Erie Indemnity Company
1st Quarter Report 2003




 true

blue
to our                      first quarter of 2003 from $713,006,889 for

             shareholders                      th...
in assumed reinsurance by non-renewing          from $38,487,005 recorded in the same
unprofitable business. These non-ren...
insurance                        $345,800 in the first quarters of 2003 and

             underwriting                    ...
earnings of $1,009,747 for the same period
Net investment income rose 12.7 percent
                                       ...
Consolidated statements of operations—
                                                                                   ...
Reconciliation of Net Income to Net Income
                                                                  excluding Net...
Consolidated statements
                                                            of financial position
                ...
stock
                        information
     Erie Indemnity Company
     Class A Common Stock is listed on the NASDAQ
  ...
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erie insurance group 2003-first-quarter-report

  1. 1. Erie Indemnity Company 1st Quarter Report 2003 true blue
  2. 2. to our first quarter of 2003 from $713,006,889 for shareholders the first quarter 2002. Increases in average premium per policy, increases in new policy growth and continuing favorable policy Net income per share increased 4.1 percent retention rates were all contributing factors to $.65 per share for the first quarter 2003 in the growth of the Erie Insurance Group’s compared to $.62 per share for the same direct written premiums. The management period in 2002. For the quarter ended fee rate was set at 24 percent in 2003 March 31, 2003, net income increased and 25 percent in 2002. This reduction in to $45,900,101 from $44,201,583 for the management fee rate caused an $8,651,897 same period one year ago. Improvements decrease in management fee revenue in in management operations were driven the first quarter of 2003 compared to the by strong premium growth. Insurance first quarter of 2002, or a reduction in net underwriting losses increased in the first income after taxes of $.08 per share. quarter of 2003 compared to the first quarter of 2002 as losses continued to Direct written premiums of the Erie outpace premiums on direct business. Insurance Group grew 23.7 percent on Increased net investment income was a rolling 12-month basis. The average largely responsible for the improvement in premium per policy increased 10.0 percent net revenue from investment operations. to $920 for the 12 months ended March 31, 2003, from $836 for the same period in Net income (excluding net realized gains 2002. Also contributing to the annualized and related federal income taxes) increased premium growth were policies in force to $45,514,252 for the quarter ended growing at an annualized rate of 12.4 March 31, 2003, from $43,408,557 for the percent to 3,590,208 at March 31, 2003, quarter ended March 31, 2002. from 3,193,405 at March 31, 2002. Policy retention increased to 91.2 percent for the management 12 months ended March 31, 2003, from operations 90.9 percent for the same period a year ago, for all lines of business combined. Management fee revenue increased 16.3 Service agreement revenue decreased percent to $207,245,537 for the quarter 11.7 percent to $6,484,141 for the first ended March 31, 2003. The property quarter of 2003 from $7,341,711 for and casualty direct written premiums of the same period in 2002. During the the Erie Insurance Group, upon which 2003 renewal season, the Erie Insurance management fee revenue is calculated, Exchange reduced its aggregate exposure grew 21.3 percent to $865,189,739 in the 2 1
  3. 3. in assumed reinsurance by non-renewing from $38,487,005 recorded in the same unprofitable business. These non-renewals period of 2002. Personnel costs, including resulted in a $880,000 reduction of service salaries, Employee benefits and payroll agreement income. Additionally, the fee taxes, increased 11.0 percent to $25,300,560 charged by the Company to the Erie for the three months ended March 31, Insurance Exchange for the management 2003, compared to $22,792,360 for the and administration of reinsurance from same period in 2002. Personnel costs were non-affiliated insurers was reduced from impacted by increases in salaries and 7.0 percent to 6.0 percent beginning in Employee benefit costs. Salaries and wages 2003. The reduction in the service fee rate increased in the first quarter of 2003 due to resulted in a $324,000 decrease in service 9.1 percent employment growth. Growth in agreement revenue in the first quarter of policy sales necessitated staffing increases 2003 compared to the first quarter of 2002. in sales support, underwriting and policy issuance functions. The cost of management operations increased 19.9 percent for the first quarter The Company’s share of information of 2003 to $154,372,590 from $128,791,180 technology hardware and infrastructure for the same period in 2002. Commission expenditures related to the Erie Insurance costs totaled $110,932,386 for the first Group’s eCommerce program totaled quarter of 2003, a 22.8 percent increase $115,163 and $1,712,840 in the first over the $90,304,175 for the first quarter of quarters of 2003 and 2002, respectively. 2002. Commission costs include scheduled Income from the Company’s management commissions, contingency awards, operations rose 4.5 percent to $59,357,088 accelerated commissions and promotional for the first quarter of 2003 compared to incentives earned by independent Agents. $56,802,252 for the first quarter of 2002. Scheduled commissions, including Agent The gross margins from management contingency awards, increased 22.8 operations were 27.8 percent and 30.6 percent to $108,365,038 for the quarter percent in the first quarters of 2003 and ended March 31, 2003. Charges incurred 2002, respectively. If the management fee for accelerated commissions above normal and service fee rates, which are currently scheduled rate commissions increased 24 percent and 6 percent, respectively, had $487,201 to $2,567,348 for the quarter remained consistent with the 2002 rates of ended March 31, 2003. 25 percent and 7 percent, respectively, gross Other operating costs, excluding margin for the first quarter 2003 would commissions, increased 12.9 percent in have been 30.7 percent. the first quarter of 2003 to $43,440,204 4 3
  4. 4. insurance $345,800 in the first quarters of 2003 and underwriting 2002, respectively. operations Underwriting results are net of premiums paid and recoveries recorded under the excess of loss agreement with the Erie Insurance underwriting operations of the Insurance Exchange. The premium paid to Company’s property and casualty insurance the Exchange for the agreement totaled subsidiaries, Erie Insurance Company and $1,150,000 during the quarter ended Erie Insurance Company of New York, which March 31, 2003, and $883,226 during the together assume a 5.5 percent share of the quarter ended March 31, 2002. Recoveries underwriting results of the Erie Insurance during the first quarter 2003 amounted Group under an intercompany reinsurance to $1,954,431 compared to recoveries of pooling agreement, reported underwriting $652,231 for the same period one year losses of $5,670,691 and $3,615,058 for the ago. No cash payments have been made first quarters of 2003 and 2002, respectively. between companies in 2003 or 2002 for The underwriting losses in the first quarter recoveries under this agreement since 2003 relate to catastrophe and other related losses are reserved but not yet paid. weather-related losses occurring in the first quarter of 2003. Included in the Company’s policy acquisition and other underwriting The Company’s property and casualty expenses are the property and casualty insurance subsidiaries’ share of the insurance subsidiaries’ share of eCommerce Erie Insurance Group’s direct business initiative expenses covered under a generated net underwriting losses technology cost sharing agreement of $6,969,048 and $3,800,602 during totaling $786,429 and $1,030,671 for the the first quarters of 2003 and 2002, quarters ended March 31, 2003 and 2002, respectively. Contributing to the direct respectively. underwriting losses were the Company’s share of catastrophe losses, which totaled investment $1,052,484 for the three months ended operations March 31, 2003, compared to $474,189 for the same period of 2002. The Company’s property and casualty Net revenue from investment operations insurance subsidiaries’ unaffiliated for the first quarter of 2003 increased to assumed reinsurance business generated $14,755,677 from $12,778,425 in the first net underwriting gains of $907,585 and quarter of 2002. 5 6
  5. 5. earnings of $1,009,747 for the same period Net investment income rose 12.7 percent in 2002. to $14,318,677 for the quarter ended March 31, 2003, from $12,704,229 for the same The Company is coming off a year of period in 2002. Increases in investments in accelerated growth. Because of our taxable bonds were largely responsible for strong retention ratio—91.2 percent at the growth in net investment income for March 31, 2003—we continue to see the quarter. healthy growth in direct written premium and, consequently, positive increases in The Company realized net gains on management fee revenue. investments of $593,615 and $1,220,040 in the first quarters of 2003 and 2002, respectively. The first quarter 2003 net realized gains include $6,007,147 in impairment charges where declines Jeffrey A. Ludrof in value were considered by Company President and Chief Executive Officer management to be other-than-temporary. Equity security impairment charges totaling $3,671,582 related primarily to the energy sector, while fixed maturity impairment charges of $2,335,565 were predominantly in the financial sector. There were no impairment charges in the first “Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995: Certain quarter of 2002. forward-looking statements contained herein involve risks and uncertainties. These statements Equity in losses of limited partnerships include certain discussions relating to management was $1,325,922 and $1,914,128 for the fee revenue, cost of management operations, underwriting, premium and investment income quarters ended March 31, 2003 and 2002, volume, business strategies, profitability and business respectively. Private equity and fixed relationships and the Company’s other business activities during 2003 and beyond. In some cases, income limited partnerships realized losses you can identify forward-looking statements by of $1,760,583 and $2,923,875 for the three terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” months ended March 31, 2003 and 2002, “estimate,” “project,” “predict,” “potential” and similar respectively. Included in the 2003 and expressions. These forward-looking statements reflect the Company’s current views about future events, 2002 losses are impairment charges of are based on assumptions and are subject to known $1,247,184 and $1,204,837, respectively. and unknown risks and uncertainties that may cause Real estate limited partnerships reflected results to differ materially from those anticipated in those statements. Many of the factors that will earnings of $434,661 for the three months determine future events or achievements are beyond ended March 31, 2003, compared to our ability to control or predict. 7 8
  6. 6. Consolidated statements of operations— segment basis (Amounts in thousands, except per share data) Three months ended March 31 (unaudited) 2003 2002 Management operations Management fee revenue $ 207,246 $ 178,252 Service agreement revenue 6,484 7,342 Total revenue from management operations $ 213,730 $ 185,594 Cost of management operations 154,373 128,791 Income from management operations $ 59,357 $ 56,803 Insurance underwriting operations Premiums earned $ 45,182 $ 37,219 Losses and loss adjustment expenses incurred $ 37,500 $ 29,336 Policy acquisition and other underwriting expenses 13,352 11,498 Total losses and expenses $ 50,852 $ 40,834 Underwriting loss $ ( 5,670) $ ( 3,615) Investment operations Net investment income $ 14,319 $ 12,704 Net realized gain on investments 593 1,220 Equity in losses of limited partnerships ( 1,326) ( 1,914) Equity in earnings of Erie Family Life Insurance Company 1,169 768 Net revenue from investment operations $ 14,755 $ 12,778 Income before income taxes $ 68,442 $ 65,966 Provision for income taxes 22,542 21,764 Net income $ 45,900 $ 44,202 Net income per share $ 0.65 $ 0.62 Net income excluding net realized gains and related taxes $ 45,514 $ 43,409 Weighted average shares outstanding 70,997 71,184 Dividends declared Class A non-voting common $ 0.19 $ 0.17 Class B common $ 28.50 $ 25.50 NOTES: (1) The Consolidated Statements of Operations and Exchange Commission on Form 10-Q. Shareholders may Comprehensive Income have been prepared from accounts obtain a copy of the Form 10-Q report without charge by without audit. (2) Net income for the period ended March 31, writing to the Chief Financial Officer, Erie Indemnity Company, 2003, is not necessarily indicative of the results that may 100 Erie Insurance Place, Erie, Pennsylvania, 16530 or by be expected for the year ending December 31, 2003. (3) The visiting the SEC’s EDGAR database at www.sec.gov. Company submits a quarterly report to the Securities and 9 10
  7. 7. Reconciliation of Net Income to Net Income excluding Net Realized Gains and Related Income Taxes The table below reconciles the Company’s GAAP-basis losses from investment sales, which could significantly net income to net income excluding net realized gains impact the Company’s financial results from one and related income taxes. Management believes this period to another based on the timing of investment measure assists the financial statement reader in sales and resulting gains or losses, which may or may interpreting and evaluating the financial results of not be recurring. the Company by removing the effects of gains and (Dollars in thousands) Three months ended March 31 (unaudited) 2003 2002 Net income $ 45,900 $ 44,202 Net realized gains on investments 593 1,220 Income tax expense on realized gains 207 427 Realized gains net of income tax expense 386 793 Net income excluding net realized gains and related taxes $ 45,514 $ 43,409 Consolidated statements of comprehensive income (Dollars in thousands) Three months ended March 31 (unaudited) 2003 2002 Net income $ 45,900 $ 44,202 Unrealized appreciation (depreciation) of investments, net of tax 9,755 ( 9,628) Minimum pension liability adjustment, net of tax 0 2,805 Comprehensive income $ 55,655 $ 37,379 11 12
  8. 8. Consolidated statements of financial position (Amounts in thousands, except per share data) December 31 March 31 2003 2002 (unaudited) Assets Investments Fixed maturities $ 725,736 $ 708,068 Equity securities Preferred stock 149,774 157,563 Common stock 42,180 36,515 Other invested assets 101,082 96,613 Total investments $ 1,018,772 $ 998,759 Cash and cash equivalents $ 98,853 $ 85,712 Equity in Erie Family Life Insurance Company 51,468 48,545 Premiums receivable from Policyholders 247,802 239,704 Receivables from affiliates 896,239 829,049 Other assets 171,905 155,907 Total assets $ 2,485,039 $ 2,357,676 Liabilities and shareholders’ equity Liabilities Unpaid losses and loss adjustment expenses $ 750,569 $ 717,015 Unearned premiums 408,161 393,091 Other liabilities 295,536 260,198 Total liabilities $ 1,454,266 $ 1,370,304 Total shareholders’ equity $ 1,030,773 $ 987,372 Total liabilities and shareholders’ equity $ 2,485,039 $ 2,357,676 Book value per share $ 14.52 $ 13.91 Shares outstanding 70,997 70,997 13 14
  9. 9. stock information Erie Indemnity Company Class A Common Stock is listed on the NASDAQ National Stock Market under the symbol “ERIE.” Quotations are available via major financial news sources. The following retail brokerage firms are market makers for Erie Indemnity Company Class A, Common Stock: Advest, Inc. Jim Keim or Mike Keim 300 State St., Erie, PA 16507 Erie Area – (814) 455-7747 Other – (800) 832-2204 Legg Mason Wood Walker, Inc. Thomas J. Miller 2500 CNG Tower 625 Liberty Avenue Pittsburgh, PA 15222 Pittsburgh Area – (412) 261-7300 Other – (800) 346-5075 Stock Transfer Information: American Stock Transfer & Trust Company 59 Maiden Lane Plaza Level New York, NY 10038 (800) 937-5449 ER ® ERIE INDEMNITY COMPANY Member • Erie Insurance Group www.erieinsurance.com GF-540 4/03

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