2. To our nine months ended September 30, 2004,
increased 5.4 percent to $165.1 million
Shareholders compared to $156.6 million during the same
period in 2003. Net income per share for
Net income per share increased 5.3 percent the nine months ended September 30, 2004,
to $.83 per share for the third quarter 2004 increased 6.0 percent to $2.34 per share
compared to $.79 per share for the same compared to $2.21 per share during the
period in 2003. For the quarter ended same period in 2003.
September 30, 2004, net income increased
to $58.6 million from $56.2 million for
Management
the same period one year ago. Income
Operations
from management operations for the third
quarter of 2004 decreased 7.1 percent from
the third quarter of 2003. Management Management fee revenue increased 6.3
fee revenue was reduced by $4.6 million percent to $246.4 million for the quarter
and $1.3 million in the third quarters of ended September 30, 2004. The property
2004 and 2003, respectively, due to an and casualty direct written premiums of
increase in the allowance on mid-term the Erie Insurance Group, upon which
policy cancellations. The higher estimated management fee revenue is calculated,
allowance for mid-term cancellations was grew 7.7 percent to $1.0 billion in the
the result of an increase in mid-term policy third quarter of 2004 from $971.0 million
cancellation experience for the most recent for the third quarter 2003. Increases in
quarter. After being offset by the change average premium per policy, reflective of
in allowance for returned commissions on rate increases achieved in various lines
mid-term policy cancellations, the impact of business, and high policy retention
of the change in cancellation allowance was rates were contributing factors in the
a reduction to net income of $.02 per share growth of direct written premiums. The
for the third quarter of 2004. The service fee slower premium growth in 2004 is due
revenue on voluntary assumed reinsurance to the Company’s focus on underwriting
also decreased as the Company exited from profitability through increased emphasis on
the business effective December 31, 2003. controlling exposure growth and improving
The improvement in insurance underwriting underwriting risk selection.
operations resulted as the benefits of rate
The management fee rate was increased by
increases and other underwriting actions are
the Company’s Board of Directors to 24
being realized. Revenue from investment
percent, effective July 1, 2004, from 23.5
operations increased 6.9 percent in the
percent in the first half of 2004. The rate
third quarter of 2004 compared to the
was set at 24 percent for all of 2003. The
same period in 2003. This increase is due
lower management fee rate in the first half
to improved results in equity in earnings of
of the year resulted in $10.2 million less
limited partnerships. Net income for the
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3. in management fee revenue for the nine 89.2 percent at June 30, 2004. This increase
months ended September 30, 2004, or a in estimated policy cancellations was partially
reduction to net income per share of $.09. offset by a change in the allowance for
returned commissions on mid-term policy
Direct written premiums of the Erie
cancellations of $2.3 million in the third
Insurance Group grew 10.1 percent on a
quarter of 2004. For the first nine months
rolling twelve-month basis. The average
of 2004 and 2003, revenues were reduced
premium per policy increased 8.2 percent
$5.7 million and $2.7 million, respectively,
to $1,042 for the twelve months ended
by changes in the estimated allowance for
September 30, 2004, from $964 for the
management fees returned on mid-term
same period in 2003. Contributing to the
policy cancellations.
annualized premium growth were policies
in force growing at an annualized rate of Service agreement revenue decreased to
1.8 percent to 3,787,053 at September 30, $5.4 million for the third quarter of 2004
2004, from 3,720,351 at September 30, from $6.7 million for the same period in
2003. Policy retention was 88.7 percent and 2003. Included in service agreement revenue
90.6 percent for the twelve months ended are service charges the Company collects
September 30, 2004 and 2003, respectively, from policyholders for providing extended
for all lines of business combined. While still payment plans on policies written by the
favorable, the reinforcement of underwriting Erie Insurance Group. The service charge
and reunderwriting standards to control revenue for the third quarters of 2004 and
exposure growth and improve risk selection 2003 was $5.3 million and $5.0 million,
is contributing to the slowdown in policy respectively.
growth and downward trend in the policy
Also included in service agreement revenue
retention rate.
is service income received from the Exchange
Management fees are returned to the as compensation for the management
Exchange when policies are cancelled mid- and administration of voluntary assumed
term and unearned premiums are refunded. reinsurance from non-affiliated insurers. As
The Company records an estimated the Exchange exits the assumed reinsurance
allowance for management fees returned on business, the service agreement revenue
mid-term policy cancellations. Third quarter received by the Company will continue to
2004 and 2003 revenues were reduced by decrease. The minimal third quarter 2004
$4.6 million and $1.3 million, respectively, voluntary assumed premium revenues
due to changes in the allowance. The higher yielded revenues to the Company of
estimated allowance was the result of higher approximately $43 thousand. Service fee
policy cancellation experience in the most revenue from voluntary assumed reinsurance
recent quarter compared to the previous business for the third quarter of 2003 was
quarter. This increase in policy cancellations $1.7 million. The non-affiliated voluntary
is reflected in the reduced year over year assumed reinsurance premium written in the
policy retention ratio, which decreased to first nine months of 2004 was $12.4 million
88.7 percent at September 30, 2004, from
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4. compared to $92.2 million in the same same period in 2003. Contributing to the
period in 2003. increase in salaries was a 4.3 percent increase
in staffing levels as well as normal merit pay
The cost of management operations
rate increases. Total employee benefit costs
increased 10.7 percent for the third quarter
increased 12.4 percent in the third quarter
of 2004 to $188.0 million from $169.8
of 2004 compared to the third quarter of
million for the same period in 2003.
2003 due to increases in health plan and
Commission costs totaled $140.2 million
retirement plan benefit costs.
for the third quarter of 2004, a 12.0 percent
increase over the $125.2 million for the third Income from the Company’s management
quarter of 2003. Commission costs include operations was $188.6 million and
scheduled commissions, contingency awards, $197.5 million for the nine months ended
accelerated commissions and promotional September 30, 2004 and 2003, respectively.
incentives earned by independent agents. The gross margins from management
Scheduled commissions, including agent operations were 25.3 percent and 28.8
contingency awards, increased 14.3 percent percent in the third quarters of 2004 and
to $134.6 million for the quarter ended 2003, respectively. Gross margins were 25.5
September 30, 2004. Agency contingency percent and 28.6 percent for the first nine
awards were $13.8 million and $6.4 million months of 2004 and 2003, respectively.
in the third quarters of 2004 and 2003, If the management fee rate had been 24
respectively. The increase in 2004 is a percent for all nine months of 2004, the
result of changes in the award program and gross margin would have been 26.5 percent.
improved underwriting results. Scheduled
commission expense was reduced by $2.3
Insurance Underwriting
million and $.8 million in the third quarters
Operations
of 2004 and 2003, respectively, related to the
changes in the allowance for management
Insurance underwriting operations of the
fees returned on mid-term policy cancellations
Company’s property and casualty insurance
discussed previously. Charges incurred for
subsidiaries, Erie Insurance Company and
accelerated commissions were $5.6 million
Erie Insurance Company of New York,
and $7.3 million for the quarters ended
which together assume a 5.5 percent share
September 30, 2004 and 2003, respectively.
of the underwriting results of the Erie
Other operating costs, excluding
Insurance Group under an intercompany
commissions, increased 7.1 percent in the
reinsurance pooling agreement, generated
third quarter of 2004 to $47.8 million
underwriting income of $2.9 million in
from $44.6 million recorded in the same
the third quarter of 2004 compared to
period of 2003. Personnel costs, including
underwriting losses of $4.9 million in the
salaries, employee benefits and payroll taxes,
third quarter of 2003.
increased 14.7 percent to $29.4 million
The Company’s property and casualty
for the three months ended September 30,
insurance subsidiaries’ share of the Erie
2004, compared to $25.6 million for the
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5. Insurance Group’s direct business generated aggregate excess of loss agreement with
underwriting income of $5.3 million in the Exchange. The premium paid to the
the third quarter of 2004 compared to Exchange for the agreement totaled $1.6
underwriting losses of $9.4 million in the million and $1.2 million for the third
third quarter of 2003. The improvement in quarters of 2004 and 2003 respectively. The
2004 underwriting results on direct business portion of this premium recorded as expense
reflects the impact of the underwriting was $.8 million in the third quarter of
profitability initiatives implemented in 2004 and $1.2 million in the third quarter
2003. Additionally, the Property and of 2003. In the third quarter of 2004, the
Casualty Group has experienced positive Company’s property and casualty insurance
development on losses of prior accident subsidiaries recorded charges under the
years through the first nine months of 2004 excess-of-loss reinsurance agreement with the
of approximately $120 million compared Exchange of $1.2 million. This is the result
to adverse development on losses of prior of the positive loss development experience
accident years experience of approximately on prior accident years, especially the 2003
$30 million in the same period a year accident year. During the third quarter of
ago. The impact on the Company of the 2003, the Company’s property and casualty
positive development of prior accident insurance subsidiaries recorded recoveries
years, net of changes in recoverables under of $7.1 million under the excess-of-loss
the excess-of-loss reinsurance agreement, reinsurance agreement. Contributing to these
was $.5 million. Contributing to the 2003 recoveries were the impact of Hurricane
underwriting losses were catastrophe losses Isabel on the 2003 accident year results and
of $6.1 million which included the effects adverse development of prior accident years.
of Hurricane Isabel. For the nine months No cash payments have been made between
ended September 30, 2004, the Company’s companies in 2004 or 2003 for recoveries
property and casualty insurance subsidiaries’ under this agreement since related losses are
share of the Erie Insurance Group’s direct reserved but not yet paid.
business generated underwriting income
Included in the Company’s policy
of $6.8 million, compared to underwriting
acquisition and other underwriting expenses
losses of $20.6 million for the same period
are the property and casualty insurance
in 2003.
subsidiaries’ share of eCommerce initiative
In August 2004, the Company implemented expenses covered under a technology cost
insurance scoring for its private passenger sharing agreement totaling $.3 million and
auto and homeowners lines of business in $.5 million for the quarters ended September
all operating states and territories except 30, 2004 and 2003, respectively. For the
Maryland, to maintain and enhance nine months ended September 30, 2004 and
underwriting fundamentals and risk selection 2003, these eCommerce costs totaled $1.0
capabilities. million and $2.1 million, respectively.
Underwriting results are net of premiums
paid and recoveries recorded under the
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6. Investment impairment charges on limited partnerships
in the third quarter of 2004. In the third
Operations quarter of 2003, there were impairment
charges related to private equity limited
Net revenue from investment operations for partnerships of $.6 million.
the third quarter of 2004 increased to $21.2
We are pleased with the continued consistent
million from $19.8 million in the third
financial performance of Erie Indemnity
quarter of 2003. For the nine months ended
Company in the third quarter. Underwriting
September 30, 2004, net revenue from
profitability has been and continues to be a
investment operations was $62.1 million
priority for our Company, and the positive
compared to $52.4 million for the same
results have been significant. An expected
period in 2003.
result of our focus on underwriting has been
The increase in net revenue from investment a slowdown in new business production,
operations in the third quarter 2004 is which continued in the third quarter. The
primarily due to earnings from limited primary focus of our agents has been on
partnerships of $3.8 million for the quarter implementing our enhanced underwriting
ended September 30 2004, compared to and reunderwriting guidelines, and their
$1.3 million for the same period in 2003. efforts have been outstanding. These
Net investment income totaled $14.8 improved results create the foundation for
million and $14.5 million for the quarters us to improve our competitiveness. Overall,
ended September 30, 2004 and 2003, the inroads we have made with underwriting
respectively
respectively. profitability and quality growth will favorably
impact our Company’s long-term objectives.
The Company realized net gains on
investments of $.9 million and $1.8 million
in the third quarters of 2004 and 2003,
respectively. There were no impairment
Jeffrey A. Ludrof
charges on investments in the third quarters
President and Chief Executive Officer
of 2004 or 2003.
Equity in earnings of limited partnerships “Safe Harbor” Statement Under the Private Securities
Litigation Reform Act of 1995: Certain forward-looking
was $3.8 million and $1.3 million for statements contained herein involve risks and uncertainties.
the quarters ended September 30, 2004 These statements include certain discussions relating to
management fee revenue, cost of management operations,
and 2003, respectively. Private equity underwriting, premium and investment income volume,
business strategies, profitability and business relationships
and mezzanine debt limited partnerships and the Company’s other business activities during 2004
generated earnings of $3.5 million for the and beyond. In some cases, you can identify forward-looking
statements by terms such as “may,” “will,” “should,” “could,”
three months ended September 30, 2004, “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,”
“estimate,” “project,” “predict,” “potential” and similar
compared to losses of $.1 million for the expressions. These forward-looking statements reflect the
same period of 2003. Real estate limited Company’s current views about future events, are based on
assumptions and are subject to known and unknown risks and
partnerships reflected earnings of $.3 million uncertainties that may cause results to differ materially from
and $1.4 million for the third quarters of those anticipated in those statements. Many of the factors that
will determine future events or achievements are beyond our
2004 and 2003, respectively. There were no ability to control or predict.
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7. Consolidated statements of operations—
segment basis
(Amounts in thousands, except per share data)
Three months ended Nine months ended
September 30 (unaudited) Septemer 30 (unaudited)
2004 2003 2004 2003
Management operations
Management fee revenue $ 246,388 $ 231,747 $ 724,379 $ 671,730
Service agreement revenue 5,384 6,667 16,207 20,014
Total revenue from management operations 251,772 238,414 740,586 691,744
Cost of management operations 187,999 169,752 551,957 494,212
Income from management operations 63,773 68,662 188,629 197,532
Insurance underwriting operations
Premiums earned 52,862 48,358 154,576 140,759
Losses and loss adjustment expenses incurred 34,602 38,723 112,642 115,587
Policy acquisition and other underwriting expenses 15,365 14,578 45,389 42,065
Total losses and expenses 49,967 53,301 158,031 157,652
Underwriting gain (loss) 2,895 ( 4,943) ( 3,455) ( 16,893)
Investment operations
Net investment income 14,795 14,477 45,048 43,015
Net realized gain on investments 859 1,846 6,743 5,815
Equity in earnings (losses) of limited partnerships 3,845 1,311 5,765 ( 1,435)
Equity in earnings of Erie Family Life
Insurance Company 1,654 2,160 4,545 5,019
Net revenue from investment operations 21,153 19,794 62,101 52,414
Income before income taxes 87,821 83,513 247,275 233,053
Provision for income taxes 29,255 27,276 82,182 76,458
Net income $ 58,566 $ 56,237 $ 165,093 $ 156,595
Net income per share—basic $ 0.83 $ 0.79 $ 2.34 $ 2.21
Net income per share—diluted $ 0.83 $ 0.79 $ 2.34 $ 2.20
Weighted average shares outstanding 70,186 70,997 70,584 70,997
Dividends declared
Class A non-voting common $ 0.215 $ 0.19 $ 0.645 $ 0.57
Class B common 32.25 28.50 96.75 85.50
NOTES: (1) The Consolidated Statements of Operations and Exchange Commission on Form 10-Q. Shareholders may
and Comprehensive Income have been prepared from obtain a copy of the Form 10-Q report without charge by
accounts without audit. (2) Net income for the period ended writing to the Chief Financial Officer, Erie Indemnity Company,
September 30, 2004, is not necessarily indicative of the results 100 Erie Insurance Place, Erie, Pennsylvania, 16530 or by
that may be expected for the year ending December 31, 2004. visiting the Company’s website at www.erieinsurance.com.
(3) The Company submits a quarterly report to the Securities
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8. Consolidated statements of
comprehensive income
(Dollars in thousands)
Three months ended Nine months ended
September 30 (unaudited) September 30 (unaudited)
2004 2003 2004 2003
Net income $ 58,566 $ 56,237 $ 165,093 $ 156,595
Unrealized holding gains (losses) arising during period,
net of reclassification adjustment for gains (losses)
included in net income, net of tax 15,123 ( 10,213) ( 4,897) 27,733
Comprehensive income $ 73,689 $ 46,024 $ 160,196 $ 184,328
Consolidated statements
of financial position
(Amounts in thousands, except per share data)
December 31
September 30
2004 2003
Assets (unaudited)
Investments
Fixed maturities $ 981,989 $ 879,361
Equity securities
Preferred stock 141,024 148,952
Common stock 39,356 40,451
Other invested assets 127,190 116,400
Total investments 1,289,559 1,185,164
Cash and cash equivalents 79,167 87,192
Equity in Erie Family Life Insurance Company 58,104 56,072
Premiums receivable from policyholders 295,119 266,957
Receivables from affiliates 1,079,669 984,146
Other assets 180,379 175,076
Total assets $ 2,981,997 $ 2,754,607
Liabilities and shareholders’ equity
Liabilities
Unpaid losses and loss adjustment expenses $ 905,930 $ 845,536
Unearned premiums 493,313 449,606
Other liabilities 344,202 295,295
Total liabilities 1,743,445 1,590,437
Total shareholders’ equity 1,238,552 1,164,170
Total liabilities and shareholders’ equity $ 2,981,997 $ 2,754,607
Book value per share $ 17.68 $ 16.40
Shares outstanding 70,040 70,997
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