Erie Indemnity Reports Fourth Quarter and Total Year 2013 Results

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Erie Indemnity Company

Feb 27, 2014, 04:15 ET

ERIE, Pa., Feb. 27, 2014 /PRNewswire/ --

4Q 2013 Highlights - Indemnity Shareholder Interest

Net income attributable to Indemnity per share-diluted was $0.67 per share in the fourth quarter of 2013, compared to net income per share-diluted of $0.56 per share in the fourth quarter of 2012.
Operating income attributable to Indemnity per share-diluted (excluding net realized gains or losses, impairments on investments and related taxes) was $0.67 per share in the fourth quarter of 2013, compared to operating income per share-diluted of $0.54 per share in the fourth quarter of 2012.
Indemnity's management operations pretax income totaled $41 million for the fourth quarter of 2013, compared to $34 million for the fourth quarter of 2012. The gross margin from management operations was 13.2 percent in the fourth quarter of 2013, compared to 12.2 percent in the fourth quarter of 2012.
Indemnity's investment operations pretax income totaled $13 million for the fourth quarter of 2013, compared to $10 million for the fourth quarter of 2012.

Total Year 2013 Highlights - Indemnity Shareholder Interest

Net income attributable to Indemnity per share-diluted was $3.08 per share for the year ended December 31, 2013, compared to net income per share-diluted of $2.99 per share for the year ended December 31, 2012.
Operating income attributable to Indemnity per share-diluted (excluding net realized gains or losses, impairments on investments and related taxes) was $3.07 per share for the year ended December 31, 2013, compared to operating income per share-diluted of $2.92 per share for the year ended December 31, 2012.
Indemnity's management operations pretax income totaled $209 million for the year ended December 31, 2013, compared to $205 million for the year ended December 31, 2012. The gross margin from management operations was 16.1 percent for the year ended December 31, 2013, compared to 17.3 percent for the year ended December 31, 2012.
Indemnity's investment operations pretax income totaled $38 million for the year ended December 31, 2013, compared to $36 million for the year ended December 31, 2012.

Erie Indemnity Company (NASDAQ: ERIE) today announced fourth quarter 2013 earnings of $36 million, compared to earnings of $30 million in the fourth quarter of 2012. Operating income was $36 million in the fourth quarter of 2013, compared to $29 million in the fourth quarter of 2012.

For the year ended December 31, 2013, Erie Indemnity Company's earnings totaled $163 million, compared to earnings of $160 million for the year ended December 31, 2012. Operating income was $162 million for the year ended December 31, 2013, compared to operating income of $157 million or the year ended December 31, 2012.

4Q 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)	4Q'13		4Q'12		4Q'13		4Q'12		4Q'13		4Q'12		4Q'13		4Q'12
Management operations	$	41	$	34	$	—	$	—	$	(33)	$	(26)	$	8	$	8
Property and casualty insurance operations⁽²⁾	—		—		22		(61)		37		30		59		(31)
Life insurance operations⁽²⁾	—		—		14		12		0		(1)		14		11
Investment operations	13		10		380		170		(4)		(3)		389		177
Income from operations before income taxes and noncontrolling interest	54		44		416		121		—		—		470		165
Provision for income taxes	18		14		138		32		—		—		156		46
Net income	$	36	$	30	$	278	$	89	$	—	$	—	$	314	$	119


(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 fourth quarter of 2013.

Management Operations

	Indemnity shareholder interest
(dollars in millions)	4Q'13			4Q'12
Management fee revenue, net	$	301		$	275
Service agreement revenue	8			8
Total revenue from management operations	$	309		$	283
Commissions	$	172		$	158
Non-commission expense	96			91
Total cost of management operations	$	268		$	249
Income from management operations before taxes	$	41		$	34
Gross margin	13.2		%	12.2		%

The management fee rate was 25 percent for both the fourth quarters of 2013 and 2012. Direct written premium of the property and casualty insurance operations, upon which the management fee is calculated, increased 9.5 percent in the fourth quarter of 2013, due to a 4.8 percent increase in policies in force and a 4.5 percent increase in the year-over-year average premium per policy for all lines of business at December 31, 2013.
Commissions increased $14 million, or 8.8 percent, in the fourth quarter of 2013, compared to the fourth quarter of 2012, primarily due to the 9.5 percent increase in direct written premium of the property and casualty insurance operations. All other commissions remained relatively flat compared to the fourth quarter of 2012.
Non-commission expense increased $5 million, or 5.4 percent, in the fourth quarter of 2013, compared to the fourth quarter of 2012. Personnel costs increased $4 million, driven by a $1 million increase in both pension and medical expenses and by a $2 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)	4Q'13		4Q'12
Net investment income	$	4	$	4
Net realized gains on investments	0		1
Net impairment losses recognized in earnings	0		0
Equity in earnings of limited partnerships	9		5
Income from investment operations before taxes	$	13	$	10

Income from investment operations before taxes was $13 million in the fourth quarter of 2013, compared to $10 million in the fourth quarter of 2012. Equity in earnings of limited partnerships increased $4 million, offset by a decrease of $1 million in net realized gains on investments.


Total Year 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)	2013		2012		2013		2012		2013		2012		2013		2012
Management operations	$	209	$	205	$	—	$	—	$	(178)	$	(174)	$	31	$	31
Property and casualty insurance operations⁽²⁾	—		—		68		(246)		192		187		260		(59)
Life insurance operations⁽²⁾	—		—		48		46		(2)		(2)		46		44
Investment operations	38		36		1,204		858		(12)		(11)		1,230		883
Income from operations before income taxes and noncontrolling interest	247		241		1,320		658		—		—		1,567		899
Provision for income taxes	84		81		435		199		—		—		519		280
Net income	$	163	$	160	$	885	$	459	$	—	$	—	$	1,048	$	619


(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.

Share Repurchase Program

In the fourth quarter of 2013, Indemnity repurchased 142,132 shares of its outstanding Class A nonvoting common stock at a total cost of $10.2 million, based upon trade date, in conjunction with its current stock repurchase program. For the year through February 14, 2014, 58,838 shares were repurchased under this program at a total cost of $4.1 million. In October 2011, Indemnity's 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 February 14, 2014, Indemnity had approximately $33 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 4.8 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." 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;
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 (dollars in millions, except per share data)

	Three months ended December 31,				Twelve months ended December 31,
	2013		2012		2013		2012
Revenues	(Unaudited)
Premiums earned	$	1,267	$	1,160	$	4,898	$	4,493
Net investment income	106		112		422		438
Net realized investment gains	270		60		771		418
Net impairment losses recognized in earnings	(3)		0		(13)		0
Equity in earnings of limited partnerships	49		32		161		131
Other income	8		8		32		32
Total revenues	1,697		1,372		6,271		5,512
Benefits and expenses
Insurance losses and loss expenses	896		909		3,467		3,480
Policy acquisition and underwriting expenses	331		298		1,237		1,133
Total benefits and expenses	1,227		1,207		4,704		4,613

Income from operations before income taxes and noncontrolling interest	470		165		1,567		899
Provision for income taxes	156		46		519		280
Net income	$	314	$	119	$	1,048	$	619

Less: Net income attributable to noncontrolling interest in consolidated entity – Exchange	278		89		885		459

Net income attributable to Indemnity	$	36	$	30	$	163	$	160


Earnings Per Share
Net income attributable to Indemnity per share
Class A common stock – basic	$	0.75	$	0.63	$	3.46	$	3.38
Class A common stock – diluted	$	0.67	$	0.56	$	3.08	$	2.99
Class B common stock – basic	$	113	$	94	$	520	$	505
Class B common stock – diluted	$	113	$	94	$	519	$	505

Weighted average shares outstanding attributable to Indemnity – Basic
Class A common stock	46,520,232		47,006,247		46,660,651		47,357,836
Class B common stock	2,542		2,543		2,542		2,544

Weighted average shares outstanding attributable to Indemnity – Diluted
Class A common stock	52,715,338		53,193,844		52,855,757		53,547,833
Class B common stock	2,542		2,543		2,542		2,544

Dividends declared per share
Class A common stock	$	0.6350	$	2.5925	$	2.4125	$	4.2500
Class B common stock	$	95.2500	$	388.8750	$	361.8750	$	637.5000

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 December 31,				Three months ended December 31,				Three months ended December 31,				Three months ended December 31,
	2013		2012		2013		2012		2013		2012		2013		2012
Management operations:
Management fee revenue, net	$	301	$	275	$	—	$	—	$	(301)	$	(275)	$	—	$	—
Service agreement revenue	8		8		—		—		—		—		8		8
Total revenue from management operations	309		283		—		—		(301)		(275)		8		8
Cost of management operations	268		249		—		—		(268)		(249)		—		—
*Income from management operations before taxes*	41		34		—		—		(33)		(26)		8		8
Property and casualty insurance operations:
Net premiums earned	—		—		1,247		1,143		—		—		1,247		1,143
Losses and loss expenses	—		—		870		883		(1)		(1)		869		882
Policy acquisition and underwriting expenses	—		—		355		321		(36)		(29)		319		292
*Income (loss) from property and casualty insurance* *operations before taxes*	—		—		22		(61)		37		30		59		(31)
Life insurance operations: ⁽¹⁾
Total revenue	—		—		53		45		0		(1)		53		44
Total benefits and expenses	—		—		39		33		0		0		39		33
*Income from life insurance operations before taxes*	—		—		14		12		0		(1)		14		11
Investment operations: ⁽¹⁾
Net investment income	4		4		82		87		(4)		(3)		82		88
Net realized gains on investments	0		1		261		56		—		—		261		57
Net impairment losses recognized in earnings	0		0		(3)		0		—		—		(3)		0
Equity in earnings of limited partnerships	9		5		40		27		—		—		49		32
*Income from investment operations before taxes*	13		10		380		170		(4)		(3)		389		177
Income from operations before income taxes and noncontrolling interest	54		44		416		121		—		—		470		165
Provision for income taxes	18		14		138		32		—		—		156		46
Net income	$	36	$	30	$	278	$	89	$	—	$	—	$	314	$	119


(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 (in millions)

	Indemnity shareholder interest				Noncontrolling interest (Exchange)				Eliminations of related party transactions				Erie Insurance Group
	Years ended December 31,				Years ended December 31,				Years ended December 31,				Years ended December 31,
	2013		2012		2013		2012		2013		2012		2013		2012
Management operations:
Management fee revenue, net	$	1,266	$	1,157	$	—	$	—	$	(1,266)	$	(1,157)	$	—	$	—
Service agreement revenue	31		31		—		—		—		—		31		31
Total revenue from management operations	1,297		1,188		—		—		(1,266)		(1,157)		31		31
Cost of management operations	1,088		983		—		—		(1,088)		(983)		—		—
*Income from management operations before taxes*	209		205		—		—		(178)		(174)		31		31
Property and casualty insurance operations:
Net premiums earned	—		—		4,820		4,422		—		—		4,820		4,422
Losses and loss expenses	—		—		3,365		3,384		(5)		(5)		3,360		3,379
Policy acquisition and underwriting expenses	—		—		1,387		1,284		(187)		(182)		1,200		1,102
*Income (loss) from property and casualty insurance* *operations before taxes*	—		—		68		(246)		192		187		260		(59)
Life insurance operations: ⁽¹⁾
Total revenue	—		—		192		178		(2)		(2)		190		176
Total benefits and expenses	—		—		144		132		0		0		144		132
*Income from life insurance operations before taxes*	—		—		48		46		(2)		(2)		46		44
Investment operations: ⁽¹⁾
Net investment income	15		16		325		338		(12)		(11)		328		343
Net realized gains on investments	1		5		753		404		—		—		754		409
Net impairment losses recognized in earnings	0		0		(12)		0		—		—		(12)		0
Equity in earnings of limited partnerships	22		15		138		116		—		—		160		131
*Income from investment operations before taxes*	38		36		1,204		858		(12)		(11)		1,230		883
Income from operations before income taxes and noncontrolling interest	247		241		1,320		658		—		—		1,567		899
Provision for income taxes	84		81		435		199		—		—		519		280
Net income	$	163	$	160	$	885	$	459	$	—	$	—	$	1,048	$	619


(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 December 31,				Years ended December 31,
(in millions, except per share data)	2013		2012		2013		2012
	(Unaudited)
Operating income attributable to Indemnity	$	36	$	29	$	162	$	157
Net realized gains and impairments on investments	0		1		1		5
Income tax expense	0		0		0		(2)
Realized gains and impairments, net of income taxes	0		1		1		3
Net income attributable to Indemnity	$	36	$	30	$	163	$	160

Per Indemnity Class A common share-diluted:
Operating income attributable to Indemnity	$	0.67	$	0.54	$	3.07	$	2.92
Net realized gains and impairments on investments	0.00		0.02		0.01		0.10
Income tax expense	0.00		0.00		0.00		(0.03)
Realized gains and impairments, net of income taxes	0.00		0.02		0.01		0.07
Net income attributable to Indemnity	$	0.67	$	0.56	$	3.08	$	2.99

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

	December 31, 2013		December 31, 2012

Assets
Investments – Indemnity
Available-for-sale securities, at fair value:
Fixed maturities	$	526	$	452
Equity securities	50		55
Limited partnerships	146		180
Other invested assets	1		1
Investments – Exchange
Available-for-sale securities, at fair value:
Fixed maturities	8,162		7,707
Equity securities	819		945
Trading securities, at fair value	3,202		2,417
Limited partnerships	940		1,037
Other invested assets	20		20
Total investments	13,866		12,814

Cash and cash equivalents (Exchange portion of $403 and $388, respectively)	452		400
Premiums receivable from policyholders – Exchange	1,167		1,062
Reinsurance recoverable – Exchange	172		168
Deferred income taxes – Indemnity	2		37
Deferred acquisition costs – Exchange	566		504
Other assets (Exchange portion of $337 and $339, respectively)	451		456
Total assets	$	16,676	$	15,441

Liabilities and shareholders' equity
Liabilities
Indemnity liabilities
Other liabilities	$	476	$	515
Exchange liabilities
Losses and loss expense reserves	3,747		3,598
Life policy and deposit contract reserves	1,758		1,708
Unearned premiums	2,598		2,365
Deferred income taxes	450		365
Other liabilities	97		99
Total liabilities	9,126		8,650

Indemnity's shareholders' equity	734		642

Noncontrolling interest in consolidated entity – Exchange	6,816		6,149
Total equity	7,550		6,791
Total liabilities, shareholders' equity and noncontrolling interest	$	16,676	$	15,441