CONTACT: Mark Dombrowski, Public and Media Relations
1-800-458-0811 ext. 2285 or 814/870-2285
Erie Indemnity Reports Second Quarter 2004 Results;
Management Fee Rate Increased to 24 Percent
Erie, Pa., July 28, 2004 - Erie Indemnity Company (Nasdaq: ERIE) today announced
results for the second quarter 2004:
o Net income increased by 4.6 percent to $57.0 million, up from $54.5
million at June 30, 2003.
o Net income per share increased by 5.1 percent to $.81 per share, compared
to $.77 per share in the comparable quarter for 2003.
o Net income, excluding net realized gains or losses on investments and
related federal income taxes, increased by 5.2 percent to $55.0
million, or $.78 per share, up from $52.3 million, or $.74 per share, for
the same period one year ago.
o Management fee revenue grew by 10.0 percent to $256.1 million, up from
$232.7 million for the same period one year ago.
o The reported statutory combined ratio for the Property and Casualty
Group decreased to 93.2 for the second quarter of 2004, compared to 105.7
in the same period in 2003.
"The improvement in our combined ratio during the second quarter and first six
months of 2004 demonstrates that our focus on underwriting profitability is
working," said Jeffrey A. Ludrof, president and chief executive officer. "Our
agents and employees are executing the strategies we have developed to maintain
our exceptional service and ensure the financial stability of our company. Our
growth has moderated as a result of our focus on underwriting profitability, yet
we continue to attract new business thanks to our unparalleled commitment to
service. The outlook for our Company to maintain a pattern of profitable growth
looks very positive."
Separately, at its quarterly July meeting, the Company's board voted to
increase the management fee rate to 24 percent from 23.5 percent. The increased
management fee rate is effective July 1, 2004.
4
Details of Second Quarter 2004 Results
- --------------------------------------
Management operations
- ---------------------
Management fee revenue increased by 10.0 percent to $256.1 million for the
quarter ended June 30, 2004, compared to $232.7 million for the same period one
year ago. Management fee revenue grew at a slower rate in the second quarter
2004 primarily due to the reduction of the fee rate in 2004 and the reduced
volume of the direct premium written by the Property & Casualty Group. The
management fee rate was reduced from 24 percent to 23.5 percent effective
January 1, 2004.
The property and casualty direct written premiums of the Erie Insurance Group,
upon which management fee revenue is calculated totaled $1.1 billion in the
second quarter 2004, compared to $973.9 million in the second quarter 2003,
which represents a growth rate of 10.7 percent in the second quarter of 2004.
New written premium continues to moderate as a result of the Company's
concentration on reunderwriting and risk selection.
The average written premium per policy increased by 8.7 percent for the twelve
months ended June 30, 2004, to $1,022, as compared to $940 for the twelve months
ended June 30, 2003. Direct written premium grew by 10.7 percent in the second
quarter of 2004, compared to the 17.9 percent growth rate for the same period in
2003. Year-over-year policy retention ratio declined slightly from 89.8, at
March 31, 2004, to 89.2 at June 30, 2004. The lower retention rate is an
expected result of our reunderwriting efforts to improve the quality of our book
of business.
Improving loss experience has resulted in the modification of anticipated rate
changes in 2004. The Company's 2004 projection of $308.3 million in additional
written premium at the end of the first quarter 2004 has been reduced to a
current estimate of $302.3 million. The Company has also reduced the number of
new agent appointments expected in 2004 from about 50 to about 40.
During the second quarter, the Company recorded a change in the estimate for the
allowance for returned management fees. This adjustment to the cancellation
allowance resulted in a positive affect on second quarter net income of $0.9
million net of commission effect, or $.01 per share.
Service agreement revenue decreased for the second quarter 2004 to $5.2 million
from $6.9 million during the second quarter of 2003. Included in service
agreement revenue is the service fee income received from the Erie Insurance
Exchange as compensation for the management and administration of voluntary
assumed reinsurance from non-affiliated insurers. These fees decreased
substantially during the second quarter 2004 due to the Company's previously
announced decision to exit from the assumed reinsurance business by the
Exchange. Assumed reinsurance premiums written by the Exchange were negligible
in second quarter 2004 compared to $32.2 million recorded in the second quarter
of 2003. Also included in the service agreement revenue are service charges the
Company collects from policyholders for providing extended payment plans on
policies. The service charge revenue for the second quarter 2004 was $5.3
million, compared to revenue of $4.9 million for the same quarter a year
earlier, up 6.5 percent.
5
The total cost of management operations increased 13.3 percent to $192.7 million
in the second quarter of 2004, from $170.1 million for the same period in 2003.
Commission costs, which were impacted by the growth in policies and premium,
increased 16.6 percent to $146.1 million, from $125.3 million in the second
quarter 2003. Second quarter costs of management operations, excluding
commissions, increased 4.1 percent to $46.6 million in 2004 from $44.8 million
in 2003.
Insurance underwriting operations
- ---------------------------------
For the second quarter 2004, the reported statutory combined ratio of the
Property & Casualty Group was 93.2, and when adjusted for the profit component
of the management fee, the combined ratio was 87.3 for the quarter. The reported
statutory combined ratio of the Property and Casualty Group was 96.7 percent for
the first six months of 2004. Catastrophe experience, as classified by the
Company, during the first six months of 2004 has been light, adding only 1.5
points to the Property and Casualty Group's reported statutory combined ratio.
The Company's insurance underwriting operations recorded losses of $4.9 million
and $6.3 million in the second quarters of 2004 and 2003, respectively. The
underwriting result for the quarter was reduced by $4.9 million or $.05 per
share due to a reversal of recoveries recorded in prior periods under the
excess-of-loss reinsurance agreement with the Exchange. This is the result of
positive loss development experience on prior accident years. The Company's
share of catastrophe losses totaled $1.2 million and $2.1 million for the
three-month periods ended June 30, 2004 and 2003, respectively.
The Company is introducing insurance scoring as a new underwriting tool. Agents
will begin using insurance scores in August 2004 in all states except Maryland,
due to regulatory constraints in that state. Insurance scores will be used
during agents' frontline underwriting, giving agents increased flexibility in
applying the Company's underwriting guidelines.
Included in the Company's policy acquisition and other underwriting expenses is
the property and casualty insurance subsidiaries' share of software development
costs related to the eCommerce initiative. Costs associated with the eCommerce
initiative totaled $0.3 million and $0.8 million for the second quarters of 2004
and 2003, respectively. These costs will continue to be incurred as the program
develops through 2004. The Company is working with agent user groups on
usability tests and enhancements to ERIEConnection while a limited rollout
continues. The system is operational in Ohio, Indiana, Illinois and Wisconsin.
6
Investment operations
- ---------------------
Net revenue from investment operations for the second quarter of 2004 reflects
an increase of 20.8 percent to $21.6 million, compared to $17.9 million for the
same period in 2003. Net investment income increased by 9.5 percent to $15.6
million for the quarter ended June 30, 2004, from $14.2 million for the same
period in 2003.
Net realized gains on investments of $3.0 million were recorded during the
second quarter of 2004 compared to net realized gains of $3.4 million for the
second quarter of 2003.
Equity in earnings of limited partnerships totaled $1.5 million in the second
quarter of 2004, compared to equity in losses of limited partnerships of $1.4
million in the second quarter of 2003. Private equity and fixed income limited
partnerships recorded earnings of $.1 million in the second quarter of 2004
compared to losses of $1.4 million in the second quarter of 2003. Real estate
limited partnerships reflected earnings of $1.4 million and $0.1 million in the
second quarters of 2004 and 2003, respectively.
The Company's earnings from its 21.6 percent equity ownership of EFL decreased
to $1.5 million for the second quarter of 2004 from $1.7 million in the second
quarter 2003.
During the second quarter 2004, the Company accelerated its share repurchase
activity and repurchased 479,015 shares of Class A Erie Indemnity Company stock
at an average per share cost of $46.11 under the Company's share repurchase
program. For the first six months of 2004, the Company has repurchased a total
of 618,074 shares of its outstanding Class A stock at a total cost of $28.4
million, or an average per share cost of $46.00.
Erie Indemnity Company provides management services to the member companies of
the Erie Insurance Group, which includes the Erie Insurance Exchange, Flagship
City Insurance Company, Erie Insurance Company, Erie Insurance Property and
Casualty Company, Erie Insurance Company of New York and Erie Family Life
Insurance Company.
According to A.M. Best Company, Erie Insurance Group, based in Erie,
Pennsylvania, is the 16th largest automobile insurer in the United States based
on direct premiums written and the 22nd largest property/casualty insurer in the
United States based on total lines net premium written. The Group, rated A+
(Superior) by A.M. Best Company, has almost 3.8 million policies in force and
operates in 11 states and the District of Columbia. Erie Insurance Group ranked
368 on the FORTUNE 500 and is included in Forbes Magazine's PLATINUM 400 list of
the best-managed companies in America.
News releases and more information about Erie Insurance Group are available at
http://www.erieinsurance.com
- ----------------------------
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995: Certain forward-looking statements contained herein involve risks and
uncertainties. These statements include certain discussions relating to
management fee revenue, cost of management operations, underwriting, premium and
investment income volume, business strategies, profitability and business
relationships and the Company's other business activities during 2004 and
beyond. In some cases, you can identify forward-looking statements by terms such
as "may," "will," "should," "could," "would," "expect," "plan," "intend,"
"anticipate," "believe," "estimate," "project," "predict," "potential" and
similar expressions. These forward-looking statements reflect the Company's
current views about future events, are based on assumptions and are subject to
known and unknown risks and uncertainties that may cause results to differ
materially from those anticipated in those statements. Many of the factors that
will determine future events or achievements are beyond our ability to control
or predict.
STATEMENTS OF OPERATIONS
AND FINANCIAL POSITION AND OTHER INFORMATION
WILL FOLLOW
7
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
Three months ended June 30, Six months endedd June30,
(unaudited) (unaudited)
2004 2003 2004 2003
---------------------------- ---------------------------
OPERATING REVENUE:
Management Fee Revenue $ 242,037 $ 219,937 $ 451,702 $ 415,784
Premiums Earned 51,065 47,219 101,714 92,401
Service Agreement Revenue 5,224 6,863 10,823 13,347
---------- ---------- ---------- ----------
Total operating revenue 298,326 274,019 564,239 521,532
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Cost of Management Operations 182,120 160,733 343,941 306,615
Losses and Loss Expenses Incurred 40,002 39,364 78,040 76,864
Policy Acquisition and Other Underwriting Expenses 12,434 10,689 23,752 21,133
---------- ---------- ---------- ----------
Total operating expenses 234,556 210,786 445,733 404,612
---------- ---------- ---------- ----------
OTHER INCOME AND EXPENSES:
Investment income, net of expenses 15,567 14,219 30,254 28,538
Realized Gains on Investments 3,030 3,376 5,883 3,969
Equity in Earnings (Losses) of Limited Partnerships 1,503 (1,420) 1,920 (2,746)
---------- ---------- ---------- ----------
Total other income and expenses 20,100 16,175 38,057 29,761
---------- ---------- ---------- ----------
Income before income taxes and equity in earnings of
Erie Family Life Insurance Company 83,870 79,408 156,563 146,681
Less: Provision for Income Taxes 28,289 26,522 52,724 48,982
Equity in Earnings of Erie Family Life Insurance
Company, net of tax 1,374 1,572 2,688 2,659
---------- ---------- ---------- ----------
Net income $ 56,955 $ 54,458 $ 106,527 $ 100,358
========== ========== ========== ==========
Net income per share $ 0.81 $ 0.77 $ 1.50 $ 1.41
========== ========== ========== ==========
Weighted average shares outstanding 70,623 70,997 70,785 70,997
========== ========== ========== ==========
DIVIDENDS DECLARED
- ------------------
Class A non-voting common $ 0.215 $ 0.19 $ 0.43 $ 0.38
---------- ---------- ---------- ----------
Class B common $ 32.25 $ 28.50 $ 64.50 $ 57.00
---------- ---------- ---------- ----------
8
Erie Indemnity Company
CONSOLIDATED STATEMENTS OF OPERATIONS - SEGMENT BASIS
(Amounts in thousands, except per share data)
Three months ended June 30 Six months ended June 30
(unaudited) (unaudited)
2004 2003 2004 2003
-------------------------- ------------------------
MANAGEMENT OPERATIONS
Management fee revenue $ 256,124 $ 232,737 $ 477,991 $ 439,983
Service agreement revenue 5,224 6,863 10,823 13,347
---------- ---------- ---------- ----------
Total revenue from management operations 261,348 239,600 488,814 453,330
Cost of management operations 192,719 170,087 363,958 324,460
---------- ---------- ---------- ----------
Income from management operations 68,629 69,513 124,856 128,870
---------- ---------- ---------- ----------
INSURANCE UNDERWRITING OPERATIONS
Premiums earned 51,065 47,219 101,714 92,401
---------- ---------- ---------- ----------
Losses and loss adjustment expenses incurred 40,002 39,364 78,040 76,864
Policy acquisition and other underwriting expenses 15,922 14,135 30,024 27,487
---------- ---------- ---------- ----------
Total losses and expenses 55,924 53,499 108,064 104,351
---------- ---------- ---------- ----------
Underwriting loss (4,859) (6,280) (6,350) (11,950)
---------- ---------- ---------- ----------
INVESTMENT OPERATIONS
Net investment income 15,567 14,219 30,254 28,538
Net realized gains on investments 3,030 3,376 5,883 3,969
Equity in earnings (losses) of limited partnerships 1,503 (1,420) 1,920 (2,746)
Equity in earnings of Erie Family Life Insurance Company 1,477 1,690 2,891 2,859
---------- ---------- ---------- ----------
Net revenue from investment operations 21,577 17,865 40,948 32,620
Income before income taxes 85,347 81,098 159,454 149,540
Provision for income taxes 28,392 26,640 52,927 49,182
---------- ---------- ---------- ----------
Net income $ 56,955 $ 54,458 $ 106,527 $ 100,358
========== ========== ========== ==========
Net income per share $ 0.81 $ 0.77 $ 1.50 $ 1.41
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 70,623 70,997 70,785 70,997
========== ========== ========== ==========
Amounts presented on a segment basis are not presented net of intercompany/intersegment items.
9
Erie Indemnity Company
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Amounts in thousands, except per share data)
June 30 December 31
2004 2003
(unaudited)
----------- -----------
ASSETS
Investments
Fixed maturities $ 911,462 $ 879,361
Equity securities
Preferred stock 147,909 148,952
Common stock 41,151 40,451
Other invested assets 125,504 116,400
---------- -----------
Total investments 1,226,026 1,185,164
Cash and cash equivalents 71,265 87,192
Equity in Erie Family Life Insurance Company 52,475 56,072
Premiums receivable from policyholders 287,129 266,957
Receivables from affiliates 1,054,743 984,146
Other assets 179,511 175,076
---------- -----------
Total assets $2,871,149 $ 2,754,607
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Unpaid losses and loss adjustment expenses $ 893,873 $ 845,536
Unearned premiums 479,126 449,606
Other liabilities 303,484 295,295
---------- -----------
Total liabilities 1,676,483 1,590,437
Total shareholders' equity 1,194,666 1,164,170
---------- -----------
Total liabilities and shareholders' equity $2,871,149 $ 2,754,607
========== ===========
Book value per share $16.97 $16.40
Shares outstanding 70,379 70,997
10
Management fee revenue by line of business - segment basis:
Three months ended June 30 % Six months ended June 30 %
2004 2003 Change 2004 2003 Change
(In thousands) ----------------------------------------- -----------------------------------------
Private passenger auto $ 122,938 $ 117,549 4.6% $ 235,948 $ 222,755 5.9%
Commercial auto 21,407 20,110 6.4 41,369 39,107 5.8
Homeowners 48,317 39,718 21.7 82,653 67,530 22.4
Commercial multi-peril 28,556 26,392 8.2 55,110 51,445 7.1
Workers' compensation 21,243 20,247 4.9 43,828 42,628 2.8
All other lines of business 10,863 9,721 11.7 20,183 17,918 12.6
----------------------------------------- -----------------------------------------
Total 253,324 233,737 8.4% 479,091 441,383 8.5%
Allowance for management
fee returned on cancelled
policies (2,800) 1,000 N/A 1,100 1,400 N/A
---------------------------------------- ----------------------------------------
Total management fee revenue $ 256,124 $ 232,737 10.0% $ 477,991 $ 439,983 8.6%
======================================== ========================================
11
Growth rate of policies in force for Property and Casualty Group insurance operations:
All other
Private 12-mth. 12-mth. lines of 12-mth. Total 12-mth.
passenger growth growth personal growth Personal growth
Date auto rate Homeowners rate business rate Lines rate
- ------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
03/31/2003 1,623,429 10.5 1,263,118 14.3 257,327 15.9 3,143,874 12.4
06/30/2003 1,650,225 9.1 1,293,575 12.8 264,423 14.0 3,208,223 11.0
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
All other
12-mth. CML* 12-mth. 12-mth. CML* 12-mth. Total 12-mth.
CML* growth multi- growth Workers' growth lines of growth CML* growth
Date auto rate peril rate comp. rate business rate Lines rate
- ----------------------------------------------------------------------------------------------------------------------------
03/31/2003 109,963 11.2 194,911 13.8 60,104 12.7 81,356 10.9 446,334 12.4
06/30/2003 112,911 10.2 201,614 12.2 61,932 11.4 83,826 10.5 460,283 11.3
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
12-mth.
Total growth
Date All lines rate
- -------------------------------
03/31/2003 3,590,208 12.4
06/30/2003 3,668,506 11.0
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
*CML = Commercial
12
Private All other
passenger CML* CML* Workers' lines of
Date auto auto Homeowners multi-peril comp. business Total
- -------------------------------------------------------------------------------------------------------------------
03/31/2003 92.5 91.3 90.6 89.1 90.2 88.5 91.2
06/30/2003 92.2 91.1 90.5 88.4 89.4 88.4 91.0
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
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 ended Six months ended
-------------------------- --------------------------
(In thousands) June 30, June 30, June 30, June 30,
Statutory Accounting Basis 2004 2003 2004 2003
(unaudited) (unaudited)
-------------------------- --------------------------
Premiums earned $ 914,360 $ 832,147 $ 1,804,603 $ 1,634,794
-------------------------- ---------------------------
Losses and loss adjustment expenses 600,610 643,028 1,257,382 1,322,883
Insurance underwriting and other expenses* 274,128 266,195 519,100 508,865
-------------------------- ---------------------------
Net underwriting gain (loss) 39,622 (77,076) 28,121 (196,954)
-------------------------- ---------------------------
Net investment income 68,765 57,110 131,494 111,175
Net realized gains (losses) 14,023 111,569 31,179 78,214
Federal income tax expense (benefit) 38,180 (5,151) 56,200 (46,681)
-------------------------- ---------------------------
Net income (loss) $ 84,230 $ 96,754 $ 134,594 $ 39,116
========================== ===========================
<FN>
* Includes management fees incurred
</FN>
As of
(In thousands) June 30, December 31,
Statutory Accounting Basis 2004 2003
(unaudited)
------------ ------------
Cash and invested assets $ 6,988,364 $ 7,024,796
Other assets 1,135,801 1,020,830
----------- -----------
Total assets $ 8,124,165 $ 8,045,626
=========== ===========
Claims and unearned premium reserves $ 4,855,013 $ 4,616,687
Other liabilities 678,803 999,854
----------- -----------
Total liabilities 5,533,816 5,616,541
Policyholders' surplus 2,590,349 2,429,085
----------- -----------
Total liabilities and policyholders' surplus $ 8,124,165 $ 8,045,626
=========== ===========
13
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 income excluding realized capital gains
and losses, after tax. 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 to
compute 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 and
six months ended June 30, 2004 and 2003.
Three months ended June 30 Six months ended June 30
(unaudited) (unaudited)
(In thousands) 2004 2003 2004 2003
-------------------------- ---------------------------
Operating income $ 54,985 $ 52,264 $ 102,703 $ 97,778
Net realized gains on investments 3,030 3,376 5,883 3,969
Income tax expense on realized gains (1,060) (1,182) (2,059) 1,389)
-------------------------- ---------------------------
Realized gains net of income tax expense 1,970 2,194 3,824 2,580
--------------------------------------------------------
Net income $ 56,955 $ 54,458 $ 106,527 $ 100,358
========================================================
Per share information Per share information
Three months ended June 30 Six months ended June 30
(unaudited) (unaudited)
2004 2003 2004 2003
-------------------------- ---------------------------
Operating income $ 0.78 $ 0.74 $ 1.45 $ 1.38
Net realized gains on investments 0.04 0.05 0.08 0.05
Income tax expense on realized gains (0.01) (0.02) (0.03) (0.02)
-------------------------- ---------------------------
Realized gains net of income tax expense 0.03 0.03 0.05 0.03
--------------------------------------------------------
Net income $ 0.81 $ 0.77 $ 1.50 $ 1.41
========================================================
14