Erie Indemnity Company 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2005
Commission
file number 0-24000
ERIE
INDEMNITY COMPANY
(Exact name of registrant as specified in its charter)
|
|
|
PENNSYLVANIA
|
|
25-0466020 |
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
|
|
|
100 Erie Insurance Place, Erie, Pennsylvania
|
|
16530 |
|
|
|
(Address of principal executive offices)
|
|
(Zip Code) |
(814) 870-2000
Registrants telephone number, including area code
Not applicable
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes þ No o
The number of shares outstanding of Class A Common Stock, with no par value and a stated value of
$.0292 per share was 62,519,483 at July 28, 2005.
The number of shares outstanding of Class B Common Stock with no par value and a stated value of
$70 per share was 2,843 at July 28, 2005.
The common stock is the only class of stock the Registrant is presently authorized to issue.
1
INDEX
ERIE INDEMNITY COMPANY
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
June 30 |
|
December 31 |
ASSETS |
|
2005 |
|
2004 |
|
|
(Unaudited) |
|
|
|
|
INVESTMENTS |
|
|
|
|
|
|
|
|
Fixed maturities at fair value
(amortized cost of $960,739 and
$939,280, respectively) |
|
$ |
987,637 |
|
|
$ |
974,512 |
|
Equity securities at fair value (cost of $218,951
and $175,860, respectively) |
|
|
232,700 |
|
|
|
202,694 |
|
Limited partnerships
(cost of $119,069 and $116,097, respectively) |
|
|
136,369 |
|
|
|
130,464 |
|
Real estate mortgage loans |
|
|
4,960 |
|
|
|
5,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
1,361,666 |
|
|
|
1,312,714 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
33,271 |
|
|
|
50,061 |
|
Accrued investment income |
|
|
12,472 |
|
|
|
12,480 |
|
Premiums receivable from policyholders |
|
|
286,820 |
|
|
|
275,721 |
|
Federal income taxes recoverable |
|
|
6,262 |
|
|
|
3,331 |
|
Reinsurance recoverable from Erie Insurance
Exchange on unpaid losses |
|
|
773,716 |
|
|
|
765,563 |
|
Ceded unearned premiums to Erie Insurance
Exchange |
|
|
128,227 |
|
|
|
128,187 |
|
Notes receivable from Erie Family Life
Insurance Company |
|
|
40,000 |
|
|
|
40,000 |
|
Other receivables from Erie Insurance
Exchange and affiliates |
|
|
217,271 |
|
|
|
211,488 |
|
Reinsurance recoverable from non-affiliates |
|
|
298 |
|
|
|
351 |
|
Deferred policy acquisition costs |
|
|
17,480 |
|
|
|
17,112 |
|
Property and equipment |
|
|
13,146 |
|
|
|
13,581 |
|
Equity in Erie Family Life Insurance Company |
|
|
60,149 |
|
|
|
58,728 |
|
Securities lending collateral |
|
|
35,550 |
|
|
|
0 |
|
Prepaid pension |
|
|
44,790 |
|
|
|
50,860 |
|
Other assets |
|
|
44,490 |
|
|
|
39,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,075,608 |
|
|
$ |
2,979,744 |
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
3
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Continued)
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
June 30 |
|
December 31 |
LIABILITIES
AND SHAREHOLDERS EQUITY |
|
2005 |
|
2004 |
|
|
(Unaudited) |
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses |
|
$ |
955,487 |
|
|
$ |
943,034 |
|
Unearned premiums |
|
|
478,643 |
|
|
|
472,553 |
|
Commissions payable and accrued |
|
|
172,360 |
|
|
|
179,284 |
|
Securities lending collateral |
|
|
35,550 |
|
|
|
0 |
|
Accounts payable and accrued expenses |
|
|
58,339 |
|
|
|
49,025 |
|
Deferred income taxes |
|
|
16,633 |
|
|
|
24,122 |
|
Dividends payable |
|
|
20,457 |
|
|
|
20,612 |
|
Employee benefit obligations |
|
|
27,003 |
|
|
|
24,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,764,472 |
|
|
|
1,712,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Capital Stock |
|
|
|
|
|
|
|
|
Class A common, stated value $.0292 per share;
authorized 74,996,930 shares; 67,576,800 and
67,540,800 shares issued, respectively; 62,519,483
and 62,992,841 shares outstanding, respectively |
|
|
1,971 |
|
|
|
1,970 |
|
Class B common, convertible at a rate of 2,400
Class A shares for one Class B share, stated
value $70 per share; 2,843 and 2,858 shares
authorized, issued and outstanding, respectively |
|
|
199 |
|
|
|
200 |
|
Additional paid-in capital |
|
|
7,830 |
|
|
|
7,830 |
|
Accumulated other comprehensive income |
|
|
36,096 |
|
|
|
58,611 |
|
Retained earnings |
|
|
1,447,133 |
|
|
|
1,354,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contributed capital and retained earnings |
|
|
1,493,229 |
|
|
|
1,422,792 |
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost, 5,057,317 and 4,547,959
shares, respectively |
|
|
(182,093 |
) |
|
|
(155,911 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
1,311,136 |
|
|
|
1,266,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
3,075,608 |
|
|
$ |
2,979,744 |
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
4
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
(Dollars in thousands, except per share data) |
OPERATING REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee revenue net |
|
$ |
240,390 |
|
|
$ |
242,037 |
|
|
$ |
458,126 |
|
|
$ |
451,702 |
|
Premiums earned |
|
|
54,166 |
|
|
|
51,065 |
|
|
|
107,814 |
|
|
|
101,714 |
|
Service agreement revenue |
|
|
5,359 |
|
|
|
5,224 |
|
|
|
10,146 |
|
|
|
10,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
|
299,915 |
|
|
|
298,326 |
|
|
|
576,086 |
|
|
|
564,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of management operations |
|
|
187,232 |
|
|
|
182,120 |
|
|
|
355,172 |
|
|
|
343,941 |
|
Losses and loss adjustment expenses
incurred |
|
|
33,785 |
|
|
|
40,002 |
|
|
|
66,462 |
|
|
|
78,040 |
|
Policy acquisition and other underwriting
expenses |
|
|
12,356 |
|
|
|
12,434 |
|
|
|
24,200 |
|
|
|
23,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
233,373 |
|
|
|
234,556 |
|
|
|
445,834 |
|
|
|
445,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT INCOME UNAFFILIATED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of expenses |
|
|
15,934 |
|
|
|
15,605 |
|
|
|
30,402 |
|
|
|
30,291 |
|
Net realized gains on investments |
|
|
9,196 |
|
|
|
3,030 |
|
|
|
14,693 |
|
|
|
5,883 |
|
Equity in earnings of limited
partnerships |
|
|
20,645 |
|
|
|
1,465 |
|
|
|
22,756 |
|
|
|
1,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income unaffiliated |
|
|
45,775 |
|
|
|
20,100 |
|
|
|
67,851 |
|
|
|
38,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity in
earnings of Erie Family Life Insurance Co. |
|
|
112,317 |
|
|
|
83,870 |
|
|
|
198,103 |
|
|
|
156,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
37,581 |
|
|
|
28,289 |
|
|
|
66,310 |
|
|
|
52,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of Erie Family Life Insurance
Company, net of tax |
|
|
1,432 |
|
|
|
1,374 |
|
|
|
2,146 |
|
|
|
2,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
76,168 |
|
|
$ |
56,955 |
|
|
$ |
133,939 |
|
|
$ |
106,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock |
|
$ |
1.21 |
|
|
$ |
0.89 |
|
|
$ |
2.12 |
|
|
$ |
1.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B common stock |
|
|
183.89 |
|
|
|
135.81 |
|
|
|
322.67 |
|
|
|
253.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted |
|
|
1.10 |
|
|
|
0.81 |
|
|
|
1.92 |
|
|
|
1.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock |
|
|
62,618,604 |
|
|
|
63,715,921 |
|
|
|
62,771,739 |
|
|
|
63,877,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B common stock |
|
|
2,843 |
|
|
|
2,878 |
|
|
|
2,847 |
|
|
|
2,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Shares |
|
|
69,525,438 |
|
|
|
70,697,736 |
|
|
|
69,688,173 |
|
|
|
70,859,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock |
|
$ |
0.325 |
|
|
$ |
0.215 |
|
|
$ |
0.65 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B common stock |
|
|
48.75 |
|
|
|
32.25 |
|
|
|
97.50 |
|
|
|
64.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements
5
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
(Dollars in thousands) |
|
Net Income |
|
$ |
76,168 |
|
|
$ |
56,955 |
|
|
$ |
133,939 |
|
|
$ |
106,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising
during period |
|
|
5,814 |
|
|
|
(47,858 |
) |
|
|
(19,945 |
) |
|
|
(24,916 |
) |
Less: Gains included in net income |
|
|
(9,196 |
) |
|
|
(3,030 |
) |
|
|
(14,693 |
) |
|
|
(5,883 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding losses
arising during period |
|
|
(3,382 |
) |
|
|
(50,888 |
) |
|
|
(34,638 |
) |
|
|
(30,799 |
) |
Income tax benefit related to
unrealized losses |
|
|
1,183 |
|
|
|
17,811 |
|
|
|
12,123 |
|
|
|
10,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in other comprehensive income,
net of tax |
|
|
(2,199 |
) |
|
|
(33,077 |
) |
|
|
(22,515 |
) |
|
|
(20,019 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
73,969 |
|
|
$ |
23,878 |
|
|
$ |
111,424 |
|
|
$ |
86,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
6
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
|
|
2005 |
|
2004 |
|
|
(Dollars in thousands) |
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Management fee received |
|
$ |
448,882 |
|
|
$ |
426,633 |
|
Service agreement fee received |
|
|
9,812 |
|
|
|
10,823 |
|
Premiums collected |
|
|
107,131 |
|
|
|
103,862 |
|
Net investment income received |
|
|
32,940 |
|
|
|
31,920 |
|
Dividends received from Erie Family Life |
|
|
899 |
|
|
|
899 |
|
Salaries and wages paid |
|
|
(47,701 |
) |
|
|
(40,700 |
) |
Pension funding and employee benefits paid |
|
|
(5,100 |
) |
|
|
(14,912 |
) |
Commissions paid to agents |
|
|
(231,410 |
) |
|
|
(230,435 |
) |
Agent bonuses paid |
|
|
(46,693 |
) |
|
|
(23,953 |
) |
General operating expenses paid |
|
|
(39,066 |
) |
|
|
(39,341 |
) |
Losses and loss adjustment expenses paid |
|
|
(62,110 |
) |
|
|
(66,477 |
) |
Other underwriting and acquisition costs paid |
|
|
(5,201 |
) |
|
|
(7,912 |
) |
Income taxes paid |
|
|
(65,373 |
) |
|
|
(51,821 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
97,010 |
|
|
|
98,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchase of investments: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
(218,591 |
) |
|
|
(180,496 |
) |
Equity securities |
|
|
(83,498 |
) |
|
|
(17,994 |
) |
Limited partnerships |
|
|
(27,980 |
) |
|
|
(15,420 |
) |
Sales/maturities of investments: |
|
|
|
|
|
|
|
|
Fixed maturity sales |
|
|
134,010 |
|
|
|
63,141 |
|
Fixed maturity calls/maturities |
|
|
63,461 |
|
|
|
63,995 |
|
Equity securities |
|
|
53,169 |
|
|
|
13,818 |
|
Limited partnership sales/distributions |
|
|
32,740 |
|
|
|
16,874 |
|
Increase (decrease) in collateral from securities lending |
|
|
35,550 |
|
|
|
(2,903 |
) |
Investment of securities lending collateral |
|
|
(35,550 |
) |
|
|
2,903 |
|
Purchase of property and equipment |
|
|
(905 |
) |
|
|
(430 |
) |
Net collections on agent loans |
|
|
1,117 |
|
|
|
1,047 |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(46,477 |
) |
|
|
(55,465 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Dividends paid to shareholders |
|
|
(41,141 |
) |
|
|
(27,714 |
) |
Purchase of treasury stock |
|
|
(26,182 |
) |
|
|
(28,431 |
) |
|
|
|
|
|
|
|
|
|
Cash used in financing activities |
|
|
(67,323 |
) |
|
|
(56,145 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(16,790 |
) |
|
|
(13,024 |
) |
Cash and cash equivalents at beginning of period |
|
|
50,061 |
|
|
|
52,313 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
33,271 |
|
|
$ |
39,289 |
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
7
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, which include the accounts of Erie
Indemnity Company and its wholly owned property/casualty insurance subsidiaries, Erie Insurance
Company (EIC), Erie Insurance Company of New York (EINY) and Erie Insurance Property & Casualty
Company (EIPC), have been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles (GAAP) for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Operating results for
the six-month period ended June 30, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Companys Form 10-K for the year ended
December 31, 2004 as filed with the Securities and Exchange Commission on February 24, 2005.
NOTE 2
RECENT ACCOUNTING PRONOUNCEMENTS
In
May 2005, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard (FAS)
No. 154, Accounting Changes and Error Corrections, which replaces Accounting Principles Board
Opinion (APB) No. 20, Accounting Changes. FAS 154 requires retrospective application to prior
periods financial statements of changes in accounting principle, unless it is impracticable.
Previous guidance required most voluntary changes in accounting principle to be recognized by
including in net income of the period the cumulative effect of changing to the new principle. FAS
154 carries forward the guidance in APB 20 for reporting the correction of an error in previously
issued financial statements and a change in accounting estimate without change. FAS 154 is
effective for changes made in fiscal years beginning after December 15, 2005. The Company has not
had any changes in accounting principle in the first half of 2005.
In 2003,
Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board
originally released Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments, and the disclosure requirements were ratified. In March 2004, the
remaining guidance was ratified to be effective for annual periods ending after June 15, 2004. In
October 2004, the effective date of certain application paragraphs of the pronouncement was delayed
for further discussion by the Task Force. At its June 29, 2005 meeting, the FASB decided not to
provide additional guidance on the meaning of other-than-temporary impairment, and directed the
staff to issue FASB Staff Position (FSP) EITF 03-1-a, Implementation Guidance for the Application
of Paragraph 16 of EITF Issue No. 03-1, as final thus
nullifying paragraphs 10-18 of EITF 03-1. The final FSP EITF 03-1-a, to be retitled, FSP
FAS 115-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments, will supercede EITF 03-1 and replace certain application paragraphs with references
to existing guidance. The Board decided that FSP FAS 115-1 would be effective for
other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005.
The Company meets the disclosure requirements of the current EITF 03-1 which will not be changed in
the new FSP FAS 115-1. Management continues to closely monitor and
evaluate how the provisions of EITF 03-1 and proposed FSP Issue 03-1-a
will affect the Company.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 2
RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
In 2004, FASB issued FAS 123R, Share-Based Payment, which requires public entities to measure the
cost of employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award. The related cost is to be recognized over the period during
which an employee is required to provide service in exchange for the award. For employees that
become eligible to retire during an explicit service period, compensation cost should be recognized
over the period through the date that the employee first becomes eligible to retire and is no
longer required to provide service to earn the award. If vesting of share-based payments
accelerates upon an employees retirement, this should be accrued at the date of retirement.
Alternatively, an award may continue to vest after retirement, even though the employee no longer
is providing services to the employer. The Company has a long-term incentive plan (Plan) from
which restricted stock awards are issued to executive management that
are settled in Company stock.
However, the Plan does not include an acceleration of vesting clause. Therefore, if an employee
retired prior to the close of the plans three-year performance period, vesting would cease at the
end of the year in which they retire. FAS 123R is effective for interim or annual periods beginning
after June 15, 2005. The implementation of FAS 123R will have no impact on the Companys financial
position, operations or cash flows.
NOTE 3
SIGNIFICANT ACCOUNTING POLICIES
Limited partnership investments
Limited partnerships include U.S. and foreign private equity, real estate and mezzanine debt
investments. The private equity limited partnerships invest primarily in small- to medium-sized
companies. Limited partnerships are recorded using the equity method, which is the Companys share
of the carrying value of the partnership. The Company has not guaranteed any partnership
liabilities.
NOTE 4
RECLASSIFICATONS
Certain amounts previously reported in the 2004 financial statements have been reclassified to
conform to the current periods presentation. Such reclassifications did not impact earnings.
NOTE 5
EARNINGS PER SHARE
Basic earnings per share is calculated under the two-class method which allocates earnings to each
class of stock based on its dividend rights. Diluted earnings per share is calculated under the
if-converted method which reflects the conversion of Class B shares and the effect of potentially
dilutive outstanding employee stock-based awards under the long-term incentive plan. In April
2005, one share of Class B voting stock was converted to 2,400 non-voting shares of Class A stock.
During the six months ended June 30, 2005, a total of 15 shares of Class B voting stock were
converted to 36,000 shares of Class A voting stock. The total weighted average number of shares
outstanding used in the basic and diluted earnings per share calculations are shown in the
following table for each period presented.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 5
EARNINGS PER SHARE (Continued)
The following table displays the basic and diluted earnings per-share computations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
(net income amounts in thousands) |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
net income Class A |
|
$ |
75,645 |
|
|
$ |
56,564 |
|
|
$ |
133,021 |
|
|
$ |
105,797 |
|
Class A shares of common stock |
|
|
62,618,604 |
|
|
|
63,715,921 |
|
|
|
62,771,739 |
|
|
|
63,877,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A earnings per share basic |
|
$ |
1.21 |
|
|
$ |
.89 |
|
|
$ |
2.12 |
|
|
$ |
1.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated
net income Class B |
|
$ |
523 |
|
|
$ |
391 |
|
|
$ |
918 |
|
|
$ |
730 |
|
Class B shares of common stock |
|
|
2,843 |
|
|
|
2,878 |
|
|
|
2,847 |
|
|
|
2,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B earnings per share basic |
|
$ |
183.89 |
|
|
$ |
135.81 |
|
|
$ |
322.67 |
|
|
$ |
253.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
76,168 |
|
|
$ |
56,955 |
|
|
$ |
133,939 |
|
|
$ |
106,527 |
|
Class A shares of common stock |
|
|
62,618,604 |
|
|
|
63,715,921 |
|
|
|
62,771,739 |
|
|
|
63,877,980 |
|
Assumed conversion of Class B common
stock and restricted stock awards |
|
|
6,906,834 |
|
|
|
6,981,815 |
|
|
|
6,916,434 |
|
|
|
6,981,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A shares of common and
equivalent shares |
|
|
69,525,438 |
|
|
|
70,697,736 |
|
|
|
69,688,173 |
|
|
|
70,859,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share diluted |
|
$ |
1.10 |
|
|
$ |
.81 |
|
|
$ |
1.92 |
|
|
$ |
1.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter 2005, the Company recorded a correction to the accounting for investments in
limited partnerships. The adjustment, related to income recognition of unrealized gains and losses
recognized by the individual limited partnership investments increased diluted earnings per share
by $.13, of which $.09 related to prior year results. See also Note 6.
Restricted stock awards not yet vested include awards related to the long-term incentive plan for
executive and senior management of 75,399 shares for the three and six months ended June 30, 2005,
and 68,176 shares for the three and six months ended June 30, 2004. Awards not yet vested related
to the outside directors stock compensation plan were 8,235 shares for the three and six months
ended June 30, 2005, and 6,439 shares for the three and six months ended June 30, 2004.
NOTE 6
INVESTMENTS
Fixed maturities and marketable equity securities are classified as available-for-sale. Equity
securities consist primarily of common and nonredeemable preferred stocks while fixed maturities
consist of bonds, notes and redeemable preferred stock. Available-for-sale securities are stated
at fair value, with the
unrealized gains and losses, net of deferred tax, reflected in shareholders equity in accumulated
other comprehensive income. When a decline in the value of an investment is considered to be
other-than-temporary by management, the investment is written down to net estimated realizable
value. Investment impairments are evaluated on an individual security position basis. Adjustments
to the carrying value of marketable equity securities and fixed maturities that are considered
impaired are recorded as realized losses in the Consolidated Statements of Operations.
The Company had loaned securities, included as part of its invested assets, with a market value of
$34.6 million at June 30, 2005. There were no loaned securities at December 31, 2004. Securities
lending collateral is recorded by the Company as a liability. The proceeds from the collateral are
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 6
INVESTMENTS (Continued)
invested in cash and short-term investments. The Company shares a portion of the interest on these
short-term investments with the lending agent. The Company has incurred no losses on the loan
program since the programs inception.
The following is a summary of fixed maturities and equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries & government
agencies |
|
$ |
10,446 |
|
|
$ |
404 |
|
|
$ |
25 |
|
|
$ |
10,825 |
|
States & political subdivisions |
|
|
132,454 |
|
|
|
2,812 |
|
|
|
231 |
|
|
|
135,035 |
|
Special revenue |
|
|
177,163 |
|
|
|
3,606 |
|
|
|
237 |
|
|
|
180,532 |
|
Public utilities |
|
|
66,406 |
|
|
|
4,233 |
|
|
|
101 |
|
|
|
70,538 |
|
U.S. industrial & miscellaneous |
|
|
372,861 |
|
|
|
10,267 |
|
|
|
2,575 |
|
|
|
380,553 |
|
Mortgage-backed securities |
|
|
37,516 |
|
|
|
766 |
|
|
|
316 |
|
|
|
37,966 |
|
Asset-backed securities |
|
|
22,598 |
|
|
|
61 |
|
|
|
220 |
|
|
|
22,439 |
|
Foreign |
|
|
109,802 |
|
|
|
7,291 |
|
|
|
344 |
|
|
|
116,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds |
|
|
929,246 |
|
|
|
29,440 |
|
|
|
4,049 |
|
|
|
954,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stock |
|
|
31,493 |
|
|
|
1,602 |
|
|
|
95 |
|
|
|
33,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
960,739 |
|
|
|
31,042 |
|
|
|
4,144 |
|
|
|
987,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
1,313 |
|
|
|
146 |
|
|
|
0 |
|
|
|
1,459 |
|
U.S. banks, trusts &
insurance companies |
|
|
7,869 |
|
|
|
804 |
|
|
|
219 |
|
|
|
8,454 |
|
U.S. industrial &
miscellaneous |
|
|
45,277 |
|
|
|
5,994 |
|
|
|
1,280 |
|
|
|
49,991 |
|
Foreign |
|
|
13,688 |
|
|
|
525 |
|
|
|
439 |
|
|
|
13,774 |
|
Nonredeemable
preferred stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
20,595 |
|
|
|
393 |
|
|
|
222 |
|
|
|
20,766 |
|
U.S. banks, trusts &
insurance companies |
|
|
59,611 |
|
|
|
2,260 |
|
|
|
139 |
|
|
|
61,732 |
|
U.S. industrial &
miscellaneous |
|
|
58,366 |
|
|
|
4,471 |
|
|
|
417 |
|
|
|
62,420 |
|
Foreign |
|
|
12,232 |
|
|
|
1,900 |
|
|
|
28 |
|
|
|
14,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
|
218,951 |
|
|
|
16,493 |
|
|
|
2,744 |
|
|
|
232,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities and
equity securities |
|
$ |
1,179,690 |
|
|
$ |
47,535 |
|
|
$ |
6,888 |
|
|
$ |
1,220,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 6
INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries &
government agencies |
|
$ |
11,850 |
|
|
$ |
412 |
|
|
$ |
69 |
|
|
$ |
12,193 |
|
States & political subdivisions |
|
|
80,508 |
|
|
|
2,515 |
|
|
|
164 |
|
|
|
82,859 |
|
Special revenue |
|
|
125,083 |
|
|
|
3,407 |
|
|
|
137 |
|
|
|
128,353 |
|
Public utilities |
|
|
66,927 |
|
|
|
4,708 |
|
|
|
52 |
|
|
|
71,583 |
|
U. S. industrial &
miscellaneous |
|
|
429,793 |
|
|
|
14,953 |
|
|
|
1,669 |
|
|
|
443,077 |
|
Mortgage-backed securities |
|
|
48,504 |
|
|
|
772 |
|
|
|
390 |
|
|
|
48,886 |
|
Asset-backed securities |
|
|
21,596 |
|
|
|
76 |
|
|
|
286 |
|
|
|
21,386 |
|
Foreign |
|
|
125,590 |
|
|
|
9,628 |
|
|
|
312 |
|
|
|
134,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds |
|
|
909,851 |
|
|
|
36,471 |
|
|
|
3,079 |
|
|
|
943,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred
stock |
|
|
29,429 |
|
|
|
1,949 |
|
|
|
109 |
|
|
|
31,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
939,280 |
|
|
|
38,420 |
|
|
|
3,188 |
|
|
|
974,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
992 |
|
|
|
11 |
|
|
|
0 |
|
|
|
1,003 |
|
U. S. banks, trusts &
insurance companies |
|
|
6,197 |
|
|
|
2,334 |
|
|
|
50 |
|
|
|
8,481 |
|
U. S. industrial &
miscellaneous |
|
|
34,120 |
|
|
|
13,136 |
|
|
|
171 |
|
|
|
47,085 |
|
Foreign |
|
|
2,245 |
|
|
|
57 |
|
|
|
28 |
|
|
|
2,274 |
|
Nonredeemable
preferred stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
21,373 |
|
|
|
1,939 |
|
|
|
59 |
|
|
|
23,253 |
|
U. S. banks, trusts &
insurance companies |
|
|
43,605 |
|
|
|
3,401 |
|
|
|
2 |
|
|
|
47,004 |
|
U. S. industrial &
miscellaneous |
|
|
55,096 |
|
|
|
4,667 |
|
|
|
88 |
|
|
|
59,675 |
|
Foreign |
|
|
12,232 |
|
|
|
1,730 |
|
|
|
43 |
|
|
|
13,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
|
175,860 |
|
|
|
27,275 |
|
|
|
441 |
|
|
|
202,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
and equity securities |
|
$ |
1,115,140 |
|
|
$ |
65,695 |
|
|
$ |
3,629 |
|
|
$ |
1,177,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 6
INVESTMENTS (Continued)
Fixed maturities and equity securities in a gross unrealized loss position at June 30, 2005 are as
follows. Data is provided by length of time securities were in a gross unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
12 months or longer |
|
Total |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
(in thousands) |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries and government
agencies |
|
$ |
2,643 |
|
|
$ |
25 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
2,643 |
|
|
$ |
25 |
|
States and political subdivisions |
|
|
18,688 |
|
|
|
149 |
|
|
|
5,156 |
|
|
|
82 |
|
|
|
23,844 |
|
|
|
231 |
|
Special revenue |
|
|
34,897 |
|
|
|
165 |
|
|
|
4,300 |
|
|
|
72 |
|
|
|
39,197 |
|
|
|
237 |
|
Public utilities |
|
|
9,875 |
|
|
|
101 |
|
|
|
0 |
|
|
|
0 |
|
|
|
9,875 |
|
|
|
101 |
|
U.S. industrial & miscellaneous |
|
|
101,721 |
|
|
|
1,576 |
|
|
|
42,959 |
|
|
|
999 |
|
|
|
144,680 |
|
|
|
2,575 |
|
Mortgage-backed securities |
|
|
5,773 |
|
|
|
39 |
|
|
|
13,038 |
|
|
|
277 |
|
|
|
18,811 |
|
|
|
316 |
|
Asset-backed securities |
|
|
0 |
|
|
|
0 |
|
|
|
14,891 |
|
|
|
220 |
|
|
|
14,891 |
|
|
|
220 |
|
Foreign |
|
|
23,921 |
|
|
|
280 |
|
|
|
2,934 |
|
|
|
64 |
|
|
|
26,855 |
|
|
|
344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds |
|
|
197,518 |
|
|
|
2,335 |
|
|
|
83,278 |
|
|
|
1,714 |
|
|
|
280,796 |
|
|
|
4,049 |
|
|
Redeemable preferred stock |
|
|
4,404 |
|
|
|
95 |
|
|
|
0 |
|
|
|
0 |
|
|
|
4,404 |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
201,922 |
|
|
|
2,430 |
|
|
|
83,278 |
|
|
|
1,714 |
|
|
|
285,200 |
|
|
|
4,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
25,869 |
|
|
|
1,938 |
|
|
|
0 |
|
|
|
0 |
|
|
|
25,869 |
|
|
|
1,938 |
|
Nonredeemable preferred stock |
|
|
37,698 |
|
|
|
681 |
|
|
|
3,411 |
|
|
|
125 |
|
|
|
41,109 |
|
|
|
806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
|
63,567 |
|
|
|
2,619 |
|
|
|
3,411 |
|
|
|
125 |
|
|
|
66,978 |
|
|
|
2,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities and
equity securities |
|
$ |
265,489 |
|
|
$ |
5,049 |
|
|
$ |
86,689 |
|
|
$ |
1,839 |
|
|
$ |
352,178 |
|
|
$ |
6,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury Obligations and Government Agencies The unrealized losses of the
Companys investments in US Treasury obligations and Government agencies were caused by interest
rate increases as credit risk is not present in these insturments. The Company has the ability and
intent to hold the investments until recovery of fair value, which may be at maturity. Because of
this, the Company does not consider the investments to be other-than-temporarily impaired at June
30, 2005.
Mortgage-Backed Securities The unrealized losses on the Companys investment in mortgage
backed securities were generally caused by interest rate increases. The Company has the ability
and intent to hold the investments until recovery of fair value, which may be at maturity. Because
of this, the Company does not consider the investments to be other-than-temporarily impaired at
June 30, 2005.
Corporate Bonds (public utilities, US banks, trust and insurance companies, US industrial,
miscellaneous and foreign) The unrealized losses on investments in corporate bonds were
caused by both interest rate increases and to declines in credit quality of certain issuers.
Evaluation of the near-term prospects suggests that the decline in credit quality is not such that
recovery of fair value is unlikely. Because the Company has the ability and intent to hold these
investments until recovery of fair value which may be at maturity, these investments are not
considered to be other-than-temporarily impaired at June 30, 2005.
Common Stock The Company has evaluated the near-term prospects of the issuers in relation
to the severity and duration of the impairment. In evaluating the near term prospects, the Company
considered significant changes in company finances, including company debt ratings, regulatory
action, accounting improprieties, etc. Based on that evaluation and the Companys ability and
intent to
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 6
INVESTMENTS (Continued)
hold these investments for a reasonable period to time sufficient for a recovery of fair value, the
Company does not consider the investments to be other-than-temporarily impaired at June 30, 2005.
Non-redeemable Preferred Stock The unrealized losses on investments in preferred stock
relates to both interest rate increases and to declines in credit quality of certain issuers.
Evaluation of the near-term prospects suggests that the decline in credit quality is not such that
recovery of fair value is unlikely. Because the Company has the ability and intent to hold these
investments until recovery of fair value which may be at maturity, these investments are not
considered to be other-than-temporarily impaired at June 30, 2005.
The components of net realized gains on investments as reported in the Consolidated Statements of
Operations are included below. There were impairment charges of $1.0 million on equity securities
and no impairment charges on fixed maturities in the second quarter of 2005. For the six months
ended June 30, 2005, there were impairment charges of $1.5 million on fixed maturities in the
automotive industry and $1.1 million on equity securities in the consumer products and technology
industries. There were no impairment charges on fixed maturities or equity securities in the three
or six months ended June 30, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Three Months Ended June 30 |
|
Six months Ended June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
$ |
3,401 |
|
|
$ |
2,430 |
|
|
$ |
4,490 |
|
|
$ |
4,869 |
|
Gross realized losses |
|
|
(578 |
) |
|
|
( 22 |
) |
|
|
(2,681 |
) |
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains |
|
|
2,823 |
|
|
|
2,408 |
|
|
|
1,809 |
|
|
|
4,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
|
8,546 |
|
|
|
719 |
|
|
|
15,674 |
|
|
|
1,432 |
|
Gross realized losses |
|
|
( 2,173 |
) |
|
|
( 97 |
) |
|
|
(2,790 |
) |
|
|
(373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains |
|
|
6,373 |
|
|
|
622 |
|
|
|
12,884 |
|
|
|
1,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains on
investments |
|
$ |
9,196 |
|
|
$ |
3,030 |
|
|
$ |
14,693 |
|
|
$ |
5,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partnerships include U.S. and foreign private equity, real estate and mezzanine debt
investments. The private equity limited partnerships invest in small- to medium-sized companies.
The Company has not guaranteed any of the partnership liabilities. Limited partnerships are
recorded using the equity method. In the second quarter of 2005, the Company made a correction to
its treatment of unrealized gains and losses on limited partnerships. This correction resulted in
an increase in pre-tax income of $14.2 million, or an increase to net income per share-diluted of
$.13, to record changes in the fair value of limited partnerships to equity in earnings or losses
of limited partnerships in the Consolidated Statement of Operations. The Company had previously
reflected unrealized gains and losses on limited partnerships in shareholders equity in
accumulated other comprehensive income, net of deferred taxes. Included in the pre-tax adjustment
was $9.4 million of unrealized gains related to 2004 and prior years, or $.09 per share diluted.
While there was an earnings impact related to this adjustment, there was no impact on the Companys
shareholders equity.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 6
INVESTMENTS (Continued)
The components of equity in earnings of limited partnerships as reported in the Consolidated
Statements of Operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
(in thousands) |
|
June 30 |
|
June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Private equity |
|
$ |
10,537 |
|
|
($ |
528 |
) |
|
$ |
11,527 |
|
|
($ |
655 |
) |
Real estate |
|
|
7,727 |
|
|
|
1,366 |
|
|
|
8,705 |
|
|
|
1,665 |
|
Mezzanine debt |
|
|
2,381 |
|
|
|
627 |
|
|
|
2,524 |
|
|
|
873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity in earnings of
limited partnerships |
|
$ |
20,645 |
|
|
$ |
1,465 |
|
|
$ |
22,756 |
|
|
$ |
1,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7
SUMMARIZED FINANCIAL STATEMENT INFORMATION OF AFFILIATE
The Company owns 21.6% of Erie Family Life Insurance Companys (EFL) outstanding common shares and
accounts for this investment using the equity method of accounting. EFL is a
Pennsylvania-domiciled life insurance company operating in 10 states and the District of Columbia.
The following represents unaudited condensed financial statement information for EFL on a GAAP
basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
(in thousands) |
|
June 30 |
|
June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Revenues |
|
$ |
41,787 |
|
|
$ |
41,595 |
|
|
$ |
75,929 |
|
|
$ |
78,368 |
|
Benefits and expenses |
|
|
31,741 |
|
|
|
21,728 |
|
|
|
60,424 |
|
|
|
48,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
10,046 |
|
|
|
19,867 |
|
|
|
15,505 |
|
|
|
30,324 |
|
Income taxes |
|
|
3,516 |
|
|
|
6,620 |
|
|
|
5,427 |
|
|
|
10,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
6,530 |
|
|
|
13,247 |
|
|
|
10,078 |
|
|
|
19,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
20,648 |
|
|
($ |
27,619 |
) |
|
$ |
10,160 |
|
|
($ |
6,135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid to shareholders |
|
$ |
2,079 |
|
|
$ |
2,079 |
|
|
$ |
4,158 |
|
|
$ |
4,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
(in thousands) |
|
June 30 |
|
December 31 |
|
|
2005 |
|
2004 |
Investments |
|
$ |
1,531,101 |
|
|
$ |
1,466,579 |
|
Total assets |
|
|
1,784,499 |
|
|
|
1,661,440 |
|
Liabilities |
|
|
1,506,969 |
|
|
|
1,389,912 |
|
Accumulated other comprehensive income |
|
|
39,334 |
|
|
|
39,252 |
|
Total shareholders equity |
|
|
277,530 |
|
|
|
271,528 |
|
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 8
RETIREMENT BENEFIT PLANS
The Companys pension plans consist of: (1) a noncontributory-defined benefit pension plan covering
substantially all employees of the Company, (2) an unfunded supplemental employee retirement plan
for its executive management and division officers and (3) an unfunded pension plan (discontinued
as of 1997) for certain of its outside directors. All liabilities for the plans described in this
note are presented in total for all employees of the Erie Insurance Group, before allocations to
related entities.
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Pension Benefits |
|
Postretirement Benefits |
|
|
Three Months Ended |
|
Three Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Service cost |
|
$ |
3,641 |
|
|
$ |
3,309 |
|
|
$ |
315 |
|
|
$ |
242 |
|
Interest cost |
|
|
3,644 |
|
|
|
3,237 |
|
|
|
242 |
|
|
|
177 |
|
Expected return on plan assets |
|
|
(4,346 |
) |
|
|
(4,248 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
175 |
|
|
|
225 |
|
|
|
(27 |
) |
|
|
(13 |
) |
Amortization of net loss |
|
|
904 |
|
|
|
801 |
|
|
|
81 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
4,018 |
|
|
$ |
3,324 |
|
|
$ |
611 |
|
|
$ |
444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Postretirement Benefits |
|
|
Six Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Service cost |
|
$ |
7,282 |
|
|
$ |
6,617 |
|
|
$ |
629 |
|
|
$ |
484 |
|
Interest cost |
|
|
7,288 |
|
|
|
6,475 |
|
|
|
484 |
|
|
|
354 |
|
Expected return on plan assets |
|
|
(8,691 |
) |
|
|
(8,498 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
350 |
|
|
|
451 |
|
|
|
(54 |
) |
|
|
(26 |
) |
Amortization of net loss |
|
|
1,807 |
|
|
|
1,603 |
|
|
|
163 |
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
8,036 |
|
|
$ |
6,648 |
|
|
$ |
1,222 |
|
|
$ |
889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A portion of the net periodic benefit cost for the pension and postretirement plans is borne by the
Erie Insurance Exchange (Exchange) and EFL. The Company was reimbursed approximately 56% and 54%
from the Exchange and EFL combined during the first half of 2005 and 2004, respectively.
NOTE 9 NOTES RECEIVABLE FROM ERIE FAMILY LIFE INSURANCE COMPANY
The Company is due $40 million from EFL in the form of two surplus notes. Repayment of the notes
is to be made out of unassigned surplus of EFL only and is subject to approval by the Pennsylvania
Insurance Commissioner. The first note, in the amount of $15 million, bears an annual interest
rate of 6.45% and is payable on demand on or after December 31, 2005. It is probable that the
Company will allow EFL to repay this note through issuance of a new note with a later maturity
date. Interest is to be paid semi-annually. EFL paid its semi-annual interest to the Company on the surplus note
of $.5 million in the second quarters ended June 30, 2005 and 2004.
The second note, in the amount of $25 million, bears an annual interest rate of 6.70% and is
payable on demand on or after December 31, 2018. This note was issued to further strengthen the
surplus of EFL and to support its continued sales growth. Interest is to be paid semi-annually.
EFL paid its semi-annual interest of $.8 million to the Company in the second quarters ended June 30, 2005 and 2004.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 10
STATUTORY INFORMATION
Cash and securities with carrying values of $3.6 million and $3.4 million were deposited by the
Companys property/casualty insurance subsidiaries with regulatory authorities under state
insurance laws and regulations at June 30, 2005 and December 31, 2004, respectively.
NOTE 11
SUPPLEMENTARY DATA ON CASH FLOWS
A reconciliation of net income to net cash provided by operating activities as presented in the
Consolidated Statements of Cash Flows is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
(in thousands) |
|
2005 |
|
2004 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
133,939 |
|
|
$ |
106,527 |
|
Adjustments to reconcile net income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
18,661 |
|
|
|
18,725 |
|
Deferred income tax expense |
|
|
4,029 |
|
|
|
1,905 |
|
Equity in earnings of limited partnerships |
|
|
(22,756 |
) |
|
|
(1,883 |
) |
Net realized gains on investments |
|
|
(14,693 |
) |
|
|
(5,883 |
) |
Net amortization of bond premium |
|
|
1,191 |
|
|
|
822 |
|
Undistributed earnings of Erie Family
Life Insurance Company |
|
|
(1,408 |
) |
|
|
(1,991 |
) |
Deferred compensation |
|
|
791 |
|
|
|
682 |
|
Increase in receivables and reinsurance
recoverable from the Exchange |
|
|
(25,022 |
) |
|
|
(90,674 |
) |
Increase in prepaid expenses and other assets |
|
|
(20,635 |
) |
|
|
(23,190 |
) |
Increase in accounts payable and accrued expenses |
|
|
4,369 |
|
|
|
15,689 |
|
Increase in loss reserves |
|
|
12,454 |
|
|
|
48,337 |
|
Increase in unearned premiums |
|
|
6,090 |
|
|
|
29,520 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
97,010 |
|
|
$ |
98,586 |
|
|
|
|
|
|
|
|
|
|
NOTE 12
COMMITMENTS AND CONTINGENCIES
The Company has contractual commitments to invest up to $135.7 million additional funds in limited
partnership investments at June 30, 2005. These commitments will be funded as required by
the partnerships agreements through 2012. At June 30, 2005, the total commitment to fund limited
partnerships that invest in private equity securities is $56.5 million, in real estate activities
is $62.6 million and in fixed income securities is $16.6 million. The Company expects to have
sufficient cash flows from operations and positive flows from existing limited partnership
investments to meet these partnership commitments.
The Company is involved in litigation arising in the ordinary course of business. In the opinion of
management, the effects, if any, of such litigation are not expected to be material to the
Companys consolidated financial condition, results of operations or cash flows.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 13
VARIABLE INTEREST ENTITY
The Exchange is a reciprocal insurance company, domiciled in Pennsylvania, for which the Company
serves as attorney-in-fact. The Company has a significant interest in the financial condition of
the Exchange because net management fee revenues are based on the direct written premiums of the
Exchange and the other members of the Property and Casualty Group.
The selected financial data below is derived from the Exchanges financial statements prepared in
accordance with Statutory Accounting Principals (SAP) required by the National Association of
Insurance Commissioners (NAIC) Accounting Practices and Procedures Manual, as modified to include
prescribed or permitted practices of the Commonwealth of Pennsylvania. In the opinion of
management, all adjustments consisting only of normal recurring accruals, considered necessary for
a fair presentation, have been included. The condensed financial data set forth below represents
the Exchanges share of underwriting results after accounting for intercompany pool transactions.
Erie
Insurance Exchange
Condensed Statutory Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 |
|
Six Months Ended June 30 |
(in thousands) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Premiums earned |
|
$ |
957,895 |
|
|
$ |
914,360 |
|
|
$ |
1,890,689 |
|
|
$ |
1,804,603 |
|
Losses and loss adjustment expenses |
|
|
580,315 |
|
|
|
600,610 |
|
|
|
1,134,309 |
|
|
|
1,257,382 |
|
Insurance underwriting and other
expenses* |
|
|
267,272 |
|
|
|
262,446 |
|
|
|
509,993 |
|
|
|
501,770 |
|
Dividends to policyholders |
|
|
3,444 |
|
|
|
5,036 |
|
|
|
10,812 |
|
|
|
7,783 |
|
Other expense |
|
|
5,532 |
|
|
|
6,646 |
|
|
|
9,070 |
|
|
|
9,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net underwriting gain |
|
|
101,332 |
|
|
|
39,622 |
|
|
|
226,505 |
|
|
|
28,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
100,883 |
|
|
|
68,765 |
|
|
|
180,518 |
|
|
|
131,494 |
|
Net realized gains |
|
|
294,706 |
|
|
|
14,023 |
|
|
|
371,305 |
|
|
|
31,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income |
|
|
395,589 |
|
|
|
82,788 |
|
|
|
551,823 |
|
|
|
162,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before federal income tax |
|
|
496,921 |
|
|
|
122,410 |
|
|
|
778,328 |
|
|
|
190,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax expense |
|
|
163,957 |
|
|
|
38,180 |
|
|
|
252,155 |
|
|
|
56,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
332,964 |
|
|
$ |
84,230 |
|
|
$ |
526,173 |
|
|
$ |
134,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes management fees and service fees paid or accrued as payable to the Company. |
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 13
VARIABLE INTEREST ENTITY (Continued)
Erie
Insurance Exchange
Condensed Statutory Statements of Financial Position
|
|
|
|
|
|
|
|
|
|
|
As of |
(in thousands) |
|
June 30 |
|
December 31 |
|
|
2005 |
|
2004 |
Assets |
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
Common stock |
|
$ |
1,525,991 |
|
|
$ |
1,508,664 |
|
Preferred stock |
|
|
611,310 |
|
|
|
550,090 |
|
Fixed maturities |
|
|
4,570,211 |
|
|
|
4,399,458 |
|
Limited partnerships |
|
|
566,256 |
|
|
|
567,089 |
|
Real estate mortgage loans |
|
|
10,699 |
|
|
|
10,859 |
|
Properties occupied by the Exchange |
|
|
35,758 |
|
|
|
36,305 |
|
Cash and cash equivalents |
|
|
279,073 |
|
|
|
125,933 |
|
Other invested assets |
|
|
31,090 |
|
|
|
1,049 |
|
|
|
|
|
|
|
|
|
|
Total invested assets |
|
|
7,630,388 |
|
|
|
7,199,447 |
|
Premium receivable |
|
|
1,062,029 |
|
|
|
1,002,818 |
|
Deferred income taxes |
|
|
27,627 |
|
|
|
0 |
|
Other assets |
|
|
67,228 |
|
|
|
67,497 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
8,787,272 |
|
|
$ |
8,269,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Loss and LAE reserves |
|
$ |
3,447,057 |
|
|
$ |
3,436,246 |
|
Unearned premium reserves |
|
|
1,572,854 |
|
|
|
1,536,890 |
|
Accrued liabilities |
|
|
679,565 |
|
|
|
400,375 |
|
Deferred income taxes |
|
|
0 |
|
|
|
92,193 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
5,699,476 |
|
|
|
5,465,704 |
|
|
|
|
|
|
|
|
|
|
Total policyholders surplus |
|
|
3,087,796 |
|
|
|
2,804,058 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and
policyholders surplus |
|
$ |
8,787,272 |
|
|
$ |
8,269,762 |
|
|
|
|
|
|
|
|
|
|
The Exchanges Policyholders surplus increased 10.1% during 2005 primarily as a result of improved
underwriting results and net investment income.
Common equity securities represent a significant portion of the Exchanges investment portfolio and
surplus and are exposed to price risk, volatility of the capital markets and general economic
conditions. Common stock investments made up approximately 49.4% of the Exchanges statutory
surplus at June 30, 2005 and 53.8% at December 31, 2004. The common stock portfolio has been
diversified and almost all of the portfolio is now managed by
external equity managers. Internally managed common stocks amounted to only $72.9 million as of June 30, 2005.
The Exchange had realized and unrealized capital gains on its common stock portfolio of $44.0
million and $15.8 million in the second quarters of 2005 and 2004, respectively. Net proceeds from
the sale of common stock investments were $406.5 million in the second quarter of 2005, which
included $284.3 million in realized capital gains as the
Exchange continued the process of selling down its internally managed
common stock portfolio. This compared to proceeds of $31.4 million in the
second quarter of 2004, which included $2.8 million in realized capital gains. The weighted
average current price to trailing 12-months earnings ratio of the Exchanges common stock portfolio
was 20.59 and 27.57 at June 30, 2005 and 2004, respectively. The Standard & Poors composite price
to trailing 12-months earnings ratio was 18.07 and 24.95 at June 30, 2005 and 2004, respectively.
Cash and cash equivalents include securities lending of $212.9 million at June 30, 2005 compared to
$2.3 million at December 31, 2004.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 13
VARIABLE INTEREST ENTITY (Continued)
If the surplus of the Exchange were to decline significantly from its current level, the Property
and Casualty Group could find it more difficult to retain its existing business and attract new
business. A decline in the business of the Property and Casualty Group would have an adverse effect
on the amount of the management fees the Company receives and the underwriting results of the
Property and Casualty Group in which the Company has a 5.5% participation. In addition, a decline
in the surplus of the Exchange from its current level would make it more likely that the management
fee rate received by the Company would be reduced.
Erie
Insurance Exchange
Condensed Statutory Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
(in thousands) |
|
2005 |
|
2004 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Premiums collected net of reinsurance |
|
$ |
1,873,472 |
|
|
$ |
1,833,023 |
|
Net investment income received |
|
|
186,744 |
|
|
|
137,655 |
|
Miscellaneous expense |
|
|
(5,660 |
) |
|
|
(5,752 |
) |
Losses and loss adjustment expenses
paid |
|
|
(963,277 |
) |
|
|
(1,005,863 |
) |
Management fee and expenses paid |
|
|
(698,538 |
) |
|
|
(682,082 |
) |
Dividends to policyholders |
|
|
(10,798 |
) |
|
|
(9,402 |
) |
Income taxes paid |
|
|
(208,864 |
) |
|
|
(188,969 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities |
|
|
173,079 |
|
|
|
78,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Proceeds from investment sales and
maturities |
|
|
1,717,516 |
|
|
|
849,504 |
|
Purchases of investments |
|
|
(1,957,410 |
) |
|
|
(1,255,204 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(239,894 |
) |
|
|
(405,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities |
|
|
219,955 |
|
|
|
47,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents |
|
|
153,140 |
|
|
|
(279,567 |
) |
Cash and cash equivalents at beginning
of period |
|
|
125,933 |
|
|
|
612,971 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period |
|
$ |
279,073 |
|
|
$ |
333,404 |
|
|
|
|
|
|
|
|
|
|
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 14
SEGMENT INFORMATION
The Company operates its business as three reportable segments management operations, insurance
underwriting operations and investment operations. Accounting policies for segments are the same
as those described in the summary of significant accounting policies Note 3 of the Companys Annual
Report on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange
Commission on February 24, 2005, with the exception of the management fee revenues received from
the property/casualty insurance subsidiaries. These revenues are not eliminated in the segment
detail that follows as management bases its decisions on the segment presentation. Summarized
financial information for the Companys operating segments is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Management Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee revenue |
|
$ |
254,381 |
|
|
$ |
256,124 |
|
|
$ |
484,790 |
|
|
$ |
477,991 |
|
Service agreement revenue |
|
|
5,359 |
|
|
|
5,224 |
|
|
|
10,146 |
|
|
|
10,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
|
259,740 |
|
|
|
261,348 |
|
|
|
494,936 |
|
|
|
488,814 |
|
|
Cost of management operations |
|
|
198,129 |
|
|
|
192,719 |
|
|
|
375,844 |
|
|
|
363,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
61,611 |
|
|
$ |
68,629 |
|
|
$ |
119,092 |
|
|
$ |
124,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from management
operations |
|
$ |
40,997 |
|
|
$ |
45,481 |
|
|
$ |
79,229 |
|
|
$ |
82,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Underwriting Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal lines |
|
$ |
38,621 |
|
|
$ |
36,901 |
|
|
$ |
76,835 |
|
|
$ |
72,340 |
|
Commercial lines |
|
|
16,383 |
|
|
|
15,456 |
|
|
|
32,940 |
|
|
|
30,755 |
|
Reinsurance nonaffiliates |
|
|
6 |
|
|
|
(441 |
) |
|
|
(274 |
) |
|
|
302 |
|
Reinsurance affiliates |
|
|
(844 |
) |
|
|
(851 |
) |
|
|
(1,687 |
) |
|
|
(1,683 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned |
|
|
54,166 |
|
|
|
51,065 |
|
|
|
107,814 |
|
|
|
101,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal lines |
|
|
34,601 |
|
|
|
35,876 |
|
|
|
68,139 |
|
|
|
71,586 |
|
Commercial lines |
|
|
14,346 |
|
|
|
15,179 |
|
|
|
27,315 |
|
|
|
30,043 |
|
Reinsurance nonaffiliates |
|
|
455 |
|
|
|
(60 |
) |
|
|
1,027 |
|
|
|
1,506 |
|
Reinsurance affiliates |
|
|
(166 |
) |
|
|
4,929 |
|
|
|
173 |
|
|
|
4,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
49,236 |
|
|
|
55,924 |
|
|
|
96,654 |
|
|
|
108,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
4,930 |
|
|
($ |
4,859 |
) |
|
$ |
11,160 |
|
|
($ |
6,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from insurance
underwriting operations |
|
$ |
3,280 |
|
|
($ |
3,220 |
) |
|
$ |
7,424 |
|
|
($ |
4,212 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of expenses |
|
$ |
15,934 |
|
|
$ |
15,605 |
|
|
$ |
30,402 |
|
|
$ |
30,291 |
|
Net realized gains on investments |
|
|
9,196 |
|
|
|
3,030 |
|
|
|
14,693 |
|
|
|
5,883 |
|
Equity in earnings of limited partnerships |
|
|
20,645 |
|
|
|
1,465 |
|
|
|
22,756 |
|
|
|
1,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income unaffiliated |
|
$ |
45,775 |
|
|
$ |
20,100 |
|
|
$ |
67,851 |
|
|
$ |
38,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from investment operations |
|
$ |
30,459 |
|
|
$ |
13,320 |
|
|
$ |
45,140 |
|
|
$ |
25,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of EFL, net of tax |
|
$ |
1,432 |
|
|
$ |
1,374 |
|
|
$ |
2,146 |
|
|
$ |
2,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 14
SEGMENT INFORMATION (Continued)
Reconciliation of reportable segment revenues and operating expenses to the Consolidated Statements
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Three Months Ended June 30 |
|
Six Months Ended June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
Segment revenues |
|
$ |
313,906 |
|
|
$ |
312,413 |
|
|
$ |
602,750 |
|
|
$ |
590,528 |
|
Elimination of intersegment
management fee revenues |
|
|
(13,991 |
) |
|
|
(14,087 |
) |
|
|
(26,664 |
) |
|
|
(26,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
$ |
299,915 |
|
|
$ |
298,326 |
|
|
$ |
576,086 |
|
|
$ |
564,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating expenses |
|
$ |
247,364 |
|
|
$ |
248,643 |
|
|
$ |
472,498 |
|
|
$ |
472,022 |
|
Elimination of intersegment
management fee revenue |
|
|
(13,991 |
) |
|
|
(14,087 |
) |
|
|
(26,664 |
) |
|
|
(26,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
233,373 |
|
|
$ |
234,556 |
|
|
$ |
445,834 |
|
|
$ |
445,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intersegment revenues and expenses that are eliminated in the Consolidated Statements of
Operations relate to the Companys property/casualty insurance subsidiaries 5.5% share of the
intersegment management fees paid to the Company.
The following table presents the management fee revenue by line of business before elimination of
the intersegment management fee revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Six Months Ended |
|
|
|
|
June 30 |
|
% |
|
June 30 |
|
% |
(dollars in thousands) |
|
2005 |
|
2004 |
|
Change |
|
2005 |
|
2004 |
|
Change |
|
Private passenger auto |
|
$ |
120,285 |
|
|
$ |
122,938 |
|
|
|
(2.2 |
)% |
|
$ |
233,143 |
|
|
$ |
235,948 |
|
|
|
(1.2 |
)% |
Commercial auto |
|
|
21,808 |
|
|
|
21,407 |
|
|
|
1.9 |
|
|
|
42,319 |
|
|
|
41,369 |
|
|
|
2.3 |
|
Homeowner |
|
|
48,621 |
|
|
|
48,317 |
|
|
|
.6 |
|
|
|
84,718 |
|
|
|
82,653 |
|
|
|
2.5 |
|
Commercial multi-peril |
|
|
29,309 |
|
|
|
28,556 |
|
|
|
2.6 |
|
|
|
56,932 |
|
|
|
55,110 |
|
|
|
3.3 |
|
Workers compensation |
|
|
22,015 |
|
|
|
21,243 |
|
|
|
3.6 |
|
|
|
46,008 |
|
|
|
43,828 |
|
|
|
5.0 |
|
All other lines of
business |
|
|
11,243 |
|
|
|
10,863 |
|
|
|
3.5 |
|
|
|
20,970 |
|
|
|
20,183 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
253,281 |
|
|
$ |
253,324 |
|
|
|
.0 |
% |
|
$ |
484,090 |
|
|
$ |
479,091 |
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in allowance for
management fee returned
on cancelled policies |
|
|
1,100 |
|
|
|
2,800 |
|
|
|
|
|
|
|
700 |
|
|
|
(1,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee, after
change in allowance |
|
$ |
254,381 |
|
|
$ |
256,124 |
|
|
|
(.7 |
)% |
|
$ |
484,790 |
|
|
$ |
477,991 |
|
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee rate |
|
|
23.75 |
% |
|
|
23.5 |
% |
|
|
|
|
|
|
23.75 |
% |
|
|
23.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 14
SEGMENT INFORMATION (Continued)
The growth rate of policies in force and policy retention trends (the percentage of policyholders
eligible for renewals who have renewed their policies measured on a twelve-month rolling basis)
directly impact the Companys management operations and property and casualty insurance operating
segments. Below is a summary of each by line of business for the Property and Casualty Groups
insurance business.
Growth rates of policies in force for Property and Casualty Group insurance operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private |
|
12-mth. |
|
|
|
|
|
12-mth. |
|
All other |
|
12-mth. |
|
Total |
|
12-mth. |
|
|
passenger |
|
growth |
|
|
|
|
|
growth |
|
personal lines |
|
growth |
|
Personal |
|
growth |
Date |
|
auto |
|
rate |
|
Homeowners |
|
rate |
|
of business |
|
rate |
|
Lines |
|
rate |
03/31/2004 |
|
|
1,678,496 |
|
|
|
3.4 |
% |
|
|
1,335,763 |
|
|
|
5.8 |
% |
|
|
275,970 |
|
|
|
7.2 |
% |
|
|
3,290,229 |
|
|
|
4.7 |
% |
06/30/2004 |
|
|
1,686,524 |
|
|
|
2.2 |
% |
|
|
1,347,409 |
|
|
|
4.2 |
% |
|
|
278,547 |
|
|
|
5.3 |
% |
|
|
3,312,480 |
|
|
|
3.3 |
% |
09/30/2004 |
|
|
1,682,561 |
|
|
|
1.0 |
% |
|
|
1,350,899 |
|
|
|
2.6 |
% |
|
|
278,707 |
|
|
|
3.4 |
% |
|
|
3,312,167 |
|
|
|
1.9 |
% |
12/31/2004 |
|
|
1,670,804 |
|
|
|
(0.1 |
)% |
|
|
1,347,671 |
|
|
|
1.5 |
% |
|
|
278,974 |
|
|
|
2.4 |
% |
|
|
3,297,449 |
|
|
|
0.8 |
% |
03/31/2005 |
|
|
1,661,955 |
|
|
|
(1.0 |
)% |
|
|
1,343,803 |
|
|
|
0.6 |
% |
|
|
279,927 |
|
|
|
1.4 |
% |
|
|
3,285,685 |
|
|
|
(0.1 |
)% |
06/30/2005 |
|
|
1,658,278 |
|
|
|
(1.7 |
)% |
|
|
1,350,491 |
|
|
|
0.2 |
% |
|
|
282,670 |
|
|
|
1.5 |
% |
|
|
3,291,439 |
|
|
|
(0.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12-mth. |
|
|
|
|
|
12-mth. |
|
|
|
|
|
12-mth. |
|
All other |
|
12-mth. |
|
Total |
|
12-mth. |
|
|
CML* |
|
growth |
|
CML* |
|
growth |
|
Workers |
|
growth |
|
CML* lines |
|
growth |
|
CML* |
|
growth |
Date |
|
auto |
|
rate |
|
multi-peril |
|
rate |
|
comp. |
|
rate |
|
of business |
|
rate |
|
Lines |
|
rate |
03/31/2004 |
|
|
115,760 |
|
|
|
5.3 |
% |
|
|
206,937 |
|
|
|
6.2 |
% |
|
|
61,378 |
|
|
|
2.1 |
% |
|
|
86,344 |
|
|
|
6.1 |
% |
|
|
470,419 |
|
|
|
5.4 |
% |
06/30/2004 |
|
|
117,060 |
|
|
|
3.7 |
% |
|
|
209,795 |
|
|
|
4.1 |
% |
|
|
60,735 |
|
|
|
(1.9 |
)% |
|
|
87,172 |
|
|
|
4.0 |
% |
|
|
474,762 |
|
|
|
3.1 |
% |
09/30/2004 |
|
|
117,090 |
|
|
|
2.4 |
% |
|
|
210,012 |
|
|
|
2.4 |
% |
|
|
59,863 |
|
|
|
(4.1 |
)% |
|
|
87,921 |
|
|
|
2.5 |
% |
|
|
474,886 |
|
|
|
1.5 |
% |
12/31/2004 |
|
|
117,287 |
|
|
|
1.8 |
% |
|
|
209,623 |
|
|
|
1.5 |
% |
|
|
58,931 |
|
|
|
(5.4 |
)% |
|
|
87,815 |
|
|
|
1.6 |
% |
|
|
473,656 |
|
|
|
0.7 |
% |
03/31/2005 |
|
|
117,382 |
|
|
|
1.4 |
% |
|
|
209,619 |
|
|
|
1.3 |
% |
|
|
57,949 |
|
|
|
(5.6 |
)% |
|
|
87,877 |
|
|
|
1.8 |
% |
|
|
472,827 |
|
|
|
0.5 |
% |
06/30/2005 |
|
|
118,445 |
|
|
|
1.2 |
% |
|
|
212,100 |
|
|
|
1.1 |
% |
|
|
57,398 |
|
|
|
(5.5 |
)% |
|
|
88,981 |
|
|
|
2.1 |
% |
|
|
476,924 |
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12-mth. |
|
|
|
Total |
|
growth |
|
Date |
|
All Lines |
|
rate |
|
03/31/2004 |
|
|
3,760,648 |
|
|
|
4.7 |
% |
|
06/30/2004 |
|
|
3,787,242 |
|
|
|
3.2 |
% |
|
09/30/2004 |
|
|
3,787,053 |
|
|
|
1.8 |
% |
|
12/31/2004 |
|
|
3,771,105 |
|
|
|
0.7 |
% |
|
03/31/2005 |
|
|
3,758,512 |
|
|
|
(0.1 |
)% |
|
06/30/2005 |
|
|
3,768,363 |
|
|
|
(0.5 |
)% |
|
Policy retention trends for Property and Casualty Group insurance operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other |
|
|
|
|
passenger |
|
CML* |
|
|
|
|
|
CML* |
|
Workers |
|
lines of |
|
|
Date |
|
auto |
|
auto |
|
Homeowners |
|
multi-peril |
|
comp. |
|
business |
|
Total |
03/31/2004 |
|
|
91.2 |
% |
|
|
89.7 |
% |
|
|
89.0 |
% |
|
|
87.6 |
% |
|
|
88.1 |
% |
|
|
87.5 |
% |
|
|
89.8 |
% |
06/30/2004 |
|
|
90.7 |
|
|
|
89.0 |
|
|
|
88.4 |
|
|
|
86.7 |
|
|
|
86.7 |
|
|
|
86.8 |
|
|
|
89.2 |
|
09/30/2004 |
|
|
90.3 |
|
|
|
88.5 |
|
|
|
87.9 |
|
|
|
86.0 |
|
|
|
86.2 |
|
|
|
86.0 |
|
|
|
88.7 |
|
12/31/2004 |
|
|
90.0 |
|
|
|
88.3 |
|
|
|
87.6 |
|
|
|
85.3 |
|
|
|
85.8 |
|
|
|
85.8 |
|
|
|
88.4 |
|
03/31/2005 |
|
|
89.9 |
|
|
|
88.2 |
|
|
|
87.6 |
|
|
|
85.5 |
|
|
|
85.9 |
|
|
|
85.5 |
|
|
|
88.3 |
|
06/30/2005 |
|
|
89.8 |
|
|
|
87.8 |
|
|
|
87.8 |
|
|
|
85.0 |
|
|
|
85.8 |
|
|
|
85.5 |
|
|
|
88.3 |
|
23
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the historical financial information
and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual
Report on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange
Commission on February 24, 2005. Preceding the discussion of financial results is an introduction
discussing the relationships between the member companies of the Erie Insurance Group. The
following discussion of financial results focuses heavily on the Erie Indemnity Companys (Company)
three primary segments: management operations, insurance underwriting operations and investment
operations consistent with the presentation in Note 14 in the Notes to Consolidated Financial
Statements. That presentation, which management uses internally to monitor and evaluate results,
is an alternative presentation of the Companys Consolidated Statements of Operations.
NATURE OF ORGANIZATION
The following organizational chart depicts the organization of the various entities of the Erie
Insurance Group:
Erie Indemnity Company has served since 1925 as the attorney-in-fact for the policyholders of the
Erie Insurance Exchange (Exchange). The Company is a public registrant that operates predominantly
as a provider of certain management services to the Exchange. The Company also owns subsidiaries
that are property and casualty insurers. Each applicant for insurance to a reciprocal insurance
exchange signs a subscribers agreement, which contains a power-of-attorney appointing an
attorney-in-fact. Under the Companys attorney-in-fact arrangement with subscribers to the
Exchange, the Company is required to perform services relating to the sales, underwriting and
issuance of policies on behalf of the Exchange.
The Exchange and its property/casualty subsidiary, Flagship City Insurance Company (Flagship), and
the Companys three property/casualty subsidiaries, Erie Insurance Company (EIC), Erie Insurance
Company of New York (EINY) and Erie Insurance Property & Casualty Company (EIPC),
(collectively,
24
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
the Property and Casualty Group) write personal and commercial lines property and casualty coverage
exclusively through more than 1,700 independent agencies comprising over 7,600 licensed independent
agents and pool their underwriting results. The financial position or results of operations of the
Exchange are not consolidated with those of the Company. The Company, together with the Property
and Casualty Group and EFL, operate collectively as the Erie Insurance Group.
The financial information presented herein reflects the Companys management operations from
serving as attorney-in-fact for the Exchange, its insurance underwriting results from its
wholly-owned subsidiaries (EIC, EINY and EIPC) and the Companys investment operations.
CRITICAL ACCOUNTING ESTIMATES
Valuation of Limited Partnership Investments
Management has made estimates concerning the valuation of all investments as disclosed in
Managements Discussion and Analysis of Financial Condition and Results of Operations contained in
the Annual Report on Form 10-K for the year ended December 31, 2004 as filed with the Securities
and Exchange Commission on February 24, 2005. The following discussion on the valuation of limited
partnership investments serves to supplement that disclosure. Investments in limited partnerships
are recorded under the equity method of accounting. This method requires that changes in the fair
value of invested assets held by the partnership in the form of unrealized gains and losses, be
recorded in earnings when recognized by the partnership. Prior to the second quarter 2005, the
Company did not record in the Companys Consolidated Statements of Operations, its proportionate
share of changes in the fair value of limited partnership investments but did recognize such
changes as a component of accumulated other comprehensive income in shareholders equity. During
the second quarter of 2005, the Company recorded an adjustment to correct the accounting for
unrealized gains and losses of its limited partnership investments by recognizing unrealized gains
and losses in the Companys Consolidated Statements of Operations. Restatement was not considered
necessary as the impact of correcting this error was not material to prior periods net income and
had no impact on total shareholders equity (see Investment
Operations section included herein).
The Companys limited partnership investment portfolio is diversified by asset class, i.e. real
estate, private equity and mezzanine debt, and by region and industry sectors. Certain of the
general partners of the limited partnerships prepare financial statements in which the investments
are valued at fair value. These financial statements are the primary basis for the valuation of
limited partnership interests. Because of the timing of the preparation and delivery of these
financial statements, the use of the most recently available financial statements provided by the
general partners typically results in not less than a quarter delay in the inclusion of the limited
partnership results in the Companys Consolidated Statements of Operations. The general partners
use various methods to estimate fair value for unlisted debt and equity investments, property and
other investments for which there is no ready market. Due to the nature of the investments,
general partners must make assumptions about the underlying companies or assets as to future
performance, financial condition, liquidity, availability of capital, market conditions and other
factors to determine the estimated fair value. The valuation procedures can include techniques
such as cash flow multiples, discounted cash flows or the pricing used to value the entity or
similar entities in recent financing transactions. Management reviews each partnerships policies
to ensure general partners utilize assumptions that independent
market analysts might use in estimating fair market value. The general partners estimate and assumption of fair value of
nonmarketable securities may differ significantly from the values that could have been derived had
a ready market existed. These values are not necessarily indicative of the value that would be
received in a current sale and valuation differences could be significant.
25
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
(dollars in thousands, except per share data) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
(unaudited) |
|
(unaudited) |
|
Income from management operations |
|
$ |
61,611 |
|
|
$ |
68,629 |
|
|
$ |
119,092 |
|
|
$ |
124,856 |
|
Underwriting income (loss) |
|
|
4,930 |
|
|
|
(4,859 |
) |
|
|
11,160 |
|
|
|
(6,350 |
) |
Net revenue from investment operations |
|
|
47,316 |
|
|
|
21,577 |
|
|
|
70,159 |
|
|
|
40,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
113,857 |
|
|
|
85,347 |
|
|
|
200,411 |
|
|
|
159,454 |
|
Provision for income taxes |
|
|
37,689 |
|
|
|
28,392 |
|
|
|
66,472 |
|
|
|
52,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
76,168 |
|
|
$ |
56,955 |
|
|
$ |
133,939 |
|
|
$ |
106,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted |
|
$ |
1.10 |
|
|
$ |
0.81 |
|
|
$ |
1.92 |
|
|
$ |
1.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income for the second quarter of 2005 increased 33.7% to $76.2 million
compared to $57.0 million during the same period in 2004. The Companys adjustment to the
valuation of limited partnership investments in the second quarter 2005 increased investment
earnings $14.2 million. The effect of this adjustment increased net income per share-diluted by
$.13, of which $.09 per share diluted related to 2004 and prior years. Management fee revenues
decreased in the second quarter of 2005 primarily as a result of lower direct written premiums of
the Property and Casualty Group, on which the management fee is based. Insurance underwriting
operations improved as a result of the Property and Casualty Groups continued efforts to focus on
underwriting profitability and from favorable development on losses of
prior accident years, in the
second quarter of 2005. Revenue from investment operations increased $25.7 million in the second
quarter of 2005 compared to the same period in 2004 due to the limited partnership valuation
adjustment and an improvement in realized gains due to sales of common stocks.
Consolidated net income for the six months ended June 30, 2005 increased 25.7% to $133.9 million.
Income from management operations decreased 4.6% during the first six months of 2005 compared to
the first six months of 2004. The gross margin from management operations decreased to 24.1% from
25.5% for the six months ended June 30, 2005 and 2004,
respectively, due to slower growth in management fee revenue relative
to increases in the cost of management operations. Insurance underwriting operations
generated income of $11.2 million for the six months ended June 30, 2005, compared to underwriting
losses of $6.4 million for the six months ended June 30, 2004. The improvement in underwriting
losses in 2005 compared to 2004 is a result of the initiatives implemented to focus on underwriting
profitability, lower catastrophe losses and continued favorable development of prior accident year
losses. Revenue from investment operations increased 71.3% to $70.2 million in the first six
months of 2005 compared to $41.0 million in the same period in 2004, due to the adjustment to
earnings from limited partnerships and realized gains.
OVERVIEW OF OPERATING SEGMENTS
Management Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
(dollars in thousands) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
(unaudited) |
|
(unaudited) |
Management fee revenue |
|
$ |
254,381 |
|
|
$ |
256,124 |
|
|
$ |
484,790 |
|
|
$ |
477,991 |
|
Service agreement revenue |
|
|
5,359 |
|
|
|
5,224 |
|
|
|
10,146 |
|
|
|
10,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from management
operations |
|
|
259,740 |
|
|
|
261,348 |
|
|
|
494,936 |
|
|
|
488,814 |
|
Cost of management operations |
|
|
198,129 |
|
|
|
192,719 |
|
|
|
375,844 |
|
|
|
363,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from management operations |
|
$ |
61,611 |
|
|
$ |
68,629 |
|
|
$ |
119,092 |
|
|
$ |
124,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin percentage |
|
|
23.7 |
% |
|
|
26.3 |
% |
|
|
24.1 |
% |
|
|
25.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee rate |
|
|
23.75 |
% |
|
|
23.5 |
% |
|
|
23.75 |
% |
|
|
23.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Management fee revenue
Management fee revenue decreased .7% for the quarter ended June 30, 2005 compared to the quarter
ended June 30, 2004. Management fees from the Exchange represented 71.5% and 75.9% of the
Companys total revenues for the second quarters of 2005 and 2004, respectively, after adjustment
to total revenue of the effect of the $9.4 million limited partnership adjustment in the second
quarter 2005 related to years prior to 2005. Management fee revenue is based on the management fee
rate, established by the Board of Directors, and the direct written premiums of the Property and
Casualty Group. The higher management fee rate in 2005 of 23.75% resulted in $2.7 million more in
management fee revenue for the quarter ended June 30, 2005, or an increase in net income per
share-diluted of $.02. Direct written premiums of the Property and
Casualty Group decreased 1.1%
in the second quarter of 2005 to $1.1 billion. While average premium per policy has increased as a
result of certain rate increases initially effective in 2004, the anticipated decline in new
policies in force resulted in lower direct written premiums. Policies in force grew by
approximately 10,000 policies during the second quarter 2005, reversing a trend of three
consecutive quarters of decline in policies in force.
Management fees are returned to the Exchange when policies are cancelled mid-term and unearned
premiums are refunded. The Company records an estimated allowance for management fees returned on
mid-term policy cancellations. Management fee revenues were increased by $1.1 million and $2.8
million in the second quarters of 2005 and 2004, respectively, due to changes in the allowance.
The 2005 allowance adjustment reflects a leveling off of cancellations evidenced by policy
retention ratios of 88.3% at both June 30, 2005 and March 31, 2005, and 88.4% at December 31, 2004.
The second quarter 2004 allowance adjustment offset a reduction of $3.9 million to management fee
revenue in the first quarter of 2004. The premium cancellation allowance at June 2004 reflected a
better estimate of actual cancellations after the previous methodology, which yielded estimates
that exceeded actual mid-term policy cancellations, was evaluated and refined in the second quarter
of 2004. Although the second quarter 2004 allowance adjustment increased management fee revenue,
the activity in the first six months of 2004 was reflective of increased policy cancellations due
to initiatives implemented to focus on underwriting profitability. The policy retention ratio
declined to 89.2% at June 30, 2004 from 90.2% at December 31, 2003. For the six months ended June
30, 2005, reductions in this allowance increased management fee revenue $.7 million compared to a
reduction to revenue of $1.1 million for the six months ended June 30, 2004.
The emphasis on underwriting discipline during 2004 resulted in a tapering off in policy production
and reduced policy retention ratios, as anticipated. Rate increases that were attained in 2003 and
2004 helped to offset the effect of these reductions on the Companys management fee revenue. In
2005, the Property and Casualty Group continued the focus on underwriting profitability and is
balancing that focus with efforts to improve premium growth. (See Insurance Underwriting
Operations section.) During the second quarter of 2005, the Company implemented certain marketing
initiatives to support agents growth efforts and is further refining its price segmentation model
for the private passenger auto and homeowners lines of business to improve the Companys
competitive position in those lines.
Policy production and retention ratios
Total new business declined 10.7% to $101.2 million in the second quarter of 2005 from $113.4
million in the second quarter of 2004. Personal lines new business premium written declined 14.6%
to $67.9 million from $79.5 million for the second quarters of 2005 and 2004, respectively.
Commercial lines new business premiums decreased 1.8% to $33.1 million in the second quarter of
2005 from $33.8 million in the second quarter of 2004. (see Note 14, Segment Information which
contains policies in force and policy retention trends by line of business). The private passenger
auto new business premium written
27
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
decreased to $40.4 million from $50.2 million for the second quarters of 2005 and 2004,
respectively.
Premium rates and rate change impacts
The average premium per policy increased 3.7% to $1,061 for the twelve months ended June 30, 2005
from $1,022 for the twelve months ended June 30, 2004. The average premium per personal lines
policy increased 3.3% while commercial lines average premiums increased 4.2% for the twelve months
ended June 30, 2005. The private passenger auto average premium per policy increased 2.4% to
$1,186 for the twelve months ended June 30, 2005 from $1,158 for the twelve months ended June 30,
2004.
In 2004 and 2003 substantial rate increases were filed by the Property and Casualty Group for
certain lines of business in various states to offset growing loss costs. The Property and
Casualty Group writes one-year policies. Rate increases take 24 months to be reflected fully in
earned premiums. It takes 12 months to implement a rate increase to all policyholders and another
12 months to earn the increased premiums in full. Because of the time span for full recognition of
premium rate increases, certain rate increases approved in 2004 are earned in 2005.
Given the improved underwriting results and the change in insurance market conditions, rate actions
will not continue to follow trends experienced in recent years. The improvement in underwriting
experience affords the Property and Casualty Group the ability to implement rate reductions to be
more price competitive for potential new policyholders and improve retention of existing
policyholders. Management continuously evaluates pricing actions and estimates that those
approved, filed and contemplated for filing through June 30, 2005 will result in a net decrease in
direct written premiums of $10.1 million in 2005. The most significant rate decreases are in the private passenger auto and homeowners lines of
business in Pennsylvania, North Carolina and Virginia.
2005 Activity
In August 2004, the Property and Casualty Group implemented insurance scoring for underwriting
purposes for its private passenger auto and homeowners lines of business in most of its operating
states in response to changing competitive market conditions. Insurance scoring has also been
incorporated, along with other risk characteristics, into a rating plan with multiple pricing
tiers. This segmented pricing provides the Property and Casualty Group greater flexibility in
pricing policies with varying degrees of risk. This should result in more competitive rates being
offered to customers with the most favorable loss characteristics. The rating plan with multiple
pricing tiers was implemented in most states on new business in March 2005, and on renewal business
in April 2005. In 2006, we anticipate implementing additional
rate interactions in auto and home.
To support the independent agents policy growth efforts, management initiated additional marketing
strategies to attract preferred business beginning in July 2005. A new lead generation program for
personal lines was introduced in support of agents efforts in identifying and marketing to quality
prospects. The Company also began a new cooperative marketing program in which a portion of the
agents marketing and advertising costs will be reimbursed by the Company. This program will
assist in the marketing of the ERIE agencies and the Property and Casualty Groups products and
services. A web-based marketing management program, @Blue®, to assist agents in
developing marketing plans is also being provided by the Company, which includes promotional
materials in support of agency marketing efforts for different media outlets. The Company is
expecting to incur approximately $1.2 million in expenses during 2005 in support of these marketing
initiatives.
Two new promotional incentive programs were also introduced as part of the overall marketing
strategy including a sales contest for agents that will run over a
twelve-month period beginning June 2005, and a
program titled
28
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
ERIE Agent Rewards Network (EARN) in which agents can earn gifts as incentive awards.
Service agreement revenue
Service agreement revenue increased to $5.4 million for the second quarter of 2005, from $5.2
million for the same period in 2004. Included in service agreement revenue are service charges the
Company collects from policyholders for providing multiple payment plans on policies written by the
Property and Casualty Group. These premium service charges increased $.2 million in the second
quarter of 2005 compared to 2004 primarily due to a shift to payment plans with more installments,
each with an associated service charge.
Cost of management operations
The cost of management operations increased 2.8% for the second quarter of 2005 to $198.1 million
from $192.7 million during the second quarter of 2004, primarily due to increases in personnel
costs and insurance scoring costs. For the six months ended June 30, 2005, the cost of management
operations grew by 3.3% to $375.8 million compared to $364.0 million for the same period a year
ago.
Commissions to independent agents, which are the largest component of the cost of management
operations, include scheduled commissions earned by independent agents on premiums written,
accelerated commissions and agent bonuses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
Three Months Ended |
|
|
|
|
|
Six Months Ended |
|
|
|
|
June 30 |
|
Percent |
|
June 30 |
|
Percent |
|
|
2005 |
|
2004 |
|
Change |
|
2005 |
|
2004 |
|
Change |
|
|
(unaudited) |
|
|
|
|
|
(unaudited) |
|
|
Scheduled and accelerated
rate commissions |
|
$ |
126,411 |
|
|
$ |
133,778 |
|
|
|
(5.5 |
)% |
|
$ |
239,499 |
|
|
$ |
251,201 |
|
|
|
(4.7 |
)% |
Agent bonuses |
|
|
18,169 |
|
|
|
10,950 |
|
|
|
65.9 |
|
|
|
31,068 |
|
|
|
18,453 |
|
|
|
68.4 |
|
Allowance for mid-term policy
cancellations |
|
|
400 |
|
|
|
1,400 |
|
|
|
(71.4 |
)% |
|
|
600 |
|
|
|
(600 |
) |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commissions |
|
$ |
144,980 |
|
|
$ |
146,128 |
|
|
|
(.8 |
)% |
|
$ |
271,167 |
|
|
$ |
269,054 |
|
|
|
.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled rate commissions were impacted by a 1.1% decrease in the direct written premiums of the
Property and Casualty Group in the second quarter of 2005 and the reduction in certain commercial
commission rates. Commercial commission rate reductions became effective on premiums collected
after December 31, 2004 and resulted in a $5.5 million reduction in scheduled rate commissions in
the second quarter of 2005 and a $10.9 million reduction for the six months ended June 30, 2005.
Accelerated rate commissions are offered to newly recruited agents for their initial three years.
Accelerated commissions were lower in the first six months of 2005 as there were fewer new agency
appointments in 2004 and existing accelerated commission contracts expired. New agency
appointments are continuing, with 24 appointments in the first six months of 2005.
Agent
bonuses are primarily comprised of the Companys agent bonus
program award that is based on an individual agencys property/casualty underwriting
profitability and also includes a component for growth in agency property/casualty premiums, if
agencies are profitable. The estimate for the bonus is modeled on a monthly basis using the two
prior years actual underwriting data by agency combined with the current year-to-date actual data.
Company estimates use projected underwriting data for the remainder of the current year in order to
model the 36-month underwriting results by agency. The increase in agent bonuses in the second
quarter of 2005 reflects the impact of the improved underwriting profitability in 2004, as the
bonus program considers the current and
two prior years actual underwriting experience. The agent bonus
award is estimated at $60.8 million
for
29
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
2005. The bonus estimate at the second quarter of 2004 was lower given the less favorable
underwriting results in 2003 and 2002.
As previously discussed, two new promotional incentive programs were initiated in June 2005 to
stimulate new policy sales growth from the independent agency force. These programs will run over
a twelve-month period and include incentives for property/casualty, life and annuity sales. The
total projected cost to the Company for these programs after reimbursement from EFL is estimated at
approximately $3.0 million, which will be expensed evenly over the program term, with $1.5 million
being incurred in 2005 and 2006.
The cost of management operations excluding commission costs, increased 14.1% for the three months
ended June 30, 2005 to $53.1 million from $46.6 million recorded in the second quarter of 2004.
Personnel related costs are the second largest component in cost of management operations. The
Companys personnel costs totaled $31.8 million for the three months ended June 30, 2005, compared
to $27.0 million for the same period in 2004, an increase of 17.8%. Contributing to this increase
was a 15.8% increase in salaries and wages due to a (1) 4.6% increase in staffing levels that include
increased salaries of information technology (IT) personnel no longer deployed to the
ErieConnection program which are being utilized by the Company rather than being allocated under
the IT cost sharing agreement, an (2) increase in base pay
rates and (3) increases in IT contract labor. Costs incurred related to
external contract labor mostly related to IT projects, increased $.4 million to $.9 million in the
second quarter of 2005. Total employee benefit costs increased 31.7% to $5.6 million in the second
quarter of 2005 compared to $4.2 million in the second quarter of 2004. This was principally due to
a 2004 reduction in the accrual of $.9 million for the Companys workers compensation benefit costs
liability. Without the 2004 workers compensation adjustment, employee benefit costs would have
risen 8.6% in the second quarter 2005.
Also contributing to the increase in the cost of management operations excluding commissions costs
were the cost of obtaining insurance scores on applications of $1.8 million during the second
quarter of 2005 and $2.3 million during the first six months of 2005. As the Company began using
insurance scoring in August 2004, there were no such expenses incurred in the first half of 2004.
(See further discussion in the 2005 Activity previously disclosed.)
Insurance Underwriting Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
(dollars in thousands) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
(unaudited) |
|
(unaudited) |
|
Premiums earned |
|
$ |
54,166 |
|
|
$ |
51,065 |
|
|
$ |
107,814 |
|
|
$ |
101,714 |
|
Losses and loss adjustment expenses
incurred |
|
|
33,786 |
|
|
|
40,002 |
|
|
|
66,462 |
|
|
|
78,040 |
|
Policy acquisition and other underwriting
expenses |
|
|
15,450 |
|
|
|
15,922 |
|
|
|
30,192 |
|
|
|
30,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
$ |
49,236 |
|
|
$ |
55,924 |
|
|
$ |
96,654 |
|
|
$ |
108,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss) |
|
$ |
4,930 |
|
|
($ |
4,859 |
) |
|
$ |
11,160 |
|
|
($ |
6,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
The following table reconciles the underwriting results of the Property and Casualty Group on a
statutory accounting basis (SAP) to the underwriting results of the Company on a GAAP basis.
Reconciliation of Property and Casualty (P&C) Group Underwriting Results to the Company
Underwriting Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 |
|
Six Months Ended June 30 |
(dollars in thousands) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
(unaudited) |
|
(unaudited) |
Property and Casualty Group Insurance
Underwriting Operations (SAP Basis) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct underwriting results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct written premium |
|
$ |
1,066,447 |
|
|
$ |
1,077,975 |
|
|
$ |
2,038,273 |
|
|
$ |
2,038,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium earned |
|
|
1,012,644 |
|
|
|
974,864 |
|
|
|
2,003,927 |
|
|
|
1,902,359 |
|
Loss and loss adjustment expenses incurred |
|
|
604,506 |
|
|
|
638,540 |
|
|
|
1,178,558 |
|
|
|
1,306,179 |
|
Policy acquisition and other underwriting
expenses |
|
|
293,506 |
|
|
|
293,627 |
|
|
|
564,119 |
|
|
|
552,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
898,012 |
|
|
|
932,167 |
|
|
|
1,742,677 |
|
|
|
1,858,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct underwriting income |
|
|
114,632 |
|
|
|
42,697 |
|
|
|
261,250 |
|
|
|
43,862 |
|
Nonaffiliated reinsurance underwriting resultsnet |
|
|
(8,042 |
) |
|
|
( 6,978 |
) |
|
|
(23,297 |
) |
|
|
( 21,386 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net underwriting gain (SAP Basis) |
|
$ |
106,590 |
|
|
$ |
35,719 |
|
|
$ |
237,953 |
|
|
$ |
22,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erie Indemnity Company Insurance
Underwriting Operations (SAP to GAAP Basis) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of pool assumed by Company |
|
|
5.5 |
% |
|
|
5.5 |
% |
|
|
5.5 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company preliminary underwriting income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
6,304 |
|
|
$ |
2,348 |
|
|
$ |
14,369 |
|
|
$ |
2,412 |
|
Nonaffiliated reinsurance |
|
|
(442 |
) |
|
|
(383 |
) |
|
|
(1,281 |
) |
|
|
(1,176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net underwriting gain (SAP Basis) |
|
|
5,862 |
|
|
|
1,965 |
|
|
|
13,088 |
|
|
|
1,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess-of-loss premiums ceded to the Exchange |
|
|
(844 |
) |
|
|
(842 |
) |
|
|
(1,687 |
) |
|
|
(1,684 |
) |
Excess-of-loss changes to recoveries
under the agreement* |
|
|
166 |
|
|
|
(4,929 |
) |
|
|
(173 |
) |
|
|
(4,929 |
) |
SAP to GAAP adjustments |
|
|
(254 |
) |
|
|
(1,053 |
) |
|
|
(68 |
) |
|
|
(973 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company underwriting income (loss) (GAAP Basis) |
|
$ |
4,930 |
|
|
($ |
4,859 |
) |
|
$ |
11,160 |
|
|
($ |
6,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The change in the recoverable under the excess-of-loss agreement is an offset to the prior
accident year loss development included in the loss and loss adjustment expenses reflected in the
table. |
COMBINED RATIO SAP AND GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Company GAAP combined ratio |
|
|
90.9 |
% |
|
|
109.5 |
% |
|
|
89.7 |
% |
|
|
106.2 |
% |
P&C Group statutory combined ratio |
|
|
87.9 |
|
|
|
93.2 |
|
|
|
87.4 |
|
|
|
96.7 |
|
P&C Group statutory combined ratio, excluding catastrophes |
|
|
87.5 |
|
|
|
91.0 |
|
|
|
86.9 |
|
|
|
95.2 |
|
P&C Group adjusted statutory combined ratio |
|
|
82.7 |
|
|
|
87.3 |
|
|
|
82.1 |
|
|
|
91.1 |
|
P&C Group adjusted statutory combined ratio, excluding
catastrophes |
|
|
82.3 |
|
|
|
85.1 |
|
|
|
81.6 |
|
|
|
89.6 |
|
Loss ratio
points from prior accident year reserve
development(redundancy) deficiency |
|
|
(3.1 |
) |
|
|
(1.9 |
) |
|
|
(4.0 |
) |
|
|
(2.6 |
) |
Loss ratio
points from salvage and subrogation recoveries collected |
|
|
(1.4 |
) |
|
|
(1.4 |
) |
|
|
(2.2 |
) |
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss
ratio point impact from prior accident years |
|
|
(4.5 |
) |
|
|
(3.3 |
) |
|
|
(6.2 |
) |
|
|
(4.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The GAAP combined ratio represents the ratio of losses, loss adjustment, acquisition and other
underwriting expenses incurred to premiums earned. The GAAP combined ratios of the Company are
different than the results of the Property and Casualty Group due to certain GAAP adjustments and
the effects of the excess-of-loss reinsurance agreement between the Companys property/casualty
insurance subsidiaries and the Exchange. The statutory combined ratio as reported and the statutory
combined ratio after being adjusted for the profit component paid to the Company are also presented
above for the Property and Casualty Group. The higher GAAP combined ratio, as compared to the
statutory combined
31
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
ratio in 2004, was largely due to $4.9 million of charges recorded by the Companys
property/casualty insurance subsidiaries under the intercompany excess-of-loss reinsurance
agreement, resulting in a variance of 9.7 GAAP combined ratio points in the second quarter 2004.
Direct
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
(dollars in thousands) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
(unaudited) |
|
(unaudited) |
|
Company underwriting income-direct,
before adjustments |
|
$ |
6,304 |
|
|
$ |
2,348 |
|
|
$ |
14,369 |
|
|
$ |
2,412 |
|
P&C
Group direct statutory combined ratio |
|
|
87.8 |
% |
|
|
94.1 |
% |
|
|
86.4 |
% |
|
|
96.5 |
% |
P&C
Group direct statutory combined ratio,
excluding catastrophes |
|
|
87.3 |
|
|
|
91.0 |
|
|
|
86.1 |
|
|
|
94.8 |
|
The improvement in 2005 underwriting results on direct business reflects the impact of the
underwriting profitability initiatives implemented in 2003 and 2004 to help offset severity
increases and manage exposure growth. Prior to the third quarter 2004, reserve estimates were
reviewed quarterly but seasonal fluctuations in the incurred but not reported (IBNR) loss reserves
were recognized over the balance of the year. Since then, refinements in the actuarial estimation
methodology have allowed seasonal fluctuations in the Property and Casualty Groups claims
experience to be recognized in the IBNR reserve in the quarter they occurred. Historically, the
second quarter of the fiscal year has higher non-catastrophe claim volume than the first quarter,
which is typically the lowest claim volume of the year. As underwriting losses are seasonally
higher in the second and fourth quarters, the Property and Casualty Groups combined ratio generally
increases as the year progresses. The seasonal increase in claim volume in the second quarter of
2005 contributed 4.3 points to the Property and Casualty Groups statutory combined ratio. The impact of seasonal fluctuations
was offset by positive development of prior accident year losses,
which improved the Property and Casualty Groups statutory
combined ratio by 3.1 points in the second quarter of 2005. Catastrophe losses incurred by the
Property and Casualty Group have not been significant in 2005. The
improved positive development of prior
accident years, totaling $13.7 million, and lower catastrophe losses, coupled with improved current accident year
underwriting experience, resulted in lower Property and Casualty Group
losses at June 30, 2005 compared to June 30, 2004.
Underwriting profitability initiatives
The Property and Casualty Group continues to maintain its focus on enhancing quality growth while
maintaining underwriting profitability. Recent underwriting practices have strengthened the
Property and Casualty Groups financial position to compete for profitable business. Underwriting
practices affect the number of new policyholders eligible for coverage with the Property and
Casualty Group as well as the number eligible to renew and the terms of renewal. The acceptability
of risks written by the Property and Casualty Group is an important element of underwriting
profitability.
In the latter portion of 2004, the Property and Casualty Group began utilizing insurance scoring
for underwriting purposes to aid in risk selection. Insurance scoring is an objective tool that
insurers use, along with other applicant loss and violation information, to better predict the
likelihood of policyholder losses. By more precisely predicting the likelihood of future losses,
the tool can help insurers manage their risk, enabling them to more accurately price insurance
coverage. Underwriting profitability is also affected by loss cost inflation and changes in the
average loss per claim.
32
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
In 2005, the Property and Casualty Group implemented the use of insurance scoring for pricing
purposes. Insurance scoring has been incorporated into a rating plan with multiple pricing tiers,
which was applied to new business in March 2005 and to renewal business in April 2005 in most of
the states in which the Property and Casualty Group operates. This segmented pricing will enable
the Company to offer competitive rates to more customers, providing greater flexibility in pricing
policies with varying degrees of risk.
To stimulate growth, the Company planned to continue its agent appointment efforts in 2005. Through
the second quarter of 2005, 24 new agents were appointed in existing territories.
Catastrophe losses
Catastrophes are an inherent risk of the property/casualty insurance business and can have a
material impact on the Companys insurance underwriting results. In addressing this risk, the
Company employs what it believes are reasonable underwriting standards and monitors its exposure by
geographic region. The Property and Casualty Group maintains catastrophe reinsurance coverage from
unaffiliated insurers. The 2005 agreement is a property catastrophe reinsurance treaty that
provides coverage of up to 95.0% of a loss of $400 million in excess of the Property and Casualty
Groups loss retention of $200 million per occurrence. No loss recoverables were recorded under
this treaty at June 30, 2005. Additionally, the Companys property/casualty insurance subsidiaries
all-lines excess-of-loss reinsurance agreement with the Exchange should assists in mitigating the
financial loss exposure of catastrophe losses on the Companys financial position. During the
second quarters of 2005 and 2004, the Companys share of catastrophe losses, as defined by the
Property and Casualty Group, amounted to $.2 million and $1.2 million, respectively and contributed
.4 points and 2.3 points to the GAAP combined ratio, respectively, reflecting very low catastrophe
experience for both periods. The second quarter 2004 catastrophe losses included wind and hail
storms in Ohio, West Virginia, Illinois and Indiana. Catastrophe losses were $.5 million and $1.6
million for the first half of 2005 and 2004, respectively.
Reinsurance
The Companys property/casualty insurance subsidiaries nonaffiliated reinsurance business includes
its share of the Property and Casualty Groups voluntary and involuntary assumed reinsurance
business and unaffiliated ceded business. The Exchange exited the voluntary assumed reinsurance
business as of December 31, 2003 to allow the Property and Casualty Group to focus on its core
business and lessen its underwriting exposure. The effects of the excess-of-loss reinsurance
agreement between the Companys property/casualty insurance subsidiaries and the Exchange is also
reflected in the reinsurance business when looking at the Companys results on a segment basis.
The excess-of-loss reinsurance agreement is not subject to the intercompany pooling agreement and
is presented after the effects of the pool in the previous reconciliation table.
The premium for the Companys property/casualty insurance subsidiaries all lines excess-of-loss
reinsurance agreement with the Exchange decreased to 1.5% of EICs and EINYs net premium earned in
2005 from 1.7% in 2004 to reflect current market conditions. The premium paid to the Exchange for
this agreement in each of the first six months of 2005 and 2004 was $1.7 million.
33
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
During a current accident year, the Company records a reinsurance recoverable under the
excess-of-loss treaty with the Exchange for direct losses and loss adjustment expenses in excess of
the attachment point in effect under the treaty. In subsequent years, the reinsurance recoverable
amount is adjusted to reflect that accident years loss development experience. Direct loss
development for each accident year is reflected in calendar year loss and loss adjustment expenses.
Unless experience improves to such an extent that direct loss and loss adjustment expenses for an
accident year that had previously exceeded the attachment point would fall below the attachment
point in the treaty, loss development for prior accident years in which the excess-of-loss treaty
attachment point has been reached is offset by an equal amount of reinsurance recoverable,
eliminating the effect of this development on calendar year net underwriting results of the
Company. Improved development beyond a previously reached attachment point would be reflected in
calendar year underwriting results of the Company.
Policy acquisition and other underwriting expenses
Policy acquisition and other underwriting expenses of the Property and Casualty Group include the
management fee earned by the Company of $253.2 million and $253.3 million for the second quarters
of 2005 and 2004, respectively. Management fee earned by the Company was $484.0 million and $479.0
million for the first six months of 2005 and 2004, respectively. The amount presented on the
Companys Statements of Operations as management fee revenue reflects the elimination of
intercompany management fee revenue between the EIC, EINY and the Company, and the allowance for
mid-term policy cancellations.
Investment Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
(dollars in thousands) |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
(unaudited) |
|
(unaudited) |
|
Net investment income |
|
$ |
15,934 |
|
|
$ |
15,605 |
|
|
$ |
30,402 |
|
|
$ |
30,291 |
|
Net realized gains on investments |
|
|
9,196 |
|
|
|
3,030 |
|
|
|
14,693 |
|
|
|
5,883 |
|
Equity in earnings of limited partnerships |
|
|
20,645 |
|
|
|
1,465 |
|
|
|
22,756 |
|
|
|
1,883 |
|
Equity in earnings of EFL |
|
|
1,541 |
|
|
|
1,477 |
|
|
|
2,308 |
|
|
|
2,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from investment operations |
|
$ |
47,316 |
|
|
$ |
21,577 |
|
|
$ |
70,159 |
|
|
$ |
40,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from investment operations increased in 2005 principally due to a $14.2 million
correction made to record a limited partnership market value adjustment to equity in earnings of
limited partnerships, of which $9.4 million, or $.09 per
share-diluted, related to 2004 and prior years and to increased
realized gains on investments. This limited partnership market value adjustment was previously
recorded in error as a component of shareholders equity. Sales of common equity securities in the
second quarter of 2005 drove the $6.2 million increase in net realized gains on investments. There
were impairment charges of $1.0 million included in net realized gains or losses on equity
investments in the second quarter of 2005 primarily related to the consumer products industry.
There were no impairment charges on fixed
34
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
maturities in the second quarter of 2005. For the six months ended June 30, 2005, there were
impairment charges of $1.5 million on fixed maturities and $1.1 on equity securities. There were
no impairment charges on fixed maturity or equity securities in the first half of 2004. Net revenue
from investment operations increased 71.3% to $70.2 million from $41.0 million for the first six
months of 2005 and 2004, respectively.
The Companys performance of its fixed maturities and preferred stock portfolios compared to
selected market indices is presented below. Annualized returns are shown pre-tax and include
investment income, realized and unrealized gains and losses.
|
|
|
|
|
|
|
Pre-tax annualized total returns |
|
|
Two year period ended |
|
|
June 30, 2005 (1) |
Erie Indemnity Company Indices: |
|
|
|
|
Fixed
maturities corporate |
|
|
4.06 |
% |
Fixed
maturities municipal |
|
|
3.41 |
(2) |
Preferred stock |
|
|
5.47 |
(2) |
Common stock |
|
|
11.93 |
(3) |
|
|
|
|
|
Market indices: |
|
|
|
|
Lehman Brothers U.S. Aggregate |
|
|
3.51 |
% |
S&P500 Composite Index |
|
|
12.51 |
|
|
|
|
(1) |
|
Includes investment income, realized and unrealized gains and losses. |
|
(2) |
|
Returns on municipal fixed maturities and preferred stocks have tax-equivalent yields
of 5.94% and 7.3%, respectively. |
|
(3) |
|
Return is gross of fees to external managers. |
Private equity and mezzanine debt limited partnerships generated earnings of $12.9 million and
$.1 million for the three months ended June 30, 2005 and 2004, respectively. Real estate limited
partnerships reflected earnings of $7.7 million and $1.4 million in the second quarters of 2005 and
2004, respectively. The 2005 amounts reflect the inclusion of market value adjustments in earnings
of limited partnerships. There were 16 additional limited partnership investments in June 2005
compared to June 2004, which also contributed to the increase in earnings from limited partnerships
in the second quarter of 2005.
FINANCIAL CONDITION
Investments
The Companys investment strategy takes a long-term perspective emphasizing investment quality,
diversification and superior investment returns. Investments are managed on a total return
approach that focuses on current income and capital appreciation. The Companys investment
strategy also provides for liquidity to meet the short- and long-term commitments of the Company.
At June 30,
2005, the Companys investment portfolio of investment-grade bonds and preferred stock, common
stock and cash and cash equivalents represents $1.2 billion, or 39%, of total assets. These
investments provide the liquidity the Company requires to meet the demands on its funds.
The Company continually reviews the investment portfolio to evaluate positions that might incur
other-than-temporary declines in value. For all investment holdings, general economic conditions
and/or conditions specifically affecting the underlying issuer or its industry, including
downgrades by the major rating agencies, are considered in evaluating impairment in value. In
addition to specific factors, other factors considered in the Companys review of investment
valuation are the length of time the market value is below cost and the amount the market value is
below cost.
35
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
There is a presumption of impairment for common equity securities when the decline is, in
managements opinion significant and of an extended duration. The Company considers market
conditions, industry characteristics and the fundamental operating results of the issuer to
determine if sufficient objective evidence exists to refute the presumption of impairment. When
the presumption of impairment is confirmed, the Company will recognize an impairment charge to
operations. Common stock impairments are included in realized losses in the Consolidated
Statements of Operations.
For fixed maturity and preferred stock investments, the Company individually analyzes all positions
with emphasis on those that have, in managements opinion, declined significantly below cost. The
Company considers market conditions, industry characteristics and the fundamental operating results
of the issuer to determine if the decline is due to changes in interest rates, changes relating to
a decline in credit quality, or other issues affecting the investment. A charge is recorded in the
Consolidated Statements of Operations for positions that have experienced other-than-temporary
impairments due to credit quality or other factors, or for which it is not the intent or ability of
the Company to hold the position until recovery has occurred. (See Analysis of Investment
Operations section).
If the Companys policy for determining the recognition of impaired positions were different, the
Companys Consolidated Statements of Operations could be significantly impacted. Management
believes its investment valuation philosophy and accounting practices result in appropriate and
timely measurement of value and recognition of impairment.
The Companys investments are subject to certain risks, including interest rate and price risk.
The Companys exposure to interest rates is concentrated in the fixed maturities portfolio. The
fixed maturities portfolio comprises 72.5% and 74.2% of invested assets at June 30, 2005 and
December 31, 2004, respectively. The Company calculates the duration and convexity of fixed
maturities portfolio each month to measure the price sensitivity of the portfolio to interest rate
changes. Duration measures the relative sensitivity of the fair value of an investment to changes
in interest rates. Convexity measures the rate of change of duration with respect to changes in
interest rates. These factors are analyzed monthly to ensure that both the duration and convexity
remain in the targeted ranges established by management.
The Companys portfolio of marketable equity securities, which is carried on the Consolidated
Statements of Financial Position at estimated fair value, has exposure to price risk, the risk of
potential loss in estimated fair value resulting from an adverse change in prices. The Company
does not hedge its exposure to equity price risk inherent in its equity investments. The Companys
objective is to earn competitive relative returns by investing in a diverse portfolio of
high-quality, liquid securities. Portfolio holdings are diversified across industries and among
exchange traded mid- to large-cap stocks. The Company measures risk by comparing the performance
of the marketable equity portfolio to benchmark returns such as the S&P 500.
The Companys portfolio of limited partnership investments has exposure to market risks, primarily
relating to the financial performance of the various entities in which they invested. The limited
partnership portfolio comprises 10.0% and 9.9% of invested assets at June 30, 2005 and
December 31, 2004, respectively. These investments consist primarily of equity investments in small
and medium-sized companies and in real estate. The Company achieves diversification within the
limited partnership portfolio by investing in approximately 78 partnerships that have approximately
1,570 distinct investments. The Company reviews at least quarterly the limited partnership
investments by sector, geography and vintage year. These limited partnership investments are
diversified to avoid concentration in a particular industry. The Company performs extensive
research prior to investment in these partnerships.
36
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Property/casualty loss reserves
Loss reserves are established to account for the estimated ultimate costs of loss and loss
adjustment expenses for claims that have been reported but not yet settled and claims that have
been incurred but not reported.
Most reserve estimates are reviewed on a quarterly basis. Reserves that are reviewed semi-annually
include all catastrophic injury no fault and asbestos and environmental liability reserves.
Multiple actuarial methods are used in estimating unpaid loss and loss adjustment expense
liabilities. Each methodology utilizes unique assumptions and variables. A range of reasonable
estimates is developed utilizing these methods for each product line or product coverage analyzed.
The presence or absence and magnitude of underlying variables, their interaction, and their
recognition in estimation
methods will cause the width of the range to vary for different product segments and over time for
the same product segment. The final estimate recorded by management is a function of detailed
analyses of historical trends adjusted as new emerging data indicates and represents managements
best estimate of ultimate claim costs.
The factors which may potentially cause the greatest variation between current reserve estimates
and the actual future paid amounts are: unforeseen changes in statutory or case law altering the
amounts to be paid on existing claim obligations, new medical procedures and/or drugs for which
costs are significantly different from that experienced in the past, and claims patterns on current
business that differ significantly from historical claims patterns.
37
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Loss and loss adjustment expense reserves are presented on the Companys Statements of Financial
Position on a gross basis for EIC, ENY, and EPC, the property/casualty insurance subsidiaries of
the Company that wrote about 17% of the direct property/casualty premiums of the Property and
Casualty Group. Under the terms of the Property and Casualty Groups quota share and intercompany
pooling arrangement, a significant portion of these reserve liabilities are recoverable.
Recoverable amounts are reflected as an asset on the Companys Statements of Financial Position.
The direct and assumed loss and loss adjustment expense reserves by major line of business and the
related amount recoverable under the intercompany pooling arrangement and excess-of-loss
reinsurance agreement are presented below:
Loss and Loss Adjustment Expense Reserve:
|
|
|
|
|
|
|
|
|
|
|
As of |
(in thousands) |
|
June 30, |
|
December 31, |
|
|
2005 |
|
2004 |
Gross reserve liability |
|
|
|
|
|
|
|
|
Personal: |
|
|
|
|
|
|
|
|
Private passenger auto |
|
$ |
401,286 |
|
|
$ |
400,609 |
|
Catastrophic injury |
|
|
84,607 |
|
|
|
86,239 |
|
Homeowners |
|
|
24,143 |
|
|
|
22,798 |
|
Other personal |
|
|
6,757 |
|
|
|
6,322 |
|
Commercial: |
|
|
|
|
|
|
|
|
Workers compensation |
|
|
219,034 |
|
|
|
216,808 |
|
Commercial auto |
|
|
82,222 |
|
|
|
78,646 |
|
Commercial multi-peril |
|
|
63,858 |
|
|
|
63,118 |
|
Catastrophic injury |
|
|
416 |
|
|
|
454 |
|
Other commercial |
|
|
16,146 |
|
|
|
15,288 |
|
Reinsurance |
|
|
57,018 |
|
|
|
52,752 |
|
|
|
|
|
|
|
|
|
|
Gross reserves |
|
|
955,487 |
|
|
|
943,034 |
|
Reinsurance recoverables |
|
|
773,716 |
|
|
|
765,563 |
|
|
|
|
|
|
|
|
|
|
Net reserve liability |
|
$ |
181,771 |
|
|
$ |
177,471 |
|
|
|
|
|
|
|
|
|
|
As discussed previously, loss and loss adjustment expense reserves are developed using multiple
estimation methods that result in a range of estimates for each product coverage group. The
estimate recorded is a function of detailed analysis of historical trends and management
expectations of future events and trends. The product coverage that has the greatest potential for
variation is the automobile catastrophic injury liability reserve. The range of reasonable
estimates, on a net basis, for the automobile catastrophic injury liability reserve, for both
personal and commercial is from $141 million to $342 million for the Property and Casualty Group.
The reserve carried by the Property and Casualty Group at June 30, 2005 was $200 million, which is
managements best estimate of liability. The Companys property/casualty subsidiaries share of the
net automobile catastrophic injury liability reserve is $11 million at June 30, 2005. The incurred
but not reported liability reserve estimates for automobile catastrophe injury are reviewed
semi-annually at the first and third quarters of 2005. Thus, changes in the second quarter reserve
estimates reflect changes to case reserves only.
The potential variability in these reserves can be primarily attributed to automobile no-fault
claims incurred prior to 1986. The automobile no-fault law in Pennsylvania at that time provided
for unlimited medical benefits. There are currently 392 claimants requiring lifetime medical care
of which 77 involve catastrophic injuries. The estimation of ultimate liabilities for these claims
is subject to significant judgment due to
38
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
assumptions that must be made for mortality rates, medical inflation costs, changes in medical
technologies and variations in claimant health over time.
It is anticipated that these automobile no-fault claims will require payments over approximately
the next 40 years. The impact of medical cost inflation in future years is a significant variable
in estimating this liability over 40 years. A 100-basis point change in the medical cost inflation
assumption would result in a change in net liability for the Company of $2 million. Claimants
future life expectancy is another significant variable. The life expectancy assumption underlying
the estimate reflects experience to date. Actual experience, different than that assumed, could
have a significant impact on the reserve estimate.
At June 30, 2005, the Property and Casualty Groups estimated total loss exposure related to the
events of September 11th remained at $150 million. At June 30, 2005, paid claims and case reserves
on reported claims total $78.4 million, with an additional exposure to adverse development of $71.6
million if every claim ultimately develops into the full layer limit loss. The estimate of assumed
loss and loss adjustment expense reserves was derived from thoroughly reviewing all outstanding
reinsurance contracts for potential exposure. However, estimation of ultimate liabilities for these
claims is difficult due to uncertainties regarding delays in claim investigation, lengthy emergence
periods for claims such as respiratory disorders, and coverage disputes with respect to the number
of events. The most critical factor in the estimation of these losses is whether the destruction of
the World Trade Center Towers will be considered a single event or two separate events. The Company
believes the current reserves should be sufficient to absorb the potential development that may
occur should the destruction of the World Trade Center Towers be considered two separate events. No
losses were recognized by the Companys property/casualty insurance subsidiaries in 2005 or 2004
related to the World Trade Center attack.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of an entitys ability to secure enough cash to meet its contractual
obligations and operating needs. The Companys major sources of funds from operations are the net
cash flow generated from the Companys management operations, the net cash flow from EICs and
EINYs 5.5% participation in the underwriting results of the reinsurance pool with the Exchange,
and investment income from affiliated and non-affiliated investments. With respect to the
management fee, funds are generally received from the Exchange on a premiums collected basis. The
Company has a receivable from the Exchange and affiliates related to the management fee receivable
from premiums written, but not yet collected, as well as the management fee receivable on premiums
collected in the current month. The Company pays nearly all general and administrative expenses on
behalf of the Exchange and other affiliated companies. The Exchange generally reimburses the
Company for these expenses on a paid basis each month.
Management fee and other cash settlements due from the Exchange were $212.6 million at June 30,
2005, and $207.2 million at December 31, 2004. A receivable from EFL for cash settlements totaled
$4.7 million at June 30, 2005, compared to $4.3 million at December 31, 2004. The receivable due
from the Exchange for reinsurance recoverable from unpaid loss and loss adjustment expenses and
unearned premium balances ceded to the intercompany reinsurance pool increased to $901.9 million at
June 30, 2005 from $893.8 million at December 31, 2004. The changes are the result of corresponding
changes in direct loss reserves, loss adjustment expense reserves and unearned premium reserves of
the Companys property/casualty insurance subsidiaries that are ceded to the Exchange under the
intercompany pooling agreement. The change in the property/casualty insurance subsidiaries reserves
ceded to the Exchange is a result of a corresponding increase or decrease in direct premium written
by the Companys property/casualty insurance subsidiaries. Direct written
39
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
premium of the property/casualty insurance subsidiaries decreased 2.8% in the second quarter of
2005 compared to a 5.8% increase in the second quarter of 2004.
Cash outflows are variable because settlement dates for claim payments vary and cannot be predicted
with absolute certainty. While volatility in claims payments could be significant for the Property
and Casualty Group, the effect on the Company of this volatility is mitigated by the intercompany
reinsurance pooling arrangement. The exposure for large loss payments is also mitigated by the
Companys excess-of-loss reinsurance agreement with the Exchange. The cash flow requirements for
claims have not historically been significant to the Companys liquidity. Historically, about 50%
of losses and loss adjustment expenses included in the reserve are paid out in the subsequent
12-month period and approximately 89% is paid out within a five year period. Such payments are
reduced by recoveries under the intercompany reinsurance pooling agreement.
The Company has historically generated sufficient net positive cash flow from its operations to
fund its commitments and build the investment portfolio. The Company also maintains a high degree
of liquidity in its investment portfolio in the form of readily marketable fixed maturities, equity
securities and short-term investments. Net cash flows provided by operating activities were $97.0
million and $98.6 million for the six months ended June 30, 2005 and 2004, respectively.
There were no cash payments for agent bonuses in the second quarter of 2005. Agent bonuses of
$46.7 million were paid in the first quarter of 2005. As $46.0 million was accrued for agent
bonuses in 2004, the Companys income reflected the $.7 million change in the first six months of
2005. There were no contributions to the employee pension plan in the first half of 2005 compared
to a $7.6 million contribution in the first half of 2004. The Company has met its minimum pension
funding requirements and does not intend on making a contribution to its employee pension plan in
2005.
Proceeds from the sales of equity securities totaled $53.2 million and $13.8 million in the first
half of 2005 and 2004, respectively. The Company has liquidated certain of its internally managed
equity securities to allow the external investment managers to manage the portfolio. Purchases of
equity securities were $83.5 million and $18.0 million in the first half of 2005 and 2004,
respectively.
Dividends paid to shareholders for the six months ended June 30, 2005 and 2004, totaled $41.1
million and $27.7 million, respectively. As part of its capital management activities in 2004,
the Company increased its quarterly shareholder dividends for 2005 by 51% on both its Class A and
Class B common stock. The annualized dividends will increase the Companys 2005 payout by
approximately $28 million from the prior dividend level. There are no regulatory restrictions on
the payment of dividends to the Companys shareholders, although there are state law restrictions
on the payment of dividends from the Companys insurance subsidiaries to the Company.
During the second quarter of 2005, the Company repurchased 223,930 shares of its outstanding Class
A common stock in conjunction with the stock repurchase plan that was authorized in December 2003.
The shares were purchased at a total cost of $11.6 million, or an average price per share of
$51.64. (See table at Part II. Item 2., Issuer Repurchases of Equity Securities.) The plan allows
the Company to repurchase up to $250 million of its outstanding Class A common stock through
December 31, 2006. The Company has repurchased shares at a total cost of $80.2 million since the
inception of the plan.
40
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
FACTORS THAT MAY AFFECT FUTURE RESULTS
Financial Condition of the Exchange
The Company has a direct interest in the financial condition of the Exchange because management fee
revenues are based on the direct written premiums of the Exchange and the other members of the
Property and Casualty Group. Additionally, the Company participates in the underwriting results of
the Exchange through the pooling arrangement in which the Companys insurance subsidiaries have
5.5% participation. The Companys property/casualty insurance subsidiaries have in effect an
all-lines aggregate excess-of-loss reinsurance agreement with the Exchange to reduce potential
exposure to catastrophe losses and variations in underwriting results. Additionally, a
concentration of credit risk exists related to the unsecured receivables due from the Exchange for
certain fees, costs and reimbursements.
To the extent that the Exchange incurs underwriting losses or investment losses resulting from
declines in the value of its marketable securities, the Exchanges policyholders surplus would be
adversely affected. If the surplus of the Exchange were to decline significantly from its current
level, the Property and Casualty Group could find it more difficult to retain its existing business
and attract new business. A decline in the business of the Property and Casualty Group would have
an adverse effect on the amount of the management fees the Company receives and the underwriting
results of the Property and Casualty Group in which the Company has 5.5% participation. In
addition, a decline in the surplus of the Exchange from its current level would make it more likely
that the management fee rate would be reduced.
Additional information, including condensed statutory financial statements of the Exchange, are
presented in Note 13 to the Consolidated Financial Statements.
Insurance Premium Rate Action
The premium growth attributable to rate increases of the Property and Casualty Group directly
affects underwriting profitability of the Property and Casualty Group and the Exchange. In recent
years, prices for commercial and personal lines insurance have increased considerably in the
industry. The property/casualty insurers of the Property and Casualty Group also increased prices
considerably during 2003 and into 2004. Pricing actions contemplated or taken by the Property and
Casualty Group are subject to various regulatory requirements of the states in which these insurers
operate. The pricing actions already implemented, or to be implemented through 2005, will also
have an effect on the market competitiveness of the Property and Casualty Groups insurance
products. Such pricing actions, and those of our competitors, could affect the ability of our
agents to sell and/or renew business.
Rate increases filed by the Property and Casualty Group for certain lines of business in various
states were sought to offset growing loss costs in those lines in 2003 and 2004. The first six
months of 2005 included some of the impact of these rate changes being earned. In the first six
months of 2005, rating actions accounted for approximately $20 million in increased written
premiums. Rate reductions are being sought by the Property and Casualty Group in 2005 to be more
price competitive. The effect of rate increases attained in 2004 offset by 2005 pricing actions
approved, filed, awaiting approval or contemplated through June 30, 2005, is anticipated to result
in a net decrease in written premiums of $9.9 million. The majority of the rate decreases stem
from the private passenger auto and the homeowners lines of business in Pennsylvania. In the
majority of states, an 8% rate reduction on certain coverages for new private passenger auto
policyholders with no claims or violations was effective
July 1, 2005. In Tennessee and Virginia, this rate reduction for policyholders with clean records
was
6%. Pricing actions anticipated in 2005 are a result of the recent improvements in underwriting
results.
41
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
A return to more stable rates should allow the Property and Casualty Group to be more competitive
with other insurers and is anticipated to increase the Property and Casualty Groups ability to
attract new policyholders and to retain existing policyholders.
Insurance Scoring
The Property and Casualty Group continues developing its comprehensive rating plan for private
passenger auto and homeowners lines of business. The rating plan includes significantly more rating
tiers, providing the Company greater flexibility in pricing policies with varying degrees of risk.
Insurance scoring is among the most significant risk factors the Company has recently incorporated
into the rating plan. Expanded pricing segmentation, that incorporates insurance scoring, should
enable the Company to provide more competitive rates to policyholders with varying risk
characteristics as risks can be more accurately priced.
Implementing and refining insurance scoring could impact retention of existing policyholders and
could affect the Property and Casualty Groups ability to attract new policyholders. Introduction
of variables such as credit-worthiness could potentially disrupt the relationships with
policyholders insured by the Property and Casualty Group. The extent of this impact cannot be
determined.
Catastrophe Losses
The Property and Casualty Group conducts business in 11 states and the District of Columbia,
primarily in the mid-Atlantic, midwestern and southeastern portions of the United States. A
substantial portion of the business is private passenger and commercial automobile, homeowners and
workers compensation insurance in Ohio, Maryland, Virginia and particularly, Pennsylvania. As a
result, a single catastrophe
occurrence or destructive weather pattern could materially adversely affect the results of
operations and surplus position of the members of the Property and Casualty Group. Common
catastrophe events include
hurricanes, earthquakes, tornadoes, wind and hail storms and winter freeze. The Property and
Casualty Group maintains catastrophe occurrence reinsurance coverage to mitigate the future
potential catastrophe loss exposure.
Information Technology Costs
In 2001, the Erie Insurance Group began a comprehensive program of eCommerce initiatives in support
of the Erie Insurance Groups agency force and back office policy underwriting, issuance and
administration. The first major component of the eCommerce program (network and desktop hardware
deployment) was completed during 2002.
The Erie Insurance Group has spent $186.1 million on the eCommerce program through June 2005.
Target delivery dates established in 2002 have generally not been met as management has devoted
increased effort to quality assurance efforts to ensure that the rollout creates only minimal
business disruption.
While functional as a personal lines rating and policy administration system, ErieConnection agency
interface has generally not met the Companys or agents expectations for ease of use. The Company
has postponed further deployment of the system until such usability issues are resolved. Estimates
of the costs to improve the agency interface for ease of use needed to facilitate future deployment
and the timetable for deployment are currently being developed.
42
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
During the first half of 2005, personnel no longer deployed to the ErieConnection project were
assigned to other information technology-related tasks. As expected, this resulted in a greater
proportion of cost allocated to the Company, which increased cost of
management operations by approximately $2.3
million in the first six months of 2005. This increase in costs will continue as more personnel are
engaged in projects other than ErieConnection.
Terrorism
On November 26, 2002, President Bush signed the Terrorism Risk Insurance Act of 2002 (Act),
establishing a program for commercial property/casualty losses, including workers compensation,
resulting from foreign acts of terrorism. The Act required commercial insurers to make terrorism
coverage available immediately through at least December 31, 2004, and provided limited federal
protection above individual company retention levels, based upon a percentage of direct earned
premium, and above aggregate industry retention levels that range from $10 billion in the second
year to $15 billion in the third year of the program. The federal government will pay 90% of
covered terrorism losses that exceed retention levels. On June 18, 2004, the Department of Treasury
announced its decision to require insurers to continue to make terrorism coverage available under
the Act in program year three. The Act is scheduled to expire on December 31, 2005. Personal lines
are not included under
the protection of the Act, and state regulators have not approved exclusions for acts of terrorism
on personal lines policies. The Property and Casualty Group is exposed to terrorism losses for
personal and commercial lines and workers compensation, although commercial lines and workers
compensation are afforded a backstop above certain retention levels for foreign acts of terrorism
under the federal program until December 31, 2005. If the Terrorism Risk Insurance Act is not
extended or reauthorized, the Property and Casualty Group will be exposed to terrorism losses for
commercial lines and workers compensation without the benefit of the federal backstop. The
Property and Casualty Group could incur large losses if future terrorist attacks occur.
The Erie Insurance Group has taken the steps necessary to comply with the Act by providing notices
to all commercial policyholders disclosing the premium, if any, attributable to coverage for acts
of terrorism, as defined in the Act, and disclosing federal participation in payment of terrorism
losses. The Act pre-empted any exclusion or provision in place prior to November 26, 2002, that
excluded or limited coverage for losses from foreign acts of terrorism. Insurers may exclude
coverage for foreign acts of terrorism under the Act if the policyholder accepts an exclusion and
rejects coverage or fails to pay additional premium charges after notice is given. Exclusions are
not allowed under workers compensation policies and rates for terrorism coverage are applied in
accordance with state laws.
The Erie Insurance Group continues to evaluate procedures that have been established to comply with
the Act. Terrorism coverage is not excluded under the majority of the Property and Casualty Group
commercial property/casualty policies. Other than workers compensation, which incur charges
consistent with state law, premium charges for terrorism coverage are currently applied only for a
small number of
new and renewal commercial policies where deemed appropriate based upon individual risk factors and
characteristics. Appropriate disclosure notices are provided in accordance with the Act.
43
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Companys exposure to market risk is primarily related to fluctuations in prices and interest
rates. Quantitative and qualitative disclosures about market risk resulting from changes in prices
and interest rates are included in Item 7A. in the Companys 2004 Annual Report on Form 10-K. There
have been no material changes in such risks or the Companys periodic reviews of asset and
liability positions during the three months ended June 30, 2005. The information contained in the
investments section of Managements Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference.
The Companys objective is to earn competitive returns by investing in a diversified portfolio of
securities. The Company is exposed to credit risk through its portfolios of fixed maturity
securities, nonredeemable preferred stock, mortgage loans, limited partnership investments and to a
lesser extent short-term investments. This risk is defined as the potential loss in market value
resulting from adverse changes in the borrowers ability to repay the debt. The Company manages
this risk by performing up front underwriting analysis and ongoing reviews of credit quality by
position and for the fixed maturity portfolio in total. The fixed maturity investments are also
maintained between the minimum and maximum percentage of invested assets. The Company does not
hedge credit risk inherent in its fixed maturity investments.
The Company has significant receivables from the Exchange, which are subject to credit risk.
Company results are directly related to the financial strength of the Exchange. Credit risks
related to the receivables from the Exchange are evaluated periodically by Company management.
Since the Companys inception, it has collected all amounts due from the Exchange in a timely
manner (generally within 120 days).
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Certain
forward-looking statements contained herein involve risks and uncertainties. These statements
include certain discussions relating to management fee revenue, cost of management operations,
underwriting, premium and investment income volume, business strategies, profitability and business
relationships and the Companys other business activities during 2005 and beyond. In some cases,
you can identify forward-looking statements by terms such as may, will, should, could,
would, expect, plan, intend, anticipate, believe, estimate, project, predict,
potential and similar expressions. These forward-looking statements reflect the Companys current
views about future events, are based on assumptions and are subject to known and unknown risks and
uncertainties that may cause results to differ materially from those anticipated in those
statements. Many of the factors that will determine future events or achievements are beyond our
ability to control or predict.
44
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of June 30, 2005, the Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including its Chief Executive Officer and its Chief
Financial Officer, the effectiveness of the design and operation of the Companys disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act). Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures are effective for gathering,
analyzing and disclosing the information the Company is required to disclose in reports it files
under the Securities Exchange Act of 1934, within the time periods specified in the Securities and
Exchange Commissions rules and forms. There have been no significant changes in the Companys
internal controls or in other factors that could significantly affect internal controls subsequent
to the date of this evaluation.
Changes in Internal Control Over Financial Reporting
There was no change in the Companys internal control over financial reporting that occurred during
the second quarter of 2005 that has materially affected, or is reasonably likely to materially
affect, the Companys internal controls over financial reporting.
45
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, AND USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Value |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
of Shares that |
|
|
Total Number |
|
Average |
|
Shares Purchased |
|
May Yet Be |
|
|
of Shares |
|
Price Paid |
|
as Part of Publicly |
|
Purchased Under |
Period |
|
Purchased |
|
Per share |
|
Announced Plan |
|
the Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1
30, 2005 |
|
|
75,581 |
|
|
$ |
51.39 |
|
|
|
73,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 1 31, 2005 |
|
|
88,541 |
|
|
|
51.42 |
|
|
|
88,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 1 30, 2005 |
|
|
61,502 |
|
|
|
52.29 |
|
|
|
61,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
225,624 |
|
|
|
|
|
|
|
223,930 |
|
|
$ |
170,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The month of April 2005 includes 1,694 shares that vested under the stock compensation plan for the
Companys outside directors. Included in this amount are the vesting of 1,585 of awards previously
granted and 109 dividend equivalent shares that vest as they are granted (as dividends are declared
by the Company).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 19, 2005, the Registrant held its Annual Meeting of Shareholders:
|
|
|
The following directors were elected for a one-year term and until a successor is elected
and qualified: |
|
|
|
Kaj Ahlmann
|
|
Susan Hirt Hagen |
John T. Baily
|
|
C. Scott Hartz |
J. Ralph Borneman, Jr.
|
|
F. William Hirt |
Wilson C. Cooney
|
|
Claude C. Lilly, III |
Patricia Garrison-Corbin
|
|
Jeffrey A. Ludrof |
John R. Graham
|
|
Robert C. Wilburn |
Jonathan Hirt Hagen |
|
|
ITEM 5. OTHER INFORMATION
Items not reported on Form 8-K during the period:
On April 19, 2005, the Executive Compensation and Development Committee recommended, and the full
Board of Directors approved, a change in the current level of Directors fees. The Companys stock
compensation portion of the annual retainer was increased from $25,000 to $35,000. The
committee chair annual retainers were increased from $2,000 to $5,000, except for the Audit Committee Chair
annual retainer that was raised to $8,500. The Lead Director will receive an additional annual cash
retainer of $20,000. These changes were effective beginning May 1, 2005.
46
PART II. OTHER INFORMATION (Continued)
ITEM 6. EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 |
|
|
|
32
|
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
Erie Indemnity Company |
|
|
|
|
|
(Registrant) |
|
|
|
Date: August 3, 2005
|
|
/s/ Jeffrey A. Ludrof |
|
|
|
|
|
Jeffrey A. Ludrof, President & CEO |
|
|
|
|
|
/s/ Philip A. Garcia |
|
|
|
|
|
Philip A. Garcia, Executive Vice President & CFO |
48
EX-31.1
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey A. Ludrof, Chief Executive Officer of Erie Indemnity Company, certify that:
|
1. |
|
I have reviewed this quarterly report on Form 10-Q of Erie Indemnity Company; |
|
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report; |
|
|
4. |
|
The registrants other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; |
|
|
b) |
|
Designed such internal control over financial reporting or caused
such internal control over financial reporting to be designated under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
|
|
c) |
|
Evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and |
|
|
d) |
|
Disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting;
and |
|
5. |
|
The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of registrants board of directors: |
|
a) |
|
All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting, which are reasonably
likely to adversely affect the registrants ability to record, process,
summarize and report financial information; and |
|
|
b) |
|
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting. |
Date: August 3, 2005
|
|
|
|
|
/s/ Jeffrey A. Ludrof |
|
|
|
|
|
Jeffrey A. Ludrof, President & CEO |
49
EX-31.2
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Philip A. Garcia, Chief Financial Officer of Erie Indemnity Company, certify that:
|
1. |
|
I have reviewed this quarterly report on Form 10-Q of Erie Indemnity Company; |
|
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report; |
|
|
4. |
|
The registrants other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; |
|
|
b) |
|
Designed such internal control over financial reporting or caused
such internal control over financial reporting to be designated under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
|
|
c) |
|
Evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and |
|
|
d) |
|
Disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting;
and |
|
5. |
|
The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of registrants board of directors: |
|
a) |
|
All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting, which are reasonably
likely to adversely affect the registrants ability to record, process,
summarize and report financial information; and |
|
|
b) |
|
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting. |
Date: August 3, 2005
|
|
|
|
|
/s/ Philip A. Garcia |
|
|
|
|
|
Philip A. Garcia, Executive Vice President & CFO |
50
EX-32
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
We, Jeffrey A. Ludrof, Chief Executive Officer of the Company, and Philip A. Garcia, Chief
Financial Officer of the Company, certify, pursuant to § 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. § 1350, that:
|
(1) |
|
The Quarterly Report on Form 10-Q of the Company for the quarterly period June 30,
2005 (the Report) fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m); and |
|
|
(2) |
|
The information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company. |
|
|
|
/s/ Jeffrey A. Ludrof
|
|
|
|
|
|
Jeffrey A. Ludrof
President and Chief Executive Officer
|
|
|
|
|
|
/s/ Philip A. Garcia |
|
|
|
|
|
Philip A. Garcia
Executive Vice President and Chief Financial Officer |
|
|
August 3, 2005
A signed original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears in typed form
within the electronic version of this written statement required by Section 906, has been
provided to Erie Indemnity Company and will be retained by Erie Indemnity Company and furnished
to the Securities and Exchange Commission or its staff upon request.
51