Erie Indemnity Company

Good morning and welcome to the Erie Indemnity Company First Quarter 2025 Earnings Conference Call. This call was 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 Investment Relations, Scott Bilehorse.

Thank you and welcome everyone. We appreciate you joining us for this recorded discussion about our first quarter results. This recording will include remarks from Tim DeCastro, President and Chief Executive Officer, and Julie Kalkowski, 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, dealerinsurance.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 these differences, please see the Safe Harbor Statement in our Form 10 key 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 joining us today. Before we dive into our first quarter results, I'd like to take a moment to acknowledge a true historic milestone for Erie Insurance. A few days ago, on April 20th, We mark the 100th anniversary of our company's founding. When I reflect on this milestone, it's amazing to think about the impact this company has had over the past century. Protection and peace of mind for millions of policyholders, stable and successful careers for tens of thousands of employees and agents, millions of dollars and thousands of hours of time contributed to our communities, and a century of innovation, resilience, and service. It's an extraordinary achievement that speaks to the strong foundation that was built 100 years ago and our commitment to the values and business principles of our founders. Fittingly, we've been celebrating this milestone with ways to connect to those values. Last month, we provided each employee $100 to contribute to a charity of their choice. So far, nearly half a million dollars has been allocated to various nonprofits across our geographic footprint. Of course, if we look back at what brought us here, we're also focused on what's ahead. We're taking actions to remain competitive in this complex and constantly evolving business landscape, and I'm confident in the strategic approach we're taking to long-term growth and stability. With that, I'd like to turn it over to Chief Financial Officer Julie Pelkowski to share details on our first quarter financial performance. Julie?

Thank you, Tim, and good morning, everyone. As Tim mentioned, this past week, Erie Insurance celebrated a significant achievement, its centennial celebration. For 100 years, Erie has operated with a focus of being above all in service, a timeless differentiator from our competitors. Our foundation of financial strength in keeping the human touch at the center of everything we do has helped us to navigate countless challenges and weather many ups and downs, particularly in more difficult times, such as significant weather events and uncertain economic and market conditions. So let's start by discussing the first quarter performance of the Erie Insurance Exchange, the insurance operations we manage. The significant rate increases we implemented in 2023 and 2024 continue to drive the exchange's direct written premium growth. Direct and assumed written premiums grew by nearly 14% in the first quarter of 2025 compared to the prior year. The rate impact is evidenced in the increase in our average premium per policy of 13.2%. Now that our rates are at more adequate levels, we're seeing the impact of the increased competitiveness of those rates. Policies in force grew 3.2% in the first quarter of 2025 compared to the first quarter of 2024, which is lower than 4.8% for the total year 2024. but more in line with growth experience prior to pandemic-related disruption. Our policy retention ratio decreased slightly to 89.9%. The significant rate actions I've mentioned were the primary lever we were pulling on to improve the profitability of the exchange. We continue to see improvement in our non-catastrophe loss ratio for the exchange. However, in March 2025, we experienced a significant catastrophe loss that contributed 13 points to the exchange's total first quarter catastrophe losses of over 16 points. This drove the increase in our first quarter combined ratio. The exchange's first quarter combined ratio was 108.1%, an increase over 106% in the first quarter of 2024. As you can see in the investor supplement that was published yesterday on our website, if we excluded catastrophe losses, as well as the effects of prior accident year reserve development, our direct current year non-catastrophe loss ratio would have been 95.4% in the first quarter of 2025. The exchange's underwriting losses in the first quarter were partially offset by investment returns, which resulted in a slight decrease in policyholder surplus from $9.3 billion at December of 2024 to $9.2 billion at March 2025. Shifting to the results for indemnity, net income was $138.4 million or $2.65 per diluted share in the first quarter of 2025 compared to $124.6 million or $2.38 per diluted share in the first quarter of 2024. Operating income increased 9% to more than $151 million for the first quarter of 2025 compared to the first quarter of 2024. Management fee revenue from policy issuance and renewal services increased over 13% to $755 million in the first quarter of 2025 compared to the prior year. The total cost of operations from policy issuance and renewal services increased $77 million, or about 14% for the first quarter of 2025, compared to the same period in 2024. Our largest expense, our commissions, grew $61 million, or about 16% for the first quarter. This growth was driven by the increase in direct written premiums of the exchange and, to a lesser extent, agent incentive compensation. Non-commissioned expenses for the first quarter grew just over $16 million, or about 9%. The biggest driver of this growth was an $11 million increase in our technology investments due to higher hardware, software, and personnel costs, as well as a decrease in the amount of professional fees capitalized. We also saw an increase in underwriting and policy processing costs of $3 million and customer service costs of about $2 million. Personnel cost increases across all expense categories were impacted by increased compensation in the first quarter of 2025, including higher estimates for incentive plan awards compared to 2024. When looking at our investment operations, it's important to note that during periods of heightened market uncertainty, we have always maintained a long-term perspective and a focus on our strategic objectives for the ERIE Insurance Group portfolios. Investment income in the first quarter of 2025 was $19.5 million compared to $15 million in the same period of 2024, driven by growth in our net investment income of $4 million. As always, we take a measured approach to capital management and we maintain a strong balance sheet. And for the first three months of 2025, our financial performance has enabled us to pay our shareholders almost $64 million in dividends. With that, I'll turn the call back over to Tim. Tim?

Thanks, Julie. The entire insurance industry is feeling the effects of external pressures related to economic instability, the dynamic political environment, and an increase in severe weather. The results Julie just reported, however, confirm that we're responding appropriately and effectively, setting the stage to address the immediate challenges ahead and to build long-term sustainability for both the company and for our agents. A key part of our response involves technology. In past calls, I've talked about our progress in modernizing our legacy platforms. One of the more significant achievements over the past quarter was the continued rollout of Business Auto 2.0. After a pilot in Indiana in the second half of last year, the product was released to Ohio, Wisconsin, Illinois, and Tennessee in late January. Business Auto 2.0 supports our refreshed and enhanced business auto product with an improved quoting and processing experience and the ability to have vehicles from multiple states on one policy. It also provides access to online account for customers and features an auto pay option. Wall out to the remainder of our footprint is expected to continue through the third quarter. Our modernization efforts are wide scale and ongoing, so you can be sure to hear more updates on our progress in upcoming calls. As Julie detailed earlier, we've experienced some very costly claims already this year. The losses incurred from the severe storms throughout our footprint in March have even surpassed those of Hurricane Malene, a September storm that flooded the southeast, causing widespread destruction and fatalities. Catastrophes like these are devastating to our customers and damaging to our profitability. But it's in these circumstances that our biggest strength, exceptional service, really shines through. When I reflect on where we are today, celebrating 100 years in business, I'm proud that we have kept our promise of service at the forefront of everything we do, and I'm excited to begin our second century of service and success. Thank you all for joining us today and for your continued interest in the area.