Erie Indemnity Company's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Erie Indemnity Company (ERIE)

Q1 2012 Earnings Call

May 4, 2012 10:00 AM ET

Executives

Karen Kraus Phillips – VP, IR

Terry Cavanaugh – President and CEO

Marcia Dall – EVP and CFO

Analysts

Ryan Burk – Macquarie

Presentation

Operator

Hello, and welcome to the Erie Indemnity Company First Quarter 2012 Earnings Conference.

I’d like to introduce your host for today’s conference call, Karen Kraus Phillips, Vice President of Investor Relations. Please go ahead.

Karen Kraus Phillips

Thank you, Shaun, and good morning. We appreciate all of you joining us. On today’s call, management will discuss our first quarter 2012 results and other matters related to the company’s first quarter operations.

Joining me are Terry Cavanaugh, President and CEO; Marcia Dall, Executive Vice President and Chief Financial Officer; Chip Dufala, Executive Vice President, Services; John Kearns, Executive Vice President, Sales And Marketing; and Brian Bolash, Assistant Corporate Secretary and Senior Council.

Our earnings release and financial supplement were issued yesterday afternoon and these have been posted on our website, erieinsurance.com. On today’s call, management will share important information about current and future company initiatives.

As a result, forward-looking statements may be incorporated into their comments. These forward-looking statements reflect the company’s current views about future events and are based on assumptions subject to known and unknown risks and uncertainties. These risks and uncertainties may cause results to differ materially from those anticipated as described in those statements.

For information on important factors that may cause such differences, please see the Safe Harbor statements in our latest 10-Q filing with the SEC, dated May 3rd, 2012 and in the related press release. In this call, we will discuss non-GAAP measures, you can find the reconciliation to the GAAP based results in the 10-Q.

This is call is being recorded and the recording is the property of Erie Indemnity Company. It is not intended for reproduction or rebroadcast by any other party without the prior written consent of the Erie Indemnity Company. A replay will be available on our website today after 12:30 p.m. eastern time.

Your participation on this call will constitute consent to the recording publication webcast broadcast and use of your name, voice, and comments by Erie Indemnity. If you don’t agree with the terms, please disconnect at this time.

I will now turn the call over to Erie’s President and CEO, Terry Cavanaugh. Terry?

Terry Cavanaugh

Thank you, Karen and good morning, everyone. Indemnity’s first quarter 2012 results show strong top-line growth in our management fee revenue. We also saw higher operating expenses and lower investment results.

Combined, these led to Indemnity net income per share of $0.67 compared to $0.78 per share last year. I will talk more about the drivers of our top-line growth in a minute and Marcia will cover our financial results.

But first, I want to comment on our operating margin. We recognize that our management margin declined in the first quarter compared to last year due to investments in the business and projected increases in variable agent compensation, because of strong underwriting results.

We need to invest in the business to ensure our strong value proposition remains relevant going forward for all of our stakeholders. So we’re investing in things we believe are important for the business, like service, technology, marketing, and our people.

We believe these types of investments will take dividends for customers and agents, employees and shareholders over the long-term. Indemnity is independent upon the performance of the exchanges property and casualty group for its primary source of revenue. The fee it earns from managing the operations of the exchange, while claimed losses do not directly impact Indemnity’s results, the healthy exchange that’s growing and profitable is vital to Indemnity.

In 2011, the Property and Casualty group ended the year with 108 combined ratio, driven by severe catastrophe losses. I am pleased to say that we ended the first quarter of 2012 with a combined ratio of 93%. Additionally, the exchange grew surplus again in the first quarter.

From the perspective of top line growth, we’ve added new policies and we’re taking rate increases where merited. We also continue to retain customers at high levels ending the quarter with a year-over-year retention rate of nearly 91%. Consequently, the direct written premium of the Property and Casualty group grew nearly 7%, which drove the similar increase in Indemnity’s management fee revenue.

Toward the end of the fourth quarter last year, we began to see new policy sales increase, and that has continued through the first quarter in all lines of business. Our competitive position is good, and our initiatives to generate new business are working.

In personal auto, our largest line of business, we’ve been able to gain positive momentum in new policy sales. New personal auto policies were up over the prior year quarter by more than 9%, with new personal auto premium growing more than 13%. In particular, we’re seeing good adoption of our new Erie rate lock product. It’s a great example of building a product that customers appreciate and agents can sell.

In home insurance, given the catastrophe losses of 2011, there is significant disruption in the marketplace. Insurers are raising rates and increasing deductibles and people are actively shopping.

We, too, are taking rate increases where exposure and experience support it. We’re also taking a disciplined approach to adding new home insurance customers. Our strategy is around out – in account with auto and home, applying consistent underwriting that allows us to price competitively over the long-term for the benefit of customers, agents, and shareholders.

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