stock
                       information                           Erie Indemnity Company
                                ...
June 30, 2003. The property and casualty
    All amounts are in thousands, except per share
                              ...
assumed reinsurance business written by        2002. Personnel costs, including salaries,
the Exchange was $32,157 in the ...
insurance                         Underwriting results are net of premiums

           underwriting                       ...
in the second quarter of 2003 compared          assumed voluntary reinsurance business
to the second quarter of 2002. For ...
Consolidated statements of operations—
                                                                                   ...
Reconciliation of net income to net income
                                                                         exclud...
Consolidated statements
                                                            of financial position
                ...
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erie insurance group 2003-second-quarter-report

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erie insurance group 2003-second-quarter-report

  1. 1. stock information Erie Indemnity Company 2nd Quarter Report 2003 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. Stock Transfer Information true American Stock Transfer & Trust Company 59 Maiden Lane Plaza Level New York, NY 10038 (800) 937-5449 blue ER ® ERIE INDEMNITY COMPANY Member • Erie Insurance Group www.erieinsurance.com GF-540 7/03 © 2003 Erie Indemnity Company
  2. 2. June 30, 2003. The property and casualty All amounts are in thousands, except per share direct written premiums of the Erie data and average premium per policy. Insurance Group, upon which management to our fee revenue is calculated, grew 17.9 percent shareholders to $973,905 in the second quarter of 2003 from $826,300 for the second quarter 2002. Increases in average premium per policy, Net income per share increased 14.1 as well as continuing favorable policy percent to $.77 per share for the second retention rates, were both contributing quarter 2003 compared to $.67 per share factors in the growth of the Erie Insurance for the same period in 2002. For the quarter Group’s direct written premiums. Partially ended June 30, 2003, net income increased offsetting the increase in management to $54,458 from $47,826 for the same fee revenue was a reduction in the period one year ago. Improvements in management fee rate to 24 percent in 2003 management operations were driven by from 25 percent in 2002. continued strong renewal premium growth. Insurance underwriting losses increased in Direct written premiums of the Erie the second quarter of 2003 compared to Insurance Group grew 22.1 percent on a the second quarter of 2002 as recoveries rolling twelve-month basis. The average under the excess of loss reinsurance treaty premium per policy increased 10.0 percent with the Erie Insurance Exchange decreased. to $940 for the twelve months ended Realized gains on investments were largely June 30, 2003 from $855 for the same responsible for the improvement in net period in 2002. Also contributing to the revenue from investment operations. For annualized premium growth were policies the six months ended June 30, 2003, net in force growing at an annualized rate of income increased to $100,358, or $1.41 per 11.0 percent to 3,700 at June 30, 2003, from share, from $92,027, or $1.29 per share, for 3,300 at June 30, 2002. Policy retention the same period in 2002. was 91.0 percent and 91.1 percent for the twelve months ended June 30, 2003 and Net income (excluding net realized gains 2002, respectively, for all lines of business or losses and related federal income taxes) combined. increased to $52,264 for the quarter ended June 30, 2003, from $51,596 for the same Service agreement revenue decreased 11.7 period one year ago. For the six months percent to $6,863 for the second quarter of ended June 30, 2003 and 2002, net income 2003. Service agreement revenue includes (excluding net realized gains or losses and service fees earned by the Company for the related federal income taxes) was $97,778 management of non-affiliated assumed and $95,005, respectively. reinsurance written by the Erie Insurance Exchange. Fees earned were $1,929 in the management second quarter of 2003 versus $2,974 in operations 2002. During the 2003 renewal season, the Exchange reduced its aggregate exposure in assumed reinsurance by non-renewing Management fee revenue increased 12.7 unprofitable business. Non-affiliated percent to $232,737 for the quarter ended 2 1
  3. 3. assumed reinsurance business written by 2002. Personnel costs, including salaries, the Exchange was $32,157 in the second Employee benefits and payroll taxes, quarter of 2003 versus $42,479 in the increased 8.6 percent to $26,011 for the three second quarter of 2002. Additionally, the months ended June 30, 2003, compared to fee charged by the Company to the Erie $23,958 for the same period in 2002. Insurance Exchange for the management Also included in the cost of management and administration of reinsurance from operations are amounts related to non-affiliated insurers was reduced from 7.0 information technology hardware and percent to 6.0 percent beginning in 2003. infrastructure from the property and Also, included in service agreement revenue casualty companies of the Erie Insurance are service charges the Company collects Group eCommerce initiative launched in from Policyholders for providing extended June 2001. Company expenses totaled payment plans on policies written by the $105 and $604 in the second quarters of property and casualty companies of the 2003 and 2002, respectively. For the first Erie Insurance Group. The service charge half of 2003, these costs totaled $220. These revenue for the second quarter of 2003 was costs will continue to be incurred in future $4,934, compared to $4,802 for the quarter periods as the program develops. ended June 30, 2002. For the year, service agreement revenue decreased by $1,771 to For the six months ended June 30, 2003, the $13,347. cost of management operations increased 17.4 percent to $324,460 from $276,296 at The cost of management operations June 30, 2002. increased 15.3 percent for the second quarter of 2003 to $170,087 from $147,504 Income from the Company’s management for the same period in 2002. Commission operations rose 4.0 percent to $69,513 for costs totaled $125,325 for the second the second quarter of 2003 compared to quarter of 2003, a 17.8 percent increase $66,847 for the second quarter of 2002. over the $106,422 for the second quarter of For the six months ended June 30, 2003, 2002. Commission costs include scheduled income from management operations commissions, contingency awards, increased to $128,870 from $123,649 for the accelerated commissions and promotional same period in 2002. incentives earned by independent Agents. The gross margins from management Scheduled commissions, including Agent operations were 29.0 percent and 31.2 contingency awards, increased 17.9 percent percent in the second quarters of 2003 and to $122,726 for the quarter ended June 30, 2002, respectively. If the management fee 2003. Charges incurred for accelerated and service fee rates, which are currently commissions above normal scheduled rate 24 percent and 6 percent, respectively, had commissions increased $247 to $2,599 for remained consistent with the 2002 rates of the quarter ended June 30, 2003. 25 percent and 7 percent, respectively, gross Other operating costs, excluding margin for the second quarter 2003 would commissions, increased 9.0 percent in the have been 31.9. Gross margins were 28.4 second quarter of 2003 to $44,762 from percent and 30.9 percent for the first six $41,082 recorded in the same period of months of 2003 and 2002, respectively. 4 3
  4. 4. insurance Underwriting results are net of premiums underwriting paid and recoveries recorded under the excess of loss agreement with the operations Erie Insurance Exchange. There were no premium payments made in the second Insurance underwriting operations of the quarter of 2003 or 2002. The premium paid Company’s property and casualty insurance to the Exchange for the agreement totaled subsidiaries, Erie Insurance Company and $1,150 and $883 during the six months Erie Insurance Company of New York, which ended June 30, 2003 and 2002, respectively. together assume a 5.5 percent share of the During the second quarter of 2003, $1,800 underwriting results of the Erie Insurance in reinsurance recoveries under this Group under an intercompany reinsurance agreement recorded in the first quarter of pooling agreement, reported underwriting 2003 were released as a result of improved losses of $6,280 and $6,046 for the second underwriting results for the Erie Insurance quarters of 2003 and 2002, respectively. Group during the second quarter of 2003. Recoveries of $918 were recorded in the The Company’s property and casualty second quarter of 2002. No cash payments insurance subsidiaries’ share of the Erie have been made between companies in Insurance Group’s direct business generated 2003 or 2002 for recoveries under this net underwriting losses of $4,191 and agreement since related losses are reserved $6,701 during the second quarters of 2003 but not yet paid. and 2002, respectively. The improvement in direct underwriting losses were partly the Included in the Company’s policy acquisition result of reduced catastrophe losses totaling and other underwriting expenses are $2,102 in the second quarter of 2003 the property and casualty insurance compared to $3,474 in the second quarter subsidiaries’ share of eCommerce initiative of 2002. For the six months ended June expenses covered under a technology 30, 2003 and 2002, direct net underwriting cost sharing agreement totaling $756 and losses from the Company’s property and $1,025 for the quarters ended June 30, 2003 casualty insurance subsidiaries were $11,161 and 2002, respectively. For the six months and $10,502, respectively. Catastrophe losses ended June 30, 2003, these eCommerce were $3,155 and $3,948 for the first half of costs totaled $1,542. These shared costs will 2003 and 2002, respectively. continue to be incurred in future periods as the program develops. The Company’s property and casualty insurance subsidiaries’ share of the investment unaffiliated assumed voluntary reinsurance operations business generated net underwriting losses of $320 and $217 for the three months ended June 30, 2003 and 2002, respectively. Net revenue from investment operations Net underwriting gains from unaffiliated for the second quarter of 2003 increased to assumed voluntary reinsurance business $17,865 from $10,771 in the second quarter was $588 and $129 for the six months of 2002. This increase was principally the ended June 30, 2003 and 2002, respectively. result of a reduction in impairment charges 5 6
  5. 5. in the second quarter of 2003 compared assumed voluntary reinsurance business to the second quarter of 2002. For the six as of December 31, 2003; suspending new months ended June 30, 2003, net revenue Agent appointments as of August 15, 2003, from investment operations was $32,621 through the remainder of the year; and compared to $23,549 for the same period relaxing the timeframe for the Group’s entry in 2002. into Minnesota. These actions allow the Company to redeploy resources in support Net investment income increased slightly of its strategies to improve underwriting to $14,219 for the quarter ended June 30, profitability. 2003, from $14,133 for the same period in 2002. Net investment income totaled We are pleased with the strong $28,538 and $26,837 for the first half of performance of the Company in the second 2003 and 2002, respectively. quarter and for the year. Our intense focus on underwriting profitability reflects The Company realized net gains on our long-term view in managing our investments of $3,376 in the second quarter property/casualty business. Throughout of 2003 compared to realized losses of our history, that focus has benefited both $5,801 in the second quarter of 2002. the Policyholders of the Exchange and the Impairment charges totaling $10,693 in shareholders of Erie Indemnity. the second quarter of 2002 related to fixed maturities and nonredeemable preferred stock investments. Realized gains on investments totaled $3,969 for the first six months of 2003 compared to realized losses Jeffrey A. Ludrof of $4,581 for the same period one year ago. President and Chief Executive Officer Equity in losses of limited partnerships were “Safe Harbor” Statement Under the Private $1,420 for the three months ended June Securities Litigation Reform Act of 1995: Certain 30, 2003 compared to earnings of $2,221 forward-looking statements contained herein involve risks and uncertainties. These statements for the same period one year ago. For the include certain discussions relating to management six months ended June 30, 2003, equity in fee revenue, cost of management operations, losses of limited partnerships totaled $2,745 underwriting, premium and investment income compared to earnings of $307 for the same volume, business strategies, profitability and business relationships and the Company’s other business period in 2002. activities during 2003 and beyond. In some cases, you can identify forward-looking statements by terms such The Company is in the process of refining as “may,”“will,”“should,”“could,”“would,”“expect,”“plan,” their focus on underwriting profitability, “intend,”“anticipate,”“believe,”“estimate,”“project,” concentrating on initiatives that will “predict,”“potential” and similar expressions. These achieve a reported combined ratio for forward-looking statements reflect the Company’s current views about future events, are based on the property and casualty insurance assumptions and are subject to known and unknown companies of the Erie Insurance Group risks and uncertainties that may cause results to differ more in line with historical results. As part materially from those anticipated in those statements. of this process, the Company is taking Many of the factors that will determine future events or achievements are beyond our ability to control or several immediate actions in support of its predict. underwriting profitability goals: exiting the 7 8
  6. 6. Consolidated statements of operations— segment basis (Amounts in thousands, except per share data) Three months ended June 30 Six months ended June 30 (unaudited) (unaudited) 2003 2002 2003 2002 Management operations Management fee revenue $ 232,737 $ 206,575 $ 439,983 $ 384,827 Service agreement revenue 6,863 7,776 13,347 15,118 Total revenue from management operations $ 239,600 $ 214,351 $ 453,330 $ 399,945 Cost of management operations 170,087 147,504 324,460 276,296 Income from management operations $ 69,513 $ 66,847 $ 128,870 $ 123,649 Insurance underwriting operations Premiums earned $ 47,219 $ 40,434 $ 92,401 $ 77,653 Losses and loss adjustment expenses incurred $ 39,364 $ 34,050 $ 76,864 $ 63,387 Policy acquisition and other underwriting expenses 14,135 12,430 27,487 23,927 Total losses and expenses $ 53,499 $ 46,480 $ 104,351 $ 87,314 Underwriting loss $ (6,280) $ (6,046) $ (11,950) $ (9,661) Investment operations Net investment income $ 14,219 $ 14,133 $ 28,538 $ 26,837 Net realized gains (losses) on investments 3,376 (5,801) 3,969 (4,581) Equity in (losses) earnings of limited partnerships (1,420) 2,221 (2,745) 307 Equity in earnings of Erie Family Life Insurance Company 1,690 218 2,859 986 Net revenue from investment operations $ 17,865 $ 10,771 $ 32,621 $ 23,549 Income before income taxes $ 81,098 $ 71,572 $ 149,541 $ 137,537 Provision for income taxes 26,640 23,746 49,183 45,510 Net income $ 54,458 $ 47,826 $ 100,358 $ 92,027 Net income per share $ 0.77 $ 0.67 $ 1.41 $ 1.29 Net income excluding net realized gains (losses) and related taxes $ 52,264 $ 51,596 $ 97,778 $ 95,005 Weighted average shares outstanding 70,997 71,144 70,997 71,162 Dividends declared Class A non-voting common $ 0.19 $ 0.17 $ 0.38 $ 0.34 Class B common $ 28.50 $ 25.50 $ 57.00 $ 51.00 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 June 30, 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 Company’s website at www.erieinsurance.com. 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 than-temporary impairment charges, which could net income to net income excluding net realized gains significantly impact the Company’s financial results or losses and related income taxes. Management from one period to another based on the timing of believes this measure assists the financial statement investment sales and resulting gains or losses, which reader in interpreting and evaluating the financial may or may not be recurring and the impact of results of the Company by removing the effects of impairment charges. gains and losses from investment sales and other- (Dollars in thousands) Three months ended June 30 Six months ended June 30 (unaudited) (unaudited) 2003 2002 2003 2002 Net income $ 54,458 $ 47,826 $ 100,358 $ 92,027 Net realized gains (losses) on investments 3,376 (5,801) 3,969 (4,581) Income tax (expense) benefit on realized gains (losses) (1,182) 2,031 (1,389) 1,603 Realized gains (losses) net of income tax (expense) benefit 2,194 (3,770) 2,580 (2,978) Net income excluding net realized gains (losses) and related taxes $ 52,264 $ 51,596 $ 97,778 $ 95,005 Consolidated statements of comprehensive income (Dollars in thousands) Three months ended June 30 Six months ended June 30 (unaudited) (unaudited) 2003 2002 2003 2002 Net income $ 54,458 $ 47,826 $ 100,358 $ 92,027 Unrealized holding gains (losses) arising during period, net of reclassification adjustment for gains included in net income, net of tax 28,191 (3,114) 37,946 (9,936) Comprehensive income $ 82,649 $ 44,712 $ 138,304 $ 82,091 11 12
  8. 8. Consolidated statements of financial position (Amounts in thousands, except per share data) December 31 June 30 2003 2002 (unaudited) Assets Investments Fixed maturities $ 784,566 $ 708,068 Equity securities Preferred stock 155,796 157,563 Common stock 40,774 36,515 Other invested assets 106,437 96,613 Total investments $ 1,087,573 $ 998,759 Cash and cash equivalents $ 139,820 $ 85,712 Equity in Erie Family Life Insurance Company 59,434 48,545 Premiums receivable from Policyholders 268,074 239,704 Receivables from affiliates 928,412 829,049 Other assets 168,024 155,907 Total assets $ 2,651,337 $ 2,357,676 Liabilities and shareholders’ equity Liabilities Unpaid losses and loss adjustment expenses $ 780,837 $ 717,015 Unearned premiums 439,214 393,091 Other liabilities 330,123 260,198 Total liabilities $ 1,550,174 $ 1,370,304 Total shareholders’ equity $ 1,101,163 $ 987,372 Total liabilities and shareholders’ equity $ 2,651,337 $ 2,357,676 Book value per share $ 15.51 $ 13.91 Shares outstanding 70,997 70,997 13 14

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