ERIE - NASDAQ

Good morning, and welcome to the Erie Indemnity Company Second Quarter 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 Beilharz.

Thank you, and welcome, everyone. We appreciate you joining us for a recorded discussion about our second quarter results. This recording will include remarks from Tim NeCastro, President and Chief Executive Officer; and Julie Pelkowski, 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, erieinsurance.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 statements in our Form 10-Q filing with the SEC dated July 27, 2023, 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 your interest in Erie's performance for the second quarter of 2023. The executive team and I have spent a lot of time over the past few months connecting with our various stakeholders, with agents at our annual branch meetings across our footprint and at our combined agency taskforce meeting here in Erie, with employees at our open door, leader forum and claims recognition meetings and with investors at our annual meeting with shareholders held in April. A frequent topic of discussion at these recent gatherings has been the challenges the industry continues to face. Inflation, supply chain issues and an increase in severe weather are among the most pressing, and we're certainly feeling the effects of them so far in 2023. That's reflected in our combined ratio, which now stands at 120.8% compared to 113.7% for the first half of 2022. Both personal and commercial lines continue to experience an increase in severity for property, auto and uninsured and underinsured motorist claims, although costs are growing at a more moderate pace than in the prior year. Year-to-date, personal auto claims severity is up 6% compared to last year and 21% since 2021. Weather and catastrophe losses are also on the rise. Hail, wind and tornadoes have been battering areas across our footprint in the first half of the year. Through June of 2023, catastrophe event claim counts were up nearly 70% compared to 2022, and catastrophe claims contributed 16% of the combined ratio at the end of the second quarter compared to 10% in 2022. While many of the external factors impacting the combined ratio are out of our control, we're taking actions within our control to bring it down to more favorable levels. Chief Financial Officer, Julie Pelkowski, will be talking more about some of those strategies in just a few minutes. And despite the factors impacting our combined ratio, our overall performance picture is strong, especially in our growth and retention numbers. Overall, policies in force are up 5.2% with personal lines reaching its highest growth in 20 years at 5.5%. Retention is also strong at 90.8% for personal and commercial lines combined, with retention for personal auto, which stands at 92.3%, approaching an all-time high. This impressive growth and the loyalty demonstrated by our policyholders is a testament to the strong value proposition we offer. Our recent ranking on the Fortune 500 list for the 20th consecutive year, this year at number 414 is yet another. All said, we are confident in our overall financial stability as we continue to navigate the challenges of today's world. With that, I'd like to turn it over to Julie Pelkowski to offer a closer look at our financials. This is Julie's first earnings call since taking the reins as Erie's Chief Financial Officer in May. Welcome, Julie.

Thank you, Tim, and good morning, everyone. Over the course of my 25-year career with Erie, I have had the pleasure of working across several different disciplines that have prepared me for the role of CFO, and I'm delighted to be with you this morning to share our second quarter results. As Tim mentioned, our business experienced an unusually early and severe start to the storm season, and we continue to feel the pressure of the inflationary conditions that are contributing to higher loss severities. These two factors are the primary drivers of the increase in our combined ratio in the Exchange. While we are prioritizing efforts to improve the Exchange's profitability, the Exchange generated substantial growth in the second quarter of 2023. This quarter marks the first time in our history that we've written over $1 billion of direct written premium in a single quarter. This strong production growth drove the increase in the amount of management fee revenue for the Indemnity Company, which you'll see as we review our second quarter 2023 results. Starting with the Exchange, the insurance operations we manage, direct written premium growth for the second quarter was 16.3%, driven by substantial growth in new business premium, which climbed almost 32.6% over the prior year. With a combined ratio for the quarter of 118.9%, the Exchange's policyholder surplus decreased to $9.7 billion, down $400 million from December 31st. The primary focus of our strategy to address the elevated combined ratio is taking rate increases to more appropriately match the level of losses we're experiencing in the current environment. This has resulted in us taking double-digit rate increases and also evaluating our rating needs more frequently. Of course, we monitor our competitive position and the rate increases we are taking are in line with the industry. We also stay focused on our underwriting and agency management discipline and have identified certain initiatives targeted towards improving profitability. These strategies, along with several others, will allow us to continue driving down our overall combined ratio. Now shifting to Indemnity. In the second quarter, Indemnity generated net income of $118 million, or $2.25 per diluted share, compared to $80 million, or $1.53 per diluted share, in the second quarter of 2022. For the first half of 2023, net income was $204 million, or $3.90 per diluted share, an increase compared to the first half of 2022 net income of $149 million, or $2.84 per diluted share. Operating income increased 29%, or $30 million, in the second quarter of 2023 compared to the second quarter of 2022. Indemnity also saw an increase in operating income of 29.9% or $56 million for the first half of this year compared to the first half of last year. Indemnity's management fee revenue for policy issuance and renewal services increased $89 million or 16.3% in the second quarter of 2023 compared to the second quarter of 2022. For the first six months of 2023, Indemnity saw an increase of $159 million, or 15.4%, compared to the first half of 2022. Management fee revenue allocated to administrative services increased just over $1 million in the second quarter and $2 million in the first six months of 2023 compared to the same periods in 2022. Turning to Indemnity's cost of operations for policy issuance and renewal services, commissions increased $44 million in the second quarter and $71 million in the first half of 2023 compared to the same periods in 2022. The increases in agent compensation in both periods were driven by growth in direct and affiliated assumed written premium, partially offset by a decrease in agent incentive compensation. Non-commission expenses increased $16.1 million in the second quarter of 2023 compared to 2022. Underwriting and policy processing expense increased $3.7 million, primarily related to the increased production growth. Information technology costs increased by $3.3 million, driven by increased personnel costs and professional fees. Also, administrative and other expenses increased $7.7 million in the second quarter of 2023 compared to the same period in 2022, driven by increases in personnel costs, partially offset by a decrease in professional fees. For the first six months of 2023, Indemnity saw an increase in non-commission expenses of $33 million, primarily driven by increases in technology costs of $14.8 million and administrative and other costs of $10.6 million. The increased technology costs were driven by higher professional fees, personnel costs and hardware and software costs. Administrative and other costs increased $10.6 million, primarily due to an increase in personnel costs, partially offset by a decrease in professional fees. Overall, personnel costs were impacted by increased compensation, including higher estimated costs for incentive plan awards, partially offset by lower pension costs compared to 2022. Investment income before taxes totaled $12 million in the second quarter compared to a loss from investments before taxes of $2 million in the same period of 2022. For the first six months of 2023, we recorded investment income before taxes of $7 million compared to $1 million in the first six months of 2022. While we recognized limited partnership losses in the first six months of 2023, these losses were offset by both higher bond net investment income and lower realized and unrealized losses on equity securities, which drove the improvement over the same period of 2022. I will remind you that the limited partnership asset class is in runoff, and we continue to expect more limited and inconsistent earnings from this asset class in the future. As always, we take a very measured approach to our capital management and we maintain a strong balance sheet. For the first six months of 2023, our financial performance enabled us to pay our shareholders over $110.8 million in dividends. Thank you again for your time today. Now I'll turn the call back over to Tim. Tim?

Thanks, Julie. Another major topic of discussion recently has been our focus on modernization. As I've mentioned in previous calls, transitioning out of legacy platforms and investing in greater digital capabilities are among our highest priorities in 2023. Recent updates to our claim status platform provide more robust claims information to agents, employees and customers on a more intuitive platform. And another claims platform, Erie Claim Center was recently migrated to the cloud. This was our largest migration to date with several more planned as part of Erie's overall cloud transformation initiative. We expect these innovative efforts to increase speed and productivity across the enterprise. Another key modernization effort is tied to our upcoming refresh of workers' compensation, which will introduce full policy servicing capabilities on our quote application and service platform, a new billing platform that allows for enhanced pay as you go functionality, and the introduction of online accounts for our commercial customers. We also continue to make enhancements to our mobile app and online account platform. Most recently, we introduced self-service functionality for roadside assistance with a mobile app through Agero. Several other modernization efforts are also underway. All aimed at helping us to increase efficiency, reduce expenses and to better serve our customers and agents. You can expect to hear more updates on this work in future earnings calls. Yet another challenge almost all industries have been facing recently has been the tight labor market and the war for talent. We're pleased to share that the challenges in attracting and retaining talent we experienced in 2021 and 2022 have leveled out. In our claims division where we experienced some of the biggest talent challenges, all open positions have been filled, and we've developed an advanced staffing capacity tool that enables us to identify and respond to staffing needs in real time. In this tough labor market, workplace accolades are particularly important, so we're excited to have recently earned a Great Place to Work certification from the Great Place to Work Institute. This recognition is based on the results of an engagement survey sent to all Erie employees in June. Four out of five Erie employees completed the survey and 86% of those employees said Erie is a great place to work. This compares to just over half or 57% of employees at typical U.S. based companies and 91% for the benchmark set by Fortune 100's Best Places to Work. We're proud of our long-standing reputation as an employer who places a great deal of importance on our workforce, culture and treats employees like family. This recognition as a certified Great Place to Work affirms that commitment. We're also proud to have recently earned a global distinction as one of only four U.S. based insurers named to all three of Forbes World's Best Insurance Companies list for 2023. Forbes ranked the best insurance companies in three areas: homeowners, auto and life insurance. Erie Insurance ranked number five in the U.S. for auto, number seven in the U.S. for homeowners and number 11 in the U.S. for life. With that, I'd like to thank you all again for listening in today and for your continued interest in Erie.

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