Operator
Good morning, and welcome to the Erie Indemnity Company Third Quarter 2026 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 Bialhars.
Thank you, and welcome, everyone. We appreciate you joining us for this recorded discussion about our third quarter results. This recording will include remarks from Tim DeCastro, 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 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 that 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?
Thanks, Scott, and good morning, everyone. When we spoke last quarter, we were encouraged by the improvement we saw in our underwriting results. In the first half of the year, catastrophe losses had moderated from 2025 levels, and our combined ratio had improved meaningfully year over year. The third quarter, however, brought some added pressure, particularly from higher catastrophe losses. The growth remains challenging in a competitive industry environment. Chief Financial Officer Julie Palkowski will walk through the results in more detail shortly. Quarter to quarter results will vary, but our priorities remain consistent, improving our competitive position, growing profitably, and maintaining our financial strength. That strength was recently affirmed by AMVEST, which maintained the A-Excellent financial strength rating for the property casualty members of Erie Insurance Group as well as Erie Family Life with a stable outlook. This affirmation reflects the financial strength and discipline approach that have long been hallmarks of Erie and give us the ability to navigate changing market conditions while continuing to serve our customers. Before I turn the call over, Julie, I also want to address an important leadership transition. As we announced earlier this year, Julie and I will both retire at the end of 2026. Search for Erie's next president and CEO is ongoing, led by a committee of the Erie Indemnity Company Board of Directors. The committee is conducting a thoughtful and thorough review of a strong group of highly qualified internal candidates. When I went through this process a decade ago, I saw firsthand just how rigorous it is and how much care and consideration goes into such an important decision. I appreciate that the search committee is taking the time needed to get it right. We've also planned carefully for continuity. The Board has identified who would serve as interim president and CEO should the search extend beyond year-end and, if necessary, would announce that appointment later in the fourth quarter to provide for a smooth transition. Because the next president and CEO will select the company's next chief financial officer, an interim CFO would also be named, if needed. Throughout the process, the organization remains in strong hands. We have an Experienced leadership team, a clear strategic direction, and a strong financial foundation. And our commitment to our customers, agents, employees, and shareholders remains firmly in place. With that, I'll turn it over to Julie for a closer look at our third quarter financial results. Julie?
Thank you, Tim. As I approach retirement after 29 years with Erie, I found myself reflecting on just how much has changed over that time. Within our industry, across our company, and certainly within finance. I'm incredibly grateful to have spent my career with an organization that has remained grounded in its values while continuing to evolve and position itself for the future. It's been a privilege to serve as CFO and to work alongside so many talented people throughout my career. I'm especially proud of the finance team we have today. They bring tremendous expertise, discipline, and commitment to their work, and they understand the important role finance plays in supporting Erie's long-term success. Over the past several years, we've also been intentional about preparing finance for what comes next, strengthening our capabilities, modernizing how we work, and continuing to evolve finance as a strategic partner to the business. I have tremendous confidence in the I'm so grateful for the opportunities I've had, the people I've worked with, and everything we've accomplished together. I leave knowing Erie is financially strong, finances in very capable hands, and both are well positioned for the future. With that, let's turn to our results for the third quarter. Starting with the Erie Insurance Exchange, the insurance operations we manage. Starting with growth, direct written premium grew 1.8% in the third quarter of 2026, compared to 7.6% in the third quarter of 2025. For the first nine months of 2026, direct written premium grew 2.9% compared to 10.1% in the same period last year. While our average premium Our retention ratio was 87.2% at the end of the third quarter. From a profitability perspective, the exchange's combined ratio was 105% in the third quarter of 2026, compared to 100.6% in the third quarter of 2025. For the first nine months of 2026, the combined ratio improved to 102.8% compared to 108.5% during the same period last year. From a catastrophe loss perspective, third-quarter catastrophe losses contributed 14.1 points to the combined ratio compared to just three points in the third quarter of 2025. Year-to-date catastrophe losses contributed 12.7 points to the combined ratio compared to 13.4 points during the same period last year. If you reference the investor supplement that's published on our website, if we exclude catastrophe losses as well as the effects of prior accident year reserve development, Our direct current-year non-catastrophe loss ratio would have been 90.8% for the third quarter and 91.3% for the first nine months of 2026, compared to 98.1% for the quarter and 96.2% year-to-date in 2025. Policyholder surplus at the end of September was approximately $10.7 billion, up over $600 million from year-end 2025. Reflecting the continued financial strength of the exchange. Shifting to the results for indemnity, net income was $182 million, or $3.48 per diluted share, in the third quarter of 2026, compared to $183 million, or $3.50 per diluted share, in the third quarter of 2025. Year-to-date, State net income was $513 million, or $9.80 per diluted share, compared to $496 million, or $9.48 per diluted share, during the first nine months of 2025. Operating income decreased approximately 0.7% to $207 million from $209 million in the third quarter of 2025. For the first nine months of 2026, operating income increased 3.4% to $578 million from $559 million during the same period last year. Management fee revenue for policy issuance and renewal services grew approximately $22 million, or 2.6%, in the third quarter. Year-to-date, management fee revenue increased approximately $92 million, or 3.8%, compared to the first nine months of 2025. Commission expenses, our largest cost of operations, increased approximately $24 million, or 5.2%, compared to the third quarter of 2025, and increased approximately $97 million, or 7.1%, compared to the first nine months of 2025. These increases were primarily driven by higher agent incentive compensation, resulting from improved underwriting profitability, as well as growth in the direct and affiliated assumed written premium. Non-commission expenses decreased approximately 1 million, or 0.6%, during the third quarter. Personnel costs increased approximately 2 million, primarily due to higher health care costs. Technology infrastructure costs grew approximately $7 million, primarily due to higher costs associated with technology initiatives. These increases were more than offset by lower acquisition and underwriting support costs of approximately $6 million, and lower administrative and other costs of approximately $6 million, primarily due to lower credit card processing fees. For the first nine months of 2026, non-commission expenses decreased $21 million, or 4%, compared to the first nine months of 2025. Personnel costs increased $7 million, primarily due to higher incentive and base compensation, partially offset by the 2025 anniversary bonuses. Technology and infrastructure costs also increased over $7 million, primarily due to higher depreciation and amortization expense from technology initiatives. We saw lower acquisition and underwriting support costs of nearly $12 million, primarily due to lower underwriting report and postage costs, as well as a $12 million decrease in professional fees due to the reduced use of third-party services related to technology initiatives. Administrative and other costs decreased $9 million, primarily due to lower credit card processing fees and charitable contributions, given the transition of charitable giving to the Erie Insurance Foundation. Our investment income in the third quarter was approximately $20 million, compared to $22 million during the same period of 2025. For the first nine months of 2026, investment income totaled approximately $65 million compared to $61 million in the first nine months of last year. Net investment income increased to approximately $25 million for the quarter and $72 million year-to-date, reflecting higher yields and invested balances. As always, we take a measured approach to capital management and maintain a Thanks, Julie.
As we look toward the end of the year, our priorities remain clear. Restoring sustainable profitability, finding the right opportunities for growth, and making it easier for our agents and employees to deliver the service our customers expect. One important part of that work is Erie Secure Auto. Last quarter, we reported that the product was available in 10 states. We're now beginning to see more evidence of what it can do. Early results in Ohio, West Virginia, and Virginia show improved new business production and a positive effect on customer retention. We're also listening closely to our agents as we continue to refine the product and quoting and servicing experience. And we're giving agents more targeted ways to reconnect with former customers and prospects who may now find a more competitive price with Erie. It's a practical way to build on relationships we already have while staying disciplined about profitable growth. We're making progress in other parts of the business as well. In Erie Family Life, we introduce life web to agents for most traditionally underwritten term and whole life policies. The new platform makes quoting and servicing easier and creates a foundation for additional capabilities over time. Along with the introduction of a 40-year term life policy, it's another step toward a simpler, more modern experience for agents and customers. Across our operations, we're also continuing to look for ways to reduce complexity and improve service. That includes expanding paperless options for customers and agents and putting technology to work on tasks that can take time away for more meaningful service. Our goal is not simply to introduce new tools. It's to make it easier to do business with while keeping the personal, human touch that sets us apart. And that commitment continues to be recognized. We recently received the 2026 Company Award of Excellence from the National Association of Professional Insurance Agents. It's the highest annual company honor. That recognition is especially meaningful because ERIE's independent agents have been central to our business from the beginning, and that partnership remains one of our greatest strengths. ERIE was also recognized by Forbes on its list of America's Best Insurance Companies 2027 across five insurance categories, and by Newsweek as one of America's Greatest Companies 2026. Each of these honors reflects something a little different, but together, they reinforce something that hasn't changed. Doing right by the people we serve remains one of Erie's greatest strengths. Before we close, I want to take a moment to recognize Julie as she prepares for her well-deserved retirement after an impressive 29-year career with Erie. Julie has brought sound judgment, financial discipline, and a steady hand in the CFO role. I value her partnership and her counsel, and Erie is stronger because of her leadership. Julie, thank you for everything you've done for this company. I wish you all the best in retirement. And because this is my final earnings call as President and CEO, I also want to offer a personal word of thanks. For 30 years, I've had the privilege of working alongside people who care deeply about this company, our agents, and the customers who depend on us. Leaving here for the past decade and help guiding it through its 100th year has been the greatest honor of my professional life. We've experienced a lot together. We've celebrated tremendous growth and important milestones, and we've navigated some very difficult moments. Through all of it, I've seen the strength of ARIE's values, and most importantly, the strength of its people. That's why I'm confident in what comes next. Leaders change, but ARIE's commitment to service, its strong values, and the people who bring them to life every day will continue to move this company forward. To our employees and agents, thank you for everything you do for Erie and the people we serve. And to our shareholders, thank you for your trust and support. It's been an incredible privilege to lead this company. Thank you all for joining us today and for your continued interest in Erie.
Thank you for your participation in today's conference. To conclude the program, you may now disconnect.
