Erie Indemnity Company (NASDAQ:ERIE) Q1 2023 Earnings Call Transcript April 28, 2023
Erie Indemnity Company beats earnings expectations. Reported EPS is $1.65, expectations were $1.48.
Operator: Good morning, and welcome to the Erie Indemnity Company First Quarter 2023 Earnings Conference Call. This call was pre-recorded, and there will be no question-and-answer session following the recording. Now I’d like to introduce your host of the call today, Vice President, Investor Relations, Scott Beilharz. Your line is open.
Scott Beilharz: Thank you, and welcome, everyone. We appreciate you joining us for this recorded discussion about our first quarter results. This recording will include remarks from Tim NeCastro, President and Chief Executive Officer; and Greg Gutting, Executive Vice President and Chief Financial Officer. 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. 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 may cause such differences, please see the safe harbor statements in our Form 10-Q filing with the SEC dated April 27, 2023, and in the related press release. This prerecorded call is property of Erie Indemnity Company. It may not be reproduced or rebroadcast by any other party without the prior risk consent of Erie Indemnity company. With that, we’ll move on to Tim’s remarks. Tim?
Timothy NeCastro: Thanks, Scott, and thanks to all of you for your interest in Erie’s performance for the first quarter of 2023. Last week on April 20, we marked the 98th anniversary of our company’s founding. And a few days later, held our annual meeting with shareholders. For the first time in 3 years, we were able to hold this meeting in person, and we did so just a block from our home office, at the historic Warner Theater in Downtown Erie, Pennsylvania. Earlier this month, we also welcomed the final groups of employees returning to on-site work. This move marked the end of our pandemic-driven working arrangements, with the COVID-19 public health emergency set to expire in just a few weeks. We look forward to moving fully into a new mode of interaction and engagement as we embrace hybrid work as a model for the majority of our workforce.
Pandemic pushed the breaks on many aspects of how we live and work, while at the same time, accelerating the pace of technology and change. Additional challenges like inflation, supply chain issues, and labor shortages emerge from the pandemic and have persisted even as COVID has slowed. Many of these challenges have had a direct impact on the unusually high combined ratio for Erie Insurance Exchange. We’re continuing with a slate of intentional steps to reduce our combined ratio through a measured approach to rate increases, adherence to expense management and strict underwriting guidelines and agency profitability reviews. We’re also placing a high priority on modernizing our legacy technology platforms and investing in digital capabilities that meet customer needs and expectations.
I’ll share more about that notable progress that’s been made so far this year. But first, let’s turn to our first quarter financials. Like the rest of the industry, our combined ratio continues to be impacted negatively by the inflationary environment. That was compounded in the first quarter by an increase in the severity of weather events. Cat losses from the poor weather events experienced in the first quarter added [indiscernible] points to the combined ratio and adverse development from [indiscernible], which relate in 2022 added another 4 points to the first quarter combined ratio [indiscernible] 122.7% compared to 104.6% for the first quarter of 2022. Tomatoes severe wins and flooding have battered Kentucky and Ohio, in particular, during the first few months of 2023.
I’d like to extend my gratitude to our catastrophe claims and personal loss of loss teams as well as agents and staff working tirelessly to serve our policyholders affected by these unrelenting storms. Now I’ll turn the call over to Greg to expand on our first quarter results. Greg?
Gregory Gutting: Thanks, Tim. Good morning, everyone, and thank you for joining our first quarter 2023 earnings call. Earlier, Tim mentioned that we held our 98th Annual Shareholder Meeting earlier this week. As you know, that meeting was my last serving as Chief Financial Officer, given my retirement effective April 30. Over my 37-year career, I have been afforded many wonderful opportunities and I am thankful for all the relationships I have cultivated during my tenure. With our prior 3 shareholder meetings being held virtually, it was wonderful to have everyone attend the live event in person and get a chance to spend time with our long-term shareholders. As I begin the next chapter in my life, Julie Pelkowski will be taking over as your company’s newest CFO.
Julie has had a distinguished career at Erie, first joining our internal audit department in 1998. In 2016, Julie was named Senior Vice President and Controller, and I look forward to seeing all the great success Erie will have under her leadership. Now I’d like to share with you the first quarter results for 2023. Beginning with the Exchange, the insurance operations we manage. Direct written premium growth for the first quarter was 14.6%, driven by substantial growth in new business premium, which increased 36% over the prior year. With the combined ratio for the quarter of 122.7%, the Exchange’s policyholder surplus decreased to $9.9 billion, down $200 million from December 31. Now shifting to Indemnity. In the first quarter, Indemnity generated net income of $86.2 million or $1.65 per diluted share compared to $68.6 million or $1.31 per diluted share in the first quarter of 2022.
Operating income increased 31.1% or $26.2 million in the first quarter of 2023 compared to the first quarter of 2022. Indemnity’s management fee revenue for policy issuance and renewal services increased $70.1 million or 14.4% in the first quarter of 2023 compared to the first quarter of 2022. Management fee revenue allocated to administrative services increased $900,000 in the first quarter. Turning to Indemnity’s cost of operations for policy issuance and renewal services. Commissions increased $27.7 million in the first quarter of 2023 compared to the same period in 2022. The increases in agent compensation were driven by increases in the direct and assumed premiums written by the Exchange, slightly offset by decreased agent compensation awards.
Noncommission expense increased $17 million in the first quarter of 2023 compared to 2022. Underwriting and policy processing expenses increased $2.7 million primarily due to increased personnel and underwriting report costs. Information technology costs increased by $11.5 million, driven by increased professional fees, hardware and software costs and personnel costs. Also, administrative and other expenses increased $2.9 million in the first quarter of 2023 compared to the same period in 2022, driven by the increased personnel costs related to compensation and building occupancy costs, partially offset by a decrease in professional fees. Investment losses before taxes totaled $5 million in the first quarter. The results were primarily driven by equity and losses of limited partnerships of $10.8 million in the first quarter.
I will remind you that the limited partnership asset classes and runoff, and we continue to expect more limited and inconsistent earnings from this asset class in the future. As always, we take a very measured approach to our capital management, and we maintain a strong balance sheet. And for the first 3 months of 2023, our financial performance has enabled us to pay our shareholders over $55 million in dividends. Thank you again for your time today. And now I’ll turn the call back over to Tim. Tim?
Timothy NeCastro: Thank you, Greg. As I mentioned earlier, modernizing our legacy platforms and investing in greater digital capabilities are among our highest priorities in 2023. We’re making significant progress in several areas, but perhaps the most visible our recent updates to our claim status platform. A series of Erie redesigns were introduced last year, all influenced by agent feedback, and pros portfolio teams have been working to develop additional updates launched and merged that provide more robust claims information to agents and customers on a more intuitive platform. As 1 of our agents recently said, the updates to claim status are moving the needle towards becoming a true concierge service for customers. These recent enhancements are just the beginning and 1 example of the investments we’re making to further improve the experience of customers and agents.
In our last call, I mentioned that our online account platform, which acts as a digital self-service tool for customers is now being used by more than 1 million households. This is an important milestone because the value of this 1 tool delivers. Online account gives customers the self-service features they want and expect and that allows our customer service team and agents to spend less time filling questions about topics like billing and more time on meaningful and valuable interactions with customers. The growth of online account also creates opportunities to increase efficiency and reduce waste and expenses. Earlier this month, a paperless option for policy documents was introduced. Now in addition to paperless billing, customers can choose to access policies on demand through the platform.
With an average policy document of 15 pages and up to 97% of personal line policies being eligible for paperless, it’s easy to see the potential these capabilities have to reduce our expenses and environmental impact. Also at the heart of these enhancements is our commitment to providing the best possible service to our customers. Our goal is to ensure everyone we serve has a positive experience no matter who they are or how they’re engaging with us. These efforts continue to be affirmed through industry accolades on the heels of the first place ranking last fall by J.D. Power for Independent Agent Satisfaction among personal lines carriers. We were proud to be ranked highest in another important J.D. Power study for customer satisfaction in the 2023 U.S. property claims assessment released in February.
Erie scored 38 points higher than the industry average and jumped 30 points over 2022. These accolades are not our only gauge of our success, but they do affirm that we’re doing the right thing by our customers and agents. What’s also notable about this particular recognition is that it comes at a time when our frontline teams are facing significant talent shortages. I’d like to commend our teams in claims, customer care operations and first ones of loss for their continued commitment to being above all in service. We were also proud to recently be named to the 2023 Best of the Best lists of insurance industry for the Black EOE Journal in Hispanic Network Magazine. And for more than 10 years in a row, Erie was recognized by the American Heart Association with a National Platinum level workforce well-being award for our commitment to employee health and wellness.
These 3 recognitions are an affirmation of our continued efforts to be a great place to work for all. Before we close, I would like to wish the CFO, Greg Gutting, all the best in his upcoming retirement after an impressive 37-year career at Erie. He will certainly be missed by the company as Chief Financial Officer, and will personally be missed by many, including myself, as a valued colleague and friend. Greg is leaving us, however, in very capable hands. Julie Pelkowski will assume the CFO role on May 1, and will join me to share Erie’s financial results on our second quarter call. Until then, thank you all again for your interest in Erie.
End of Q&A:
