Q2 2025 Pre-Recorded Earnings Call Transcript

Good morning, and welcome to the Erie Indemnity Company Second Quarter 2025 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.

Thank you, and welcome, everyone. We appreciate you joining us for this recorded discussion about our second 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 statements in our Form 10-Q filing with the SEC filed yesterday and in the related press release.

This prerecorded 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'll move on to Tim's remarks. Tim?

Thanks, Scott, and thank you all for listening in today. Before we get into our financial update for the second quarter, I'd like to spend a few minutes sharing some insights into the information security event our company recently experienced. On June 7, our IT team identified unauthorized network activity. Consistent with our incident response plans, the team took immediate action and initiated a proactive network outage and system shutdown.

This was a necessary step to protect our systems and data, and thankfully, it was effective. After a thorough forensics investigation conducted by independent cybersecurity specialists, there is no evidence that any sensitive personal information, financial records or legally protected data was breached by the threat actor during our incident. Our recovery process was supported by some of the nation's leading cybersecurity specialists and was conducted with an intentional phased and prioritized method. This complex recovery process took time to ensure that systems and applications were restored safely and securely.

While that work was underway, teams from across the company moved quickly to implement workarounds for critical processes like claims handling and to mobilize our workforce to step outside their normal duties to support. By July 7, 1 month after the outage, the majority of our systems were back up and running. I'd like to express my appreciation to the employees and agents who work tirelessly to recover our systems safely and to keep our operations going. From every area of the company and from both employees and agents, I saw a willingness to do whatever it took to get through this situation and to uphold our promise of service.

That is never what we expected to be dealing with in our 100th year of business, but incidents like this one are an unfortunate reality of doing business in today's world. Our information security protocols, along with our technical and physical safeguards are aligned with the best practices of the insurance industry. However, this incident shows that no organization is completely immune to such attacks. Cybercriminal groups and information security incidents are becoming increasingly sophisticated and even the most well-protected organizations can be impacted.

Safeguarding our systems and the information we have continue to be top priorities, and we're already implementing what we learned from this incident to further strengthen our cybersecurity protections. Now let's turn to the financial performance of the past quarter. Here to share the details is Chief Financial Officer, Julie Pelkowski. Julie?

Thank you, Tim, and good morning, everyone. As Tim mentioned, while the cyber incident caused a challenging end to our second quarter, we're certainly proud of how quickly teams mobilized to ensure we were able to provide our policyholders with best-in-class service, albeit under less-than-ideal circumstances. Given the diligent implementation of our business continuity protocols, we do not believe there has been a material impact to our statements of financial position, income or cash flows as a result of this incident. Starting with the results of the Erie Insurance Exchange, the insurance operations we manage from a growth perspective.

As we've seen in recent quarters, the significant rate increases we implemented in 2023 and 2024 continue to drive the Exchange's direct written premium growth. The Exchange's direct and assumed written premiums grew by nearly 9.2% in the second quarter of 2025 and 11.4% in the first half of 2025 compared to the same respective periods in the prior year. The rate impact is evidenced in the increase in our average premium per policy of 11.9%. We saw policies in-force growth of 1.7%, and our policy retention ratio remained strong at 89.7%.

The more adequate rates are continuing to drive improvement in the Exchange's non-catastrophe loss ratio. However, from a seasonality perspective, we generally see higher weather losses in the first half of the year. We saw this trend hold true as the Exchange's combined ratio was 116.9% in the second quarter of 2025 compared to 115.9% in the second quarter of 2024, with catastrophic weather events contributing 20.7 points and 16.2 points in those same respective periods. The year-to-date combined ratio was 112.6% in 2025 compared to 111.1% in the first 6 months of 2024. In the first 6 months, catastrophic weather events contributed 18.5 points versus 12.7 points in the same period of 2024. These catastrophe losses were experienced in March, April and May, the spring months that generally have the highest experience of weather events in our geographic footprint.

The other months in the 6-month period experienced combined ratios below 100%. As I highlighted during our last call, if you reference the Investor Supplement that is published on our website, if we excluded catastrophe losses as well as the effects of prior accident year reserve development, our direct current year non-catastrophe loss ratio would have been 94.6% and 95.1% in the second quarter and first 6 months of 2025, respectively. In summary, while our rate increases contribute to profitability improvements, they are being masked by the more significant catastrophe losses we experienced in 2025 compared to last year.

The Exchange's underwriting losses were partially offset by investment returns, which resulted in a slight decrease in policyholder surplus from $9.3 billion at December 2024 to $9.2 billion at June 2025, which held steady from March of 2025. Shifting to the results for Indemnity. Net income was $175 million or $3.34 per diluted share in the second quarter of 2025 compared to $164 million or $3.13 per diluted share in the second quarter of 2024. Year-to-date, Indemnity net income was $313 million or $5.99 per diluted share compared to $289 million or $5.52 per diluted share at this time last year.

Operating income increased in the second quarter nearly 5% to almost $200 million compared to the second quarter of 2024 bringing our year-to-date 2025 operating income to $350 million, which was an increase of almost 7% compared to the first half of 2024. The main driver of these increases continues to be higher management fee revenue resulting from the growth in the Exchange's direct written premium. Management fee revenue from policy issuance and renewal services increased 8.3% to $824 million in the second quarter of 2025 compared to the second quarter of 2024 and nearly 11% to $1.6 billion in the first half of the year compared to this time last year.

Total cost of operations from policy issuance and renewal services increased $54 million or 9.1% for the second quarter of 2025 compared to the same period in 2024. The first half of 2025 saw an increase of $132 million or 11.5% when compared with the first half of 2024. Commission expenses are the largest driver, increasing almost $44 million or just over 10% compared to the second quarter of 2024 and nearly $105 million or 13.1% in the first half of 2025 compared to the same period of 2024. Non-commission expenses for the second quarter increased nearly $11 million or 6.1%, primarily driven by higher information technology costs and sales and advertising expenses.

Year-to-date 2025 non-commission expenses grew almost $27 million or 7.7% compared to the first half of 2024. This was primarily driven by increased information technology costs as well as higher underwriting and policy processing, sales and advertising and customer service expenses. Personnel costs within each of these expense categories were impacted by increased health care costs compared to 2024. Income from investments totaled almost $20 million compared to earnings of nearly $14 million in the second quarter of 2024. Net investment income was just over $20 million in the second quarter compared to almost $16 million in the same period last year.

Total investment income in the first half of 2025 was $39 million compared to $29 million in the first half of 2024. Net investment income for the first half of 2025 drove most of this improvement, contributing $8 million compared to 2024. As always, we take a measured approach to capital management, and we maintain a strong balance sheet. And for the first 6 months of 2025, our financial performance has enabled us to pay our shareholders over $127 million in dividends. With that, I'll turn the call back over to Tim. Tim?

Thanks, Julie. The cybersecurity event and system outage occupied much of our attention over the past quarter, but we also celebrated several notable milestones, achievements and accolades. In April, several members of our leadership team capped off Erie's 100th anniversary week with a visit to the NASDAQ headquarters in New York City to ring the opening bell. This was to celebrate both our 100th year in business and the 30th anniversary of Erie Indemnity's listing on the NASDAQ.

It was a remarkable moment, representing the amazing growth and success our company has achieved since its humble beginnings in 1925. Another example of this success came in May when we announced the creation of the Erie Insurance Foundation, a private charitable foundation that will create long-term sustainability for charitable contributions and grant making. To launch the initiative and seed the foundation's endowment, Erie Indemnity Company as the management company for Erie Insurance plans to donate $100 million. Many of the company's charitable giving funds and activities previously coordinated by the giving network will be consolidated under the separate 501(c)(3) foundation.

This will enable the foundation's Board of Directors and Officers to direct the entity's investment decisions, charitable strategy and grant funding. The $100 million seed gift from Erie Indemnity will build a charitable legacy for years to come as the initial gift can be invested and grow. The support of our communities is part of our larger commitment to putting service above all else. Service is at the heart of Erie's unique value proposition and recent recognitions show that our customers continue to experience it firsthand.

Earlier this year, Erie was named the highest-rated auto insurance provider by Consumer Reports. It was the highest rated carrier out of 36 of the nation's top carriers with rankings based on factors like premiums, claims, coverage and policy clarity. Consumer Reports is an independent nonprofit member organization that works side-by-side with consumers for truth, transparency and fairness in the marketplace, including insurance. This recognition of our value proposition was a big win for us, and it will hopefully prompt more consumers to consider us for their insurance needs.

To round out this quarter's recognitions, our strong financial standing was validated in June when Erie moved up 52 spots on the 2025 Fortune 500 list. Erie improved its position from 376 to 323 on the list of America's largest corporations based on total revenue for the 2024 fiscal year. This marks the 22nd year Erie has been named to Fortune 500 alongside some of the most well-known and successful companies in this country. Over the course of the last century, we've never stopped delivering on the promise our founders made in the earliest days of the company to put service and people above all else.

This commitment has helped us establish a reputation for exceptional service that consistently ranks higher than the rest of the insurance industry. It's also helped us weather countless challenges over the years, including the one we just experienced. Thank you to our loyal and committed employees and agents for upholding our promise of service for our shareholders, for your continued trust and support and to our policyholders placing your trust in us. Thank you all for your interest in the Erie.