erie insurance group 2004-third-quarter-report


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erie insurance group 2004-third-quarter-report

  1. 1. Stock CHARTING THE WAY 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. Stock Transfer Information American Stock Transfer & Trust Company 59 Maiden Lane Plaza Level New York, NY 10038 (800) 937-5449 ER ERIE INDEMNITY COMPANY 3 3RD QUARTER REPORT ® 2004 ERIE INDEMNITY COMPANY Member • Erie Insurance Group GF-540 11/04 © 2004 Erie Indemnity Company
  2. 2. To our nine months ended September 30, 2004, increased 5.4 percent to $165.1 million Shareholders compared to $156.6 million during the same period in 2003. Net income per share for Net income per share increased 5.3 percent the nine months ended September 30, 2004, to $.83 per share for the third quarter 2004 increased 6.0 percent to $2.34 per share compared to $.79 per share for the same compared to $2.21 per share during the period in 2003. For the quarter ended same period in 2003. September 30, 2004, net income increased to $58.6 million from $56.2 million for Management the same period one year ago. Income Operations from management operations for the third quarter of 2004 decreased 7.1 percent from the third quarter of 2003. Management Management fee revenue increased 6.3 fee revenue was reduced by $4.6 million percent to $246.4 million for the quarter and $1.3 million in the third quarters of ended September 30, 2004. The property 2004 and 2003, respectively, due to an and casualty direct written premiums of increase in the allowance on mid-term the Erie Insurance Group, upon which policy cancellations. The higher estimated management fee revenue is calculated, allowance for mid-term cancellations was grew 7.7 percent to $1.0 billion in the the result of an increase in mid-term policy third quarter of 2004 from $971.0 million cancellation experience for the most recent for the third quarter 2003. Increases in quarter. After being offset by the change average premium per policy, reflective of in allowance for returned commissions on rate increases achieved in various lines mid-term policy cancellations, the impact of business, and high policy retention of the change in cancellation allowance was rates were contributing factors in the a reduction to net income of $.02 per share growth of direct written premiums. The for the third quarter of 2004. The service fee slower premium growth in 2004 is due revenue on voluntary assumed reinsurance to the Company’s focus on underwriting also decreased as the Company exited from profitability through increased emphasis on the business effective December 31, 2003. controlling exposure growth and improving The improvement in insurance underwriting underwriting risk selection. operations resulted as the benefits of rate The management fee rate was increased by increases and other underwriting actions are the Company’s Board of Directors to 24 being realized. Revenue from investment percent, effective July 1, 2004, from 23.5 operations increased 6.9 percent in the percent in the first half of 2004. The rate third quarter of 2004 compared to the was set at 24 percent for all of 2003. The same period in 2003. This increase is due lower management fee rate in the first half to improved results in equity in earnings of of the year resulted in $10.2 million less limited partnerships. Net income for the 2 1 ▼ ▼
  3. 3. in management fee revenue for the nine 89.2 percent at June 30, 2004. This increase months ended September 30, 2004, or a in estimated policy cancellations was partially reduction to net income per share of $.09. offset by a change in the allowance for returned commissions on mid-term policy Direct written premiums of the Erie cancellations of $2.3 million in the third Insurance Group grew 10.1 percent on a quarter of 2004. For the first nine months rolling twelve-month basis. The average of 2004 and 2003, revenues were reduced premium per policy increased 8.2 percent $5.7 million and $2.7 million, respectively, to $1,042 for the twelve months ended by changes in the estimated allowance for September 30, 2004, from $964 for the management fees returned on mid-term same period in 2003. Contributing to the policy cancellations. annualized premium growth were policies in force growing at an annualized rate of Service agreement revenue decreased to 1.8 percent to 3,787,053 at September 30, $5.4 million for the third quarter of 2004 2004, from 3,720,351 at September 30, from $6.7 million for the same period in 2003. Policy retention was 88.7 percent and 2003. Included in service agreement revenue 90.6 percent for the twelve months ended are service charges the Company collects September 30, 2004 and 2003, respectively, from policyholders for providing extended for all lines of business combined. While still payment plans on policies written by the favorable, the reinforcement of underwriting Erie Insurance Group. The service charge and reunderwriting standards to control revenue for the third quarters of 2004 and exposure growth and improve risk selection 2003 was $5.3 million and $5.0 million, is contributing to the slowdown in policy respectively. growth and downward trend in the policy Also included in service agreement revenue retention rate. is service income received from the Exchange Management fees are returned to the as compensation for the management Exchange when policies are cancelled mid- and administration of voluntary assumed term and unearned premiums are refunded. reinsurance from non-affiliated insurers. As The Company records an estimated the Exchange exits the assumed reinsurance allowance for management fees returned on business, the service agreement revenue mid-term policy cancellations. Third quarter received by the Company will continue to 2004 and 2003 revenues were reduced by decrease. The minimal third quarter 2004 $4.6 million and $1.3 million, respectively, voluntary assumed premium revenues due to changes in the allowance. The higher yielded revenues to the Company of estimated allowance was the result of higher approximately $43 thousand. Service fee policy cancellation experience in the most revenue from voluntary assumed reinsurance recent quarter compared to the previous business for the third quarter of 2003 was quarter. This increase in policy cancellations $1.7 million. The non-affiliated voluntary is reflected in the reduced year over year assumed reinsurance premium written in the policy retention ratio, which decreased to first nine months of 2004 was $12.4 million 88.7 percent at September 30, 2004, from 4 3 ▼ ▼
  4. 4. compared to $92.2 million in the same same period in 2003. Contributing to the period in 2003. increase in salaries was a 4.3 percent increase in staffing levels as well as normal merit pay The cost of management operations rate increases. Total employee benefit costs increased 10.7 percent for the third quarter increased 12.4 percent in the third quarter of 2004 to $188.0 million from $169.8 of 2004 compared to the third quarter of million for the same period in 2003. 2003 due to increases in health plan and Commission costs totaled $140.2 million retirement plan benefit costs. for the third quarter of 2004, a 12.0 percent increase over the $125.2 million for the third Income from the Company’s management quarter of 2003. Commission costs include operations was $188.6 million and scheduled commissions, contingency awards, $197.5 million for the nine months ended accelerated commissions and promotional September 30, 2004 and 2003, respectively. incentives earned by independent agents. The gross margins from management Scheduled commissions, including agent operations were 25.3 percent and 28.8 contingency awards, increased 14.3 percent percent in the third quarters of 2004 and to $134.6 million for the quarter ended 2003, respectively. Gross margins were 25.5 September 30, 2004. Agency contingency percent and 28.6 percent for the first nine awards were $13.8 million and $6.4 million months of 2004 and 2003, respectively. in the third quarters of 2004 and 2003, If the management fee rate had been 24 respectively. The increase in 2004 is a percent for all nine months of 2004, the result of changes in the award program and gross margin would have been 26.5 percent. improved underwriting results. Scheduled commission expense was reduced by $2.3 Insurance Underwriting million and $.8 million in the third quarters Operations of 2004 and 2003, respectively, related to the changes in the allowance for management Insurance underwriting operations of the fees returned on mid-term policy cancellations Company’s property and casualty insurance discussed previously. Charges incurred for subsidiaries, Erie Insurance Company and accelerated commissions were $5.6 million Erie Insurance Company of New York, and $7.3 million for the quarters ended which together assume a 5.5 percent share September 30, 2004 and 2003, respectively. of the underwriting results of the Erie Other operating costs, excluding Insurance Group under an intercompany commissions, increased 7.1 percent in the reinsurance pooling agreement, generated third quarter of 2004 to $47.8 million underwriting income of $2.9 million in from $44.6 million recorded in the same the third quarter of 2004 compared to period of 2003. Personnel costs, including underwriting losses of $4.9 million in the salaries, employee benefits and payroll taxes, third quarter of 2003. increased 14.7 percent to $29.4 million The Company’s property and casualty for the three months ended September 30, insurance subsidiaries’ share of the Erie 2004, compared to $25.6 million for the 6 5 ▼ ▼
  5. 5. Insurance Group’s direct business generated aggregate excess of loss agreement with underwriting income of $5.3 million in the Exchange. The premium paid to the the third quarter of 2004 compared to Exchange for the agreement totaled $1.6 underwriting losses of $9.4 million in the million and $1.2 million for the third third quarter of 2003. The improvement in quarters of 2004 and 2003 respectively. The 2004 underwriting results on direct business portion of this premium recorded as expense reflects the impact of the underwriting was $.8 million in the third quarter of profitability initiatives implemented in 2004 and $1.2 million in the third quarter 2003. Additionally, the Property and of 2003. In the third quarter of 2004, the Casualty Group has experienced positive Company’s property and casualty insurance development on losses of prior accident subsidiaries recorded charges under the years through the first nine months of 2004 excess-of-loss reinsurance agreement with the of approximately $120 million compared Exchange of $1.2 million. This is the result to adverse development on losses of prior of the positive loss development experience accident years experience of approximately on prior accident years, especially the 2003 $30 million in the same period a year accident year. During the third quarter of ago. The impact on the Company of the 2003, the Company’s property and casualty positive development of prior accident insurance subsidiaries recorded recoveries years, net of changes in recoverables under of $7.1 million under the excess-of-loss the excess-of-loss reinsurance agreement, reinsurance agreement. Contributing to these was $.5 million. Contributing to the 2003 recoveries were the impact of Hurricane underwriting losses were catastrophe losses Isabel on the 2003 accident year results and of $6.1 million which included the effects adverse development of prior accident years. of Hurricane Isabel. For the nine months No cash payments have been made between ended September 30, 2004, the Company’s companies in 2004 or 2003 for recoveries property and casualty insurance subsidiaries’ under this agreement since related losses are share of the Erie Insurance Group’s direct reserved but not yet paid. business generated underwriting income Included in the Company’s policy of $6.8 million, compared to underwriting acquisition and other underwriting expenses losses of $20.6 million for the same period are the property and casualty insurance in 2003. subsidiaries’ share of eCommerce initiative In August 2004, the Company implemented expenses covered under a technology cost insurance scoring for its private passenger sharing agreement totaling $.3 million and auto and homeowners lines of business in $.5 million for the quarters ended September all operating states and territories except 30, 2004 and 2003, respectively. For the Maryland, to maintain and enhance nine months ended September 30, 2004 and underwriting fundamentals and risk selection 2003, these eCommerce costs totaled $1.0 capabilities. million and $2.1 million, respectively. Underwriting results are net of premiums paid and recoveries recorded under the 8 7 ▼ ▼
  6. 6. Investment impairment charges on limited partnerships in the third quarter of 2004. In the third Operations quarter of 2003, there were impairment charges related to private equity limited Net revenue from investment operations for partnerships of $.6 million. the third quarter of 2004 increased to $21.2 We are pleased with the continued consistent million from $19.8 million in the third financial performance of Erie Indemnity quarter of 2003. For the nine months ended Company in the third quarter. Underwriting September 30, 2004, net revenue from profitability has been and continues to be a investment operations was $62.1 million priority for our Company, and the positive compared to $52.4 million for the same results have been significant. An expected period in 2003. result of our focus on underwriting has been The increase in net revenue from investment a slowdown in new business production, operations in the third quarter 2004 is which continued in the third quarter. The primarily due to earnings from limited primary focus of our agents has been on partnerships of $3.8 million for the quarter implementing our enhanced underwriting ended September 30 2004, compared to and reunderwriting guidelines, and their $1.3 million for the same period in 2003. efforts have been outstanding. These Net investment income totaled $14.8 improved results create the foundation for million and $14.5 million for the quarters us to improve our competitiveness. Overall, ended September 30, 2004 and 2003, the inroads we have made with underwriting respectively respectively. profitability and quality growth will favorably impact our Company’s long-term objectives. The Company realized net gains on investments of $.9 million and $1.8 million in the third quarters of 2004 and 2003, respectively. There were no impairment Jeffrey A. Ludrof charges on investments in the third quarters President and Chief Executive Officer of 2004 or 2003. Equity in earnings of limited partnerships “Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995: Certain forward-looking was $3.8 million and $1.3 million for statements contained herein involve risks and uncertainties. the quarters ended September 30, 2004 These statements include certain discussions relating to management fee revenue, cost of management operations, and 2003, respectively. Private equity underwriting, premium and investment income volume, business strategies, profitability and business relationships and mezzanine debt limited partnerships and the Company’s other business activities during 2004 generated earnings of $3.5 million for the and beyond. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” three months ended September 30, 2004, “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar compared to losses of $.1 million for the expressions. These forward-looking statements reflect the same period of 2003. Real estate limited Company’s current views about future events, are based on assumptions and are subject to known and unknown risks and partnerships reflected earnings of $.3 million uncertainties that may cause results to differ materially from and $1.4 million for the third quarters of those anticipated in those statements. Many of the factors that will determine future events or achievements are beyond our 2004 and 2003, respectively. There were no ability to control or predict. 10 9 ▼ ▼
  7. 7. Consolidated statements of operations— segment basis (Amounts in thousands, except per share data) Three months ended Nine months ended September 30 (unaudited) Septemer 30 (unaudited) 2004 2003 2004 2003 Management operations Management fee revenue $ 246,388 $ 231,747 $ 724,379 $ 671,730 Service agreement revenue 5,384 6,667 16,207 20,014 Total revenue from management operations 251,772 238,414 740,586 691,744 Cost of management operations 187,999 169,752 551,957 494,212 Income from management operations 63,773 68,662 188,629 197,532 Insurance underwriting operations Premiums earned 52,862 48,358 154,576 140,759 Losses and loss adjustment expenses incurred 34,602 38,723 112,642 115,587 Policy acquisition and other underwriting expenses 15,365 14,578 45,389 42,065 Total losses and expenses 49,967 53,301 158,031 157,652 Underwriting gain (loss) 2,895 ( 4,943) ( 3,455) ( 16,893) Investment operations Net investment income 14,795 14,477 45,048 43,015 Net realized gain on investments 859 1,846 6,743 5,815 Equity in earnings (losses) of limited partnerships 3,845 1,311 5,765 ( 1,435) Equity in earnings of Erie Family Life Insurance Company 1,654 2,160 4,545 5,019 Net revenue from investment operations 21,153 19,794 62,101 52,414 Income before income taxes 87,821 83,513 247,275 233,053 Provision for income taxes 29,255 27,276 82,182 76,458 Net income $ 58,566 $ 56,237 $ 165,093 $ 156,595 Net income per share—basic $ 0.83 $ 0.79 $ 2.34 $ 2.21 Net income per share—diluted $ 0.83 $ 0.79 $ 2.34 $ 2.20 Weighted average shares outstanding 70,186 70,997 70,584 70,997 Dividends declared Class A non-voting common $ 0.215 $ 0.19 $ 0.645 $ 0.57 Class B common 32.25 28.50 96.75 85.50 NOTES: (1) The Consolidated Statements of Operations and Exchange Commission on Form 10-Q. Shareholders may and Comprehensive Income have been prepared from obtain a copy of the Form 10-Q report without charge by accounts without audit. (2) Net income for the period ended writing to the Chief Financial Officer, Erie Indemnity Company, September 30, 2004, is not necessarily indicative of the results 100 Erie Insurance Place, Erie, Pennsylvania, 16530 or by that may be expected for the year ending December 31, 2004. visiting the Company’s website at (3) The Company submits a quarterly report to the Securities 12 11 ▼ ▼
  8. 8. Consolidated statements of comprehensive income (Dollars in thousands) Three months ended Nine months ended September 30 (unaudited) September 30 (unaudited) 2004 2003 2004 2003 Net income $ 58,566 $ 56,237 $ 165,093 $ 156,595 Unrealized holding gains (losses) arising during period, net of reclassification adjustment for gains (losses) included in net income, net of tax 15,123 ( 10,213) ( 4,897) 27,733 Comprehensive income $ 73,689 $ 46,024 $ 160,196 $ 184,328 Consolidated statements of financial position (Amounts in thousands, except per share data) December 31 September 30 2004 2003 Assets (unaudited) Investments Fixed maturities $ 981,989 $ 879,361 Equity securities Preferred stock 141,024 148,952 Common stock 39,356 40,451 Other invested assets 127,190 116,400 Total investments 1,289,559 1,185,164 Cash and cash equivalents 79,167 87,192 Equity in Erie Family Life Insurance Company 58,104 56,072 Premiums receivable from policyholders 295,119 266,957 Receivables from affiliates 1,079,669 984,146 Other assets 180,379 175,076 Total assets $ 2,981,997 $ 2,754,607 Liabilities and shareholders’ equity Liabilities Unpaid losses and loss adjustment expenses $ 905,930 $ 845,536 Unearned premiums 493,313 449,606 Other liabilities 344,202 295,295 Total liabilities 1,743,445 1,590,437 Total shareholders’ equity 1,238,552 1,164,170 Total liabilities and shareholders’ equity $ 2,981,997 $ 2,754,607 Book value per share $ 17.68 $ 16.40 Shares outstanding 70,040 70,997 14 13 ▼ ▼