ERIE INDEMNITY COMPANY

                             2005 FIRST QUARTER
                           SHAREHOLDERS’ REPORT
Th...
Corporate Information
Financial Information                                          Stock Transfer Agent
The Erie Indemni...
experienced positive development on losses of prior           and 2004, respectively. Private equity and mezzanine
acciden...
CONSOLIDATED STATEMENTS OF OPERATIONS
                                      (Amounts in thousands, except per share data)
...
CONSOLIDATED STATEMENTS OF OPERATIONS—SEGMENT BASIS
                                      (Amounts in thousands, except pe...
RECONCILIATION OF OPERATING INCOME TO NET INCOME

Definition on Non-GAAP and Operating                           effects of...
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
                                    (Amounts in thousands, except per share ...
ER        ®


                                                   ERIE INDEMNITY COMPANY
                                  ...
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erie insurance group 2005-first-quarter-report

  1. 1. ERIE INDEMNITY COMPANY 2005 FIRST QUARTER SHAREHOLDERS’ REPORT The marked improvement in the respective combined property/casualty subsidiaries (collectively, the “Property ratios of the Property and Casualty Group and the and Casualty Group”) write personal and commercial Company in the first quarter of 2005 provides a firm lines property/casualty coverages exclusively through foundation for profitable growth. Moderating pricing as independent agents and pool their underwriting results. a result of our improved loss experience, combined with The financial position or results of operations of the initiatives such as our new segmented pricing model, will Exchange are not consolidated with those of the Company. provide ERIE agents with a wider range of pricing and the The Company’s earnings are largely generated by fees Company will be better positioned to attract and retain based on direct written premiums of the Property and the very best customers. Casualty Group, the principal member of which is the Jeffrey A. Ludrof, Exchange. The Company, therefore, has a direct incentive President and Chief Executive Officer to protect the financial condition of the Exchange. The members of the Property and Casualty Group pool their About Erie Indemnity Company underwriting results. Under the pooling agreement, the Exchange assumes 94.5% of the pool. Accordingly, the Erie Indemnity Company (Company) is a Pennsylvania underwriting risk of the Property and Casualty Group’s business corporation formed in 1925 to be the attorney- business is largely borne by the Exchange. Through in-fact for the Erie Insurance Exchange (Exchange), a the pool, the Company’s property/casualty subsidiaries Pennsylvania-domiciled reciprocal insurance exchange. currently assume 5.5% of the Property and Casualty As attorney-in-fact, the Company is required to perform Group’s underwriting results. certain services relating to the sales, underwriting and issuance of policies on behalf of the Exchange. For The Property and Casualty Group seeks to insure its services as attorney-in-fact, the Company charges standard and preferred risks primarily in private a management fee calculated as a percentage, not passenger automobile, homeowners and small to exceed 25%, of the direct and affiliated assumed commercial lines, including workers’ compensation. The premiums written of the Exchange. Property and Casualty Group’s sole distribution channel is its independent agency force, which consists of more The Company also operates as a property/casualty insurer than 1,700 agencies comprised of over 7,600 licensed through its three insurance subsidiaries. The Exchange and representatives in 11 midwestern, mid-Atlantic and its property/casualty subsidiary and the Company’s three southeastern states, and the District of Columbia. Erie Insurance Group Organizational Chart
  2. 2. Corporate Information Financial Information Stock Transfer Agent The Erie Indemnity Company submits a quarterly report American Stock Transfer & Trust Company to the Securities and Exchange Commission on Form 59 Maiden Lane 10-Q. Shareholders may obtain a copy of the Form 10-Q Plaza Level report without charge by writing to: Chief Financial New York, NY 10038 Officer, Erie Indemnity Company, 100 Erie Insurance (800) 937-5449 Place, Erie, PA, 16530 or by visiting the Company’s Web Corporate Headquarters site at www.erieinsurance.com. 100 Erie Insurance Place Common Stock Information Erie, PA 16530 The Erie Indemnity Company’s Class A, non-voting (814) 870-2000 common stock is traded on the NASDAQ Stock Market Internet Address under the symbol “ERIE.” Quotations are available via major financial news sources. Financial statement filings, shareholder information, press releases and general news about the Company may also be accessed at: www.erieinsurance.com. Erie Indemnity Company First Quarter 2005 Results Highlights of the first quarter 2005 results of the Erie percent at March 31, 2004. An emphasis on underwriting Indemnity Company are as follows: discipline during 2004 resulted in a tapering off in policy production and reduced policy retention ratios, as • Net income increased by 16.5 percent to $57.8 million, anticipated. The Property and Casualty Group continues up from $49.6 million at March 31, 2004. to maintain its focus on enhancing quality growth while • Net income per share increased by 18.5 percent to maintaining underwriting profitability. $0.83 per share, compared to $.70 per share in the Management fee revenue was reduced by $.4 million comparable quarter for 2004.` and $3.9 million in the first quarters of 2005 and 2004, • Net management fee revenue grew by 3.9 percent to respectively, due to an increase in the allowance on $230.4 million, up from $221.9 million for the same mid-term policy cancellations. The methodology used period one year ago. to estimate the mid-term policy cancellations was refined in the second quarter of 2004 upon completion • The Property and Casualty Group’s direct written of an analysis of the adequacy of the allowance. The premium grew 1.2 percent to $971.8 million at March 31, refined methodology decreased the second quarter 2005, from $960.7 million at March 31, 2004. 2004 allowance and increased the second quarter 2004 management fee revenue by $2.8 million. Management operations The cost of management operations increased 3.8 percent Management fee revenue increased by 3.9 percent to to $177.7 million in the first quarter of 2005, from $171.2 $230.4 million for the quarter ended March 31, 2005, million for the same period in 2004. Commission costs compared to $221.9 million for the same period one year increased 2.7 percent to $126.2 million from $122.9 million ago. The higher management fee rate in 2005 of 23.75 in the first quarter 2004. Commission costs decreased $5.3 percent resulted in $2.4 million more in management million in the first quarter of 2005 due to a reduction in fee revenue for the quarter ended March 31, 2005, or commercial commission rates, which became effective on an increase in net income per share-diluted of $.02 per premiums collected after December 31, 2004. An increase share. The management fee rate was 23.5 percent in the in agent bonus expense of $5.4 million resulting from the first quarter of 2004. recent improvements in underwriting profitability impacted The direct written premiums of the Property and commission costs for the first quarter of 2005. First quarter Casualty Group, upon which management fee revenue is costs of management operations, excluding commissions, calculated, totaled $971.8 million in the first quarter 2005, increased 6.7 percent to $51.5 million in 2005 from $48.3 compared to $960.7 million in the first quarter 2004, a 1.2 million in 2004. percent rate of growth in the first quarter of 2005. Insurance underwriting operations The year-over-year average written premium per policy increased by 6.4 percent to $1,066 at March 31, 2005, The Company’s insurance underwriting operations as compared to $1,002 at March 31, 2004. Year-over- recorded gains of $6.2 million in the first quarter of year personal lines premium increased 6.4 percent, while 2005 compared to underwriting losses of $1.5 million commercial lines increased 6.2 percent at March 31, 2005. in the first quarter of 2004. The Company’s share of New written premium declined by 13.3 percent in the first catastrophe losses totaled $0.3 million and $0.4 million quarter of 2005. The year-over-year policy retention rate for the three-month periods ended March 31, 2005 and declined to 88.3 percent at March 31, 2005, from 89.8 2004, respectively. The Property and Casualty Group
  3. 3. experienced positive development on losses of prior and 2004, respectively. Private equity and mezzanine accident years reducing the statutory combined ratio debt limited partnerships generated earnings of $1.1 by 7.9 points and 6.4 points in the first quarters of 2005 million and $.1 million for the three months ended March and 2004, respectively. The combined ratio, calculated 31, 2005 and 2004, respectively. Real estate limited in accordance with generally accepted accounting partnerships generated earnings of $1.0 million and $.3 principles, for the Company was 88.4 in the first quarter million in the first quarters of 2005 and 2004, respectively. 2005 compared to 102.9 for the same period in 2004. There were impairment charges of $.6 million and $.1 million on limited partnerships in the first quarters of 2005 The adjusted statutory combined ratio for the Property and 2004, respectively, related to private equity limited and Casualty Group for the first quarter 2005 was 81.4, partnerships. compared to 95.0 for the first quarter 2004. Prior to the third quarter 2004, reserve estimates were reviewed Liquidity and capital resources quarterly but seasonal fluctuations in loss reserves were Dividends paid to shareholders totaled $20.6 million previously recognized over the balance of the year. Since and $13.9 million in the first quarters of 2005 and 2004, then, seasonal fluctuations in the Property and Casualty respectively. As part of its capital management program Group’s underwriting results were recognized in the in 2004, the Company increased its quarterly shareholders quarterly results in which they occurred. The first quarter dividend for 2005 by 51 percent on its Class A common of the fiscal year typically has the lowest non-catastrophe stock. claim volume of the year. Lower claim volume, coupled with improved underwriting, resulted in seasonally low During the first quarter of 2005, the Company underwriting losses at March 31, 2005. Underwriting repurchased 285,428 shares of its outstanding Class A losses are seasonally higher in the second and fourth common stock in conjunction with the stock repurchase quarters, and as a consequence, the Company’s property/ plan that was authorized in December 2003. The shares casualty combined ratio generally increases as the year were purchased at a total cost of $14.6 million, or an progresses. Catastrophe losses resulted in a .5 point average price per share of $51.21. increase in the first quarter statutory combined ratio of the Property and Casualty Group compared to .8 points in catastrophe losses for the same period in 2004. “Safe Harbor” Statement Under the Private Securities Investment operations Litigation Reform Act of 1995: Certain forward-looking Net revenue from investment operations for the first statements contained herein involve risks and uncertainties. These quarter of 2005 reflects an increase of 17.9 percent to statements include certain discussions relating to management fee revenue, cost of management operations, underwriting, $22.8 million, compared to $19.4 million for the same premium and investment income volume, business strategies, period in 2004. profitability and business relationships and the Company’s other Net realized gains on investments of $5.5 million were business activities during 2005 and beyond. In some cases, you recorded during the first quarter 2005 compared to net can identify forward-looking statements by terms such as “may,” realized gains of $2.9 million for the first quarter 2004. “will,” “should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “project,” “predict,” There were impairment charges of $1.5 million included “potential” and similar expressions. These forward-looking in net realized gains or losses on fixed maturity and equity statements reflect the Company’s current views about future investments in the first quarter of 2005 in the technology events, are based on assumptions and are subject to known and and automotive industries. There were no impairment unknown risks and uncertainties that may cause results to differ charges on these securities in the first quarter of 2004. materially from those anticipated in those statements. Many of the factors that will determine future events or achievements are Equity in earnings of limited partnerships was $2.1 million beyond our ability to control or predict. and $.4 million for the quarters ended March 31, 2005
  4. 4. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share data) Three months ended March 31 2005 2004 (unaudited) Operating revenue Management fee revenue—net $ 217,736 $ 209,664 Premiums earned 53,648 50,649 Service agreement revenue 4,787 5,598 Total operating revenue 276,171 265,911 Operating expenses Cost of management operations 167,940 161,821 Losses and loss adjustment expenses incurred 32,677 38,037 Policy acquisition and other underwriting expenses 11,844 11,318 Total operating expenses 212,461 211,176 Investment income—unaffiliated Investment income, net of expenses 14,468 14,686 Net realized gains on investments 5,497 2,853 Equity in earnings of limited partnerships 2,111 418 Total investment income—unaffiliated 22,076 17,957 Income before income taxes and equity in earnings of Erie Family Life Insurance Company 85,786 72,692 Provision for income taxes 28,729 24,435 Equity in earnings of Erie Family Life Insurance Company, net of tax 714 1,315 Net income $ 57,771 $ 49,572 Net income per share—Class A basic $ 0.91 $ 0.77 Net income per share—Class B basic $ 138.84 $ 117.87 Net income per share—diluted $ 0.83 $ 0.70 Weighted average shares outstanding—diluted 69,846 70,926 Dividends declared per share Class A common stock $ 0.325 $ 0.215 Class B common stock $ 48.75 $ 32.25
  5. 5. CONSOLIDATED STATEMENTS OF OPERATIONS—SEGMENT BASIS (Amounts in thousands, except per share data) Three months ended March 31 2005 2004 (unaudited) Management operations Management fee revenue $ 230,409 $ 221,867 Service agreement revenue 4,787 5,598 Total revenue from management operations 235,196 227,465 Cost of management operations 177,714 171,239 Income from management operations 57,482 56,226 Insurance underwriting operations Premiums earned 53,648 50,649 Losses and loss adjustment expenses incurred 32,677 38,037 Policy acquisition and other underwriting expenses 14,742 14,103 Total losses and expenses 47,419 52,140 Underwriting gain (loss) 6,229 (1,491) Investment operations Net investment income 14,468 14,686 Net realized gains on investments 5,497 2,853 Equity in earnings of limited partnerships 2,111 418 Equity in earnings of Erie Family Life Insurance Company 767 1,414 Net revenue from investment operations 22,843 19,371 Income before income taxes 86,554 74,106 Provision for income taxes 28,783 24,534 Net income $ 57,771 $ 49,572 Net income per share—diluted $ 0.83 $ 0.70 Amounts presented on a segment basis are presented gross of intercompany/intersegment items
  6. 6. RECONCILIATION OF OPERATING INCOME TO NET INCOME Definition on Non-GAAP and Operating effects of realized capital gains and losses. These items Measures may vary significantly between periods and are generally driven by business decisions and economic developments Operating income, a non-GAAP measure, is net income such as capital market conditions, the timing of which excluding realized capital gains and losses and federal is unrelated to management services and insurance income taxes related to realized capital gains and losses. underwriting processes of the Company. The Company Realized capital gains and losses which are included in the believes operating income is useful for investors to Company’s equity in earnings of Erie Family Life Insurance evaluate these components separately and in the Company and equity in earnings of limited partnerships aggregate when reviewing the Company’s performance. are not excluded from net income in computing operating The Company is aware that the price to earnings income. Net income is the GAAP measure that is most multiple commonly used by investors as a forward- directly comparable to operating income. looking valuation technique uses operating income as the denominator. Operating income should not be The Company’s method of calculating this measure may considered as a substitute for net income and does not differ from those used by other companies and therefore reflect the overall profitability of the Company’s business. comparability may be limited. The following table reconciles operating income and net The Company uses operating income to evaluate their income for the three months ended March 31, 2005 and results of operations. It reveals trends in the Company’s 2004. management services, insurance underwriting and investment operations that may be obscured by the net Three months ended March 31 (in thousands) (unaudited) 2005 2004 Operating income $ 54,199 $ 47,718 Net realized gains on investments 5,497 2,853 Income tax expense on realized gains (1,925) (999) Realized gains net of income tax expense 3,572 1,854 Net income $ 57,771 $ 49,572 Three months ended March 31 (per share information—diluted) (unaudited) 2005 2004 Operating income $ 0.78 $ 0.67 Net realized gains on investments 0.08 0.04 Income tax expense on realized gains (0.03) (0.01) Realized gains net of income tax expense 0.05 0.03 Net income $ 0.83 $ 0.70
  7. 7. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Amounts in thousands, except per share data) March 31 December 31 2005 2004 (unaudited) Assets Investments Fixed maturities $ 981,572 $ 974,512 Equity securities Preferred stock 148,790 143,851 Common stock 60,540 58,843 Other invested assets 137,720 135,508 Total investments 1,328,622 1,312,714 Cash and cash equivalents 53,307 50,061 Equity in Erie Family Life Insurance Company 56,010 58,728 Premiums receivable from policyholders 272,870 275,721 Receivables from affiliates 1,123,900 1,145,238 Other assets 141,896 137,282 Total assets $ 2,976,605 $ 2,979,744 Liabilities and shareholders’ equity Liabilities Unpaid losses and loss adjustment expenses $ 942,586 $ 943,034 Unearned premiums 464,154 472,553 Other liabilities 300,675 297,276 Total liabilities 1,707,415 1,712,863 Total shareholders’ equity 1,269,190 1,266,881 Total liabilities and shareholders’ equity $ 2,976,605 $ 2,979,744 Book value per share $ 18.24 $ 18.14 Shares outstanding 69,567 69,852
  8. 8. ER ® ERIE INDEMNITY COMPANY Member • Erie Insurance Group An Equal Opportunity Employer Home Office • 100 Erie Insurance Place • Erie, PA 16530 (814) 870-2000 • www.erieinsurance.com GF-540 4/05 © 2005 Erie Indemnity Company

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