Policy acquisition and other underwriting expenses
14,501
11,844
Total operating expenses
227,708
212,461
Investment Income – Unaffiliated:
Investment income, net of expenses
15,000
14,468
Net realized gains on investments
784
5,497
Equity in earnings of limited
partnerships
4,142
2,111
Total investment income — unaffiliated
19,926
22,076
Income before income taxes and equity in earnings of Erie Family
Life Insurance Company
73,938
85,786
Provision for income taxes
25,077
28,729
Equity in earnings of Erie Family Life Insurance Company, net of tax
605
714
Net income
$
49,466
$
57,771
Net income per share — basic
Class A common stock
$
0.81
$
0.91
Class B common stock
$
121.08
$
138.84
Net income per share — diluted
$
0.73
$
0.83
Weighted average shares outstanding
Basic:
Class A common stock
60,630,395
62,926,683
Class B common stock
2,833
2,851
Diluted shares
67,505,125
69,845,958
Dividends declared per share
Class A common stock
$
0.36
$
0.325
Class B common stock
$
54.00
$
48.75
1
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS — SEGMENT BASIS
(Dollars in thousands, except per share data)
Three
Three
months
months
ended
ended
March 31
March 31
2006
2005
(Unaudited)
(Unaudited)
MANAGEMENT OPERATIONS
Management fee revenue
$
232,935
$
230,409
Service agreement revenue
7,592
4,787
Total revenue from management operations
240,527
235,196
Cost of management operations
193,825
177,714
Income from management operations
46,702
57,482
INSURANCE UNDERWRITING OPERATIONS
Premiums earned
54,026
53,648
Losses and loss adjustment expenses incurred
30,053
32,677
Policy acquisition and other underwriting expenses
16,663
14,742
Total losses and expenses
46,716
47,419
Underwriting gain
7,310
6,229
INVESTMENT OPERATIONS
Investment income, net of expenses
15,000
14,468
Net realized gains on investments
784
5,497
Equity in earnings of limited
4,142
2,111
partnerships
Equity in earnings of Erie Family Life Insurance Company
651
767
Net revenue from investment operations
20,577
22,843
Income before income taxes
74,589
86,554
Provision for income taxes
25,123
28,783
Net income
$
49,466
$
57,771
Net income per share – Class A basic
$
0.81
$
0.91
Net income per share – Class B basic
$
121.08
$
138.84
Net income per share — diluted
$
0.73
$
0.83
WEIGHTED AVERAGE SHARES OUTSTANDING — DILUTED
67,505
69,846
Amounts presented on a segment basis are presented gross of intercompany/intersegment items
2
ERIE INDEMNITY COMPANY
RECONCILIATION OF OPERATING INCOME TO NET INCOME
(Dollars 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 March 31, 2006 and 2005:
Three months
Three months
ended March 31
ended March 31
2006
2005
(Unaudited)
(Unaudited)
(in thousands)
Operating income
$
48,956
$
54,199
Net realized gains on investments
784
5,497
Income tax expense on realized gains
(274
)
(1,925
)
Realized gains, net of income tax expense
510
3,572
Net income
$
49,466
$
57,771
Three months
Three months
ended March 31
ended March 31
2006
2005
(Unaudited)
(Unaudited)
Per Share Information – Diluted
Operating income
$
0.72
$
0.78
Net realized gains on investments
0.01
0.08
Income tax expense on realized gains
0.00
(0.03
)
Realized gains, net of income tax expense
0.01
0.05
Net income
$
0.73
$
0.83
3
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands, except per share data)
March 31
December 31
2006
2005
(Unaudited)
ASSETS
Investments
Fixed maturities
$
925,689
$
972,210
Equity securities
Preferred stock
137,048
170,773
Common stock
106,554
95,561
Other invested assets
180,544
158,044
Total investments
1,349,835
1,396,588
Cash and cash equivalents
7,132
31,666
Equity in Erie Family Life Insurance Company
52,434
55,843
Premiums receivable from policyholders
258,083
267,632
Receivables from affiliates
1,179,860
1,176,419
Other assets
158,871
173,113
Total assets
$
3,006,215
$
3,101,261
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Unpaid losses and loss adjustment expenses
$
997,124
$
1,019,459
Unearned premiums
443,269
454,409
Other liabilities
306,953
348,791
Total liabilities
1,747,346
1,822,659
Total shareholders’ equity
1,258,869
1,278,602
Total liabilities and shareholders’ equity
$
3,006,215
$
3,101,261
Book value per share
$
18.74
$
18.81
Shares outstanding
67,189
67,962
4
ERIE INDEMNITY COMPANY RECONCILIATION OF PROPERTY AND CASUALTY GROUP TO INDEMNITY RESULTS
Three months
Three months ended
ended March 31
March 31
2006
2005
(Dollars in thousands)
(Unaudited)
PROPERTY AND CASUALTY GROUP INSURANCE UNDERWRITING OPERATIONS (SAP BASIS)
Direct underwriting results
Direct written premium
$
942,768
$
971,825
Premiums earned
983,829
991,283
Loss and loss adjustment expenses incurred
522,490
574,052
Policy acquisition and other underwriting expenses
301,474
270,613
Total losses and expenses
823,964
844,665
Direct underwriting income
159,865
146,618
Nonaffiliated reinsurance underwriting results
Assumed voluntary-less ceded retrocessions
689
(3,619
)
Assumed involuntary
(10,295
)
(7,789
)
Ceded
7,199
3,848
Nonaffiliated reinsurance underwriting loss
(16,805
)
(15,256
)
Net Underwriting Gain (SAP BASIS)
$
143,060
$
131,362
ERIE INDEMNITY INSURANCE UNDERWRITING OPERATIONS (SAP TO GAAP BASIS)
Percent of pool assumed by the Indemnity Company
5.50
%
5.50
%
Indemnity preliminary underwriting gain (SAP basis)
$
7,868
$
7,225
Excess-of-loss premiums ceded to the Exchange
0
(844
)
Excess-of-loss changes to recoveries under the agreement
(145
)
(340
)
SAP to GAAP adjustments
(413
)
188
Indemnity Underwriting Gain before tax (GAAP Basis)
Loss ratio points from prior accident year reserve development-redundancy
(7.9
)
(4.9
)
Loss ratio points from salvage and subrogation recoveries collected
(3.1
)
(3.0
)
Total loss ratio point impact from accident years – redundancy
(11.0
)
(7.9
)
Loss ratio points from catastrophes
0.6
0.5
Erie Indemnity Company
GAAP combined ratio
86.5
88.4
GAAP loss ratio points from catastrophes
0.6
0.5
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
ended March 31
ended March 31
2006
2005
(In thousands)
(Unaudited)
STATUTORY ACCOUNTING BASIS
Premiums earned
$
928,408
$
932,794
Losses and loss adjustment expenses
509,865
553,994
Insurance underwriting and other expenses
283,282
253,627
Total underwriting operations expenses
793,147
807,621
Net underwriting gain
135,261
125,173
Net investment income
80,064
79,635
Net realized gains
25,532
76,599
Federal income tax expense
(68,610
)
(88,198
)
Net income
$
172,247
$
193,209
As of
As of
March 31
December 31
2006
2005
(In thousands)
(Unaudited)
STATUTORY ACCOUNTING BASIS
Cash and invested assets
$
8,268,390
$
7,917,615
Other assets
1,062,272
1,152,648
Total assets
$
9,330,662
$
9,070,263
Claims and unearned premium reserves
$
4,978,037
$
5,058,764
Other liabilities
742,082
629,749
Total liabilities
5,720,119
5,688,513
Policyholders’ surplus
3,610,543
3,381,750
Total liabilities and policyholders’ surplus
$
9,330,662
$
9,070,263
6
Management fee revenue by line of business-Segment basis:
Three months
Three months
ended
ended
March 31
March 31
%
2006
2005
Change
(in thousands)
Private passenger auto
$
111,055
$
112,858
-1.6
%
Commercial auto
21,198
20,510
3.4
Homeowners
36,656
36,097
1.5
Commercial multi-peril
29,436
27,624
6.6
Workers’ compensation
24,316
23,994
1.3
All other lines of business
10,674
9,726
9.7
233,335
230,809
1.1
%
Change in allowance for management fee returned on cancelled policies
(400
)
(400
)
Management fee revenue, after changes in allowance
$
232,935
$
230,409
1.1
%
Management fee rate
24.75
%
23.75
%
4.2
%
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
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
)
03/31/2006
1,636,048
(1.6
)
1,356,885
1.0
289,964
3.6
3,282,897
(0.1
)
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
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
03/31/2006
118,587
1.0
214,461
2.3
55,254
(4.7
)
90,301
2.8
478,603
1.2
Growth rate of policies in force for Property and Casualty Group insurance operations:
12-mth.
Total all
growth
Date
lines
rate
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
)
03/31/2006
3,761,500
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
03/31/2004
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
03/31/2006
90.1
88.0
88.6
85.9
86.0
86.2
88.8
CML* = Commercial
9
PROPERTY & CASUALTY GROUP ADJUSTED COMBINED RATIO BY MAJOR LINES OF BUSINESS (SAP BASIS) – DIRECT BUSINESS
Three months
Three months ended
ended
March 31
March 31
2005
2006
—
Private passenger auto
86.7
%
88.7
%
Homeowners
72.3
%
67.4
%
Other personal lines
72.9
%
73.7
%
Total personal
82.8
%
82.5
%
Commercial multi-peril
85.0
%
59.6
%
Commercial auto
81.6
%
80.2
%
Workers’ compensation
66.1
%
82.7
%
Other commercial lines
63.5
%
69.1
%
Total commercial
76.2
%
72.5
%
Grand total-direct business only•
80.4
%
79.6
%
• The adjusted statutory combined ratio removes the profit component of the management fee earned by the Company.
10
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