Erie Indemnity(US:ERIE)2021-02-24 16:00Revenue and Income - Management fee revenue for administrative services increased by 4.0% to $59.5 million in 2020 compared to $57.2 million in 2019[171]. - Operating income decreased by 5.4% to $338.2 million in 2020, as growth in operating expenses outpaced the growth in operating revenues[168]. - Net income decreased by 7.4% to $293.3 million in 2020, with diluted net income per share also decreasing by 7.4% to $5.61[168]. - Management fee revenue for policy issuance and renewal services increased by 1.7% to $1,841,794 thousand in 2020, compared to $1,810,457 thousand in 2019[225]. - The management fee rate was maintained at 25% for 2020, 2019, and 2018, significantly impacting revenue and net income[208]. Premiums and Policy Growth - Direct and affiliated assumed premiums written by the Exchange increased by 1.7% to $7.6 billion in 2020, following a 5.2% increase to $7.5 billion in 2019[169]. - New business premiums grew by 10.8% in the second half of 2020 compared to the same period in 2019, primarily driven by growth in personal auto and homeowners lines[164]. - Premiums generated from new business decreased by 1.2% to $852 million in 2020, despite a 5.0% increase in new business policies written[213]. - Renewal business premiums increased by 2.1% to $6.8 billion in 2020, supported by steady policy retention ratios[214]. - Total personal lines premiums written increased by 1.3% to $5.4 billion in 2020, with a 2.2% increase in total personal lines policies in force[216]. - Total commercial lines premiums written increased by 2.6% to $2.2 billion in 2020, driven by a 1.6% increase in total commercial lines policies in force[217]. Investment Income and Financial Position - Total investment income decreased by $7.1 million in 2020, primarily due to higher impairments and lower net investment income reflecting lower interest rates caused by COVID-19 market volatility[172]. - Total investment income decreased by 17.8% in 2020, amounting to $32,867 thousand, primarily due to lower net investment income and higher impairment losses[237]. - Net investment income fell by $4.3 million in 2020 to $29,753 thousand, influenced by decreased income from cash and cash equivalents[238]. - The company recorded a market-related asset experience gain of $146.3 million in 2020, which will be recognized over a four-year period[201]. - Policyholders' surplus increased to $10.7 billion in 2020 from $9.5 billion in 2019, reflecting a strong financial position[243]. Expenses and Costs - Cost of operations for policy issuance and renewal services increased by 3.3% to $1.6 billion in 2020, driven by higher commissions and agent incentive compensation[170]. - Total commissions increased by $26.6 million in 2020 compared to 2019, reaching $1,051,272 thousand, driven by higher premiums and agent incentive compensation[228]. - Non-commission expenses rose by $24.3 million in 2020, totaling $537,625 thousand, with significant increases in underwriting, IT, and administrative costs[229]. - Increased personnel costs across all categories were noted, contributing to higher administrative expenses in 2020[229]. Tax and Pension Costs - Income tax expense decreased to $75.2 million in 2020 from $79.9 million in 2019, with a reduction of $4.0 million in 2019 due to settling an uncertain tax position, lowering the effective tax rate by 1.0%[173]. - The company anticipates net pension benefit costs to rise from $45.1 million in 2020 to $56.6 million in 2021, primarily due to a decrease in the discount rate[204]. - The discount rate for the projected benefit obligation was set at 2.96% for December 31, 2020, compared to 3.59% in 2019 and 4.47% in 2018[199]. - A 25 basis point decrease in the discount rate assumption would increase pension costs by $6.8 million, with the company's share being approximately $2.8 million, and would raise the pension benefit obligation by $61.6 million[199]. - The expected long-term rate of return on pension plan assets was reduced from 6.00% to 5.50% for 2021, with a 25 basis point change impacting net pension benefit cost by an estimated $2.3 million[200]. Cash Flow and Liquidity - Net cash provided by operating activities was $342.6 million in 2020, a decrease of 6% from $364.5 million in 2019, primarily due to increased agent commissions and operating expenses[258]. - Net cash used in investing activities increased to $243.2 million in 2020, up from $124.6 million in 2019, largely due to higher purchases of available-for-sale securities[259]. - Net cash used in financing activities totaled $274.9 million in 2020, compared to $169.6 million in 2019, driven by increased dividends paid to shareholders[260]. - The company maintains a $100 million line of credit that does not expire until October 2023, ensuring liquidity for future operational needs[255]. - The company has access to a $100 million bank revolving line of credit, which includes a $25 million letter of credit sublimit expiring on October 30, 2023[268]. Market Conditions and Future Outlook - The COVID-19 pandemic is estimated to decrease premiums by $110 million and management fee revenue by $28 million in 2021 due to rate reductions[222]. - The Exchange plans to expand its agency force to increase market penetration, contributing to future growth despite potential challenges from the COVID-19 pandemic[218]. - Changes in premium levels due to rate changes directly affect the profitability of the Exchange and its management fee[221]. - Deteriorating market conditions may hinder the ability to obtain additional financing or increase financing costs[109]. - Accurate estimation of capital needs is crucial to avoid adverse effects on financial condition[107].