Erie Indemnity Company (NASDAQ:ERIE) Q3 2023 Earnings Call Transcript

Erie Indemnity Company (NASDAQ:ERIE) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Good morning, and welcome to the Erie Indemnity Company’s Third Quarter 2023 Earnings Conference Call. This call was prerecorded, and there will be no question-and-answer session row I’d like to introduce your host for the call, Vice President of Investor Relations, Scott Beilharz.

Scott Beilharz: Thank you, and welcome, everyone. We appreciate you joining us for this recorded discussion about our third quarter results. This recording will include remarks from Tim NeCastro, President and Chief Executive Officer; and Julie Pelkowski, Executive Vice President and Chief Financial Officer. Our earnings release and financial supplement were issued yesterday afternoon after the market close 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 that may cause such differences, please see the safe harbor statements in our Form 10-Q filing with the SEC dated October 26, 2023 and in the related press release. This prerecorded call 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. With that, we’ll move on to Tim’s remarks. Tim?

Timothy NeCastro: Thanks, Scott, and good morning, everyone. Before we get into our financial results for the third quarter, I’d like to share some details around the recent announcement we made related to our approach to hybrid work. We began to return to on-site work last year, we acknowledge we would need to learn and adapt. We knew we’d likely evolve as we experiment with new ways of working following the pandemic. Now, after more than a year of working on a variety of hybrid arrangements, we’ve learned we need a more consistent approach to how and where we work. We believe it’s important to increase the opportunities for employees to work together in person to collaborate and learn from one another. This helps us build stronger bonds with our colleagues and ultimately, stronger teams.

We also know that in-person interaction is important to our business. For building the relationships vital to our business model and for upholding our service promise to customers and agents. At the same time, we recognize employees have come to value the flexibility hybrid arrangements offer. With all that considered, we landed on a balanced and innovative approach. It increases opportunities for in-person interactions while giving employees more choice over when they work remotely. Starting in January, employees and hybrid roles will be given in a lot in the 52 days to work remotely each year. Employees will work on site in our offices on days that they are not using in a lot of remote day. This revised approach will help preserve distinct relationship aspects of our business and the vibrant Erie workplaces that support our collaboration, creativity and success.

See also Top 20 Cloud Computing Companies in USA and 20 Best Residency by Investment Programs in 2023.

Q&A Session

And now let’s turn to our financial performance for the third quarter of 2023. With respect to the Erie Insurance Exchange, inflation and weather-related events continue to adversely impact our combined ratio. Our year-to-date net combined ratio climbed from 120.8% through the first 2 quarters to 121.9% by the end of September. Positive investment income was not enough to offset underwriting losses resulting in a surplus decline of 6% since the second quarter. However, we remain very strong financially with an overall surplus position of $9.1 billion. Like many other carriers, we’ve been taking rate increases to improve our profitability. These increases, along with an upsurge in customer shopping in response to rising industry rates have contributed to the 20-year high for growth in our direct written premium.

That growth, which is over 16% year-to-date, is previously supported by strong retention of 91% for personal and commercial lines combined. With that, I’ll turn it over to our Chief Financial Officer, Julie Pelkowski, for a more detailed review of our financials.

Julie Pelkowski: Thank you, Tim, and good morning, everyone. As Tim mentioned, the third quarter was similar to the first 2 quarters of this year. We are still being impacted by weather-related events across our footprint, and we continue to experience an elevated combined ratio due to inflationary pressures. That said, I am pleased to share that during the third quarter, the A.M. Best rating agency once again affirmed our A+ Superior rating for financial strength. Now let me get into the details at hand for the quarter. As I noted, weather challenges continued in the third quarter, somewhat unexpectedly. Typically, storm activity diminishes in the second half of the year, but our footprint experienced two significant wind events in the early part of the third quarter.

Catastrophe losses in the quarter also increased due to adverse loss development associated with prior storms occurring earlier this year. Non-catastrophe property claim severity continued to grow in both personal and commercial lines albeit at a more moderate rate than 2022. Personal auto severity increases of 6% in 2023 are about half the level they were in 2022, while commercial auto and homeowner severity increase remain about 10%. To combat the increase in the combined ratio, we continue to take rate increases tightened underwriting guidelines and implement strategic agency management practices. Keep in mind that our policies span 12 months, and we will see a much more significant benefit next year from those increases as they are realized.

Even with these rate increases, we are still maintaining high levels of retention, which is complementing our new business growth. For the year, we’ve increased new business premium more than 36% and total premium more than 16%. With respect to the Exchange, the insurance operations we manage, direct written premium growth for the third quarter was 17.6%, driven by substantial growth in new business premium, which grew almost 40% over the prior year. With a net combined ratio for the quarter of 124%, the Exchange’s policyholder surplus decreased to $9.1 billion, down nearly $1 billion from December 31. Now shifting to Indemnity. In the third quarter, Indemnity generated net income of $131 million or $2.51 per diluted share compared to $84 million or $1.61 per diluted share in the third quarter of 2022.

For the first 9 months of 2023, net income was $335 million or $6.41 per diluted share, compared to $233 million or $4.46 per diluted share for the same period in 2022. Operating income increased 39% or $42 million in the third quarter of 2023, compared to the third quarter of 2022. Indemnity also saw an increase in operating income of 33% or $98 million for the first 9 months of this year, compared to the first 9 months of 2022. Indemnity’s management fee revenue for policy issuance and renewal services increased $97 million or 17.7% in the third quarter of 2023, compared to the third quarter of 2022. For the first 9 months of 2023, Indemnity saw an increase of $256 million or 16.2% compared to the same period of 2022. The Management fee revenue allocated to administrative services increased $1.5 million in the third quarter and $3.5 million in the first 9 months of 2023, compared to the same period in 2022.