Erie Indemnity Reports Third Quarter 2020 Results

Net Income per Diluted Share was $1.71 for the Quarter and $4.41 for the Nine Months of 2020

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Oct 29, 2020, 16:15 ET

ERIE, Pa., Oct. 29, 2020 /PRNewswire/ -- Erie Indemnity Company (NASDAQ: ERIE) today announced financial results for the quarter and nine months ending September 30, 2020. Net income was $89.2 million, or $1.71 per diluted share, in the third quarter of 2020, compared to $94.2 million, or $1.80 per diluted share, in the third quarter of 2019. Net income was $230.5 million, or $4.41 per diluted share, in the first nine months of 2020, compared to $257.2 million, or $4.92 per diluted share, in the first nine months of 2019.

The significant disruption to the economy and financial markets resulting from the COVID-19 pandemic that began in the first quarter of 2020 continues to evolve and the pandemic's ultimate impact and duration remain highly uncertain at this time. While the Exchange experienced declines in new business premium in the second quarter of 2020 due to the pandemic, new business premiums grew 10.4% in the third quarter of 2020 compared to the same period in 2019. The financial markets substantially recovered in the third quarter from the financial volatility negatively impacting our portfolio in the first quarter of 2020, improving our investment results in the third quarter.

3Q and Nine Months 2020
(in thousands)	3Q'20		3Q'19		2020		2019
Operating income	$	96,225	$	105,907	$	273,105	$	288,639
Investment income	16,438		13,606		18,796		33,053
Interest and other expense, net	967		11		1,596		637
Income before income taxes	111,696		119,502		290,305		321,055
Income tax expense	22,480		25,333		59,786		63,821
Net income	$	89,216	$	94,169	$	230,519	$	257,234

3Q 2020 Highlights

Operating income before taxes decreased $9.7 million, or 9.1 percent, in the third quarter of 2020 compared to the third quarter of 2019.

Management fee revenue - policy issuance and renewal services increased $10.1 million, or 2.1 percent, in the third quarter of 2020 compared to the third quarter of 2019.
Management fee revenue - administrative services increased $0.5 million, or 3.3 percent, in the third quarter of 2020 compared to the third quarter of 2019.
Cost of operations - policy issuance and renewal services

Commissions increased $6.2 million in the third quarter of 2020 compared to the third quarter of 2019, primarily driven by direct and affiliated assumed written premium growth.
Non-commission expense increased $13.2 million in the third quarter of 2020 compared to the third quarter of 2019. Underwriting and policy processing expense increased $3.2 million primarily due to increases in personnel costs and underwriting report costs. Administrative and other costs increased $8.8 million primarily driven by higher incentive plan award accruals due to the Exchange's lower combined ratio and the change in the company stock price, which experienced an increase in the third quarter of 2020 compared to a decrease in the same period in 2019. Increased professional fees also contributed to the increase in administrative and other costs compared to the same period in 2019.

Income from investments before taxes totaled $16.4 million in the third quarter of 2020 compared to $13.6 million in the third quarter of 2019. Net realized gains on investments were $5.9 million in the third quarter of 2020 compared to $1.7 million in the third quarter of 2019. Net investment income was $7.0 million in the third quarter of 2020 compared to $8.7 million in the third quarter of 2019. Earnings from limited partnerships were $3.6 million in the third quarter of 2020 compared to earnings of $3.3 million in the third quarter of 2019.

Nine Months 2020 Highlights

Operating income before taxes decreased $15.5 million, or 5.4 percent, in the first nine months of 2020 compared to the first nine months of 2019.

Management fee revenue - policy issuance and renewal services increased $26.2 million, or 1.9 percent, in the first nine months of 2020 compared to the first nine months of 2019.
Management fee revenue - administrative services increased $1.9 million, or 4.5 percent, in the first nine months of 2020 compared to the first nine months of 2019.
Cost of operations - policy issuance and renewal services

Commissions increased $20.4 million in the first nine months of 2020 compared to the first nine months of 2019, primarily driven by a 1.9% increase in direct and affiliated assumed written premium growth and increases in agent incentive compensation due to improved agent profitability.
Non-commission expense increased $21.9 million in the first nine months of 2020 compared to the first nine months of 2019. Information technology costs increased $6.4 million primarily due to increases in hardware and software costs, personnel costs, and professional fees. Underwriting and policy processing expense increased $6.0 million primarily due to increases in personnel costs and underwriting report costs. Administrative and other costs increased $6.3 million primarily driven by increases in personnel costs and professional fees. Increased personnel costs in all categories included higher incentive plan award accruals due to Exchange's lower combined ratio and higher vacation accruals as employees took less vacation in the first nine months of 2020 as a result of the COVID-19 pandemic.

Income from investments before taxes totaled $18.8 million in the first nine months of 2020 compared to $33.1 million in the first nine months of 2019. Net investment income was $22.8 million in the first nine months of 2020 compared to $25.2 million in the first nine months of 2019. Net realized gains on investments were $1.6 million in the first nine months of 2020 compared to $5.5 million in the first nine months of 2019. Net impairment losses of $3.2 million in the first nine months of 2020 were driven by the COVID-19 pandemic's impact on the financial markets. Losses from limited partnerships were $2.4 million in the first nine months of 2020 compared to earnings of $2.5 million in the first nine months of 2019.

Webcast Information
Indemnity has scheduled a pre-recorded audio broadcast on the Web for 10:00 AM ET on October 30, 2020. Investors may access the pre-recorded audio broadcast by logging on to www.erieinsurance.com.

Erie Insurance Group
According to A.M. Best Company, Erie Insurance Group, based in Erie, Pennsylvania, is the 11^th largest homeowners insurer and 12^th largest automobile insurer in the United States based on direct premiums written and the 16^th largest property/casualty insurer in the United States based on total lines net premium written. The Group, rated A+ (Superior) by A.M. Best Company, has nearly 6 million policies in force and operates in 12 states and the District of Columbia. Erie Insurance Group is a FORTUNE 500 company.

News releases and more information about Erie Insurance Group are available at www.erieinsurance.com.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995:
Statements contained herein that are not historical fact are forward-looking statements and, as such, are subject to risks and uncertainties that could cause actual events and results to differ, perhaps materially, from those discussed herein. Forward-looking statements relate to future trends, events or results and include, without limitation, statements and assumptions on which such statements are based that are related to our plans, strategies, objectives, expectations, intentions, and adequacy of resources. Examples of forward-looking statements are discussions relating to premium and investment income, expenses, operating results, and compliance with contractual and regulatory requirements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Among the risks and uncertainties, in addition to those set forth in our filings with the Securities and Exchange Commission, that could cause actual results and future events to differ from those set forth or contemplated in the forward-looking statements include the following:

potential impacts of the COVID-19 pandemic on the growth and financial condition of the Erie Insurance Exchange ("Exchange");
potential impacts of the COVID-19 pandemic on our operations, the business operations of our customers and/or independent agents, or our third-party vendor operations;
dependence upon our relationship with the Exchange and the management fee under the agreement with the subscribers at the Exchange;
dependence upon our relationship with the Exchange and the growth of the Exchange, including:

general business and economic conditions;
factors affecting insurance industry competition;
dependence upon the independent agency system; and
ability to maintain our reputation for customer service;

dependence upon our relationship with the Exchange and the financial condition of the Exchange, including:

the Exchange's ability to maintain acceptable financial strength ratings;
factors affecting the quality and liquidity of the Exchange's investment portfolio;
changes in government regulation of the insurance industry;
emerging claims and coverage issues in the industry; and
severe weather conditions or other catastrophic losses, including terrorism;

costs of providing policy issuance and renewal services to the Exchange under the subscriber's agreement;
ability to attract and retain talented management and employees;
ability to ensure system availability and effectively manage technology initiatives;
difficulties with technology or data security breaches, including cyber attacks;
ability to maintain uninterrupted business operations;
factors affecting the quality and liquidity of our investment portfolio;
our ability to meet liquidity needs and access capital; and
outcome of pending and potential litigation.

A forward-looking statement speaks only as of the date on which it is made and reflects our analysis only as of that date. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changes in assumptions, or otherwise.

Erie Indemnity Company
Statements of Operations
(dollars in thousands, except per share data)

	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(Unaudited)				(Unaudited)
Operating revenue
Management fee revenue - policy issuance and renewal services, net	$	484,551	$	474,427	$	1,412,096	$	1,385,923
Management fee revenue - administrative services, net	14,910		14,430		44,494		42,576
Administrative services reimbursement revenue	147,710		142,730		451,229		431,305
Service agreement revenue	6,310		7,155		19,418		20,754
Total operating revenue	653,481		638,742		1,927,237		1,880,558

Operating expenses
Cost of operations - policy issuance and renewal services	409,546		390,105		1,202,903		1,160,614
Cost of operations - administrative services	147,710		142,730		451,229		431,305
Total operating expenses	557,256		532,835		1,654,132		1,591,919
Operating income	96,225		105,907		273,105		288,639

Investment income
Net investment income	7,030		8,652		22,772		25,199
Net realized investment gains	5,915		1,696		1,635		5,501
Net impairment losses recognized in earnings	(122)		(31)		(3,192)		(193)
Equity in earnings (losses) of limited partnerships	3,615		3,289		(2,419)		2,546
Total investment income	16,438		13,606		18,796		33,053

Interest expense, net	3		111		8		832
Other (expense) income	(964)		100		(1,588)		195
Income before income taxes	111,696		119,502		290,305		321,055
Income tax expense	22,480		25,333		59,786		63,821
Net income	$	89,216	$	94,169	$	230,519	$	257,234

Net income per share
Class A common stock – basic	$	1.92	$	2.02	$	4.95	$	5.52
Class A common stock – diluted	$	1.71	$	1.80	$	4.41	$	4.92
Class B common stock – basic	$	287	$	303	$	742	$	829
Class B common stock – diluted	$	287	$	303	$	742	$	828

Weighted average shares outstanding – Basic
Class A common stock	46,189,030		46,189,006		46,188,544		46,188,767
Class B common stock	2,542		2,542		2,542		2,542

Weighted average shares outstanding – Diluted
Class A common stock	52,310,429		52,325,125		52,312,588		52,317,275
Class B common stock	2,542		2,542		2,542		2,542

Dividends declared per share
Class A common stock	$	0.965	$	0.90	$	2.895	$	2.70
Class B common stock	$	144.75	$	135.00	$	434.25	$	405.00

Erie Indemnity Company
Statements of Financial Position
(in thousands)

	September 30, 2020		December 31, 2019
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	216,355	$	336,739
Available-for-sale securities	13,429		32,810
Equity securities	0		2,381
Receivables from Erie Insurance Exchange and affiliates, net	501,192		468,636
Prepaid expenses and other current assets	52,008		44,943
Federal income taxes recoverable	3,965		462
Accrued investment income	5,973		5,433
Total current assets	792,922		891,404

Available-for-sale securities, net	894,625		697,891
Equity securities	94,435		64,752
Limited partnership investments	10,006		26,775
Fixed assets, net	254,908		221,379
Agent loans, net	58,339		60,978
Deferred income taxes, net	21,618		17,186
Other assets	32,489		35,875
Total assets	$	2,159,342	$	2,016,240

Liabilities and shareholders' equity
Current liabilities:
Commissions payable	$	275,594	$	262,963
Agent bonuses	85,709		96,053
Accounts payable and accrued liabilities	148,075		134,957
Dividends payable	44,940		44,940
Contract liability	37,420		35,938
Deferred executive compensation	12,701		10,882
Current portion of long-term borrowings	2,021		1,979
Total current liabilities	606,460		587,712

Defined benefit pension plans	169,358		145,659
Long-term borrowings	94,337		95,842
Contract liability	19,140		18,435
Deferred executive compensation	11,335		13,734
Other long-term liabilities	11,495		21,605
Total liabilities	912,125		882,987

Shareholders' equity	1,247,217		1,133,253
Total liabilities and shareholders' equity	$	2,159,342	$	2,016,240