Erie Indemnity Reports Third Quarter 2014 Results

Net Income per Diluted Share Up 3.0 percent, Earnings Up 2.1 percent

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Oct 30, 2014, 04:15 ET

ERIE, Pa., Oct. 30, 2014 /PRNewswire/ -- Erie Indemnity Company (NASDAQ: ERIE) today announced financial results for the quarter ending September 30, 2014.

"ERIE continues to achieve strong results through sound execution of our business strategy and the steadfast commitment of our Agents, Customers and Employees," says Terry Cavanaugh, president and chief executive officer. "As we look to 2015, we are well-positioned for continued long-term growth and value creation."

Net income attributable to Indemnity was $47 million, or $0.90 per diluted share, in the third quarter of 2014, compared to $46 million, or $0.87 per diluted share, in the third quarter of 2013. Net income attributable to Indemnity was $142 million, or $2.71 per diluted share, in the first nine months of 2014, compared to $127 million, or $2.41 per diluted share, in the first nine months of 2013. For the third quarter of 2014, the growth was driven by increased revenue from management operations, and for the first nine months of 2014, the growth was driven by increased revenue from management operations and lower expense growth.

3Q 2014 Highlights - Results of the Erie Insurance Group's Operations⁽¹⁾

	Indemnity shareholder interest				Noncontrolling interest (Exchange)				Elimination of related party transactions				Erie Insurance Group
(dollars in millions)	3Q'14		3Q'13		3Q'14		3Q'13		3Q'14		3Q'13		3Q'14		3Q'13
Management operations	$	62	$	60	$	—	$	—	$	(54)	$	(52)	$	8	$	8
Property and casualty insurance operations⁽²⁾	—		—		38		24		57		55		95		79
Life insurance operations⁽²⁾	—		—		10		10		0		(1)		10		9
Investment operations	8		10		32		294		(3)		(2)		37		302
Income from operations before income taxes and noncontrolling interest	70		70		80		328		—		—		150		398
Provision for income taxes	23		24		19		107		—		—		42		131
Net income	$	47	$	46	$	61	$	221	$	—	$	—	$	108	$	267


(1)	The 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").

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

Management Operations

Revenue from management operations increased $29 million, or 8.5 percent, in the third quarter of 2014, compared to the third quarter of 2013. Direct written premium of the property and casualty insurance operations, upon which the management fee is calculated, increased 8.8 percent in the third quarter of 2014, due to a 4.5 percent increase in policies in force and a 4.1 percent increase in the year-over-year average premium per policy at September 30, 2014. The management fee rate was 25 percent for both the third quarters of 2014 and 2013.

Commissions increased $21 million, or 11.5 percent, in the third quarter of 2014, compared to the third quarter of 2013, primarily due to the 8.8 percent increase in direct written premium of the property and casualty insurance operations. Commission growth outpaced direct premium written growth primarily due to an increase in agent incentive costs.

Non-commission expense increased $6 million, or 7.1 percent, in the third quarter of 2014, compared to the third quarter of 2013. Professional fees increased $2 million while underwriting reports, personnel costs, credit card fees, and postage and printing expenses each increased $1 million.

Management Operations

	Indemnity shareholder interest
(dollars in millions)	3Q'14			3Q'13
Management fee revenue, net	$	362		$	333
Service agreement revenue	8			8
Total revenue from management operations	$	370		$	341
Commissions	$	208		$	187
Non-commission expense	100			94
Total cost of management operations	$	308		$	281
Income from management operations before taxes	$	62		$	60
Gross margin	16.5		%	17.7		%

Investment Operations

Income from investment operations before taxes totaled $8 million in the third quarter of 2014, compared to $10 million in the third quarter of 2013. Net realized gains on investments and equity in earnings of limited partnerships both decreased $1 million.

Investment Operations

	Indemnity shareholder interest
(dollars in millions)	3Q'14		3Q'13
Net investment income	$	4	$	4
Net realized gains on investments	0		1
Net impairment losses recognized in earnings	0		0
Equity in earnings of limited partnerships	4		5
Income from investment operations before taxes	$	8	$	10

Nine Months Ended September 30, 2014 Results of the Erie Insurance Group's Operations⁽¹⁾

	Indemnity shareholder interest				Noncontrolling interest (Exchange)				Elimination of related party transactions				Erie Insurance Group
(dollars in millions)	2014		2013		2014		2013		2014		2013		2014		2013
Management operations	$	188	$	168	$	—	$	—	$	(165)	$	(145)	$	23	$	23
Property and casualty insurance operations⁽²⁾	—		—		(249)		46		177		155		(72)		201
Life insurance operations⁽²⁾	—		—		33		34		(1)		(2)		32		32
Investment operations	26		25		455		824		(11)		(8)		470		841
Income from operations before income taxes and noncontrolling interest	214		193		239		904		—		—		453		1,097
Provision for income taxes	72		66		61		297		—		—		133		363
Net income	$	142	$	127	$	178	$	607	$	—	$	—	$	320	$	734


(1)	The 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").

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

Indemnity's management operations pretax income totaled $188 million in the first nine months of 2014, compared to $168 million in the first nine months of 2013. The increase resulted in a gross margin of 17.5 percent for the first nine months of 2014, compared to 17.1 percent for the first nine months of 2013. Indemnity's investment operations pretax income totaled $26 million in the first nine months of 2014, compared to $25 million in the first nine months of 2013.

Webcast Information

Indemnity has scheduled a conference call and live audio broadcast on the Web for 10:00 AM ET on October 31, 2014. 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 4.9 million policies in force and operates in 11 states and the District of Columbia. Erie Insurance Group is a FORTUNE 500 and Barron's 500 company. Erie Insurance is proud to have received the J.D. Power award for "Highest in Customer Satisfaction with the Auto Insurance Purchase Experience" two years in a row. ERIE has also 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 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;
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 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 litigation against the Exchange; 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 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 (dollars in millions, except per share data)

	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
Revenues	(Unaudited)				(Unaudited)
Premiums earned	$	1,355	$	1,241	$	3,962	$	3,631
Net investment income	115		109		335		316
Net realized investment (losses) gains	(85)		191		104		501
Net impairment losses recognized in earnings	(1)		(9)		(1)		(10)
Equity in earnings of limited partnerships	34		37		111		112
Other income	8		8		24		24
Total revenues	1,426		1,577		4,535		4,574
Benefits and expenses
Insurance losses and loss expenses	935		868		3,095		2,571
Policy acquisition and underwriting expenses	341		311		987		906
Total benefits and expenses	1,276		1,179		4,082		3,477

Income from operations before income taxes and noncontrolling interest	150		398		453		1,097
Provision for income taxes	42		131		133		363
Net income	$	108	$	267	$	320	$	734

Less: Net income attributable to noncontrolling interest in consolidated entity – Exchange	61		221		178		607

Net income attributable to Indemnity	$	47	$	46	$	142	$	127


Earnings Per Share
Net income attributable to Indemnity per share
Class A common stock – basic	$	1.01	$	0.98	$	3.05	$	2.71
Class A common stock – diluted	$	0.90	$	0.87	$	2.71	$	2.41
Class B common stock – basic	$	151	$	147	$	458	$	406
Class B common stock – diluted	$	151	$	147	$	457	$	406

Weighted average shares outstanding attributable to Indemnity – Basic
Class A common stock	46,189,068		46,656,911		46,267,694		46,707,971
Class B common stock	2,542		2,542		2,542		2,542

Weighted average shares outstanding attributable to Indemnity – Diluted
Class A common stock	52,387,164		52,851,250		52,465,790		52,902,310
Class B common stock	2,542		2,542		2,542		2,542

Dividends declared per share
Class A common stock	$	0.6350	$	0.5925	$	1.9050	$	1.7775
Class B common stock	$	95.2500	$	88.8750	$	285.7500	$	266.6250

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 September 30,				Three months ended September 30,				Three months ended S eptember 30,				Three months ended September 30,
	2014		2013		2014		2013		2014		2013		2014		2013
Management operations:
Management fee revenue, net	$	362	$	333	$	—	$	—	$	(362)	$	(333)	$	—	$	—
Service agreement revenue	8		8		—		—		—		—		8		8
Total revenue from management operations	370		341		—		—		(362)		(333)		8		8
Cost of management operations	308		281		—		—		(308)		(281)		—		—
*Income from management operations before taxes*	62		60		—		—		(54)		(52)		8		8
Property and casualty insurance operations:
Net premiums earned	—		—		1,333		1,221		—		—		1,333		1,221
Losses and loss expenses	—		—		908		841		(1)		(1)		907		840
Policy acquisition and underwriting expenses	—		—		387		356		(56)		(54)		331		302
*Income from property and casualty insurance operations before taxes*	—		—		38		24		57		55		95		79
Life insurance operations: ⁽¹⁾
Total revenue	—		—		48		47		0		(1)		48		46
Total benefits and expenses	—		—		38		37		0		0		38		37
*Income from life insurance operations before taxes*	—		—		10		10		0		(1)		10		9
Investment operations: ⁽¹⁾
Net investment income	4		4		90		83		(3)		(2)		91		85
Net realized gains (losses) on investments	0		1		(88)		188		—		—		(88)		189
Net impairment losses recognized in earnings	0		0		0		(9)		—		—		0		(9)
Equity in earnings of limited partnerships	4		5		30		32		—		—		34		37
*Income from investment operations before taxes*	8		10		32		294		(3)		(2)		37		302
Income from operations before income taxes and noncontrolling interest	70		70		80		328		—		—		150		398
Provision for income taxes	23		24		19		107		—		—		42		131
Net income	$	47	$	46	$	61	$	221	$	—	$	—	$	108	$	267


(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
	Nine months ended September 30,				Nine months ended September 30,				Nine months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013		2014		2013		2014		2013
Management operations:
Management fee revenue, net	$	1,047	$	965	$	—	$	—	$	(1,047)	$	(965)	$	—	$	—
Service agreement revenue	23		23		—		—		—		—		23		23
Total revenue from management operations	1,070		988		—		—		(1,047)		(965)		23		23
Cost of management operations	882		820		—		—		(882)		(820)		—		—
*Income from management operations before taxes*	188		168		—		—		(165)		(145)		23		23
Property and casualty insurance operations:
Net premiums earned	—		—		3,899		3,573		—		—		3,899		3,573
Losses and loss expenses	—		—		3,016		2,495		(4)		(4)		3,012		2,491
Policy acquisition and underwriting expenses	—		—		1,132		1,032		(173)		(151)		959		881
*(Loss) income from property and casualty insurance operations before taxes*	—		—		(249)		46		177		155		(72)		201
Life insurance operations: ⁽¹⁾
Total revenue	—		—		144		139		(1)		(2)		143		137
Total benefits and expenses	—		—		111		105		0		0		111		105
*Income from life insurance operations before taxes*	—		—		33		34		(1)		(2)		32		32
Investment operations: ⁽¹⁾
Net investment income	12		11		263		243		(11)		(8)		264		246
Net realized gains on investments	1		1		95		492		—		—		96		493
Net impairment losses recognized in earnings	0		0		0		(9)		—		—		0		(9)
Equity in earnings of limited partnerships	13		13		97		98		—		—		110		111
*Income from investment operations before taxes*	26		25		455		824		(11)		(8)		470		841
Income from operations before income taxes and noncontrolling interest	214		193		239		904		—		—		453		1,097
Provision for income taxes	72		66		61		297		—		—		133		363
Net income	$	142	$	127	$	178	$	607	$	—	$	—	$	320	$	734


(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 September 30,				Nine months ended September 30,
(in millions, except per share data)	2014		2013		2014		2013
	(Unaudited)				(Unaudited)
Operating income attributable to Indemnity	$	47	$	45	$	141	$	126
Net realized gains and impairments on investments	0		1		1		1
Income tax expense	0		0		0		0
Realized gains and impairments, net of income taxes	0		1		1		1
Net income attributable to Indemnity	$	47	$	46	$	142	$	127

Per Indemnity Class A common share-diluted:
Operating income attributable to Indemnity	$	0.90	$	0.86	$	2.70	$	2.40
Net realized gains and impairments on investments	0.00		0.01		0.02		0.01
Income tax expense	0.00		0.00		(0.01)		0.00
Realized gains and impairments, net of income taxes	0.00		0.01		0.01		0.01
Net income attributable to Indemnity	$	0.90	$	0.87	$	2.71	$	2.41

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

	September 30, 2014		December 31, 2013
	(Unaudited)
Assets
Investments – Indemnity
Available-for-sale securities, at fair value:
Fixed maturities	$	563	$	526
Equity securities	25		50
Limited partnerships	134		146
Other invested assets	1		1
Investments – Exchange
Available-for-sale securities, at fair value:
Fixed maturities	8,902		8,162
Equity securities	917		819
Trading securities, at fair value	3,125		3,202
Limited partnerships	939		940
Other invested assets	20		20
Total investments	14,626		13,866

Cash and cash equivalents (Exchange portion of $334 and $403, respectively)	379		452
Premiums receivable from policyholders – Exchange	1,323		1,167
Reinsurance recoverable – Exchange	165		172
Deferred income taxes – Indemnity	2		2
Deferred acquisition costs – Exchange	603		566
Other assets (Exchange portion of $366 and $337, respectively)	480		451
Total assets	$	17,578	$	16,676

Liabilities and shareholders' equity
Liabilities
Indemnity liabilities
Other liabilities	$	482	$	476
Exchange liabilities
Losses and loss expense reserves	3,933		3,747
Life policy and deposit contract reserves	1,801		1,758
Unearned premiums	2,896		2,598
Deferred income taxes	465		450
Other liabilities	165		97
Total liabilities	9,742		9,126

Indemnity's shareholders' equity	771		734

Noncontrolling interest in consolidated entity – Exchange	7,065		6,816
Total equity	7,836		7,550
Total liabilities, shareholders' equity and noncontrolling interest	$	17,578	$	16,676