Policy acquisition and other underwriting expenses
12,637
12,153
36,836
35,906
Total operating expenses
233,688
224,414
679,521
670,147
Investment income — Unaffiliated
Investment income, net of expenses
14,755
14,795
45,158
45,086
Net realized gains on investments
1,765
859
16,457
6,743
Equity in earnings of limited
partnerships
8,032
3,845
30,788
5,727
Total investment income — unaffiliated
24,552
19,499
92,403
57,556
Income before income taxes and equity in earnings of Erie Family
Life Insurance Company
78,415
86,168
276,518
242,731
Provision for income taxes
25,930
29,141
92,241
81,865
Equity in earnings of Erie Family Life Insurance Company, net of tax
520
1,539
2,667
4,227
Net income
$
53,005
$
58,566
$
186,944
$
165,093
Net income per share — basic
Class A common stock
$
0.84
$
0.92
$
2.97
$
2.58
Class B common stock
$
128.01
$
139.84
$
450.68
$
393.52
Net income per share — diluted
$
0.76
$
0.83
$
2.69
$
2.34
Weighted average shares outstanding
Basic:
Class A common stock
62,415,372
63,279,022
62,650,810
63,676,870
Class B common stock
2,843
2,878
2,846
2,878
Diluted shares
69,320,147
70,259,227
69,562,785
70,657,075
Dividends declared per share
Class A non-voting common
$
0.325
$
0.215
$
0.975
$
0.645
Class B common
$
48.75
$
32.25
$
146.25
$
96.75
1
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS — SEGMENT BASIS
(Amounts in thousands, except per share data)
Three
Three
Nine
Nine
months
months
months
months
ended
ended
ended
ended
September 30
September 30
September 30
September 30
(Unaudited)
(Unaudited)
(Unaudited)
(Unaudited)
2005
2004
2005
2004
MANAGEMENT OPERATIONS
Management fee revenue
$
241,639
$
246,388
$
726,429
$
724,379
Service agreement revenue
5,294
5,384
15,440
16,207
Total revenue from management operations
246,933
251,772
741,869
740,586
Cost of management operations
194,768
187,998
570,612
551,957
Income from management operations
52,165
63,774
171,257
188,629
INSURANCE UNDERWRITING OPERATIONS
Premiums earned
53,908
52,862
161,721
154,576
Losses and loss adjustment expenses incurred
36,995
34,602
103,457
112,642
Policy acquisition and other underwriting expenses
15,215
15,365
45,407
45,389
Total losses and expenses
52,210
49,967
148,864
158,031
Underwriting gain (loss)
1,698
2,895
12,857
(3,455
)
INVESTMENT OPERATIONS
Net investment income
14,755
14,795
45,158
45,086
Net realized gains on investments
1,765
859
16,457
6,743
Equity in earnings of limited
8,032
3,845
30,788
5,727
partnerships
Equity in earnings of Erie Family Life Insurance Company
560
1,654
2,868
4,545
Net revenue from investment operations
25,112
21,153
95,271
62,101
Income before income taxes
78,975
87,822
279,385
247,275
Provision for income taxes
25,970
29,256
92,441
82,182
Net income
$
53,005
$
58,566
$
186,944
$
165,093
Net income per share – Class A basic
$
0.84
$
0.92
$
2.97
$
2.58
Net income per share – Class B basic
$
128.01
$
139.84
$
450.68
$
393.52
Net income per share — diluted
$
0.76
$
0.83
$
2.69
$
2.34
WEIGHTED AVERAGE SHARES OUTSTANDING — DILUTED
69,320
70,259
69,563
70,657
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
Management believes that investors’ understanding of the Company’s performance is enhanced by the disclosure of the following non-GAAP financial measure. The Company’s method of calculating this measure may differ from those used by other companies and therefore comparability may be limited.
Operating incomeis net income excluding realized capital gains and losses and related federal income taxes. Equity in earnings or losses of Erie Family Life Insurance Company and equity in earnings or losses of limited partnerships are not excluded from the calculation of operating income. Both of these categories include the respective investment’s realized capital gains and losses, as well as unrealized gains and losses, as these investments are accounted for under the equity method.
Net income is the GAAP measure that is most directly comparable to operating income.
The Company uses operating income to evaluate the 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. Realized capital gains and losses may vary significantly between periods and are generally driven by business decisions and economic developments such as capital market condition, the timing of which is unrelated to management services and the insurance underwriting processes of the Company. The Company believes it 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 periods ended Septmber 30, 2005 and 2004:
Three months
Three months
Nine months
Nine months
ended
ended
ended
ended
September 30
September 30
September 30
September 30
(Unaudited)
(Unaudited)
(Unaudited)
(Unaudited)
2005
2004
2005
2004
(in thousands)
Operating income
$
51,858
$
58,007
$
176,247
$
160,710
Net realized gains on investments
1,765
859
16,457
6,743
Income tax expense on realized gains
(618
)
(300
)
(5,760
)
(2,360
)
Realized gains, net of income tax expense
1,147
559
10,697
4,383
Net income
$
53,005
$
58,566
$
186,944
$
165,093
Three months
Three months
Nine months
Nine months
ended
ended
ended
ended
September 30
September 30
September 30
September 30
(Unaudited)
(Unaudited)
(Unaudited)
(Unaudited)
2005
2004
2005
2004
Per Share Information – Diluted
Operating income
$
0.74
$
0.82
$
2.54
$
2.28
Net realized gains on investments
0.03
0.01
0.24
0.10
Income tax expense on realized gains
(0.01
)
(0.00
)
(0.09
)
(0.04
)
Realized gains, net of income tax expense
0.02
0.01
0.15
0.06
Net income
$
0.76
$
0.83
$
2.69
$
2.34
3
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Amounts in thousands, except per share data)
September 30
December 31
2005
2004
(Unaudited)
ASSETS
Investments
Fixed maturities
$
988,333
$
974,512
Equity securities
Preferred stock
169,489
143,851
Common stock
92,690
58,843
Other invested assets
136,151
135,508
Total investments
1,386,663
1,312,714
Cash and cash equivalents
42,735
50,061
Equity in Erie Family Life Insurance Company
56,773
58,728
Premiums receivable from policyholders
287,152
275,721
Receivables from affiliates
1,180,095
1,145,238
Other assets
161,988
137,282
Total assets
$
3,115,406
$
2,979,744
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Unpaid losses and loss adjustment expenses
$
985,836
$
943,034
Unearned premiums
480,404
472,553
Other liabilities
336,887
297,276
Total liabilities
1,803,127
1,712,863
Total shareholders’ equity
1,312,279
1,266,881
Total liabilities and shareholders’ equity
$
3,115,406
$
2,979,744
Book value per share
$
19.03
$
18.14
Shares outstanding
68,947
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
Nine months
Nine months
ended
ended
ended
ended
September 30
September 30
September 30
September 30
2005
2004
2005
2004
(In thousands) (Unaudited)
Statutory Accounting Basis
Premiums earned
$
945,738
$
937,357
$
2,836,427
$
2,741,960
Losses and loss adjustment expenses
597,252
573,469
1,731,561
1,830,851
Insurance underwriting and other expenses
263,615
271,124
793,490
790,224
Net underwriting gain
84,871
92,764
311,376
120,885
Net investment income
104,839
70,685
285,357
202,179
Net realized gains
70,268
45,371
441,573
76,550
Federal income tax expense
97,015
63,525
349,170
119,725
Net income
$
162,963
$
145,295
$
689,136
$
279,889
(In thousands)
As of
As of
September 30
Dec. 31
2005
2004
Statutory Accounting Basis
(Unaudited)
Cash and invested assets
$
7,787,175
$
7,199,447
Other assets
1,199,773
1,070,315
Total assets
$
8,986,948
$
8,269,762
Claims and unearned premium reserves
$
5,081,742
$
4,973,136
Other liabilities
644,758
492,568
Total liabilities
5,726,500
5,465,704
Policyholders’ surplus
3,260,448
2,804,058
Total liabilities and policyholders’ surplus
$
8,986,948
$
8,269,762
5
ERIE INDEMNITY COMPANY RECONCILIATION OF PROPERTY AND CASUALTY GROUP TO INDEMNITY RESULTS
Three months
Three months
Nine months
Nine months
ended
ended
ended
ended
September 30
September 30
September 30
September 30
2005
2004
2005
2004
(Dollars in thousands)
(Unaudited)
Underwriting results of the Property and Casualty Group-(SAP Basis)
Direct underwriting results
Direct written premium
$
1,024,165
$
1,045,785
$
3,062,437
$
3,084,470
Premiums earned
1,005,571
998,231
3,009,496
2,900,590
Loss and loss adjustment expenses incurred
686,611
604,944
1,865,169
1,911,122
Policy acquisition and other underwriting expenses
Loss ratio points from prior accident year reserve development-(redundancy) deficiency
(1.8
)
(2.3
)
(3.3
)
(2.5
)
Loss ratio points from salvage and subrogation recoveries collected
(0.8
)
(0.9
)
(1.7
)
(1.8
)
Total loss ratio point impact from accident years
(2.6
)
(3.2
)
(5.0
)
(4.3
)
Loss ratio points from catastrophes
0.5
3.6
0.5
2.2
Erie Indemnity Company
GAAP combined ratio
96.9
94.5
92.1
102.2
GAAP loss ratio points from catastrophes
0.5
3.7
0.5
2.3
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
Nine months
Nine months
ended
ended
ended
ended
September 30
September 30
%
September 30
September 30
%
2005
2004
Change
2005
2004
Change
(in thousands)
Private passenger auto
$
120,879
$
126,724
-4.6
$
354,022
$
362,672
-2.4
Commercial auto
18,707
18,587
0.6
61,026
59,956
1.8
Homeowners
49,107
49,962
-1.7
133,825
132,615
0.9
Commercial multi-peril
24,730
25,192
-1.8
81,662
80,302
1.7
Workers’ compensation
19,559
20,491
-4.5
65,567
64,319
1.9
All other lines of business
10,257
10,032
2.2
31,227
30,215
3.3
243,239
250,988
-3.1
727,329
730,079
-0.4
Change in allowance for management fee returned on cancelled policies
(1,600
)
(4,600
)
N/A
(900
)
(5,700
)
N/A
Management fee revenue, after changes in allowance
$
241,639
$
246,388
-1.9
%
$
726,429
$
724,379
0.3
%
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
09/30/2003
1,666,285
7.2
1,316,775
10.6
269,640
12.2
3,252,700
9.0
12/31/2003
1,672,621
5.1
1,327,842
7.9
272,547
9.2
3,273,010
6.6
03/31/2004
1,678,496
3.4
1,335,763
5.8
275,970
7.2
3,290,229
4.7
06/30/2004
1,686,524
2.2
1,347,409
4.2
278,547
5.3
3,312,480
3.3
09/30/2004
1,682,561
1.0
1,350,899
2.6
278,707
3.4
3,312,167
1.9
12/31/2004
1,670,804
(0.1
)
1,347,671
1.5
278,974
2.4
3,297,449
0.8
03/31/2005
1,661,955
(1.0
)
1,343,803
0.6
279,927
1.4
3,285,685
(0.1
)
06/30/2005
1,658,278
(1.7
)
1,350,491
0.2
282,670
1.5
3,291,439
(0.6
)
09/30/2005
1,651,629
(1.8
)
1,354,487
0.3
285,134
2.3
3,291,250
(0.6
)
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
09/30/2003
114,339
8.5
205,127
10.5
62,396
8.8
85,789
9.8
467,651
9.7
12/31/2003
115,171
6.6
206,533
8.3
62,282
5.7
86,409
8.3
470,395
7.5
03/31/2004
115,760
5.3
206,937
6.2
61,378
2.1
86,344
6.1
470,419
5.4
06/30/2004
117,060
3.7
209,795
4.1
60,735
(1.9
)
87,172
4.0
474,762
3.1
09/30/2004
117,090
2.4
210,012
2.4
59,863
(4.1
)
87,921
2.5
474,886
1.5
12/31/2004
117,287
1.8
209,623
1.5
58,931
(5.4
)
87,815
1.6
473,656
0.7
03/31/2005
117,382
1.4
209,619
1.3
57,949
(5.6
)
87,877
1.8
472,827
0.5
06/30/2005
118,445
1.2
212,100
1.1
57,398
(5.5
)
88,981
2.1
476,924
0.5
09/30/2005
118,555
1.3
212,939
1.4
56,877
(5.0
)
90,074
2.4
478,445
0.7
Growth rates of policies in force for Property and Casualty Group insurance operations:
12-mth.
Total all
growth
Date
lines
rate
09/30/2003
3,720,351
9.0
12/31/2003
3,743,405
6.7
03/31/2004
3,760,648
4.7
06/30/2004
3,787,242
3.2
09/30/2004
3,787,053
1.8
12/31/2004
3,771,105
0.7
03/31/2005
3,758,512
(0.1
)
06/30/2005
3,768,363
(0.5
)
09/30/2005
3,769,695
(0.5
)
*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
09/30/2003
91.9
90.4
90.1
88.0
88.9
88.4
90.6
12/31/2003
91.6
89.8
89.5
87.5
88.1
88.2
90.2
03/31/2004
91.2
89.7
89.0
87.6
88.1
87.5
89.8
06/30/2004
90.7
89.0
88.4
86.7
86.7
86.8
89.2
09/30/2004
90.3
88.5
87.9
86.0
86.2
86.0
88.7
12/31/2004
90.0
88.3
87.6
85.3
85.8
85.8
88.4
03/31/2005
89.9
88.2
87.6
85.5
85.9
85.5
88.3
06/30/2005
89.8
87.8
87.8
85.0
85.8
85.5
88.3
09/30/2005
89.9
88.0
88.0
85.1
86.0
85.6
88.4
*CML = Commercial
9
ERIE INDEMNITY COMPANY
PROPERTY & CASUALTY GROUP ADJUSTED COMBINED RATIO BY MAJOR LINES OF BUSINESS (SAP BASIS) – DIRECT BUSINESS
Three months
Three months ended
Nine months
Nine months
ended
September 30
ended
ended
September 30
2004
September 30
September 30
2005
—
2005
2004
Private passenger auto
97.6
%
85.3
%
92.1
%
91.7
%
Home protector
71.5
%
74.4
%
69.1
%
77.5
%
Other personal lines
89.3
%
88.4
%
71.4
%
79.1
%
Total personal
90.5
%
82.7
%
85.3
%
87.8
%
Commercial multi-peril
88.9
%
59.8
%
74.0
%
78.0
%
Commercial auto
88.6
%
96.0
%
83.1
%
89.8
%
Workers’ compensation
108.9
%
101.2
%
96.7
%
103.7
%
Other commercial lines
54.1
%
90.7
%
56.0
%
75.9
%
Total commercial
92.6
%
84.1
%
82.1
%
88.9
%
Grand total-direct business only
91.0
%
82.9
%
84.4
%
88.1
%
10
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