Erie Indemnity Company

Good morning, and welcome to the Area Indemnity Company Third Quarter 2021 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.

Thank you, and welcome, everyone. We appreciate you joining us for this recorded discussion about our 2021 Third Quarter results. This recording will include remarks from Tim DeCastro, 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, yourinsurance.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 28, 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.

Tim? Thanks, Scott, and thanks to all of you for taking time to learn more about Erie's performance in the third quarter of 2021. In our last call, I discussed our plans to begin returning significant numbers of employees to our offices in September. However, as the Delta variant spread, presenting new challenges and uncertainties, we made the decision to pause those plans until January of 2022. Returning more employees back to our offices is important to our close-knit, relationship-based culture, and we're eager to do so. But ensuring the health and safety of our employees and communities while maintaining business continuity remains the top priority. One decision we did move ahead on was the historic and long-anticipated dedication of Erie's new seven-story office tower The Thomas B. Hagan Building, appropriately named for our esteemed chairman of the board, is an impressive addition to our home office campus and to the City of Erie. This occasion was delayed by 17 months due to the pandemic. However, the dedication date of September 15th was significant. It was the 68th anniversary of the day Tom Hagan joined Erie Insurance as a part-time file clerk while attending college. Tom, of course, is one of my predecessors in the CEO office and since 2007, he has served as the chairman of Erie Indemnity. Tom's influence and contributions as an Erie CEO, a businessman, philanthropist, preservationist, and historian are evident across the city, and his wisdom and leadership have helped Erie Insurance grow into the thriving company it is today. The Hagen Building is a monumental symbol of that continued growth and success, and of our hope for the future. When the building was designed, It was targeted to provide relief to expanding employee ranks, supporting our robust business growth. In the workplace reset underway, the building provides us ample space and an inspiring environment for new, safe ways to come together. We're targeting January to start the return of our workforce to on-site locations. That return is marked by greater flexibility and empowerment in deference to our relationship culture and the changing nature of work. Now let's turn to our third quarter financial results. As you saw in our press release filed after the market closed yesterday, Erie Indemnity reported a net income of $90 million or $1.72 per diluted share for the third quarter. This is compared to a net income of $89 million or $1.71 per diluted share in the third quarter of 2020. I'd now like to invite Greg Gutting to share a deeper review of the financials. Greg?

Thanks, Tim. Good morning, everyone. Thank you for taking time today to be a part of the Erie Indemnity Third Quarter Earnings Call. I am proud to be here today to share with you our strong financial performance for the third quarter and the first nine months of 2021. With that, I'd like to share with you our third quarter results. Starting with the exchange, the insurance operations we managed. Direct written premium growth for the third quarter was 3.8%. driven by growth in both our homeowners and commercial multi-parallel products. During the third quarter, the Exchange experienced an increase in frequency in auto and increased severity in both auto and property, reflecting the driving activity resuming to nearly a pre-pandemic level and the increased cost of automobiles, parts, and building supplies. The Exchange also experienced an increase in weather-related losses in the third quarter. The combined ratio for the quarter was 110.6%, which increased the combined ratio to 98.7% for the first nine months of 2021. The exchange surplus remained very strong at $11.7 billion. Turning our attention to your company, Indemnity, in the third quarter, Indemnity's net income was $90 million, or $1.72 per diluted share. compared to $89 million or $1.71 per diluted share in the third quarter of 2020. For the first nine months of 2021, net income was $243 million or $4.64 per diluted share, compared to $231 million or $4.41 per diluted share in the first nine months of 2020. Operating income before taxes decreased 1.2% or $1 million in the third quarter of 2021 compared to the third quarter of 2020. Indemnity also saw a decrease in operating income before taxes of 6.2% or $17 million for the first nine months of this year compared to the same period in 2020. Indemnity's management fee revenue for policy issuance and renewal services increased $20 million or 4.2%. in the third quarter of 2021 compared to the third quarter of 2020, while for the first nine months of 2021, indemnity saw an increase of $51 million, or 3.6%, compared to the first nine months of 2020. Management fee revenue allocated to administrative services decreased $400,000 in the third quarter and $500,000 in the first nine months of 2021 compared to the same periods in 2020. Focusing on indemnity's cost of operations, commissions increased $15 million in the third quarter and $39 million in the first nine months of 2021, compared to the same periods in 2020. The increases in commission in both the third quarter and year-to-date were driven by the growth in the direct and assumed premiums written by the exchange, and to a lesser extent, increase in agent incentive compensation. Non-commissioned expense increased $6 million in the third quarter of 2021 compared to the third quarter of 2020. Information technology costs increased by $4 million, driven by increases in hardware and software expenses, as well as personnel costs. Sales and advertising costs increased $1 million due to personnel costs. A point to note, all expense categories were impacted as it relates to personnel costs due to an increase in medical costs compared to 2020. This is true for both the third quarter as well as year-to-date, as many elective procedures were delayed in 2020 due to the COVID-19 pandemic. For the first nine months of 2021, indemnities saw an increase in non-commissioned expenses of nearly $27 million. Increases in technology costs of $11 million were driven by hardware and software costs as well as personnel costs. Administrative and other expenses increased almost $13 million in the first nine months. driven by increases in building and equipment depreciation, professional fees, and personnel costs. Underwriting and policy processing expense increased nearly $3 million, primarily due to increased personnel costs and underwriting report costs. Income from investments before taxes totaled $21 million in the third quarter of 2021 and $55 million year-to-date for 2021. which included income from limited partnerships of $12 million and $27 million, respectively. Limited partnerships were the largest contributor to investment income in both the quarter and year to date. I will remind you that limited partnership asset class is in runoff and we continue to expect more limited and inconsistent earnings from this asset class in the future. In closing, the indemnity company is continuing to perform through the uncertain times of a pandemic And it is this performance that has allowed us to pay our shareholders nearly $145 million in dividends this year. Thank you again for your time today. I'll turn the call back over to Tim.

Thanks, Greg. It's hard to imagine where we'd be if not for the technology that's allowed us to transcend physical location to connect and collaborate virtually for more than a year and a half. This has not only opened our eyes to a new world of work, but to the new demands of doing business. Something that's become very clear is that being fully present and operational in the digital space is critical. Consumers are more reliant on digital commerce than ever before. They've grown to expect the same level of ease when doing business with their insurance provider as they do with their favorite online retailer. But what's different about Erie is the human touch that has been our differentiator and source of success for nearly a century. It's core to who we are and how we operate, and that will never change. That's why we're focused on a strategy that embraces technology in a way that gives customers access to digital tools when they want it and contact with a person when they need it. The self-service capabilities offered through online account are a great example of that, including the new chat functionality. The chat function was first piloted last year with phased rollouts continuing into 2022. An online account's paperless billing option introduced in March is approaching 100,000 policies enrolled. In another recent example of digital labelment, our claims handlers now have the ability to contact claimants by text message. We're seeing great initial usage rates for this service, with the claims team engaging in more than 16,000 text conversations per month since July, and 72% of applicable customers opting in. These numbers are a strong indication that sometimes the human touch means meeting people where they are and communicating in the method they prefer. That outside-in approach to service delivery and product development using customer data to drive our strategic priorities across the enterprise is key to our strategy moving forward. This will ensure that we deliver seamless customer experiences that are highly satisfying and provide agents with data-tested products and services to help them grow their businesses. Two expected product enhancements for 2022 support our growth objectives. On the commercial side, we're rolling out expanded cybersecurity coverage to be quoted on all new Erie Secure business policies. This comprehensive endorsement will provide first and third party coverage of digital attacks like data breaches and computer fraud. For personal lines, we're rolling out extended water or flood coverage early in 2022. Using underwriting and pricing sophistication, we'll be able to manage our exposures and price risks properly to offer this coverage to customers who may benefit from it. Growing and preparing our workforce for the future is another area of focus as we move forward, and implementing more inclusive and equitable recruiting strategies is a key component of that. As part of this journey to build a more diverse workforce, we're proud to be collaborating with the Precisionists, an organization focused on employment for people with disabilities. With them, we are piloting a program that leverages the talents of adults with autism 80% of adults with autism in the U.S. are unemployed or underemployed, according to the precisionists. Yet, when properly assessed and trained, people with autism and other neurodiversities are extremely high-performing employees. Individuals in the pilot program are identified, assessed, trained, and employed by the precisionists to engage as consultants in project-based work as members of our teams in data, human resources, and information technology, This partnership promises to be a win-win, helping Erie build a more diverse workforce while making a positive difference in the lives of these talented individuals. I'm also proud to report that Erie was honored with several third-party recognitions since our last call. Independent agents ranked Erie first among personal lines insurers in J.D. Power's 2021 U.S. Independent Agent Performance and Satisfaction Survey. Newsweek named Erie one of America's best customer service companies for 2022, ranking us fourth in the homeowners insurance category. U.S. News and World Report ranked Erie third in its best renters insurance companies of 2021, calling out Erie's competitive pricing, A-plus rating from AMVEST, and policy features such as personal property coverage, loss of use coverage, personal liability, and guest medical coverage. Forbes listed Erie as a top company in five different personal insurance categories in its 2022 list of America's Best Insurance Companies. And Forbes also named Erie to its list of America's Best In-State Employers for 2021 in Pennsylvania. And finally, the Global ERG Network, the world's largest network of employee resource groups and diversity councils, recognized Erie's African American Affinity Network and Dignity and Respect Affinity Network with a Top 25 ERG Diversity Impact Award. And Fred Johnson, Vice President and Manager of the Wisconsin Branch, was one of five recipients of the Diversity Impact Executive Sponsor of the Year honor. Fred is the sponsor of Erie's African American Affinity Network. Before we close, I'd like to acknowledge two changes to our executive team. Dionne Wallace-Oakley, former Executive Vice President of Human Resources and Strategy, announced her decision to resign from Erie in July to pursue another executive career opportunity in the Washington, D.C. area. We are deeply grateful for Dionne's leadership, expertise, creativity, and the perspective she shared during her career with Erie, which spanned more than a decade. Human Resources Senior Vice President Sean Dugan has taken on oversight of the collective areas of responsibility, HR, strategy, strategic communications, and employment and privacy. and is reporting directly to me as we determine next steps for this role. And Executive Vice President and Chief Information Officer Bob Ingram shared his plans to retire at the end of this year. Bob joined Erie in August 2012, and under his leadership, Erie has achieved numerous technology gains with our agents, customers, and employees. These accomplishments have given Erie a solid foundation for continued success in the years ahead. Bob's early notice provided time to begin an internal and external search for his replacement, which is currently underway. We thank both Bob and Dion for their significant contributions to the organization and wish them all the best in their new chapters. As always, I'd like to express my gratitude to our employees and agents for their commitment to being above all in service and to our shareholders for their continued support and trust. Thank you all for listening in today. and for your continued interest in Erie.

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