Erie Indemnity Reports First Quarter 2011 Results

News provided by

Erie Indemnity Company

May 05, 2011, 04:05 ET

ERIE, Pa., May 5, 2011 /PRNewswire/ --

1Q 2011 Highlights

Indemnity Shareholder Interest

Net income attributable to Indemnity per share-diluted was $0.78 per share in the first quarter of 2011 compared to net income per share-diluted of $0.82 per share in the first quarter of 2010.
Operating income attributable to Indemnity per share-diluted (excluding net realized gains or losses, impairments on investments and related taxes) was $0.77 per share in both the first quarter of 2011 and 2010.
Gross margin from management operations was 18.6 percent in the first quarter of 2011 compared to 21.8 percent in the first quarter of 2010.
Indemnity’s investment operations pretax income totaled $16 million for the first quarter of 2011 compared to $14 million for the first quarter of 2010.

(Logo: http://photos.prnewswire.com/prnh/20041112/ERIELOGO )

Erie Indemnity Company (NASDAQ: ERIE) today announced first quarter 2011 earnings of $44 million, compared to earnings of $47 million in the first quarter of 2010. Operating income was $43 million in the first quarter of 2011 compared to $44 million for the same period one year ago. Also, the sale of Indemnity’s 21.6 percent interest in Erie Family Life Insurance Company to the Erie Insurance Exchange was completed on March 31, 2011.

Note: The accompanying consolidated financial statements of Erie Indemnity Company (“Indemnity”) reflect the consolidated results of Indemnity and the Erie Insurance Exchange (“Exchange”), which we refer to collectively as the “Erie Insurance Group.”

Indemnity or Indemnity shareholder interest refers to the interest in Erie Indemnity Company owned by the Class A and Class B shareholders. The Exchange refers to the noncontrolling interest held for the benefit of the subscribers (policyholders) and includes its interest in its property and casualty subsidiaries and Erie Family Life Insurance Company (“EFL”).

The following table shows the consolidated results of the Erie Insurance Group by operating segment:

Results of the Erie Insurance Group’s Operations

	Indemnity shareholder interest		Noncontrolling interest (Exchange)		Elimination of related party transactions		Erie Insurance Group
(dollars in millions)	1Q’11	1Q’10	1Q’11	1Q’10	1Q’11	1Q’10	1Q’11	1Q’10
Management operations	$48	$53	$ -	$ -	$(40)	$(45)	$ 8	$ 8
Property and casualty insurance operations	-	(2)	49	(39)	43	47	92	6
Life insurance operations	3	2	10	8	0	1	13	11
Investment operations	16	14	286	192	(3)	(3)	299	203
Income from operations before income taxes and noncontrolling interest	67	67	345	161	-	-	412	228
Provision for income taxes	23	20	115	46	-	-	138	66
Net income	$44	$47	$230	$115	$ -	$ -	$274	$162

The following sections highlight and discuss the results of management operations, property and casualty insurance operations, life insurance operations and investment operations related to the Indemnity shareholder interest.

Management Operations

	Indemnity shareholder interest		Noncontrolling interest (Exchange)		Elimination of related party transactions		Erie Insurance Group
(dollars in millions)	1Q’11	1Q’10	1Q’11	1Q’10	1Q’11	1Q’10	1Q’11	1Q’10
Management fee revenue, net	$251	$237	$ -	$ -	$(251)	$(237)	$ -	$ -
Service agreement revenue	8	8	-	-	-	-	8	8
Total revenue from management operations	259	245	-	-	(251)	(237)	8	8
Cost of management operations	211	192	-	-	(211)	(192)	-	-
Income from management operations before taxes	$ 48	$ 53	$ -	$-	$ (40)	$ (45)	$8	$8
Gross margin	18.6%	21.8%

The management fee rate was 25 percent for both the first quarters of 2011 and 2010. Direct written premiums of the property and casualty insurance operations, upon which the management fee is calculated, increased 6.3 percent in the first quarter of 2011, due to a 3.2 percent increase in policies in force and modest increases in average premium. The year-over-year average premium per policy for all lines of business increased 2.1 percent at March 31, 2011, compared to a decrease of 1.3 percent at March 31, 2010.

The cost of management operations increased to $211 million in the first quarter 2011 from $192 million in the first quarter of 2010. First quarter 2011 commissions increased $9 million compared to the same period a year ago. First quarter 2011 non-commission expense increased $10 million compared to the first quarter of 2010. Of this amount, personnel costs increased $5 million while the remaining increase was due to a $5 million expense reduction recorded in the first quarter of 2010 for a favorable ruling related to an outstanding judgment against Indemnity.

Property and Casualty Insurance Operations

	Indemnity shareholder interest		Noncontrolling interest (Exchange)		Elimination of related party transactions		Erie Insurance Group
(dollars in millions)	1Q’11	1Q’10	1Q’11	1Q’10	1Q’11	1Q’10	1Q’11	1Q’10
Net premiums earned	$ -	$53	$1,014	$909	$ -	$ -	$1,014	$962
Losses and loss expenses	-	40	683	698	(1)	(1)	682	737
Policy acquisition and other underwriting expenses	-	15	282	250	(42)	(46)	240	219
Total losses and expenses	-	55	965	948	(43)	(47)	922	956
Income (loss) from property and casualty insurance operations before taxes	$ -	$(2)	$ 49	$ (39)	$ 43	$ 47	$ 92	$6
Combined ratio	-	104.3%	95.2%	104.3%

Prior to and through December 31, 2010, the underwriting results retained by Erie Insurance Company (“EIC”) and Erie Insurance Company of New York (“ENY”) accrued to the benefit of the Indemnity shareholder interest. Due to the sale of Indemnity’s property and casualty subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting results accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, beginning in the first quarter of 2011.

Life Insurance Operations

(dollars in millions)	Indemnity shareholder interest		Noncontrolling interest (Exchange)		Elimination of related party transactions		Erie Insurance Group
	1Q’11	1Q’10	1Q’11	1Q’10	1Q’11	1Q’10	1Q’11	1Q’10
Total revenue	$10	$9	$34	$34	$ -	$ -	$44	$43
Total benefits and expenses	7	7	24	26	-	(1)	31	32
Income from life insurance operations before taxes	$ 3	$2	$10	$ 8	$ -	$ 1	$13	$ 11

The increase in total revenue in the first quarter of 2011 was driven by a modest increase in policy revenue and continued positive investment results compared to the first quarter of 2010.

Total benefits and expenses were primarily impacted by a decrease in the amortization of deferred policy acquisition costs in the first quarter of 2011, compared to the first quarter of 2010.

Investment Operations

	Indemnity shareholder interest		Noncontrolling interest (Exchange)		Elimination of related party transactions		Erie Insurance Group
(dollars in millions)	1Q’11	1Q’10	1Q’11	1Q’10	1Q’11	1Q’10	1Q’11	1Q’10
Net investment income	$4	$9	$ 81	$ 75	$(3)	$(3)	$ 82	$ 81
Net realized gains on investments	1	5	144	115	-	-	145	120
Net impairment losses recognized in earnings	0	0	0	(2)	-	-	0	(2)
Equity in earnings of limited partnerships	11	0	61	4	-	-	72	4
Income from investment operations before taxes	$16	$14	$286	$192	$(3)	$(3)	$299	$203

Net investment income, which primarily includes interest and dividends on bonds and stocks, decreased $5 million in the first quarter of 2011. The first quarter of 2010 includes $6 million of net investment income from EIC, ENY and Erie Property & Casualty Company which were sold to the Exchange on December 31, 2010.

Net realized gains on investments decreased $4 million in the first quarter of 2011 due to lower common stock valuation adjustments and lower realized gains on the sale of bonds compared to the first quarter of 2010.

Equity in earnings of limited partnerships increased $11 million in the first quarter of 2011 driven by increases in fair value in our private equity, mezzanine debt, and real estate limited partnerships compared to the first quarter of 2010.

In the first four months of 2011, we repurchased 0.7 million shares of our outstanding Class A nonvoting common stock at a total cost of $45 million in conjunction with our current stock repurchase plan. In December 2010, our Board of Directors approved a continuation of the current stock repurchase program for a total of $150 million. As of April 30, 2011, we had approximately $100 million in repurchase authority remaining under the program.

Sale of EFL Stock to Erie Insurance Exchange

The sale of Indemnity’s 21.6% ownership interest in EFL to the Exchange was completed on March 31, 2011, at which time Indemnity received cash consideration from the Exchange based upon an estimated purchase price of $82 million. Final settlement of the transaction was made on April 25, 2011, for a final purchase price of $82 million. Net after-tax cash proceeds to Indemnity from the sale are estimated to be $58 million. There was no gain or loss resulting from this sale as Indemnity and the Exchange are deemed to be under common control.

According to A.M. Best Company, Erie Insurance Group, based in Erie, Pennsylvania, is the 13th largest automobile and homeowners insurer in the United States based on direct premiums written and the 19th 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 over 4.3 million policies in force and operates in 11 states and the District of Columbia. Erie Insurance Group ranks 461 on the FORTUNE 500.

Erie Insurance is proud to be named a J.D. Power and Associates’ 2011 Customer Service Champion and is only one of 40 companies so named in the U.S. Erie Insurance has also been recognized on the list of Ward's 50 Group of top performing insurance companies. The Ward's 50 award analyzes the financial performance of 3,000 property and casualty companies and nearly 800 life and health insurance companies and recognizes the top performers for achieving outstanding financial results in safety and consistency over a five-year period (2005-2010).

News releases and more information about Erie Insurance Group are available at www.erieinsurance.com.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995:

Statements contained herein that are not historical fact are forward-looking statements and, as such, are subject to risks and uncertainties that could cause actual events and results to differ, perhaps materially, from those discussed herein. Forward-looking statements relate to future trends, events or results and include, without limitation, statements and assumptions on which such statements are based that are related to our plans, strategies, objectives, expectations, intentions and adequacy of resources. Examples of forward-looking statements are discussions relating to premium and investment income, expenses, operating results, agency relationships, and compliance with contractual and regulatory requirements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Among the risks and uncertainties, in addition to those set forth in our filings with the Securities and Exchange Commission, that could cause actual results and future events to differ from those set forth or contemplated in the forward-looking statements include the following:

Risk factors related to the Indemnity shareholder interest:

dependence on Indemnity’s relationship with the Exchange and the management fee under the agreement with the subscribers at the Exchange;
costs of providing services to the Exchange under the subscriber’s agreement;
ability to attract and retain talented management and employees;
ability to maintain the uninterrupted operations of our business, including our information technology system;
factors affecting the quality and liquidity of our investment portfolio;
credit risk from the Exchange;
ability to meet liquidity needs and access capital; and
outcome of pending and potential litigations against us.

Risk factors related to the non-controlling interest owned by the Exchange, which includes the Property and Casualty Group and EFL:

general business and economic conditions;
dependence on the independent agency system;
ability to maintain our reputation for superior customer service;
factors affecting price competition;
government regulation of the insurance industry, including approval of rate increases and rating factors such as credit and prior experience, and required processes related to underwriting and claims handling;
the uncertain role of the Federal Government, and the ongoing role of the States, in regulating the property/casualty or life insurance industries;
premium rates and reserves must be established from forecasts of ultimate costs;
emerging claims, coverage issues in the industry, and changes in reserve estimates related to the property and casualty business;
changes in reserve estimates related to the life business;
severe weather conditions or other catastrophic losses, including terrorism
ability to acquire reinsurance coverage and collectability from reinsurers;
factors affecting the quality and liquidity of our investment portfolio;
ability to meet liquidity needs and access capital;
ability to maintain acceptable financial strength rating;
outcome of pending and potential litigations against us; and
dependency on service provided by Indemnity.

A forward-looking statement speaks only as of the date on which it is made and reflects Indemnity’s analysis only as of that date. Indemnity undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changes in assumptions, or otherwise.

Erie Indemnity Company
Consolidated Statements of Operations (Unaudited)
(in millions, except per share data)

	Three months ended
	March 31,
	2011	2010
Revenues
Premiums earned	$ 1,030	$ 978
Net investment income	105	104
Net realized investment gains	149	125
Net impairment losses recognized in earnings	0	(2)
Equity in earnings of limited partnerships	72	3
Other income	9	8
Total revenues	1,365	1,216

Benefits and expenses
Insurance losses and loss expenses	706	761
Policy acquisition and underwriting expenses	247	227
Total benefits and expenses	953	988

Income from operations before income taxes
and noncontrolling interest	412	228
Provision for income taxes	138	66
Net income	274	162

Less: Net income attributable to noncontrolling
interest in consolidated entity - Exchange	230	115

Net income attributable to Indemnity	$ 44	$ 47



Earnings Per Share
Net income attributable to Indemnity per share
Class A common stock - basic	$0.88	$0.92
Class A common stock - diluted	$0.78	$0.82
Class B common stock - basic and diluted	$126.48	$132.83

Weighted average shares outstanding attributable to
Indemnity - Basic
Class A common stock	49,789,056	51,185,736
Class B common stock	2,546	2,546

Weighted average shares outstanding attributable to
Indemnity - Diluted
Class A common stock	55,968,838	57,357,543
Class B common stock	2,546	2,546

Dividends declared per share
Class A common stock	$0.515	$0.48
Class B common stock	$77.25	$72.00

Erie Indemnity Company
Results of the Erie Insurance Group's operations by interest (Unaudited)
(in millions)
	Indemnity shareholder interest				Noncontrolling interest (Exchange)		Eliminations of related party transactions		Erie Insurance Group
		Three months ended			Three months ended		Three months ended		Three months ended
		March 31,			March 31,		March 31,		March 31,
	Percent	2011	2010	Percent	2011	2010	2011	2010	2011	2010

Management operations:
Management fee revenue, net	100.0%	$ 251	$ 237		$ -	$ -	$ (251)	$ (237)	$ -	$ -
Service agreement revenue	100.0%	8	8		-	-	-	-	8	8
Total revenue from management operations		259	245		-	-	(251)	(237)	8	8
Cost of management operations	100.0%	211	192		-	-	(211)	(192)	-	-
*Income from management operations before taxes*		48	53		-	-	(40)	(45)	8	8
Property and casualty insurance operations: (2)
Net premiums earned	5.5%(2)	-	53	94.5%(2)	1,014	909	-	-	1,014	962
Losses and loss expenses	5.5%(2)	-	40	94.5%(2)	683	698	(1)	(1)	682	737
Policy acquisition and other underwriting expenses	5.5%(2)	-	15	94.5%(2)	282	250	(42)	(46)	240	219
*Income (loss) from property and casualty*		-	(2)		49	(39)	43	47	92	6
*insurance operations before taxes*
Life insurance operations: (1)
Total revenue	21.6%(3)	10	9	78.4%(3)	34	34	0	0	44	43
Total benefits and expenses	21.6%(3)	7	7	78.4%(3)	24	26	0	(1)	31	32
*Income from life insurance operations before taxes*		3	2		10	8	0	1	13	11
Investment operations:
Net investment income (2)		4	9		81	75	(3)	(3)	82	81
Net realized gains on investments (2)		1	5		144	115	-	-	145	120
Net impairment losses recognized in earnings (2)		0	0		0	(2)	-	-	0	(2)
Equity in earnings of limited partnerships		11	0		61	4	-	-	72	4
*Income from investment operations before taxes (2)*		16	14		286	192	(3)	(3)	299	203
Income from operations before income taxes
and noncontrolling interest		67	67		345	161	-	-	412	228
Provision for income taxes		23	20		115	46	-	-	138	66
Net income		$ 44	$ 47		$ 230	$ 115	$ -	$ -	$ 274	$ 162


(1) Earnings on life insurance related invested assets are integral to the evaluation of the life insurance operations because of the long duration of life products. On that basis, for presentation purposes, the life insurance operations in the table above include life insurance related investment results.

(2) Prior to and through December 31, 2010, the underwriting results retained by EIC and ENY and the investment results of EIC, ENY and EPC accrued to the benefit of the Indemnity shareholder interest. Due to the sale of Indemnity’s property and casualty subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting results and all investment results for these companies accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after December 31, 2010.

(3) Prior to and through March 31, 2011, Indemnity retained a 21.6% ownership interest in EFL, which accrued to the benefit of the Indemnity shareholder interest, and the Exchange retained a 78.4% ownership interest in EFL, which accrued to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest. Due to the sale of Indemnity's 21.6% ownership interest in EFL to the Exchange on March 31, 2011, 100% of the life insurance results of EFL will accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after March 31, 2011.

Erie Indemnity Company
Reconciliation of Operating Income to Net Income (Unaudited)

We believe that an investor's understanding of our performance related to the Indemnity shareholder interest is enhanced by the disclosure of operating income, a non-GAAP financial measure. Our method of calculating this measure may differ from those used by other companies, and therefore comparability may be limited.
Indemnity defines operating income as income generated form management operations, life insurance operations (1), property and casualty insurance underwriting operations (2), net investment income (2), and equity in earnings or losses of limited partnerships, net of related federal income taxes. It does not include realized capital gains and losses, impairment losses and related federal income taxes.
Indemnity uses operating income to evaluate the results of its operations. It reveals trends 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 which are not related to our ongoing operations. 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 prepared in accordance with U.S. GAAP and does not reflect Indemnity's overall profitability.


The following table reconciles operating income and net income for the Indemnity shareholder interest: (1) (2)

	Indemnity
	Shareholder interest
	Three months ended
(in millions, except per share data)	March 31,
	2011	2010

Operating income attributable to Indemnity	$43	$44
Net realized gains and impairments on investments	1	5
Income tax expense	0	(2)
Realized gains and impairments, net of income taxes	1	3
Net income attributable to Indemnity	$44	$47


Per Indemnity Class A common share - diluted:
Operating income attributable to Indemnity	$0.77	$0.77
Net realized gains and impairments on investments	0.02	0.09
Income tax expense	(0.01)	(0.04)
Realized gains and impairments, net of income taxes	0.01	0.05
Net income attributable to Indemnity	$0.78	$0.82

(1) Prior to and through March 31, 2011, Indemnity retained a 21.6% ownership interest in EFL, which accrued to the benefit of the Indemnity shareholder interest, and the Exchange retained a 78.4% ownership interest in EFL, which accrued to the benefit of the subscribers (policyholders) of the Exchange or noncontrolling interest. Due to the sale of Indemnity's 21.6% ownership interest in EFL to the Exchange on March 31, 2011, 100% of the life insurance results of EFL will accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after March 31, 2011.
(2) Prior to and through December 31, 2010, the underwriting results retained by EIC and ENY and the investment results of EIC, ENY and EPC accrued to the benefit of the Indemnity shareholder interest. Due to the sale of Indemnity's property and casualty subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting results and all investment results for these companies accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest after December 31, 2010.

Erie Indemnity Company
Consolidated Statements of Financial Position
(in millions)

	March 31,	December 31,
	2011	2010
	(Unaudited)
Assets
Investments-Indemnity
Available-for-sale securities, at fair value:
Fixed maturities	$ 513	$ 264
Equity securities	22	24
Trading securities, at fair value	29	28
Limited partnerships	222	216
Other invested assets	1	1
Investments-Exchange
Available-for-sale securities, at fair value:
Fixed maturities	7,254	7,279
Equity securities	603	570
Trading securities, at fair value	2,462	2,306
Limited partnerships	1,153	1,108
Other invested assets	18	19
Total investments	12,277	11,815

Cash and cash equivalents (Exchange portion of $125 and $120, respectively)	211	430
Premiums receivable from policyholders (Exchange portion of $959 and $942, respectively)	959	942
Reinsurance recoverable (Exchange portion of $199 and $201, respectively)	199	201
Deferred acquisition costs (Exchange portion of $469 and $467, respectively)	469	467
Other assets (Exchange portion of $332 and $357, respectively)	438	489
Total assets	$ 14,553	$ 14,344

Liabilities and shareholders' equity
Liabilities
Indemnity liabilities
Deferred income taxes	$ 14	$ 26
Other liabilities	344	382
Exchange liabilities
Losses and loss expense reserves	3,559	3,584
Life policy and deposit contract reserves	1,615	1,603
Unearned premiums	2,093	2,082
Deferred income taxes	309	257
Other liabilities	68	76
Total liabilities	8,002	8,010

Indemnity's shareholders' equity	893	912

Noncontrolling interest in consolidated entity – Exchange	5,658	5,422
Total equity	6,551	6,334
Total liabilities, shareholders' equity and noncontrolling interest	$ 14,553	$ 14,344