Operator: Good morning and welcome to Erie Indemnity Company Fourth Quarter 2012 Earnings Conference Call. I'd like to introduce your host for today's call, Scott Beilharz.
Scott Beilharz - Director, IR: Thank you, Janine, and welcome, everyone. We appreciate all of you joining us. On today's call, management will discuss our fourth quarter 2012 results and other matters related to the Company's fourth quarter operations.
Joining me today are Terry Cavanaugh, President and CEO; Marcia Dall, Executive Vice President and Chief Financial Officer; Rick Burt, Executive Vice President, Products; Chip Dufala, Executive Vice President, Services; Bob Ingram, Executive Vice President Information Technology; John Kearns, Executive Vice President, Sales and Marketing; and Jim Tanous, Executive Vice President, Secretary and General Counsel. Our earnings release and financial supplements were issued yesterday afternoon and are currently available on our website erieinsurance.com. We will hear brief remarks from Terry and Marcia and then open the call for questions.
Before we begin, let me remind everyone that today's discussion may contain forward-looking statements. These forward-looking statements reflect the Company's current views about future events and are based on assumptions subject to known and unknown risks and uncertainties. These risks and uncertainties may cause results to differ materially from those anticipated as described in those statements. For information on important factors that may cause such differences, please see the Safe Harbor statements in our latest 10-K filing with the SEC dated February 26, 2013, and in the related press release.
Also, in this call we may cover non-GAAP measures. A reconciliation to the GAAP-based results can be found in the 10-K. This call is being recorded and recording is the property of Erie Indemnity Company. It is not intended for reproduction or rebroadcast by any other party without the prior written consent of Erie Indemnity Company. A replay will be available on our website today after 12.30 p.m. Eastern Time.
Your participation on this call will constitute consent to recording, publication, webcast, broadcast, and use of your name, voice and comments by Erie Indemnity. If you do not agree with these terms, please disconnect at this time.
With that I'll now turn the call over to Terry.
Terrence W. Cavanaugh - President and CEO: Thank you, Scott, and good morning to everyone. Erie Indemnity ended 2012 with strong gains in both net income and earnings per share, driven primarily by strong top line growth and positive year-over-year investment results. Combined these led to an Indemnity net income per share diluted for the quarter of $0.56 compared to $0.49 last year. Direct written premium of the exchange, which drives Indemnity's management fee revenue, remained strong, up 9.9% for the fourth quarter. Higher average premium per policy in all of our major lines of business contributed to the increase in revenue.
In 2012, thanks to the efforts of our agents and employees, we increased policies by 3.9% and our policy retention rate increased to a strong 90.9% at year-end. Our 2012 results reflect success and our key initiatives, service responsiveness as well as the engagement of our agency force. These initiatives, which will continue in 2013, focused on three strategic priorities; ease of doing business, innovation, and service excellence.
One of the initiatives that encompasses all of our strategic priorities is the progress made in the last year in helping our agents quote and buying seamlessly using our new quoting system for auto. During the fourth quarter the system was fully deployed in all states where we write business. Agent feedback has been positive and we will continue to enhance the system's capability throughout this year. Another way we’re working better to serve our agents is with our marketing portal. This portal not only makes it easier for agents to find materials but provides ease and mailing or e-mailing to targeted prospects, keeping in touch with existing customers and ultimately improving cross-selling opportunities.
Agent use has been robust in the fourth quarter and we are working closely with them to ensure the portal becomes efficient and valuable as a tool. Our marketing efforts throughout 2012 have yielded strong results, adding to Erie’s market share gains in all states where we write business. One of these is our Go Local campaign, which is building brand awareness for Erie in a number of markets throughout our footprint.
In fact, as independent agency force reduces their marketing efforts, Erie agents are more engaged than ever in marketing our products. They are participating in high rates in Erie’s co-op marketing programming effectively cobranding with Erie. This will pay off in the future as we work with our agents to build brand awareness and sales.
With that, I'll now turn the call over to Marcia to review the financials for the quarter and the year.
Marcia A. Dall - EVP and CFO: Thank you, Terry, and good morning, everyone. Today I'll share results for the fourth quarter and the full year 2012. First let's look at our fourth quarter results. After-tax net income for the quarter was $30 million compared to $26 million for the same period a year ago. On a per diluted share basis, net income was $0.56 per share in the current quarter compared to $0.49 per share in the prior year quarter.
Our management operations income was flat year-over-year and our investment results was slightly higher. Management fee revenue was $275 million in the fourth quarter 2012, up 10% from the prior year and consistent with the 10% increase in direct written premiums of the exchange.
While we continued to take rate increases where appropriate, our customer retention remained strong at 90.9%, resulting in an 8% increase in renewal premium. Our agency force is generating higher levels of new business in both personal and commercial lines. New business premiums increased 27% compared to the fourth quarter of 2011, driven by a 21% increase in new policies and an increase of 8% in average premium per policy.
Cost of management operations was $249 million or 11% over the fourth quarter of 2011, primarily due to an increase in volume-related commission expenses. The gross margin from our management operations in the fourth quarter 2012 was 12% compared to 13% a year earlier. It is important to note that our fourth quarter gross margin is typically lower due to the seasonality of our written premiums and management fees.
Now turning to the results of our investment operations. Indemnity recorded a profit before taxes of $10 million compared to a profit before taxes of $7 million in the prior year quarter. The increase in investment results over the prior year was driven primarily from gains on limited partnerships of $5 million compared to gains of $1 million in the fourth quarter of 2011.
Now I'll move on to our full year 2012 results. Indemnity's net income totaled a $160 million or $2.99 per share diluted compared to $169 million or $3.08 per share diluted in 2011. The decrease in net income was primarily from lower investment income driven by a reduction in limited partnership income and a slight decrease in management margins. Income before taxes in our management operations was $205 million for the year compared to $208 million in 2011. The 2012 results was driven primarily by an 8% increase in the direct written premiums of the exchange, offset by a 10% increase in total cost of operations. We were able to see consistent progression in our premium growth throughout 2012 as we added more new policies, maintained our strong retention, and increased average premium per policy.
Turning back to our management operations for the year, the gross margin was 17% in 2012 compared to 19% in 2011.
And finally the results of our investment operations. Indemnity ended the year with profit before taxes of $36 million down $9 million due to the performance of alternative real estate investments.
Now let’s look at our share repurchases for the fourth quarter and full-year. During the fourth quarter of 2012, we repurchased approximately 235,000 shares of our outstanding Class A common stock at a total cost of $16 million. For the full-year 2012, we repurchased approximately 1 million Class A shares at a total cost of $70 million. As of December 31, we had approximately $68 million remaining in our share repurchase program.
Now, I’ll turn the call back over to Terry.
Terrence W. Cavanaugh - President and CEO: Thank you, Marcia. In addition to the ongoing share repurchase program, our Board increased the regular quarterly cash dividend of 7.2% on Class A and Class B shares in November. The Board also declared a special one-time cash dividend of $2 on Class A shares and $300 on Class B shares, which was also paid in 2012. Our Board of Directors also voted to maintain a 25% management fee rate going forward in 2013.
In 2013, we’re building on the momentum we achieved in 2012. The Erie team remains engaged and focused on our three primary initiatives; ease of doing business, innovation and service excellence. In each of these areas, we’re aiming for tangible gains that will move the business forward and enhance the Erie brand experience for agents and customers. In turn, we create value for you, our shareholders. Erie's long-standing commitment to do what's right for the people and the communities we serve is what drives us towards excellence to be above all in service. Our employees actively demonstrate this commitment in every aspect of their work. This is what makes Erie strong and drives our long-term success.
Now, I'll turn the call back over to the operator to open the line for questions.
Operator: Ray Iardella, Macquarie.
Christopher Maimone - Macquarie: This is actually (Chris Maimone), Ray's associate. I was hoping you guys could talk a little bit about the gross margin for management operations maybe you could help us just get a feel on what factors specifically were behind the year-over-year compression in the quarter?
Terrence W. Cavanaugh - President and CEO: For the quarter, again, we again had good increase in revenue, which again has commensurate number of that goes along with in terms of commissions and other compensation we pay our agents. There continues to be a technology spend in there. There are other costs associated with the service component of our business that allows us to maintain the retention rate that we have and the customer loyalty that we have and so there are a number of things that were in there nothing of major, we would stick out in terms of a specific item.
Christopher Maimone - Macquarie: I guess I just wanted to try and get a better feel for the compensation rate as a percentage of total revenues for management. It looks like it was up just a little bit year-over-year in the quarter, but relatively flat year-over-year as a whole. So calm is the non-commission component – you referred to the IT spend another sort of fixed cost. is the run rate that we're seeing now sort of expected to be more or less steady or is there still more build-out that you guys expect in '13?
Terrence W. Cavanaugh - President and CEO: To go back to the composition, the agents issue, it's a bit lumpy. There is not a direct correlation, but there will be times where the foundries award which is a yearly compensation vehicle will have a tendency to move, will have sales contest that will be embedded in that number that'll have a tendency to move that number around. So again I'd ask you to look at those numbers I guess yearly and from – over a two and three-year cycle from that standpoint. We are very committed to our agents and believe the partnership we have with them is one of our great strengths and a strategic capability that we think is something that is second to none in the industry. In terms of the technology spend, again, that can be also a bit lumpy. Again, we still believe we have opportunities to improve our business. You've heard me talk about the ease of doing business. We made great strides this year in that in terms of I think our DSPRO product, which is the personal lines platform that I referred to in my prepared remarks. We are still building out a commercial lines platform called (C-Line) that has a longer journey to it and we will continue to spend money to make sure that becomes a state-of-the-art platform, and we have other needs in terms of again making sure that the customer experience is strong in terms around billing, around our claims activities, and so we are a business that will continue to invest in technology as appropriate to make sure that we have a great product and service platform for our customers and our agents.
Christopher Maimone - Macquarie: And I guess, one follow-up if I could, can you just let us know what the sort of thought process is behind the buyback program in terms of what metrics you look for in terms of whether to keep it at a sort of a steady rate or to ramp up or to maybe slow it down?
Terrence W. Cavanaugh - President and CEO: We’ve got an authorization there that we’re still have plenty of run rate to do from that standpoint. We’re thoughtful in terms of how we manage the process. I don’t think there is not a magic formula or metric in terms of that, we look at it on a basis that talks about our ability to make sure that we can run an effective business to make sure that whatever we do, anything we do and this in particular that it’s accretive to earnings and that is serving the shareholders effectively both short-term and long-term.
Operator: Chris Leikhim, William Blair.
Chris Leikhim - William Blair: I just have a quick follow-up on the conversation you guys just had. As you reinvest in these initiatives going forward, what are the key metrics that you guys are looking at to sort of measure or gauge the success of them?
Terrence W. Cavanaugh - President and CEO: One clearly would be a top line growth the other thing we are very proud of is again not only top line growth but the holistic aspect of that. And again we have been able to grow all of our major lines in every state that we do business in over the last 2 to 3 years. And so again it's a great complement to our field force to our strategic marketing team here in terms of being able to build products and then be able to execute on our strategy to be able to do that across our entire footprint. So, again certainly top line would be one of those factors. The other again would be again customer satisfaction. Again, we are very proud of the place we hold in terms of in the market and how it's affirmed by people like J.D. Power and Insure.com and others in terms of the accolades we get for again whether it'd be the customer experience and the front end of the business or whether it would be claims handling, whether it would be the it'd be financial recognition, and best ratings. And so again we look to make sure that we are a strong service provider and a great brand. And clearly then we also expect to make margin on this both from an underwriting standpoint at the exchange level and in terms of what margin we create at the indemnity company.
Chris Leikhim - William Blair: Then just piggybacking on something that you said, you said all the lines were going pretty nicely. As you think about 2013, are there any lines in particular that exchange is focused on growing next year or anything that you are finding particularly attractive given market conditions right now?
Terrence W. Cavanaugh - President and CEO: I think we are pretty bullish on everything. Again, the nice thing about our model is that we have a very preferred place with our agents and so we are expected to respond across the entire spectrum of our product offerings and so again obviously we're strong personal lines company without the auto and home being those two major products there and then we are a very decent commercial lines operations in terms of small to middle market. And so again when you respond to the small and middle market, you really do sell auto, comp and package to one customer. So, I think what’s neat about our relationship and our position in the marketplace is that we have an opportunity to grow all those lines.
Chris Leikhim - William Blair: Then finally just want to touch on private auto quickly. It looks like the combined ratio picked up a little bit this year, can you just talk quickly on what you're seeing in loss trends in the private auto business and how you feel about your current rate adequacy?
Terrence W. Cavanaugh - President and CEO: Yeah. I think we are watching it closely. Again, clearly, you look at the numbers, there was some cat activity in there by virtue of some of the storms that occurred in 2012, but we are looking at those numbers ex-cat. We are mindful of what can happen in terms of inflation and in terms of I'll call it legal inflation. We think we have a good handle on our cost. It is also not a universal issue. Across the platform, there are some jurisdictions that are more worrisome than others, but again we are proactively looking at this and I think you can expect us to make sure that we are an underwriting Company and we are focused on making strong underwriting results happen across the personal auto as well as entire organization.
Chris Leikhim - William Blair: Are you seeing anything interesting from competitors on that front over the last six months that might have deferred from say this time last year?
Terrence W. Cavanaugh - President and CEO: In terms of personal auto?
Chris Leikhim - William Blair: Yeah. In terms of…
Terrence W. Cavanaugh - President and CEO: I don't know how you define interesting.
Chris Leikhim - William Blair: In terms of rate action or pulling back from the market or especially maybe on homeowner side given what happened with Sandy?
Terrence W. Cavanaugh - President and CEO: Yeah. I think clearly homeowners has been the product that has been more discussed at the executive level with our competitors based upon the characteristics it has in terms of the weather connection it has, the volatility it has in some geographies. So, I think in some ways, it makes people to get more focused on personal auto and saying how do we make this work for ourselves, and so I think the personal auto marketplace will remain competitive across the country.
Operator: And I would now like to turn the call back to Mr. Scott Beilharz for any further remarks.
Scott Beilharz - Director, IR: Thank you, Janine, and thanks again for joining us. A recording of this call will be posted on our website, erieinsurance.com after 12.30 pm Eastern Time today. Our 2013 annual meeting of shareholders is scheduled for Wednesday, April 17 at 9.30 am Eastern Time at our home office in Erie, Pennsylvania. If you have any questions, please call me at area code 814-870-7312. Thank you.
Terrence W. Cavanaugh - President and CEO: Thank you very much.
Operator: Ladies and gentlemen, thank you for participating in today’s program. This does conclude the conference and you may all disconnect. Everyone have a good day.