Scott Beilharz - Vice President, Investor Relations Timothy NeCastro - President & Chief Executive Officer Gregory Gutting - Executive Vice President & Chief Financial Officer

Amit Kumar - Macquarie

Good morning and welcome to the Erie Indemnity Company's First Quarter 2017 Earnings Conference Call. I'd like to introduce your host for today's call, Scott Beilharz, Vice President of Investor Relations.

Thank you, Howard, and welcome, everyone. We appreciate you joining us for today's discussion about the 2017 first quarter results. Joining me today are Tim NeCastro, President and Chief Executive Officer; Greg Gutting, Executive Vice President and Chief Financial Officer; and Sean McLaughlin, Executive Vice President and General Counsel. Our earnings release and financial supplement were issued yesterday afternoon after the market closed and are available within the Investor Relations section of our Web site, erieinsurance.com. We will start the call today with opening remarks from Tim and Greg, and then, we will open the call for your questions. 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 dated May 1, 2017 and in the related press release. This call is being recorded and recording 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. A replay will be available on our Web site today after 12:30 PM Eastern Time. Your participation on this call constitutes your consent to recording, its publication, webcast and broadcast and the 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 will now turn the call over to Tim.

Thanks Scott, and good morning, everyone. Just last week we held our annual meeting with shareholders here at our home office in Erie. As I noted at the meeting, 2016 was truly a great year for Erie. Even the year of transition, the efforts our employees and our agent partners delivered record results and positioned us well for continued strong performance again this year. In the first three months of 2017, growth of 6.7% in the direct and assumed premiums written by the exchange bolstered our top-line as we continued to outpace forecasted results for the industry. At the end of the first quarter, policyholder surplus is nearing $8 billion. The strong surplus position allows us to meet our commitment of policyholders after the loss. During the first quarter, bad weather played a more prominent role than it did in 2016. That is evident in our reported combined ratio of 100.3, a 5 point increase over the first quarter of 2016. The weather impact was not due to an individual large event, instead we responded to a number of smaller events at the end of February, in the beginning of March, which called on the skilled service of our dedicated cat team. The spring storms impacted nearly every operating territory and the cat team has had a presence in more than 90% of our agent offices affected by the weather, servicing over 12,500 customers impacted by weather related claims. In addition, [indiscernible] in our personal auto line of business similar to the rest of the industry. The first quarter results are showing signs of lost cost trends moderating, but obviously it's too early to make any definitive statement on how the year will develop. We will continue to address profitability consistent with our past practices using a measured approach of taking rate with a long-term view, a strong underwriting focus on new business and focused re-underwriting on our existing book. This will allow us to improve profitability in the personal auto line without shocking our customers. In a minute, Greg will talk more about our first quarter financial results. But first, I would like to recognize Bob Wilburn, a long time member of our Board, who recently retired. Bob joined the Indemnity Board in 1999 serving at many capacities over the years. During his tenure on the Board, Bob served as Chairman of our Audit and Executive Compensation and Development Committees and was a long-time member of our Charitable Giving Committee. I would like to publicly acknowledge and thank Bob for his many years of service and wish him well in his retirement. I'm also pleased to report that two new Directors for our Board were elected at last week's Annual Shareholder Meeting, Gene Connell and Brian Hudson. Gene isn't new to Erie. During his 23-year tenure with the company, he served in various senior positions including Chief Actuary and Chief Risk Officer. Brian Hudson is Executive Director and Chief Executive Officer of the Pennsylvania Housing Finance Agency. Both Directors will bring a wealth of knowledge and experience to our Board and we will look forward to working with them. Now, I will turn the call over to Greg to expand in our first quarter results.

Thanks Tim. Net income in the first quarter of 2017 was $48 million or $0.91 per diluted share compared to $46 million or $0.87 per diluted share in the first quarter of 2016. The growth was driven by increased investment income in the quarter. Net revenue from operations on a pre-tax basis decreased 1.7% from $68 million in the first quarter of 2016 to $67 million in the first quarter this year. Indemnity's management fee revenue increased nearly $25 million to $392 million or 6.7% in the first quarter of 2017 compared to the first quarter of last year driven by the 6.7% increase in the direct and assumed premiums written by this exchange as both policies enforced and average premium per policy increased year-over-year. Indemnity's total operating expenses also increased in the quarter to $333 million representing an 8.4% increase compared to the first quarter of 2016. Commissions [indiscernible] agent partners increased $12 million in the first quarter of 2017 compared to the same period in 2016 driven by the top-line growth. Non-commission expenses increased $14 million in the first quarter of 2017 compared to the first quarter of 2016 driven by increases in information technology-related professional fees, underwriting costs and personnel costs including incentive compensation. Indemnity's gross margin for the first quarter of 2017 was 16.7% versus 18.1% in the first quarter of last year. Indemnity's investment income for the quarter totaled $6.6 million compared to $2.6 million in the first quarter of 2016. The $4 million increase was driven by higher net investment income coupled with realized investment gains and equity and earnings of limited partnerships. Finally, in the first three months of 2017, we returned $36 million in dividends to our shareholders. And now, I will turn the call back over to Tim.

Thanks Greg. As our financial results confirmed, we're off to a strong start again this year. On our last call, I told you that our strategic focus going forward is really a continuation of what we've done to succeed over the years. Let me recap that focus and add a little color around how we're delivering. You may recall that our leadership team identified four areas of strategic focus to help us continue to win in the marketplace. First, we're continuing to enhance the Erie experience for our employees, agents and customers. We're already driving speed and accuracy with our enhanced online e-signature capability, improved claim service and quicker claim settlement. And our underwriters are equipped with better tools and workflows for greater efficiency. We'll continue to deliver improved digital tools throughout the year and in the years ahead. Our second area of focus is around exploring and developing new sources of revenue that will keep Erie and Erie agents strong. New and expanded coverage in both personal lines and commercial lines continue to roll out. Protections that filled the gaps in homeowner's products as well as our custom collection for business owners, for example, have been well received by our customers and we will continue to research new innovative opportunities in the protection arena as we work to expand our market presence. Our third area of focus is around platform replacement and advanced data management. Our new Erie claim center is an important step in replacing our strategic platforms. It's creating greater flexibility and capability for consolidating our abundant claims data. We will continue to evaluate our policy administration platforms in order to expand our capabilities to accelerate the delivery of future products and services and to provide greater ease of use for our employees, agents and customers. Finally, we're focused on preparing the workforce future. This is a commitment to our current and our future employees. We will embrace the evolving tools, resources and environment needed to attract, develop and retain talent in the coming years. Equipping employees with more innovative technology, greater access to on-demand learning opportunities and a support of work environment will give them the competencies needed to thrive in a changing market and aid their efforts to deliver on our service promise. We're confident that developments across these focal areas will enable us to make continued gains in the market share and to continue to create value for you, our shareholders. Before I close, we have some late breaking news. Just yesterday, J.D. Power & Associates released their results for the 2017 insurance shopping study. For the fifth year on a row, Erie achieved the top score for customer satisfaction with the auto insurance purchase experience. This recognition in particular demonstrates our commitment to the Erie experience and I'd like to thank all of our dedicated agents and employees for the role they play in our customer shopping experience. At this point, we're happy to take your questions.

[Operator Instructions] Our first question or comment comes from the line of Amit Kumar from Macquarie. Your line is open.

Thanks and good morning and congrats on the J.D. Power recognition.

Thank you, Amit.

Just few questions and then I'll re-queue. The first question goes back to the one-time or some of the expense lines and I was wondering if you could just talk about how we should think about the remaining quarters, just to keep on showing up or it's just more one time in nature?

Amit, this is Greg Gutting. Our expenses vary from quarter-to-quarter, when you compare this year --this year's first quarter to last year's first quarter, we are seeing an increase in the IT spend, but some of that's related to the first quarter of last year being a little lower than you might expect. Some of the other things on the administrative and other expenses we saw a large increase a couple of million dollars related to the long-term incentive accrual and that was just a function of the stock price -- the company's stock price going up over $10 during the quarter. So, that's some of the detail around what happened during the quarter.

Got it. Moving on to -- I guess the main focus topic. On the personal auto side, your top -- your premiums grew 10%. Can you talk about what drove that growth and generally where is that business coming from -- is that coming from some other larger national carriers pulling back because of their attempts to improve their underwriting profitability or is there something more going on that front?

Amit, this is Tim. We're seeing it from a variety of places. First, we have taken modest rate increases. I think our average premium for the quarter was up around 5% compared to the first quarter of last year. And we're also seeing robust tiff growth, very balanced growth between policy accounts and average premium. We're seeing that business come from a variety of places, certainly many competitors have taken greater rate increases than we have. And it kind of goes back to our longer term focus. We do our best not to shock our customers or our policyholders and so we tend to moderate our rate increases overtime and take that longer term view and it's showing up in the -- our ability to increase our ratings in automobile.

Okay. Fair enough. And then, final question, I'll re-queue. Can you talk -- you said that the loss cost trends are moderating a bit, can you just sort of flush that out just talk about the BI and PD component and just sort of give us a quarter over versus past few quarter color? Thanks.

This is Greg. We're seeing moderating in the frequency, the severity in the physical damage we're still keeping a close eye on that the lost costs as far as the more expensive vehicles and technology and stuff we still are seeing a little bit of that. The BI severity has been fairly benign.

Okay. I'll stop here and re-queue. Thanks for the answers and good luck for the future.

Thank you.

Thank you.

Thank you. [Operator Instructions] I show no additional audio questions. We have another follow-up from Mr. Amit Kumar. Your line is open.

Thanks. Maybe just two other clean-up questions. The first question was on the commercial auto, can you talk about how that book is performing and your results seems okay, but maybe just talk about the trends versus the past few quarters?

Yes. We're not seeing anything to unusual. Again our -- book of commercial auto is much different than some of our competitors we're the very small personal auto space more like personal lines. And so we're not seeing a long-haul trucking and that sort of thing we don't write that. So it's been pretty benign.

Got it. And the final question I have is, on the reserve release side, it seemed that I think worker's comp releases seemed a bit higher may be just talk about some of the reserve release numbers. And again, I know that [indiscernible] added to that makes us a deal, but maybe just talk about what years the releases came from? Thanks.

That's going to moderate from quarter-to-quarter that it wasn't a big item on our strength, slight changes in what we're seeing nothing major.

Okay. I'll stop here. Thanks for the answers and good luck for the future.

Thank you, Amit.

Thank you. [Operator Instructions] I'm showing no additional audio questions at this time. I'd like to turn the conference back over to Mr. Tim NeCastro for any closing remarks.

Hi. This is Scott. Howard, thank you, and thanks, again, everyone for joining us. A recording of this call will be posted on our Web site, erieinsurance.com after 12:30 pm Eastern Time today. If you have any questions, please feel free to call me at Erie code 814-870-7312. Thank you.

Thanks, everybody.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.