Scott Beilharz - Vice President, Investor Relations Tim NeCastro - President and Chief Executive Officer Greg Gutting - Executive Vice President and Chief Financial Officer Sean McLaughlin - Executive Vice President and General Counsel.

Adam Klauber - William Blair Frederick Shepard - Capital Returns Management.

Good morning and welcome to the Erie Indemnity Company Second Quarter 2017 Earnings Conference Call. I would like to introduce your host for today’s call, Scott Beilharz, Vice President of Investor Relations..

Thank you, Ashley and welcome everyone. We appreciate you joining us for today’s discussion about our 2017 second quarter results. Joining me today are Tim NeCastro, President and Chief Executive Officer; Greg Gutting, Executive Vice President and Chief Financial Officer; and Sean McLaughlin, Executive Vice President and General Counsel.

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. We will start the call today with opening remarks from Tim and Greg and then we will open the call for your questions.

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 July 27, 2017 and in the related press release.

This call is being recorded and recording 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. A replay will be available on our website today after 12:30 PM Eastern Time.

Your participation on this call constitutes your consent to recording, its publication, webcast and broadcast and the use of your name, voice and comments by Erie Indemnity. If you do not agree with these terms, please disconnect at this time. With that, I will now turn the call over to Tim..

Thank you, Scott and good morning everyone. As reported in our second quarter Form 10-Q filed yesterday, Indemnity had a good first half of the year. We are pleased with the results and confident in the direction we have set for 2017. A quick look at the exchange, the insurance operation we manage shows continued positive results.

The direct and assumed premiums written in the first 6 months of 2017 grew 6.2% compared to the same period last year. And we continue to outpace Corning’s industry forecast of 4.5% for the year. Policyholder surplus stands at just over $8 billion, another firm indicator of our operational and financial health.

It’s especially relevant as we make continued investments in our business to meet and anticipate changes in the market, in the workforce and in consumer appetite. I will touch on those strategic investments and the specific areas of focus in just a few minutes.

But before I hand it over to Greg, let me say that we are very pleased with Indemnity’s results. While on a year-to-year basis, earnings per share are down slightly. Our margin remains very strong even as we purposely invest in technology and processes that will keep us relevant and competitive going forward.

Now, I will ask Greg to share the detail and additional context around our financial results.

Greg?.

Thanks, Tim. As Tim mentioned, we are pleased with the results we are seeing this year. They reflect our commitment to our agents and employees as well as our ongoing investment in infrastructure and platform improvements.

Starting with the second quarter of 2017, net income was $$59 million or $1.12 per diluted share compared to $61 million or $1.17 per diluted share in the second quarter of 2016.

While we continue to generate strong top line growth, net income in the quarter decreased due to a $2.7 million reduction in operating income and a $1 million reduction in investment income.

Indemnity’s revenue from operations increased $25 million in the second quarter of 2017, representing a 5.8% increase over the same period in 2016, resulting from the exchange’s steady growth in both policies in force and average premium per policy.

This top line growth was offset by increased expenses primarily higher agent compensation costs and technology investments.

Indemnity’s commission expenses increased $16 million in the second quarter of 2017 compared to the second quarter of 2016 driven by a 5.7% quarter-over-quarter increase in the direct and assumed written premiums of the exchange and higher agent incentive cost related to profitable growth.

Non-commission expenses also increased compared to the second quarter of 2016. Indemnity’s non-commission expenses increased $12 million driven primarily by a $7 million increase in the information technology costs, including increased professional fees and personnel costs.

Other drivers include underwriting and policy processing costs and administrative cost. The resulting gross margin for the second quarter of 2017 was the strong 18.5%, down from a margin of 20.2% recorded in the second quarter of 2016.

Keep in mind that the 20.2% margin in last year’s second quarter was the highest margin in any quarter in the last 4 years. We continue to invest in technology and process improvements. So, we expect to see a higher technology costs in some quarters going forward.

It’s important to recognize that unlike our new claim center platform that supports the claims function and is therefore paid for by the exchange, many of the cost associated with our technology initiatives going forward will align with sales, underwriting and policy issuance functions and therefore will be paid for by the Indemnity Company.

As we make these investments, you will see the margin fluctuate. Indemnity’s investment income in the second quarter of 2017 totaled $6 million compared to $7 million in the second quarter of 2016. The decrease was driven by lower earnings from our limited partnership. Indemnity’s year-to-date results tell a similar story.

For the first 6 months of 2017, net income was $106 million or $2.03 per diluted share down slightly from the $107 million or $2.04 per diluted share in the first 6 months of 2016. Revenue from operations increased $49 million or 6.2% year-over-year once again in line with the exchange’s strong premium growth.

Commissions increased $27 million in the first 6 months of 2017 compared to the same period last year resulting from a 6.2% increase in the direct and assumed written premiums of the exchange. Non-commission expense increased $26 million in the first half of 2017 compared to the first half of 2016.

As in the quarter, the drivers of the increase were higher technology costs, higher underwriting and policy processing costs and higher administrative costs. The gross margin for the first 6 months of 2017 is 17.6% compared to 19.2% in the first 6 months of 2016.

Indemnity’s investment income for the first half of 2017 totaled $13 million compared to $10 million in the first half of 2016. Finally, our continued success has enabled us to pay our shareholders $36 million in dividends in the second quarter of 2017. And now, I will turn the call back over to Tim..

Thanks, Greg. With Greg’s report as a backdrop, let me touch on the strategic focus areas I mentioned on the last call. These are the areas we are focusing on to sustain and accelerate the positive results of our successful business model. I will share a few examples too of how, where we are delivering value to our agents and customers.

As you may recall, we have four strategic focus areas. First, continuing to enhance the Erie experience; second, improving our key strategic platforms in our data management; third, exploring new sources of revenue; and fourth, preparing the workforce for the future.

These are areas we believe offer the greatest opportunity for continued growth and success into the future. If you have been engaged in our calls over the past few years, you will recognize that these are really an extension of our direction.

For instance, the replacement of our claims platform that began in 2014 is nearing completion and we are working to achieve the same kind of efficiencies and better experience for customers, agents and employees on other legacy systems.

Improving how we manage and leverage our data represents a clear opportunity that aligns with updating our technology platforms. Right now, we are bringing together the right talent and teams to elevate our capabilities.

The work in this area will enable greater accessibility of usable data companywide and this will help drive better decision making and opportunities for innovation. As I mentioned these focal areas aren’t a shift in our strategic direction, instead they represent a more conservative focus on needs and opportunities for immediate and long-term.

In terms of the Erie experience for instance we are introducing process improvements that will enhance speed and flexibility, making it easier for our agents and customers to do business with us, in contemporary ways leveraging digital tools.

Our new commercial account quote application system for workers compensation is a good example of how making the process easier leads to increased production. We see new business in this line increased 18% since our agents gained the ability to quote and submit an application electronically.

Feedback from both the recent internal survey of agents and our ongoing agent task force meetings demonstrates that our agents agree there is real value in these incremental process improvements. At the same time we are looking ahead and planning for the longer term with our focus on the workforce in the future.

Today, we have in place some very successful programs for hiring in advance of need in critical areas like claims, underwriting and field sales. Our most recent hiring session brought in an application pool of more than 600 candidates for just 10 positions.

The competition for these programs and the rigor of our selection process guarantees we will get the best of the best. Once hired, we train all new employees to meet our service promise. Our Start Smart program for example continues to prepare new claims employees to confidently meet the needs of our customers on their first day on the job.

We also say the future work will demand evolving capabilities and tools, workplace settings and regulatory factors. Our focus on the workforce in the future will allow us to identify and prepare our company, our employees and our agency force for those challenges and opportunities.

Many of the initiatives such as our future policy management system will involve multi-year investments of resources, so it’s important that we plan thoughtfully and with the right cadence to support our continued success for Erie and our agents. As we move forward, we do so from a steady position of strength.

Thanks to the work of our dedicated team of agents and employees. We are listed once again among the Fortune 500 and the work of our Erie team also led to continue recognition from our customers. For the fifth consecutive year, we earned the highest score in the J.D. Power and Associates Insurance Shopping Study.

It’s a great affirmation of the value of our independent agent business model, trusted advisors those seeking financial protection. And finally, we learned recently that A.M. Best once again affirmed the financial health of our property and casualty group with an A+ superior rating.

All of these reflect the firm foundation on which Erie was built and which we remain deeply committed to sustaining. And now we would be happy to take any questions you may have..

[Operator Instructions] Our first question comes from Adam Klauber of William Blair. Your line is open..

Thanks. Good morning..

Good morning Adam..

Couple of different questions, how fast did the commercial business versus the personal lines businesses grow in the second quarter?.

The personal lines businesses is growing faster than commercial, a lot of that has to do with the rate of personal lines are in the private passenger auto as well as the growth we are seeing there in new production..

And roughly how much rate are you getting on the auto side?.

About 5%..

5%, okay.

How is the competitive environment in auto, are most companies pushing rate and are you sort of in that mid – are most of the companies pushing for roughly 5% rate or are they pushing for more than 5%?.

Adam, I would say that most of them are pushing for at least that and on a relative basis our competitive position in auto is improving. We have looked at the business more holistically in personal lines as a package. We like to sell more than a single policy. And so in previous years, we had to make some great corrections in our homeowners’ product.

We are now making some corrections in auto, but our rate indications are relatively benign at this point..

Okay. Okay, great.

And then the technology project, how long do you think that’s going to last and which vendor – vendors are using for the different systems?.

Yes. So Adam, we’ll wrap up the first element of the strategic platform project, the claim center, which is a Guidewire installation when we released the property lines this fall. We have not selected a vendor for the balance of the programs yet and we are evaluating a combination of potential internal solutions and external solutions.

Those decisions as there may, will drive the overall duration of the program and we will have more information on that probably on the third quarter call..

Okay. Okay, thanks.

And then how is growth of the agency force both from a number standpoint and also from a productivity standpoint?.

At this point, the number of agencies is growing, but relatively on a very slow basis. What we are seeing is growth within the existing agency force and so we are pretty much on average, the average agency is growing in line with the overall company growth in premium..

Okay, okay. Thanks a lot..

Thank you..

[Operator Instructions] And our next question is from Frederick Shepard of Capital Returns Management. Your line is open..

Hey, guys. Thanks for taking my questions.

Just real quick on the commission expense ratio, can you break that into base commissions versus bonus commissions and other accruals and maybe how does that split compared to last year?.

This is Greg. The splits are similar. I believe I don’t have it in front of me, but I believe we are about 85% of the commissions are the base and the rest is profitability bonus and other age incentive costs..

Okay, great.

And is that a pretty standard split?.

It generally is. I mean, it can vary, but it’s been fairly consistent over the last 2 years..

Okay, great.

And then how much of the salary expense had a bonus commission tied to it this quarter and maybe in the year-over-year quarter?.

The salary?.

Yes..

There is no bonus commission to the – I guess I am confused about your question..

You mean incentive comp versus base comp?.

Yes, yes..

That I don’t know, if we….

We have had – the incentive comp has increased a couple of million dollars for the year 2 to 3. Some of that is driven by the long-term incentives where they are tied to the stock price and the stock price is up over $13 for the year. So, that’s driving a lot of it, most of it actually..

Great. Thank you so much, guys..

Yes, thank you..

I am showing no further questions. I would like to turn the call back to Scott Beilharz for any further remarks..

Thanks, Ashley and thanks again everyone for joining our call today. A recording of this call will be posted on our website erieinsuramce.com after 12:30 PM Eastern Time today. If you have any questions, please call me at 814-870-7312. Thank you..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude your program and you may all disconnect. Everyone have a great day..