This summary is based on the second quarter fiscal 2008 earnings call conducted by Erie Indemnity Co. (ERIE) on July 31, 2008.
Management:
VP and Manager of Corporate Communications and Investor Relation: Karen Kraus Phillips
President and CEO: Terrence W. Cavanaugh
EVP and CFO: Philip A. Garcia
EVP, Insurance Operations: Michael S. Zavasky
Key Investors Issues
- EPS were 71 cents per share compared to $1.11 last year.
- Net income decreased by 41.4% to $41.3 million from $70.5 million at June 30, 2007.
- Net operating income per share decreased by 19.6% to 87 cents compared to $1.09 last year.
Second Quarter Highlights
Net income decreased by 41.4% to $41.3 million from $70.5 million at June 30, 2007.
- On a per share basis, net income decreased to 71 cents per share compared to $1.11 last year.
- Net operating income per share decreased by 19.6% to 87 cents compared to $1.09 last year. The earnings decrease in the second quarter was mainly a result of a reduction in investment revenues due to $12.4 million of impairment charges and $4.6 million of changes in fair value on common stock in accordance with FAS 159. The company had a decrease of $8.9 million in equity in earnings of limited partnerships.
- Management fee revenue was flat as direct written premiums of the property casualty group remained level compared to the second quarter of 2007.
- Management fee rate was 25% for the second quarters of both 2008 and 2007. The company estimates that its pricing actions that are improved and filed and considered for filing could reduce the direct return premiums of the property casualty group by about $31.5 million during 2008.
- Approximately $17.3 million of the total occurred in the first half of 2008. Most rate reductions effective in 2008 are in workers'' compensation in Pennsylvania and a home owner''s rate reduction in Maryland. Segmented pricing in Auto and home where the company offers lower prices to better risks has accelerated decline in average premium per policy. Given accident year last experience from the market conditions the company is projecting premium rate increases of about 0% to 1% overall for 2009.
- The trend towards increased policy growth continued in the second quarter 2008 as policies enforce and new written premium continued to decline. Year-over-year policies enforce grew 2.5% or about 98,000 policies to 3,945,000 policies at June 30, 2008, compared to year-over-year growth of 66,000 policies in the second quarter of 2007.
- Policy retention rate improved to 90.4% compared to 89.9% at the end of the second quarter last year.
Premiums generated from new business increased 1% to $113.5 million from $112.4 million compared to 2007.
- The new business year-over-year average premium per policy was $866 and $852 at June 30th of 2008 and 2007 respectively, an increase of 1.6%.
- The total cost to management operations increased by 2.8%. Commissions reflect a decrease in the estimate for agent bonuses of about $2.3 million, which was offset by an increase in normal and accelerated rate commissions of $1.8 million or 1.5% to $125.6 million.
- On June 1, 2008, the company implemented a new tiered payment structure to replace the $50 bonus the company has been paying on new private passenger auto applications. The new structure pays up between $50 and $200 per policy based on the number of qualifying new private passenger auto policies and agency issues. The cost of this program is expected to be around $9 million on an annualized basis. The original estimate for the $50 private passenger bonus was about $6 million annualized for 2008.
- On July 1st, the company increased commissions on certain commercial lines new business premiums from 15% to 20%. The increased commercial commission resulted in about $0.5 million of additional commission expense on un-collected premium balances for new commercial policies at June 30, 2008. The full impact of this commission increase is expected to be approximately $1.5 million for the remainder of 2008 and about $2 million on an annualized run rate basis. Accelerated commissions were higher because of the new agencies appointed during the year.
Cost to management operation excluding commissions, increased $5.8 million or 9.8%.
- Personnel cost increased by 4.9% compared to 2007 primarily as a result of $1 million charge for executive severance cost.
- Excluding the severance charge, personnel cost rose 2%.
- Sales and policy issuance cost increased 32.3% due to a $1.3 million increase in advertising expense.
- All other operating costs increased 14.6% driven by a $2.2 million increase in consulting fees, primarily related to current technology program.
In 2007, the company started looking at options for replacing policy administration system and that process continued during first half of this year.
- In the second half of 2008 the company will be developing the design of the policy administration replacement system. The company anticipates additional IT expense excluding internal labor for this project in the second half of 2008 to approximate about $10 million.
- The company made some short term enhancements to its systems to improve the ease of doing business for agents. Some of these enhancements include a 24 hour batch cycle, personalized downloads into agency management systems and continued upgrades to existing agency interface, DS pro.
Insurance underwriting operations continued to perform profitability, generating a profit of $3.2 million compared to underwriting profit of $7.9 million in the second quarter of 2007.
- The property and casualty groups adjusted statutory combined ratio at June 30 2008 was 87% compared to 77.7% at June 30, 2007. The GAAP combined ratio for the company was 93.7% compared to 84.8% last year.
- Development of prior accident year loss reserves remained favorable improving the loss ratio of 3.9 points or $2 million compared to an improvement of 4.3 points in the second quarter of 2007. The favorable development was concentrated in the auto bodily injury and underinsured motorists, bodily injury coverage. Catastrophe losses contributed 3 points and 2.2 points to the GAAP combined ratio in the second quarters of 2008 and 2007 respectively.
