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Erie Indemnity Reports Second Quarter 2014 Results

Net Income per Diluted Share Up 11.0 percent, Earnings Up 10.0 percent

Erie Insurance. (PRNewsFoto/Erie Insurance) (PRNewsFoto/)

News provided by

Erie Indemnity Company

Jul 31, 2014, 04:15 ET

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ERIE, Pa., July 31, 2014 /PRNewswire/ -- Erie Indemnity Company (NASDAQ: ERIE) today announced financial results for the quarter ending June 30, 2014.

"This continues to be a positive year for ERIE, thanks to our hard-working team of Agents and Employees," says Terry Cavanaugh, president and chief executive officer.  "Our growth and the recognition we received once again this year from organizations like J.D. Power and the Ward Group reflect our commitment and dedication to exceptional service."

Net income attributable to Indemnity was $49 million, or $0.94 per diluted share, in the second quarter of 2014, compared to $44 million, or $0.84 per diluted share, in the second quarter of 2013.  Net income attributable to Indemnity was $95 million, or $1.82 per diluted share, in the first six months of 2014, compared to $81 million, or $1.54 per diluted share, in the first six months of 2013.  For both the second quarter and first six months of 2014, the growth was driven by increased revenue from management operations and lower expense growth.

2Q 2014 Highlights - 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'14

2Q'13

2Q'14

2Q'13

2Q'14

2Q'13

2Q'14

2Q'13

Management operations

$

68


$

59


$

—


$

—


$

(60)


$

(51)


$

8


$

8


Property and casualty insurance operations(2)

—


—


(183)


11


66


55


(117)


66


Life insurance operations(2)

—


—


10


13


(1)


(1)


9


12


Investment operations

7


8


245


172


(5)


(3)


247


177


Income from operations before income
 
taxes and noncontrolling interest

75


67


72


196


—


—


147


263


Provision for income taxes

26


23


18


63


—


—


44


86


Net income

$

49


$

44


$

54


$

133


$

—


$

—


$

103


$

177




















(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.

Management Operations

Revenue from management operations increased $30 million, or 8.7 percent, in the second quarter of 2014, compared to the second quarter of 2013.  Direct written premium of the property and casualty insurance operations, upon which the management fee is calculated, increased 8.8 percent in the second quarter of 2014, due to a 4.5 percent increase in policies in force and a 4.2 percent increase in the year-over-year average premium per policy at June 30, 2014.  The management fee rate was 25 percent for both the second quarters of 2014 and 2013.

Commissions increased $18 million, or 10.0 percent, in the second quarter of 2014, compared to the second quarter of 2013, primarily due to the 8.8 percent increase in direct written premium of the property and casualty insurance operations.  Commission growth outpaced direct premium written growth primarily due to an increase in agent incentive costs.

Non-commission expense increased $3 million, or 2.8 percent, in the second quarter of 2014, compared to the second quarter of 2013.  Hardware costs increased $2 million, while professional fees, underwriting reports, advertising and postage expense increased $1 million each.  These cost increases were partially offset by a $3 million decrease in personnel costs, primarily from decreased employee incentive plan costs related to underwriting performance and decreased pension costs.  

Management Operations




Indemnity shareholder interest

(dollars in millions)

2Q'14

2Q'13

Management fee revenue, net

$

366


$

336


Service agreement revenue

8


8


Total revenue from management operations

$

374


$

344


Commissions

$

205


$

187


Non-commission expense

101


98


Total cost of management operations

$

306


$

285


Income from management operations before taxes

$

68


$

59


Gross margin


18.2

%


17.3

%






Investment Operations

Income from investment operations before taxes totaled $7 million in the second quarter of 2014, compared to $8 million in the second quarter of 2013.  Net investment income increased $1 million and equity in earnings of limited partnerships decreased $2 million.

Investment Operations




Indemnity

shareholder

 interest

(dollars in millions)

2Q'14

2Q'13

Net investment income

$

4


$

3


Net realized gains on investments

0


0


Net impairment losses recognized in earnings

0


0


Equity in earnings of limited partnerships

3


5


Income from investment operations before taxes

$

7


$

8







Six Months Ended June 30, 2014 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)

2014

2013

2014

2013

2014

2013

2014

2013

Management operations

$

126


$

108


$

—


$

—


$

(111)


$

(93)


$

15


$

15


Property and casualty insurance operations(2)

—


—


(287)


22


120


100


(167)


122


Life insurance operations(2)

—


—


23


24


(1)


(1)


22


23


Investment operations

18


15


423


530


(8)


(6)


433


539


Income from operations before income taxes and noncontrolling interest

144


123


159


576


—


—


303


699



















Provision for income taxes

49


42


42


190


—


—


91


232


Net income

$

95


$

81


$

117


$

386


$

—


$

—


$

212


$

467




















(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.

Indemnity's management operations pretax income totaled $126 million in the first six months of 2014, compared to $108 million in the first six months of 2013.  The increase resulted in a gross margin of 18.0 percent for the first six months of 2014, compared to 16.7 percent for the first six months of 2013.  Indemnity's investment operations pretax income totaled $18 million in the first six months of 2014, compared to $15 million in the first six months of 2013.

Corporate Activity

On July 30, 2014, Indemnity's Board of Directors approved a quarterly cash dividend of $0.635 per Class A common stock, payable on October 17, 2014, to shareholders of record at the close of business on October 2, 2014.  This dividend rate represents a 7.2 percent increase over the quarterly dividend rate paid in 2013.

In the second quarter of 2014, Indemnity repurchased 114,158 shares of its outstanding Class A nonvoting common stock at a total cost of $8.2 million, based upon trade date, in conjunction with its current stock repurchase program.  For the year through July 18, 2014, 272,057 shares were repurchased under this program at a total cost of $19.2 million.  As of July 18, 2014, Indemnity had approximately $18 million in repurchase authority remaining under the existing stock repurchase program.

Webcast Information

Indemnity has scheduled a conference call and live audio broadcast on the Web for 10:00 AM ET on August 1, 2014.  Investors may access the live audio broadcast by logging on to www.erieinsurance.com. Indemnity recommends visiting the website at least 15 minutes prior to the webcast to download and install any necessary software.  A webcast audio replay will be available on the Investor Relations page of the Erie Insurance Group's website by 12:30 PM ET.

About the Erie Insurance Group

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 4.9 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 award for "Highest in Customer Satisfaction with the Auto Insurance Purchase Experience" two years in a row. ERIE has also been recognized by Forbes as one of America's 50 Most Trustworthy Financial Companies and is 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 (2009-2013).

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 June 30,


Six months ended June 30,



2014


2013


2014


2013

Revenues


(Unaudited)


(Unaudited)

Premiums earned


$

1,319



$

1,215



$

2,607



$

2,390


Net investment income


111



104



220



207


Net realized investment gains


133



61



189



310


Net impairment losses recognized in earnings


0



(1)



0



(1)


Equity in earnings of limited partnerships


27



39



77



75


Other income


8



8



16



16


Total revenues


1,598



1,426



3,109



2,997


Benefits and expenses













Insurance losses and loss expenses


1,126



861



2,160



1,703


Policy acquisition and underwriting expenses


325



302



646



595


Total benefits and expenses


1,451



1,163



2,806



2,298















Income from operations before income taxes and noncontrolling interest


147



263



303



699


Provision for income taxes


44



86



91



232


Net income


$

103



$

177



$

212



$

467















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


54



133



117



386















Net income attributable to Indemnity


$

49



$

44



$

95



$

81




























Earnings Per Share













Net income attributable to Indemnity per share













Class A common stock – basic


$

1.05



$

0.95



$

2.04



$

1.73


Class A common stock – diluted


$

0.94



$

0.84



$

1.82



$

1.54


Class B common stock – basic and diluted


$

158



$

142



$

307



$

259















Weighted average shares outstanding attributable to Indemnity – Basic













Class A common stock


46,214,153



46,693,333



46,307,659



46,733,925


Class B common stock


2,542



2,542



2,542



2,542















Weighted average shares outstanding attributable to Indemnity – Diluted













Class A common stock


52,411,414



52,886,259



52,504,920



52,926,851


Class B common stock


2,542



2,542



2,542



2,542















Dividends declared per share













Class A common stock


$

0.6350



$

0.5925



$

1.2700



$

1.1850


Class B common stock


$

95.2500



$

88.8750



$

190.5000



$

177.7500


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,



2014

2013


2014

2013


2014

2013


2014

2013

Management operations:





















Management fee revenue, net


$

366


$

336



$

—


$

—



$

(366)


$

(336)



$

—


$

—


Service agreement revenue


8


8



—


—



—


—



8


8


Total revenue from management operations


374


344



—


—



(366)


(336)



8


8


Cost of management operations


306


285



—


—



(306)


(285)



—


—


Income from management operations before taxes


68


59



—


—



(60)


(51)



8


8


Property and casualty insurance operations:





















Net premiums earned


—


—



1,298


1,196



—


—



1,298


1,196


Losses and loss expenses


—


—



1,101


837



(2)


(2)



1,099


835


Policy acquisition and underwriting expenses


—


—



380


348



(64)


(53)



316


295


(Loss) income from property and casualty insurance operations before taxes


—


—



(183)


11



66


55



(117)


66


Life insurance operations: (1)





















Total revenue


—


—



46


46



(1)


(1)



45


45


Total benefits and expenses


—


—



36


33



0


0



36


33


Income from life insurance operations before taxes


—


—



10


13



(1)


(1)



9


12


Investment operations: (1)





















Net investment income


4


3



89


81



(5)


(3)



88


81


Net realized gains on investments


0


0



133


58



—


—



133


58


Net impairment losses recognized in earnings


0


0



0


0



—


—



0


0


Equity in earnings of limited partnerships


3


5



23


33



—


—



26


38


Income from investment operations before taxes


7


8



245


172



(5)


(3)



247


177


Income from operations before income taxes and noncontrolling interest


75


67



72


196



—


—



147


263


Provision for income taxes


26


23



18


63



—


—



44


86


Net income


$

49


$

44



$

54


$

133



$

—


$

—



$

103


$

177































(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,



2014

2013


2014

2013


2014

2013


2014

2013

Management operations:





















Management fee revenue, net


$

685


$

632



$

—


$

—



$

(685)


$

(632)



$

—


$

—


Service agreement revenue


15


15



—


—



—


—



15


15


Total revenue from management operations


700


647



—


—



(685)


(632)



15


15


Cost of management operations


574


539



—


—



(574)


(539)



—


—


Income from management operations before taxes


126


108



—


—



(111)


(93)



15


15


Property and casualty insurance operations:





















Net premiums earned


—


—



2,566


2,352



—


—



2,566


2,352


Losses and loss expenses


—


—



2,108


1,654



(3)


(3)



2,105


1,651


Policy acquisition and underwriting expenses


—


—



745


676



(117)


(97)



628


579


(Loss) income from property and casualty insurance operations before taxes


—


—



(287)


22



120


100



(167)


122


Life insurance operations: (1)





















Total revenue


—


—



96


92



(1)


(1)



95


91


Total benefits and expenses


—


—



73


68



0


0



73


68


Income from life insurance operations before taxes


—


—



23


24



(1)


(1)



22


23


Investment operations: (1)





















Net investment income


8


7



173


160



(8)


(6)



173


161


Net realized gains on investments


1


0



183


304



—


—



184


304


Net impairment losses recognized in earnings


0


0



0


0



—


—



0


0


Equity in earnings of limited partnerships


9


8



67


66



—


—



76


74


Income from investment operations before taxes


18


15



423


530



(8)


(6)



433


539


Income from operations before income taxes and noncontrolling interest


144


123



159


576



—


—



303


699


Provision for income taxes


49


42



42


190



—


—



91


232


Net income


$

95


$

81



$

117


$

386



$

—


$

—



$

212


$

467































(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)


2014


2013


2014


2013



(Unaudited)


(Unaudited)

Operating income attributable to Indemnity


$

49



$

44



$

94



$

81


Net realized gains and impairments on investments


0



0



1



0


Income tax expense


0



0



0



0


Realized gains and impairments, net of income taxes


0



0



1



0


Net income attributable to Indemnity


$

49



$

44



$

95



$

81















Per Indemnity Class A common share-diluted:













Operating income attributable to Indemnity


$

0.94



$

0.84



$

1.81



$

1.54


Net realized gains and impairments on investments


0.00



0.00



0.02



0.00


Income tax expense


0.00



0.00



(0.01)



0.00


Realized gains and impairments, net of income taxes


0.00



0.00



0.01



0.00


Net income attributable to Indemnity


$

0.94



$

0.84



$

1.82



$

1.54


Erie Indemnity Company





Consolidated Statements of Financial Position





(in millions)












June 30, 2014


December 31, 2013



(Unaudited)




Assets







Investments – Indemnity







Available-for-sale securities, at fair value:







Fixed maturities


$

497



$

526


Equity securities


26



50


Limited partnerships


141



146


Other invested assets


1



1


Investments – Exchange







Available-for-sale securities, at fair value:







Fixed maturities


8,701



8,162


Equity securities


914



819


Trading securities, at fair value


3,377



3,202


Limited partnerships


931



940


Other invested assets


20



20


Total investments


14,608



13,866









Cash and cash equivalents (Exchange portion of $237 and $403, respectively)


300



452


Premiums receivable from policyholders – Exchange


1,287



1,167


Reinsurance recoverable – Exchange


168



172


Deferred income taxes – Indemnity


1



2


Deferred acquisition costs – Exchange


579



566


Other assets (Exchange portion of $405 and $337, respectively)


517



451


Total assets


$

17,460



$

16,676









Liabilities and shareholders' equity







Liabilities







Indemnity liabilities







Other liabilities


$

451



$

476


Exchange liabilities







Losses and loss expense reserves


3,964



3,747


Life policy and deposit contract reserves


1,789



1,758


Unearned premiums


2,788



2,598


Deferred income taxes


557



450


Other liabilities


90



97


Total liabilities


9,639



9,126









Indemnity's shareholders' equity


755



734









Noncontrolling interest in consolidated entity – Exchange


7,066



6,816


Total equity


7,821



7,550


Total liabilities, shareholders' equity and noncontrolling interest


$

17,460



$

16,676


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SOURCE Erie Indemnity Company

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