Erie Indemnity (ERIE) Q2 2026 earnings call transcript

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 McCastro, President and Chief Executive Officer, and Julie Pukowski, 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, eerieinsurance. 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 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 key filing with the SEC filed yesterday and in the related press release. This pre-recorded call is the property of your indemnity company. It may not be reproduced or rebroadcast by any other party without the prior written consent of your indemnity company.

With that, we will move on to Tim's remarks. Tim?

Tim Hicks Thanks, Scott, and good morning, everyone. Before we get into our second quarter results, I'd like to take a moment to recognize two recent affirmations of the strength of Erie's business and the trust our customers continue to place in us.

First, Erie Insurance ranked highest in customer satisfaction among large auto insurers in the J. D. Power 2026 U. S. Insurance Shopping Study. This marks the third consecutive year Erie has earned the top ranking. The study looks at insurance shopping experience across several important factors, including the quote process, price, distribution channel, and policy offerings. To be recognized by customers in this way, particularly in a highly competitive market, is meaningful.

It speaks to the value of our independent agency model and the care our agents and employees bring to helping customers make competent, informed decisions. We were also pleased to recently be ranked number 308 on the 2026 Fortune 500 list of America's largest corporations, moving up 15 spots from last year's ranking of 323. This year marks 23 years since Erie first appeared on the list.

These affirmations of our service quality and financial strength are especially important in the context of today's market. As we shared in previous calls, 2025 was a challenging year for the industry and for Erie, particularly from a profitability perspective. We faced elevated weather activity, including the costliest weather event in our company's history, along with a complex and competitive market environment.

In the first two quarters of this year, we've been pleased to see improvement and a more balanced picture emerging in our results. Here to share more details of Erie's performance is Chief Financial Officer Julie Palkowski.

Julie Thank you Tim and good morning everyone Starting with the Erie Insurance Exchange the insurance operations we manage The second quarter of 2026 reflected continued progress in our underlying underwriting performance with the combined ratio improving 13 points in the second quarter compared to the same period in 2025 As is typical in the second quarter, catastrophe losses increased due to the seasonality in our Book of Business. While catastrophe losses impacted the combined ratio by 15 points, the losses were much more in line with historical experience and well below the 22-point impact we experienced in the second quarter of last year. And as we anticipated, direct written premium growth continues to moderate as pricing has become more adequate and competitive pressures continue.

While growth remains our primary challenge, we are committed to profitable growth. We continued the rollout of Erie Secure Auto, which was effective in our largest state of Pennsylvania in May. Other growth initiatives include targeted savings opportunities for eligible customers through programs such as TeamSpark, both of which Tim will discuss shortly. We remain focused on pricing discipline, implementing targeted rate reductions where indicated, but we aren't broadly lowering rates to drive growth. Now getting into the details, starting with growth, direct written premium grew 3.3% in the second quarter of 2026 compared to 9.2% in the second quarter of 2025. For the first six months of 2026, direct written premium grew 3.4% compared to 11.4% in the same period last year.

While our average premium per policy increased 6.8% from this time last year, growth in policies in force have continued to decrease slightly, down 2%. Our retention ratio also dropped slightly to 87.5%. From a profitability perspective, the exchange's combined ratio was 103.9% in the second quarter of 2026, compared to 116.9% in the second quarter of 2025. For the first six months of 2026, the combined ratio improved to 101.6% compared to 112.6% during the same period last year. As previously mentioned, catastrophe losses have improved. Year-to-date, our catastrophe losses are seven points better than the comparable prior year period, and our non-catastrophe losses improved almost three points from last year. Improved underwriting results and strong investment performance contributed to an increase in policyholder surplus at the end of June to approximately $10.7 billion from approximately $10.1 billion at year-end 2025, reflecting the continued financial strength of the exchange.

Shifting to the results for indemnity, net income was $180 million, or $3.45 per diluted share, in the second quarter of 2026, compared to $175 million, or $3.34 per diluted share, in the second quarter of 2025. Year to date net income was million or per diluted share compared to million or per diluted share during the first six months of 2025 Operating income increased approximately 2 to million from million in the second quarter of 2025 For the first six months of 2026 operating income increased 5 to million from million during the same period last year Management fee revenue for policy issuance and renewal services grew approximately $39 million quarter to date, or 4.7%. Year to date, management fee revenue increased approximately $70 million, or 4.5%, compared to the first six months of 2025.

Commission expense, our largest cost of operations, increased almost $45 million, or 9.6%, compared to the second quarter of 2025, and increased approximately $73 million, or 8.1%, compared to the first half of 2025. Increases in both periods were primarily driven by higher agent incentive compensation resulting from improved underwriting profitability, as well as the growth in direct and affiliated assumed written premium. Non-commission expenses decreased approximately $9 million, or 4.8%, during the second quarter. Although personnel costs increased approximately $3 million due to higher incentive compensation driven by stronger performance metrics, it was partially offset by lower bonuses awarded to all employees. In 2025, we had a special all-employee bonus in recognition of our 100th anniversary.

While personnel costs increased, the overall decrease in expenses for the quarter was driven by lower expenses in other categories, including sales and advertising, acquisition and underwriting support, professional fees, and administrative costs. For the first six months of 2026, non-commissioned expenses decreased approximately $20 million, or 5%, compared to the first half of 2025. Personnel costs increased approximately $5 million, primarily due to higher incentive and base compensation, partially offset by the 2025 anniversary bonuses, as mentioned before. Similar to the second quarter, we also experienced lower expenses in all other categories of sales and advertising, acquisition and underwriting support, professional fees, and administrative costs during the first six months of the year.

Our investment income in the second quarter was $23 million compared to $20 million during the same period of 2025. For the first six months of 2026, investment income totaled $45 million compared to $39 million in the first half of last year. As always, we take a measured approach to capital management and maintain a strong balance sheet. For the first six months of 2026, our financial performance enabled us to pay our shareholders approximately $136 million in dividends.

With that, I'll turn the call back over to Tim.

Thank you, Julie. As we look ahead, our focus remains on building on the progress we've made, continuing to restore profitability, support disciplined growth, and invest in the capabilities to help our agents and employees serve customers well. As Julie mentioned one important area of progress is Erie Secure Auto We continue to move forward with the rollout across our footprint with the product now active in 10 states Erie Secure Auto is an important part of our broader effort to modernize our personal auto product and strengthen our competitive position over time. It gives us more flexibility, supports greater pricing sophistication, and helps us better meet the needs of customers and agents in a changing market. We're also seeing encouraging results from our new online quoting platform.

As we shared last quarter, the platform was introduced to Ohio agents in February. Since then, it has continued to roll out across the ERI's footprint, and as of the end of June, the rollout is complete. The early results are positive. We're seeing a significant improvement in the quality of leads being sent to agents, and conversions are nearly double compared to our historical online quoting platform. This is an important capability for Erie. It creates a more streamlined experience for prospective customers, helps connect those customers with independent agents more efficiently, supports our long-term growth strategy. At the same time, we're being thoughtful about how we compete, focusing on targeted opportunities to provide value to customers while supporting sustainable underwriting performance.

Our Teen Smart program is one example. Offered through our partnership with ADEPT Driver, the program combines video learning, realistic driving simulations, and in-car driving activities to help young drivers build safer habits. Eligible drivers up to age 20 who complete the program may qualify for a discount of up to 20%. Most importantly, young drivers enrolled in the program are showing improvement in claim frequency and severity. We're excited by the potential this program has to support safer driving, provide a legitimate savings opportunity for customers, and help Erie and our agents grow more profitably. Across these initiatives, Erie Secure Auto, Online Quoting, and Team Smart, the common thread The key is that we are investing in capabilities that improve the customer and agent experience while supporting more disciplined, sustainable growth.

We also continue to explore practical applications of artificial intelligence that help our employees work more efficiently and consistently. Recent AI assistants being introduced in support of claims and underwriting. The claimed subrogation AI assistant helps claims professionals evaluate opportunities, prepare referrals, summarize complex claim information, and support negotiations. And the commercial underwriting assistant helps underwriters assess prospective new business by identifying missing information and highlighting key risk characteristics. Both tools allow our employees to spend less time gathering information and more time applying their expertise.

As we move into the second half of 2026, we know the environment remains competitive, but we're encouraged by the progress we're making across products, services, and technology, and the improvements we're seeing in our financial performance. As we remain focused on supporting our employees and agents, serving our customers, and continuing to strengthen the business for the long term.

Thank you all for your continued support and for your interest in ERI.