Policy acquisition and other underwriting expenses
13,274
11,300
50,109
47,205
Total operating expenses
221,209
214,770
900,731
884,916
Investment Income – Unaffiliated:
Investment income, net of expenses
16,397
15,940
61,555
60,988
Net realized (losses) gains on investments
(837
)
11,734
15,620
18,476
Equity in earnings of limited
partnerships
7,274
2,889
38,062
8,655
Total investment income — unaffiliated
22,834
30,563
115,237
88,119
Income before income taxes and equity in earnings of Erie Family
Life Insurance Company
62,938
83,617
339,456
326,347
Provision for income taxes
19,492
23,275
111,733
105,140
Equity in earnings of Erie Family Life Insurance Company, net of tax
714
978
3,381
5,206
Net income
$
44,160
$
61,320
$
231,104
$
226,413
Net income per share — basic
Class A common stock
$
0.72
$
0.96
$
3.69
$
3.54
Class B common stock
$
107.45
$
146.36
$
558.34
$
539.88
Net income per share — diluted
$
0.66
$
0.87
$
3.34
$
3.21
Weighted average shares outstanding
Basic:
Class A common stock
60,121,604
63,046,985
62,392,860
63,508,873
Class B common stock
2,837
2,876
2,843
2,877
Diluted shares
67,007,993
69,984,804
69,293,649
70,492,292
Dividends declared per share
Class A non-voting common
$
0.360
$
0.325
$
1.335
$
0.97
Class B common
$
54.00
$
48.75
$
200.25
$
145.50
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
ended
ended
ended
December 31
December 31
December 31
December 31
2005
2004
2005
2004
MANAGEMENT OPERATIONS
Management fee revenue
$
213,845
$
220,687
$
940,274
$
945,066
Service agreement revenue
5,128
5,649
20,568
21,855
Total revenue from management operations
218,973
226,336
960,842
966,921
Cost of management operations
180,962
172,372
751,573
724,329
Income from management operations
38,011
53,964
209,269
242,592
INSURANCE UNDERWRITING OPERATIONS
Premiums earned
54,102
53,626
215,824
208,202
Losses and loss adjustment expenses incurred
36,927
40,579
140,386
153,220
Policy acquisition and other underwriting expenses
15,081
13,956
60,488
59,346
Total losses and expenses
52,008
54,535
200,874
212,566
Underwriting gain (loss)
2,094
(909
)
14,950
(4,364
)
INVESTMENT OPERATIONS
Net investment income
16,397
15,940
61,555
60,988
Net realized (losses) gains on investments
(837
)
11,734
15,620
18,476
Equity in earnings of limited
7,274
2,889
38,062
8,655
partnerships
Equity in earnings of Erie Family Life Insurance Company
768
1,053
3,636
5,598
Net revenue from investment operations
23,602
31,616
118,873
93,717
Income before income taxes
63,707
84,671
343,092
331,945
Provision for income taxes
19,547
23,351
111,988
105,532
Net income
$
44,160
$
61,320
$
231,104
$
226,413
Net income per share – Class A basic
$
0.72
$
0.96
$
3.69
$
3.54
Net income per share – Class B basic
$
107.45
$
146.36
$
558.34
$
539.88
Net income per share — diluted
$
0.66
$
0.87
$
3.34
$
3.21
WEIGHTED AVERAGE SHARES OUTSTANDING — DILUTED
67,008
69,985
69,294
70,492
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 December 31, 2005 and 2004:
Three months
Three months
Twelve months
Twelve months
ended
ended
ended
ended
December 31
December 31
December 31
December 31
2005
2004
2005
2004
(Unaudited)
(Unaudited)
(Unaudited)
(Unaudited)
(in thousands)
Operating income
$
44,704
$
53,693
$
220,951
$
214,404
Net realized (losses) gains on investments
(837
)
11,734
15,620
18,476
Income tax benefit (expense) on realized (losses) gains
293
(4,107
)
(5,467
)
(6,467
)
Realized (losses) gains, net of income tax benefit (expense)
(544
)
7,627
10,153
12,009
Net income
$
44,160
$
61,320
$
231,104
$
226,413
Three months
Three months
Twelve months
Twelve months
ended
ended
ended
ended
December 31
December 31
December 31
December 31
2005
2004
2005
2004
(Unaudited)
(Unaudited)
(Unaudited)
(Unaudited)
Per Share Information – Diluted
Operating income
$
0.67
$
0.76
$
3.19
$
3.04
Net realized (losses) gains on investments
(0.02
)
0.17
0.23
0.26
Income tax benefit (expense) on realized (losses) gains
0.01
(0.06
)
(0.08
)
(0.09
)
Realized (losses) gains, net of income tax benefit (expense)
(0.01
)
0.11
0.15
0.17
Net income
$
0.66
$
0.87
$
3.34
$
3.21
3
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Amounts in thousands, except per share data)
December 31
December 31
2005
2004
ASSETS
Investments
Fixed maturities
$
972,210
$
974,512
Equity securities
Preferred stock
170,773
143,851
Common stock
95,561
58,843
Other invested assets
158,044
135,508
Total investments
1,396,588
1,312,714
Cash and cash equivalents
31,666
50,061
Equity in Erie Family Life Insurance Company
55,843
58,728
Premiums receivable from policyholders
267,632
275,721
Receivables from affiliates
1,176,419
1,144,625
Other assets
173,113
140,955
Total assets
$
3,101,261
$
2,982,804
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Unpaid losses and loss adjustment expenses
$
1,019,459
$
943,034
Unearned premiums
454,409
472,553
Other liabilities
348,791
300,336
Total liabilities
1,822,659
1,715,923
Total shareholders’ equity
1,278,602
1,266,881
Total liabilities and shareholders’ equity
$
3,101,261
$
2,982,804
Book value per share
$
18.81
$
18.14
Shares outstanding
67,962
69,852
4
ERIE INDEMNITY COMPANY RECONCILIATION OF PROPERTY AND CASUALTY GROUP TO INDEMNITY RESULTS
Three months
Three months
Twelve months
Twelve months
ended
ended
ended
ended
December 31
December 31
December 31
December 31
2005
2004
2005
2004
(Dollars in thousands)
Property and Casualty Group Insurance Underwriting Operations (SAP Basis)
Direct underwriting results
Direct written premium
$
894,504
$
912,859
$
3,956,942
$
3,997,330
Premiums earned
975,151
977,254
3,984,648
3,877,844
Loss and loss adjustment expenses incurred
696,336
712,609
2,561,504
2,623,731
Policy acquisition and other underwriting expenses
255,684
263,340
1,100,772
1,105,028
Total losses and expenses
952,020
975,949
3,662,276
3,728,759
Direct underwriting income
23,131
1,305
322,372
149,085
Nonaffiliated reinsurance underwriting results
Assumed voluntary-less ceded retrocessions
8,488
12,857
59,289
22,731
Assumed involuntary
3,381
(11,888
)
(12,508
)
(26,748
)
Ceded reinsurance
(12,130
)
(3,866
)
(2,646
)
20,521
Nonaffiliated reinsurance underwriting gain (loss)
23,999
4,835
49,427
(24,538
)
Net Underwriting Gain (SAP Basis)
$
47,130
$
6,140
$
371,799
$
124,547
Erie Indemnity Insurance Underwriting Operations (SAP to GAAP Basis)
Percent of pool assumed by the Indemnity Company
5.50
%
5.50
%
5.50
%
5.50
%
Indemnity preliminary underwriting gain (SAP basis)
$
2,592
$
338
$
20,449
$
6,850
Excess-of-loss premiums ceded to the Exchange
(731
)
(1,104
)
(3,262
)
(3,628
)
Excess-of-loss changes to recoveries under the agreement
114
(1,652
)
(2,226
)
(7,740
)
SAP to GAAP adjustments
119
1,509
(11
)
154
Indemnity Underwriting Gain (Loss) before tax- (GAAP Basis)
Loss ratio points from prior accident year reserve development-(redundancy) deficiency
2.0
1.6
(1.9
)
(1.5
)
Loss ratio points from salvage and subrogation recoveries collected
(0.8
)
(0.7
)
(1.5
)
(1.5
)
Total loss ratio point impact from accident years – deficiency (redundancy)
1.2
0.9
(3.4
)
(3.0
)
Loss ratio points from catastrophes
0.7
0.9
0.5
1.9
Erie Indemnity Company
GAAP combined ratio
96.1
101.7
93.1
102.1
GAAP loss ratio points from catastrophes
0.7
0.9
0.5
1.9
SAP Basis represents statutory accounting principles as codified by the National Association of Insurance Commissioners (NAIC)
5Selected 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
Twelve months
Twelve months
ended
ended
ended
ended
December 31
December 31
December 31
December 31
2005
2004
2005
2004
(In thousands)
Statutory Accounting Basis
Premiums earned
$
925,833
$
930,526
$
3,762,260
$
3,672,486
Losses and loss adjustment expenses
640,099
671,462
2,371,660
2,502,313
Insurance underwriting and other expenses
240,649
251,620
1,034,139
1,041,843
880,748
923,082
3,405,799
3,544,156
Net underwriting gain
45,085
7,444
356,461
128,330
Net investment income
85,620
80,209
370,977
282,388
Net realized (losses) gains
(3,086
)
86,355
438,487
162,905
Federal income tax expense
(30,393
)
(61,099
)
(379,563
)
(180,824
)
Net income
$
97,226
$
112,909
$
786,362
$
392,799
(In thousands)
As of
As of
December 31
December 31
2005
2004
Statutory Accounting Basis
Cash and invested assets
$
7,917,615
$
7,199,447
Other assets
1,152,648
1,070,315
Total assets
$
9,070,263
$
8,269,762
Claims and unearned premium reserves
$
5,058,764
$
4,973,136
Other liabilities
629,749
492,568
Total liabilities
5,688,513
5,465,704
Policyholders’ surplus
3,381,750
2,804,058
Total liabilities and policyholders’ surplus
$
9,070,263
$
8,269,762
6
Management fee revenue by line of business-Segment basis:
Three months
Three months
Twelve months
Twelve months
ended
ended
ended
ended
December 31
December 31
%
December 31
December 31
%
2005
2004
Change
2005
2004
Change
(in thousands)
Private passenger auto
$
102,926
$
109,137
-5.7
$
456,948
$
471,809
-3.1
Commercial auto
17,390
17,692
-1.7
78,416
77,648
1.0
Homeowners
40,945
42,241
-3.1
174,770
174,856
0.0
Commercial multi-peril
24,065
23,535
2.3
105,727
103,837
1.8
Workers’ compensation
17,377
17,071
1.8
82,945
81,390
1.9
All other lines of business
9,742
9,411
3.5
40,968
39,626
3.4
212,445
219,087
-3.0
939,774
949,166
-1.0
Change in allowance for management fee returned on cancelled policies
1,400
1,600
-12.5
500
(4,100
)
N/A
Management fee revenue, after changes in allowance
$
213,845
$
220,687
-3.1
$
940,274
$
945,066
-0.5
7
Growth rate 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
12/31/2003
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
)
12/31/2005
1,640,563
(1.8
)
1,353,912
0.5
286,604
2.7
3,281,079
(0.5
)
Growth rate 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
12/31/2003
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
12/31/2005
118,728
1.2
213,347
1.8
56,218
(4.6
)
90,227
2.7
478,520
1.0
Growth rate of policies in force for Property and Casualty Group insurance operations:
12-mth.
Total all
growth
Date
lines
rate
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
)
12/31/2005
3,759,599
(0.3
)
*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
12/31/2003
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
12/31/2005
90.0
87.9
88.2
85.4
86.2
86.0
88.6
*CML = Commercial
9
PROPERTY & CASUALTY GROUP ADJUSTED COMBINED RATIO BY MAJOR LINES OF BUSINESS (SAP BASIS) – DIRECT BUSINESS
Three months
Three months ended
Twelve months
Twelve months
ended
December 31
ended
ended
December 31
2004
December 31
December 31
2005
—
2005
2004
Private passenger auto
107.5
%
103.9
%
95.9
%
94.8
%
Home protector
73.0
%
61.3
%
70.0
%
73.1
%
Other personal lines
108.4
%
80.4
%
80.8
%
79.3
%
Total personal
98.4
%
92.1
%
88.5
%
88.9
%
Commercial multi-peril
81.6
%
81.5
%
75.9
%
78.7
%
Commercial auto
94.0
%
94.5
%
85.7
%
91.0
%
Workers’ compensation
89.3
%
146.2
%
94.7
%
114.2
%
Other commercial lines
62.8
%
59.3
%
57.7
%
71.4
%
Total commercial
86.3
%
102.8
%
83.1
%
92.3
%
Grand total-direct business only•
94.7
%
95.2
%
86.8
%
89.9
%
• The adjusted statutory combined ratio removes the profit component of the management fee earned by the Company.
10
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