Erie Indemnity Reports First Quarter 2013 Results

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Erie Indemnity Company

Apr 29, 2013, 04:15 ET

ERIE, Pa., April 29, 2013 /PRNewswire-FirstCall/ --

1Q 2013 Highlights - Indemnity Shareholder Interest

Net income attributable to Indemnity per share-diluted was $0.69 per share in the first quarter of 2013, compared to net income per share-diluted of $0.67 per share in the first quarter of 2012.

Operating income attributable to Indemnity per share-diluted (excluding net realized gains or losses, impairments on investments and related taxes) was $0.69 per share in the first quarter of 2013, compared to operating income per share-diluted of $0.64 per share in the first quarter of 2012.

Indemnity's management operations pretax income totaled $49 million in the first quarter of 2013, compared to $46 million in the first quarter of 2012. The gross margin from management operations was 16.1 percent in the first quarter of 2013, compared to 16.8 percent in the first quarter of 2012.

Indemnity's investment operations pretax income totaled $7 million for the first quarter of 2013, compared to $8 million for the first quarter of 2012.

Erie Indemnity Company (NASDAQ: ERIE) today announced first quarter 2013 earnings of $37 million, compared to earnings of $36 million in the first quarter of 2012. Operating income was $37 million in the first quarter of 2013, compared to operating income of $34 million in the first quarter of 2012.

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

1Q 2013 Highlights
Results of the Erie Insurance Group's Operations⁽¹⁾

	Indemnity shareholder interest				Noncontrolling interest (Exchange)				Elimination of related party transactions				Erie Insurance Group
(dollars in millions)	1Q'13		1Q'12		1Q'13		1Q'12		1Q'13		1Q'12		1Q'13		1Q'12
Management operations	$	49	$	46	$	—	$	—	$	(42)	$	(39)	$	7	$	7
Property and casualty insurance operations⁽²⁾	—		—		11		75		45		42		56		117
Life insurance operations⁽²⁾	—		—		11		9		0		0		11		9
Investment operations	7		8		358		396		(3)		(3)		362		401
Income from operations before income taxes and noncontrolling interest	56		54		380		480		—		—		436		534
Provision for income taxes	19		18		127		162		—		—		146		180
Net income	$	37	$	36	$	253	$	318	$	—	$	—	$	290	$	354

(1)	The 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 interest of the subscribers (policyholders), and includes its interest in its property and casualty subsidiaries and Erie Family Life Insurance Company ("EFL").

(2)	All property and casualty and life insurance results accrue to the interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest.

The following tables and discussion show the operating results attributable to the Indemnity shareholder interest in the Erie Indemnity Company owned by the Class A and Class B shareholders for the first quarter of 2013.

Management Operations

	Indemnity shareholder interest
(dollars in millions)	1Q'13			1Q'12
Management fee revenue, net	$	296		$	269
Service agreement revenue	7			7
Total revenue from management operations	$	303		$	276
Cost of management operations	254			230
Income from management operations before taxes	$	49		$	46
Gross margin	16.1		%	16.8		%

The management fee rate was 25 percent for both the first quarters of 2013 and 2012. Direct written premium of the property and casualty insurance operations, upon which the management fee is calculated, increased 10.1 percent in the first quarter of 2013, due to a 4.3 percent increase in policies in force and a 4.7 percent increase in the year-over-year average premium per policy for all lines of business at March 31, 2013.

Commissions increased $15 million in the first quarter of 2013, compared to the first quarter of 2012, primarily as a result of the 10.1 percent increase in direct written premium of the property and casualty insurance operations.

Non-commission expense increased $9 million in the first quarter of 2013, compared to the first quarter of 2012. Sales, policy issuance, advertising, and underwriting costs increased $2 million. Personnel costs increased $5 million as a result of a $1 million increase in salaries, a $2 million increase in pension and medical costs, and a $2 million increase in the estimate for incentive plan compensation related to growth and underwriting performance. All other operating costs increased $2 million, which included a $1 million increase related to professional fees.

Investment Operations

	Indemnity shareholder interest
(dollars in millions)	1Q'13		1Q'12
Net investment income	$	4	$	4
Net realized gains on investments	0		3
Net impairment losses recognized in earnings	0		0
Equity in earnings of limited partnerships	3		1
Income from investment operations before taxes	$	7	$	8

Income from investment operations before taxes decreased to $7 million in the first quarter of 2013, from $8 million in the first quarter of 2012, due to a $3 million decrease in net realized gains on investments, offset by a $2 million increase in equity in earnings of limited partnerships.

Share Repurchase Program

In the first quarter of 2013, we repurchased 189,563 shares of our outstanding Class A nonvoting common stock at a total cost of $14 million, based upon trade date, in conjunction with our current stock repurchase program. For the year through April 19, 2013, we repurchased 195,673 shares under this program at a total cost of $14 million. In October 2011, our Board of Directors approved a continuation of the current stock repurchase program for a total of $150 million, with no time limitation. This repurchase authority included, and was not in addition to, any unspent amounts remaining under the prior authorization. As of April 19, 2013, we had approximately $54 million in repurchase authority remaining under the program.

According to A.M. Best Company, Erie Insurance Group, based in Erie, Pennsylvania, is the 15^th largest homeowners insurer and 12^th largest automobile insurer in the United States based on direct premiums written and the 20^th 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 more than 4.6 million policies in force and operates in 11 states and the District of Columbia. Erie Insurance Group is a FORTUNE 500 company. Erie Insurance is proud to be named a J.D. Power and Associates' 2012 Customer Service Champion. ERIE is one of only 50 U.S. companies so named. Erie Insurance is also recognized on the list of Ward's 50 Group of top performing insurance companies, which analyzes the financial performance of 3,000 property and casualty companies and recognizes the top performers for achieving outstanding results in safety, consistency and financial performance over a five-year period (2007-2011).

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 uninterrupted business operations, including information technology systems;
factors affecting the quality and liquidity of Indemnity's investment portfolio;
credit risk from the Exchange;
Indemnity's ability to meet liquidity needs and access capital; and
outcome of pending and potential litigation against Indemnity.

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 upon the independent agency system;
ability to maintain our reputation for customer service;
factors affecting insurance industry competition;
changes in government regulation of the insurance industry;
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;
the Exchange's ability to acquire reinsurance coverage and collectability from reinsurers;
factors affecting the quality and liquidity of the Exchange's investment portfolio;
the Exchange's ability to meet liquidity needs and access capital;
the Exchange's ability to maintain acceptable financial strength rating;
outcome of pending and potential litigation against the Exchange; and
dependence upon the 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
(dollars in millions, except per share data)

	Three months ended March 31,
	2013		2012
Revenues	(Unaudited)
Premiums earned	$	1,175	$	1,087
Net investment income	103		108
Net realized investment gains	249		296
Net impairment losses recognized in earnings	0		0
Equity in earnings of limited partnerships	36		21
Other income	8		8
Total revenues	1,571		1,520
Benefits and expenses
Insurance losses and loss expenses	842		716
Policy acquisition and underwriting expenses	293		270
Total benefits and expenses	1,135		986
Income from operations before income taxes and noncontrolling interest	436		534
Provision for income taxes	146		180
Net income	290		354

Less: Net income attributable to noncontrolling interest in consolidated entity – Exchange	253		318
Net income attributable to Indemnity	$	37	$	36

Earnings Per Share
Net income attributable to Indemnity per share
Class A common stock – basic	$	0.78	$	0.76
Class A common stock – diluted	$	0.69	$	0.67
Class B common stock – basic and diluted	$	117	$	114

Weighted average shares outstanding attributable to Indemnity – Basic
Class A common stock	46,774,968		47,749,799
Class B common stock	2,542		2,545

Weighted average shares outstanding attributable to Indemnity – Diluted
Class A common stock	52,960,165		53,930,044
Class B common stock	2,542		2,545

Dividends declared per share
Class A common stock	$	0.5925	$	0.5525
Class B common stock	$	88.8750	$	82.8750

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 March 31,					Three months ended March 31,				Three months ended March 31,				Three months ended March 31,
	Percent	2013		2012		Percent	2013		2012		2013		2012		2013		2012
Management operations:
Management fee revenue, net	100%	$	296	$	269		$	—	$	—	$	(296)	$	(269)	$	—	$	—
Service agreement revenue	100%	7		7			—		—		—		—		7		7
Total revenue from management operations		303		276			—		—		(296)		(269)		7		7
Cost of management operations	100%	254		230			—		—		(254)		(230)		—		—
*Income from management operations* *before taxes*		49		46			—		—		(42)		(39)		7		7
Property and casualty insurance operations:
Net premiums earned		—		—		100%	1,156		1,069		—		—		1,156		1,069
Losses and loss expenses		—		—		100%	817		692		(1)		(1)		816		691
Policy acquisition and underwriting expenses		—		—		100%	328		302		(44)		(41)		284		261
*Income from property and casualty* *insurance* *operations before taxes*		—		—			11		75		45		42		56		117
Life insurance operations: ⁽¹⁾
Total revenue		—		—		100%	46		43		0		0		46		43
Total benefits and expenses		—		—		100%	35		34		0		0		35		34
*Income from life insurance* *operations* *before taxes*		—		—			11		9		0		0		11		9
Investment operations:
Net investment income		4		4			79		83		(3)		(3)		80		84
Net realized gains on investments		0		3			246		293		—		—		246		296
Net impairment losses recognized in earnings		0		0			0		0		—		—		0		0
Equity in earnings of limited partnerships		3		1			33		20		—		—		36		21
*Income from investment operations* *before taxes*		7		8			358		396		(3)		(3)		362		401
Income from operations before income taxes and noncontrolling interest		56		54			380		480		—		—		436		534
Provision for income taxes		19		18			127		162		—		—		146		180
Net income		$	37	$	36		$	253	$	318	$	—	$	—	$	290	$	354

(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.

Erie Indemnity Company
Reconciliation of Operating Income to Net Income

Reconciliation of operating income to net income

We disclose operating income, a non-GAAP financial measure, to enhance our investors' understanding of our performance related to the Indemnity shareholder interest. 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 net income excluding 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 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. generally accepted accounting principles ("GAAP") and does not reflect Indemnity's overall profitability.

The following table reconciles operating income and net income for the Indemnity shareholder interest:

		Indemnity Shareholder Interest
		Three months ended March 31,
(in millions, except per share data)		2013		2012
		(Unaudited)
Operating income attributable to Indemnity	$	37	$	34
Net realized gains and impairments on investments		0		3
Income tax expense		0		(1)
Realized gains and impairments, net of income taxes		0		2
Net income attributable to Indemnity	$	37	$	36

Per Indemnity Class A common share-diluted:
Operating income attributable to Indemnity	$	0.69	$	0.64
Net realized gains and impairments on investments		0.00		0.05
Income tax expense		0.00		(0.02)
Realized gains and impairments, net of income taxes		0.00		0.03
Net income attributable to Indemnity	$	0.69	$	0.67

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

	March 31, 2013		December 31, 2012
	(Unaudited)
Assets
Investments – Indemnity
Available-for-sale securities, at fair value:
Fixed maturities	$	421	$	452
Equity securities	49		55
Limited partnerships	167		180
Other invested assets	1		1
Investments – Exchange
Available-for-sale securities, at fair value:
Fixed maturities	7,891		7,707
Equity securities	943		945
Trading securities, at fair value	2,662		2,417
Limited partnerships	1,004		1,037
Other invested assets	20		20
Total investments	13,158		12,814

Cash and cash equivalents (Exchange portion of $347 and $388, respectively)	388		400
Premiums receivable from policyholders – Exchange	1,113		1,062
Reinsurance recoverable – Exchange	169		168
Deferred income taxes – Indemnity	39		37
Deferred acquisition costs – Exchange	510		504
Other assets (Exchange portion of $299 and $339, respectively)	414		456
Total assets	$	15,791	$	15,441

Liabilities and shareholders' equity
Liabilities
Indemnity liabilities
Other liabilities	$	506	$	515
Exchange liabilities
Losses and loss expense reserves	3,628		3,598
Life policy and deposit contract reserves	1,726		1,708
Unearned premiums	2,399		2,365
Deferred income taxes	410		365
Other liabilities	105		99
Total liabilities	8,774		8,650

Indemnity's shareholders' equity	636		642

Noncontrolling interest in consolidated entity – Exchange	6,381		6,149
Total equity	7,017		6,791
Total liabilities, shareholders' equity and noncontrolling interest	$	15,791	$	15,441