Erie Indemnity Co (ERIE) 2017 Q3 法說會逐字稿

Good morning, and welcome to the Erie Indemnity Company Third Quarter 2017 Earnings Conference Call. I'd like to introduce your host for today's call, Scott Beilharz, Vice President of Investor Relations.

Thank you, Glenda, and welcome, everyone. We appreciate you joining us for today's discussion about our 2017 third quarter results. Joining me today are Tim NeCastro, President and Chief Executive Officer; Greg Gutting, Executive Vice President and Chief Financial Officer; and Sean McLaughlin, Executive Vice President 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'll start the call today with opening remarks from Tim and Greg, and then we'll 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 safe harbor statements in our Form 10-Q filing with the SEC, dated October 26, 2017, and the related press release.

This call is being recorded, and 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 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'll now turn the call over to Tim.

Thank you, Scott. Good morning, everyone, and thank you for joining us. Yesterday, we reported strong results for Erie Indemnity Company. Slight gains from net income for the quarter and year-to-date resulted in earnings per share of $3.15 for the first 9 months of 2017. This is consistent with the result for the same period last year. And our management margin remains strong as we exercise prudent expense management, including our ongoing investments in technology.

Top line growth was driven by a 6% increase in the direct and assumed premiums written by the Exchange, and we continue to outpace Conning's current industry forecast of 4.7% for 2017. Furthermore, the top line growth was profitable growth. The Exchange reported a combined ratio of 96% for the first 9 months of 2017, affirming our underwriting discipline.

In a minute, Greg will give details on our financial results. But before I turn it over to him, I'd like to offer my thoughts on the hurricanes and wildfires that have devastated so many recently. Although our territories were not directly impacted, the run of severe weather is a ready reminder for us. We are partners in an industry vital to economic stability and vital to those whose lives suddenly become vulnerable. I know I speak on behalf of all of us in the Erie Family when I say our hearts and thoughts remain with those affected by these recent weather events, and we are committed to continuing our monetary support of the Red Cross in their efforts to provide aid.

Now I'll turn it over to Greg to report on our results. Greg?

Thanks Tim, and good morning. As Tim pointed out, our 2017 third quarter and year-to-date results remained strong, given our thoughtful support for our agents and employees and our commitment to provide the tools for their success.

In the quarter, net income was $59 million or $1.12 per diluted share compared to $57 million or $1.09 per diluted share in the third quarter of 2016. Year-to-date, net income is flat at $165 million for both 2017 and 2016, resulting in $3.15 per diluted share for the first 9 months of 2017 and $3.14 per diluted share for the same period in 2016.

Operating revenue in the quarter was up 5.8% to $442 million from $418 million. And for the first 9 months of 2017, operating revenue was up 6% to $1.3 billion compared to $1.2 billion for the first 9 months of last year.

Growth in the quarter and in the year reflects a steady increase in the direct and assumed premiums written by the Exchange, as both policies enforced and average premium per policy continue in a positive direction in both personal and commercial lines.

Indemnity's operating expenses increased $26 million or 7.6% in the third quarter of 2017 compared to the third quarter of last year. Year-to-date, operating expenses increased $79 million or 8% compared to the first 9 months of last year. You'll recall that approximately 2/3 of Indemnity's operating expenses are commission based. Commissions increased $16 million in the third quarter of 2017 and $44 million for the first 9 months of this year compared to the same respective period in 2016. The increase was primarily driven by increases in the direct and assumed premiums written by the Exchange as well as increased incentive costs related to profitable growth.

Noncommissioned expenses increased $9 million in the third quarter of 2017 and $35 million in the first 9 months in 2017 compared to the same period in 2016. For both the third quarter and first 9 months of 2017, primary drivers were increased costs in underwriting and policy processing, customer service, information technology and administrative related. While the underwriting policy processing and customer service expenses are tied more directly to our increase in business, overall expenses are in line with our expectations as we take deliberate action to deliver on our areas of strategic focus.

You may recall that I told you last quarter that more of our expenses will align with the Indemnity Company as we upgrade our platforms and data capabilities. With that in mind, we are very pleased with our strong operating margin. For the third quarter and year-to-date 2017, Indemnity's gross margin was 18.3% and 17.9%, respectively, compared to 19.7% and 19.4% for the same period in 2016.

Total investment income increased by $4 million in the third quarter of 2017 compared to the third quarter of 2016 and increased by $7 million for the first 9 months of 2017 compared to the same period in 2016. The increased earnings in the quarter were driven by limited partnership return, while the increase for the first 9 months was driven by increased net investment income, limited partnership returns and realized capital gains.

Finally, our continued growth and profitability has enabled us to pay our shareholders dividend in the amount of $109 million in the first 3 quarters of 2017.

And now I'll turn the call back over to Tim.

Thank you, Greg. Now I'll provide brief updates on some of the initiatives we're working on as we continue to execute our strategic focus. As a reminder, we've identified 4 broad areas that we believe support continued growth while ensuring we deliver on our promise of superior protection and service at the lowest-possible costs.

Continuing to enhance the Erie experience, identifying and adopted new sources of revenue, improving, replacing and expanding our business platforms and uses of data; and preparing for the challenges that the future holds for our workforce and that of our agents, are all areas we know present great opportunity. We continue our work in all of these spaces collectively, and we are very pleased with our ongoing progress.

Our efforts to foster ease of doing business, coupled with time-saving efficiencies and new coverage options, are receiving high marks from our agents and our customers.

In the third quarter, we further expanded our commercial online quote and application system to include greater functionality in our business insurance. This upgrade allows agents to quote a complete commercial account in real time by reducing the time it takes to get a quote from 2 days to 10 minutes. And we intentionally aligned the introduction of 2 new business classes in our custom collection suite of products simultaneously with this new functionality. This month, we added contractors and manufacturers to the suite. Both were a natural fit as we have experienced many years of profitability from these business classes, and now our agents can quote these products with greater efficiency.

Additional improvements are evident in our new claims platform. You may recall that over the last 2 years, we introduced Erie claim center, with functionality for workers compensation and personal auto. Since that time, we've incrementally added functionality for additional lines of business. And in just a few days, the final release we will be complete for all lines of business.

As we think about our product offerings and reflect on the evolving picture of customer needs, we're identifying new and innovative coverage options that best fill those needs. We continue to develop and test products emerging from the shared economy, for example.

I talked about what we are doing for our agents and our customers, but I would be remiss if I didn't mention our commitment to our employees. They are the heartbeat of this company, and it's our responsibility to provide them with the tools they need to succeed. We are taking a thoughtful look at the workforce of the future and engaging employees and agents in the conversation. Through survey participation and internal workgroup sessions, they are helping us proactively assess the workforce of the future, the workplace of the future and the future of work. This assessment and the ensuing programs will ensure that we're well positioned to meet the needs of all stakeholders in a contemporary way.

Before I end my remarks, let me acknowledge some recent recognition we've received from J.D. Power and Associates. Thanks to the dedication of our team, Erie remains in the high-satisfaction tier in the 2017 Small Commercial Insurance Study and is the highest-ranked insurer in Renters Insurance segment of the 2017 Home Insurance Study. And just this week, J.D. Power released the results of their 2017 Auto Claims Satisfaction Study. Erie, once again, scored well above the industry average, finishing third industry-wide. We're very happy to have earned these distinctions.

We were also recently recognized for our leadership and engagement around diversity and inclusion. Erie was among the top 25 companies recognized for the efforts of our employee resource groups and our diversity council. Our strong team approach for fostering greater inclusiveness in our workplace has been very effective in providing us a variety of perspectives that makes good business sense. We are both encouraged by and very grateful for the recognition we received from third parties, but we are not complacent. We recognize the need for additional investment, and we remain committed to the necessary technology improvements, data investment and product updates that will keep Erie the insurer of choice for our agents and customers, the employer of choice for our employees and the long-term investment of choice for you, our shareholders.

Thank you for your time this morning, and now we would be happy to take your questions.

(Operator Instructions)

Okay, Glenda. If there are no questions, I want to thank everyone for joining us. A recording of this call will be posted on our website, erieinsurance.com after 12:30 p.m. Eastern time today. If you do have any questions, please call me at (814) 870-7312. Thank you.

Thanks, everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program, and you may now disconnect. Everyone have a great day.