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 Co.
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 — basic
Class A common stock
$
0.91
$
0.77
Class B common stock
$
138.84
$
117.87
Net income per share — diluted
$
0.83
$
0.70
Weighted average shares outstanding
Basic:
Class A common stock
62,926,683
63,950,847
Class B common stock
2,851
2,878
Diluted shares
69,845,958
70,926,223
Dividends Declared Per Share
Class A non-voting common
$
0.325
$
0.215
Class B common
$
48.75
$
32.25
1
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS — SEGMENT BASIS
(Amounts in thousands, except per share data)
Three
Three
months
months
ended Mar. 31
ended Mar. 31
(Unaudited)
(Unaudited)
2005
2004
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 – 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
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 on Non-GAAP and Operating Measures
Operating income, a non-GAAP measure, is net income excluding realized capital gains and losses and federal income taxes related to realized capital gains and losses. 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 in computing 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 months ended March 31, 2005 and 2004.
Three months
Three months ended
ended Mar. 31
Mar. 31
(in thousands)
(unaudited)
(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
Per share
Per share
Information-diluted
Information-diluted
Three months
Three months
ended Mar. 31
ended Mar. 31
(unaudited)
(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
3
ERIE INDEMNITY COMPANY
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
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
ended Mar. 31
Mar. 31
2005
2004
(In thousands) (Unaudited)
Statutory Accounting Basis
Premiums earned
$
932,794
$
890,243
Losses and loss adjustment expenses
553,994
656,772
Insurance underwriting and other expenses
253,627
244,972
Net underwriting gain (loss)
125,173
(11,501
)
Net investment income
79,635
62,729
Net realized gains
76,599
17,156
Federal income tax expense
88,198
18,020
Net income
$
193,209
$
50,364
As of
As of
Mar. 31,
Dec. 31,
2005
2004
(Unaudited)
(In thousands)
Statutory Accounting Basis
Cash and invested assets
$
7,329,730
$
7,199,447
Other assets
1,083,892
1,070,315
Total assets
8,413,622
8,269,762
Claims and unearned premium reserves
4,949,755
4,973,136
Other liabilities
554,468
492,568
Total liabilities
5,504,223
5,465,704
Policyholders’ surplus
2,909,399
2,804,058
Total liabilities and policyholders’ surplus
$
8,413,622
$
8,269,762
5
ERIE INDEMNITY COMPANY RECONCILIATION OF PROPERTY AND CASUALTY GROUP TO INDEMNITY RESULTS
Three months
Three months ended
ended Mar. 31
Mar. 31
(Dollars in thousands)
2005
2004
Underwriting results of the Property and Casualty Group-(SAP Basis)
(Unaudited)
(Unaudited)
Direct underwriting results
Direct written premiums
$
971,825
$
960,710
Premiums earned
991,283
927,495
Loss and loss adjustment expenses incurred
574,052
667,638
Policy acquisition and other underwriting expenses
Loss ratio points from prior accident year reserve development-(redundancy) deficiency
(7.9
)
(6.4
)
Erie Indemnity Company
GAAP combined ratio
88.4
102.9
GAAP loss ratio points from catastrophes
0.5
0.8
SAP Basis represents statutory accounting principles as codified by the National Association of Insurance Commissioners (NAIC)
6Management fee revenue by line of business-Segment basis:
Three months
Three months ended
ended Mar. 31
Mar. 31
(in thousands)
(in thousands)
%
2005
2004
Change
Private passenger auto
$
112,858
$
113,010
(0.1
)
Commercial auto
20,510
19,962
2.7
Homeowners
36,097
34,337
5.1
Commercial multi-peril
27,624
26,554
4.0
Workers’ compensation
23,994
22,586
6.2
All other lines of business
9,726
9,318
4.4
230,809
225,767
2.2
%
Increase in allowance for management fee returned on cancelled policies
(400
)
(3,900
)
Management fee revenue-segment basis
$
230,409
$
221,867
3.9
%
Management fee rate
23.75
%
23.5
%
1.1
%
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
03/31/03
1,623,429
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
03/31/05
1,661,955
(1.0
)
1,343,803
0.6
279,927
1.4
3,285,685
(0.1
)
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
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
)
87,815
1.6
473,656
0.7
03/31/05
117,382
1.4
208,619
1.3
57,949
(5.6
)
87,877
1.8
472,827
0.5
Growth rates of policies in force for Property and Casualty Group insurance operations:
12-mth.
Total all
growth
Date
lines
rate
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
03/31/05
3,758,512
(0.1
)
*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
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
91.0
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
85.8
88.4
03/31/05
89.9
88.2
87.6
85.5
85.9
85.5
88.3
*CML = Commercial
9
ERIE INDEMNITY COMPANY
PROPERTY & CASUALTY GROUP ADJUSTED COMBINED RATIO BY MAJOR LINES OF BUSINESS (SAP BASIS)
Year to date
Year to date
Mar. 31
Mar. 31
2005
2004
Private passenger auto
88.7
%
98.7
%
Home protector
67.4
%
81.5
%
Other personal lines
73.7
%
80.9
%
Total personal
82.5
%
93.9
%
Commercial multi-peril
59.6
%
93.3
%
Commercial auto
80.2
%
81.9
%
Workers’ compensation
73.6
%
101.5
%
Other commercial lines
69.1
%
88.1
%
Total commercial
69.8
%
92.1
%
Grand total-direct business only
78.8
%
93.5
%
10
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