SEC Filing | Erie Indemnity Company

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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 September 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

Registrant’s 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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of Class A Common Stock, with no par value and a stated value of $.0292 per share was 61,851,203 at October 24, 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 October 24, 2005.

The common stock is the only class of stock the Registrant is presently authorized to issue.

INDEX

ERIE INDEMNITY COMPANY


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Financial Position—September 30, 2005 and December 31, 2004

Consolidated Statements of Operations—Three and nine months ended September 30, 2005 and 2004

Consolidated Statements of Comprehensive Income—Three and nine months ended September 30, 2005 and 2004

Consolidated Statements of Cash Flows— Nine months ended September 30, 2005 and 2004

Notes to Consolidated Financial Statements—September 30, 2005

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Item 2. Changes in Securities, and Use of Proceeds and Issuer Purchases of Equity Securities

Item 6. Exhibits

SIGNATURES
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION


	(Dollars in thousands)
	September 30		December 31
	2005		2004
	(Unaudited)
ASSETS

INVESTMENTS
Fixed maturities at fair value (amortized cost of $975,231 and $939,280, respectively)	$	988,333	$	974,512
Equity securities at fair value (cost of $245,536 and $175,860, respectively)		262,179		202,694
Limited partnerships (cost of $114,441 and $116,097, respectively)		131,228		130,464
Real estate mortgage loans		4,923		5,044


Total investments		1,386,663		1,312,714

Cash and cash equivalents		42,735		50,061
Accrued investment income		14,122		12,480
Premiums receivable from policyholders		287,152		275,721
Federal income taxes recoverable		5,704		3,331
Reinsurance recoverable from Erie Insurance Exchange on unpaid losses		779,174		765,563
Ceded unearned premiums to Erie Insurance Exchange		149,823		128,187
Notes receivable from Erie Family Life Insurance Company		40,000		40,000
Other receivables from Erie Insurance Exchange and affiliates		211,098		211,488
Reinsurance recoverable from non-affiliates		294		351
Deferred policy acquisition costs		17,515		17,112
Property and equipment		13,092		13,581
Equity in Erie Family Life Insurance Company		56,773		58,728
Securities lending collateral		26,866		0
Prepaid pension		41,755		50,860
Other assets		42,640		39,567


Total assets	$	3,115,406	$	2,979,744

See Accompanying Notes to Consolidated Financial Statements.

ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Continued)


	(Dollars in thousands)
	September 30			December 31
	2005			2004
	(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES
Unpaid losses and loss adjustment expenses	$	985,836		$	943,034
Unearned premiums		480,404			472,553
Commissions payable and accrued		190,030			179,284
Securities lending collateral		26,866			0
Accounts payable and accrued expenses		64,048			49,025
Deferred income taxes		7,226			24,122
Dividends payable		20,329			20,612
Employee benefit obligations		28,388			24,233


Total liabilities		1,803,127			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; 62,124,038 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		25,341			58,611
Retained earnings		1,479,808			1,354,181


Total contributed capital and retained earnings		1,515,149			1,422,792

Treasury stock, at cost, 5,452,762 and 4,547,959 shares, respectively		(202,870	)		(155,911	)


Total shareholders’ equity		1,312,279			1,266,881


Total liabilities and shareholders’ equity	$	3,115,406		$	2,979,744

See Accompanying Notes to Consolidated Financial Statements.

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)


	Three Months Ended				Nine Months Ended
	September 30				September 30
	2005		2004		2005		2004
	(Dollars in thousands, except per share data)
OPERATING REVENUE
Management fee revenue — net	$	228,349	$	232,837	$	686,475	$	684,539
Premiums earned		53,908		52,862		161,721		154,576
Service agreement revenue		5,294		5,384		15,440		16,207


Total operating revenues		287,551		291,083		863,636		855,322

OPERATING EXPENSES
Cost of management operations		184,056		177,659		539,228		521,599
Losses and loss adjustment expenses incurred		36,995		34,602		103,457		112,642
Policy acquisition and other underwriting expenses		12,637		12,153		36,836		35,906


Total operating expenses		233,688		224,414		679,521		670,147

INVESTMENT INCOME — UNAFFILIATED
Investment income, net of expenses		14,755		14,795		45,158		45,086
Net realized gains on investments		1,765		859		16,457		6,743
Equity in earnings of limited partnerships		8,032		3,845		30,788		5,727


Total investment income — unaffiliated		24,552		19,499		92,403		57,556


Income before income taxes and equity in earnings of Erie Family Life Insurance Co.		78,415		86,168		276,518		242,731

Provision for income taxes		25,930		29,141		92,241		81,865

Equity in earnings of Erie Family Life Insurance Company, net of tax		520		1,539		2,667		4,227


Net income	$	53,005	$	58,566	$	186,944	$	165,093


Net income per share — basic
Class A common stock	$	.84	$	.92	$	2.97	$	2.58

Class B common stock		128.01		139.84		450.68		393.52

Net income per share — diluted		0.76		0.83		2.69		2.34


Weighted average shares outstanding
Basic:
Class A common stock		62,415,372		63,279,022		62,650,810		63,676,870

Class B common stock		2,843		2,878		2,846		2,878

Diluted Shares		69,320,147		70,259,227		69,562,785		70,657,075


Dividends declared per share:
Class A common stock	$	0.325	$	0.215	$	0.975	$	0.645

Class B common stock		48.75		32.25		146.25		96.75

See Accompanying Notes to Consolidated Financial Statements

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	Three Months Ended						Nine Months Ended
	September 30						September 30
	2005			2004			2005			2004
				(Dollars in thousands)
Net Income	$	53,005		$	58,566		$	186,944		$	165,093
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period		(14,782	)		24,125			(34,728	)		(791	)
Less: Gains included in net income		(1,765	)		(859	)		(16,457	)		(6,743	)

Net unrealized holding (losses) gains arising during period		(16,547	)		23,266			(51,185	)		(7,534	)
Income tax benefit (expense) related to unrealized losses (gains)		5,792			(8,143	)		17,915			2,637


Change in other comprehensive income, net of tax		(10,755	)		15,123			(33,270	)		(4,897	)


Comprehensive income	$	42,250		$	73,689		$	153,674		$	160,196

See Accompanying Notes to Consolidated Financial Statements.

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Nine Months Ended September 30
	2005			2004
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Management fee received	$	682,440		$	657,176
Service agreement fee received		14,907			16,207
Premiums collected		161,737			150,398
Net investment income received		47,465			45,876
Dividends received from Erie Family Life		1,349			1,349
Salaries and wages paid		(67,920	)		(58,629	)
Pension funding and employee benefits paid		(7,760	)		(17,515	)
Commissions paid to agents		(354,028	)		(359,013	)
Agent bonuses paid		(46,717	)		(24,010	)
General operating expenses paid		(59,280	)		(51,986	)
Losses and loss adjustment expenses paid		(94,210	)		(98,966	)
Other underwriting and acquisition costs paid		(6,693	)		(9,654	)
Income taxes paid		(96,373	)		(73,001	)

Net cash provided by operating activities		174,917			178,232


CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities		(302,085	)		(275,490	)
Equity securities		(128,676	)		(23,937	)
Limited partnerships		(42,996	)		(24,047	)
Sales/maturities of investments:
Fixed maturity sales		182,517			83,145
Fixed maturity calls/maturities		84,367			86,994
Equity securities		72,382			29,413
Limited partnership sales/distributions		60,752			25,078
Increase in collateral from securities lending		26,866			1,449
Redemption of securities lending collateral		(26,866	)		(1,449	)
Purchase of property and equipment		(1,510	)		(1,887	)
Net collections on agent loans		1,563			1,943

Net cash used in investing activities		(73,686	)		(98,788	)


CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders		(61,598	)		(41,454	)
Purchase of treasury stock		(46,959	)		(44,566	)

Cash used in financing activities		(108,557	)		(86,020	)


Net decrease in cash and cash equivalents		(7,326	)		(6,576	)
Cash and cash equivalents at beginning of period		50,061			52,313

Cash and cash equivalents at end of period	$	42,735		$	45,737

See Accompanying Notes to Consolidated Financial Statements.

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 nine-month period ended September 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 Company’s 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 March 2004, the Financial Accounting Standards Board (FASB) reached a consensus on Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”. This issue establishes impairment models for determining whether to record impairment losses associated with investments in certain equity and debt securities. In September 2004, the FASB issued Staff Position (FSP) No. EITF 03-1-1, which delayed the effective date of the measurement and recognition guidance contained in paragraphs 10-20 of EITF 03-1. In June, 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, and directed the staff to issue the retitled, FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments,” which will supercede EITF 03-1 and replace certain application paragraphs with references to existing guidance. In September 2005, the FASB decided to retain the guidance for the accounting for debt securities subsequent to an other-than-temporary impairment. The final FSP FAS 115-1 is expected to be effective for fiscal years beginning after December 15, 2005. The Company had previously adopted the disclosure requirements of EITF 03-1, which were unchanged by FSP FAS 115-1 and were effective for periods ending after December 15, 2003. Management continues to closely monitor and evaluate how the proposed FSP FAS 115-1 will affect the Company.

NOTE 3 — RECLASSIFICATONS

Certain amounts previously reported in the 2004 financial statements have been reclassified to conform to the current period’s presentation. Such reclassifications did not impact earnings.

NOTE 4 — 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. There were no

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 4 — EARNINGS PER SHARE (Continued)

conversions of Class B voting stock to Class A stock in the third quarter 2005. During the nine months ended September 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.

The following table displays the basic and diluted earnings per-share computations.


	Three Months Ended				Nine Months Ended
	September 30				September 30
			(net income amounts in thousands)
	2005		2004		2005		2004
Basic:
Allocated net income — Class A	$	52,641	$	58,164	$	185,662	$	163,960
Class A shares of common stock		62,415,372		63,279,022		62,650,810		63,676,870

Class A earnings per share — basic	$	.84	$	.92	$	2.97	$	2.58


Allocated net income — Class B	$	364	$	402	$	1,282	$	1,133
Class B shares of common stock		2,843		2,878		2,846		2,878

Class B earnings per share — basic	$	128.01	$	139.84	$	450.68	$	393.52


Diluted:
Net income	$	53,005	$	58,566	$	186,944	$	165,093
Class A shares of common stock		62,415,372		63,279,022		62,650,810		63,676,870
Assumed conversion of Class B common stock and restricted stock awards		6,904,775		6,980,205		6,911,975		6,980,205

Class A shares of common and equivalent shares		69,320,147		70,259,227		69,562,785		70,657,075

Earnings per share — diluted	$	.76	$	.83	$	2.69	$	2.34

The 2005 year to date diluted earnings per share includes the effects of a second quarter adjustment for a correction to the accounting for investments in limited partnerships which increased diluted earnings per share $.13 as discussed further in Note 5.

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 nine months ended September 30, 2005, and 68,176 shares for the three and nine months ended September 30, 2004. Awards not yet vested related to the outside directors stock compensation plan were 6,176 shares for the three and nine months ended September 30, 2005, and 4,829 shares for the three and nine months ended September 30, 2004.

NOTE 5 — 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 5 — INVESTMENTS (Continued)

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 $26.1 million at September 30, 2005. There were no loaned securities at December 31, 2004. Securities lending collateral is recorded by the Company as a liability. The collateral for the securities on loan are 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 program’s inception.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 5 — INVESTMENTS (Continued)

The following is a summary of fixed maturities and equity securities:


			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(in thousands)	Cost		Gains		Losses		Value
September 30, 2005

Fixed maturities
U.S. treasuries & government agencies	$	10,312	$	263	$	42	$	10,533
States & political subdivisions		142,377		1,577		857		143,097
Special revenue		189,496		2,082		762		190,816
Public utilities		72,454		3,267		371		75,350
U.S. industrial & miscellaneous		369,367		6,750		4,312		371,805
Mortgage-backed securities		34,154		865		386		34,633
Asset-backed securities		22,849		48		376		22,521
Foreign		103,594		4,547		749		107,392


Total bonds		944,603		19,399		7,855		956,147

Redeemable preferred stock		30,628		1,558		0		32,186


Total fixed maturities		975,231		20,957		7,855		988,333


Equity securities
Common stock:
Public utilities		1,313		274		0		1,587
U.S. banks, trusts & insurance companies		10,521		1,309		332		11,498
U.S. industrial & miscellaneous		53,198		7,826		1,589		59,435
Foreign		18,603		1,926		359		20,170
Nonredeemable preferred stock:
Public utilities		22,485		360		326		22,519
U.S. banks, trusts & insurance companies		67,632		2,382		119		69,895
U.S. industrial & miscellaneous		59,552		4,181		459		63,274
Foreign		12,232		1,588		19		13,801


Total equity securities		245,536		19,846		3,203		262,179


Total fixed maturities and equity securities	$	1,220,767	$	40,803	$	11,058	$	1,250,512

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 5 — INVESTMENTS (Continued)


			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(in thousands)	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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 5 — INVESTMENTS (Continued)

Fixed maturities and equity securities in a gross unrealized loss position at September 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		Number of
(in thousands)	Value		Losses		Value		Losses		Value		Losses		Holdings
Fixed maturities
U.S. treasuries and government agencies	$	5,503	$	42	$	0	$	0	$	5,503	$	42		6
States and political subdivisions		74,623		705		5,084		152		79,707		857		34
Special revenue		101,192		639		6,305		123		107,497		762		47
Public utilities		22,374		274		2,894		97		25,268		371		13
U.S. industrial & miscellaneous		134,488		2,804		46,688		1,508		181,176		4,312		94
Mortgage-backed securities		7,498		101		12,427		285		19,925		386		16
Asset-backed securities		2,931		69		13,127		307		16,058		376		7
Foreign		27,176		560		6,802		189		33,978		749		16


Total fixed maturities		375,785		5,194		93,327		2,661		469,112		7,855		233


Equity securities
Common stock		26,406		2,280		0		0		26,406		2,280		97
Nonredeemable preferred stock		27,416		696		5,407		227		32,823		923		14


Total equity securities		53,822		2,976		5,407		227		59,229		3,203		111


Total fixed maturities and equity securities	$	429,607	$	8,170	$	98,734	$	2,888	$	528,341	$	11,058		344

U.S. Treasury Obligations and Government Agencies — The unrealized losses of the Company’s investments in U.S. treasury obligations and government agencies were caused by market interest rate increases as credit risk is not present in these instruments. The Company has the ability and intent to hold the investments until recovery of fair value.

Mortgage-Backed Securities — The unrealized losses on the Company’s investment in mortgage-backed securities were caused by market interest rate increases. The Company has the ability and intent to hold the investments until recovery of fair value.

Corporate Bonds (public utilities, U.S. banks, trust and insurance companies, U.S. industrial, miscellaneous and foreign) — The unrealized losses on investments in corporate bonds relates to both interest rate increases and to declines in credit quality of certain issuers. Evaluation of the near-term prospects of the issues suggests that the decline in credit quality is not such that recovery of fair value is unlikely. The Company has the ability and intent to hold these investments until recovery of fair value.

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, and other matters which potentially affect the value of the issuer. The Company has the ability and intent to hold these investments until recovery of fair value.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 5 — INVESTMENTS (Continued)

Nonredeemable preferred stock — The unrealized losses on investments in preferred stock relates to both market 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. The Company has the ability and intent to hold these investments until recovery of fair value.

The components of net realized gains on investments as reported in the Consolidated Statements of Operations are included below. The third quarter of 2005 includes impairment charges of $.3 million on equity securities and $.6 million on fixed maturities. For the nine months ended September 30, 2005, impairment charges totaled $2.1 million on fixed maturities in the automotive industry and $1.4 million on equity securities in the consumer products, automotive and technology industries. There were no impairment charges on fixed maturities or equity securities in the three or nine months ended September 30, 2004.


	Three Months Ended						Nine months Ended
	September 30						September 30
(in thousands)	2005			2004			2005			2004
Fixed maturities:
Gross realized gains	$	2,034		$	933		$	6,523		$	5,803
Gross realized losses		(902	)		(63	)		(3,583	)		(89	)

Net realized gains		1,132			870			2,940			5,714


Equity securities:
Gross realized gains		1,190			480			16,865			1,912
Gross realized losses		(557	)		(491	)		(3,348	)		(883	)

Net realized gains (losses)		633			(11	)		13,517			1,029


Net realized gains on investments	$	1,765		$	859		$	16,457		$	6,743

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 under the equity method. In the second quarter of 2005, the Company corrected its treatment of unrealized gains and losses on limited partnerships by recognizing unrealized gains and losses in the Consolidated Statements of Operations. Prior period amounts were not restated as the impact of this correction was not material to prior periods’ net income and had no impact on total shareholders’ equity. Net unrealized gains included in the equity in earnings of limited partnerships were $.3 million and $14.5 million for the three and nine months ended September 30, 2005, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 5 — 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					Nine Months Ended
	September 30					September 30
(in thousands)	2005			2004		2005		2004
Private equity	$	7,119		$	3,252	$	18,646	$	2,597
Real estate		(108	)		296		8,597		1,960
Mezzanine debt		1,021			297		3,545		1,170

Total equity in earnings of limited partnerships	$	8,032		$	3,845	$	30,788	$	5,727

NOTE 6 — SUMMARIZED FINANCIAL STATEMENT INFORMATION OF AFFILIATE

The Company owns 21.6% of Erie Family Life Insurance Company’s (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					Nine Months Ended
	September 30					September 30
(in thousands)	2005			2004		2005			2004
Revenues	$	36,043		$	35,491	$	111,972		$	113,859
Benefits and expenses		32,427			27,874		92,850			75,919

Income before income taxes		3,616			7,617		19,122			37,940
Income taxes		709			2,618		6,136			13,179

Net income	$	2,907		$	4,999	$	12,986		$	24,761

Comprehensive (loss) income	($	13,234	)	$	25,454	($	3,074	)	$	19,317

Dividends paid to shareholders	$	2,079		$	2,079	$	6,237		$	6,143


	As of
	September 30		December 31
(in thousands)	2005		2004
Investments	$	1,505,985	$	1,466,579
Total assets		1,767,232		1,661,440
Liabilities		1,507,094		1,389,912
Accumulated other comprehensive income		23,192		39,252
Total shareholders’ equity		260,138		271,528

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 7 — RETIREMENT BENEFIT PLANS

The Company’s 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


	Pension Benefits						Postretirement Benefits
	Three Months Ended						Three Months Ended
	September 30						September 30
(in thousands)	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		899			801			81			38

Net periodic benefit cost	$	4,013		$	3,324		$	611		$	444


	Pension Benefits						Postretirement Benefits
	Nine Months Ended						Nine Months Ended
	September 30						September 30
	2005			2004			2005			2004
Service cost	$	10,923		$	9,927		$	944		$	726
Interest cost		10,932			9,712			726			531
Expected return on plan assets		(13,037	)		(12,747	)		—			—
Amortization of prior service cost		525			676			(81	)		(40	)
Amortization of net loss		2,697			2,404			245			116

Net periodic benefit cost	$	12,040		$	9,972		$	1,834		$	1,333

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 for the annual pension cost approximately 56% and 54% from the Exchange and EFL combined during the first nine months of 2005 and 2004, respectively.

NOTE 8 — 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 likely EFL will reissue the note with market terms to either the Company or the Exchange by December 31, 2005. EFL accrued interest, payable semi-annually, to the Company on the surplus note of $.3 million in the third quarters of 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. EFL accrued interest, payable semi-annually, of $.4 million to the Company in the third quarters of 2005 and 2004.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 9 — STATUTORY INFORMATION

Cash and securities with carrying values of $3.7 million and $3.6 million were deposited by the Company’s property/casualty insurance subsidiaries with regulatory authorities under state insurance laws and regulations at September 30, 2005 and December 31, 2004, respectively.

NOTE 10 — 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:


	Nine Months Ended September 30
(in thousands)	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income	$	186,944		$	165,093
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		27,927			27,986
Deferred income tax expense		(1,558	)		2,753
Equity in earnings of limited partnerships		(30,788	)		(5,727	)
Net realized gains on investments		(16,457	)		(6,743	)
Net amortization of bond premium		1,949			1,212
Undistributed earnings of Erie Family Life Insurance Company		(1,519	)		(3,196	)
Deferred compensation		1,943			1,516
Increase in receivables and reinsurance recoverable from the Exchange		(46,232	)		(123,586	)
Increase in prepaid expenses and other assets		(25,877	)		(33,481	)
Increase in accounts payable and accrued expenses		27,931			48,305
Increase in loss reserves		42,802			60,394
Increase in unearned premiums		7,852			43,706

Net cash provided by operating activities	$	174,917		$	178,232

NOTE 11 — COMMITMENTS AND CONTINGENCIES

The Company has contractual commitments to invest up to $202.3 million additional funds in limited partnership investments at September 30, 2005. These commitments will be funded as required by the partnerships’ agreements through 2012. At September 30, 2005, the total commitment to fund limited partnerships that invest in private equity securities is $60.1 million, in real estate activities is $94.5 million and in fixed income securities is $47.7 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 Company’s consolidated financial condition, results of operations or cash flows.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 12 — 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 Exchange’s 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 Exchange’s share of underwriting results after accounting for intercompany pool transactions.

Erie Insurance Exchange
Condensed Statutory Statements of Operations


	Three Months Ended					Nine Months Ended
	September 30					September 30
(in thousands)	2005			2004		2005		2004
Premiums earned	$	945,738		$	937,357	$	2,836,427	$	2,741,960
Losses and loss adjustment expenses		597,252			573,469		1,731,561		1,830,851
Insurance underwriting and other expenses*		258,657			262,519		768,650		764,289
Dividends to policyholders		5,605			3,744		16,417		11,527
Other (income) expense		(647	)		4,861		8,423		14,408

Net underwriting gain		84,871			92,764		311,376		120,885


Net investment income		104,839			70,685		285,357		202,179
Net realized gains		70,268			45,371		441,573		76,550

Total investment income		175,107			116,056		726,930		278,729

Net income before federal income tax		259,978			208,820		1,038,306		399,614

Federal income tax expense		97,015			63,525		349,170		119,725


Net income	$	162,963		$	145,295	$	689,136	$	279,889


*		Includes management fees and service fees paid or accrued as payable to the Company.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 12 — VARIABLE INTEREST ENTITY (Continued)

Erie Insurance Exchange
Condensed Statutory Statements of Financial Position


	As of
	September 30		December 31
(in thousands)	2005		2004
Assets
Equity securities:
Common stock	$	1,680,909	$	1,508,664
Preferred stock		641,383		550,090
Fixed maturities		4,550,783		4,399,458
Limited partnerships		536,964		567,089
Real estate mortgage loans		10,617		10,859
Properties occupied by the Exchange		35,683		36,305
Cash and cash equivalents		319,438		125,933
Other invested assets		11,398		1,049

Total invested assets		7,787,175		7,199,447
Premium receivable		1,056,812		1,002,818
Federal income tax recoverable		31,831		0
Deferred income taxes		42,528		0
Other assets		68,602		67,497

Total assets	$	8,986,948	$	8,269,762


Liabilities
Loss and LAE reserves	$	3,492,563	$	3,436,246
Unearned premium reserves		1,589,179		1,536,890
Accrued liabilities		644,758		400,375
Deferred income taxes		0		92,193

Total liabilities		5,726,500		5,465,704

Total policyholders’ surplus		3,260,448		2,804,058

Total liabilities and policyholders’ surplus	$	8,986,948	$	8,269,762

Surplus — The Exchange’s policyholders’ surplus increased 16.3% during 2005 primarily as a result of improved underwriting results and net investment income.

Common stocks — Common stock securities represent a significant portion of the Exchange’s 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 51.6% of the Exchange’s statutory surplus at September 30, 2005 and 53.8% at December 31, 2004.

Included in these common stock amounts are realized gains on the common stock portfolio of $77.7 million and $40.0 million in the third quarters of 2005 and 2004, respectively. During 2005, the Exchange was in the process of diversifying its common stocks through transitioning the portfolio to external equity managers. During the third quarter of 2005, this process was completed and all of the common stock portfolio is now managed by external equity managers. The increase in net realized gains to $441.6 million for the nine months ended September 30, 2005 from $76.6 million in the same period of 2004 was largely due to the selling down of the common stock which generated $418.9 million in realized gains.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 12 — VARIABLE INTEREST ENTITY (Continued)

Net proceeds from the sale of common stock investments were $241.6 million and $107.8 million in the third quarters of 2005 and 2004, respectively. Included in the proceed amounts were $57.1 million and $38.5 million respectively, in realized capital gains related to the process of selling down its internally managed common stock portfolio.


	September 30,
	2005		2004
*Weighted average current price to earnings ratio		21.19		19.48

*Standard & Poors composite price to earnings ratio		17.96		19.03


*		Ratios are prices to trailing 12-months earnings.

Cash and cash equivalents — Cash and cash equivalents include securities lending of $233.7 million at September 30, 2005 compared to $2.3 million at December 31, 2004.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 12 — VARIABLE INTEREST ENTITY (Continued)

Erie Insurance Exchange
Condensed Statutory Statements of Cash Flows


	Nine Months Ended September 30
(in thousands)	2005			2004
Cash flows from operating activities
Premiums collected net of reinsurance	$	2,839,789		$	2,809,439
Net investment income received		295,424			209,109
Miscellaneous expense		(8,569	)		(9,554	)
Losses and loss adjustment expenses paid		(1,435,294	)		(1,490,754	)
Management fee and expenses paid		(1,021,673	)		(1,005,664	)
Dividends to policyholders		(15,854	)		(13,488	)
Income taxes paid		(402,691	)		(229,060	)

Net cash provided by operating activities		251,132			270,028


Cash flows from investing activities
Proceeds from investment sales and maturities		2,530,248			1,234,874
Purchases of investments		(2,830,460	)		(1,891,594	)

Net cash used in investing activities		(300,212	)		(656,720	)


Net cash provided by financing activities		242,585			77,449


Net increase (decrease) in cash and cash equivalents		193,505			(309,243	)
Cash and cash equivalents at beginning of period		125,933			612,971

Cash and cash equivalents at end of period	$	319,438		$	303,728

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 13 — 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 Company’s 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 Company’s operating segments is presented below:


	Three Months Ended						Nine Months Ended
	September 30						September 30
(in thousands)	2005			2004			2005			2004
Management Operations
Operating revenue
Management fee revenue	$	241,639		$	246,388		$	726,429		$	724,379
Service agreement revenue		5,294			5,384			15,440			16,207

Total operating revenue		246,933			251,772			741,869			740,586

Cost of management operations		194,768			187,998			570,612			551,957

Income before income taxes	$	52,165		$	63,774		$	171,257		$	188,629

Net income from management operations	$	34,921		$	42,207		$	114,136		$	125,011


Insurance Underwriting Operations
Operating revenue
Premiums earned:
Personal lines	$	38,848		$	38,205		$	115,683		$	110,559
Commercial lines		16,216			15,895			49,156			46,635
Reinsurance — nonaffiliates		(312	)		(396	)		(587	)		(94	)
Reinsurance — affiliates		(844	)		(842	)		(2,531	)		(2,524	)

Total premiums earned		53,908			52,862			161,721			154,576


Operating expenses
Losses and expenses:
Personal lines		37,793			35,117			105,906			106,712
Commercial lines		15,238			13,648			42,578			43,683
Reinsurance — nonaffiliates		(2,987	)		43			(1,961	)		1,548
Reinsurance — affiliates		2,166			1,159			2,341			6,088

Total losses and expenses		52,210			49,967			148,864			158,031

Income (loss) before income taxes	$	1,698		$	2,895		$	12,857			($3,455	)

Net income (loss) from insurance underwriting operations	$	1,137		$	1,916		$	8,567			($2,289	)


Investment Operations
Investment income, net of expenses	$	14,755		$	14,795		$	45,158		$	45,086
Net realized gains on investments		1,765			859			16,457			6,743
Equity in earnings of limited partnerships		8,032			3,845			30,788			5,727

Total investment income — unaffiliated	$	24,552		$	19,499		$	92,403		$	57,556

Net income from investment operations	$	16,427		$	12,904		$	61,574		$	38,144

Equity in earnings of EFL, net of tax	$	520		$	1,539		$	2,667		$	4,227

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 13 — SEGMENT INFORMATION (Continued)

Reconciliation of reportable segment revenues and operating expenses to the Consolidated Statements of Operations:


	Three Months Ended						Nine Months Ended
	September 30						September 30
(in thousands)	2005			2004			2005			2004
Segment revenues	$	300,841		$	304,634		$	903,590		$	895,163
Elimination of intersegment management fee revenues		(13,290	)		(13,551	)		(39,954	)		(39,841	)

Total operating revenues	$	287,551		$	291,083		$	863,636		$	855,322


Segment operating expenses	$	246,978		$	237,965		$	719,475		$	709,988
Elimination of intersegment management fee revenue		(13,290	)		(13,551	)		(39,954	)		(39,841	)

Total operating expenses	$	233,688		$	224,414		$	679,521		$	670,147

The intersegment revenues and expenses shown above to reconcile to the Consolidated Statements of Operations represents the Company’s 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									Nine Months Ended
	September 30						%			September 30						%
(dollars in thousands)	2005			2004			Change			2005			2004			Change
Private passenger auto	$	120,879		$	126,724			(4.6	)%	$	354,022		$	362,672			(2.4	)%
Commercial auto		18,707			18,587			.6			61,026			59,956			1.8
Homeowner		49,107			49,962			(1.7	)		133,825			132,615			.9
Commercial multi-peril		24,730			25,192			(1.8	)		81,662			80,302			1.7
Workers’ compensation		19,559			20,491			(4.5	)		65,567			64,319			1.9
All other lines of business		10,257			10,032			2.2			31,227			30,215			3.3

Total	$	243,239		$	250,988			(3.1	)%	$	727,329		$	730,079			(.4	)%

Change in allowance for management fee returned on cancelled policies		1,600			4,600						900			5,700

Management fee, after change in allowance	$	241,639		$	246,388			(1.9	)%	$	726,429		$	724,379			.3	%

Management fee rate		23.75	%		24.0	%					23.75	%		23.7	%*


*		Effective management fee includes 23.5% effective January through June 2004 and 24.0% from July to September 2004.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 13 — 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 Company’s management operations and property and casualty insurance operating segments. Below is a summary of each by line of business for the Property and Casualty Group’s insurance business, followed by the retention ratios by line of 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
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	)%
09/30/2005		1,651,629		(1.8	)%		1,354,487		0.3	%		285,134		2.3	%		3,291,250		(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
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	%
09/30/2005		118,555		1.3	%		212,939		1.4	%		56,877		(5.0	)%		90,074		2.4	%		478,445		0.7	%


			12-mth.
	Total		growth
Date	All Lines		rate
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	)%
09/30/2005		3,769,695		(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
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
09/30/2005		89.9			88.0			88.0			85.1			86.0			85.6			88.4

* CML = Commercial

ITEM 2. MANAGEMENT’S 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 Management’s 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 on the Erie Indemnity Company’s (Company) three primary segments: management operations, insurance underwriting operations and investment operations consistent with the presentation in Note 13 in the Notes to Consolidated Financial Statements. That presentation, which management uses internally to monitor and evaluate results, is an alternative presentation of the Company’s Consolidated Statements of Operations.

NATURE OF ORGANIZATION

The following organizational chart depicts the organization of the various entities of the Erie Insurance Group:

(ERIE INSURANCE GROUP ORGANIZATIONAL CHART)

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 subscriber’s agreement, which contains a power-of-attorney appointing an attorney-in-fact. Under the Company’s 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 Company’s three property/casualty subsidiaries, Erie Insurance Company (EIC), Erie Insurance Company of New York (EINY) and Erie Insurance Property & Casualty Company (EIPC), (collectively,

ITEM 2. MANAGEMENT’S 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 7,700 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 Company’s 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 Company’s investment operations.

Results of Operations


	Three Months Ended				Nine Months Ended
	September 30				September 30
(dollars in thousands, except per share data)	2005		2004		2005		2004
	(unaudited)				(unaudited)
Income from management operations	$	52,165	$	63,774	$	171,257	$	188,629
Underwriting income (loss)		1,698		2,895		12,857		(3,455	)
Net revenue from investment operations		25,112		21,153		95,271		62,101

Income before income taxes		78,975		87,822		279,385		247,275
Provision for income taxes		25,970		29,256		92,441		82,182

Net income	$	53,005	$	58,566	$	186,944	$	165,093

Net income per share — diluted	$	.76	$	.83	$	2.69	$	2.34

Consolidated net income for the third quarter of 2005 was $53.0 million compared to $58.6 million during the same period in 2004, a decrease of 9.5%. Management fee revenues decreased in the third quarter of 2005 as a result of lower direct written premiums of the Property and Casualty Group, on which the management fee is based as well as the lower management fee rate in the third quarter of 2005. The cost of management operations increased in the third quarter 2005 primarily due to higher personnel costs which included contract labor for information technology projects. Income from insurance underwriting operations was lower in the third quarter of 2005 than the third quarter of 2004 driven by an increases in claims reserves for certain pre-1986 automobile catastrophic injury claims made during the third quarter 2005 loss reserve evaluation. The Company’s underwriting loss resulting from these reserve actions were $2.7 million. The Property and Casualty Group and Company recorded no underwriting losses as a result of Hurricanes Katrina or Rita during the third quarter of 2005 or Wilma during October 2005. Revenue from investment operations increased in the third quarter of 2005 compared to the same period in 2004 primarily due to improved earnings of limited partnerships and realized gains.

Consolidated net income for the nine months ended September 30, 2005 increased 13.2% to $186.9 million. Income from management operations decreased 9.2% during the first nine months of 2005 compared to the first nine months of 2004. The gross margin from management operations decreased to 23.1% from 25.5% for the nine months ended September 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 $12.9 million for the nine months ended September 30, 2005, compared to underwriting losses of $3.5 million for the nine months ended September 30, 2004. The improvement in underwriting results in 2005 compared to 2004 is a result of the initiatives implemented to focus on underwriting profitability in combination with very low catastrophe losses in 2005 and favorable development of prior accident year losses. Revenue from investment operations increased to $95.3 million for the nine months ended September 30, 2005 from $62.1 million in the same period in 2004 due to a recognition of limited partnership valuation adjustment recorded in the second quarter of 2005 which increased realized earnings from limited partnerships, as well as improvement in realized gains due to sales of common stock.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

OVERVIEW OF OPERATING SEGMENTS

Management Operations


	Three Months Ended						Nine Months Ended
	September 30						September 30
(dollars in thousands)	2005			2004			2005			2004
	(unaudited)						(unaudited)
Management fee revenue — net	$	241,639		$	246,388		$	726,429		$	724,379
Service agreement revenue		5,294			5,384			15,440			16,207

Total revenue from management operations		246,933			251,772			741,869			740,586
Cost of management operations		194,768			187,998			570,612			551,957

Income from management operations	$	52,165		$	63,774		$	171,257		$	188,629

Gross margin percentage		21.1	%		25.3	%		23.1	%		25.5	%

Management fee rate		23.75	%		24.0	%		23.75	%		23.7	%*


*		Effective management fee rate represents 23.5% effective January through June 2004 and 24.0% from July to September 2004

Management fee revenue

Net management fee revenue decreased 1.9% for the quarter ended September 30, 2005 compared to the quarter ended September 30, 2004. Management fees from the Exchange represented 73.2% and 75.0% of the Company’s total revenues for the third quarters of 2005 and 2004, respectively. 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 lower management fee rate in the third quarter of 2005 of 23.75%, compared to 24% in the third quarter of 2004, resulted in $2.6 million less in management fee revenue for the quarter ended September 30, 2005, or a decrease in diluted net income per share of $.02. Direct written premiums of the Property and Casualty Group decreased 2.1% in the third quarter of 2005 to $1.0 billion. While policies in force continued to grow modestly by about 1,300 policies in the third quarter of 2005, the average premium per policy declined in the third quarter of 2005 compared to the third quarter of 2004 resulting in lower direct written premiums for the third quarter 2005. The year over year average premium per policy still increased due to certain rate increases implemented in 2004, however the anticipated year over year decline in new policies resulted in lower direct written premiums for the nine months ended September 30, 2005 compared to 2004. Retention ratios improved slightly through the third quarter 2005 to 88.4 from 88.3 through the second quarter of 2005.

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 reduced by $1.6 million and $4.6 million in the third quarters of 2005 and 2004, respectively, due to changes in the allowance. The 2005 allowance adjustment reflects stabilizing of cancellation levels as compared to 2004. Policy retention ratios were 88.4% at September 30, 2005 and 88.3% at both June and March 2005. Cancellation levels have been stabilizing as a result of underwriting rate stabilization and price segmentation. The 2004 allowance adjustment was partially reflective of higher cancellations with the retention ratio declining to 88.7% at September 2004, compared to 89.2% at June 2004 and 89.8% at March 2004. The higher cancellation experience in 2004 was due to initiatives implemented to focus on underwriting profitability.

The Company periodically evaluates actual mid-term policy cancellations compared to the allowance and refines this estimate accordingly. During the third quarter of 2005, the Company began to utilize a greater number of historical periods to develop the cancellation rate, a refinement management believes more accurately reflects anticipated amounts of management fees to be returned. This revision yielded projected annual cancellations more comparable to actual cancellations in the developed periods. For the

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

nine months ended September 30, 2005 and 2004, changes in this allowance reduced management fee revenue $.9 million and $5.7 million, respectively.

Significant factors affecting management fee revenue are as follows:

New business premium production

Total new business premium of the Property and Casualty Group declined 2.9% to $100.7 million in the third quarter of 2005 from $103.6 million in the third quarter of 2004. Personal lines new business premium written of the Property and Casualty Group declined 5.4% to $70.6 million from $74.6 million for the third quarters of 2005 and 2004, respectively. Commercial lines new business premiums of the Property and Casualty Group increased 3.4% to $30.0 million in the third quarter of 2005 from $29.0 million in the third quarter of 2004. (see Note 13, “Segment Information” which contains policies in force and policy retention trends by line of business). The private passenger auto new business premium written of the Property and Casualty Group decreased to $42.0 million from $46.8 million for the third quarters of 2005 and 2004, respectively. During the third quarter of 2005, the Company continued refining its price segmentation model for the private passenger auto and homeowners lines of business to improve the Company’s competitive position in those lines.

Premium rates and rate change impacts

The year over year average premium per policy increased 1.2% to $1,055 at September 30, 2005 from $1,042 at September 30, 2004. The year over year average premium per personal lines policy increased .6% while commercial lines year over year average premiums increased 1.9% at September 30, 2005. The private passenger auto year over year average premium per policy increased .4% to $1,179 at September 30, 2005 from $1,175 at September 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.

The improvement in underwriting experience afforded 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 in 2005. Management continuously evaluates pricing actions and estimates that those approved, filed and contemplated for filing through September 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.

Premium related initiatives

Personal Lines — 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

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

states on new business in March 2005, and on renewal business in April 2005. In 2006, the Company anticipates implementing additional pricing segmentations in auto and homeowners insurance.

Commercial Lines — The Property and Casualty Group is implementing initiatives to provide more competitive rates for higher quality workers compensation risks. Rate changes and a more formalized process of evaluating accounts should allow a better alignment between rate and risk level similar to the pricing segmentation efforts in the personal lines. Rate changes will become effective in November 2005 in the state of Pennsylvania. Rate changes for workers compensation in all other states except Wisconsin are filed to be effective in January 2006.

Promotional incentive programs — Two twelve-month promotional incentive programs started in the second quarter of 2005 to offer incentives for property/casualty, life and annuity sales. The total projected cost to the Company, after reimbursement from EFL, is estimated at $3.0 million. Through September 2005, the Company has incurred $.9 million for the programs.

Cost of management operations

The cost of management operations increased 3.6% for the third quarter of 2005 to $194.8 million from $188.0 million during the third quarter of 2004, primarily due to increases in personnel costs and insurance scoring costs. For the nine months ended September 30, 2005, the cost of management operations grew by 3.4% to $570.6 million compared to $552.0 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.


	Three Months Ended									Nine Months Ended
	September 30						Percent			September 30						Percent
(dollars in thousands)	2005			2004			Change			2005			2004			Change
	(unaudited)									(unaudited)
Scheduled and accelerated rate commissions	$	121,598		$	128,714			(5.5	)%	$	361,099		$	379,915			(5.0	)%
Agent bonuses		19,412			13,807			40.6			50,479			32,260			56.5
Allowance for mid-term policy cancellations		(700	)		(2,300	)		N/A			(100	)		(2,900	)		N/A

Total commissions	$	140,310		$	140,221			0.1	%	$	411,478		$	409,275			0.5	%

Scheduled rate commissions were impacted by a 2.1% decrease in the direct written premiums of the Property and Casualty Group in the third 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 $4.9 million reduction in scheduled rate commissions in the third quarter of 2005 and a $15.8 million reduction for the nine months ended September 30, 2005.

Accelerated rate commissions are offered to some newly recruited agents for their initial three years. Accelerated commissions were lower in the first nine months of 2005 as there were fewer new agency appointments in 2004 and existing accelerated commission contracts expired. New agency appointments resumed in 2005, with 41 appointments in the first nine months. As new agent appointments continue, accelerated rate commissions will reflect a corresponding increase.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Agent bonuses are based on an individual agency’s property/casualty underwriting profitability and also include a component for growth in agency current and prior two year property/casualty premiums if the 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 third quarter of 2005 reflects the impact of the improved underwriting profitability in 2004. The agent bonus award is estimated at $66.4 million for 2005. The bonus estimate at the third quarter of 2004 was lower given the less favorable underwriting results in 2003 and 2002.

The cost of management operations excluding commission costs, increased 14.0% for the third quarter of 2005 to $54.5 million from $47.8 million recorded in the third quarter of 2004. Personnel related costs are the second largest component in cost of management operations. The Company’s personnel costs totaled $33.6 million in the third quarter of 2005, compared to $29.4 million in the third quarter of 2004, an increase of 14.4%. Contributing to this increase was an 11.9% increase in salaries and wages which includes, in addition to base pay rate increases, an increase in staffing levels and increases in contract labor of 5.0%. Costs incurred related to external contract labor primarily related to information technology projects, increased $1.1 million to $1.7 million in the third quarter of 2005 and there was an increase in expense of $1.0 million in the long term incentive plan for executives.

Also contributing to the increase in the cost of management operations were the cost of obtaining insurance scores on applications of $.7 million during the third quarter of 2005 and $3.1 million during the first nine months of 2005. The Company began using insurance scoring in August 2004 and had only incurred $.1 million in the three and nine months ended September 30, 2004 for insurance scores.

Insurance Underwriting Operations


	Three Months Ended				Nine Months Ended
	September 30				September 30
(dollars in thousands)	2005		2004		2005		2004
	(unaudited)				(unaudited)
Premiums earned	$	53,908	$	52,862	$	161,721	$	154,576
Losses and loss adjustment expenses incurred		36,995		34,602		103,457		112,642
Policy acquisition and other underwriting expenses		15,215		15,365		45,407		45,389

Total losses and expenses	$	52,210	$	49,967	$	148,864	$	158,031

Underwriting income (loss)	$	1,698	$	2,895	$	12,857	($	3,455	)

ITEM 2. MANAGEMENT’S 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						Nine Months Ended
	September 30						September 30
(dollars in thousands)	2005			2004			2005			2004
Property and Casualty Group Insurance
Underwriting Operations (SAP Basis)
Direct underwriting results:
Direct written premium	$	1,024,165		$	1,045,785		$	3,062,437		$	3,084,470

Premium earned		1,005,571			998,231			3,009,496			2,900,590
Loss and loss adjustment expenses incurred		686,611			604,944			1,865,169			1,911,122
Policy acquisition and other underwriting expenses		280,968			289,371			845,087			841,688

Total losses and expenses		967,579			894,315			2,710,256			2,752,810

Direct underwriting income		37,992			103,916			299,240			147,780
Nonaffiliated reinsurance underwriting results—net		48,724			(7,986	)		25,428			( 29,373	)

Net underwriting gain (SAP Basis)	$	86,716		$	95,930		$	324,668		$	118,407


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	$	2,090		$	5,715		$	16,458		$	8,128
Nonaffiliated reinsurance		2,679			(439	)		1,399			( 1,616	)

Net underwriting gain (SAP Basis)		4,769			5,276			17,857			6,512

Excess-of-loss premiums ceded to the Exchange		(844	)		(842	)		( 2,531	)		( 2,524	)
Excess-of-loss changes to recoveries under the agreement*		(2,166	)		(1,159	)		( 2,341	)		( 6,088	)
SAP to GAAP adjustments		(61	)		(380	)		( 128	)		( 1,355	)

Company underwriting income (loss) before tax (GAAP Basis)	$	1,698		$	2,895		$	12,857			($3,455	)


*		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						Nine Months Ended
	September 30						September 30
	2005			2004			2005			2004
Company GAAP combined ratio		96.9	%		94.5	%		92.1	%		102.2	%
P&C Group statutory combined ratio		90.5			88.6			88.4			93.9
P&C Group statutory combined ratio, excluding catastrophes		90.0			85.0			87.9			91.7
P&C Group adjusted statutory combined ratio		85.9			83.0			83.3			88.3
P&C Group adjusted statutory combined ratio, excluding catastrophes		85.4			79.4			82.8			86.1

Loss ratio points from prior accident year reserve development- (redundancy) efficiency		(1.8	)		(2.3	)		(3.3	)		(2.5	)
Loss ratio point from salvage and subrogation recoveries collected		(0.8	)		(0.9	)		(1.7	)		(1.8	)

Total loss ratio points from prior accident years		(2.6	)		(3.2	)		(5.0	)		(4.3	)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Summary

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 Company’s property/casualty insurance subsidiaries and the Exchange. The statutory combined ratio as reported and the adjusted statutory combined ratio which removes the profit component paid to the Company are also presented above for the Property and Casualty Group. There was no impact on the Property and Casualty Group or the Company’s underwriting results from either Hurricane Katrina or Hurricane Rita during the third quarter 2005 or Hurricane Wilma in October 2005. For the nine months ended 2004, the less favorable GAAP combined ratio, as compared to the statutory combined ratio, was driven by $6.1 million of charges recorded by the Company’s property/casualty insurance subsidiaries under the intercompany excess-of-loss reinsurance agreement, resulting in a variance of 3.9 GAAP combined ratio points.

The Property and Casualty Group direct business statutory combined ratio increased in the third quarter of 2005 as a result of increased pre-1986 automobile catastrophe injury liability reserves as well as seasonal fluctuations. Favorable prior year development of the direct business other than the pre-1986 automobile catastrophe injury liability reserves reduced the statutory combined ratio and catastrophe losses had a minimal impact. The assumed loss and loss adjustment expense reserves related to the September 11^th 2001 attack were reduced in the third quarter of 2005 improving the Property and Casualty Group’s statutory combined ratio. See discussion of property/casualty loss reserves on page 38. While the Company’s GAAP combined ratio was impacted by these reserve adjustments, the reduction in the World Trade Center assumed loss and loss adjustment expense reserves triggered a reduction in previously recorded recoveries under the intercompany aggregate excess-of-loss reinsurance arrangement for accident year 2001 which offset the reduction in assumed reserves.

Direct Underwriting Results


	Three Months Ended						Nine Months Ended
	September 30						September 30
(dollars in thousands)	2005			2004			2005			2004
	(unaudited)						(unaudited)
Property and Casualty Group direct underwriting income	$	37,992		$	103,916		$	299,240		$	147,780
Percent of pool assumed by Company		5.5	%		5.5	%		5.5	%		5.5	%

Company direct underwriting income, before adjustments	$	2,090		$	5,715		$	16,458		$	8,128

While underwriting results on direct business in 2005 continue to reflect the impact of underwriting profitability initiatives implemented in 2003 and 2004 to help offset severity increases and manage exposure growth, the third quarter of 2005 reflects an increase to reserves for certain pre-1986 automobile catastrophe injury liability reserves. The Property and Casualty Group increased reserves for automobile catastrophe injury liability reserves by $47 million (net of ceded recoveries) during the third quarter reserve evaluation. The reserve re-estimates on these claims during the quarter took into account updated trends with respect to ongoing attendant care costs for claimants. This reserve increase was responsible for adding 4.7 points to the third quarter 2005 Property and Casualty Group statutory combined ratio. Also in the third quarter of 2005, seasonal increases in claim volume, which are recognized in reserves in the quarter they occurred, contributed 6.1 points to the Property and Casualty Group’s statutory combined ratio. The impact of seasonal fluctuations was offset by positive

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

development of prior accident year losses, which improved the Property and Casualty Group’s statutory combined ratio by 1.8 points in the third quarter of 2005. Catastrophe losses incurred by the Property and Casualty Group have not been significant in 2005. During the third quarter of 2004, the Property and Casualty Group recorded approximately $21 million related to Hurricane Ivan. The positive development of prior accident years and minimal catastrophe losses, coupled with improved current accident year underwriting experience, resulted in Property and Casualty Group losses that were lower by $46 million for the nine months ended September 30, 2005 compared to September 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 results have strengthened the Property and Casualty Group’s ability 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 part of 2004 and into 2005, the Property and Casualty Group implemented insurance scoring for private passenger auto and homeowners to aid in underwriting risk selection and to provide greater flexibility in pricing policies with varying degrees of risk. In November 2005, the Property and Casualty Group will be implementing a tiered pricing program for workers compensation in the state of Pennsylvania to provide more competitive rates to more desirable risks. This price segmentation, along with a new underwriting process of evaluating workers’ compensation risks factors, should allow a better alignment between rate and risk level. These rate changes and new commercial underwriting process are expected to be implemented in all other states except Wisconsin in January 2006.

Catastrophe losses

Catastrophes are an inherent risk of the property/casualty insurance business and can have a material impact on the Company’s 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 Group’s loss retention of $200 million per occurrence. No loss recoverables were recorded under this treaty at September 30, 2005 as the Property and Casualty Group had no significant catastrophe losses in 2005. Additionally, the Company’s property/casualty insurance subsidiaries’ aggregate excess-of-loss reinsurance agreement with the Exchange can mitigate the effect of catastrophe losses on the Company’s financial position. During the third quarters of 2005 and 2004, the Company’s share of catastrophe losses, as defined by the Property and Casualty Group, amounted to $.3 million and $2.0 million, respectively and contributed .5 points and 3.6 points to the GAAP combined ratio.

There was no impact on the Property and Casualty Group’s underwriting results from either Hurricane Katrina or Hurricane Rita during the third quarter 2005 or Wilma during October 2005. The third quarter 2004 catastrophe losses included the effects of Hurricane Ivan on North Carolina, West Virginia, Virginia, Pennsylvania and the District of Columbia. Catastrophe losses of the Company were $.8 million and $3.6 million for the first nine months of 2005 and 2004, respectively.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Reinsurance Underwriting Results


	Three Months Ended						Nine Months Ended
	September 30						September 30
(dollars in thousands)	2005			2004			2005			2004
	(unaudited)						(unaudited)
Erie Indemnity Company Insurance
Underwriting Operations:
Nonaffiliated reinsurance	$	2,679		($	439	)	$	1,399		($	1,616	)

Affiliated reinsurance
Premiums ceded to Exchange		(844	)		(842	)		(2,531	)		(2,524	)
Change to recoveries under the excess-of-loss agreement		(2,166	)		(1,159	)		(2,341	)		(6,088	)

	($	3,010	)	($	2,001	)	($	4,872	)	($	8,612	)

In the third quarter of 2005, the estimate of assumed loss and loss adjustment expense reserves related to the September 11^th, 2001 event was reevaluated based on potential exposure. This review resulted in a reduction of the Property and Casualty Group’s reserves by $42 million, of which the Company’s share was $2.3 million (See Financial Condition for further discussion). This reserve change triggered a $2.2 million reduction in recoveries during the third quarter of 2005 to the Company under the aggregate excess-of-loss reinsurance agreement for the 2001 accident year which was recorded in the third quarter of 2005. The net effect of this World Trade Center reserve activity to the Company was a $.1 million reduction in expense to the Company in the third quarter of 2005.

Investment Operations


	Three Months Ended				Nine Months Ended
	September 30				September 30
(dollars in thousands)	2005		2004		2005		2004
	(unaudited)				(unaudited)
Net investment income	$	14,755	$	14,795	$	45,158	$	45,086
Net realized gains on investments		1,765		859		16,457		6,743
Equity in earnings of limited partnerships		8,032		3,845		30,788		5,727
Equity in earnings of EFL		560		1,654		2,868		4,545

Net revenue from investment operations	$	25,112	$	21,153	$	95,271	$	62,101

Net revenues from investment operations increased in the third quarter of 2005 primarily due to a $4.2 million increase in earnings from limited partnerships. During the third quarter of 2005, the Company recorded earnings from one partnership of $4.4 million in the form of a distribution. In the second quarter of 2005, the

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Company corrected its accounting for limited partnerships to recognize in earnings market valuation adjustments to equity in earnings of limited partnerships. Included in the third quarter 2005 limited partnership earnings are $.3 million of unrealized gains.

Net realized gains improved $.9 million due to sales of common equity securities that were offset by impairment charges of $.3 million on equity investments and $.6 million on fixed maturities. The equity in earnings of EFL for the third quarter of 2005 was negatively impacted by a one time change in estimate recorded by EFL for implementing a new actuarial valuation system for its traditional products. The Company’s share of this reduction to earnings of EFL approximated $.5 million in the third quarter.

The $33.2 million increase in net revenue from investment operations for the nine months ended September 30, 2005 included the second quarter 2005 $14.2 million limited partnership market valuation adjustment. Total unrealized gains included in limited partnership earnings were $14.5 million for the nine months ended September 30, 2005. Additionally, the limited partnership portfolio included investments in 81 partnerships at September 2005 compared to 70 partnerships in September 2004. Net realized gains on investments for the nine months ended September 30, 2005 was driven by sales of common equity securities. Impairment charges recorded in the nine months ended September 30, 2005 were $1.4 million on equity securities and $2.1 million on fixed maturities. There were no impairment charges on equity securities or fixed maturities in the nine months ended September 30, 2004.

The Company’s 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
	September 30, 2005
Erie Indemnity Company Indices:
Fixed maturities — corporate		4.01	%

Fixed maturities — municipal		3.05
Preferred stock		5.87

Common stock		10.72	(1)

Market indices:
Lehman Brothers U.S. Aggregate		3.24	%
S&P 500 Composite Index		13.03


(1)		Return is gross of fees to external managers.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

FINANCIAL CONDITION

Investments

The Company’s 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 Company’s investment strategy also provides for liquidity to meet the short- and long-term commitments of the Company. At September 30, 2005, the Company’s investment portfolio of investment-grade bonds and preferred stock, common stock and cash and cash equivalents represents $1.2 billion, or 39.8%, 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 Company’s review of investment valuation are the length of time the market value is below cost and the amount the market value is below cost.

There is a presumption of impairment for common equity securities when the decline is, in management’s 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 management’s 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 Company’s policy for determining the recognition of impaired positions were different, the Company’s 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 Company’s investments are subject to certain risks, including interest rate and price risk. The Company’s exposure to interest rates is concentrated in the fixed maturities portfolio. The fixed maturities portfolio comprises 71.3% and 74.2% of invested assets at September 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.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The Company’s 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 has been diversified its common stock portfolio through transitioning the portfolio to external equity managers. The Company does not hedge its exposure to equity price risk inherent in its equity investments. The Company’s 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 Company’s portfolio of limited partnership investments has exposure to market risks, primarily relating to the financial performance of the various entities in which the partnerships are invested. The limited partnership portfolio comprised 9.5% and 9.9% of invested assets at September 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 81 partnerships that have approximately 1,568 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.

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 management’s 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.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Loss and loss adjustment expense reserves are presented on the Company’s 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 for the nine months ended September 30, 2005. Under the terms of the Property and Casualty Group’s quota share and intercompany pooling arrangement, a significant portion of these reserve liabilities are recoverable. Recoverable amounts are reflected as an asset on the Company’s 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
	September 30,		December 31,
(in thousands)	2005		2004
Gross reserve liability
Personal:
Private passenger auto	$	406,894	$	400,609
Catastrophic injury		104,895		86,239
Homeowners		23,229		22,798
Other personal		7,528		6,322
Commercial:
Workers’ compensation		222,405		216,808
Commercial auto		84,143		78,646
Commercial multi-peril		66,178		63,118
Catastrophic injury		390		454
Other commercial		16,164		15,288
Reinsurance		54,010		52,752

Gross reserves		985,836		943,034
Reinsurance recoverables		779,174		765,563

Net reserve liability	$	186,662	$	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 pre-1986 automobile catastrophic injury liability reserve. The range of reasonable estimates for the pre-1986 automobile catastrophic injury liability reserve, net of reinsurance recoverables, for both personal and commercial is from $183 million to $400 million for the Property and Casualty Group. The reserve carried by the Property and Casualty Group, which is management’s best estimate of liability at this time, increased to $249 million at September 30, 2005 which is net of $109 million of anticipated reinsurance recoverables. The Property and Casualty Group’s net pre-1986 automobile catastrophic injury liability reserve increased from $200 million at June 2005. The increase was the result of higher cost expectations of future attendant care services as a result of the settlement of litigation involving attendant care liabilities. The Company’s property/casualty subsidiaries share of the net automobile catastrophic injury liability reserve is $13.7 million at September 30, 2005.

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 variations in claimant health over time.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

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 $2.2 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. The Company will continue to closely monitor these reserve estimates.

During the third quarter of 2005, the Property and Casualty Group reevaluated its estimate of assumed loss and loss adjustment expense reserves estimated for the September 11^th 2001 event. Based on that assessment the Property and Casualty Group reduced its World Trade Center reserves by $42 million as of September 30, 2005. The original $150 million estimated total loss and loss adjustment expense estimate was based on uncertainties including cedant reserve estimates, the potential of retrocessional spirals, undeveloped claims and the uncertainty of legal actions. As a result of this reserve re-estimate the Property and Casualty Group’s total loss and loss adjustment expense estimate for the World Trade Center claims are estimated at $107 million. At September 2005, four years subsequent to the date of the event, most of the reported claims have been property losses which are short-tailed and have developed since 2001 providing more known data. Only one claim was identified as being exposed to a retrocessional spiral, which results when there are multiple levels of reinsurers and has the potential to increase the Company’s obligation. Factoring in this loss experience data supported the reduction in the World Trade Center reserve. At September 2005, the Property and Casualty Group’s estimated total loss exposure related to the events of September 11^th of $107 million, includes paid claims and case reserves on reported claims of $78.2 million. The remaining $29 million recorded relates to the 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 Company’s property/casualty insurance subsidiaries in 2005 and 2004 related to the World Trade Center attack.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of an entity’s ability to secure enough cash to meet its contractual obligations and operating needs. The Company’s major sources of funds from operations are the net cash flow generated from the Company’s management operations, the net cash flow from EIC’s and EINY’s 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 $208.6 million at September 30, 2005, and $207.2 million at December 31, 2004. A receivable from EFL for cash settlements totaled $2.5 million at September 30, 2005, compared to $4.3 million at

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

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 $929.0 million at September 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 Company’s 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 Company’s property/casualty insurance subsidiaries. Direct written premium of the property/casualty insurance subsidiaries decreased 5.9% in the third quarter of 2005 compared to the third 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 Company’s excess-of-loss reinsurance agreement with the Exchange. The cash flow requirements for claims have not historically been significant to the Company’s 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 $174.9 million and $178.2 million for the nine months ended September 30, 2005 and 2004, respectively.

There were no cash payments for agent bonuses in the third 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 Company’s income reflected the $.7 million change in the first nine months of 2005. There were no contributions to the employee pension plan in the nine months ended September 30, 2005 compared to a $7.6 million contribution in the nine months ended September 30, 2004. The Company has met its minimum pension funding requirements and no contribution will be made to the employee pension plan in 2005 in accordance with tax regulations.

The Company has liquidated certain of its internally managed equity securities to allow the external investment managers to manage the portfolio. As a result, proceeds from the sales of equity securities totaled $72.4 million and $29.4 million in the first nine months of 2005 and 2004, respectively. Purchases of equity securities were $128.7 million and $23.9 million in the first nine months of 2005 and 2004, respectively.

Dividends paid to shareholders for the nine months ended September 30, 2005 and 2004, totaled $61.6 million and $41.5 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 Company’s 2005 payout by approximately $28 million from the prior dividend level. There are no regulatory restrictions on the payment of dividends to the Company’s shareholders, although there are state law restrictions on the payment of dividends from the Company’s insurance subsidiaries to the Company.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

During the third quarter of 2005, the Company repurchased 395,445 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 $20.8 million, or an average price per share of $51.90. (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 $101.0 million since the inception of the plan.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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 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 Group’s insurance products. Such pricing actions, and those of competitors, could affect the ability of the Company’s 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 taken to offset growing loss costs in those lines in 2003 and 2004. The financial results for the first nine months of 2005 included some of the impact of these rate changes being earned. In the first nine months of 2005, rating actions accounted for approximately $9 million in increased written premiums. Rate reductions are being sought by the Property and Casualty Group in 2005 to be more price competitive. The effects of rate increases implemented in 2004 offset by 2005 pricing actions approved, filed, awaiting approval or contemplated through September 30, 2005, are anticipated to result in a net decrease in written premiums of $10.1 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 West Virginia, this rate reduction for policyholders with no claims or violations was 6%. Pricing actions anticipated in 2005 are a result of the improvement in underwriting results. Pricing actions approved, contemplated or filing and awaiting approval through September 30, 2005, could reduce premium for the Property and Casualty Group by $87.4 million in 2006.

A return to more stable rates should allow the Property and Casualty Group to be price competitive with other insurers and is anticipated to increase the Property and Casualty Group’s ability to attract new policyholders and to retain existing policyholders.

Policy Growth

Premium levels attributable to growth in policies in force of the Property and Casualty Group directly affects the underwriting profitability of the Property and Casualty Group and the management operations of the Company. The 2004 focus on underwriting discipline resulted in a reduction in policy production and policy retention ratios as expected. The continued growth of the business of the Property and Casualty Group is dependent upon its ability to retain existing and attract new policyholders. A lack of new policy growth or the inability to retain existing customers could have an adverse effect on the growth of premium levels for the Property and Casualty Group.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Insurance Scoring

The Property and Casualty Group continues developing its comprehensive rating plan for private passenger auto and homeowners lines of business. The new rating plan includes significantly more pricing segments than the former plan, 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 Group’s 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 long-term extent of this impact cannot be determined.

Service agreement revenue

The Company collects service charges from policyholders for providing multiple payment plans on policies written by the Property and Casualty Group. These premium service charges are currently $3 for each installment. Effective for policies renewing on or after January 1, 2006 paid in installments, the service charge will increase to $5 per installment. Also effective for policies renewing on or after January 1, 2006 paid using the direct debit payment method, the service charges will be eliminated. The financial impact this will have on the Company cannot be determined since the payment plan policyholders will choose cannot be predicted. However, if the number and mix of policyholders currently utilizing the installment plans and the direct debit program were to remain the same, premium service charges would increase by about $13 million on an annual basis once fully implemented, with approximately $7.5 million in 2006.

Reinsurance

During the fourth quarter of 2005, the Company conducted its’ annual review of the Property and Casualty Group’s exposure to property catastrophe risk in preparation for the renewal of its property catastrophe reinsurance treaties in 2006. The Company intends to purchase property catastrophe reinsurance in 2006 for the Property and Casualty Group’s property/casualty insurance business and is actively considering alternative structures and soliciting quotations relating to its property catastrophe reinsurance program.

The Company has also considered its’ renewal of the aggregate excess-of-loss reinsurance coverage with the Exchange for 2006. The aggregate excess-of-loss reinsurance coverage was first purchased by the Company in 1998 with the intent of dampening the effect on the Company’s operating earnings of the volatility from the assumption of 5.5% of the Property Casualty Group’s underwriting results. At that time, the Property Casualty Group was engaged in the assumed reinsurance business, which introduced added volatility to its’ insurance underwriting results and as a consequence the Company’s. Additionally, at that time and until 2003, the Property Casualty Group did not carry ceded reinsurance coverage including property catastrophe reinsurance coverage and therefore was exposed to greater variability in insurance underwriting result.

For 2006, the Company does not expect to renew the aggregate excess-of-loss reinsurance arrangement with the Exchange. The Company believes this reinsurance arrangement with the Exchange should not be renewed as the Property Casualty Group plans to continue to purchase property catastrophe reinsurance coverage in 2006 and has completed its exit from the assumed reinsurance business. The Company also took into consideration the increased cost of this reinsurance in 2006.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Information Technology Costs

The comprehensive program of eCommerce initiatives being undertaken by the Erie Insurance Group began in 2001. Early in the program, substantial advancements in the organizations internal infrastructure were put in place, providing the enabling foundation for implementing advanced technology including operating environments and applications.

The Erie Insurance Group has spent $192.4 million on the eCommerce program through September 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, the agency interface component of ErieConnection has generally not met the Company’s 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 continue to be analyzed and developed.

During the third quarter of 2005, substantial progress was made in migrating all independent agencies to a common, stable Windows XP based agency interface platform. Previously, many agencies interfaced with the Company utilizing a DOS based platform that was commercially unsupportable, while some were on the Windows XP platform. While this more stable platform does not interface to ErieConnection, this migration enables the Company to more thoroughly research and plan for its future interface development and rollout strategy.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s 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 Company’s 2004 Annual Report on Form 10-K. There have been no material changes in such risks or the Company’s periodic reviews of asset and liability positions during the three months ended September 30, 2005. The information contained in the investments section of Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

The Company’s 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 borrower’s ability to repay the debt. The Company manages this risk by performing up front underwriting analysis by carefully monitoring positions by issuer and ongoing reviews of credit quality of the portfolio. 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 Company’s 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 Company’s 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 Company’s 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.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of September 30, 2005, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, the effectiveness of the design and operation of the Company’s 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 Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s 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 Commission’s rules and forms. There have been no significant changes in the Company’s 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 Company’s internal control over financial reporting that occurred during the third quarter of 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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
July 1 - 31, 2005		2,367	$	54.34		0
August 1 - 31, 2005		147,832		52.42		147,832
September 1 - 30, 2005		247,613		52.61		247,613


Total		397,812				395,445	$	149,000,000

The month of July 2005 represents shares that vested under the stock compensation plan for the Company’s outside directors. Included in this amount are the vesting of 2,213 of awards previously granted and 154 dividend equivalent shares that vest as they are granted (as dividends are declared by the Company).

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

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: November 2, 2005	/s/ Jeffrey A. Ludrof
	Jeffrey A. Ludrof, President & CEO


	/s/ Philip A. Garcia
	Philip A. Garcia, Executive Vice President & CFO

Exhibit 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 registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting.

Date: November 2, 2005



	/s/ Jeffrey A. Ludrof
	Jeffrey A. Ludrof, President & CEO

Exhibit 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 registrant’s 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 registrant’s 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 registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	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 registrant’s 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 registrant’s internal control over financial reporting.

Date: November 2, 2005



	/s/ Philip A. Garcia
	Philip A. Garcia, Executive Vice President & CFO

Exhibit 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 September 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

November 2, 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.