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. 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. 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. 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. 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. 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. 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. 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
