Erie Indemnity Q2 2024 Earnings Call Transcript

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July 26, 2024

There are 4 speakers on the call.

Operator

Good morning, and welcome to Erie Indemnity Company Second Quarter 2024 Earnings Conference Call. This call is pre recorded and there will be no question and answer session following the recording. Now I'd like to introduce your host for the call, Vice President of Investor Relations, Scott Beal Harz.

Speaker 1

Thank you, and welcome, everyone. We appreciate you joining us for this recorded discussion about our Q2 results. This recording will include remarks from Tim McCastro, President and Chief Executive Officer and Julie Pokowski, 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.

Speaker 1

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 filed yesterday 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.

Speaker 1

With that, we will move on to Tim's remarks. Tim?

Speaker 2

Thanks, Scott, and thanks to all of you for taking time to learn more about Erie's performance in the Q2 of 2024. As we reached the halfway point of our 99th year in business, I'm excited to share that we also reached a significant milestone for Erie Insurance Exchange, 7,000,000 policies in force. Our last milestone of 6,000,000 policies in force was reached in 2021 and adding 1,000,000,000 policies to our book of business in just 3 years is no small feat. To give you a sense of scale, it took our company more than 60 years to reach our 1st million and just 3 to get from 6,000,000 to 7,000,000 dollars So this recent milestone is no doubt a testament to our hardworking agency force and dedicated sales and underwriting teams. Our impressive growth in customer retention, which stands at just over 91% for personal and commercial lines combined, underscore the strong value proposition we offer.

Speaker 2

Putting service above all else is always our top priority and customers notice. That's why we hold true to the principles that have shaped our success for almost 100 years while continuously adapting for what's ahead. I'm also pleased to share that Erie ranked number 376 on the 2024 Fortune 500 List of Largest American Corporations. We 14. The 2024 list marks our 21st year in the Fortune 500 alongside some of the most well known and successful companies in the country.

Speaker 2

Here to share some insights into our financial performance for the Q2 is Chief Financial Officer, Julie Palkowski. Julie?

Speaker 3

Thank you, Tim, and good morning, everyone. Erie Insurance Exchange, the insurance operations we manage, continued to experience strong growth in the Q2 of 2024, driven by steady new policy growth and solid retention, as Tim just mentioned. In addition, incremental improvements continue to be realized from our more significant rate increases. These increases have had the most impact when addressing our profitability challenge. With these efforts, the Exchange's direct written premiums grew 20% in the Q2 of 2024 compared to the Q2 of 2023 with year to date growth through June 2024 at that similar 20% level.

Speaker 3

From a seasonality perspective, we generally see higher weather losses in the first half of the year. We saw this trend hold true as the exchange's combined ratio was 115.9% in the Q2 of 2024 compared to 118.9 in the Q2 of 2023, with catastrophic weather events contributing 16.2 points and 16.9 points in those same respective periods. Worth noting is the more significant improvement in our year to date combined ratio of 111.1 in 2024 compared to 120.8 in the 1st 6 months of 2023. In these 1st 6 months, catastrophic weather events contributed 12.7 points versus 15.7 points in the same period of 2023. We did experience an improvement in our non catastrophe loss ratio in the 1st 6 months of 2024 compared to 2023 of 72.2 points versus 73.8 points, respectively.

Speaker 3

Additionally, in 2023, higher severity drove adverse development on prior accident years, increasing the combined ratio by 2.9 points. In 2024, moderating severity trends resulted in favorable development on prior accident years, improving the combined ratio by 2 points. In summary, our rate increases are having the desired impact. And with lower weather events and moderating severity in the first half of twenty twenty four, we have seen a profitability improvement compared to the same period in 2023. Our policyholder surplus dropped slightly from $9,500,000,000 in March 2024, although we maintained a strong surplus position consistent with our December 2023 level of $9,300,000,000 as of June 2024.

Speaker 3

Shifting to the results for Indemnity. Net income was 164,000,000 or $3.13 per diluted share in the Q2 of 2024 compared to $118,000,000 dollars or $2.25 per diluted share in the Q2 of 2023. Year to date Indemnity net income was $289,000,000 or $5.52 per diluted share compared to 204,000,000 dollars or $3.90 per diluted share at this time last year. Operating income increased in the Q2 nearly 42 percent to over $190,000,000 compared to the Q2 of 2023, bringing our year to date 2024 operating income to $329,000,000 which was an increase of almost 35% compared to the first half of twenty twenty three. The main driver of these increases continues to be higher management fee revenue resulting from the exchange's significant direct written premium growth.

Speaker 3

Management fee revenue from policy issuance and renewal services increased 20.1 percent to nearly $761,000,000 in the Q2 of 2024 compared to the Q2 of 2023 and nearly 20 percent to $1,400,000,000 in the first half of the year compared to this time last year. Total cost of operations from policy issuance and renewal services increased 73,000,000 dollars or 14% for the Q2 of 2024 compared to the same period in 2023. The first half of twenty twenty four saw an increase of $154,000,000 or 16% when compared with the first half of twenty twenty three. Commission expenses continue to be the largest driver, increasing almost $69,000,000 or roughly 20% compared to the Q2 of 2023 and nearly $136,000,000 or almost 21% in the first half of twenty twenty four compared to the same respective period of 2023, again related to the substantial growth in the direct written premiums of the exchange. Non commission expenses for the 2nd quarter grew just over $4,000,000 or 2.4 percent.

Speaker 3

This was driven mainly by production costs such as underwriting reports and customer service costs, partially offset by lower information and technology spend compared to the Q2 of 2023. Year to date 2024 non commission expenses increased just over $18,000,000 or almost 6% compared to the first half of twenty twenty three. This was driven by underwriting and policy processing expenses as well as administrative and sales and advertising expenses. Technology spend was lower in the first half of twenty twenty four compared to 2023, partially offsetting these increases due to higher capitalized labor in 2024. Income from investments totaled almost $14,000,000 compared to earnings of nearly $12,000,000 in the Q2 of 2023.

Speaker 3

Net investment income was just over $16,000,000 in the 2nd quarter compared to almost $14,000,000 in the same period last year. Total investment income in the first half of twenty twenty four was $29,000,000 compared to $7,000,000 in the first half of twenty twenty three. Net investment income for the first half of twenty twenty four drove most of this improvement, contributing $32,000,000 compared to $16,000,000 last year, mainly due to a loss generated from limited partnerships in 2023 of almost 11,000,000 dollars Additionally, we generated net realized gains in 2024, while in 2023, we experienced net realized losses. As always, we take a measured approach to capital management and we maintain a strong balance sheet. And for the 1st 6 months of 2024, our financial performance has enabled us to pay our shareholders over $118,000,000 in dividends.

Speaker 3

With that, I'll turn the call back over to Tim. Tim?

Speaker 2

Thanks, Julie. Earlier in the call, I talked about our long standing commitment to being above all in service. That means treating customers with care and compassion and handling their needs quickly and effectively. It also means giving them the ability to interact with us in the ways they prefer. To do that, we need to equip our agents with the tools, resources and capabilities to ensure customers have a positive experience.

Speaker 2

Much of the work we've been doing over the 1st 6 months of 2024 has been focused on just that. We've made several enhancements to our customer and agent facing platforms and have made significant progress in our technology modernization hearing. One example of an enhancement is the added ability for agents to set up car rentals for policyholders during the first notice of loss process. Now customers don't need to make a separate call to secure a rental and it streamlines the process for our agents and first notice of loss teams. Since rolling out to Allstates in June, agents have set up nearly 2,000 rentals and they rated the ease of effort to do so at 9 out of 10.

Speaker 2

We also continue to modernize our legacy technology platforms, having successfully migrated 4 additional applications to the cloud in the first half of the year. In addition, we recently decommissioned an outdated platform for data disaster recovery and moved to a new environment. This has resulted in a notable improvements in replication and recovery times and reduced costs. Much more work is ongoing in our efforts to migrate to more modern platforms, reduce expenses and continuously improve the experience and satisfaction of our customers and agents. At the same time, we're looking at leveraging the emerging technologies and capabilities related to artificial intelligence.

Speaker 2

We recently established an AI center of excellence dedicated to exploring potential AI use cases across the enterprise, targeting implementation where appropriate based on our business and operational strategies. More than 20 use cases are currently being explored with many more in the queue. We know AI has a lot of potential benefits, particularly in improving efficiencies and reducing expenses, but we are taking a measured approach to ensure we're harnessing the power of AI responsibly and in the best interest of Erie and our stakeholders. And most importantly, to use it in a way that enhances our ability to provide the human touch rather than to replace it. Investing in technology is critical to our future.

Speaker 2

We also understand that investing in our communities is important. In April Erie Insurance awarded 24 grants totaling nearly $900,000 for non profits to help provide and expand educational programs to school age children as part of Pennsylvania's educational improvement tax credit program. And in June, we announced a $1,000,000 gift to the United Way of Erie County to help launch the organization's community schools model at Erie High School. With this funding from Erie and other community partners, United Way will hire community school directors for Erie High School and provide inside the school support that includes health, mental health, vision and dental care, clothing and personal hygiene items and expanded learning and enrichment programs. I'm also pleased to share that through our Charity Challenge golf events in Erie and Allentown, Pennsylvania, we've now raised more than $2,000,000,000 for nonprofits in those communities since 2010.

Speaker 2

This year's tournaments alone raised nearly $200,000 for 40 charities in the Erie and Allentown areas. As I close out our call for the Q2, I'd like to thank our employees and agents for their tireless dedication to Erie and our commitment to being above all in service. I'm confident in our strength and stability amid continued external pressures and I'm proud of the massive amount of work that's underway to move us into the future. Thank you as always to our shareholders for your trust and support And thanks to all of you for your interest in Erie.

Operator

This concludes today's conference call. Thank you for participating. You may now

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Key Takeaways

  • 7,000,000 policies milestone reached with over 91% customer retention, adding 1 million policies in just three years versus 60+ years for the first million.
  • Direct written premiums grew 20% in Q2 (and year-to-date) as rate increases and moderating severity drove the combined ratio down to 115.9% in Q2 and 111.1% YTD.
  • Net income rose to $164 million ($3.13/share) in Q2 2024 from $118 million ($2.25) a year ago, while operating income jumped 42% to over $190 million.
  • Investment income climbed to $29 million in H1 2024 versus $7 million last year, supporting $118 million in dividends and maintaining policyholder surplus near $9.3 billion.
  • Digital transformation accelerated with four more applications migrated to the cloud, a new agent car-rental integration, and launch of an AI center of excellence to boost service and lower costs.
AI Generated. May Contain Errors.
Earnings Conference Call
Erie Indemnity Q2 2024
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