Erie Indemnity Reports Second Quarter 2015 Results

Earnings Up 14.5 percent, Net Income per Diluted Share Up 14.2 percent

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Jul 30, 2015, 04:15 ET

ERIE, Pa., July 30, 2015 /PRNewswire/ -- Erie Indemnity Company (NASDAQ: ERIE) today announced financial results for the quarter ending June 30, 2015. Net income attributable to Indemnity was $56 million, or $1.07 per diluted share, in the second quarter of 2015, compared to $49 million, or $0.94 per diluted share, in the second quarter of 2014. Net income attributable to Indemnity was $95 million, or $1.81 per diluted share, in the first six months of 2015, compared to $95 million, or $1.82 per diluted share, in the first six months of 2014. For the second quarter of 2015, the growth was driven primarily by increased revenue from investment operations.

"Erie Indemnity continues to benefit from the premium growth of the Exchange which is currently outpacing the industry by nearly double Conning's 3.8% forecast for 2015," said Terry Cavanaugh, President and CEO.

2Q and First Half 2015 - Results of Indemnity Shareholder Interest
(dollars in millions)	2Q'14		2Q'15		1H'14		1H'15
Management operations	$68		$70		$126		$123
Investment operations	7		16		18		22
Income before income taxes	75		86		144		145
Provision for income taxes	26		30		49		50
Net income	$49		$56		$95		$95
Gross margin from management operations	18.2	%	17.4	%	18.0	%	16.3	%

2Q 2015 Highlights

Management Operations

Income from management operations before taxes increased $2 million, or 3.0 percent, in the second quarter of 2015 compared to the second quarter of 2014.

Revenue from management operations increased $28 million, or 7.4 percent, in the second quarter of 2015 compared to the second quarter of 2014.
Commissions increased $19 million in the second quarter of 2015, compared to the same period in 2014. The majority of the increase was driven by the 7.6 percent 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 $7 million in the second quarter of 2015, compared to the second quarter of 2014. Underwriting and policy processing costs increased $3 million due to increased personnel costs. Information technology costs increased $2 million due to increased professional fees. Personnel costs in all expense categories include a total increase of $3 million related to pension and medical costs in the second quarter of 2015 compared to the same period in 2014.
The gross margin in the second quarter of 2015 was 17.4 percent, compared to 18.2 percent in the second quarter of 2014. The 0.8 point decrease in gross margin for the second quarter was driven primarily by the increased estimated agent incentive payout discussed above.

Investment Operations

Income from investment operations before taxes totaled $16 million in the second quarter of 2015, compared to $7 million in the second quarter of 2014, primarily from higher earnings from limited partnerships. Earnings from limited partnerships were $11 million in the second quarter of 2015 compared to earnings of $3 million in the second quarter of 2014.

First Half 2015 Highlights

Management Operations

Income from management operations before taxes decreased $3 million, or 3.1 percent, in the first six months of 2015 compared to the first six months of 2014.

Revenue from management operations increased $53 million, or 7.5 percent, in the first six months of 2015 compared to the first six months of 2014.
Commissions increased $39 million in the first six months of 2015, compared to the same period in 2014. The majority of the increase was driven by the 7.6 percent 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. 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 $17 million in the first six months of 2015, compared to the same period in 2014. Underwriting and policy processing costs increased $3 million due to increased personnel costs. Information technology costs increased $7 million, which included $5 million in professional fees and $1 million each of hardware and software costs and personnel costs. Administrative and other expenses increased $4 million related to professional fees and personnel costs. Personnel costs in all expense categories include a total increase of $4 million related to pension and medical costs in the first six months of 2015 compared to the same period in 2014.
The gross margin for the first six months of 2015 was 16.3 percent, compared to 18.0 percent for the first six months of 2014. The 1.7 point decrease in gross margin for the first six months of 2015 was driven primarily by the increased estimated agent incentive payout discussed above.

Investment Operations

Income from investment operations before taxes totaled $22 million in the first six months of 2015, compared to $18 million in the first six months of 2014. Earnings from limited partnerships were $13 million in the first six months of 2015 compared to earnings of $9 million in the first six months of 2014.

Webcast Information

Indemnity has scheduled a conference call and live audio broadcast on the Web for 10:00 AM ET on July 31, 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 company, a Barron's 500 company and has been recognized by Forbes as one of America's 50 Most Trustworthy Financial Companies.

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 June 30,				Six months ended June 30,
	2015		2014		2015		2014
Revenues	(Unaudited)				(Unaudited)
Premiums earned	$	1,434	$	1,319	$	2,836	$	2,607
Net investment income	127		111		240		220
Net realized investment (losses) gains	(7)		133		49		189
Net impairment losses recognized in earnings	(2)		0		(4)		0
Equity in earnings of limited partnerships	72		27		100		77
Other income	8		8		16		16
Total revenues	1,632		1,598		3,237		3,109
Benefits and expenses
Insurance losses and loss expenses	976		1,126		2,036		2,160
Policy acquisition and underwriting expenses	361		325		709		646
Total benefits and expenses	1,337		1,451		2,745		2,806

Income from operations before income taxes and noncontrolling interest	295		147		492		303
Provision for income taxes	98		44		159		91
Net income	$	197	$	103	$	333	$	212

Less: Net income attributable to noncontrolling interest in consolidated entity – Exchange	141		54		238		117

Net income attributable to Indemnity	$	56	$	49	$	95	$	95


Earnings Per Share
Net income attributable to Indemnity per share
Class A common stock – basic	$	1.21	$	1.05	$	2.04	$	2.04
Class A common stock – diluted	$	1.07	$	0.94	$	1.81	$	1.82
Class B common stock – basic and diluted	$	181	$	158	$	306	$	307
Class B common stock – diluted	$	180	$	158	$	305	$	307

Weighted average shares outstanding attributable to Indemnity – Basic
Class A common stock	46,189,068		46,214,153		46,189,068		46,307,659
Class B common stock	2,542		2,542		2,542		2,542

Weighted average shares outstanding attributable to Indemnity – Diluted
Class A common stock	52,562,514		52,411,414		52,598,633		52,504,920
Class B common stock	2,542		2,542		2,542		2,542

Dividends declared per share
Class A common stock	$	0.6810	$	0.6350	$	1.3620	$	1.2700
Class B common stock	$	102.1500	$	95.2500	$	204.3000	$	190.5000

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 June 30,				Three months ended June 30,				Three months ended June 30,				Three months ended June 30,
	2015		2014		2015		2014		2015		2014		2015		2014
Management operations:
Management fee revenue, net	$	395	$	366	$	—	$	—	$	(395)	$	(366)	$	—	$	—
Service agreement revenue	7		8		—		—		—		—		7		8
Total revenue from management operations	402		374		—		—		(395)		(366)		7		8
Cost of management operations	332		306		—		—		(332)		(306)		—		—
*Income from management operations before taxes*	70		68		—		—		(63)		(60)		7		8
Property and casualty insurance operations:
Net premiums earned	—		—		1,412		1,298		—		—		1,412		1,298
Losses and loss expenses	—		—		952		1,101		(1)		(2)		951		1,099
Policy acquisition and underwriting expenses	—		—		416		380		(65)		(64)		351		316
Income (loss) from property and casualty insurance operations before taxes	—		—		44		(183)		66		66		110		(117)
Life insurance operations: ⁽¹⁾
Total revenue	—		—		48		46		0		(1)		48		45
Total benefits and expenses	—		—		35		36		0		0		35		36
*Income from life insurance operations before taxes*	—		—		13		10		0		(1)		13		9
Investment operations: ⁽¹⁾
Net investment income	5		4		101		89		(3)		(5)		103		88
Net realized investment (losses) gains	0		0		(8)		133		—		—		(8)		133
Net impairment losses recognized in earnings	0		0		(2)		0		—		—		(2)		0
Equity in earnings of limited partnerships	11		3		61		23		—		—		72		26
*Income from investment operations before taxes*	16		7		152		245		(3)		(5)		165		247
Income from operations before income taxes and noncontrolling interest	86		75		209		72		—		—		295		147
Provision for income taxes	30		26		68		18		—		—		98		44
Net income	$	56	$	49	$	141	$	54	$	—	$	—	$	197	$	103

(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
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
	Six months ended June 30,				Six months ended June 30,				Six months ended June 30,				Six months ended June 30,
	2015		2014		2015		2014		2015		2014		2015		2014
Management operations:
Management fee revenue, net	$	738	$	685	$	—	$	—	$	(738)	$	(685)	$	—	$	—
Service agreement revenue	15		15		—		—		—		—		15		15
Total revenue from management operations	753		700		—		—		(738)		(685)		15		15
Cost of management operations	630		574		—		—		(630)		(574)		—		—
*Income from management operations before taxes*	123		126		—		—		(108)		(111)		15		15
Property and casualty insurance operations:
Net premiums earned	—		—		2,792		2,566		—		—		2,792		2,566
Losses and loss expenses	—		—		1,985		2,108		(2)		(3)		1,983		2,105
Policy acquisition and underwriting expenses	—		—		802		745		(112)		(117)		690		628
Income (loss) from property and casualty insurance operations before taxes	—		—		5		(287)		114		120		119		(167)
Life insurance operations: ⁽¹⁾
Total revenue	—		—		95		96		0		(1)		95		95
Total benefits and expenses	—		—		72		73		0		0		72		73
*Income from life insurance operations before taxes*	—		—		23		23		0		(1)		23		22
Investment operations: ⁽¹⁾
Net investment income	9		8		189		173		(6)		(8)		192		173
Net realized investment gains	0		1		48		183		—		—		48		184
Net impairment losses recognized in earnings	0		0		(4)		0		—		—		(4)		0
Equity in earnings of limited partnerships	13		9		86		67		—		—		99		76
*Income from investment operations before taxes*	22		18		319		423		(6)		(8)		335		433
Income from operations before income taxes and noncontrolling interest	145		144		347		159		—		—		492		303
Provision for income taxes	50		49		109		42		—		—		159		91
Net income	$	95	$	95	$	238	$	117	$	—	$	—	$	333	$	212

(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 (unaudited)

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 June 30,				Six months ended June 30,
(in millions, except per share data)	2015		2014		2015		2014
	(Unaudited)				(Unaudited)
Operating income attributable to Indemnity	$	56	$	49	$	95	$	94
Net realized investment gains and impairments	0		0		0		1
Income tax expense	0		0		0		0
Realized gains and impairments, net of income taxes	0		0		0		1
Net income attributable to Indemnity	$	56	$	49	$	95	$	95

Per Indemnity Class A common share-diluted:
Operating income attributable to Indemnity	$	1.07	$	0.94	$	1.81	$	1.81
Net realized investment gains and impairments	0.00		0.00		0.00		0.02
Income tax expense	0.00		0.00		0.00		(0.01)
Realized gains and impairments, net of income taxes	0.00		0.00		0.00		0.01
Net income attributable to Indemnity	$	1.07	$	0.94	$	1.81	$	1.82

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

	June 30, 2015		December 31, 2014
	(Unaudited)
Assets
Investments – Indemnity
Available-for-sale securities, at fair value:
Fixed maturities	$	561	$	564
Equity securities	22		25
Limited partnerships	101		113
Other invested assets	1		1
Investments – Exchange
Available-for-sale securities, at fair value:
Fixed maturities	9,372		9,007
Equity securities	817		850
Trading securities, at fair value	3,144		3,223
Limited partnerships	842		866
Other invested assets	21		20
Total investments	14,881		14,669

Cash and cash equivalents (Exchange portion of $344 and $422, respectively)	421		514
Premiums receivable from policyholders – Exchange	1,384		1,281
Reinsurance recoverable – Exchange	162		161
Deferred income taxes – Indemnity	44		37
Deferred acquisition costs – Exchange	635		595
Other assets (Exchange portion of $419 and $374, respectively)	542		501
Total assets	$	18,069	$	17,758

Liabilities and shareholders' equity
Liabilities
Indemnity liabilities
Other liabilities	$	589	$	611
Exchange liabilities
Losses and loss expense reserves	3,963		3,853
Life policy and deposit contract reserves	1,837		1,812
Unearned premiums	3,007		2,834
Deferred income taxes	413		490
Other liabilities	98		175
Total liabilities	9,907		9,775

Indemnity's shareholders' equity	732		703

Noncontrolling interest in consolidated entity – Exchange	7,430		7,280
Total equity	8,162		7,983
Total liabilities, shareholders' equity and noncontrolling interest	$	18,069	$	17,758