1. Stock
CHARTING THE WAY
Information
Erie Indemnity Company
Class A Common Stock is listed on the
NASDAQ National Stock Market under the
symbol “ERIE.” Quotations are available via
major financial news sources.
Stock Transfer Information
American Stock Transfer & Trust Company
59 Maiden Lane
Plaza Level
New York, NY 10038
(800) 937-5449
ER ERIE INDEMNITY COMPANY
2
2nd QUARTER REPORT
®
2004
ERIE INDEMNITY COMPANY
Member • Erie Insurance Group
www.erieinsurance.com
GF-540 8/04 © 2004 Erie Indemnity Company

2. To our Net income for the six months ended
June 30, 2004, increased 6.1 percent to
Shareholders $106.5 million compared to $100.4 million
during the same period in 2003. Net income
Net income per share increased 5.1 percent per share for the six months ended June 30,
to $.81 per share for the second quarter 2004, increased 6.5 percent to $1.50 per
2004 compared to $.77 per share for the share compared to $1.41 per share during
same period in 2003. For the quarter ended the same period in 2003.
June 30, 2004, net income increased to
$57.0 million from $54.5 million for the
Management
same period one year ago. Income from
Operations
management operations for the second
quarter of 2004 decreased 1.3 percent from
the second quarter of 2003. Contributing Management fee revenue increased 10.0
to this decrease was a slower growth in percent to $256.1 million for the quarter
management operations due to the lower ended June 30, 2004. The property and
management fee rate of 23.5 percent in 2004 casualty direct written premiums of the Erie
compared to 24.0 percent in 2003, despite Insurance Group, upon which management
a 10.7 percent increase in direct written fee revenue is calculated, grew 10.7 percent
premiums of the Erie Insurance Group. In to $1.1 billion in the second quarter of 2004
the second quarter of 2004, management from $973.9 million for the second quarter
fee revenue increased $2.8 million due 2003. Increases in average premium per policy,
to a reduction in the second quarter of reflective of rate increases achieved in various
2004 of the allowance for management fee lines of business, and continuing favorable
revenue. In the second quarter of 2003, policy retention rates were contributing factors
the allowance for management fee revenue in the growth of direct written premiums. The
decreased management fee revenue by $1.0 slower premium growth in 2004 is due to the
million. The service fee revenue on voluntary Company’s focus on underwriting profitability
assumed reinsurance also decreased as the through increased emphasis on controlling
Company exited from the business effective exposure growth and improving underwriting
December 31, 2003. The improvement in risk selection.
insurance underwriting operations resulted
The management fee rate was set at 23.5
as the benefits of rate increases and other
percent beginning January 1, 2004, and
underwriting actions are being realized.
was 24 percent for 2003. This reduction in
Revenue from investment operations
management fee rate caused a $10.2 million
increased 20.8 percent in the second quarter
decrease in management fee revenue for the
of 2004 compared to the same period in
first six months of 2004 compared to the
2003. This increase is due to increased net
same period of 2003, or a reduction to net
investment income and improved results in
income per share of $.09. At its July 2004
equity in earnings of limited partnerships.
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3. meeting, the Board voted to increase the This change in estimate was partially offset
management fee rate to 24% from 23.5% by a change in the allowance for returned
effective July 1, 2004. commissions on mid-term cancellations.
For the first six months of 2004 and 2003,
Direct written premiums of the Erie
revenues were reduced $1.1 million and
Insurance Group grew 12.2 percent on
$1.4 million, respectively, by changes in this
a rolling 12-month basis. The average
estimated allowance.
premium per policy increased 8.7 percent
to $1,022 for the 12 months ended Service agreement revenue decreased to
June 30, 2004, from $940 for the same $5.2 million for the second quarter of 2004
period in 2003. Also contributing to the from $6.9 million for the same period in
annualized premium growth were policies 2003. Included in service agreement revenue
in force growing at an annualized rate are service charges the Company collects
of 3.2 percent to 3,787,242 at June 30, from policyholders for providing extended
2004, from 3,668,506 at June 30, 2003. payment plans on policies written by the
Policy retention was 89.2 percent and Erie Insurance Group. The service charge
91.0 percent for the 12 months ended revenue for the second quarters of 2004 and
June 30, 2004 and 2003, respectively, for 2003 were $5.2 million and $5.0 million,
all lines of business combined. While still respectively.
favorable, the reinforcement of underwriting
Also included in service agreement revenue
and reunderwriting standards to control
is service income received from the Exchange
exposure growth and improve risk selection
as compensation for the management
is contributing to the downward trend in the
and administration of voluntary assumed
policy retention rate.
reinsurance from non-affiliated insurers. As
Management fees are returned to the the Exchange exits the assumed reinsurance
Exchange when policyholders cancel their business, the service agreement revenue
coverage mid-term and unearned premiums received by the Company will continue
are refunded. The Company records an to decrease. The second quarter 2004
estimated allowance for management fees voluntary assumed premium and related
returned on mid-term cancellations. Second service fee revenue was minimal. Service fee
quarter 2004 revenues were increased by revenue from voluntary assumed reinsurance
$2.8 million while second quarter 2003 business for the second quarter of 2003 was
revenues had been decreased $1.0 million $1.9 million. The non-affiliated voluntary
due to changes in this allowance. During assumed reinsurance premium written in
the second quarter of 2004, the Company the first half of 2004 was $11.7 million
performed an evaluation of actual mid- compared to $64.5 million in the same
term policy cancellation experience. As period in 2003.
a consequence, the Company refined
The cost of management operations
its estimated allowance for mid-term
increased 13.3 percent for the second
cancellations in the second quarter 2004.
quarter of 2004 to $192.7 million from
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4. $170.1 million for the same period in 2003. 2003. Increases in health plan and retirement
Commission costs totaled $146.1 million plan benefit costs were offset by a reduction
for the second quarter of 2004, a 16.6 to the liability for the Company’s workers’
percent increase over the $125.3 million for compensation benefit cost.
the second quarter of 2003. Commission
Income from the Company’s management
costs include scheduled commissions,
operations was $124.9 million and $128.9
contingency awards, accelerated commissions
and promotional incentives earned by million for the six months ended June 30,
independent agents. Scheduled commissions, 2004 and 2003, respectively. The gross
including agent contingency awards, margins from management operations were
increased 18.9 percent to $140.1 million for 26.3 percent and 29.0 percent in the second
the quarter ended June 30, 2004. Charges quarters of 2004 and 2003, respectively. If
incurred for accelerated commissions were the management fee rate, which is currently
$1.7 million and $2.6 million above normal
23.5 percent, had remained consistent
scheduled rate commissions for the quarters
with the 2003 rates of 24 percent, the
ended June 30, 2004 and 2003, respectively.
gross margin for the second quarter of
In the second quarter of 2004, scheduled
2004 would have been 27.8 percent. Gross
commission expense was increased by
margins were 25.5 percent and 28.4 percent
$1.4 million related to the changes in the
for the first six months of 2004 and 2003
allowance for management fees returned on
respectively.
mid-term cancellations, discussed previously.
In the second quarter of 2003, scheduled
commission expense was reduced by $.6
Insurance Underwriting
million related to changes in this allowance.
Operations
Other operating costs, excluding
commissions, increased 4.1 percent in the Insurance underwriting operations of the
second quarter of 2004 to $46.6 million Company’s property and casualty insurance
from $44.8 million recorded in the same subsidiaries, Erie Insurance Company and
period of 2003. Personnel costs, including Erie Insurance Company of New York,
salaries, employee benefits and payroll taxes, which together assume a 5.5 percent share
increased 3.7 percent to $27.0 million of the underwriting results of the Erie
for the three months ended June 30, Insurance Group under an intercompany
2004, compared to $26.0 million for the reinsurance pooling agreement, reported
same period in 2003. Contributing to the underwriting losses of $4.9 million and $6.3
increase in salaries was a 5.3% increase in million for the second quarters of 2004 and
staffing levels as well as normal merit pay 2003, respectively.
rate increases. Total employee benefit costs
The Company’s property and casualty
decreased 1.8% in the second quarter of
insurance subsidiaries’ share of the Erie
2004 compared to the second quarter of
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5. Insurance Group’s direct business generated for private passenger auto and homeowners
underwriting income of $1.3 million in lines of business.
the second quarter of 2004 compared
Underwriting results are net of premiums
to underwriting losses of $4.2 million
paid and recoveries recorded under the
in the second quarter of 2003. The
aggregate excess of loss agreement with
improvement in 2004 underwriting results
the Exchange. The premium paid to the
on direct business reflects the impact of
Exchange for the agreement totaled $1.7
the underwriting profitability initiatives
million and $1.2 million during the six
implemented in 2003. Additionally,
months ended June 30, 2004 and 2003,
the Property and Casualty Group has
respectively. In the second quarter of
experienced positive development on losses
2004, the Company’s property/casualty
of prior accident years through the first six
insurance subsidiaries had a reduction
months of 2004 of approximately $100
of recoveries under the excess-of-loss
million compared to adverse development
reinsurance agreement with the Exchange
on losses of prior accident years experience
by $4.9 million. This is the result of the
of about $30 million in the same period a
positive loss development experience on
year ago. The impact on the Company of
prior accident years, especially the 2003
the positive development of prior accident
accident year. During the second quarter
years, net of changes in recoverables under
of 2003, the Company’s property/casualty
the excess-of-loss reinsurance agreement, was
insurance subsidiaries recorded a $1.8
$.5 million. Certain lines of business, such
million reduction of reinsurance recoveries
as workers’ compensation and commercial
that had been recorded in the first quarter of
multi-peril continue to experience poor loss
2003 as a result of improved underwriting
ratios as a result of increased severity. These
results of the Property and Casualty Group.
trends are being addressed by reunderwriting
No cash payments have been made between
and severity control initiatives. The 2003
companies in 2004 or 2003 for recoveries
underwriting losses resulted primarily from
under this agreement since related losses are
increases in claims severity and higher
reserved but not yet paid.
catastrophe losses. For the six months ended
June 30, 2004 and 2003, underwriting Included in the Company’s policy
losses from the Company’s property/casualty acquisition and other underwriting expenses
insurance subsidiaries were $6.3 million and are the property and casualty insurance
$12.0 million, respectively. subsidiaries’ share of eCommerce initiative
expenses covered under a technology cost
In August 2004, subject to regulatory
sharing agreement totaling $.3 million and
approval in the various jurisdictions where
$.8 million for the quarters ended June 30,
the Company operates, the Property and
2004 and 2003, respectively. For the six
Casualty Group plans to implement the
months ended June 30, 2004 and 2003,
use of insurance scoring in underwriting
these eCommerce costs totaled $.7 million
to maintain and enhance underwriting
and $1.6 million, respectively.
fundamentals and risk selection capabilities
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6. Investment for the same period in 2003. There were no
impairment charges on limited partnerships
Operations in the second quarter of 2004. In the second
quarter of 2003, there were impairment
Net revenue from investment operations for charges related to private equity limited
the second quarter of 2004 increased to $21.6 partnerships of $.5 million.
million from $17.9 million in the second
The improvement in our combined ratio
quarter of 2003. For the six months ended
during the second quarter and first six
June 30, 2004, net revenue from investment
months of 2004 demonstrates that our focus
operations was $40.9 million compared to
on underwriting profitability is working.
$32.6 million for the same period in 2003.
Our agents and employees are executing the
The increase in net revenue from investment strategies we have developed to maintain
operations in the second quarter 2004 is our exceptional service and ensure the
primarily due to earnings from limited financial stability of our company. Our
partnerships of $1.5 million for the quarter growth has moderated as a result of our
ended June 30 2004, compared to losses of focus on underwriting profitability, yet we
$1.4 million for the same period in 2003, as continue to attract new business thanks to
well as increases in net investment income. our unparalleled commitment to service.
Net investment income totaled $15.6 The outlook for our Company to maintain
million and $14.2 million for the quarters a pattern of profitable growth looks very
ended June 30, 2004 and 2003, respectively. positive.
The Company realized net gains on
investments of $3.0 million and $3.4 million
in the second quarters of 2004 and 2003,
Jeffrey A. Ludrof
respectively. There were no impairment
President and Chief Executive Officer
charges on investments in the second
quarters of 2004 or 2003.
“Safe Harbor” Statement Under the Private Securities
Litigation Reform Act of 1995: Certain forward-looking
Equity in earnings of limited partnerships
statements contained herein involve risks and uncertainties.
was $1.5 million for the quarter ended These statements include certain discussions relating to
management fee revenue, cost of management operations,
June 30, 2004, compared to losses of $1.4
underwriting, premium and investment income volume,
million for the same period one year ago. business strategies, profitability and business relationships
and the Company’s other business activities during 2004
Private equity and fixed income limited and beyond. In some cases, you can identify forward-looking
partnerships recorded earnings of $.1 statements by terms such as “may,” “will,” “should,” “could,”
“would,” “expect,” “plan,” “intend,” “anticipate,” “believe,”
million for the quarter ended June 30, 2004, “estimate,” “project,” “predict,” “potential” and similar
compared to losses of $1.4 million in the expressions. These forward-looking statements reflect the
Company’s current views about future events, are based on
second quarter of 2003. Real estate limited assumptions and are subject to known and unknown risks
partnerships reflected earnings of $1.4 and uncertainties that may cause results to differ materially
from those anticipated in those statements. Many of the
million for the three months ended June 30, factors that will determine future events or achievements
2004, compared to earnings of $.1 million are beyond our 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 June 30 Six months ended June 30
(unaudited) (unaudited)
2004 2003 2004 2003
Management operations
Management fee revenue $ 256,124 $ 232,737 $ 477,991 $ 439,983
Service agreement revenue 5,224 6,863 10,823 13,347
Total revenue from management operations 261,348 239,600 488,814 453,330
Cost of management operations 192,719 170,087 363,958 324,460
Income from management operations $ 68,629 $ 69,513 $ 124,856 $ 128,870
Insurance underwriting operations
Premiums earned $ 51,065 $ 47,219 $ 101,714 $ 92,401
Losses and loss adjustment expenses incurred 40,002 39,364 78,040 76,864
Policy acquisition and other underwriting expenses 15,922 14,135 30,024 27,487
Total losses and expenses 55,924 53,499 108,064 104,351
Underwriting loss $ ( 4,859) $ ( 6,280) $ ( 6,350) $ ( 11,950)
Investment operations
Net investment income $ 15,567 $ 14,219 $ 30,254 $ 28,538
Net realized gain on investments 3,030 3,376 5,883 3,969
Equity in earnings (losses) of limited partnerships 1,503 ( 1,420) 1,920 ( 2,746)
Equity in earnings of Erie Family Life
Insurance Company 1,477 1,690 2,891 2,859
Net revenue from investment operations $ 21,577 $ 17,865 $ 40,948 $ 32,620
Income before income taxes 85,347 81,098 159,454 149,540
Provision for income taxes 28,392 26,640 52,927 49,182
Net income $ 56,955 $ 54,458 $ 106,527 $ 100,358
Net income per share—basic and diluted $ 0.81 $ 0.77 $ 1.50 $ 1.41
Weighted average shares outstanding 70,623 70,997 70,785 70,997
Dividends declared
Class A non-voting common $ 0.215 $ 0.19 $ 0.43 $ 0.38
Class B common $ 32.25 $ 28.50 $ 64.50 $ 57.00
NOTES: (1) The Consolidated Statements of Operations and Exchange Commission on Form 10-Q. Shareholders may
Comprehensive Income have been prepared from accounts obtain a copy of the Form 10-Q report without charge by
without audit. (2) Net income for the period ended June 30, writing to the Chief Financial Officer, Erie Indemnity Company,
2004, is not necessarily indicative of the results that may 100 Erie Insurance Place, Erie, Pennsylvania, 16530 or by
be expected for the year ending December 31, 2004. (3) The visiting the Company’s website at www.erieinsurance.com.
Company submits a quarterly report to the Securities and
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8. Consolidated statements of
comprehensive income
(Dollars in thousands)
Three months ended June 30 Six months ended June 30
(unaudited) (unaudited)
2004 2003 2004 2003
Net income $ 56,955 $ 54,458 $ 106,527 $ 100,358
Unrealized holding (losses) gains arising during period,
net of reclassification adjustment for gains (losses)
included in net income, net of tax ( 33,077) 28,191 ( 20,019) 37,946
Comprehensive income $ 23,878 $ 82,649 $ 86,508 $ 138,304
Consolidated statements
of financial position
(Amounts in thousands, except per share data)
December 31
June 30
2004 2003
Assets (unaudited)
Investments
Fixed maturities $ 911,462 $ 879,361
Equity securities
Preferred stock 147,909 148,952
Common stock 41,151 40,451
Other invested assets 125,504 116,400
Total investments 1,226,026 1,185,164
Cash and cash equivalents 71,265 87,192
Equity in Erie Family Life Insurance Company 52,475 56,072
Premiums receivable from policyholders 287,129 266,957
Receivables from affiliates 1,054,743 984,146
Other assets 179,511 175,076
Total assets $ 2,871,149 $ 2,754,607
Liabilities and shareholders’ equity
Liabilities
Unpaid losses and loss adjustment expenses $ 893,873 $ 845,536
Unearned premiums 479,126 449,606
Other liabilities 303,484 295,295
Total liabilities 1,676,483 1,590,437
Total shareholders’ equity 1,194,666 1,164,170
Total liabilities and shareholders’ equity $ 2,871,149 $ 2,754,607
Book value per share $ 16.97 $ 16.40
Shares outstanding 70,379 70,997
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