Erie Indemnity Co (ERIE) 2015 Q3 法說會逐字稿

Good morning and welcome to the Erie Indemnity third quarter 2015 earnings conference call. I would like to introduce your host for today's call, Mr. Scott Beilharz, Vice President of Investor Relations.

Thank you, Karen, and welcome, everyone. We appreciate you joining us for today's discussion about the third-quarter 2015 results. Joining me today are Terry Cavanaugh, President and Chief Executive Officer; Greg Gutting, Interim Chief Financial Office; 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, erieinsurance.com. We will start the call today with opening remarks from Terry and Greg 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 these differences please see the Safe Harbor statement in our Form 10-Q filing with the SEC dated October 29, 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 recording is the property day 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 p.m. 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 we discuss our third quarter and year-to-date results I'd like to take a moment to acknowledge the departure of Marcia Dall. As Executive Vice President and Chief Financial Officer for the past six and a half years Marcia was an integral part of our management team. I want to thank Marcia for her efforts and wish her well in the next phase of her career.

Greg Gutting has assumed the position of interim Chief Financial Officer. Greg steps into this role as a 30-year contributor to Erie's financial operations. Greg has served as the company's Senior Vice President and Controller for the past six years and I'm gratified for the continuity and competency Greg brings to this interim role. After my comments I will ask Greg to discuss our third quarter and year-to-date results in more detail.

Erie Indemnity recorded gains in net income in both the third quarter and year to date. Strong topline growth and positive limited partnership investment earnings were the primary drivers of the improved results. Net income for the quarter was $0.94 per diluted share up from $0.90 per share in the third quarter of 2014. For the year net income per diluted share is $2.75 compared to $2.71 last year. Our strong topline growth is primarily driven by the 7.6% increase in direct written premium for the property and casualty group for the first three quarters of 2015 compared to last year. We continue to outpace Conning's industry forecast of 4% premium growth for 2015.

Erie's agents and employees are essential to our continued strong financial performance and it's our job to ensure that they have the tools, training and resources necessary to fulfill our promise of superior service. With that in mind we continue to execute on the strategic initiatives we laid down in 2014.

One of our key strategic priorities is to refresh our claims experience. Earlier this month we launched the initial release of our new claims system. This automated claims system will enhance our ability to deliver best in class claims service experience. It will reduce the time it takes to settle a claim and provide greater consistency wherever Erie's claim service is delivered. Worker's Compensation was the first line of business deployed in this system. This platform will now be used to process all new and existing workers' comp claims. Implementation of our remaining lines of business will be added incrementally beginning with personal and commercial auto in 2016.

We are also excited to be putting drones to use in the claims process. Erie Insurance was among the first wave of insurance companies to get FAA approval to use drones. Just this month we flew one for the first time to inspect storm damage to a residential roof in Pennsylvania. While the FAA works to determine proper guidelines and oversight for drones in public use we will continue to explore their value as tools for more efficient customer service, risk assessment and claims management.

In addition to improving our processes we are also focused on giving our agents and customers the products they expect from Erie. First we are pleased to announce that agents are now able to quote and write commercial products in the Commonwealth of Kentucky. With the recent rollout of commercial auto we have completed the suite of business insurance products that also includes Ultrapack Plus Business Commercial Liability and Workers' Compensation coverages. We now offer this same high-quality customized commercial insurance products to business owners in Kentucky as the personal insurance products we have provided there for the past year.

In commercial lines we expanded our custom collections clientele by adding veterinary and pet care businesses. We anticipate the same positive response from them as we've seen from our other businesses already benefiting from our custom collection suite of products.

Finally, in personal lines we've made both ridesharing coverage and our enhanced motorcycle coverage available in more states throughout our footprint and we will continue to expand these product offerings geographically through the remainder of 2015 and into 2016.

With that I will ask Greg to expand on our third quarter and year-to-date financials. Greg?

Thank you, Terry. As Terry mentioned Erie Indemnity's net income was $0.94 per diluted share in the third quarter of 2015 compared to $0.90 per share for the same period last year reflecting an increase in income for management operations. Income for management operations before taxes was $68 million, up $6 million or 11.8% over the prior year quarter. Our management margin for the quarter was 17.2% versus 16.5% in last year's third quarter. Revenue from management operations grew from $370 million in the third quarter of 2014 to $396 million in the current quarter. This $26 million or 7.3% increase over last year's quarter is consistent with the 7.5% increase in direct written premiums of the property casualty group.

Cost of management operations grew $20 million to $328 million which represents a 6.4% increase over the third quarter of last year. Commissions increased $15 million or 7.5% in the quarter driven by the 7.5% increase in direct written premiums of the property casualty group. The non commission expense increase of $5 million or 4.2% in the third quarter was driven primarily by medical and pension costs as well as higher projected employee incentive payouts based on current projected levels of profitable growth for the year. These increased costs were partially offset by a decrease in professional fees. Income from investment operations before taxes totaled $7 million in the third quarter of 2015 compared to $8 million in last year's quarter.

For the year indemnity reported a modest uptick in net income of $3 million to $145 million; on a per share basis net income is up $0.04 per diluted share to $2.75. Management operations income before taxes grew $3 million to $191 million. Revenue from management operations grew $79 million or 7.4% year to date in 2015 compared to the same period last year. Steady increases in both policies in force and premiums for policy for all lines of business for the exchange help drive these positive results. Cost of management operations for the nine months ended 2015 grew $76 million or 8.6%.

Commission expenses increased $54 million or 9.1% over the first three quarters of last year. The 7.6% increase in direct written premiums of the property casualty group and projected increases in agent incentive costs related to profitable growth were the primary drivers of increased commission. Non-commissioned expenses increased $22 million to $317 in the first nine months of the year compared to the same time last year. The primary drivers of the 7.6% increase were employee incentive costs, pension and medical costs and professional fees.

The gross margin from management operations for the first nine months of 2015 is 16.6% versus 17.5% in 2014. The margin decrease was driven primarily by increased estimated agent incentive products. Indemnity's income from investment operations on a pretax basis totaled $29 million in the first nine months of 2015 representing a $3 million increase compared to last year. Earnings from limited partnership investments were the primary contributor. Finally in the first three quarters of 2015 we paid our shareholders dividends in the amount of $95 million.

Before I end my commentary I would like to mention that we will be implementing some new accounting guidance in the fourth quarter. In February of this year the Financial Accounting Standards Board issued accounting standards update 2015-02 - Consolidation. This update changed the analysis to determine whether the reporting entities should consolidate certain types of legal entities. In accordance with the new accounting guidance indemnity is not deemed to have a variable interest in the exchange as the fees paid for services provided to the exchange no longer represent a variable interest. The compensation received by indemnity for services provided for acting as the attorney in fact for the subscribers at the exchange is commensurate with the level of effort required to perform these services. Under the previously issued accounting guidance indemnity was deemed to be the primary beneficiary of the exchange and the exchange's financial position and operating results were consolidated with indemnity.

We plan to adopt the new guidance on a retrospective basis effective with our Form 10-K filing for the period ended December 31, 2015. Beginning next quarter the exchanges results will no longer be consolidated with indemnity. This will have a significant impact on the statements of operations, statements of financial position and statements of cash flow given the size of the exchanges operations. It will not impact indemnity's net income or shareholder equity.

Now I will turn the call back over to Terry.

Thank you, Greg. As you know Erie's [above all in] service brand is the hallmark of our value proposition. It has earned us the loyalty and trust of our customers, agents, and shareholders and many accolades and awards. Recently Erie Indemnity was included in the Forbes 50 most trustworthy financial companies for 2015. Only 7% of the publicly traded financial companies considered for the list made the cut. It is the second year in a row that Erie has earned a spot on the list and like last year Erie topped the ranking for mid-cap companies.

We also received recognition from JD Power and Associates and are pleased to announce Erie took the top honors in their small business commercial insurance study for the third year in a row. Additionally we scored in the top tier in their annual household insurance study taking top honors in renters insurance segment. These accolades affirm the fact that we are accomplishing our goals. Our employees and agents are engaged, focused and executing effectively and our customers are continuing to value the products and services they get from Erie. Our results reflect Erie's commitment to our proven business model and our long-term success.

To support our purposeful and thoughtful planning, I shared the news last week that I would be retiring at the end of 2016. The long window allows us time to transition leadership and continue to focus on our strategic priorities with minimal disruption. The Board of Directors is committed to working to select a successor by the end of the first quarter 2016. That will allow careful planning, collaboration and knowledge sharing throughout the remainder of the year. I am engaged and committed to continue the great work currently underway to ensure the Erie family executes today and prepares for tomorrow. Now I will open the call for your questions.

Thank you.

(Operator Instructions)

Our first question for today comes from the line of Christopher Martin from MacQuarie.

Hey guys, congrats on the quarter --

Thank you.

and Terry congratulations on your pending retirement. I was wondering if you could go through a little further on your actual succession plans for replacing Marcia and then yourself? Will this be an internal or external review or serve a combination? If you could just go into that a little bit that would be great. Thanks.

At the current plan the board is focused on finding my successor and they are working to do that with a lens towards the internal organization. They will then make that decision and then they will follow that up with working with that person to name the permanent CFO.

Okay, great. Would you expect the search and for the future company to be served the way you guys have been running with a full stakeholder focus and not necessarily shareholder focus in the company?

I didn't quite understand the question.

Sure. So, as you have had some comments on the calls over the past few quarters or years, people were questioning whether or not management was looking out for shareholders and you said the company has been run looking at the stakeholder model and you guys have been rewarded for that from JD Power and Associates and Forbes, etc. Just wondering if you think there would be any sort of change to that or you would stay focused on what you have had?

I can't make a forward-looking projection like that. I think again the culture and the 90 years of success we have had as an organization speaks for itself. I think again it is very important that any successful organization balance all constituencies and that they are all thought of as important and if you fail on one you are probably not going to be successful. I think again our model in terms of focusing in on our customers, our agents, our shareholders and our employees as well as the community has worked well and I would believe that the board will continue to make sure that is a focus going forward.

Great. Thanks, that's all I had.

Thank you.

(Operator Instructions)

Our next question comes from the line of Katelyn Young from William Blair.

Hi, good morning. A few questions for you guys. Terry, can you comment on any auto frequency trends you can the see in the market?

I'm not sure I can comment on the market. Clearly you can listen to others. I think again we are seeing obviously more, I will call it activity, you hear about when we clearly see more miles being driven, there is a slow evolution of our customer base buying newer automobiles that are more expensive to fix. Medical costs continue to escalate and repair costs are not necessarily going down although they are mitigated by some inflationary numbers so I guess we are watching it. We are seeing an uptick. We are monitoring it and we are very vigilant to make sure that we stay ahead of the pricing game.

Okay. Great. Thank you. And then on the policies enforced (inaudible) in the third quarter relative to the first half year tracking. I was wondering if you could provide some color on this?

Again. I'm having trouble hearing you. Can you repeat that again?

I'm sorry, the policy enforced growth rates just shy of 4%. [Did you seem to] pulled back a bit in the third quarter? Sorry for the background noise.

Again, it is still a good number compared to the industry. Obviously if you get larger and have the number enforced that we have, you know, it is still a significant number and -- the absolute number is still very strong and we are managing it to make sure that we pick the right business and at the right price so that we have long-term underwriting profitability in the exchange and at the same time we recognize that the competition is getting more robust.

All right, great. Thank you. That's all I had.

Thank you.

Thank you.

(Operator Instructions)

One moment to see if we have any additional questions. I see no further questions in que. I would like to turn the conference back over to Terry Cavanaugh for closing remarks.

Thank you. Thanks again for joining us this morning. We are confident that our financial results demonstrate that we are working hard to remain well positioned for continued long-term growth and value creation. We look forward to talking to you next quarter.

Thanks again for joining us. As a reminder a recording of this call will we posted on our website erieinsurance.com after 12.30 Eastern time today. If you have any questions please call me at area code 814-870-7312. Thank you.

Thank you. Ladies and gentlemen thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.