Erie Indemnity Reports Second Quarter 2017 Results

Net Income per Diluted Share was $1.12 for the Quarter and $2.03 Year to Date

News provided by

Jul 27, 2017, 16:15 ET

ERIE, Pa., July 27, 2017 /PRNewswire/ -- Erie Indemnity Company (NASDAQ: ERIE) today announced financial results for the quarter ending June 30, 2017. Net income was $58.5 million, or $1.12 per diluted share, in the second quarter of 2017, compared to $61.3 million, or $1.17 per diluted share, in the second quarter of 2016. Net income was $106.4 million, or $2.03 per diluted share, in the first six months of 2017, compared to $107.2 million, or $2.04 per diluted share, in the first six months of 2016.

2Q and First Half 2017
(dollars in thousands)	2Q'17			2Q'16			1H'17			1H'16
Operating income	$	83,044		$	85,759		$	149,578		$	153,424
Investment income, net of interest expense	6,191			7,404			12,611			9,963
Income before income taxes	89,235			93,163			162,189			163,387
Income tax expense	30,708			31,854			55,786			56,183
Net income	$	58,527		$	61,309		$	106,403		$	107,204
Gross margin from operations	18.5		%	20.2		%	17.6		%	19.2		%

2Q 2017 Highlights

Operating income decreased $2.7 million, or 3.2 percent, in the second quarter of 2017 compared to the second quarter of 2016.

Management fee revenue increased $24.7 million, or 5.9 percent, in the second quarter of 2017 compared to the second quarter of 2016.
Commissions increased $15.6 million in the second quarter of 2017 compared to the second quarter of 2016, as a result of the 5.7 percent increase in direct and assumed premiums written by the Exchange. The remaining portion of the increase in the second quarter of 2017 was due to higher agent incentive costs related to profitable growth, compared to the second quarter of 2016.
Non-commission expense increased $11.8 million in the second quarter of 2017 compared to the second quarter of 2016. Information technology costs increased $7.1 million primarily due to increased professional fees and personnel costs. Underwriting and policy processing costs increased $1.9 million primarily due to increased personnel costs and underwriting report costs. Administrative and other expenses increased $2.6 million driven by increased professional fees and personnel costs.
The gross margin in the second quarter of 2017 was 18.5 percent compared to 20.2 percent in the second quarter of 2016.

Income from investments before taxes totaled $6.4 million in the second quarter of 2017 compared to $7.4 million in the second quarter of 2016. Earnings from limited partnerships were $0.1 million in the second quarter of 2017 compared to $2.1 million in the second quarter of 2016, while net investment income was $6.2 million in the second quarter of 2017 compared to $4.9 million in the second quarter of 2016.

First Half 2017 Highlights

Operating income decreased $3.8 million, or 2.5 percent, in the first six months of 2017 compared to the first six months of 2016.

Management fee revenue increased $49.3 million, or 6.3 percent, in the first six months of 2017 compared to the first six months of 2016.
Commissions increased $27.4 million in the first six months of 2017 compared to the first six months of 2016, as a result of the 6.2 percent increase in direct and assumed premiums written by the Exchange.
Non-commission expense increased $25.8 million in the first six months of 2017 compared to the first six months of 2016. Information technology costs increased $13.6 million primarily due to increased professional fees. Underwriting and policy processing costs increased $3.9 million primarily due to increased personnel costs and underwriting report costs. Administrative and other expenses increased $9.4 million primarily driven by increased personnel costs, including higher incentive plan costs and pension expenses. The incentive plan cost increase was driven by the long-term incentive plan due to the increase in the company stock price during the first six months of 2017. Additionally, the employee incentive plan program was expanded to additional employee groups beginning in 2017.
The gross margin in the first six months of 2017 was 17.6 percent compared to 19.2 percent in the first six months of 2016.

Income from investments before taxes totaled $13.0 million in the first six months of 2017 compared to $10.0 million in the first six months of 2016. Net investment income was $12.2 million in the first six months of 2017 compared to $9.6 million in the first six months of 2016, while net realized gains on investments were $0.6 million in the first six months of 2017 compared to net realized losses of $0.7 million in the first six months of 2016.

Webcast Information
Indemnity has scheduled a conference call and live audio broadcast on the Web for 10:00 AM ET on July 28, 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.

Erie Insurance Group
According to A.M. Best Company, Erie Insurance Group, based in Erie, Pennsylvania, is the 10^th largest homeowners insurer and 11^th largest automobile insurer in the United States based on direct premiums written and the 15^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.

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

	Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
	(Unaudited)				(Unaudited)
Operating revenue
Management fee revenue, net	$	441,319	$	416,665	$	833,377	$	784,123
Service agreement revenue	7,245		7,219		14,503		14,489
Total operating revenue	448,564		423,884		847,880		798,612

Operating expenses
Commissions	251,383		235,794		471,861		444,508
Salaries and employee benefits	60,774		55,025		120,514		108,314
All other operating expenses	53,363		47,306		105,927		92,366
Total operating expenses	365,520		338,125		698,302		645,188
Operating income	83,044		85,759		149,578		153,424

Investment income
Net investment income	6,236		4,891		12,214		9,553
Net realized investment gains (losses)	124		399		640		(689)
Net impairment losses recognized in earnings	(61)		0		(182)		(345)
Equity in earnings of limited partnerships	149		2,114		362		1,444
Total investment income	6,448		7,404		13,034		9,963
Interest expense, net	257		—		423		—
Income before income taxes	89,235		93,163		162,189		163,387
Income tax expense	30,708		31,854		55,786		56,183
Net income	$	58,527	$	61,309	$	106,403	$	107,204


Earnings Per Share
Net income per share
Class A common stock – basic	$	1.26	$	1.32	$	2.28	$	2.30
Class A common stock – diluted	$	1.12	$	1.17	$	2.03	$	2.04
Class B common stock – basic and diluted	$	189	$	197	$	343	$	345
Class B common stock – diluted	$	188	$	197	$	343	$	345

Weighted average shares outstanding – Basic
Class A common stock	46,180,852		46,188,867		46,184,666		46,188,967
Class B common stock	2,542		2,542		2,542		2,542

Weighted average shares outstanding – Diluted
Class A common stock	52,299,395		52,392,862		52,355,214		52,458,394
Class B common stock	2,542		2,542		2,542		2,542

Dividends declared per share
Class A common stock	$	0.7825	$	0.7300	$	1.565	$	1.460
Class B common stock	$	117.3750	$	109.5000	$	234.750	$	219.000

Erie Indemnity Company Statements of Financial Position (in thousands)

	June 30, 2017		December 31, 2016
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	144,709	$	189,072
Available-for-sale securities	72,057		56,138
Receivables from Erie Insurance Exchange and affiliates	411,422		378,540
Prepaid expenses and other current assets	36,023		30,169
Federal income taxes recoverable	0		5,260
Accrued investment income	6,874		6,337
Total current assets	671,085		665,516

Available-for-sale securities	672,625		657,153
Limited partnership investments	53,230		58,159
Fixed assets, net	71,119		69,142
Deferred income taxes, net	51,811		53,889
Note receivable from Erie Family Life Insurance Company	25,000		25,000
Other assets	22,355		20,096
Total assets	$	1,567,225	$	1,548,955

Liabilities and shareholders' equity
Current liabilities:
Commissions payable	$	232,905	$	210,559
Agent bonuses	62,845		114,772
Accounts payable and accrued liabilities	86,844		88,153
Dividends payable	36,441		36,441
Deferred executive compensation	9,898		19,675
Federal income taxes payable	2,088		0
Total current liabilities	431,021		469,600

Defined benefit pension plans	219,972		221,827
Employee benefit obligations	462		756
Deferred executive compensation	11,810		13,233
Long-term borrowings	49,742		24,766
Other long-term liabilities	1,004		1,863
Total liabilities	714,011		732,045

Shareholders' equity	853,214		816,910
Total liabilities and shareholders' equity	$	1,567,225	$	1,548,955