Erie Indemnity Company

Good morning, and welcome to the Erie Indemnity Company fourth quarter and year-end 2023 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 Balshart.

Thank you, and welcome, everyone. We appreciate you joining us for this recorded discussion about our fourth quarter and year-end results. This recording will include remarks from Tim DeCastro, President and Chief Executive Officer, and Julie Pekowski, 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 that 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 filed yesterday and in the related press release. This prerecorded call is the property of your indemnity company. It may not be reproduced or rebroadcast by any other party without the prior written consent of your indemnity company. With that, we'll move on to Tim's remarks. Tim?

Thanks, Scott. And thanks to all of you for taking time to learn more about Erie's fourth quarter and year-end results for 2023. We're proudly moving closer to celebrating a century of service, and we're doing so as a company with $10 million in premium, a milestone reached in the fourth quarter of 2023. This came in a year of both record-setting growth and significant challenges. We saw net income for Erie Indemnity Company reach an all-time high of more than $446 million, and growth for Erie Insurance Exchange hit a 20-year high of 17 percent, helping us hit that $10 billion mark and moving us towards 7 million policies in force. With all that said, we've certainly been feeling the negative effects of the economic and environmental pressures that continue to impact our industry. Weather-related claims rose to nearly 70,000 in 2023, compared to roughly 50,000 in 2022. Even with the typical decline in weather-related claims in the second half of the year and overall claim severity leveling out, we ended the year with a combined ratio of 119.1%, three points higher than year-end 2022. We've responded to the tough market conditions through rate increases, and we're also reinforcing our focus on underwriting standards and partnering with our independent agents on individualized profitability action plans where appropriate. This multi-pronged approach is aimed at improving the combined ratio over time. In addition, we've placed greater emphasis on managing expenses across the enterprise and expect to see long-term savings through our work to modernize legacy technology platforms and to introduce new digital capabilities. I'll share an update on recent progress with those modernization efforts in a few minutes, but first, I'd like to introduce Chief Financial Officer Julie Palkowski, who will provide a deeper review of our financials. Julie?

Thank you, Tim, and good morning, everyone. Throughout 2023, we've discussed how weather events and severity were the primary drivers of the profitability challenge for the exchange. As Tim mentioned, we've taken action on several fronts aimed at improving profitability. We are starting to see the benefits of the more significant rate increases taken recently, with more to come. As a reminder, our policies span 12 months, unlike most of our competitors, so it takes longer to realize the benefits. We haven't yet seen a slowdown in new business growth, and our retention levels remain strong at 91.2% despite these rate increases. Policyholder surplus ended at $9.3 billion at December 2023. While this was lower than where we started the year, we did see a positive turn in the fourth quarter, with surplus increasing $203 million. Again, the combined ratio for the year ended at 119.1%, which was an improvement from September year to date, given the fourth quarter experienced a lower level of weather events and more moderate severity growth. Turning to the results for indemnity, net income was almost $111 million or $2.12 per diluted share in the fourth quarter of 2023 compared to $65.5 million or $1.25 per diluted share in the fourth quarter of 2022. 2023 total year net income was just over $446 million or $8.53 per diluted share compared to $299 million or $5.71 per diluted share in 2022. Operating income in the fourth quarter increased nearly $46 million or 56.1% compared to the fourth quarter of 2022. For the total year, indemnity experienced an increase in operating income of $144 million or 38.3% compared to 2022. Both periods saw revenue growth outpace expense growth. From a revenue perspective, management fee revenue from policy issuance and renewal services increased over $98 million, or 19.5%, in the fourth quarter of 2023 compared to the fourth quarter of 2022, and over $354 million, or 17%, for the total year compared to 2022. These increases in both the fourth quarter and total year were in line with the respective increases in the direct and assumed written premiums of the exchange. The main driver of the premium increase was that the exchange was continuing to experience substantial growth in new business premium, which grew over 43% in the fourth quarter and almost 38% for the year, compared to the same respective prior year periods. From an expense perspective, the total cost of operations from policy issuance and renewal services increased just over 54 million or 12.2% for the fourth quarter and almost 216 million or 12% for the total year 2023 compared to the same periods in 2022. Our most significant cost of operations, our commission expenses, grew 53 million for the fourth quarter while the total year commission expenses increased 169 million. The higher commissions in both periods were driven by the increase in direct and affiliated assumed written premiums of the exchange. Non-commission expenses for the fourth quarter grew 1 million, while the total year non-commission expenses grew 47 million. The fourth quarter increase was driven by additional investments in both technology of $3 million and customer service of nearly $1 million, offset by lower sales and advertising costs of over $2 million. Tim will provide greater detail on our technology and customer service deliveries in a couple of minutes. The increase in total year non-commission expenses was due to additional investments in technology of almost $19 million and higher administrative and other expenses of $20 million, driven by higher personnel costs. the growth in number of policies led to an increase in underwriting and policy processing costs of $9.4 million. Our investments generated almost $10 million in pre-tax income in the fourth quarter of 2023 compared to $300,000 in the fourth quarter of 2022. For the total year 2023, pre-tax income from investments was $29 million compared to $600,000 for 2022. Finally, in 2023, we paid our shareholders $222 million in dividends. Also, in December of last year, our Board approved a 7.1% increase in the 2024 regular quarterly cash dividend for both our Class A and Class B shares. Now, I'll turn the call back over to Tim.

Thanks, Julie. The rapid pace of technology and changing consumer behaviors have heightened the sense of urgency to modernize our platforms and introduce new digital capabilities. As I mentioned earlier, we know it's important to long-term expense savings, and it's critical to our ability to offer innovative and customer-centric products and services. That's why we made modernization one of our top priorities in 2023. A notable example of progress is the migration of several legacy platforms to the cloud. a technology infrastructure that is more stable, secure, and efficient. The largest cloud conversion to date was our Erie Claim Center platform, which is now seeing a 75% reduction in system outage time and significantly reduced costs. In our third quarter call, I shared that we launched a pilot for a refreshed workers' compensation platform starting in Indiana. Since that time, our teams have successfully rolled out the platform in every state on our footprint, The refresh introduces full policy servicing capabilities, online account for commercial customers, and a new billing platform that allows customers the ability to manage their automatic payments. Other significant progress was made in the enhancement to our Claim Status Portal, a valuable tool that puts important claims information at the fingertips of agents and customers. In 2023, more than 75 different enhancements were made to the platform to improve the user interface, and to make the information provided by the tool more robust. Nearly 100% of auto claims handlers and more than 70% of property claims handlers are using the tool to share important updates with agents and customers, helping claims get handled faster and more efficiently. These modernization efforts are continuing in 2024 and beyond, and we're embracing agile ways of working to help us work faster, improve our speed to market, and deliver the capabilities demanded by today's marketplace. That spirit of innovation is also behind the investments we're making through Erie Strategic Ventures. This venture capital arm of Erie Indemnity Company, formed in 2022, focuses on investing in the personal and commercial insurance value chain. And recently, we announced three initial startup investments. WAGMO, which offers tech-enabled pet wellness and insurance, Roots Automation, which leverages artificial intelligence to automate manual and time-consuming insurance processes, and Trust & Will, an online estate planning platform. These initial investments are adjacencies that have the potential to deliver value to Erie, our agents, and policyholders. In addition to capital, the startup companies also benefit from Erie's industry expertise. We look forward to continuing to build our portfolio to support more visionary entrepreneurs and help bring innovative products and services to the market. As I mentioned earlier in the call, weather claims have been up and significantly over the prior year, which makes accolades like those we recently received from J.D. Power even more meaningful. In December, J.D. Power ranked Erie the best in home insurance customer satisfaction, coming in at number one for both homeowners and renters insurance. Erie's score of 856 on J.D. Power's 1,000-point scale was 37 points higher than the homeowner's insurance segment average for 2023. And both our ranking and score improved during a year when the study cited overall homeowner satisfaction as flat compared to the previous year. This recognition comes on the heels of two other first-place rankings from J.D. Power in 2023, one for property claims experience and another for independent agent satisfaction and personal lines. I'd like to express my gratitude to our agents and frontline employees from claims, first notice of loss, and customer care operations for continuing to be above all in service, even in and especially in these demanding times. Thank you all for listening in today and for your continued interest in Erie.