Policy acquisition and other underwriting expenses
11,300
18,810
47,205
51,112
Total operating expenses
214,770
205,558
884,916
820,478
Investment income — Unaffiliated
Investment income, net of expenses
15,940
15,283
60,988
58,298
Net realized gains on investments
11,734
4,630
18,476
10,445
Equity in earnings (losses) of limited
partnerships
2,889
(566
)
8,655
(2,000
)
Total investment income — unaffiliated
30,563
19,347
88,119
66,743
Income before income taxes and equity in earnings of Erie Family
Life Insurance Co.
83,617
67,019
326,347
295,053
Provision for income taxes
23,275
26,130
105,140
102,237
Equity in earnings of Erie Family Life Insurance Company, net of tax
978
2,241
5,206
6,909
Net income
$
61,320
$
43,130
$
226,413
$
199,725
Net income per share — basic
Class A common stock
$
0.96
$
0.67
$
3.54
$
3.09
Class B common stock
$
146.36
$
102.36
$
539.88
$
474.19
Net income per share — diluted
$
0.87
$
0.61
$
3.21
$
2.81
Weighted average shares outstanding
Basic:
Class A common stock
63,046,985
64,089,906
63,508,873
64,075,506
Class B common stock
2,876
2,878
2,877
2,884
Diluted shares
69,984,804
71,094,167
70,492,292
71,094,167
DIVIDENDS DECLARED
Class A non-voting common
$
0.325
$
0.215
$
0.970
$
0.785
Class B common
48.75
32.25
145.50
117.75
1
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS — SEGMENT BASIS
(Amounts in thousands, except per share data)
Three
Three
Twelve
Twelve
months
months
months
months
ended Dec. 31
ended Dec. 31
ended Dec. 31
ended Dec. 31
2004
2003
2004
2003
MANAGEMENT OPERATIONS
Management fee revenue
$
220,687
$
206,651
$
945,066
$
878,380
Service agreement revenue
5,649
7,113
21,855
27,127
Total revenue from management operations
226,336
213,764
966,921
905,507
Cost of management operations
172,372
158,044
724,329
652,256
Income from management operations
53,964
55,720
242,592
253,251
INSURANCE UNDERWRITING OPERATIONS
Premiums earned
53,626
50,833
208,202
191,592
Losses and loss adjustment expenses incurred
40,579
37,397
153,220
152,984
Policy acquisition and other underwriting expenses
13,956
21,484
59,346
63,549
Total losses and expenses
54,535
58,881
212,566
216,533
Underwriting gain (loss)
(909
)
(8,048
)
(4,364
)
(24,941
)
INVESTMENT OPERATIONS
Net investment income
15,940
15,283
60,988
58,298
Net realized gains on investments
11,734
4,630
18,476
10,445
Equity in earnings (losses) of limited
partnerships
2,889
(566
)
8,655
(2,000
)
Equity in earnings of Erie Family Life Insurance Company
1,053
2,410
5,598
7,429
Net revenue from investment operations
31,616
21,757
93,717
74,172
Income before income taxes
84,671
69,429
331,945
302,482
Provision for income taxes
23,351
26,299
105,532
102,757
Net income
$
61,320
$
43,130
$
226,413
$
199,725
��
Net income per share – Class A basic
$
0.96
$
0.67
$
3.54
$
3.09
Net income per share – Class B basic
$
146.36
$
102.36
$
539.88
$
474.19
Net income per share — diluted
$
0.87
$
0.61
$
3.21
$
2.81
WEIGHTED AVERAGE SHARES OUTSTANDING — DILUTED
69,985
71,094
70,492
71,094
Amounts presented on a segment basis are presented gross of intercompany/intersegment items
2
ERIE INDEMNITY COMPANY
RECONCILIATION OF OPERATING INCOME TO NET INCOME
(Amounts in thousands, except per share data)
Definition of Non-GAAP and Operating Measures
Operating income, a non-GAAP measure, is income excluding realized capital gains and losses, after tax. Realized capital gains and losses which are included in the Company’s equity in earnings of Erie Family Life Insurance Company and equity in earnings of limited partnerships are not excluded from net income to compute operating income. Net income is the GAAP measure that is most directly comparable to operating income. The Company’s method of calculating this measure may differ from those used by other companies and therefore comparability may be limited.
The Company uses operating income to evaluate their results of operations. It reveals trends in the Company’s management services, insurance underwriting and investment operations that may be obscured by the net effects of realized capital gains and losses. These items may vary significantly between periods and are generally driven by business decisions and economic developments such as capital market conditions, the timing of which is unrelated to management services and insurance underwriting processes of the Company. The Company believes operating income is useful for investors to evaluate these components separately and in the aggregate when reviewing the Company’s performance. The Company is aware that the price to earnings multiple commonly used by investors as a forward-looking valuation technique uses operating income as the denominator. Operating income should not be considered as a substitute for net income and does not reflect the overall profitability of the Company’s business.
The following table reconciles operating income and net income for the three and twelve months ended December 31, 2004 and 2003.
Three months
Three months ended
Twelve months ended
Twelve months ended
ended Dec. 31
Dec. 31
Dec. 31
Dec. 31
(in thousands)
(unaudited)
(unaudited)
(unaudited)
(unaudited)
2004
2003
2004
2003
Operating income
$
53,693
$
40,121
$
214,404
$
192,936
Net realized gains on investments
11,734
4,630
18,476
10,445
Income tax expense on realized gains
(4,107
)
(1,621
)
(6,467
)
(3,656
)
Realized gains net of income tax expense
7,627
3,009
12,009
6,789
Net income
$
61,320
$
43,130
$
226,413
$
199,725
Per share
Per share
Per share
Per share
Information-diluted
Information-diluted
Information-diluted
Information-diluted
Three months
Three months
Twelve months
Twelve months
ended Dec. 31
ended Dec. 31
ended Dec. 31
ended Dec. 31
(in thousands)
(unaudited)
(unaudited)
(unaudited)
(unaudited)
2004
2003
2004
2003
Operating income
$
0.76
$
0.56
$
3.04
$
2.71
Net realized gains on investments
0.17
0.07
0.26
0.15
Income tax expense on realized gains
(0.06
)
(0.02
)
(0.09
)
(0.05
)
Realized gains net of income tax expense
0.11
0.05
0.17
0.10
Net income
$
0.87
$
0.61
$
3.21
$
2.81
3
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Amounts in thousands, except per share data)
December 31
December 31
2004
2003
ASSETS
Investments
Fixed maturities
$
974,512
$
879,361
Equity securities
Preferred stock
143,851
148,952
Common stock
58,843
40,451
Other invested assets
135,508
116,400
Total investments
1,312,714
1,185,164
Cash and cash equivalents
50,061
87,192
Equity in Erie Family Life Insurance Company
58,728
56,072
Premiums receivable from policyholders
275,721
266,957
Receivables from affiliates
1,145,238
1,024,146
Other assets
137,282
135,076
Total assets
2,979,744
2,754,607
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Unpaid losses and loss adjustment expenses
943,034
845,536
Unearned premiums
472,553
449,606
Other liabilities
297,276
295,295
Total liabilities
1,712,863
1,590,437
Total shareholders’ equity
1,266,881
1,164,170
Total liabilities and shareholders’ equity
$
2,979,744
$
2,754,607
Book value per share
$
18.14
$
16.40
Shares outstanding
69,852
70,997
4
Selected financial data of Erie Insurance Exchange:
The selected financial data below is derived from the Erie Insurance Exchange’s financial statements prepared in accordance with Statutory Accounting Principles. In the opinion of management, all adjustments consisting only of normal recurring accruals, considered necessary for a fair presentation have been included. The financial data set forth below is only a summary.
Three months
Three months ended
Twelve months ended
Twelve months ended
ended Dec. 31
Dec. 31
Dec. 31
Dec. 31
(In thousands)
2004
2003
2004
2003
Statutory Accounting Basis
Premiums earned
$
930,526
$
870,654
$
3,672,486
$
3,372,308
Losses and loss adjustment expenses
671,462
656,112
2,502,313
2,772,940
Insurance underwriting and other expenses
251,620
226,757
1,041,843
983,354
Net underwriting gain (loss)
7,444
(12,215
)
128,330
(383,986
)
Net investment income
80,209
60,364
282,388
232,677
Net realized gains
86,355
579,941
162,905
734,848
Federal income tax expense (benefit)
61,099
201,645
180,824
142,106
Net income (loss)
$
112,909
$
426,445
$
392,799
$
441,433
As of
As of
(In thousands)
Dec. 31,
Dec. 31,
Statutory Accounting Basis
2004
2003
Cash and invested assets
$
7,199,447
$
7,024,796
Other assets
1,070,315
1,020,830
Total assets
8,269,762
8,045,626
Claims and unearned premium reserves
4,973,136
4,616,687
Other liabilities
492,568
999,854
Total liabilities
5,465,704
5,616,541
Policyholders’ surplus
2,804,058
2,429,085
Total liabilities and policyholders surplus
$
8,269,762
$
8,045,626
5
ERIE INDEMNITY COMPANY RECONCILIATION OF PROPERTY AND CASUALTY GROUP TO INDEMNITY RESULTS
Three months
Three months ended
Twelve months ended
Twelve months ended
ended Dec. 31
Dec. 31
Dec. 31
Dec. 30
(Dollars in thousands)
2004
2003
2004
2003
Underwriting results of the Property and Casualty Group-(SAP Basis)
Direct underwriting results
Direct written premiums
$
912,859
$
862,296
$
3,997,330
$
3,672,419
Premiums earned
977,254
894,327
3,877,844
3,460,792
Loss and loss adjustment expense incurred
712,609
662,777
2,623,731
2,808,678
Policy acquisition and other underwriting expenses
Loss ratio points from prior accident year reserve development-(redundancy) deficiency
0.9
(2.5
)
(3.0
)
0.1
Erie Indemnity Company
GAAP combined ratio
101.7
115.8
102.1
113.0
GAAP loss ratio points from catastrophes
0.9
1.7
1.9
5.2
SAP Basis represents statutory accounting principles as codified by the National Association of Insurance Commissioners (NAIC)
6Management fee revenue by line of business:
Three months
Three months ended
Twelve months ended
Twelve months ended
ended Dec. 31
Dec. 31
Dec. 31
Dec. 31
(in thousands)
(in thousands)
%
(in thousands)
(in thousands)
%
2004
2003
Change
2004
2003
Change
Private passenger auto
$
109,137
$
106,408
2.6
%
$
471,809
$
450,228
4.8
%
Commercial auto
17,692
16,906
4.6
77,648
74,022
4.9
Homeowners
42,241
37,706
12.0
174,856
148,197
18.0
Commercial multi-peril
23,535
21,797
8.0
103,837
96,370
7.7
Workers’ compensation
17,071
15,790
8.1
81,390
77,134
5.5
All other lines of business
9,411
8,344
12.8
39,626
35,429
11.8
219,087
206,951
5.9
%
949,166
881,380
7.7
%
Allowance for management fee returned on cancelled policies
1,600
(300
)
(4,100
)
(3,000
)
Total management fee revenue
$
220,687
$
206,651
6.8
%
$
945,066
$
878,380
7.6
%
7
Growth rates of policies in force for Property and Casualty Group insurance operations:
Private
12-mth.
12-mth.
All other
12-mth.
Total
12-mth.
passenger
growth
growth
personal lines
growth
Personal
growth
Date
auto
rate
Homeowners
rate
of business
rate
lines
rate
12/31/02
1,591,161
11.1
%
1,230,895
14.4
%
249,544
16.0
%
3,071,600
12.8
%
03/31/03
1,623,439
10.5
1,263,118
14.3
257,327
15.9
3,143,874
12.4
06/30/03
1,650,225
9.1
1,293,575
12.8
264,423
14.0
3,208,223
11.0
09/30/03
1,666,285
7.2
1,316,775
10.6
269,640
12.2
3,252,700
9.0
12/31/03
1,672,621
5.1
1,327,842
7.9
272,547
9.2
3,273,010
6.6
03/31/04
1,678,496
3.4
1,335,763
5.8
275,970
7.2
3,290,229
4.7
06/30/04
1,686,524
2.2
1,347,409
4.2
278,547
5.3
3,312,480
3.3
09/30/04
1,682,561
1.0
1,350,899
2.6
278,707
3.4
3,312,167
1.9
12/31/04
1,670,804
(0.1
)
1,347,671
1.5
278,974
2.4
3,297,449
0.8
Growth rates of policies in force for Property and Casualty Group insurance operations:
12-mth.
CML*
12-mth.
12-mth.
All other
12-mth.
Total
12-mth.
CML*
growth
multi-
growth
Workers'
growth
CML* lines
growth
CML*
growth
Date
auto
rate
peril
rate
comp.
rate
of business
rate
lines
rate
12/31/02
108,069
12.5
%
190,787
14.8
%
58,930
13.3
%
79,772
11.5
%
437,558
13.4
%
03/31/03
109,963
11.2
194,911
13.8
60,104
12.7
81,356
10.9
446,334
12.4
06/30/03
112,911
10.2
201,614
12.2
61,932
11.4
83,826
10.5
460,283
11.3
09/30/03
114,339
8.5
205,127
10.5
62,396
8.8
85,789
9.8
467,651
9.7
12/31/03
115,171
6.6
206,533
8.3
62,282
5.7
86,409
8.3
470,395
7.5
03/31/04
115,760
5.3
206,937
6.2
61,378
2.1
86,344
6.1
470,419
5.4
06/30/04
117,060
3.7
209,795
4.1
60,735
(1.9
)
87,172
4.0
474,762
3.1
09/30/04
117,090
2.4
210,012
2.4
59,863
(4.1
)
87,921
2.5
474,886
1.5
12/31/04
117,287
1.8
209,623
1.5
58,931
(5.4
)
87815
1.6
473,656
0.7
Growth rates of policies in force for Property and Casualty Group insurance operations:
12-mth.
Total all
growth
Date
lines
rate
12/31/02
3,509,208
12.8
%
03/31/03
3,590,208
12.4
06/30/03
3,668,506
11.0
09/30/03
3,720,351
9.0
12/31/03
3,743,405
6.7
03/31/04
3,760,648
4.7
06/30/04
3,787,242
3.2
09/30/04
3,787,053
1.8
12/31/04
3,771,105
0.7
*CML = Commercial
8
Policy retention trends for Property and Casualty Group insurance operations:
Private
CML*
All other
passenger
CML*
multi-
Workers'
lines of
Date
auto
auto
Homeowners
peril
comp.
business
Total
12/31/02
92.6
%
91.0
%
90.5
%
88.7
%
89.4
%
88.5
%
91.2
%
03/31/03
92.5
91.3
90.6
89.1
90.2
88.5
91.2
06/30/03
92.2
91.1
90.5
88.4
89.4
88.4
90.0
09/30/03
91.9
90.4
90.1
88.0
88.9
88.4
90.6
12/31/03
91.6
89.8
89.5
87.5
88.1
88.2
90.2
03/31/04
91.2
89.7
89.0
87.6
88.1
87.5
89.8
06/30/04
90.7
89.0
88.4
86.7
86.7
86.8
89.2
09/30/04
90.3
88.5
87.9
86.0
86.2
86.0
88.7
12/31/04
90.0
88.3
87.6
85.3
85.8
84.9
88.4
*CML = Commercial
9
ERIE INDEMNITY COMPANY
PROPERTY & CASUALTY GROUP ADJUSTED COMBINED RATIO BY MAJOR LINES OF BUSINESS (SAP BASIS)
Quarter to date
Quarter to date
Year to date
Year to date
Dec. 31
Dec. 31
Dec. 31
Dec. 31
2004
2003
2004
2003
Private passenger auto
103.9
%
98.6
%
94.8
%
100.1
%
Home protector
61.3
%
62.5
%
73.1
%
101.0
%
Other personal lines
80.4
%
74.3
%
79.3
%
90.8
%
Total personal
92.1
%
89.3
%
89.0
%
100.1
%
Commercial multi-peril
81.5
%
144.1
%
78.8
%
122.6
%
Commercial auto
94.5
%
91.0
%
91.0
%
97.1
%
Workers’ compensation
142.3
%
87.9
%
109.9
%
112.7
%
Other commercial lines
59.3
%
44.9
%
71.4
%
70.1
%
Total commercial
101.7
%
106.9
%
91.0
%
111.7
%
Grand total-direct business only
94.9
%
94.4
%
89.6
%
103.4
%
10
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