording is the property of Erie Indemnity Company. It may not be reproduced or rebroadcast by any other party without the prior written consent of Erie Indemnity Company. A replay will be available on our website, say after 12.30 PM Eastern Time.

Your participation in this call constitutes your consent for recording this publication, webcast and broadcast and the use of your name, voice and comments by Erie Indemnity. If you do not agree with these terms, please disconnect at this time. With that, I will now turn the call over to Terry.

Thank would you, Scott, and good morning, everyone. As you can see in the earnings release we continue to achieve solid results in the third quarter.

We generated net income per share of $0.90 in the third quarter, which was up $0.03 from the prior year. For the year, net income per share is up $0.30 to $2.71. This year-over-year improvement reflects strong growth in management margin as well as our investment operations.

For the exchange direct written premium continues to outpace [accountings] 2014 industry projection of 4.5%, increasing almost 9% for the third quarter and 8.5% for the year. We are very pleased with this growth in direct written premium resulting from increases in both policies in force and average premium per policy along with our strong retention rate of 90.5%.

When we talk about strong quarterly results like these, it is important to remember that these results weren't the outcome of some near-term action rather the seeds of these results were planted quarters if not years ago and took careful attention to be realized. We also know that the road to our success is paved with loyal agents, strong customer retention and providing products that consumers want and need.

Therefore we will continue to focus our investments on these interwoven priorities, helping agents be successful, finding new ways to provide exceptional service and delivering products that customers need in a manner in which they want. It should come as no surprise to those who have followed Erie for some time that it all starts with attracting and retaining a loyal agency force. Without question, our agents are crucial to the sustained success of our Company as they are the face of Erie in the communities we serve.

One way we are supporting our agents and helping them be successful is by investing in targeted marketing initiatives to increase brand awareness in the places they call home, and our efforts are working. According to a recent J.D. Power study, Erie's brand awareness has increased 25% over the past three years thanks in part to the goal local marketing initiative. We are also laying the ground work for success through technology and ongoing platform enhances.

We've had great success over the past few years with our rollout of our personal lines web based quoting system and enhancements to our commercial system and our life system. We plan to continue building on this momentum using each system and platform improvement as an opportunity to innovate and expand the capabilities of our products. We believe this kind of innovation and technology enhancement will position us for sustained long-term growth.

It also provides opportunities for productivity gains. In particular, I would like to talk about two metrics related to productivity, premium per employee and policies in force per employee. From 2009 through 2013 premium per employee has increased 24% while policies in force per employee has increased 9%.

Both metrics are particularly valuable in measuring efficiency and reflect the hard work and commitment of our employees. Even more, we were able to become more productive while achieving multiple recognitions by J.D. Power. With that, I will now ask Marcia to provide you with more details on our financial performance.

Thank you, Terry, and good morning, everyone. As Terry mentioned net income for Erie Indemnity was $0.90 per diluted share in the current quarter compared to $0.87 per diluted share in the prior year quarter, reflecting increased revenue from management operations.

In our management operations income before taxes was $62 million, up $2 million or 1% over the prior year quarter. Revenue from our management operations grew $29 million to $370 million. This represents an 8.5% increase over the prior year period and is consistent with the nearly 9% increase in direct written premium of the property and casualty group.

Cost of management operations grew $27 million, or 10%, to $308 million. Commission expense grew $21 million or 11.5%. Commission growth outpaced direct written premium growth primarily due to a projected increase in agent incentive costs. Noncommissioned expenses increased $6 million or 7% over the prior year quarter.

The increase in expenses is attributable to increased costs associated with technology, underwriting and policy processing costs. These increases were partially offset by decreased pension costs and a decrease in the employee incentive plan cost related to underwriting performance.

Income from investment operations decreased 23% to $8 million in the third quarter of 2014 compared to $10 million in the third quarter of 2013 primarily due to a decrease in limited partnership income. We are pleased with our results for the first nine months of 2014.

Indemnity's net income on a year-to-date basis is up $15 million to $142 million. On a per share basis, net income is up $0.30 per share to $2.71.

In our management operations, income before taxes grew $20 million, or over 11%, to $188 million. The gross margin from management operations for the first nine months of 2014 was 17.5% compared to 17.1% for 2013. Revenues from our management operations grew $82 million to $1.1 billion an increase of more than 8% reflecting strong growth in property and casualty premiums.

For the year, premium per policy grew 4%. In addition, our strong policy holder retention and the increase in new policies resulted in policy growth of 4.5%. Cost of management operations grew $62 million to $882 million, or 7.7%.

Commission expense grew $49 million to $587 million. Similar to the quarter, commission growth was higher than direct written premium growth in the first nine months of 2014, primarily due to an increase in agent incentive costs.

Noncommissioned expenses increased $13 million or 4.5% over the prior year period. Our noncommissioned expenses for the first nine months of the year benefited from a decrease in the employee incentive plan cost and pension costs.

Indemnity income from investment operations grew $1 million to $26 million for the first nine months of 2014. In our continued commitment to provide shareholder value, we paid dividends to shareholders of $89 million for the first nine months of 2014. Now, I will turn the call back over to Terry.

Thank you, Marcia. Now before we take your questions, I'm very proud to announce two industry recognitions we recently received.

In August, Erie was once again recognized by J.D. Power and Associates receiving the top ranking for highest in customer satisfaction with small business commercial insurance. Erie Indemnity was also named in the Barron's 400 Index which collects the most fundamentally sound and attractively priced stocks from all corners of the market. Only 6% of the publicly traded companies are included on that list, affirming the strength of our capital management strategy.

Finally, I want to give you a quick update on our expansion into the Kentucky market. Thanks to the hard work and dedication of our employees, we expect to begin writing personal auto, home insurance, personal excess life and annuity products in Kentucky in the fourth quarter of 2014. And now, I'll turn the call back over to the operator to open the line for your questions.

Thank you. (Operator Instructions) I'm not showing any questions at this time.

There being no questions, I would like to thank everyone for their time and interest this morning. As we approach the end of 2014 and look ahead, I believe we are well positioned for continued long-term growth and value creation thanks in large part to our unwavering commitment to exceeding the expectations of our customers. Thank you.

Thanks, again, for joining us. A recording of this call will be posted on our website, www.erieinsurance.com after 12.30 PM Eastern Time today. If you have any questions, please call me at 814-870-7312. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.