Policy acquisition and other underwriting expenses
12,381
12,281
24,910
24,281
Total operating expenses
244,074
247,442
482,234
474,320
Investment (loss) income – unaffiliated
Investment income, net of expenses
9,548
11,467
22,060
23,139
Realized gains (losses) on investments
3,467
(1,818
)
(367
)
(14,443
)
Total other-than-temporary impairment losses on securities
(2,544
)
(12,449
)
(7,152
)
(24,403
)
Portion of losses recognized in other comprehensive income
0
0
0
0
Net impairment losses recognized in earnings
(2,544
)
(12,449
)
(7,152
)
(24,403
)
Equity in (losses) earnings of limited partnerships
(26,798
)
11,275
(54,829
)
19,253
Total investment (loss) income – unaffiliated
(16,327
)
8,475
(40,288
)
3,546
Income before income taxes and equity in earnings (losses) of Erie Family Life Insurance
45,725
62,163
61,037
106,644
Provision for income taxes
14,855
20,288
17,478
34,539
Equity in earnings (losses) of Erie Family Life Insurance, net of tax
1,864
(560
)
304
(813
)
Net income
$
32,734
$
41,315
$
43,863
$
71,292
Net income per share:
Class A common stock – basic
$
0.63
$
0.80
$
0.85
$
1.36
Class A common stock – diluted
0.57
0.71
0.76
1.22
Class B common stock – basic and diluted
93.19
116.10
127.98
200.67
Weighted average shares outstanding:
Class A common stock – basic
51,240,693
51,754,896
51,255,385
52,291,387
Class A common stock – diluted
57,390,302
57,898,022
57,404,994
58,434,513
Class B common stock – basic and diluted
2,551
2,551
2,551
2,551
Dividends declared per share:
Class A common stock
$
0.45
$
0.44
$
0.90
$
0.88
Class B common stock
67.50
66.00
135.00
132.00
1
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS — SEGMENT BASIS
(amounts in thousands, except per share data)
Three
Three
Six
Six
months
months
months
months
ended
ended
ended
ended
June 30,
June 30,
June 30,
June 30,
2009
2008
2009
2008
(Unaudited)
(Unaudited)
Management operations
Management fee revenue
$
259,771
$
255,809
$
489,541
$
485,408
Service agreement revenue
8,604
7,748
17,182
15,139
Total revenue from management operations
268,375
263,557
506,723
500,547
Cost of management operations
208,093
213,114
401,367
404,774
Income from management operations
60,282
50,443
105,356
95,773
Insurance underwriting operations
Premiums earned
52,110
51,736
103,860
103,662
Losses and loss adjustment expenses incurred
35,084
33,823
78,088
67,583
Policy acquisition and other underwriting expenses
15,256
14,668
29,804
28,754
Total losses and expenses
50,340
48,491
107,892
96,337
Underwriting income (loss)
1,770
3,245
(4,032
)
7,325
Investment operations
Investment income, net of expenses
9,548
11,467
22,060
23,139
Realized gains (losses) on investments
3,467
(1,818
)
(367
)
(14,443
)
Net impairment losses recognized in earnings
(2,544
)
(12,449
)
(7,152
)
(24,403
)
Equity in (losses) earnings of limited partnerships
(26,798
)
11,275
(54,829
)
19,253
Equity in earnings (losses) of Erie Family Life Insurance
2,005
(602
)
327
(874
)
Net (loss) revenue from investment operations
(14,322
)
7,873
(39,961
)
2,672
Income before income taxes
47,730
61,561
61,363
105,770
Provision for income taxes
14,996
20,246
17,500
34,478
Net income
$
32,734
$
41,315
$
43,863
$
71,292
Net income per share – Class A basic
$
0.63
$
0.80
$
0.85
$
1.36
Net income per share – Class A diluted
0.57
0.71
0.76
1.22
Net income per share – Class B basic and diluted
93.19
116.10
127.98
200.67
Weighted average shares outstanding - Class A diluted
57,390
57,898
57,405
58,435
Amounts presented on a segment basis are gross of intercompany/intersegment items.
2
ERIE INDEMNITY COMPANY
RECONCILIATION OF OPERATING INCOME TO NET INCOME
Definition of non-GAAP and operating measures
We believe that investors’ understanding of our performance is enhanced by the disclosure of the following non-GAAP financial measure. Our 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 impairment losses and related federal income taxes. We elected the fair value measurement option for our common stock portfolio effective January 1, 2008. As such, changes in value related to common stocks are reported in earnings. These unrealized gains or losses are included in the net realized losses/gains on investments on the Consolidated Statements of Operations that is used to calculate operating income. 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. Equity in earnings or losses of limited partnerships includes the respective investment’s realized capital gains and losses, as well as unrealized gains and losses.
Net income is the GAAP measure that is most directly comparable to operating income.
We use operating income to evaluate the results of operations. It reveals trends in our management services, insurance underwriting and investment operations that may be obscured by the net effects of realized capital gains and losses including impairment losses. Realized capital gains and losses including impairment losses, 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 our management services and insurance underwriting processes. We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. We are 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 our overall profitability.
The following table reconciles operating income and net income for the periods ended June 30, 2009 and 2008:
Three
Three
Six
Six
months ended
months ended
months ended
months ended
June 30,
June 30,
June 30,
June 30,
2009
2008
2009
2008
(in thousands, except per share data)
(Unaudited)
(Unaudited)
Operating income
$
32,134
$
50,589
$
48,750
$
96,542
Net realized gains (losses) and impairments on investments
923
(14,267
)
(7,519
)
(38,846
)
Income tax (expense) benefit
(323
)
4,993
2,632
13,596
Realized gains (losses) and impairments, net of income taxes
600
(9,274
)
(4,887
)
(25,250
)
Net income
$
32,734
$
41,315
$
43,863
$
71,292
Three
Three
Six
Six
months ended
months ended
months ended
months ended
June 30,
June 30,
June 30,
June 30,
2009
2008
2009
2008
Per Class A share – diluted:
(Unaudited)
(Unaudited)
Operating income
$
0.56
$
0.87
$
0.85
$
1.65
Net realized gains (losses) and impairments on investments
0.02
(0.25
)
(0.13
)
(0.66
)
Income tax (expense) benefit
(0.01
)
0.09
0.04
0.23
Realized gains (losses) and impairments, net of income taxes
0.01
(0.16
)
(0.09
)
(0.43
)
Net income
$
0.57
$
0.71
$
0.76
$
1.22
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(amounts in thousands, except per share data)
June 30,
December 31,
2009
2008
(Unaudited)
Assets
Investments
Available-for-sale securities, at fair value:
Fixed maturities
$
601,971
$
563,429
Equity securities
46,491
55,281
Trading securities, at fair value
36,125
33,338
Other invested assets
255,876
300,391
Total investments
940,463
952,439
Cash and cash equivalents
26,417
61,073
Equity in Erie Family Life Insurance
57,476
29,236
Premiums receivable from policyholders
257,049
244,760
Receivables from affiliates
1,144,086
1,130,610
Other assets
210,237
195,268
Total assets
$
2,635,728
$
2,613,386
Liabilities and shareholders’ equity
Liabilities
Unpaid losses and loss adjustment expenses
$
979,869
$
965,081
Unearned premiums
442,579
424,370
Other liabilities
384,164
432,060
Total liabilities
1,806,612
1,821,511
Total shareholders’ equity
829,116
791,875
Total liabilities and shareholders’ equity
$
2,635,728
$
2,613,386
Book value per share
$
14.45
$
13.79
Shares outstanding
57,363
57,405
3
ERIE INDEMNITY COMPANY RECONCILIATION OF PROPERTY AND CASUALTY GROUP TO INDEMNITY RESULTS
Three
Three
Six
Six
months ended
months ended
months ended
months ended
June 30,
June 30,
June 30,
June 30,
2009
2008
2009
2008
(dollars in thousands)
Property and Casualty Group insurance underwriting operations (SAP basis)
Direct underwriting results
Direct written premium
$
1,044,285
$
1,030,036
$
1,965,364
$
1,948,432
Premiums earned
966,493
962,466
1,905,187
1,900,286
Loss and loss adjustment expenses incurred
626,620
602,238
1,405,465
1,205,628
Policy acquisition and other underwriting expenses
294,777
284,255
556,577
539,118
Total losses and expenses
921,397
886,493
1,962,042
1,744,746
Direct underwriting income (loss)
45,096
75,973
(56,855
)
155,540
Nonaffiliated reinsurance underwriting results
Assumed voluntary-less ceded retrocessions
800
(555
)
(36
)
(345
)
Assumed involuntary
3,066
(1,614
)
3,177
(2,405
)
Less: Ceded
7,266
9,253
21,437
18,296
Nonaffiliated reinsurance underwriting income
(3,400
)
(11,422
)
(18,296
)
(21,046
)
Net underwriting income (loss) (SAP basis)
$
41,696
$
64,551
($75,151
)
$
134,494
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 income (loss) (SAP basis)
$
2,293
$
3,550
($4,133
)
$
7,397
SAP to GAAP adjustments
(523
)
(305
)
101
(72
)
Indemnity underwriting income (loss) before tax (GAAP basis)
Loss ratio points from prior accident year reserve development – (redundancy) deficiency
(0.3
)
(3.9
)
1.9
(4.6
)
Loss ratio points from prior accident years from salvage and subrogation recoveries collected
(1.6
)
(1.6
)
(2.4
)
(2.4
)
Total loss ratio points from prior accident years
(1.9
)
(5.5
)
(0.5
)
(7.0
)
Loss ratio points from catastrophes
1.5
2.9
4.6
2.3
Erie Indemnity Company
GAAP combined ratio
96.6
93.7
103.9
92.9
GAAP loss ratio points from catastrophes
1.6
3.0
4.6
2.3
SAP basis represents statutory accounting principles as codified by the National Association of Insurance Commissioners (NAIC).
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 our opinion, 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
Three
Six
Six
months ended
months ended
months ended
months ended
June 30,
June 30,
June 30,
June 30,
2009
2008
2009
2008
(dollars in thousands)
Statutory accounting basis
(Unaudited)
(Unaudited)
Premiums earned
$
913,464
$
905,050
$
1,797,715
$
1,792,542
Losses, loss adjustment expenses and
underwriting expenses
874,063
844,022
1,868,722
1,665,440
��
Net underwriting income (loss)
39,401
61,028
(71,007
)
127,102
Total investment income (loss)
283
(54,492
)
(191,408
)
(24,263
)
Income (loss) before income taxes
39,684
6,536
(262,415
)
102,839
Federal income tax expense (benefit)
5,656
52,564
(47,564
)
113,364
Net income (loss)
$
34,028
$
(46,028
)
$
(214,851
)
$
(10,525
)
As of
As of
June 30,
December 31,
2009
2008
(dollars in thousands)
Statutory accounting basis
(Unaudited)
Cash and invested assets
$
7,785,784
$
7,595,727
Other assets
1,388,664
1,552,902
Total assets
$
9,174,448
$
9,148,629
Loss, loss adjustment expense and
unearned premium reserves
$
4,917,441
$
4,768,240
Other liabilities
341,763
334,399
Total liabilities
5,259,204
5,102,639
Policyholders’ surplus
3,915,244
4,045,990
Total liabilities and policyholders’ surplus
$
9,174,448
$
9,148,629
5
Management fee revenue by major lines of business – Segment basis:
Three months
Three months
Six months
Six months
ended
ended
ended
ended
June 30,
June 30,
%
June 30,
June 30,
%
2009
2008
Change
2009
2008
Change
(dollars in thousands)
Private passenger auto
$
122,966
$
120,804
1.8
%
$
233,337
$
230,054
1.4
%
Homeowners
55,304
51,756
6.9
94,986
89,540
6.1
Commercial multi-peril
30,005
29,950
0.2
59,022
58,694
0.6
Commercial auto
21,003
21,638
(2.9
)
40,753
42,355
(3.8
)
Workers compensation
17,138
19,490
(12.1
)
36,047
40,704
(11.4
)
All other lines of business
14,655
13,871
5.7
27,196
25,761
5.6
261,071
257,509
1.4
491,341
487,108
0.9
Change in allowance for management fee returned on cancelled policies
(1,300)
(1,700)
(1,800)
(1,700)
Management fee revenue, net of allowance
$259,771
$255,809
1.5%
$489,541
$485,408
0.9%
Management fee rate
25.00
%
25.00
%
25.00
%
25.00
%
6
Growth rates of policies in force for Property and Casualty Group insurance operations by major lines of business:
Private
12-mth.
12-mth.
12-mth.
Total
12-mth.
Passenger
growth
growth
All Other
growth
Personal
growth
Date
Auto
rate
Homeowners
rate
Personal Lines
rate
Lines
rate
06/30/2007
1,644,561
0.4
%
1,398,034
2.3
%
311,761
5.9
%
3,354,356
1.7
%
09/30/2007
1,649,801
0.8
1,408,114
2.5
316,786
6.2
3,374,701
2.0
12/31/2007
1,651,234
1.1
1,413,712
2.6
321,431
6.6
3,386,377
2.2
03/31/2008
1,655,869
1.2
1,420,250
2.6
325,926
6.7
3,402,045
2.3
06/30/2008
1,667,446
1.4
1,433,504
2.5
332,922
6.8
3,433,872
2.4
09/30/2008
1,677,151
1.7
1,446,779
2.7
340,566
7.5
3,464,496
2.7
12/31/2008
1,683,526
2.0
1,454,797
2.9
346,953
7.9
3,485,276
2.9
03/31/2009
1,694,583
2.3
1,466,227
3.2
353,470
8.5
3,514,280
3.3
06/30/2009
1,709,580
2.5
1,483,763
3.5
362,582
8.9
3,555,925
3.6
12-mth.
CML*
12-mth.
12-mth.
12-mth.
Total
12-mth.
CML*
growth
Multi-
growth
Workers
growth
All Other
growth
CML*
growth
Date
Auto
rate
Peril
rate
Comp.
rate
CML* Lines
rate
Lines
rate
06/30/2007
121,587
1.8
%
223,670
3.0
%
53,955
(1.7
)%
94,612
3.3
%
493,824
2.2
%
09/30/2007
122,154
2.2
226,302
3.9
54,341
(0.1
)
96,167
3.8
498,964
3.0
12/31/2007
122,558
2.3
228,214
4.4
54,720
1.5
96,464
4.1
501,956
3.5
03/31/2008
122,882
2.5
229,577
4.7
54,927
2.7
96,511
3.9
503,897
3.8
06/30/2008
123,955
1.9
234,393
4.8
55,801
3.4
97,745
3.3
511,894
3.7
09/30/2008
124,418
1.9
236,994
4.7
56,381
3.8
98,786
2.7
516,579
3.5
12/31/2008
124,205
1.3
237,228
3.9
56,704
3.6
98,796
2.4
516,933
3.0
03/31/2009
123,747
0.7
236,804
3.1
56,661
3.2
98,622
2.2
515,834
2.4
06/30/2009
124,917
0.8
240,970
2.8
57,549
3.1
99,973
2.3
523,409
2.2
12-mth.
Total All
growth
Date
Lines
rate
06/30/2007
3,848,180
1.8
%
09/30/2007
3,873,665
2.1
12/31/2007
3,888,333
2.4
03/31/2008
3,905,942
2.5
06/30/2008
3,945,766
2.5
09/30/2008
3,981,075
2.8
12/31/2008
4,002,209
2.9
03/31/2009
4,030,114
3.2
06/30/2009
4,079,334
3.4
CML* = Commercial
7
Policy retention trends for Property and Casualty Group insurance operations by major lines of business:
Private
CML*
Passenger
CML*
Multi-
Workers
All Other
Date
Auto
Auto
Homeowners
Peril
Comp.
Lines
Total All Lines
06/30/2007
91.1
%
88.1
%
89.9
%
86.0
%
86.3
%
87.6
%
89.9
%
09/30/2007
91.3
88.2
90.1
86.1
86.8
87.5
90.0
12/31/2007
91.5
88.2
90.3
86.0
86.8
87.8
90.2
03/31/2008
91.6
88.4
90.5
86.5
87.6
87.9
90.4
06/30/2008
91.6
87.9
90.7
86.2
87.5
88.1
90.4
09/30/2008
91.7
87.8
91.0
86.0
87.2
88.2
90.5
12/31/2008
91.8
87.6
91.1
85.6
86.6
88.5
90.6
03/31/2009
91.9
87.5
91.4
85.7
86.3
88.8
90.8
06/30/2009
91.9
87.3
91.6
85.2
85.7
89.1
90.8
CML* = Commercial
8
Average premium per policy trends for Property and Casualty Group insurance operations by major lines of business:
Private
12-mth.
12-mth.
All other
12-mth.
12-mth.
Passenger
percent
percent
Personal
percent
Total Personal
percent
Date
Auto
change
Homeowners
change
Lines
change
Lines
change
06/30/2007
$
1,094
(4.0
)%
$
520
(2.8
)%
$
351
0.9
%
$
786
(3.9
)%
09/30/2007
1,093
(2.6
)
519
(2.1
)
352
1.1
783
(2.9
)
12/31/2007
1,092
(1.6
)
518
(1.5
)
353
1.1
782
(1.9
)
03/31/2008
1,091
(0.8
)
518
(1.1
)
354
1.4
781
(1.3
)
06/30/2008
1,088
(0.5
)
514
(1.2
)
353
0.6
777
(1.1
)
09/30/2008
1,086
(0.6
)
511
(1.5
)
354
0.6
774
(1.1
)
12/31/2008
1,085
(0.6
)
511
(1.4
)
356
0.8
773
(1.2
)
03/31/2009
1,081
(0.9
)
512
(1.2
)
358
1.1
771
(1.3
)
06/30/2009
1,076
(1.1
)
516
0.4
359
1.7
769
(1.0
)
12-mth.
12-mth.
12-mth.
Total
12-mth.
percent
percent
All Other
percent
CML*
percent
Date
CML* Auto
change
Workers Comp.
change
CML* Lines
change
Lines
change
06/30/2007
$
2,627
(3.8
)%
$
5,901
(3.9
)%
$
1,616
(3.6
)%
$
2,333
(4.5
)%
09/30/2007
2,600
(3.9
)
5,780
(4.4
)
1,592
(4.6
)
2,295
(5.0
)
12/31/2007
2,577
(4.1
)
5,602
(6.4
)
1,581
(4.6
)
2,262
(5.5
)
03/31/2008
2,568
(3.6
)
5,453
(7.8
)
1,576
(4.0
)
2,240
(5.3
)
06/30/2008
2,530
(3.7
)
5,236
(11.3
)
1,546
(4.3
)
2,187
(6.3
)
09/30/2008
2,514
(3.3
)
5,067
(12.3
)
1,536
(3.5
)
2,157
(6.0
)
12/31/2008
2,505
(2.8
)
4,951
(11.6
)
1,533
(3.0
)
2,141
(5.3
)
03/31/2009
2,483
(3.3
)
4,792
(12.1
)
1,537
(2.5
)
2,122
(5.3
)
06/30/2009
2,439
(3.6
)
4,555
(13.0
)
1,511
(2.3
)
2,067
(5.5
)
12-mth.
Total All
percent
Date
Lines
change
06/30/2007
$
984
(4.1
)%
09/30/2007
978
(3.3
)
12/31/2007
973
(2.8
)
03/31/2008
969
(2.2
)
06/30/2008
960
(2.4
)
09/30/2008
953
(2.6
)
12/31/2008
949
(2.5
)
03/31/2009
944
(2.6
)
06/30/2009
936
(2.5
)
CML* = Commercial
9
PROPERTY & CASUALTY GROUP ADJUSTED COMBINED RATIO BY MAJOR LINES OF BUSINESS (SAP BASIS) – DIRECT BUSINESS
Three Months ended
Three Months ended
June 30, 2009
June 30, 2008
Calendar* Year
Prior Year** Reserve Development Deficiency (Redundancy)
Catastrophe Losses
Current Accident Year Excluding Catastrophes
Calendar* Year
Prior Year** Reserve Development Deficiency (Redundancy)
Catastrophe Losses
Current Accident Year Excluding Catastrophes
Private Passenger Auto
89.0
%
0.7
%
-1.9
%
90.2
%
83.6
%
-2.5
%
0.9
%
85.2
%
Homeowners
97.9
%
1.0
%
8.4
%
88.5
%
88.2
%
-9.5
%
10.3
%
87.4
%
Other Personal Lines
75.6
%
-4.6
%
3.0
%
77.2
%
98.7
%
9.1
%
2.9
%
86.7
%
Total Personal
90.8
%
0.5
%
1.2
%
89.1
%
85.5
%
-4.0
%
3.6
%
85.9
%
Commercial Multi-Peril
96.1
%
4.4
%
6.6
%
85.1
%
74.1
%
-17.4
%
2.6
%
88.9
%
Commercial Auto
85.7
%
2.9
%
-1.1
%
83.9
%
94.4
%
4.3
%
1.3
%
88.8
%
Workers’ Compensation
70.3
%
-18.8
%
0.0
%
89.1
%
115.6
%
6.3
%
0.0
%
109.3
%
Other Commercial Lines
61.9
%
-5.9
%
0.7
%
67.1
%
63.9
%
1.3
%
0.4
%
62.2
%
Total Commercial
84.5
%
-2.3
%
2.4
%
84.4
%
90.1
%
-3.7
%
1.4
%
92.4
%
Grand Total – Direct Business Only
89.1%
-0.3%
1.5%
87.9%
86.9%
-3.9%
2.9%
87.9%
Six Months ended
Six Months ended
June 30, 2009
June 30, 2008
Calendar* Year
Prior Year** Reserve Development Deficiency (Redundancy)
Catastrophe Losses
Current Accident Year Excluding Catastrophes
Calendar* Year
Prior Year** Reserve Development Deficiency (Redundancy)
Catastrophe Losses
Current Accident Year Excluding Catastrophes
Private Passenger Auto
95.5
%
3.0
%
0.8
%
91.7
%
84.3
%
-6.8
%
0.6
%
90.5
%
Homeowners
113.8
%
3.2
%
16.2
%
94.4
%
89.2
%
-5.4
%
8.1
%
86.5
%
Other Personal Lines
82.2
%
-5.5
%
5.3
%
82.4
%
79.3
%
-3.8
%
3.1
%
80.0
%
Total Personal
99.9
%
2.6
%
5.3
%
92.0
%
85.4
%
-6.3
%
2.8
%
88.9
%
Commercial Multi-Peril
112.9
%
11.7
%
6.1
%
95.1
%
91.6
%
-2.1
%
2.4
%
91.3
%
Commercial Auto
75.0
%
-8.5
%
1.8
%
81.7
%
78.6
%
-9.8
%
0.7
%
87.7
%
Workers’ Compensation
88.8
%
-4.3
%
0.0
%
93.1
%
103.0
%
5.6
%
0.0
%
97.4
%
Other Commercial Lines
53.5
%
-17.4
%
0.6
%
70.3
%
90.4
%
23.2
%
0.4
%
66.8
%
Total Commercial
92.0
%
0.0
%
3.0
%
89.0
%
90.9
%
-0.5
%
1.2
%
90.2
%
Grand Total – Direct Business Only
97.7%
1.9%
4.6%
91.2%
87.1%
-4.6%
2.3%
89.4%
*The calendar year combined ratio represents the adjusted statutory combined ratio, which removes the profit component of the management fee earned by the Company.
**The prior accident year reserve development does not include the effects of salvage and subrogation recoveries.
10
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