Erie Indemnity Reports Third Quarter 2013 Results

ERIE, Pa., Oct. 31, 2013 /PRNewswire-FirstCall/ --

3Q 2013 Highlights - Indemnity Shareholder Interest

  • Net income attributable to Indemnity per share-diluted was $0.87 per share in the third quarter of 2013, compared to net income per share-diluted of $0.96 per share in the third quarter of 2012.
  • Operating income attributable to Indemnity per share-diluted (excluding net realized gains or losses, impairments on investments and related taxes) was $0.86 per share in the third quarter of 2013, compared to operating income per share-diluted of $0.93 per share in the third quarter of 2012.
  • Indemnity's management operations pretax income totaled $60 million for the third quarter of 2013, compared to $66 million for the third quarter of 2012. The gross margin from management operations was 17.7 percent in the third quarter of 2013, compared to 20.9 percent in the third quarter of 2012.
  • Indemnity's investment operations pretax income totaled $10 million for the third quarter of 2013, compared to $12 million for the third quarter of 2012.

 

Nine Months Ended September 30, 2013 Highlights - Indemnity Shareholder Interest

  • Net income attributable to Indemnity per share-diluted was $2.41 per share for the nine months ended September 30, 2013, compared to net income per share-diluted of $2.43 per share for the nine months ended September 30, 2012.
  • Operating income attributable to Indemnity per share-diluted (excluding net realized gains or losses, impairments on investments and related taxes) was $2.40 per share for the nine months ended September 30, 2013, compared to operating income per share-diluted of $2.38 per share for the nine months ended September 30, 2012.
  • Indemnity's management operations pretax income totaled $168 million for the nine months ended September 30, 2013, compared to $171 million for the nine months ended September 30, 2012. The gross margin from management operations was 17.1 percent for the nine months ended September 30, 2013, compared to 18.8 percent for the nine months ended September 30, 2012.
  • Indemnity's investment operations pretax income totaled $25 million for the nine months ended September 30, 2013, compared to $26 million for the nine months ended September 30, 2012.

Erie Indemnity Company (NASDAQ: ERIE) today announced third quarter 2013 earnings of $46 million, compared to earnings of $51 million in the third quarter of 2012.  Operating income was $45 million in the third quarter of 2013, compared to $50 million in the third quarter of 2012.

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

Erie Indemnity Company also announced plans to expand the property and casualty and life insurance operations of the Erie Insurance Group into the Commonwealth of Kentucky by early 2015.

3Q 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)

3Q'13

3Q'12

3Q'13

3Q'12

3Q'13

3Q'12

3Q'13

3Q'12

Management operations

$

60


$

66


$


$


$

(52)


$

(58)


$

8


$

8


Property and casualty insurance operations(2)



24


(101)


55


61


79


(40)


Life insurance operations(2)



10


12


(1)


0


9


12


Investment operations

10


12


294


281


(2)


(3)


302


290


    Income from operations before income

     taxes and noncontrolling interest

70


78


328


192




398


270


Provision for income taxes

24


27


107


59




131


86


Net income

$

46


$

51


$

221


$

133


$


$


$

267


$

184











 

(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 third quarter of 2013.

Management Operations




Indemnity
shareholder
interest

(dollars in millions)

3Q'13

3Q'12

Management fee revenue, net

$

333


$

305


Service agreement revenue

8


8


Total revenue from management operations

$

341


$

313


Cost of management operations

281


247


Income from management operations before taxes

$

60


$

66


Gross margin

17.7

%

20.9

%




  • The management fee rate was 25 percent for both the third quarters of 2013 and 2012. Direct written premium of the property and casualty insurance operations, upon which the management fee is calculated, increased 9.6 percent in the third quarter of 2013, due to a 4.7 percent increase in policies in force and a 4.7 percent increase in the year-over-year average premium per policy for all lines of business at September 30, 2013.
  • Commissions increased $24 million in the third quarter of 2013, compared to the third quarter of 2012. Base commissions increased due to the 9.6 percent increase in direct written premium of the property and casualty insurance operations. Agent bonuses also increased due to an increase in the profitability component of the bonus as a result of factoring in the most recent year's underwriting results and the increased premium levels of the property and casualty insurance operations.
  • Non-commission expense increased $10 million in the third quarter of 2013, compared to the third quarter of 2012. Sales, policy issuance, advertising, and underwriting costs increased $2 million. Personnel costs increased $4 million as a result of a $1 million increase in salaries, a $1 million increase in pension costs, and a $2 million increase in the estimate for incentive plan compensation related to growth and underwriting performance. All other operating costs increased $4 million.

 

Investment Operations




Indemnity
shareholder
interest

(dollars in millions)

3Q'13

3Q'12

Net investment income

$

4


$

4


Net realized gains on investments

1


2


Net impairment losses recognized in earnings

0


0


Equity in earnings of limited partnerships

5


6


Income from investment operations before taxes

$

10


$

12


  • Income from investment operations before taxes were $10 million in the third quarter of 2013, compared to $12 million in the third quarter of 2012.  Net realized gains on investments and equity in earnings of limited partnerships each decreased $1 million.

Share Repurchase Program

In the third quarter of 2013, we repurchased 76,063 shares of our outstanding Class A nonvoting common stock at a total cost of $5.7 million, based upon trade date, in conjunction with our current stock repurchase program.  For the year through October 18, 2013, we repurchased 328,987 shares under this program at a total cost of $23.9 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 October 18, 2013, we had approximately $44 million in repurchase authority remaining under the program.

According to A.M. Best Company, Erie Insurance Group, based in Erie, Pennsylvania, is the 14th largest homeowners insurer and 12th largest automobile insurer in the United States based on direct premiums written and the 18th 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 nearly 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 Small Business Commercial Insurance" and "Highest in Customer Satisfaction with the Auto Insurance Purchase Experience" in 2013, 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
September 30,


Nine months ended
September 30,



2013


2012


2013


2012

Revenues





Premiums earned


$

1,241



$

1,137



$

3,631



$

3,333


Net investment income


109



105



316



326


Net realized investment gains


191



169



501



358


Net impairment losses recognized in earnings


(9)



0



(10)



0


Equity in earnings of limited partnerships


37



41



112



99


Other income


8



8



24



24


Total revenues


1,577



1,460



4,574



4,140


Benefits and expenses









Insurance losses and loss expenses


868



912



2,571



2,571


Policy acquisition and underwriting expenses


311



278



906



835


Total benefits and expenses


1,179



1,190



3,477



3,406


Income from operations before income taxes and noncontrolling interest


398



270



1,097



734


Provision for income taxes


131



86



363



234


Net income


$

267



$

184



$

734



$

500











Less: Net income attributable to noncontrolling interest in consolidated 
     entity – Exchange


221



133



607



370


Net income attributable to Indemnity


$

46



$

51



$

127



$

130











Earnings Per Share









Net income attributable to Indemnity per share









Class A common stock – basic


$

0.98



$

1.08



$

2.71



$

2.73


Class A common stock – diluted


$

0.87



$

0.96



$

2.41



$

2.43


Class B common stock – basic and diluted


$

147



$

162



$

406



$

411











Weighted average shares outstanding attributable to Indemnity – Basic









Class A common stock


46,656,911



47,188,741



46,707,971



47,476,693


Class B common stock


2,542



2,544



2,542



2,544











Weighted average shares outstanding attributable to Indemnity – Diluted









Class A common stock


52,851,250



53,374,846



52,902,310



53,662,798


Class B common stock


2,542



2,544



2,542



2,544











Dividends declared per share









Class A common stock


$

0.5925



$

0.5525



$

1.7775



$

1.6575


Class B common stock


$

88.8750



$

82.8750



$

266.6250



$

248.6250


 

 

 

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

September 30,


Three months ended
September 30,



2013

2012


2013

2012


2013

2012


2013

2012

Management operations:













Management fee revenue, net


$

333


$

305



$


$



$

(333)


$

(305)



$


$


Service agreement revenue


8


8









8


8


Total revenue from management operations


341


313






(333)


(305)



8


8


Cost of management operations


281


247






(281)


(247)





Income from management operations before taxes


60


66






(52)


(58)



8


8


Property and casualty insurance operations:













Net premiums earned





1,221


1,118






1,221


1,118


Losses and loss expenses





841


890



(1)


(2)



840


888


Policy acquisition and underwriting expenses





356


329



(54)


(59)



302


270


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





24


(101)



55


61



79


(40)


Life insurance operations: (1)













Total revenue





47


44



(1)


0



46


44


Total benefits and expenses





37


32



0


0



37


32


Income from life insurance operations before taxes





10


12



(1)


0



9


12


Investment operations:













Net investment income


4


4



83


81



(2)


(3)



85


82


Net realized gains on investments


1


2



188


165






189


167


Net impairment losses recognized in earnings


0


0



(9)


0






(9)


0


Equity in earnings of limited partnerships


5


6



32


35






37


41


Income from investment operations before taxes


10


12



294


281



(2)


(3)



302


290


Income from operations before income taxes and 
     noncontrolling
interest


70


78



328


192






398


270


Provision for income taxes


24


27



107


59






131


86


Net income


$

46


$

51



$

221


$

133



$


$



$

267


$

184


 


(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,



2013

2012


2013

2012


2013

2012


2013

2012

Management operations:













Management fee revenue, net


$

965


$

882



$


$



$

(965)


$

(882)



$


$


Service agreement revenue


23


23









23


23


Total revenue from management operations


988


905






(965)


(882)



23


23


Cost of management operations


820


734






(820)


(734)





Income from management operations before taxes


168


171






(145)


(148)



23


23


Property and casualty insurance operations:













Net premiums earned





3,573


3,279






3,573


3,279


Losses and loss expenses





2,495


2,501



(4)


(4)



2,491


2,497


Policy acquisition and underwriting expenses





1,032


963



(151)


(153)



881


810


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





46


(185)



155


157



201


(28)


Life insurance operations: (1)













Total revenue





139


133



(2)


(1)



137


132


Total benefits and expenses





105


99



0


0



105


99


Income from life insurance operations before taxes





34


34



(2)


(1)



32


33


Investment operations:













Net investment income


11


12



243


251



(8)


(8)



246


255


Net realized gains on investments


1


4



492


348






493


352


Net impairment losses recognized in earnings


0


0



(9)


0






(9)


0


Equity in earnings of limited partnerships


13


10



98


89






111


99


Income from investment operations before taxes


25


26



824


688



(8)


(8)



841


706


Income from operations before income taxes and
     noncontrolling
interest


193


197



904


537






1,097


734


Provision for income taxes


66


67



297


167






363


234


Net income


$

127


$

130



$

607


$

370



$


$



$

734


$

500


 

(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 (Unaudited) 

 

 

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)



2013



2012



2013



2012




(Unaudited)



(Unaudited)

Operating income attributable to Indemnity


$

45


$

50


$

126


$

128

Net realized gains and impairments on investments



1



2



1



4

Income tax expense



0



(1)



0



(2)

Realized gains and impairments, net of income taxes



1



1



1



2

Net income attributable to Indemnity


$

46


$

51


$

127


$

130














Per Indemnity Class A common share-diluted:













Operating income attributable to Indemnity


$

0.86


$

0.93


$

2.40


$

2.38

Net realized gains and impairments on investments



0.01



0.05



0.01



0.08

Income tax expense



0.00



(0.02)



0.00



(0.03)

Realized gains and impairments, net of income taxes



0.01



0.03



0.01



0.05

Net income attributable to Indemnity


$

0.87


$

0.96


$

2.41


$

2.43

 

 

 

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

 



September 30,
2013


December 31,
2012



(Unaudited)



Assets





Investments – Indemnity





Available-for-sale securities, at fair value:





Fixed maturities


$

499



$

452


Equity securities


48



55


Limited partnerships


158



180


Other invested assets


1



1


Investments – Exchange





Available-for-sale securities, at fair value:





Fixed maturities


7,921



7,707


Equity securities


849



945


Trading securities, at fair value


2,945



2,417


Limited partnerships


979



1,037


Other invested assets


20



20


Total investments


13,420



12,814







Cash and cash equivalents (Exchange portion of $502 and $388, respectively)


535



400


Premiums receivable from policyholders – Exchange


1,203



1,062


Reinsurance recoverable – Exchange


174



168


Deferred income taxes – Indemnity


42



37


Deferred acquisition costs – Exchange


574



504


Other assets (Exchange portion of $329 and $339, respectively)


436



456


Total assets


$

16,384



$

15,441







Liabilities and shareholders' equity





Liabilities





Indemnity liabilities





Other liabilities


$

574



$

515


Exchange liabilities





Losses and loss expense reserves


3,712



3,598


Life policy and deposit contract reserves


1,754



1,708


Unearned premiums


2,654



2,365


Deferred income taxes


368



365


Other liabilities


123



99


Total liabilities


9,185



8,650







Indemnity's shareholders' equity


657



642







Noncontrolling interest in consolidated entity – Exchange


6,542



6,149


Total equity


7,199



6,791


Total liabilities, shareholders' equity and noncontrolling interest


$

16,384



$

15,441


 

SOURCE Erie Indemnity Company



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