Erie Indemnity Company - Earnings Call - Q3 2025

Executive Summary

• Q3 delivered a clean EPS beat with improved underwriting at the Exchange: diluted EPS $3.50 vs $3.37 consensus (+$0.13), while total operating revenue was $1.067B vs $1.085B consensus (miss) as fee revenue tracked premium growth and expenses were well‑managed (consensus marked with ). Non‑commission expenses declined on lower incentive comp and professional fees, and investment income rose.
• Exchange profitability inflected: combined ratio improved to 100.6% from 113.7% YoY; YTD combined ratio 108.6% vs 113.4% YoY, aided by lower weather events in Q3 and cumulative rate actions; policyholder surplus rose to $9.6B.
• Management launched “Erie Secure Auto” (pilot in OH with strong early lift) and plans December rollouts to PA, WV, VA, supporting competitiveness and growth into mid‑2026.
• AM Best lowered Erie Insurance Group’s FSR to A (Excellent) from A+ (Superior) in September; management emphasized robust surplus ($9.6B) and ongoing rate/pricing discipline amid elevated weather and severity headwinds.
• Stock reaction catalysts: quality of beat (expense control, higher net investment income) despite revenue miss; visible underwriting progress at the Exchange; new auto product rollout; offset by headline risk from rating action and weather/severity backdrop.

What Went Well and What Went Wrong

What Went Well

• Expense discipline: non‑commission expense fell $11.9M YoY in Q3 on lower personnel incentive and professional fees; sales/advertising also down, supporting margin despite higher commissions.
• Underwriting trend improvement at the Exchange: Q3 combined ratio of 100.6% vs 113.7% YoY; YTD 108.6% vs 113.4% YoY, reflecting rate adequacy with fewer Q3 weather events.
• Product innovation: “Erie Secure Auto” pilot in OH showed “impressive” lift in submissions and DWP; broader deployment slated for Dec. and into mid‑2026 to boost competitiveness and growth.

What Went Wrong

• Top‑line shortfall vs consensus: operating revenue $1.067B vs $1.085B* despite 6.7% YoY growth, as Fee revenue growth slightly lagged the single estimate.
• Elevated commission expense: +$41M YoY in Q3 driven by premium growth and agent incentives, partly offsetting revenue gains.
• Ratings optics: AM Best FSR change to A (Excellent) underscores industry pressure from weather and severity; management framed capital position as strong ($9.6B surplus) but acknowledged profitability challenges from CAT and severity trends.

Transcript

Speaker 2

Morning and welcome to the Erie Indemnity Company third quarter 2025 earnings conference call. This call was pre-recorded, and there will be no questions and answer sessions following the recording. Now, I would like to introduce your host for the call, Vice President of Investor Relations, Scott Beilharz. Please proceed.

Thank you and welcome, everyone. We appreciate you joining us for this recorded discussion about our third 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 such differences, please see the safe harbor statement in our Form 10-K filing with the SEC filed yesterday and in the related press release. This pre-recorded 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 will move on to Tim's remarks. Tim.

Speaker 0

Thanks, Scott, and good morning, everyone. As we start today's call, I want to share an important update regarding our financial strength rating. In September, AM Best adjusted the financial strength rating of the property casualty members of Erie Insurance Group from A-plus superior to A-excellent. While that change was disappointing, it's important to note that an A-excellent rating is still one of the strongest in the industry. AM Best pointed to Erie's solid balance sheet, adequate operating performance, a favorable business profile, and strong risk management practices. This feedback from AM Best is reflected in our financial position, particularly our surplus, which remains extremely robust at $9.6 billion. The rating change primarily reflects profitability challenges we've discussed in past calls related to large underwriting losses driven by more frequent and severe weather events and increased claim severity in both auto and homeowners.

To provide a bit of background, severe weather-related events in 2023 and 2024 were nearly double historical levels, contributing to Erie's elevated underwriting losses. That trend has continued into 2025, where a fast-moving hailstorm earlier this year caused $370 million in insured losses, the single largest weather event in our company's history. At the same time, claim severity in both auto and homeowners grew faster than our rate increases, even as we worked to keep pricing competitive for our mutual customers. We've continued to take a measured, steady approach to rate adjustments, and that means it takes a bit longer to fully see the benefits of these changes. The bottom line is that the past few years, marked by inflation and weather volatility, have been some of the most challenging in our history.

I'm confident in the actions we've been taking to bring our profitability back to more stable levels, which are already taking hold, reflected in our third quarter results. With that, I'll turn it over to our Chief Financial Officer, Julie Pelkowski, to share more on those results. Julie.

Speaker 3

Thank you, Tim, and good morning, everyone. This quarter marks a meaningful step forward in Erie's return to profitability. As Tim touched on, our consistent focus on underwriting discipline and pricing actions is beginning to deliver the results we've been working toward. After a first half impacted by elevated catastrophe activity, the more typical lower weather events of the third quarter provided a clearer view of our core performance from a profitability perspective. Starting with the results of the exchange, the insurance operations we manage, the exchange's direct written premiums grew 7.6% in the quarter and 10.1% year-to-date. The average premium per policy increased 10.7%, reflecting the cumulative impact of rate increases over the past two years. Policy growth remained flat year-over-year, increasing 0.2%, while retention was 89.1% at the end of the third quarter.

While policy growth has moderated, consistent with broader industry trends, we're confident the balance of rate adequacy and retention positions us well for long-term profitable growth. We're introducing an enhanced auto product with more competitive rates and growth potential that Tim will expand on in a few minutes. From a profitability perspective, the third quarter combined ratio was 100.6% compared to 113.7% in the same quarter last year. On a year-to-date basis, the combined ratio was 108.6% compared to 113.4% in the same period of 2024. These results reflect steady, measurable progress toward restoring sustainable profitability. As a reminder, catastrophe events in the first half of the year significantly affected our reported loss ratios. The low level of weather events in this quarter highlights the adequacy of our rate levels and the improvement in profitability of our core book.

Policyholder surplus is up over $300 million for the year, bringing total surplus to $9.6 billion, as Tim mentioned. This growth demonstrates the strength of our capital position and our ability to withstand volatility while continuing to deliver long-term value to our policyholders. Shifting to the results for indemnity, net income for the third quarter was $183 million, or $3.50 per diluted share, compared to $160 million, or $3.06 per share, in the third quarter of 2024, a 14% increase. For the year, net income was $496 million, or $9.48 per diluted share, compared to $448 million, or $8.57 per diluted share in the first nine months of 2024, an 11% increase. Operating income grew to $209 million, up 16% from the same quarter last year, primarily driven by higher management fee revenue.

Operating income grew to $559 million, up almost 10% for the year, primarily driven by management fee revenue as well. Management fee revenue from policy issuance and renewal services increased 7.3% to $825 million for the quarter and 9.5% to $2.4 billion for the year, in line with the exchange's premium growth. On the expense side, commissions increased 9.7% to $462 million in the third quarter and up 12% to almost $1.4 billion year-to-date, driven by higher base commission expense in line with premium increases, as well as increased agent incentive compensation. Non-commission expenses decreased 6.2% in the third quarter to $181 million, reflecting lower administrative and other expenses, as well as lower sales and advertising expenses, all of which were partially offset by investments in information technology and underwriting costs.

Non-commission expenses increased 2.8% for the year to $556 million, reflecting increased investments in information technology, increased underwriting costs, as well as customer service costs, partially offset by administrative and other expenses, primarily due to decreased personnel costs. Investment income for the quarter totaled $22 million, up 10% from last year, reflecting higher yields and higher average balances. Investment income for the year totaled $61 million, up 25.2% from last year, primarily from net investment income. We take a measured approach to capital management, maintaining a strong balance sheet. For the first nine months of 2025, our financial performance has enabled us to pay our shareholders over $190 million in dividends. With that, I'll turn the call back over to Tim.

Speaker 0

Thank you, Julie. As Julie mentioned, we're excited to introduce an enhanced auto product that we're confident will have a positive impact on our competitive position. Erie Secure Auto has the pricing sophistication of our rate lock product without the lock. That means more competitive rates and greater opportunity for growth. Since launching the pilot in Ohio in August, we've seen this product have impressive impacts on submitted applications and direct written premium in that state. We plan to deploy the product in December to agents in Pennsylvania, West Virginia, and Virginia, with additional states to follow through the mid-next year. Erie Secure Auto is just one of the actions we're taking to bring profitability back to more normal levels. It's also just one of the product enhancements and rollouts on the horizon as we continue to modernize our technology platforms and respond to changing agent and customer needs.

As we focus on the future with new products and technology, our 100-year commitment to service is, as always, at the forefront. The ongoing strength of that commitment has been recognized by several industry accolades this year, including several in this past quarter. Erie Insurance was ranked first in small business insurance customer satisfaction in J.D. Power's 2025 U.S. Small Commercial Insurance Study, 25 points above the industry average and the best in class for price, for coverage, ease of doing business, and people. We were also named to Forbes' list of America's Best Insurance Companies 2026, earning recognition across multiple product categories, including auto, homeowners, renters, term life, and permanent life. In addition, Newsweek and Plant A Insights Group named Erie one of America's Greatest Companies 2025, recognizing our financial strength, innovation, sustainability, and ethics.

Finally, Erie was again recognized among the top employers in Pennsylvania on Forbes' list of America's Best in State Employers 2025 for the sixth consecutive year, building on earlier recognition as one of America's Best Large Employers and Best Employers for College Grads. As we near the end of our 100th year in business and look ahead to 2026, our focus remains clear: strengthening profitability, delivering exceptional service, and investing in the technology and products that will shape Erie's next century. We've faced difficult cycles before, and each time we've emerged stronger. Thanks to our dedicated employees and trusted agents who are committed to delivering superior service and protection, this time will be no different. Thank you for listening in today and for your interest in Erie.