Scott Beilharz; Investor Relations; Erie Indemnity Co
Timothy Necastro; President, Chief Executive Officer; Erie Indemnity Co
Julie Pelkowski; Executive Vice President & Chief Financial Officer; Erie Indemnity Co
Presentation
Operator
Good morning, and welcome to the Erie Indemnity Company fourth-quarter and year-end 2024 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.
Scott Beilharz
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 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 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 a 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?
Timothy Necastro
Thanks, Scott, and thanks to all of you for your interest in Erie's fourth-quarter and year-end results for 2024. 2025 is an exciting year at Erie Insurance as we celebrate our centennial. H.O. Hirt and O.G. Crawford opened the doors of Erie Insurance Exchange on April 20, 1925, after selling $31,000 of stock in Erie Indemnity Company as the [managing attorneys act]. Within the first year, H.O. and O.G. brought in just under $50,000 in premiums from nearly 1,400 policyholders and established a surplus of almost $37,000. It's amazing to think that today, Erie Insurance Exchange has amassed close to $12 billion in premium, more than 7 million policies in force, and just over $9 billion in policyholder surplus. And Erie Indemnity just experienced net income of $600 million in 2024. This growth and success are no doubt testaments to the value proposition we offer, delivered by our dedicated employees and our agents. Today, we face challenges and changes that are quite different from those of our founders. But we are adapting and responding in a way that aligns with our founding principles, which guide us to put people in service above all else. I'll share some examples of recent strides we've made to adapt to some of those changes in a few minutes. But first, I'd like to introduce Chief Financial Officer, Julie Pelkowski, who will provide an overview of our financial results. Julie?
Julie Pelkowski
Thank you, Tim, and good morning, everyone. In 2024, Erie Indemnity Company continued to experience strong operating performance, driven by growth for Erie Insurance Exchange. Direct written premiums of the exchange grew 16% in the fourth quarter of 2024 and over 18% for the full-year 2024, compared to the respective periods in the prior year. These results were primarily driven by the more significant rate increases that had been taken to combat higher loss costs caused by increased severity in weather events. The exchange's total average premium per policy grew over 13% in 2024, compared to 2023. Policies in force grew a solid 4.8% to over 7 million in 2024, although slowing from the significant growth of 6.9% in 2023. Policyholder retention also remained strong at 90.4%. As stated in previous calls, because we write 12-month policies, it takes 24 months for the related premium to be fully earned into our financial results. As expected, the exchange's profitability experienced improvements driven by the higher earned premiums, as the more significant portion of rate increases were realized in 2024. In the fourth quarter of 2024, the combined ratio was 105.7, an improvement from 111.4 in the fourth quarter of 2023. From a total year perspective, the combined ratio for the exchange ended at 110.4, nearly 9 points better than the 2023 combined ratio of 119.1. Coupled with the impact from rate increases, the exchange has seen stable frequency. And while there are still pockets of higher severity, overall severity trends have been moderating. Catastrophe losses from weather events were also lower in 2024, despite the impacts of Hurricane Helene that added 1.6 points to the 2024 combined ratio. Overall, catastrophe losses contributed 9.6 points to the 2024 combined ratio, compared to 12.6 points in 2023. In 2022 and 2023, the exchange experience declines in policyholder surplus, driven by the severity and weather events we've been discussing. With the more significant rate actions taking hold in 2024, policyholder surplus stabilized this year, remaining at $9.3 billion at year-end, similar to the beginning of the year. Now let's turn to the Indemnity Company and the positive results for both the fourth quarter and year-end. Net income was $152 million or $2.91 per diluted share in the fourth quarter of 2024, compared to nearly $111 million or $2.12 per diluted share in the fourth quarter of 2023. Net income was just over $600 million or $11.48 per diluted share in 2024, compared to just over $446 million or $8.53 per diluted share in 2023. Operating income in the fourth quarter increased a little over $40 million or 31.7% compared to the fourth quarter of 2023. For the total year, Indemnity experienced an increase in operating income of just over $156 million or 30% compared to 2023. When looking at our revenue growth, management fee revenue from policy issuance and renewal services increased over $97 million or 16.1% in the fourth quarter of 2024, compared to the fourth quarter of 2023 and $452 million or 18.5% for the total year compared to 2023. These increases in both the fourth quarter and total year were in line with the respective increases in the direct and affiliated assumed written premiums of the exchange. From an expense standpoint, the total cost of operations from policy issuance and renewal services increased $57 million or 11.4% for the fourth quarter and $301 million or 15% for the total year 2024 compared to the same period in 2023. Our most significant cost of operations, our commission expenses, grew $51 million in the fourth quarter, although total year commission expenses increased $253 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 just over $6 million, while the total year non-commission expenses grew $48 million. The $6 million fourth-quarter increase was driven by increased underwriting and policy processing costs of nearly $5 million, $3 million in additional information technology investments, and $2 million in higher customer service costs. These increases were offset by lower sales and advertising expenses of $2 million, and lower administrative and other costs of $1 million. The increase in total year non-commission expenses of $48 million included increased underwriting and policy processing expenses of $18.5 million. Sales and advertising expenses increased by almost $8 million, driven by higher agent-related and community development costs. Administrative and other costs increased $14.5 million due to increased personnel costs, charitable contributions, and professional fees. Customer service costs also increased $9 million due to increases in both personnel costs and credit card processing fees. These increases were offset by lower overall information technology costs for the year of over $1 million due to decreases in professional fees and personnel costs. Income from investments for the fourth quarter totaled almost $21 million compared to $10 million in the same period last year. The fourth quarter of 2024 saw an increase of $7 million in net investment income as well as a decrease in net impairment losses of $7 million, compared to the fourth quarter of 2023. Income from investments totaled over $69 million for 2024 compared to just $29 million for total year 2023, primarily driven by a $25 million increase in net investment income. Contributing to this increase was a $13 million improvement in our limited partnership results, and higher net realized and unrealized gains of $9 million compared to 2023. Finally, in 2024, we paid our shareholders over $237 million in dividends. And in December of last year, our Board approved a 7.1% increase in the 2025 regular quarterly cash dividend for both our class A and class B shares. Now, I'll turn the call back over to Tim.
Timothy Necastro
Thank you, Julie. Earlier in the call, I mentioned the challenges and changes we've been facing, and we're certainly not alone. The volatility of the economy, the climate, and the legal landscape are impacting our entire industry. And of course, the pace of technology continues to demand more of our resources and attention. Modernization of our technology platforms and processes has been a key initiative for the past two years. It's foundational to our future growth and geographic expansion. And it's directly tied to one of our highest current priorities, expense management. I'm pleased to share that at the end of 2024, we'd successfully migrated multiple legacy systems to modern platforms. We still have a lot of work ahead to continue this migration and to sunset legacy systems, but we're pleased with our progress to date. Several legacy platforms have been migrated to the cloud, a technology infrastructure that is more stable, secure, and efficient. And the modernization efforts have also led to enhancements to our products, services, and related digital and data capabilities. This includes a new billing platform that has been implemented with two recent rollouts, the expansion of workers' compensation, and the launch of Business Auto 2.0. You may recall that in 2023, we launched a refreshed workers' compensation platform. This paved the way for the recent expansion of workers' comp coverage to adjacent states. Commercial customers domiciled in the states within Erie's footprint can now include employees who work primarily in Delaware and Vermont on their Erie workers' comp policy. Additional states are expected to be added soon. Business Auto 2.0 supports our refreshed and enhanced commercial auto product with an improved quoting and processing experience and the ability to have vehicles from multiple states on one policy. After being successfully piloted in Indiana and incorporating recommended improvements from stakeholders, Business Auto 2.0 will move ahead for a full rollout in the first half of 2025. Before we close, I'd like to mention a couple of third-party recognitions Erie received in the last quarter. In November, Erie was recognized as a Top 100 Employer for Workplace Culture for the second consecutive year by the American Opportunity Index. The annual employer study measures how effective America's largest companies are at developing talent to drive business performance and advance individual careers. And in December, Erie's Future Focus Internship Program was named to the Rising Insurance Star Executive list of the industry's 50 best leadership programs for the fourth consecutive year. More than 100 interns from 40 different colleges and universities participated in the program last year. Finally, I'm excited to share that two of our senior leaders have been promoted to Executive Vice Presidents. Sarah Shine, a 25-year employee of Erie, has been appointed Executive Vice President of Customer Service and Experience. And Cody Cook, a 22-year employee of Erie, has been appointed Executive Vice President of Claims. As tenured employees who have served in both business and support functions, they each bring great institutional knowledge and valuable perspective to our executive team. I'm excited to have Cody and Sarah serving in these important executive roles as we begin our 100th year and set our strategy for the future. Thank you, all, again for listening in today and for your continued interest in Erie.
