Stock




                                                                             CHARTING THE WAY
   Information
Eri...
To our                                          Net income for the six months ended
                                      ...
meeting, the Board voted to increase the       This change in estimate was partially offset
management fee rate to 24% fro...
$170.1 million for the same period in 2003.      2003. Increases in health plan and retirement
Commission costs totaled $1...
Insurance Group’s direct business generated       for private passenger auto and homeowners
underwriting income of $1.3 mi...
Investment                                      for the same period in 2003. There were no
                               ...
Consolidated statements of operations—
                                                                                   ...
Consolidated statements of
                                                                                       comprehe...
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erie insurance group 2004-second-quarter-report

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erie insurance group 2004-second-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 2 2nd QUARTER REPORT ® 2004 ERIE INDEMNITY COMPANY Member • Erie Insurance Group www.erieinsurance.com GF-540 8/04 © 2004 Erie Indemnity Company
  2. 2. To our Net income for the six months ended June 30, 2004, increased 6.1 percent to Shareholders $106.5 million compared to $100.4 million during the same period in 2003. Net income Net income per share increased 5.1 percent per share for the six months ended June 30, to $.81 per share for the second quarter 2004, increased 6.5 percent to $1.50 per 2004 compared to $.77 per share for the share compared to $1.41 per share during same period in 2003. For the quarter ended the same period in 2003. June 30, 2004, net income increased to $57.0 million from $54.5 million for the Management same period one year ago. Income from Operations management operations for the second quarter of 2004 decreased 1.3 percent from the second quarter of 2003. Contributing Management fee revenue increased 10.0 to this decrease was a slower growth in percent to $256.1 million for the quarter management operations due to the lower ended June 30, 2004. The property and management fee rate of 23.5 percent in 2004 casualty direct written premiums of the Erie compared to 24.0 percent in 2003, despite Insurance Group, upon which management a 10.7 percent increase in direct written fee revenue is calculated, grew 10.7 percent premiums of the Erie Insurance Group. In to $1.1 billion in the second quarter of 2004 the second quarter of 2004, management from $973.9 million for the second quarter fee revenue increased $2.8 million due 2003. Increases in average premium per policy, to a reduction in the second quarter of reflective of rate increases achieved in various 2004 of the allowance for management fee lines of business, and continuing favorable revenue. In the second quarter of 2003, policy retention rates were contributing factors the allowance for management fee revenue in the growth of direct written premiums. The decreased management fee revenue by $1.0 slower premium growth in 2004 is due to the million. The service fee revenue on voluntary Company’s focus on underwriting profitability assumed reinsurance also decreased as the through increased emphasis on controlling Company exited from the business effective exposure growth and improving underwriting December 31, 2003. The improvement in risk selection. insurance underwriting operations resulted The management fee rate was set at 23.5 as the benefits of rate increases and other percent beginning January 1, 2004, and underwriting actions are being realized. was 24 percent for 2003. This reduction in Revenue from investment operations management fee rate caused a $10.2 million increased 20.8 percent in the second quarter decrease in management fee revenue for the of 2004 compared to the same period in first six months of 2004 compared to the 2003. This increase is due to increased net same period of 2003, or a reduction to net investment income and improved results in income per share of $.09. At its July 2004 equity in earnings of limited partnerships. 2 1 ▼ ▼
  3. 3. meeting, the Board voted to increase the This change in estimate was partially offset management fee rate to 24% from 23.5% by a change in the allowance for returned effective July 1, 2004. commissions on mid-term cancellations. For the first six months of 2004 and 2003, Direct written premiums of the Erie revenues were reduced $1.1 million and Insurance Group grew 12.2 percent on $1.4 million, respectively, by changes in this a rolling 12-month basis. The average estimated allowance. premium per policy increased 8.7 percent to $1,022 for the 12 months ended Service agreement revenue decreased to June 30, 2004, from $940 for the same $5.2 million for the second quarter of 2004 period in 2003. Also contributing to the from $6.9 million for the same period in annualized premium growth were policies 2003. Included in service agreement revenue in force growing at an annualized rate are service charges the Company collects of 3.2 percent to 3,787,242 at June 30, from policyholders for providing extended 2004, from 3,668,506 at June 30, 2003. payment plans on policies written by the Policy retention was 89.2 percent and Erie Insurance Group. The service charge 91.0 percent for the 12 months ended revenue for the second quarters of 2004 and June 30, 2004 and 2003, respectively, for 2003 were $5.2 million and $5.0 million, all lines of business combined. While still respectively. favorable, the reinforcement of underwriting Also included in service agreement revenue and reunderwriting standards to control is service income received from the Exchange exposure growth and improve risk selection as compensation for the management is contributing to the downward trend in the and administration of voluntary assumed policy retention rate. reinsurance from non-affiliated insurers. As Management fees are returned to the the Exchange exits the assumed reinsurance Exchange when policyholders cancel their business, the service agreement revenue coverage mid-term and unearned premiums received by the Company will continue are refunded. The Company records an to decrease. The second quarter 2004 estimated allowance for management fees voluntary assumed premium and related returned on mid-term cancellations. Second service fee revenue was minimal. Service fee quarter 2004 revenues were increased by revenue from voluntary assumed reinsurance $2.8 million while second quarter 2003 business for the second quarter of 2003 was revenues had been decreased $1.0 million $1.9 million. The non-affiliated voluntary due to changes in this allowance. During assumed reinsurance premium written in the second quarter of 2004, the Company the first half of 2004 was $11.7 million performed an evaluation of actual mid- compared to $64.5 million in the same term policy cancellation experience. As period in 2003. a consequence, the Company refined The cost of management operations its estimated allowance for mid-term increased 13.3 percent for the second cancellations in the second quarter 2004. quarter of 2004 to $192.7 million from 4 3 ▼ ▼
  4. 4. $170.1 million for the same period in 2003. 2003. Increases in health plan and retirement Commission costs totaled $146.1 million plan benefit costs were offset by a reduction for the second quarter of 2004, a 16.6 to the liability for the Company’s workers’ percent increase over the $125.3 million for compensation benefit cost. the second quarter of 2003. Commission Income from the Company’s management costs include scheduled commissions, operations was $124.9 million and $128.9 contingency awards, accelerated commissions and promotional incentives earned by million for the six months ended June 30, independent agents. Scheduled commissions, 2004 and 2003, respectively. The gross including agent contingency awards, margins from management operations were increased 18.9 percent to $140.1 million for 26.3 percent and 29.0 percent in the second the quarter ended June 30, 2004. Charges quarters of 2004 and 2003, respectively. If incurred for accelerated commissions were the management fee rate, which is currently $1.7 million and $2.6 million above normal 23.5 percent, had remained consistent scheduled rate commissions for the quarters with the 2003 rates of 24 percent, the ended June 30, 2004 and 2003, respectively. gross margin for the second quarter of In the second quarter of 2004, scheduled 2004 would have been 27.8 percent. Gross commission expense was increased by margins were 25.5 percent and 28.4 percent $1.4 million related to the changes in the for the first six months of 2004 and 2003 allowance for management fees returned on respectively. mid-term cancellations, discussed previously. In the second quarter of 2003, scheduled commission expense was reduced by $.6 Insurance Underwriting million related to changes in this allowance. Operations Other operating costs, excluding commissions, increased 4.1 percent in the Insurance underwriting operations of the second quarter of 2004 to $46.6 million Company’s property and casualty insurance from $44.8 million recorded in the same subsidiaries, Erie Insurance Company and period of 2003. Personnel costs, including Erie Insurance Company of New York, salaries, employee benefits and payroll taxes, which together assume a 5.5 percent share increased 3.7 percent to $27.0 million of the underwriting results of the Erie for the three months ended June 30, Insurance Group under an intercompany 2004, compared to $26.0 million for the reinsurance pooling agreement, reported same period in 2003. Contributing to the underwriting losses of $4.9 million and $6.3 increase in salaries was a 5.3% increase in million for the second quarters of 2004 and staffing levels as well as normal merit pay 2003, respectively. rate increases. Total employee benefit costs The Company’s property and casualty decreased 1.8% in the second quarter of insurance subsidiaries’ share of the Erie 2004 compared to the second quarter of 6 5 ▼ ▼
  5. 5. Insurance Group’s direct business generated for private passenger auto and homeowners underwriting income of $1.3 million in lines of business. the second quarter of 2004 compared Underwriting results are net of premiums to underwriting losses of $4.2 million paid and recoveries recorded under the in the second quarter of 2003. The aggregate excess of loss agreement with improvement in 2004 underwriting results the Exchange. The premium paid to the on direct business reflects the impact of Exchange for the agreement totaled $1.7 the underwriting profitability initiatives million and $1.2 million during the six implemented in 2003. Additionally, months ended June 30, 2004 and 2003, the Property and Casualty Group has respectively. In the second quarter of experienced positive development on losses 2004, the Company’s property/casualty of prior accident years through the first six insurance subsidiaries had a reduction months of 2004 of approximately $100 of recoveries under the excess-of-loss million compared to adverse development reinsurance agreement with the Exchange on losses of prior accident years experience by $4.9 million. This is the result of the of about $30 million in the same period a positive loss development experience on year ago. The impact on the Company of prior accident years, especially the 2003 the positive development of prior accident accident year. During the second quarter years, net of changes in recoverables under of 2003, the Company’s property/casualty the excess-of-loss reinsurance agreement, was insurance subsidiaries recorded a $1.8 $.5 million. Certain lines of business, such million reduction of reinsurance recoveries as workers’ compensation and commercial that had been recorded in the first quarter of multi-peril continue to experience poor loss 2003 as a result of improved underwriting ratios as a result of increased severity. These results of the Property and Casualty Group. trends are being addressed by reunderwriting No cash payments have been made between and severity control initiatives. The 2003 companies in 2004 or 2003 for recoveries underwriting losses resulted primarily from under this agreement since related losses are increases in claims severity and higher reserved but not yet paid. catastrophe losses. For the six months ended June 30, 2004 and 2003, underwriting Included in the Company’s policy losses from the Company’s property/casualty acquisition and other underwriting expenses insurance subsidiaries were $6.3 million and are the property and casualty insurance $12.0 million, respectively. subsidiaries’ share of eCommerce initiative expenses covered under a technology cost In August 2004, subject to regulatory sharing agreement totaling $.3 million and approval in the various jurisdictions where $.8 million for the quarters ended June 30, the Company operates, the Property and 2004 and 2003, respectively. For the six Casualty Group plans to implement the months ended June 30, 2004 and 2003, use of insurance scoring in underwriting these eCommerce costs totaled $.7 million to maintain and enhance underwriting and $1.6 million, respectively. fundamentals and risk selection capabilities 8 7 ▼ ▼
  6. 6. Investment for the same period in 2003. There were no impairment charges on limited partnerships Operations in the second quarter of 2004. In the second quarter of 2003, there were impairment Net revenue from investment operations for charges related to private equity limited the second quarter of 2004 increased to $21.6 partnerships of $.5 million. million from $17.9 million in the second The improvement in our combined ratio quarter of 2003. For the six months ended during the second quarter and first six June 30, 2004, net revenue from investment months of 2004 demonstrates that our focus operations was $40.9 million compared to on underwriting profitability is working. $32.6 million for the same period in 2003. Our agents and employees are executing the The increase in net revenue from investment strategies we have developed to maintain operations in the second quarter 2004 is our exceptional service and ensure the primarily due to earnings from limited financial stability of our company. Our partnerships of $1.5 million for the quarter growth has moderated as a result of our ended June 30 2004, compared to losses of focus on underwriting profitability, yet we $1.4 million for the same period in 2003, as continue to attract new business thanks to well as increases in net investment income. our unparalleled commitment to service. Net investment income totaled $15.6 The outlook for our Company to maintain million and $14.2 million for the quarters a pattern of profitable growth looks very ended June 30, 2004 and 2003, respectively. positive. The Company realized net gains on investments of $3.0 million and $3.4 million in the second quarters of 2004 and 2003, Jeffrey A. Ludrof respectively. There were no impairment President and Chief Executive Officer charges on investments in the second quarters of 2004 or 2003. “Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995: Certain forward-looking Equity in earnings of limited partnerships statements contained herein involve risks and uncertainties. was $1.5 million for the quarter ended These statements include certain discussions relating to management fee revenue, cost of management operations, June 30, 2004, compared to losses of $1.4 underwriting, premium and investment income volume, million for the same period one year ago. business strategies, profitability and business relationships and the Company’s other business activities during 2004 Private equity and fixed income limited and beyond. In some cases, you can identify forward-looking partnerships recorded earnings of $.1 statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” million for the quarter ended June 30, 2004, “estimate,” “project,” “predict,” “potential” and similar compared to losses of $1.4 million in the expressions. These forward-looking statements reflect the Company’s current views about future events, are based on second quarter of 2003. Real estate limited assumptions and are subject to known and unknown risks partnerships reflected earnings of $1.4 and uncertainties that may cause results to differ materially from those anticipated in those statements. Many of the million for the three months ended June 30, factors that will determine future events or achievements 2004, compared to earnings of $.1 million are beyond our 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 June 30 Six months ended June 30 (unaudited) (unaudited) 2004 2003 2004 2003 Management operations Management fee revenue $ 256,124 $ 232,737 $ 477,991 $ 439,983 Service agreement revenue 5,224 6,863 10,823 13,347 Total revenue from management operations 261,348 239,600 488,814 453,330 Cost of management operations 192,719 170,087 363,958 324,460 Income from management operations $ 68,629 $ 69,513 $ 124,856 $ 128,870 Insurance underwriting operations Premiums earned $ 51,065 $ 47,219 $ 101,714 $ 92,401 Losses and loss adjustment expenses incurred 40,002 39,364 78,040 76,864 Policy acquisition and other underwriting expenses 15,922 14,135 30,024 27,487 Total losses and expenses 55,924 53,499 108,064 104,351 Underwriting loss $ ( 4,859) $ ( 6,280) $ ( 6,350) $ ( 11,950) Investment operations Net investment income $ 15,567 $ 14,219 $ 30,254 $ 28,538 Net realized gain on investments 3,030 3,376 5,883 3,969 Equity in earnings (losses) of limited partnerships 1,503 ( 1,420) 1,920 ( 2,746) Equity in earnings of Erie Family Life Insurance Company 1,477 1,690 2,891 2,859 Net revenue from investment operations $ 21,577 $ 17,865 $ 40,948 $ 32,620 Income before income taxes 85,347 81,098 159,454 149,540 Provision for income taxes 28,392 26,640 52,927 49,182 Net income $ 56,955 $ 54,458 $ 106,527 $ 100,358 Net income per share—basic and diluted $ 0.81 $ 0.77 $ 1.50 $ 1.41 Weighted average shares outstanding 70,623 70,997 70,785 70,997 Dividends declared Class A non-voting common $ 0.215 $ 0.19 $ 0.43 $ 0.38 Class B common $ 32.25 $ 28.50 $ 64.50 $ 57.00 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, 2004, 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, 2004. (3) The visiting the Company’s website at www.erieinsurance.com. Company submits a quarterly report to the Securities and 12 11 ▼ ▼
  8. 8. Consolidated statements of comprehensive income (Dollars in thousands) Three months ended June 30 Six months ended June 30 (unaudited) (unaudited) 2004 2003 2004 2003 Net income $ 56,955 $ 54,458 $ 106,527 $ 100,358 Unrealized holding (losses) gains arising during period, net of reclassification adjustment for gains (losses) included in net income, net of tax ( 33,077) 28,191 ( 20,019) 37,946 Comprehensive income $ 23,878 $ 82,649 $ 86,508 $ 138,304 Consolidated statements of financial position (Amounts in thousands, except per share data) December 31 June 30 2004 2003 Assets (unaudited) Investments Fixed maturities $ 911,462 $ 879,361 Equity securities Preferred stock 147,909 148,952 Common stock 41,151 40,451 Other invested assets 125,504 116,400 Total investments 1,226,026 1,185,164 Cash and cash equivalents 71,265 87,192 Equity in Erie Family Life Insurance Company 52,475 56,072 Premiums receivable from policyholders 287,129 266,957 Receivables from affiliates 1,054,743 984,146 Other assets 179,511 175,076 Total assets $ 2,871,149 $ 2,754,607 Liabilities and shareholders’ equity Liabilities Unpaid losses and loss adjustment expenses $ 893,873 $ 845,536 Unearned premiums 479,126 449,606 Other liabilities 303,484 295,295 Total liabilities 1,676,483 1,590,437 Total shareholders’ equity 1,194,666 1,164,170 Total liabilities and shareholders’ equity $ 2,871,149 $ 2,754,607 Book value per share $ 16.97 $ 16.40 Shares outstanding 70,379 70,997 14 13 ▼ ▼

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