Erie Indemnity Co (ERIE) 2015 Q2 法說會逐字稿

Good morning, and welcome to the Erie Indemnity Company second-quarter 2015 earnings conference call. I would like to introduce your host for today's call, Scott Beilharz, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Ashley, and welcome, everyone. We appreciate you joining us for today's discussion about the second-quarter 2015 results. Joining me today are Terry Cavanaugh, President and Chief Executive Officer, Marcia Dall, Executive Vice President and Chief Financial Officer, and John 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, erieinsurance.com. As we typically do, we will start call today with opening remarks from Terry and Marcia, and then we will open the call for your questions.

Before would begin, I would like to remind anyone that today's discussions 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 Form 10-Q filing with the SEC dated July 30, 2015, 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 Form 10-Q that was filed with the SEC yesterday.

This call is being recorded, and the recording is the property of the 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 today after 12:30 PM Eastern time.

Your participation on this call constitutes your consent to the recording, its 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 you, Scott, and good morning, everyone.

Before I talk about our second-quarter results, I would like to take a moment to recognize the passing of two members of our Erie family: John Peterson and Susan Hirt Hagen.

John Peterson passed away on May 30 of this year. John joined Erie in 1962 as the Company's first investment officer, and then went on to serve as Chief Financial Officer, and eventually President and CEO. After retiring in 1995, he remained with Erie, serving on the Board of Directors until 2003. John will be fondly remembered here at Erie for his personal generosity, as well as his contribution to the financial growth of the Company during his tenure.

Erie suffered another profound loss with the passing of Susan Hirt Hagen on June 15. Susan was the daughter of our Co-Founder, H.O. Hirt, and the Co-Trustee of the H.O. Hirt trusts. She was also the first female and longest-serving Board member of Erie Indemnity Company.

Susan gave tirelessly to Erie. Furthermore, her generosity of time and talent stretched far beyond our walls. She touched many across the country, as she served in her leadership positions on a number of boards of local, state and national nonprofit organizations over the years.

Susan is best remembered here at Erie for her conviction, compassion and intellect that helped form the very fabric of the Erie culture. She'll be fondly remembered, and sadly missed by all of us.

Earlier this month, Jonathan Hirt Hagen was appointed to succeed his mother as Co-Trustee of the H.O. Hirt trusts. John joins his cousin, Elizabeth Hirt Vorshek, and Sentinel Trust Company as Co-Trustee.

As you've seen from our second-quarter financial release yesterday, Erie Indemnity had a solid quarter, with strong top line growth, a modest increase in our management margin dollars, and additional earnings from our alternate asset portfolio. As a result, we reported net income per share increasing from $0.94 last year to $1.07 per share in the second quarter of 2015.

Our top line growth was driven by a 7.6% increase in direct written premium from the exchange. We are pleased with this growth in light of accounting's forecast of 3.8% for the industry this year. Our ability to outpace the industry growth speaks to both the strength of our brand, and the commitment and excellence of our agents and employees.

Regarding our strategic initiatives, we introduced three new product enhancements in the second quarter of this year that will improve the customer and agent experience. First, our improved motorcycle coverage rolled out in Pennsylvania. This is a strong product by virtue of its significantly enhanced pricing, optional first-party medical coverage, and new safety equipment and accessory coverage. This enhanced motorcycle product will allow our agents to better compete with the national and specialty characters. We will continue to roll out this product in additional states within our footprint later this year.

Second, in commercial lines, we continue to target specific business classes with what we call our custom collections portfolio. As you may recall, we initially offered this suite of enhanced products to restaurant business owners. Since the beginning of this year, the number of new restaurant policies has already surpassed the total number of new policies in all of 2014.

In the second quarter, we expanded our custom collection to include wholesalers and distributors. The expansion to the auto services class and veterinary and pet care classes are on track for roll out later this year. And third, Erie Family Life expanded its whole life portfolio by rolling out a new juvenile whole life product that provides simple and affordable coverage.

We remain committed to investing in technology to ensure we can offer the best customer and agent experience possible. As an example, we recently rolled out our enhanced online onto quote. This new streamlined mobile friendly capability will meet the digital demands of our customers, while improving the overall agent experience for responding to an online quote.

I will now ask Marcia to expand on our financial results. Marcia?

Thanks, Terry.

As Terry said, we had a solid second quarter. With net income per share on a diluted basis increasing $0.13 per share to $1.07 in the second quarter compared to the same period last year. We continue to generate strong growth in our direct written premiums from the Property and Casualty Group, which resulted in a 7.4% growth in our revenue from management operations.

Our agents helped drive solid increases in both policies in forced, and average premium per policy on all of our major product lines. We saw policy growth of 4% in both personal Lines and commercial lines, and our overall average premium per policy grew nearly 4%, as well.

As Terry said, our ability to outpace the industry growth speaks to both the strength of our brand and the commitment to excellence of our agents and employees. Our focus on enhancing our products and the investments we've made in technology to make it easier to do business are also helping to support our growth for the long term. Commission expenses increased $19 million, or 9% in a second quarter compared to last year, driven primarily by the increase in direct written premium and the increase in the estimated agent incentive costs related to profitable growth.

Similar to the first quarter, our statutory combined ratio for the Property and Casualty Group continued to be significantly better in the second quarter of 2015 compared to the prior year. The Property and Casualty Group did not have any major weather-related events in the quarter, and it had some favorable development from prior-accident year claims.

As you may recall, a large hail event in May of last year caused its combined ratio to escalate in the second quarter of 2014. And therefore, estimates for the profitability based agent incentive payouts were higher in this quarter than last year's second quarter. Non commissioned expenses increased $7 million, or 7% in the second quarter compared to last year.

Investments in technology, expenses related to our employee pension plan resulting from the continued low interest rate environment and higher projected employee incentive payouts based on the current projected level of profitable growth or the year, were the primary drivers of this increase. Indemnity's income from investment operations was $16 million, compared to $7 million last year as the result of an increase in one of our private equity limited partnerships investments this quarter. Please keep in mind, limited partnership earnings tend to be cyclical in nature and difficult to project. Finally, our strong cash flows have enabled Indemnity to pay $32 million in dividends to our shareholders in the second quarter of 2015, representing a 7.2% increase over 2014.

I will now turn the call back over to Terry.

Thank you, Marcia.

Before we take your questions, I'm pleased to announce the recognitions we received since our last call. In June, A.M. Best affirmed the A+ superior rating for the property and casualty companies. We have enjoyed a rating of A excellent or better since 1939. Furthermore, A.M. Best affirmed the A excellent rating for Erie Family Life.

Last month, JD Power released the results of the 2015 auto insurance study, and Erie received the highest customer satisfaction ranking for the mid-Atlantic region. We also continue to be ranked in the high satisfaction tier in the North-central region. Our increase in overall satisfaction was driven by improvements and policy offerings, interaction, price and in claims.

Finally, the recognition that makes us especially proud is the great rating we received on the Great Places to Work study. This rating is calculated from survey feedback from our employees, and highlights what makes their workplace culture great in areas like professional development and training, Company atmosphere, benefits and rewards. While all these recognitions are fantastic, we recognize that the true value of all recognitions is to serve as a constant reminder of how important it is for us to be above all in service.

Thank you. And I'll now turn the call over to the operator for your questions.

(Operator Instructions)

Charlie Smith, Fort Pitt Capital.

Good morning, thanks for taking the question.

I wonder if the Company has any broad thoughts with regard to both the threats and the opportunities that go with automated vehicles and cyber security of vehicles that we have been reading about a lot in the press over the past few weeks?

Charlie, we are actively researching the evolving technology in the automobile space, as well as quite frankly the homeowner space and the building space. We are on -- we're seeing some interesting opportunities in that area, as well as the sharing economy, et cetera.

So I think it is in early days to wrap our arms around what exactly that will present to us in terms of opportunity from an insurance standpoint, as well as any ultimate threat. I think the cyber piece of it, and again, relatively new in terms of again what we're hearing about those issues. And so I can have you rest assured though, that we have people both internally and we're working with external consultants to make sure that we stay on top of this issue.

Okay. I would encourage you, when you do formulate maybe a broad policy within the Company, you produce some sort of a white paper that outlines that strategy

I appreciate that feedback. We always balance again, obviously, the need to be a good partner with our customers, our agents, and the community. At the same time, making sure that we have competitive capabilities that will serve all of us well.

Okay, thanks a lot.

(Operator Instructions)

Katelyn Young, William Blair.

Thank you. I'm in for Adam Klauber. Sorry I joined a little late, sorry if you touched on these points. But just a few questions for you.

Can you just give us a little bit more color on how the homeowners and commercial business is going? Specifically just looking at the homeowners growth, 7% this year, sorry, this quarter or last quarter versus a little bit stronger in the last two years. Can you just tell us how that's going?

I'm sorry, specifically the homeowners line of business?

Yes, please.

Yes. I think we've obviously, if you've followed us and followed the industry, I think there's been a pretty strong recognition to be able to have adequate rate. And the rates have grown pretty dramatically in the homeowner line over the last several years, certainly with us and within the industry.

And I think we are now finding ourselves in a position of a better rate picture that is not requiring us to take as much aggressive rate action from that standpoint. So I think that's the primary driver to that, but I'm still very pleased with the growth number. I think we are seeing it again.

And we're also very pleased again with our strong retention number. Again, I think that the accommodation of the two, leads to a very good model.

Okay. And then what rate increases are you seeing in auto specifically?

Again, it varies by state, and actually by company and class of business. So again, we would say that the low single digits.

Okay, great. And then loss experience in autos, any increase in frequency there or do you see any changes?

We are seeing a little bit, I think our numbers would indicate it. But again, obviously, miles driven are moving up. Where we are seeing there's some concern about distracted driving and things of that nature, nothing significant. We stay on top of it, and we think we are in good shape from that standpoint.

Okay. So even with miles up, is frequency following that?

Yes, I would say that we are not seeing any big anomaly from that standpoint. And the industry is seeing the same activity.

Sure. Okay, great. Thank you. That's all I had.

Thank you.

I'm not showing any further questions in queue. I'd like to turn the call back over to Terry Cavanaugh for any further remarks.

Thank you. I'd like to thank everyone for their time this morning. As we look ahead to the second half of the year, we are on track with our strategic initiatives and I believe we are well-positioned for continued long-term operating success. Thank you for your interest, and have a great weekend.

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