Erie Indemnity Reports First Quarter 2015 Results

Net Income per Diluted Share is $0.74

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Apr 30, 2015, 04:15 ET

ERIE, Pa., April 30, 2015 /PRNewswire/ -- Erie Indemnity Company (NASDAQ: ERIE) today announced financial results for the quarter ending March 31, 2015. Net income per diluted share in the first quarter of 2015 was $0.74 compared to $0.88 in the first quarter of 2014.

"As we celebrate our 90^th anniversary, we are proud of surpassing 5 million policies in force in the first quarter of 2015", said Terry Cavanaugh, president and chief executive officer. "We remain committed to helping and rewarding agents for profitable growth and making it easier to do business with ERIE."

1Q 2015 - Results of Indemnity Shareholder Interest
(dollars in millions)	1Q'14		1Q'15
Management operations	$58		$53
Investment operations	11		6
Income before income taxes	69		59
Provision for income taxes	23		20
Net income	$46		$39
Gross margin from management operations	17.9	%	14.9	%

1Q 2015 Highlights

Management Operations

Income from management operations before taxes decreased $5 million, or 10.3 percent, in the first quarter of 2015 compared to the first quarter of 2014.

Revenue from management operations increased $25 million, or 7.5 percent, in the first quarter of 2015 compared to the first quarter of 2014.
Commissions increased $20 million in the first quarter of 2015, compared to the same period in 2014. The majority of the increase was driven by the 7.7% increase in direct written premiums of the Property and Casualty Group, while about one-third of the increase was due to an increase in agent incentive costs related to profitable growth, compared to the prior year quarter. The estimated agent incentive payout, at the end of each quarter, is based on actual underwriting results for the two prior years and the current year-to-date period. Therefore, fluctuations in the current quarter underwriting results can impact the estimated incentive payout on a quarter-to-quarter basis.
Non-commission expense increased $10 million in the first quarter of 2015, compared to the first quarter of 2014. Information technology costs increased $5 million while administrative and other expenses increased $4 million.
The gross margin in the first quarter of 2015 was 14.9%, compared to 17.9% in the first quarter of 2014. The majority of the 3.0 point decrease in gross margin was driven by the increased estimated agent incentive payout discussed above. The remaining decrease in gross margin was the result of increased information technology and administrative and other costs.

Investment Operations

Income from investment operations before taxes totaled $6 million in the first quarter of 2015, compared to $11 million in the first quarter of 2014. Earnings from limited partnerships were $2 million in the first quarter of 2015 compared to earnings of $6 million in the first quarter of 2014.

Webcast Information

Indemnity has scheduled a conference call and live audio broadcast on the Web for 10:00 AM ET on May 1, 2015. Investors may access the live audio broadcast by logging on to www.erieinsurance.com. Indemnity recommends visiting the website at least 15 minutes prior to the Webcast to download and install any necessary software. A Webcast audio replay will be available on the Investor Relations page of the Erie Insurance Group's website by 12:30 PM ET.

About the Erie Insurance Group

According to A.M. Best Company, Erie Insurance Group, based in Erie, Pennsylvania, is the 11^th largest homeowners insurer and 12^th largest automobile insurer in the United States based on direct premiums written and the 16^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 5 million policies in force and operates in 12 states and the District of Columbia. Erie Insurance Group is a FORTUNE 500 and Barron's 500 company. ERIE has been recognized by Forbes as one of America's 50 Most Trustworthy Financial Companies and is 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 (2009-2013).

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 Erie Indemnity Company ("Indemnity") shareholder interest:

dependence upon 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;
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.

Risk factors related to the non-controlling interest owned by the Erie Insurance Exchange ("Exchange"), which includes the Property and Casualty Group and Erie Family Life Insurance Company:

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 and pandemic events;
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 ratings;
outcome of pending and potential litigation; 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 our analysis only as of that date. We undertake 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,
	2015		2014
Revenues	(Unaudited)
Premiums earned	$	1,402	$	1,288
Net investment income	113		109
Net realized investment gains	56		56
Net impairment losses recognized in earnings	(2)		0
Equity in earnings of limited partnerships	28		50
Other income	8		8
Total revenues	1,605		1,511
Benefits and expenses
Insurance losses and loss expenses	1,060		1,034
Policy acquisition and underwriting expenses	348		321
Total benefits and expenses	1,408		1,355

Income from operations before income taxes and noncontrolling interest	197		156
Provision for income taxes	61		47
Net income	$	136	$	109

Less: Net income attributable to noncontrolling interest in consolidated entity – Exchange	97		63

Net income attributable to Indemnity	$	39	$	46


Earnings Per Share
Net income attributable to Indemnity per share
Class A common stock – basic	$	0.83	$	0.99
Class A common stock – diluted	$	0.74	$	0.88
Class B common stock – basic and diluted	$	125	$	149

Weighted average shares outstanding attributable to Indemnity – Basic
Class A common stock	46,189,068		46,402,270
Class B common stock	2,542		2,542

Weighted average shares outstanding attributable to Indemnity – Diluted
Class A common stock	52,634,752		52,598,211
Class B common stock	2,542		2,542

Dividends declared per share
Class A common stock	$	0.6810	$	0.6350
Class B common stock	$	102.1500	$	95.2500

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,
	2015		2014		2015		2014		2015		2014		2015		2014
Management operations:
Management fee revenue, net	$	343	$	319	$	—	$	—	$	(343)	$	(319)	$	—	$	—
Service agreement revenue	8		7		—		—		—		—		8		7
Total revenue from management operations	351		326		—		—		(343)		(319)		8		7
Cost of management operations	298		268		—		—		(298)		(268)		—		—
*Income from management operations before taxes*	53		58		—		—		(45)		(51)		8		7
Property and casualty insurance operations:
Net premiums earned	—		—		1,380		1,268		—		—		1,380		1,268
Losses and loss expenses	—		—		1,033		1,007		(1)		(1)		1,032		1,006
Policy acquisition and underwriting expenses	—		—		386		365		(47)		(53)		339		312
(Loss) income from property and casualty insurance operations before taxes	—		—		(39)		(104)		48		54		9		(50)
Life insurance operations: ⁽¹⁾
Total revenue	—		—		47		50		0		0		47		50
Total benefits and expenses	—		—		37		37		0		0		37		37
*Income from life insurance operations before taxes*	—		—		10		13		0		0		10		13
Investment operations: ⁽¹⁾
Net investment income	4		4		88		84		(3)		(3)		89		85
Net realized gains on investments	0		1		56		50		—		—		56		51
Net impairment losses recognized in earnings	0		0		(2)		0		—		—		(2)		0
Equity in earnings of limited partnerships	2		6		25		44		—		—		27		50
*Income from investment operations before taxes*	6		11		167		178		(3)		(3)		170		186
Income from operations before income taxes and noncontrolling interest	59		69		138		87		—		—		197		156
Provision for income taxes	20		23		41		24		—		—		61		47
Net income	$	39	$	46	$	97	$	63	$	—	$	—	$	136	$	109

(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)	2015		2014
	(Unaudited)
Operating income attributable to Indemnity	$	39	$	45
Net realized gains and impairments on investments	0		1
Income tax expense	0		0
Realized gains and impairments, net of income taxes	0		1
Net income attributable to Indemnity	$	39	$	46

Per Indemnity Class A common share-diluted:
Operating income attributable to Indemnity	$	0.74	$	0.87
Net realized gains and impairments on investments	0.00		0.02
Income tax expense	0.00		(0.01)
Realized gains and impairments, net of income taxes	0.00		0.01
Net income attributable to Indemnity	$	0.74	$	0.88

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

	March 31, 2015		December 31, 2014
	(Unaudited)
Assets
Investments – Indemnity
Available-for-sale securities, at fair value:
Fixed maturities	$	556	$	564
Equity securities	25		25
Limited partnerships	100		113
Other invested assets	1		1
Investments – Exchange
Available-for-sale securities, at fair value:
Fixed maturities	9,499		9,007
Equity securities	837		850
Trading securities, at fair value	3,096		3,223
Limited partnerships	815		866
Other invested assets	21		20
Total investments	14,950		14,669

Cash and cash equivalents (Exchange portion of $362 and $422, respectively)	420		514
Premiums receivable from policyholders – Exchange	1,304		1,281
Reinsurance recoverable – Exchange	162		161
Deferred income taxes – Indemnity	40		37
Deferred acquisition costs – Exchange	589		595
Other assets (Exchange portion of $403 and $374, respectively)	528		501
Total assets	$	17,993	$	17,758

Liabilities and shareholders' equity
Liabilities
Indemnity liabilities
Other liabilities	$	552	$	611
Exchange liabilities
Losses and loss expense reserves	3,966		3,853
Life policy and deposit contract reserves	1,827		1,812
Unearned premiums	2,845		2,834
Deferred income taxes	494		490
Other liabilities	172		175
Total liabilities	9,856		9,775

Indemnity's shareholders' equity	710		703

Noncontrolling interest in consolidated entity – Exchange	7,427		7,280
Total equity	8,137		7,983
Total liabilities, shareholders' equity and noncontrolling interest	$	17,993	$	17,758