Erie Indemnity Reports Third Quarter 2015 Results

Earnings Up 5.7 percent, Net Income per Diluted Share Up 5.2 percent

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Oct 29, 2015, 04:15 ET

ERIE, Pa., Oct. 29, 2015 /PRNewswire/ -- Erie Indemnity Company (NASDAQ: ERIE) today announced financial results for the quarter ending September 30, 2015. Net income attributable to Indemnity was $50 million, or $0.94 per diluted share, in the third quarter of 2015, compared to $47 million, or $0.90 per diluted share, in the third quarter of 2014. Net income attributable to Indemnity was $145 million, or $2.75 per diluted share, in the first nine months of 2015, compared to $142 million, or $2.71 per diluted share, in the first nine months of 2014. For the third quarter of 2015, the growth was driven by increased revenue from management operations.

"We are very pleased with our third quarter results and the progress we are making with our strategic objectives. We remain committed to driving value for our agents, customers, employees and shareholders," said Terry Cavanaugh, President and CEO.

3Q and Nine Months 2015 - Results of Indemnity Shareholder Interest
(dollars in millions)	3Q'14		3Q'15		2014		2015
Management operations	$62		$68		$188		$191
Investment operations	8		7		26		29
Income before income taxes	70		75		214		220
Provision for income taxes	23		25		72		75
Net income	$47		$50		$142		$145
Gross margin from management operations	16.5	%	17.2	%	17.5	%	16.6	%

3Q 2015 Highlights

Management Operations

Income from management operations before taxes increased $6 million, or 11.8 percent, in the third quarter of 2015 compared to the third quarter of 2014.

Revenue from management operations increased $26 million, or 7.3 percent, in the third quarter of 2015 compared to the third quarter of 2014.
Commissions increased $15 million in the third quarter of 2015, compared to the same period in 2014. The majority of the increase was driven by the 7.5 percent increase in direct written premiums of the Property and Casualty Group.
Non-commission expense increased $5 million in the third quarter of 2015 compared to the third quarter of 2014. Underwriting and policy processing costs increased $3 million due to increased personnel costs. Information technology costs decreased $4 million, which included $5 million in decreased professional fees offset by $1 million in increased hardware and software costs. Administrative and other expenses increased $5 million, which included $4 million in personnel costs and $1 million in professional fees. Personnel costs in all expense categories include increases of $1 million in pension costs, $2 million in medical costs and $4 million in the estimate for incentive plan compensation related to the underwriting performance in the third quarter of 2015 compared to the same period in 2014.
The gross margin in the third quarter of 2015 was 17.2 percent, compared to 16.5 percent in the third quarter of 2014.

Investment Operations
Income from investment operations before taxes totaled $7 million in the third quarter of 2015, compared to $8 million in the third quarter of 2014.

Nine Months 2015 Highlights

Management Operations
Income from management operations before taxes increased $3 million, or 1.7 percent, in the first nine months of 2015 compared to the first nine months of 2014.

Revenue from management operations increased $79 million, or 7.4 percent, in the first nine months of 2015 compared to the first nine months of 2014.
Commissions increased $54 million in the first nine 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. 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 $22 million in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. Sales and advertising costs increased $2 million due to increased personnel costs. Underwriting and policy processing costs increased $6 million due to increased personnel costs. Information technology costs increased $3 million, which included $2 million in hardware and software costs and $1 million in personnel costs. Administrative and other expenses increased $9 million, which included $6 million in personnel costs and $3 million in professional fees. Personnel costs in all expense categories include increases of $4 million in pension costs, $3 million in medical costs and $5 million in the estimate for incentive plan compensation related to the underwriting performance in the first nine months of 2015 compared to the same period in 2014.
The gross margin for the first nine months of 2015 was 16.6 percent, compared to 17.5 percent for the first nine months of 2014. The 0.9 point decrease in gross margin for the first nine months of 2015 was driven primarily by the increased estimated agent incentive payout discussed above.

Investment Operations
Income from investment operations before taxes totaled $29 million in the first nine months of 2015, compared to $26 million in the first nine months of 2014. Earnings from limited partnerships were $17 million in the first nine months of 2015 compared to earnings of $13 million in the first nine months of 2014.

Webcast Information

Indemnity has scheduled a conference call and live audio broadcast on the Web for 10:00 AM ET on October 30, 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 September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Revenues	(Unaudited)				(Unaudited)
Premiums earned	$	1,472	$	1,355	$	4,308	$	3,962
Net investment income	120		115		360		335
Net realized investment (losses) gains	(292)		(85)		(243)		104
Net impairment losses recognized in earnings	(4)		(1)		(8)		(1)
Equity in earnings of limited partnerships	43		34		143		111
Other income	7		8		23		24
Total revenues	1,346		1,426		4,583		4,535
Benefits and expenses
Insurance losses and loss expenses	939		935		2,975		3,095
Policy acquisition and underwriting expenses	367		341		1,076		987
Total benefits and expenses	1,306		1,276		4,051		4,082

Income from operations before income taxes and noncontrolling interest	40		150		532		453
Provision for income taxes	7		42		166		133
Net income	$	33	$	108	$	366	$	320

Less: Net (loss) income attributable to noncontrolling interest in consolidated entity – Exchange	(17)		61		221		178

Net income attributable to Indemnity	$	50	$	47	$	145	$	142


Earnings Per Share
Net income attributable to Indemnity per share
Class A common stock – basic	$	1.06	$	1.01	$	3.10	$	3.05
Class A common stock – diluted	$	0.94	$	0.90	$	2.75	$	2.71
Class B common stock – basic and diluted	$	160	$	151	$	466	$	458
Class B common stock – diluted	$	159	$	151	$	465	$	457

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

Weighted average shares outstanding attributable to Indemnity – Diluted
Class A common stock	52,602,083		52,387,164		52,599,783		52,465,790
Class B common stock	2,542		2,542		2,542		2,542

Dividends declared per share
Class A common stock	$	0.6810	$	0.6350	$	2.0430	$	1.9050
Class B common stock	$	102.1500	$	95.2500	$	306.4500	$	285.7500

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 September 30,				Three months ended September 30,
	2015		2014		2015		2014		2015		2014		2015		2014
Management operations:
Management fee revenue, net	$	389	$	362	$	—	$	—	$	(389)	$	(362)	$	—	$	—
Service agreement revenue	7		8		—		—		—		—		7		8
Total revenue from management operations	396		370		—		—		(389)		(362)		7		8
Cost of management operations	328		308		—		—		(328)		(308)		—		—
*Income from management operations before taxes*	68		62		—		—		(61)		(54)		7		8
Property and casualty insurance operations:
Net premiums earned	—		—		1,447		1,333		—		—		1,447		1,333
Losses and loss expenses	—		—		912		908		(1)		(1)		911		907
Policy acquisition and underwriting expenses	—		—		420		387		(63)		(56)		357		331
*Income from property and casualty insurance operations before taxes*	—		—		115		38		64		57		179		95
Life insurance operations: ⁽¹⁾
Total revenue	—		—		49		48		0		0		49		48
Total benefits and expenses	—		—		38		38		0		0		38		38
*Income from life insurance operations before taxes*	—		—		11		10		0		0		11		10
Investment operations: ⁽¹⁾
Net investment income	4		4		95		90		(3)		(3)		96		91
Net realized investment losses	0		0		(292)		(88)		—		—		(292)		(88)
Net impairment losses recognized in earnings	(1)		0		(3)		0		—		—		(4)		0
Equity in earnings of limited partnerships	4		4		39		30		—		—		43		34
*Income (loss) from investment operations before taxes*	7		8		(161)		32		(3)		(3)		(157)		37
Income (loss) from operations before income taxes and noncontrolling interest	75		70		(35)		80		—		—		40		150
Provision for income taxes	25		23		(18)		19		—		—		7		42
Net income (loss)	$	50	$	47	$	(17)	$	61	$	—	$	—	$	33	$	108

(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,
	2015		2014		2015		2014		2015		2014		2015		2014
Management operations:
Management fee revenue, net	$	1,127	$	1,047	$	—	$	—	$	(1,127)	$	(1,047)	$	—	$	—
Service agreement revenue	22		23		—		—		—		—		22		23
Total revenue from management operations	1,149		1,070		—		—		(1,127)		(1,047)		22		23
Cost of management operations	958		882		—		—		(958)		(882)		—		—
*Income from management operations before taxes*	191		188		—		—		(169)		(165)		22		23
Property and casualty insurance operations:
Net premiums earned	—		—		4,239		3,899		—		—		4,239		3,899
Losses and loss expenses	—		—		2,897		3,016		(3)		(4)		2,894		3,012
Policy acquisition and underwriting expenses	—		—		1,222		1,132		(175)		(173)		1,047		959
*Income (loss) from property and casualty insurance operations before taxes*	—		—		120		(249)		178		177		298		(72)
Life insurance operations: ⁽¹⁾													144		143
Total revenue	—		—		144		144		0		(1)		144		143
Total benefits and expenses	—		—		110		111		0		0		110		111
*Income from life insurance operations before taxes*	—		—		34		33		0		(1)		34		32
Investment operations: ⁽¹⁾
Net investment income	13		12		284		263		(9)		(11)		288		264
Net realized investment gains (losses)	0		1		(244)		95		—		—		(244)		96
Net impairment losses recognized in earnings	(1)		0		(7)		0		—		—		(8)		0
Equity in earnings of limited partnerships	17		13		125		97		—		—		142		110
*Income from investment operations before taxes*	29		26		158		455		(9)		(11)		178		470
Income from operations before income taxes and noncontrolling interest	220		214		312		239		—		—		532		453
Provision for income taxes	75		72		91		61		—		—		166		133
Net income	$	145	$	142	$	221	$	178	$	—	$	—	$	366	$	320

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 September 30,				Nine months ended September 30,
(in millions, except per share data)	2015		2014		2015		2014
	(Unaudited)				(Unaudited)
Operating income attributable to Indemnity	$	51	$	47	$	146	$	141
Net realized investment (losses) gains and impairments	(1)		0		(1)		1
Income tax benefit (expense)	0		0		0		0
Realized (losses) gains and impairments, net of income taxes	(1)		0		(1)		1
Net income attributable to Indemnity	$	50	$	47	$	145	$	142

Per Indemnity Class A common share-diluted:
Operating income attributable to Indemnity	$	0.95	$	0.90	$	2.76	$	2.70
Net realized investment (losses) gains and impairments	(0.01)		0.00		(0.01)		0.02
Income tax benefit (expense)	0.00		0.00		0.00		(0.01)
Realized (losses) gains and impairments, net of income taxes	(0.01)		0.00		(0.01)		0.01
Net income attributable to Indemnity	$	0.94	$	0.90	$	2.75	$	2.71

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

	September 30, 2015		December 31, 2014
	(Unaudited)
Assets
Investments – Indemnity
Available-for-sale securities, at fair value:
Fixed maturities	$	588	$	564
Equity securities	20		25
Limited partnerships	95		113
Other invested assets	1		1
Investments – Exchange
Available-for-sale securities, at fair value:
Fixed maturities	9,392		9,007
Equity securities	720		850
Trading securities, at fair value	2,981		3,223
Limited partnerships	832		866
Other invested assets	21		20
Total investments	14,650		14,669

Cash and cash equivalents (Exchange portion of $496 and $422, respectively)	618		514
Premiums receivable from policyholders – Exchange	1,417		1,281
Reinsurance recoverable – Exchange	162		161
Deferred income taxes – Indemnity	51		37
Deferred acquisition costs – Exchange	656		595
Other assets (Exchange portion of $451 and $374, respectively)	561		501
Total assets	$	18,115	$	17,758

Liabilities and shareholders' equity
Liabilities
Indemnity liabilities
Other liabilities	$	644	$	611
Exchange liabilities
Losses and loss expense reserves	3,923		3,853
Life policy and deposit contract reserves	1,848		1,812
Unearned premiums	3,109		2,834
Deferred income taxes	283		490
Other liabilities	183		175
Total liabilities	9,990		9,775

Indemnity's shareholders' equity	750		703

Noncontrolling interest in consolidated entity – Exchange	7,375		7,280
Total equity	8,125		7,983
Total liabilities, shareholders' equity and noncontrolling interest	$	18,115	$	17,758