Erie Indemnity Reports Full Year and Fourth Quarter 2016 Results

Net Income per Diluted Share Up 20.6 percent for the Full Year

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Feb 23, 2017, 15:10 ET

ERIE, Pa., Feb. 23, 2017 /PRNewswire/ -- Erie Indemnity Company (NASDAQ: ERIE) today announced financial results for the full year and quarter ending December 31, 2016. Net income was $210.4 million, or $4.01 per diluted share, for the full year 2016, compared to $174.7 million, or $3.33 per diluted share, in 2015. Net income was $45.8 million, or $0.87 per diluted share, in the fourth quarter of 2016, compared to $30.1 million, or $0.57 per diluted share, in the fourth quarter of 2015. The growth in 2016 for the fourth quarter and full year was driven by increased net revenue from operations as revenue growth outpaced the growth in expenses.

"We continue to grow profitably," said Tim NeCastro, President and CEO. "The dedicated work of our Agents and Employees has once again enabled us to beat the industry forecast for 2016 and as we embark upon 2017, we are well positioned for continued long-term growth and value creation."

4Q and Total Year 2016
(dollars in thousands)	4Q'15			4Q'16			2015			2016
Net revenue from operations	$	41,839		$	56,685		$	232,541		$	292,364
Investment income, net of interest expense	4,244			13,438			33,708			27,727
Income before income taxes	46,083			70,123			266,249			320,091
Income tax expense	15,950			24,337			91,571			109,725
Net income	$	30,133		$	45,786		$	174,678		$	210,366
Gross margin from operations	11.7		%	14.9		%	15.4		%	18.3		%

2016 Total Year Highlights

Net revenue from operations before taxes increased $59.8 million, or 25.7 percent, in 2016 compared to 2015.

Management fee revenue increased $91.9 million, or 6.2 percent, in 2016 compared to 2015.
Commissions increased $45.9 million in 2016 compared to 2015 as a result of the 6.2 percent increase in direct and assumed premiums written by the Exchange.
Non-commission expense decreased $14.6 million in 2016 compared to 2015. Information technology costs decreased $2.1 million primarily due to decreased personnel costs somewhat offset by an increase in professional fees. Customer service costs decreased $4.7 million primarily due to decreased credit card processing fees and personnel costs. Administrative and other costs decreased $7.8 million due to decreased personnel costs, including incentive compensation forfeited by senior executives who separated from service during 2016, somewhat offset by an increase in professional fees. Personnel costs in all expense categories were impacted by decreased pension costs primarily due to an increase in the pension discount rate as well as decreased medical costs.
The gross margin for 2016 was 18.3 percent, compared to 15.4 percent for 2015.

Income from investments before taxes totaled $27.8 million in 2016, compared to $33.7 million in 2015. Earnings from limited partnerships were $7.0 million in 2016 compared to earnings of $17.0 million in 2015.

4Q 2016 Highlights

Net revenue from operations before taxes increased $14.8 million, or 35.5 percent, in the fourth quarter of 2016 compared to the fourth quarter of 2015.

Management fee revenue increased $23.3 million, or 6.7 percent, in the fourth quarter of 2016 compared to the fourth quarter of 2015.
Commissions increased $10.1 million in the fourth quarter of 2016 compared to the fourth quarter of 2015 as a result of the 6.4 percent increase in direct and assumed premiums written by the Exchange.
Non-commission expense decreased $1.8 million in the fourth quarter of 2016 compared to the fourth quarter of 2015. Information technology costs increased $4.3 million primarily due to an increase in professional fees. Customer service costs decreased $1.8 million primarily due to decreased credit card processing fees and personnel costs. Administrative and other costs decreased $4.0 million due to decreased personnel costs, including incentive compensation forfeited by senior executives who separated from service during 2016, somewhat offset by an increase in professional fees. Personnel costs in all expense categories were impacted by decreased pension costs primarily due to an increase in the pension discount rate.
The gross margin in the fourth quarter of 2016 was 14.9 percent, compared to 11.7 percent in the fourth quarter of 2015.

Income from investments before taxes totaled $13.5 million in the fourth quarter of 2016, compared to $4.2 million in the fourth quarter of 2015. Earnings from limited partnerships were $7.3 million in the fourth quarter of 2016 compared to earnings of $0.1 million in the fourth quarter of 2015.

Webcast Information
Indemnity has scheduled a conference call and live audio broadcast on the Web for 10:00 AM ET on February 24, 2017. 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 website by 12:30 PM ET.

About Erie Insurance
According to A.M. Best Company, Erie Insurance Group, based in Erie, Pennsylvania, is the 10th largest homeowners insurer and 12th largest automobile insurer in the United States based on direct premiums written and the 15th 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 company.

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, 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:

dependence upon our 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 and investments in new technology and systems;
credit risk from the Exchange;
dependence upon our relationship with the Exchange and the growth of the Exchange, including:
- general business and economic conditions;
- factors affecting insurance industry competition;
- dependence upon the independent agency system; and
- ability to maintain our reputation for customer service;
dependence upon our relationship with the Exchange and the financial condition of the Exchange, including:
- the Exchange's ability to maintain acceptable financial strength ratings;
- factors affecting the quality and liquidity of the Exchange's investment portfolio;
- changes in government regulation of the insurance industry;
- emerging claims and coverage issues in the industry; and
- severe weather conditions or other catastrophic losses, including terrorism;
ability to attract and retain talented management and employees;
ability to maintain uninterrupted business operations and difficulties with technology or data security breaches, including cyber attacks;
factors affecting the quality and liquidity of our investment portfolio;
our ability to meet liquidity needs and access capital; and
outcome of pending and potential litigation.

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-F)

Erie Indemnity Company
Statements of Operations
(dollars in thousands, except per share data)

	Three months ended December 31,				Twelve months ended December 31,
	2016		2015		2016		2015
	(Unaudited)
Operating revenue
Management fee revenue, net	$	372,169	$	348,885	$	1,567,431	$	1,475,511
Service agreement revenue	7,444		7,495		29,200		29,997
Total operating revenue	379,613		356,380		1,596,631		1,505,508

Operating expenses
Commissions	216,837		206,691		893,800		847,880
Salaries and employee benefits	51,777		55,998		213,356		226,713
All other operating expenses	54,314		51,852		197,111		198,374
Total operating expenses	322,928		314,541		1,304,267		1,272,967
Net revenue from operations	56,685		41,839		292,364		232,541

Investment income
Net investment income	5,663		4,469		20,547		17,791
Net realized gains on investments	643		617		672		492
Net impairment losses recognized in earnings	(71)		(923)		(416)		(1,558)
Equity in earnings of limited partnerships	7,304		81		7,025		16,983
Total investment income	13,539		4,244		27,828		33,708
Interest expense, net	101		—		101		—
Income before income taxes	70,123		46,083		320,091		266,249
Income tax expense	24,337		15,950		109,725		91,571
Net income	$	45,786	$	30,133	$	210,366	$	174,678


Earnings Per Share
Net income per share
Class A common stock – basic	$	0.98	$	0.65	$	4.52	$	3.75
Class A common stock – diluted	$	0.87	$	0.57	$	4.01	$	3.33
Class B common stock – basic	$	147	$	97	$	678	$	563
Class B common stock – diluted	$	147	$	97	$	677	$	562

Weighted average shares outstanding – Basic
Class A common stock	46,188,895		46,179,559		46,188,952		46,186,671
Class B common stock	2,542		2,542		2,542		2,542

Weighted average shares outstanding – Diluted
Class A common stock	52,413,119		52,506,600		52,435,303		52,498,811
Class B common stock	2,542		2,542		2,542		2,542

Dividends declared per share
Class A common stock	$	0.7825	$	0.7300	$	2.9725	$	2.7730
Class B common stock	$	117.375	$	109.500	$	445.875	$	415.950

Erie Indemnity Company
Reconciliation of Net Income to Operating Income

Reconciliation of net income to operating income

We disclose operating income, a non-GAAP financial measure, to enhance our investors' understanding of our performance. Our method of calculating this measure may differ from those used by other companies, and therefore comparability may be limited.

We define operating income as net income excluding realized capital gains and losses, impairment losses, and related federal income taxes.

We use operating income to evaluate the results of our 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 our overall profitability.

The following table reconciles net income and operating income:

	Three months ended December 31,				Twelve months ended December 31,
(in thousands, except per share data)	2016		2015		2016		2015
	(Unaudited)
Net income	$	45,786	$	30,133	$	210,366	$	174,678
Net realized (gains) losses and impairments on investments	(572)		306		(256)		1,066
Income tax expense (benefit)	199		(107)		89		(373)
Realized (gains) losses and impairments, net of income taxes	(373)		199		(167)		693
Operating income	$	45,413	$	30,332	$	210,199	$	175,371

Per Class A common share-diluted:
Net income	$	0.87	$	0.57	$	4.01	$	3.33
Net realized (gains) losses and impairments on investments	0.00		0.01		0.00		0.02
Income tax expense (benefit)	0.00		0.00		0.00		(0.01)
Realized (gains) losses and impairments, net of income taxes	0.00		0.01		0.00		0.01
Operating income	$	0.87	$	0.58	$	4.01	$	3.34

Erie Indemnity Company
Statements of Financial Position
(in thousands)

	December 31, 2016		December 31, 2015
Assets
Current assets:
Cash and cash equivalents	$	189,072	$	182,889
Available-for-sale securities	56,138		62,067
Receivables from Erie Insurance Exchange and affiliates	378,540		348,055
Prepaid expenses and other current assets	30,169		24,697
Federal income taxes recoverable	5,260		11,947
Accrued investment income	6,337		5,491
Total current assets	665,516		635,146

Available-for-sale securities	657,153		537,874
Limited partnership investments	58,159		88,535
Fixed assets, net	69,142		59,087
Deferred income taxes, net	53,889		40,686
Note receivable from Erie Family Life Insurance Company	25,000		25,000
Other assets	20,096		20,968
Total assets	$	1,548,955	$	1,407,296

Liabilities and shareholders' equity
Current liabilities:
Commissions payable	$	210,559	$	195,542
Agent bonuses	114,772		106,752
Accounts payable and accrued liabilities	88,153		88,532
Dividends payable	36,441		33,996
Deferred executive compensation	19,675		20,877
Total current liabilities	469,600		445,699

Defined benefit pension plan	221,827		172,700
Employee benefit obligations	756		1,234
Deferred executive compensation	13,233		16,580
Long-term borrowings	24,766		—
Other long-term liabilities	1,863		1,580
Total liabilities	732,045		637,793

Shareholders' equity	816,910		769,503
Total liabilities and shareholders' equity	$	1,548,955	$	1,407,296