Erie Indemnity Reports Second Quarter 2013 Results

ERIE, Pa., Aug. 1, 2013 /PRNewswire-FirstCall/ --

2Q 2013 Highlights - Indemnity Shareholder Interest

  • Net income attributable to Indemnity per share-diluted was $0.84 per share in the second quarter of 2013, compared to net income per share-diluted of $0.80 per share in the second quarter of 2012.
  • Operating income attributable to Indemnity per share-diluted (excluding net realized gains or losses, impairments on investments and related taxes) was $0.84 per share in the second quarter of 2013, compared to operating income per share-diluted of $0.82 per share in the second quarter of 2012.
  • Indemnity's management operations pretax income totaled $59 million in both the second quarters of 2013 and 2012.  The gross margin from management operations was 17.3 percent in the second quarter of 2013, compared to 18.6 percent in the second quarter of 2012.
  • Indemnity's investment operations pretax income totaled $8 million for the second quarter of 2013, compared to $6 million for the second quarter of 2012.

Six Months Ended June 30, 2013 Highlights - Indemnity Shareholder Interest

  • Net income attributable to Indemnity per share-diluted was $1.54 per share for the six months ended June 30, 2013, compared to net income per share-diluted of $1.47 per share for the six months ended June 30, 2012.
  • Operating income attributable to Indemnity per share-diluted (excluding net realized gains or losses, impairments on investments and related taxes) was $1.54 per share for the six months ended June 30, 2013, compared to operating income per share-diluted of $1.45 per share for the six months ended June 30, 2012.
  • Indemnity's management operations pretax income totaled $108 million for the six months ended June 30, 2013, compared to $105 million for the six months ended June 30, 2012.  The gross margin from management operations was 16.7 percent for the six months ended June 30, 2013, compared to 17.8 percent for the six months ended June 30, 2012.
  • Indemnity's investment operations pretax income totaled $15 million for the six months ended June 30, 2013, compared to $14 million for the six months ended June 30, 2012.

Erie Indemnity Company (NASDAQ: ERIE) today announced second quarter 2013 earnings of $44 million, compared to earnings of $43 million in the second quarter of 2012.  Operating income was $44 million in both the second quarters of 2013 and 2012.

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

2Q 2013 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)

2Q'13

2Q'12

2Q'13

2Q'12

2Q'13

2Q'12

2Q'13

2Q'12

Management operations

$

59


$

59


$


$


$

(51)


$

(51)


$

8


$

8


Property and casualty insurance operations(2)



11


(159)


55


54


66


(105)


Life insurance operations(2)



13


13


(1)


(1)


12


12


Investment operations

8


6


172


11


(3)


(2)


177


15


Income (loss) from operations before income

     taxes and noncontrolling interest

67


65


196


(135)




263


(70)


Provision for income taxes

23


22


63


(54)




86


(32)


Net income (loss)

$

44


$

43


$

133


$

(81)


$


$


$

177


$

(38)













(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.

The following tables and discussion show the operating results attributable to the Indemnity shareholder interest in the Erie Indemnity Company owned by the Class A and Class B shareholders for the second quarter of 2013.

Management Operations




Indemnity
shareholder
interest

(dollars in millions)

2Q'13

2Q'12

Management fee revenue, net

$

336


$

308


Service agreement revenue

8


8


Total revenue from management operations

$

344


$

316


Cost of management operations

285


257


Income from management operations before taxes

$

59


$

59


Gross margin

17.3

%

18.6

%




  • The management fee rate was 25 percent for both the second quarters of 2013 and 2012.  Direct written premium of the property and casualty insurance operations, upon which the management fee is calculated, increased 9.3 percent in the second quarter of 2013, due to a 4.4 percent increase in policies in force and a 4.8 percent increase in the year-over-year average premium per policy for all lines of business at June 30, 2013.
  • Commissions increased $22 million in the second quarter of 2013, compared to the second quarter of 2012, primarily as a result of the 9.3 percent increase in direct written premium of the property and casualty insurance operations, combined with a slight increase in agent bonuses.  Additionally, impacting the second quarter of 2012 was an adjustment that reduced commission expense by $6 million.  This amount represents the reimbursement by the North Carolina Reinsurance Facility (NCRF) for commissions Indemnity paid to agents on the surcharges collected on behalf of the NCRF which was incorrectly recorded as a benefit to the Exchange in prior periods.  Excluding this adjustment, the gross margin would have been 16.8% for the second quarter of 2012.
  • Non-commission expense increased $6 million in the second quarter of 2013, compared to the second quarter of 2012.  Sales, policy issuance, and underwriting costs increased $1 million.  Personnel costs increased $4 million as a result of a $2 million increase in salaries, a $1 million increase in pension costs, and a $1 million increase in the estimate for incentive plan compensation related to growth and underwriting performance.  All other operating costs increased $1 million.

Investment Operations




Indemnity
shareholder
interest

(dollars in millions)

2Q'13

2Q'12

Net investment income

$

3


$

4


Net realized gains (losses) on investments

0


(1)


Net impairment losses recognized in earnings

0


0


Equity in earnings of limited partnerships

5


3


Income from investment operations before taxes

$

8


$

6





  • Income from investment operations before taxes increased to $8 million in the second quarter of 2013, from $6 million in the second quarter of 2012, due to a a $2 million increase in equity in earnings of limited partnerships.  Additionally, we recorded $1 million in net realized losses in the second quarter of 2012, which was offset by a $1 million reduction in net investment income in the second quarter of 2013 compared to the second quarter of 2012.

Share Repurchase Program

In the second quarter of 2013, we repurchased 23,798 shares of our outstanding Class A nonvoting common stock at a total cost of $1 million, based upon trade date, in conjunction with our current stock repurchase program.  For the year through July 19, 2013, we repurchased 213,361 shares under this program at a total cost of $15 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 July 19, 2013, we had approximately $53 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 15th 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 more than 4.7 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 and Associates' award for "Highest in Customer Satisfaction with the Auto Insurance Purchase Experience" and to be 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 (2008-2012).

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 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 (Unaudited)
(dollars in millions, except per share data)












Three months ended
June 30,


Six months ended
June 30,



2013


2012


2013


2012

Revenues





Premiums earned


$

1,215



$

1,109



$

2,390



$

2,196


Net investment income


104



113



207



221


Net realized investment gains (losses)


61



(107)



310



189


Net impairment losses recognized in earnings


(1)



0



(1)



0


Equity in earnings of limited partnerships


39



37



75



58


Other income


8



8



16



16


     Total revenues


1,426



1,160



2,997



2,680


Benefits and expenses









Insurance losses and loss expenses


861



943



1,703



1,659


Policy acquisition and underwriting expenses


302



287



595



557


     Total benefits and expenses


1,163



1,230



2,298



2,216


Income (loss) from operations before income taxes and noncontrolling

    interest


263



(70)



699



464


Provision for income taxes


86



(32)



232



148


Net income (loss)


$

177



$

(38)



$

467



$

316











Less: Net income (loss) attributable to noncontrolling interest in

    consolidated entity – Exchange


133



(81)



386



237


Net income attributable to Indemnity


$

44



$

43



$

81



$

79











Earnings Per Share









Net income attributable to Indemnity per share









Class A common stock – basic


$

0.95



$

0.90



$

1.73



$

1.65


Class A common stock – diluted


$

0.84



$

0.80



$

1.54



$

1.47


Class B common stock – basic and diluted


$

142



$

135



$

259



$

249











Weighted average shares outstanding attributable to Indemnity – Basic









Class A common stock


46,693,333



47,492,305



46,733,925



47,619,852


Class B common stock


2,542



2,544



2,542



2,545











Weighted average shares outstanding attributable to Indemnity – Diluted









Class A common stock


52,886,259



53,677,848



52,926,851



53,807,795


Class B common stock


2,542



2,544



2,542



2,545











Dividends declared per share









Class A common stock


$

0.5925



$

0.5525



$

1.185



$

1.105


Class B common stock


$

88.8750



$

82.8750



$

177.750



$

165.750


 

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
June 30,


Three months ended
June 30,


Three months ended
June 30,


Three months ended
June 30,



2013

2012


2013

2012


2013

2012


2013

2012

Management operations:













Management fee revenue, net


$

336


$

308



$


$



$

(336)


$

(308)



$


$


Service agreement revenue


8


8









8


8


Total revenue from management operations


344


316






(336)


(308)



8


8


Cost of management operations


285


257






(285)


(257)





     Income from management operations before taxes


59


59






(51)


(51)



8


8


Property and casualty insurance operations:













Net premiums earned





1,196


1,092






1,196


1,092


Losses and loss expenses





837


919



(2)


(1)



835


918


Policy acquisition and underwriting expenses





348


332



(53)


(53)



295


279


     Income (loss) from property and casualty insurance 
               operations before taxes





11


(159)



55


54



66


(105)


Life insurance operations: (1)













Total revenue





46


46



(1)


(1)



45


45


Total benefits and expenses





33


33



0


0



33


33


     Income from life insurance operations before taxes





13


13



(1)


(1)



12


12


Investment operations:













Net investment income


3


4



81


87



(3)


(2)



81


89


Net realized gains (losses) on investments


0


(1)



58


(110)






58


(111)


Net impairment losses recognized in earnings


0


0



0


0






0


0


Equity in earnings of limited partnerships


5


3



33


34






38


37


     Income from investment operations before taxes


8


6



172


11



(3)


(2)



177


15


Income (loss) from operations before income taxes and

    noncontrolling interest


67


65



196


(135)






263


(70)


Provision for income taxes


23


22



63


(54)






86


(32)


Net income (loss)


$

44


$

43



$

133


$

(81)



$


$



$

177


$

(38)




(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



Six months ended
June 30,


Six months ended
June 30,


Six months ended
June 30,


Six months ended
June 30,



2013

2012


2013

2012


2013

2012


2013

2012

Management operations:













Management fee revenue, net


$

632


$

577



$


$



$

(632)


$

(577)



$


$


Service agreement revenue


15


15









15


15


Total revenue from management operations


647


592






(632)


(577)



15


15


Cost of management operations


539


487






(539)


(487)





     Income from management operations before taxes


108


105






(93)


(90)



15


15


Property and casualty insurance operations:













Net premiums earned





2,352


2,161






2,352


2,161


Losses and loss expenses





1,654


1,611



(3)


(2)



1,651


1,609


Policy acquisition and underwriting expenses





676


634



(97)


(94)



579


540


     Income (loss) from property and casualty insurance 
               operations before taxes





22


(84)



100


96



122


12


Life insurance operations: (1)













Total revenue





92


89



(1)


(1)



91


88


Total benefits and expenses





68


67



0


0



68


67


     Income from life insurance operations before taxes





24


22



(1)


(1)



23


21


Investment operations:













Net investment income


7


8



160


170



(6)


(5)



161


173


Net realized gains on investments


0


2



304


183






304


185


Net impairment losses recognized in earnings


0


0



0


0






0


0


Equity in earnings of limited partnerships


8


4



66


54






74


58


     Income from investment operations before taxes


15


14



530


407



(6)


(5)



539


416


Income from operations before income taxes and

    noncontrolling interest


123


119



576


345






699


464


Provision for income taxes


42


40



190


108






232


148


Net income


$

81


$

79



$

386


$

237



$


$



$

467


$

316




(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 June 30,



Six months ended June 30,

(in millions, except per share data)



2013



2012



2013



2012




(Unaudited)



(Unaudited)

Operating income attributable to Indemnity


$

44


$

44


$

81


$

78

Net realized gains (losses) and impairments on investments



0



(1)



0



2

Income tax (expense) benefit



0



0



0



(1)

   Realized gains (losses) and impairments, net of income taxes



0



(1)



0



1

Net income attributable to Indemnity


$

44


$

43


$

81


$

79














Per Indemnity Class A common share-diluted:













Operating income attributable to Indemnity


$

0.84


$

0.82


$

1.54


$

1.45

Net realized gains (losses) and impairments on investments



0.00



(0.03)



0.00



0.03

Income tax (expense) benefit



0.00



0.01



0.00



(0.01)

   Realized gains (losses) and impairments, net of income taxes



0.00



(0.02)



0.00



0.02

Net income attributable to Indemnity


$

0.84


$

0.80


$

1.54


$

1.47

 

 

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












June 30,

2013


December 31,
2012



(Unaudited)



Assets





Investments – Indemnity





     Available-for-sale securities, at fair value:





       Fixed maturities


$

438



$

452


       Equity securities


48



55


     Limited partnerships


166



180


     Other invested assets


1



1


Investments – Exchange





     Available-for-sale securities, at fair value:





       Fixed maturities


7,725



7,707


       Equity securities


969



945


     Trading securities, at fair value


2,724



2,417


     Limited partnerships


1,011



1,037


     Other invested assets


20



20


         Total investments


13,102



12,814







Cash and cash equivalents (Exchange portion of $326 and $388, respectively)


365



400


Premiums receivable from policyholders – Exchange


1,191



1,062


Reinsurance recoverable – Exchange


174



168


Deferred income taxes – Indemnity


43



37


Deferred acquisition costs – Exchange


553



504


Other assets (Exchange portion of $336 and $339, respectively)


451



456


         Total assets


$

15,879



$

15,441







Liabilities and shareholders' equity





Liabilities





Indemnity liabilities





      Other liabilities


$

535



$

515


Exchange liabilities





      Losses and loss expense reserves


3,668



3,598


      Life policy and deposit contract reserves


1,739



1,708


      Unearned premiums


2,553



2,365


      Deferred income taxes


312



365


      Other liabilities


104



99


         Total liabilities


8,911



8,650







Indemnity's shareholders' equity


647



642







Noncontrolling interest in consolidated entity – Exchange


6,321



6,149


         Total equity


6,968



6,791


         Total liabilities, shareholders' equity and noncontrolling interest


$

15,879



$

15,441


 

SOURCE Erie Indemnity Company



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