Erie Indemnity Company

Good morning and welcome to the Erie Indemnity Company fourth quarter and year end 2020 earnings conference call. This call was prerecorded 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 Byhars. Please go ahead.

Scott Byhars Thank you and welcome everyone. We appreciate you joining us for this recorded discussion about our 2020 fourth quarter and year end results. This recording will include remarks from Tim DeCastro, President and Chief Executive Officer, and Greg Dudding, 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, erinsurance.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-K filing with the SEC, dated February 25th, 2021, 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 move on to Tim's remarks.

Thanks, Scott, and thanks to all of you for taking time to learn more about Erie's performance in the fourth quarter of 2020 and our year-end results. I hope you and your families are staying healthy and safe and are ready to move forward positively in 2021. Last year was unlike any other. It demanded a lot from us as individuals and as a company, and it deeply impacted how we live, how we work, and how we connect with one another. The culture of the Erie has been an incredible asset in helping us get through this together, and I'd like to extend my sincere appreciation to the nearly 6,000 employees and 13,000 licensed agents who make up our Erie family. They adapted seamlessly to the new ways of serving our customers and keeping our business thriving over the course of this uncertain and often challenging year, In March, as the threat of the pandemic became more clear, we equipped more than 95% of our employees to work from home in a matter of days. This was to keep them safe and to reduce the risk of exposure to the small number of dedicated employees whose roles require them to be in the office. I've received countless messages from members of the Erie family expressing appreciation for the actions we've taken over the past year to keep their well-being a priority. In April, we provided $400 million in financial relief for our personal and commercial automobile customers, including $200 million in policy over dividends and an overall 5% rate reduction for those policies. After the $2.5 million dividend checks were distributed, we heard from thousands of customers who responded with greeting cards, letters, and emails thanking Erie and our agents. To support communities across our geographic footprint, we provided an additional $2.5 million to agents and branch offices to support charitable work in local communities. Our agents and employees stepped up in big ways to help feed frontline workers and first responders, support local businesses, and give money to charities in need. This important work was reflected in nearly 2,000 stories shared on social media. The safety and well-being of our customers, agents, employees, and communities has been at the forefront of everything we've done in response to the pandemic. While it's not how any of us expected to spend our 95th year, this balanced and intentional approach reflects just how committed we are to our longstanding principles of service and doing the right thing. Let's move on to our fourth quarter and year-end financial results. As reported in our press release filed after the market closed yesterday, Erie Indemnity reported net income of $63 million, or $1.20 per diluted share, for the fourth quarter. Compared to the fourth quarter of 2019, that was an increase of $3 million. Greg will talk in more detail about the financial performance of Erie Indemnity Company in a few minutes, but first, I'd like to share some highlights for the year for the Erie Insurance Exchange, the insurance operations that we manage, recognizing that a healthy exchange is an integral part of Indemnity's success. Policyholder surplus of the exchange grew to $10.7 billion, up almost $1.3 billion for the year, reflecting a disciplined approach to underwriting and a sharpened focus on investments. Over the past 10 years, the exchange's surplus has more than doubled. This surplus allowed us to provide the policyholder dividend to our automobile customers that I mentioned earlier. In 2020, the exchange grew property and casualty premium 2% over 2019 to $7.6 billion. Rate reductions led to lower average premium for policy, but total policies grew by a solid 2.1%. On the claims side, our territory saw fewer catastrophic events in 2020 compared to 2019. This, along with an industry-wide reduction in miles driven due to the pandemic, led to below normal losses and a combined ratio of 93.7 compared to 105 at the end of 2019. Despite the challenges faced over the past year in the industry, the country, and the world, we are in a strong place financially and well-positioned for a successful 2021. This reflects the dedication and adaptability of the agency force and our teams in sales, marketing, underwriting, and products, who ensure that growth and production continue through the challenges. And of course, it underscores the strength of Erie's value proposition of protection and service demonstrated by our claims and customer service personnel, who stepped up to serve our customers in new and meaningful ways. I'll highlight some of the progress and accomplishments from 2020 in a few minutes after Greg provides a deeper review of our financials. Greg?

Thank you, Tim. At this time a year ago, I began our year-end discussion by saying that our strong financial performance in 2019 would propel us forward in 2020. Then a month later, our world was turned completely upside down when the COVID-19 pandemic drastically altered our everyday lives. and uncertainty of the future became the new normal. Despite the difficulty and challenge that 2020 presented, Erie delivered, and I am proud to share with you our fourth quarter and full year 2020 financial performance. Starting with the exchange, the insurance operations we manage, direct written premium growth for the fourth quarter was 1%, driven by strong growth in new business premium, which climbed just over 11%, compared to the fourth quarter of last year, while total year direct written premium grew almost 2%. I will remind you that the exchange implemented $200 million in auto rate reductions that began in July of 2020 and will extend through June of 2021. These rate reductions impacted the rate charged on new and renewal policies. With a combined ratio for the quarter of 94.4%, and the strong financial markets, the exchange's policyholder surplus grew to $10.7 billion from $10 billion at the end of the third quarter. The exchange's total year combined ratio ended significantly better compared to 2019 at 93.7% compared to 105% a year ago. Shifting our focus to indemnity, net income was $63 million or $1.20 per diluted share compared to $60 million, or $1.14 per diluted share, in the fourth quarter of 2019. 2020 total year net income was $293 million, or $5.61 per diluted share, compared to $317 million, or $6.06 per diluted share, in 2019. Operating income in the fourth quarter decreased nearly $4 million, or 5.3%, compared to the fourth quarter of 2019. Comparing year-over-year results, indemnity's operating income decreased a little over $19 million, or 5.4%. Management fee revenue from policy issuance and renewal services increased $5 million, or 1.2%, in the fourth quarter of 2020 compared to the fourth quarter of 2019, and $31 million, or 1.7%, for the total year compared to 2019. The increase for the fourth quarter and for the year were driven by an increase in the direct and assumed premiums written by the exchange. The total cost of operations from policy issuance and renewal services increased $9 million for the quarter and $51 million for the total year 2020. Commission expenses for the fourth quarter grew $6 million, while the total year commission expense increased nearly $27 million. The fourth quarter was impacted mainly by the growth in the direct and assumed premiums written. However, our total year commission expense was driven by two factors, the increase in written premium, as well as the higher agent incentive compensation. The exchange experienced a significant decrease in automobile claims frequency and related loss expenses beginning in March of 2020. That continued through May of 2020, driven by the COVID-19 pandemic. which contributed to an increase in the profitability component of the agent incentive bonuses. Turning to our non-commissioned expenses, for the fourth quarter, indemnity saw an increase of $2.5 million compared to the same period in 2019. Administrative and other expenses increased $2.9 million, primarily driven by an increase in long-term incentive plan costs as well as increased personnel costs. For the total year 2020, non-commissioned expenses grew over $24 million compared to 2019. Underwriting and policy processing costs increased $6 million. IT costs also saw an increase of $6 million, and administrative and other expenses increased $9 million. All expense categories were impacted by increased personnel costs related to more profitable underwriting results in 2020. That led to higher accruals related to incentive compensation awards. Indemnity's fourth quarter pre-tax income from investments totaled $14 million, an increase of $7 million compared to the same period in 2019. The growth was driven by an increase in net realized gains of $4 million. For the year, pre-tax income from investments decreased $7 million compared to 2019. The decrease was driven by lower net investment income compared to 2019 and impairment losses of $3 million. Finally, in 2020, we paid our shareholders dividend in the amount of $273 million, which included a one-time special dividend of $2 per share for Class A shareholders. Also in December of last year, our board approved a 7.3% increase in the regular quarterly cash dividend for both Class A and Class B shareholders for 2021. Now I'll turn the call back over to Tim.

Thanks, Greg. As we enter 2020, we were poised to deliver on several key initiatives in support of our strategic focus areas, strengthening business platforms and use of data, enhancing the eerie experience, identifying and developing new sources of revenue, and preparing the workforce in the future. The unexpected challenges presented early in the year by the pandemic could have easily upended those plans, but I'm proud to say that our employees and agents stepped up often exceeding expectations. As I've reported in previous calls, we launched and enhanced several products this year. Erie Secure Business reimagined seven legacy products into one single customizable commercial multi-parallel product. Agents can get a quote in about seven minutes, and nearly half of the policies are instantly issued without underwriting review. This is a considerable improvement from the days and weeks those tasks took with legacy products. Since the new product rollout in late 2020, Erie Secure Business has generated nearly $35 million in written premium and provided protection to nearly 15,000 businesses. Erie Express Life, a new instant issue term and whole life product, can be quoted, found, and issued during the auto insurance quote and application process without the need for a medical exam or physical physician statement. More than 2,400 policies were placed in less than four months after it was introduced in August. Erie Rate Lock, which provides customers with an option to lock in their auto rate until they've made a qualifying change, was refreshed with more competitive pricing and rolled out in 10 states. Auto conversion rates increased nearly 25% and applications were up more than 10% in those states. And Your Turn, a product that rewards safe drivers with financial benefits expanded to four additional states. More than 22,000 drivers have registered for your turn in eight states where it's now offered. Providing customers with greater digital capabilities while maintaining Erie's distinctive human touch continues to be a critical objective. The launch of our new mobile app in September was an important advancement in this area, and it's quickly gathering popularity with customers. More than 75,000 customers downloaded the app in the first three months after its launch. We also expanded our digital capabilities and created greater efficiencies with two new claims tools. Preferred method of inspection uses artificial intelligence to determine the best method of inspection for vehicles. And photo appraisal allows customers to upload pictures of vehicle damage using a mobile device. Both capabilities allow our employees and agents to work smarter and faster so they can focus on providing the human touch where and when it's needed most. The advancements made during the past year demonstrate our commitment to strengthening our competitive position, creating new sources of revenue, and meeting the challenging needs of our customers. It's also a testament to the strong relationships among our employees and agents, which have allowed us to work together seamlessly and be highly productive, even in a very different and sometimes challenging environment. The relationships we share with our independent agents are critical to our success, and our annual branch meetings have been an important opportunity to recognize and connect with our agency force for more than 80 years. In 2020, we continued that tradition, just in a different way. Nearly 4,500 agents and employees turned in to 18 live virtual events held in October. Just like we do at the in-person events, we reflected on the successes of the year and what's ahead honored award recipients, and even had a little fun. While we all missed shaking hands and catching up in person, the spirit of coming together to celebrate our mutual achievements was very much alive at each event. Before I close, I'd like to mention a couple third-party recognitions you received in the fourth quarter of 2020. In October, we received certification as a 2021 Great Place to Work. The designation from Great Places to Work Institute was based on the results of an employee engagement survey conducted in September. It showed that 93% of employees consider Erie to be a great place to work, compared to 59% at a typical US-based company. In other employer accolades, Forbes named Erie to its list of America's best large employers for 2021, ranking 395 out of 500. Erie was also named Penn State University's Corporate Partner of the Year in October, The annual award celebrates corporate partners that have demonstrated exceptional commitment in promotion and support to Penn State, excellent track records, philanthropy, and research, and active engagement of students and alumni in the workplace and the classroom. Endiri continued to exceed industry in J.D. Power's 2020 Auto Claims Satisfaction Study released in October. Our overall satisfaction score of 880 on a 1,000-point scale was eight points above the industry average. We exceeded the industry average in eight of the top 10 key performance indicator categories and scored in the top 10 for first notice of loss, claim servicing, estimation process, and settlement. While we all set out to be recognized, these recognitions are a nod to our enduring commitment to our core values, being above all in service, practicing the golden rule, and living the Erie family spirit. As we begin 2021, our 96th year in business, I'd like to once again thank our employees and agents for their dedication and resiliency over the past year, and our shareholders for their continued support and trust. The strength and stability of this company, even in uncertain times, is truly remarkable, and we couldn't do it without the confidence you place in us. Thank you all for your continued interest in Erie. I hope you and your loved ones stay well.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.