Erie Indemnity Reports Third Quarter 2012 Results

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Nov 01, 2012, 04:40 ET

ERIE, Pa., Nov. 1, 2012 /PRNewswire-FirstCall/ --

	3Q 2012 Highlights

	Indemnity Shareholder Interest:

	Net income attributable to Indemnity per share-diluted was $0.96 per share in the third quarter of 2012, compared to net income per share-diluted of $0.87 per share in the third quarter of 2011.
	Operating income attributable to Indemnity per share-diluted (excluding net realized gains or losses, impairments on investments and related taxes) was $0.93 per share in both the third quarter of 2012 and 2011.
	Indemnity's management operations pretax income totaled $66 million in the third quarter of 2012, compared to $62 million in the third quarter of 2011. The gross margin from management operations was 20.9 percent in the third quarter of 2012, compared to 21.7 percent in the third quarter of 2011.
	Indemnity's investment operations pretax income totaled $12 million for the third quarter of 2012, compared to $5 million for the third quarter of 2011.

Erie Indemnity Company (NASDAQ: ERIE) today announced third quarter 2012 earnings of $51 million, compared to earnings of $47 million in the third quarter of 2011. Operating income was $50 million in the third quarter of 2012, compared to operating income of $51 million in the third quarter of 2011.

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

Note: The accompanying 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").

The following table shows the consolidated results of the Erie Insurance Group by operating segment:

Results of the Erie Insurance Group's Operations

	Indemnity shareholder interest		Noncontrolling interest (Exchange)		Elimination of related party transactions		Erie Insurance Group
(dollars in millions)	3Q'12	3Q'11	3Q'12	3Q'11	3Q'12	3Q'11	3Q'12	3Q'11
Management operations	$66	$62	$ -	$ -	$(58)	$(54)	$ 8	$ 8
Property and casualty insurance operations	-	-	(101)	(80)	61	57	(40)	(23)
Life insurance operations	-	-	12	13	0	0	12	13
Investment operations	12	5	281	(305)	(3)	(3)	290	(303)
Income (loss) from operations before income taxes and noncontrolling interest	78	67	192	(372)	-	-	270	(305)
Provision for income taxes	27	20	59	(145)	-	-	86	(125)
Net income (loss)	$51	$47	$ 133	$(227)	$ -	$ -	$ 184	$(180)

The following sections highlight and discuss the segment results of the management, property and casualty insurance, life insurance, and investment operations related to the Indemnity shareholder interest.

Management Operations

	Indemnity shareholder interest		Noncontrolling interest (Exchange)		Elimination of related party transactions		Erie Insurance Group
(dollars in millions)	3Q'12	3Q'11	3Q'12	3Q'11	3Q'12	3Q'11	3Q'12	3Q'11
Management fee revenue, net	$ 305	$ 280	$ -	$ -	$(305)	$(280)	$ -	$ -
Service agreement revenue	8	8	-	-	-	-	8	8
Total revenue from management operations	313	288	-	-	(305)	(280)	8	8
Cost of management operations	247	226	-	-	(247)	(226)	-	-
Income from management operations before taxes	$ 66	$ 62	$ -	$ -	$ (58)	$ (54)	$8	$8
Gross margin	20.9%	21.7%

The management fee rate was 25 percent for both the third quarters of 2012 and 2011. Direct written premium of the property and casualty insurance operations, upon which the management fee is calculated, increased 8.6 percent in the third quarter of 2012, due to a 3.4 percent increase in policies in force and a 4.1 percent increase in the year-over-year average premium per policy for all lines of business at September 30, 2012.
Commissions increased $12 million in the third quarter of 2012, compared to the third quarter of 2011, primarily as a result of the 8.6 percent increase in direct written premium of the property and casualty insurance operations.
Non-commission expense increased $9 million in the third quarter of 2012, compared to the third quarter of 2011. Sales, policy issuance, advertising, and underwriting costs increased $2 million primarily due to increased levels of applications and policies and increased agent related advertising and support. Information technology costs increased $3 million, which included $1 million of personnel costs, $1 million of software costs and $1 million of professional fees. Personnel and all other underwriting costs, excluding information technology related costs, increased $4 million as a result of a $2 million increase related to higher staffing levels primarily associated with policy acquisition and customer service functions, a $1 million increase in pension costs, and a $1 million increase in the estimate for annual incentive plan compensation related to growth and underwriting performance.

Property and Casualty Insurance Operations *

	Indemnity shareholder interest		Noncontrolling interest (Exchange)		Elimination of related party transactions		Erie Insurance Group
(dollars in millions)	3Q'12	3Q'11	3Q'12	3Q'11	3Q'12	3Q'11	3Q'12	3Q'11
Net premiums earned	$ -	$ -	$1,118	$1,045	$ -	$ -	$1,118	$1,045
Losses and loss expenses	-	-	890	823	(2)	(1)	888	822
Policy acquisition and other underwriting expenses	-	-	329	302	(59)	(56)	270	246
Total losses and expenses	-	-	1,219	1,125	(61)	(57)	1,158	1,068
Loss from property and casualty insurance operations before taxes	$ -	$ -	$ (101)	$ (80)	$ 61	$ 57	$ (40)	$ (23)
Combined ratio	-	-	108.9%	107.7%


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

Life Insurance Operations *

	Indemnity shareholder interest		Noncontrolling interest (Exchange)		Elimination of related party transactions		Erie Insurance Group
(dollars in millions)	3Q'12	3Q'11	3Q'12	3Q'11	3Q'12	3Q'11	3Q'12	3Q'11
Total revenue	$ -	$ -	$44	$46	$0	$0	$44	$46
Total benefits and expenses	-	-	32	33	0	0	32	33
Income from life insurance operations before taxes	$ -	$ -	$12	$13	$0	$0	$12	$13


* All life insurance underwriting results accrue to the interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest.

Investment Operations

	Indemnity shareholder interest		Noncontrolling interest (Exchange)		Elimination of related party transactions		Erie Insurance Group
(dollars in millions)	3Q'12	3Q'11	3Q'12	3Q'11	3Q'12	3Q'11	3Q'12	3Q'11
Net investment income	$ 4	$ 4	$ 81	$ 83	$(3)	$(3)	$ 82	$ 84
Net realized gains (losses) on investments	2	(6)	165	(421)	-	-	167	(427)
Net impairment losses recognized in earnings	0	0	0	0	-	-	0	0
Equity in earnings of limited partnerships	6	7	35	33	-	-	41	40
Income (loss) from investment operations before taxes	$12	$ 5	$281	$(305)	$(3)	$(3)	$290	$(303)

Net investment income, which primarily includes interest and dividends on Indemnity's fixed maturity and equity security portfolios, was $4 million in both the third quarter of 2012 and 2011.
Net realized gains on investments totaled $2 million, compared to losses of $6 million in the third quarter of 2011, due to common stock valuation gains experienced in the third quarter of 2012, compared to valuation losses experienced in the third quarter of 2011.
There were no net impairment losses recognized in earnings for Indemnity in the third quarter of 2012 and 2011.
Equity in earnings of limited partnerships decreased to $6 million in the third quarter of 2012, from $7 million in the third quarter of 2011.

	Nine-Months Ended September 30, 2012 Highlights

	Indemnity Shareholder Interest:

	Net income attributable to Indemnity per share-diluted was $2.43 per share for the nine months ended September 30, 2012, compared to net income per share-diluted of $2.59 per share for the nine months ended September 30, 2011. The nine months ended September 30, 2011 net income amount includes $0.02 per share-diluted related to the life insurance operations sold to the Exchange.
	Operating income attributable to Indemnity per share-diluted (excluding net realized gains or losses, impairments on investments and related taxes) was $2.38 per share for the nine months ended September 30, 2012, compared to $2.57 per share-diluted for the nine months ended September 30, 2011. The nine months ended September 30, 2011 operating income amount includes $0.02 per share-diluted related to the life insurance operations sold to the Exchange.
	Indemnity's management operations pretax income totaled $171 million for the nine months ended September 30, 2012, compared to $174 million for the nine months ended September 30, 2011. The gross margin from management operations was 18.8 percent for the nine months ended September 30, 2012, compared to 20.7 percent for the nine months ended September 30, 2011.
	Indemnity's investment operations pretax income totaled $26 million for the nine months ended September 30, 2012, compared to $38 million for the nine months ended September 30, 2011.

Share Repurchase Program

In the third quarter of 2012, we repurchased 160,848 shares of our outstanding Class A nonvoting common stock at a total cost of $11 million in conjunction with our current stock repurchase program. For the year through October 17, 2012, shares repurchased under this program totaled 795,547 at a total cost of $57 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 October 17, 2012, we had approximately $80 million in repurchase authority remaining under the program.

According to A.M. Best Company, Erie Insurance Group, based in Erie, Pennsylvania, is the 15th largest homeowners insurer and 12^th largest automobile insurer in the United States based on direct premiums written and the 20th 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 nearly 4.5 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 litigations 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 litigations against the Exchange; and
dependency 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 (Unaudited)
(dollars in millions, except per share data)

	Three months ended		Nine months ended
	September 30,		September 30,
	2012	2011	2012	2011
Revenues
Premiums earned	$ 1,137	$ 1,061	$ 3,333	$ 3,138
Net investment income	105	108	326	326
Net realized investment gains (losses)	169	(422)	358	(234)
Net impairment losses recognized in earnings	0	0	0	0
Equity in earnings of limited partnerships	41	40	99	150
Other income	8	9	24	26
Total revenues	1,460	796	4,140	3,406

Benefits and expenses
Insurance losses and loss expenses	912	848	2,571	2,724
Policy acquisition and underwriting expenses	278	253	835	749
Total benefits and expenses	1,190	1,101	3,406	3,473

Income (loss) from operations before income taxes and noncontrolling interest
	270	(305)	734	(67)
Provision for income taxes	86	(125)	234	(54)
Net income (loss)	184	(180)	500	(13)

Less: Net income (loss) attributable to noncontrolling interest in consolidated entity - Exchange
	133	(227)	370	(156)

Net income attributable to Indemnity	$ 51	$ 47	$ 130	$ 143



Earnings Per Share
Net income attributable to Indemnity per share
Class A common stock - basic	$ 1.08	$ 0.97	$ 2.73	$ 2.90
Class A common stock - diluted	$ 0.96	$ 0.87	$ 2.43	$ 2.59
Class B common stock - basic and diluted	$ 162.02	$ 146.67	$ 410.89	$ 439.39

Weighted average shares outstanding attributable to
Indemnity - Basic
Class A common stock	47,188,741	48,503,383	47,476,693	49,176,124
Class B common stock	2,544	2,546	2,544	2,546

Weighted average shares outstanding attributable to
Indemnity - Diluted
Class A common stock	53,374,846	54,685,021	53,662,798	55,357,762
Class B common stock	2,544	2,546	2,544	2,546

Dividends declared per share
Class A common stock	$ 0.5525	$ 0.515	$ 1.6575	$ 1.545
Class B common stock	$ 82.8750	$ 77.250	$248.6250	$ 231.750


Erie Indemnity Company
Results of the Erie Insurance Group's operations by interest (Unaudited)
(in millions)							Eliminations of
		Indemnity			Noncontrolling interest		related party
		shareholder interest			(Exchange)		transactions		Erie Insurance Group
		Three months ended			Three months ended		Three months ended		Three months ended
		September 30,			September 30,		September 30,		September 30,
	Percent	2012	2011	Percent	2012	2011	2012	2011	2012	2011

Management operations:
Management fee revenue, net	100.0%	$ 305	$ 280		$ -	$ -	$ (305)	$ (280)	$ -	$ -
Service agreement revenue	100.0%	8	8		-	-	-	-	8	8
Total revenue from management operations		313	288		-	-	(305)	(280)	8	8
Cost of management operations	100.0%	247	226		-	-	(247)	(226)	-	-
*Income from management operations before taxes*		66	62		-	-	(58)	(54)	8	8
Property and casualty insurance operations:
Net premiums earned		-	-	100.0%	1,118	1,045	-	-	1,118	1,045
Losses and loss expenses		-	-	100.0%	890	823	(2)	(1)	888	822
Policy acquisition and other underwriting expenses		-	-	100.0%	329	302	(59)	(56)	270	246
*Loss from property and casualty* *insurance operations before taxes*		-	-		(101)	(80)	61	57	(40)	(23)

Life insurance operations: ⁽¹⁾
Total revenue		-	-	100.0%	44	46	0	0	44	46
Total benefits and expenses		-	-	100.0%	32	33	0	0	32	33
*Income from life insurance operations before taxes*		-	-		12	13	0	0	12	13
Investment operations:
Net investment income		4	4		81	83	(3)	(3)	82	84
Net realized gains (losses) on investments		2	(6)		165	(421)	-	-	167	(427)
Net impairment losses recognized in earnings		0	0		0	0	-	-	0	0
Equity in earnings of limited partnerships		6	7		35	33	-	-	41	40
*Income (loss) from investment operations before taxes*		12	5		281	(305)	(3)	(3)	290	(303)
Income (loss) from operations before income taxes and noncontrolling interest
		78	67		192	(372)	-	-	270	(305)
Provision for income taxes		27	20		59	(145)	-	-	86	(125)
Net income (loss)		$ 51	$ 47		$ 133	$ (227)	$ -	$ -	$ 184	$ (180)

(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)							Eliminations of
		Indemnity			Noncontrolling interest		related party
		shareholder interest			(Exchange)		transactions		Erie Insurance Group
		Nine months ended			Nine months ended		Nine months ended		Nine months ended
		September 30,			September 30,		September 30,		September 30,
	Percent	2012	2011	Percent	2012	2011	2012	2011	2012	2011

Management operations:
Management fee revenue, net	100.0%	$ 882	$ 816		$ -	$ -	$ (882)	$ (816)	$ -	$ -
Service agreement revenue	100.0%	23	25		-	-	-	-	23	25
Total revenue from management operations		905	841		-	-	(882)	(816)	23	25
Cost of management operations	100.0%	734	667		-	-	(734)	(667)	-	-
*Income from management operations before taxes*		171	174		-	-	(148)	(149)	23	25
Property and casualty insurance operations:					-	-
Net premiums earned		-	-	100.0%	3,279	3,089	-	-	3,279	3,089
Losses and loss expenses		-	-	100.0%	2,501	2,653	(4)	(4)	2,497	2,649
Policy acquisition and other underwriting expenses		-	-	100.0%	963	882	(153)	(154)	810	728
*Loss from property and casualty*		-	-		(185)	(446)	157	158	(28)	(288)
*insurance operations before taxes*
Life insurance operations: ^{(1) (2)}
Total revenue	21.6% ⁽²⁾	-	10	78.4% ⁽²⁾	133	124	(1)	(1)	132	133
Total benefits and expenses	21.6% ⁽²⁾	-	7	78.4% ⁽²⁾	99	89	0	0	99	96
*Income from life insurance operations before taxes*		-	3		34	35	(1)	(1)	33	37
Investment operations:
Net investment income		12	12		251	252	(8)	(8)	255	256
Net realized gains (losses) on investments		4	1		348	(247)	-	-	352	(246)
Net impairment losses recognized in earnings		0	0		0	0	-	-	0	0
Equity in earnings of limited partnerships		10	25		89	124	-	-	99	149
*Income from investment operations before taxes*		26	38		688	129	(8)	(8)	706	159
Income (loss) from operations before income taxes and noncontrolling interest
		197	215		537	(282)	-	-	734	(67)
Provision for income taxes		67	72		167	(126)	-	-	234	(54)
Net income (loss)		$ 130	$ 143		$ 370	$ (156)	$ -	$ -	$ 500	$ (13)

(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.

(2)

Prior to and through March 31, 2011, Indemnity retained a 21.6% ownership interest in EFL, which accrued to the Indemnity shareholder interest, and the Exchange retained a 78.4% ownership interest in EFL, which accrued to the interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest. Due to the sale of Indemnity's 21.6% ownership interest in EFL to the Exchange on March 31, 2011, 100% of EFL's life insurance results accrue to the interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after March 31, 2011.

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		Indemnity
	Shareholder interest		Shareholder interest
	Three months ended		Nine months ended
(in millions, except per share data)	September 30,		September 30,
	2012	2011	2012	2011
	(unaudited)		(unaudited)
Operating income attributable to Indemnity	$ 50	$ 51	$ 128	$ 142
Net realized gains (losses) and impairments on investments	2	(6)	4	1
Income tax (expense) benefit	(1)	2	(2)	0
Realized gains (losses) and impairments, net of income taxes	1	(4)	2	1
Net income attributable to Indemnity	$ 51	$ 47	$ 130	$ 143


Per Indemnity Class A common share-diluted:
Operating income attributable to Indemnity	$ 0.93	$ 0.93	$ 2.38	$ 2.57
Net realized gains (losses) and impairments on investments	0.05	(0.09)	0.08	0.03
Income tax (expense) benefit	(0.02)	0.03	(0.03)	(0.01)
Realized gains (losses) and impairments, net of income taxes	0.03	(0.06)	0.05	0.02
Net income attributable to Indemnity	$ 0.96	$ 0.87	$ 2.43	$ 2.59

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

	September 30,	December 31,
	2012	2011
	(Unaudited)
Assets
Investments-Indemnity
Available-for-sale securities, at fair value:
Fixed maturities	$ 547	$ 548
Equity securities	29	25
Trading securities, at fair value	30	27
Limited partnerships	195	208
Other invested assets	1	1
Investments-Exchange
Available-for-sale securities, at fair value:
Fixed maturities	7,623	7,292
Equity securities	624	564
Trading securities, at fair value	2,639	2,308
Limited partnerships	1,083	1,082
Other invested assets	20	19
Total investments	12,791	12,074

Cash and cash equivalents (Exchange portion of $392 and $174, respectively)	404	185
Premiums receivable from policyholders - Exchange	1,100	976
Reinsurance recoverable - Exchange	165	166
Deferred income taxes - Indemnity	16	19
Deferred acquisition costs - Exchange	505	487
Other assets (Exchange portion of $448 and $322, respectively)	563	441
Total assets	$ 15,544	$ 14,348

Liabilities and shareholders' equity
Liabilities
Indemnity liabilities
Other liabilities	$ 472	$ 455
Exchange liabilities
Losses and loss expense reserves	3,598	3,499
Life policy and deposit contract reserves	1,721	1,671
Unearned premiums	2,420	2,178
Deferred income taxes	367	147
Other liabilities	123	105
Total liabilities	8,701	8,055

Indemnity's shareholders' equity	782	781

Noncontrolling interest in consolidated entity – Exchange	6,061	5,512
Total equity	6,843	6,293
Total liabilities, shareholders' equity and noncontrolling interest	$ 15,544	$ 14,348