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 March 31, 2006
Commission
file number 0-24000
ERIE INDEMNITY COMPANY
(Exact name of registrant as specified in its charter)
|
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PENNSYLVANIA
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25-0466020 |
|
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|
(State or other jurisdiction of
|
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(I.R.S. Employer |
incorporation or organization)
|
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Identification No.) |
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|
100 Erie Insurance Place, Erie, Pennsylvania
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16530 |
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(Address of principal executive offices)
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(Zip Code) |
(814) 870-2000
Registrants telephone number, including area code
Not applicable
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes þ No o
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 a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act. Large accelerated filer þ Accelerated filer o Non-accelerated filer 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 60,213,111 at April 24, 2006.
The number of shares outstanding of Class B Common Stock with no par value and a stated value of
$70 per share was 2,833 at April 24, 2006.
The common stock is the only class of stock the Registrant is presently authorized to issue.
INDEX
ERIE INDEMNITY COMPANY
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, |
|
|
|
except per share data) |
|
|
|
March 31 |
|
|
December 31 |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS |
|
|
|
|
|
|
|
|
Fixed maturities at fair value
(amortized cost of $926,384 and
$962,320, respectively) |
|
$ |
925,689 |
|
|
$ |
972,210 |
|
Equity securities at fair value (cost of $221,471
and $249,440, respectively) |
|
|
243,602 |
|
|
|
266,334 |
|
Limited partnerships
(cost of $162,940 and $141,405, respectively) |
|
|
175,697 |
|
|
|
153,159 |
|
Real estate mortgage loans |
|
|
4,847 |
|
|
|
4,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
|
1,349,835 |
|
|
|
1,396,588 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
7,132 |
|
|
|
31,666 |
|
Accrued investment income |
|
|
13,642 |
|
|
|
13,131 |
|
Premiums receivable from policyholders |
|
|
258,083 |
|
|
|
267,632 |
|
Federal income taxes recoverable |
|
|
0 |
|
|
|
15,170 |
|
Reinsurance recoverable from Erie Insurance
Exchange on unpaid losses |
|
|
807,663 |
|
|
|
827,126 |
|
Ceded unearned premiums to Erie Insurance
Exchange |
|
|
125,974 |
|
|
|
125,579 |
|
Notes receivable from Erie Family Life
Insurance Company |
|
|
25,000 |
|
|
|
25,000 |
|
Other receivables from Erie Insurance
Exchange and affiliates |
|
|
221,223 |
|
|
|
198,714 |
|
Reinsurance recoverable from non-affiliates |
|
|
1,157 |
|
|
|
1,321 |
|
Deferred policy acquisition costs |
|
|
16,089 |
|
|
|
16,436 |
|
Equity in Erie Family Life Insurance Company |
|
|
52,434 |
|
|
|
55,843 |
|
Securities lending collateral |
|
|
26,746 |
|
|
|
30,831 |
|
Prepaid pension costs |
|
|
34,742 |
|
|
|
38,720 |
|
Other assets |
|
|
66,495 |
|
|
|
57,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,006,215 |
|
|
$ |
3,101,261 |
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
3
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Continued)
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(Dollars in thousands, except per share data) |
|
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|
March 31 |
|
|
December 31 |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
|
|
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|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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LIABILITIES |
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses |
|
$ |
997,124 |
|
|
$ |
1,019,459 |
|
Unearned premiums |
|
|
443,269 |
|
|
|
454,409 |
|
Commissions payable and accrued |
|
|
155,330 |
|
|
|
200,459 |
|
Securities lending collateral |
|
|
26,746 |
|
|
|
30,831 |
|
Accounts payable and accrued expenses |
|
|
35,514 |
|
|
|
34,885 |
|
Federal income taxes payable |
|
|
10,462 |
|
|
|
0 |
|
Deferred executive compensation |
|
|
21,135 |
|
|
|
24,447 |
|
Deferred income taxes |
|
|
4,410 |
|
|
|
6,538 |
|
Dividends payable |
|
|
21,910 |
|
|
|
22,172 |
|
Employee benefit obligations |
|
|
31,446 |
|
|
|
29,459 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Total liabilities |
|
|
1,747,346 |
|
|
|
1,822,659 |
|
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|
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|
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SHAREHOLDERS EQUITY |
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Capital Stock |
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Class A common, stated value $.0292 per share;
authorized 74,996,930 shares; 67,600,800 shares
issued; 60,390,235 and 61,162,682 shares
outstanding, respectively |
|
|
1,972 |
|
|
|
1,972 |
|
Class B common, convertible at a rate of 2,400
Class A shares for one Class B share, stated
value $70 per share; 2,833 shares authorized,
issued and outstanding, respectively |
|
|
198 |
|
|
|
198 |
|
Additional paid-in capital |
|
|
7,830 |
|
|
|
7,830 |
|
Accumulated other comprehensive income |
|
|
15,088 |
|
|
|
21,681 |
|
Retained earnings |
|
|
1,529,353 |
|
|
|
1,501,798 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Total contributed capital and retained earnings |
|
|
1,554,441 |
|
|
|
1,533,479 |
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|
|
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|
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|
Treasury stock, at cost, 7,210,565 and 6,438,118
shares, respectively |
|
|
(295,572 |
) |
|
|
(254,877 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
1,258,869 |
|
|
|
1,278,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
3,006,215 |
|
|
$ |
3,101,261 |
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
4
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS
OF OPERATIONS (Unaudited)
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|
Three Months Ended March 31 |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands, except per share data) |
|
OPERATING REVENUE |
|
|
|
|
|
|
|
|
Management fee revenue, net |
|
$ |
220,102 |
|
|
$ |
217,736 |
|
Premiums earned |
|
|
54,026 |
|
|
|
53,648 |
|
Service agreement revenue |
|
|
7,592 |
|
|
|
4,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
|
281,720 |
|
|
|
276,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
Cost of management operations |
|
|
183,154 |
|
|
|
167,940 |
|
Losses and loss adjustment expenses incurred |
|
|
30,053 |
|
|
|
32,677 |
|
Policy acquisition and other underwriting
expenses |
|
|
14,501 |
|
|
|
11,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
227,708 |
|
|
|
212,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT INCOME UNAFFILIATED |
|
|
|
|
|
|
|
|
Investment income, net of expenses |
|
|
15,000 |
|
|
|
14,468 |
|
Net realized gains on investments |
|
|
784 |
|
|
|
5,497 |
|
Equity in earnings of limited
partnerships |
|
|
4,142 |
|
|
|
2,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income unaffiliated |
|
|
19,926 |
|
|
|
22,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity in earnings
of Erie Family Life Insurance Company |
|
|
73,938 |
|
|
|
85,786 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
25,077 |
|
|
|
28,729 |
|
|
|
|
|
|
|
|
|
|
Equity in earnings of Erie Family Life
Insurance Company, net of tax |
|
|
605 |
|
|
|
714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
49,466 |
|
|
$ |
57,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic |
|
|
|
|
|
|
|
|
Class A common stock |
|
$ |
.81 |
|
|
$ |
.91 |
|
|
|
|
|
|
|
|
Class B common stock |
|
|
121.08 |
|
|
|
138.84 |
|
|
|
|
|
|
|
|
Net income per share diluted |
|
|
.73 |
|
|
|
.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
Class A common stock |
|
|
60,630,395 |
|
|
|
62,926,683 |
|
|
|
|
|
|
|
|
Class B common stock |
|
|
2,833 |
|
|
|
2,851 |
|
|
|
|
|
|
|
|
Diluted Shares |
|
|
67,505,125 |
|
|
|
69,845,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share: |
|
|
|
|
|
|
|
|
Class A common stock |
|
$ |
0.36 |
|
|
$ |
0.325 |
|
|
|
|
|
|
|
|
Class B common stock |
|
|
54.00 |
|
|
|
48.75 |
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
5
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
Net income |
|
$ |
49,466 |
|
|
$ |
57,771 |
|
|
|
|
|
|
|
|
Unrealized losses on securities: |
|
|
|
|
|
|
|
|
Unrealized holding losses arising during period |
|
|
(9,361 |
) |
|
|
(25,759 |
) |
Less: Gains included in net income |
|
|
(784 |
) |
|
|
(5,497 |
) |
|
|
|
|
|
|
|
Net unrealized holding losses arising during period |
|
|
(10,145 |
) |
|
|
(31,256 |
) |
Income tax benefit related to unrealized losses |
|
|
3,552 |
|
|
|
10,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in other comprehensive income,
net of tax |
|
|
(6,593 |
) |
|
|
(20,316 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
42,873 |
|
|
$ |
37,455 |
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
6
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS
OF CASH FLOWS (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Management fee received |
|
$ |
197,898 |
|
|
$ |
231,991 |
|
Service agreement fee received |
|
|
7,292 |
|
|
|
4,553 |
|
Premiums collected |
|
|
51,558 |
|
|
|
51,307 |
|
Settlement of commutation received from Exchange |
|
|
1,710 |
|
|
|
0 |
|
Net investment income received |
|
|
15,884 |
|
|
|
14,030 |
|
Limited partnership distributions |
|
|
12,865 |
|
|
|
13,871 |
|
Dividends received from Erie Family Life |
|
|
450 |
|
|
|
450 |
|
Salaries and wages paid |
|
|
(27,828 |
) |
|
|
(24,853 |
) |
Employee benefits paid |
|
|
(1,634 |
) |
|
|
(1,724 |
) |
Commissions paid to agents |
|
|
(107,674 |
) |
|
|
(110,959 |
) |
Agent bonuses paid |
|
|
(71,544 |
) |
|
|
(46,399 |
) |
General operating expenses paid |
|
|
(33,508 |
) |
|
|
(29,812 |
) |
Losses and loss adjustment expenses paid |
|
|
(32,761 |
) |
|
|
(29,790 |
) |
Other underwriting and acquisition costs paid |
|
|
(4,363 |
) |
|
|
(2,506 |
) |
Income taxes paid |
|
|
(12 |
) |
|
|
(6,057 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
8,333 |
|
|
|
64,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchase of investments: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
(63,975 |
) |
|
|
(88,724 |
) |
Equity securities |
|
|
(33,272 |
) |
|
|
(47,089 |
) |
Limited partnerships |
|
|
(31,089 |
) |
|
|
(13,583 |
) |
Sales/maturities of investments: |
|
|
|
|
|
|
|
|
Fixed maturity sales |
|
|
73,346 |
|
|
|
48,657 |
|
Fixed maturity calls/maturities |
|
|
25,010 |
|
|
|
22,969 |
|
Equity securities |
|
|
62,982 |
|
|
|
40,917 |
|
Return on limited partnerships |
|
|
316 |
|
|
|
473 |
|
Purchase of property and equipment |
|
|
(1,979 |
) |
|
|
(301 |
) |
Net (distributions) collections on agent loans |
|
|
(1,339 |
) |
|
|
925 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
30,000 |
|
|
|
(35,756 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
(Decrease) increase in collateral from securities lending |
|
|
(4,085 |
) |
|
|
10,128 |
|
Redemption of securities lending collateral |
|
|
4,085 |
|
|
|
(10,128 |
) |
Dividends paid to shareholders |
|
|
(22,172 |
) |
|
|
(20,612 |
) |
Purchase of treasury stock |
|
|
(40,695 |
) |
|
|
(14,616 |
) |
|
|
|
|
|
|
|
Cash used in financing activities |
|
|
(62,867 |
) |
|
|
(35,228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(24,534 |
) |
|
|
(6,882 |
) |
Cash and cash equivalents at beginning of period |
|
|
31,666 |
|
|
|
50,061 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
7,132 |
|
|
$ |
43,179 |
|
|
|
|
|
|
|
|
See Accompanying Notes to Consolidated Financial Statements.
7
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, which include the accounts of Erie
Indemnity Company and its wholly owned property/casualty insurance subsidiaries, Erie Insurance
Company (EIC), Erie Insurance Company of New York (EINY) and Erie Insurance Property & Casualty
Company (EIPC), have been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles (GAAP) for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Operating results for
the three-month period ended March 31, 2006 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2006. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Companys Form 10-K for the
year ended December 31, 2005 as filed with the Securities and Exchange Commission on February 22,
2006.
NOTE 2
RECLASSIFICATIONS
Certain amounts previously reported in the 2005 financial statements have been reclassified to
conform to the current periods presentation. Such reclassifications did not impact earnings or
total shareholders equity.
NOTE 3 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. 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.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 3 EARNINGS PER SHARE (Continued)
The following table displays the basic and diluted earnings per-share computations.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands, except per share data) |
|
Basic: |
|
|
|
|
|
|
|
|
Allocated net income Class A |
|
$ |
49,124 |
|
|
$ |
57,376 |
|
Class A shares of common stock |
|
|
60,630,395 |
|
|
|
62,926,683 |
|
|
|
|
|
|
|
|
Class A earnings per share basic |
|
$ |
.81 |
|
|
$ |
.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated net income Class B |
|
$ |
342 |
|
|
$ |
395 |
|
Class B shares of common stock |
|
|
2,833 |
|
|
|
2,851 |
|
|
|
|
|
|
|
|
Class B earnings per share basic |
|
$ |
121.08 |
|
|
$ |
138.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
49,466 |
|
|
$ |
57,771 |
|
Class A shares of common stock |
|
|
60,630,395 |
|
|
|
62,926,683 |
|
Assumed conversion of Class B common
stock and restricted stock awards |
|
|
6,874,730 |
|
|
|
6,919,275 |
|
|
|
|
|
|
|
|
Class A shares of common and equivalent
shares |
|
|
67,505,125 |
|
|
|
69,845,958 |
|
|
|
|
|
|
|
|
Earnings per share diluted |
|
$ |
.73 |
|
|
$ |
.83 |
|
|
|
|
|
|
|
|
Included in the restricted stock awards not yet vested are awards of 73,471 and 75,399 for the
first quarter of 2006 and 2005, respectively, related to the long-term incentive plan for executive
and senior management. Awards not yet vested related to the outside directors stock compensation
plan were 2,059 and 1,476 for the first quarters of 2006 and 2005, respectively.
NOTE 4 INVESTMENTS
Fixed maturities and equity securities
Fixed maturities consist of bonds, notes and redeemable preferred stock. Equity securities include
common and nonredeemable preferred stock. Fixed maturities and equity securities are classified as
available for sale. Available for sale securities are stated at fair value, with the unrealized
gains and losses, net of deferred tax, reflected in shareholders equity in accumulated other
comprehensive income. When a decline in the value of an investment is considered to be
other-than-temporary by management, the investment is written down to net estimated realizable
value. Investment impairments are evaluated on an individual security position basis. Adjustments
to the carrying value of marketable equity securities and fixed maturities that are considered
impaired are recorded as realized losses in the Consolidated Statements of Operations.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 4 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 |
|
March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries & government
agencies |
|
$ |
9,598 |
|
|
$ |
151 |
|
|
$ |
157 |
|
|
$ |
9,592 |
|
States & political subdivisions |
|
|
157,620 |
|
|
|
970 |
|
|
|
2,450 |
|
|
|
156,140 |
|
Special revenue |
|
|
207,438 |
|
|
|
1,104 |
|
|
|
2,506 |
|
|
|
206,036 |
|
Public utilities |
|
|
60,356 |
|
|
|
2,694 |
|
|
|
702 |
|
|
|
62,348 |
|
U.S. industrial & miscellaneous |
|
|
331,590 |
|
|
|
3,517 |
|
|
|
5,569 |
|
|
|
329,538 |
|
Mortgage-backed securities |
|
|
26,256 |
|
|
|
429 |
|
|
|
442 |
|
|
|
26,243 |
|
Asset-backed securities |
|
|
11,350 |
|
|
|
38 |
|
|
|
146 |
|
|
|
11,242 |
|
Foreign |
|
|
96,964 |
|
|
|
2,664 |
|
|
|
1,345 |
|
|
|
98,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds |
|
|
901,172 |
|
|
|
11,567 |
|
|
|
13,317 |
|
|
|
899,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stock |
|
|
25,212 |
|
|
|
1,172 |
|
|
|
117 |
|
|
|
26,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
926,384 |
|
|
|
12,739 |
|
|
|
13,434 |
|
|
|
925,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
1,408 |
|
|
|
148 |
|
|
|
0 |
|
|
|
1,556 |
|
U.S. banks, trusts &
insurance companies |
|
|
10,176 |
|
|
|
1,949 |
|
|
|
60 |
|
|
|
12,065 |
|
U.S. industrial &
miscellaneous |
|
|
56,560 |
|
|
|
11,442 |
|
|
|
933 |
|
|
|
67,069 |
|
Foreign |
|
|
21,842 |
|
|
|
4,454 |
|
|
|
432 |
|
|
|
25,864 |
|
Nonredeemable
preferred stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
19,678 |
|
|
|
298 |
|
|
|
255 |
|
|
|
19,721 |
|
U.S. banks, trusts &
insurance companies |
|
|
56,482 |
|
|
|
1,993 |
|
|
|
485 |
|
|
|
57,990 |
|
U.S. industrial &
miscellaneous |
|
|
48,332 |
|
|
|
3,557 |
|
|
|
252 |
|
|
|
51,637 |
|
Foreign |
|
|
6,993 |
|
|
|
713 |
|
|
|
6 |
|
|
|
7,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
221,471 |
|
|
$ |
24,554 |
|
|
$ |
2,423 |
|
|
$ |
243,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 4 INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
(in thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries &
government agencies |
|
$ |
9,583 |
|
|
$ |
204 |
|
|
$ |
52 |
|
|
$ |
9,735 |
|
States & political subdivisions |
|
|
145,528 |
|
|
|
1,383 |
|
|
|
1,104 |
|
|
|
145,807 |
|
Special revenue |
|
|
195,059 |
|
|
|
1,816 |
|
|
|
1,130 |
|
|
|
195,745 |
|
Public utilities |
|
|
66,866 |
|
|
|
3,077 |
|
|
|
334 |
|
|
|
69,609 |
|
U. S. industrial &
miscellaneous |
|
|
353,843 |
|
|
|
5,889 |
|
|
|
4,013 |
|
|
|
355,719 |
|
Mortgage-backed securities |
|
|
32,251 |
|
|
|
788 |
|
|
|
413 |
|
|
|
32,626 |
|
Asset-backed securities |
|
|
22,117 |
|
|
|
43 |
|
|
|
443 |
|
|
|
21,717 |
|
Foreign |
|
|
106,445 |
|
|
|
3,772 |
|
|
|
816 |
|
|
|
109,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds |
|
|
931,692 |
|
|
|
16,972 |
|
|
|
8,305 |
|
|
|
940,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stock |
|
|
30,628 |
|
|
|
1,340 |
|
|
|
117 |
|
|
|
31,851 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
962,320 |
|
|
|
18,312 |
|
|
|
8,422 |
|
|
|
972,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
1,313 |
|
|
|
160 |
|
|
|
0 |
|
|
|
1,473 |
|
U. S. banks, trusts &
insurance companies |
|
|
10,783 |
|
|
|
1,528 |
|
|
|
286 |
|
|
|
12,025 |
|
U. S. industrial &
miscellaneous |
|
|
53,713 |
|
|
|
8,668 |
|
|
|
1,599 |
|
|
|
60,782 |
|
Foreign |
|
|
18,950 |
|
|
|
2,712 |
|
|
|
381 |
|
|
|
21,281 |
|
Nonredeemable preferred stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public utilities |
|
|
26,266 |
|
|
|
285 |
|
|
|
448 |
|
|
|
26,103 |
|
U. S. banks, trusts &
insurance companies |
|
|
64,632 |
|
|
|
2,432 |
|
|
|
228 |
|
|
|
66,836 |
|
U. S. industrial &
miscellaneous |
|
|
62,552 |
|
|
|
3,523 |
|
|
|
464 |
|
|
|
65,611 |
|
Foreign |
|
|
11,231 |
|
|
|
1,033 |
|
|
|
41 |
|
|
|
12,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
249,440 |
|
|
$ |
20,341 |
|
|
$ |
3,447 |
|
|
$ |
266,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 4 INVESTMENTS (Continued)
Fixed maturities and equity securities in a gross unrealized loss position at March 31, 2006 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 |
|
$ |
3,596 |
|
|
$ |
84 |
|
|
$ |
4,199 |
|
|
$ |
73 |
|
|
$ |
7,795 |
|
|
$ |
157 |
|
|
|
8 |
|
States and political subdivisions |
|
|
111,800 |
|
|
|
2,065 |
|
|
|
9,676 |
|
|
|
385 |
|
|
|
121,476 |
|
|
|
2,450 |
|
|
|
51 |
|
Special revenue |
|
|
145,901 |
|
|
|
2,275 |
|
|
|
8,185 |
|
|
|
231 |
|
|
|
154,086 |
|
|
|
2,506 |
|
|
|
70 |
|
Public utilities |
|
|
28,425 |
|
|
|
584 |
|
|
|
2,855 |
|
|
|
118 |
|
|
|
31,280 |
|
|
|
702 |
|
|
|
23 |
|
U.S. industrial & miscellaneous |
|
|
112,764 |
|
|
|
2,364 |
|
|
|
85,523 |
|
|
|
3,205 |
|
|
|
198,287 |
|
|
|
5,569 |
|
|
|
124 |
|
Mortgage-backed securities |
|
|
7,079 |
|
|
|
96 |
|
|
|
11,456 |
|
|
|
346 |
|
|
|
18,535 |
|
|
|
442 |
|
|
|
16 |
|
Asset-backed securities |
|
|
3,540 |
|
|
|
104 |
|
|
|
2,025 |
|
|
|
42 |
|
|
|
5,565 |
|
|
|
146 |
|
|
|
4 |
|
Foreign |
|
|
26,553 |
|
|
|
581 |
|
|
|
20,405 |
|
|
|
764 |
|
|
|
46,958 |
|
|
|
1,345 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds |
|
|
439,658 |
|
|
|
8,153 |
|
|
|
144,324 |
|
|
|
5,164 |
|
|
|
583,982 |
|
|
|
13,317 |
|
|
|
321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred stock |
|
|
5,018 |
|
|
|
117 |
|
|
|
0 |
|
|
|
0 |
|
|
|
5,018 |
|
|
|
117 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
444,676 |
|
|
$ |
8,270 |
|
|
$ |
144,324 |
|
|
$ |
5,164 |
|
|
$ |
589,000 |
|
|
$ |
13,434 |
|
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
18,804 |
|
|
|
1,167 |
|
|
|
2,473 |
|
|
|
258 |
|
|
|
21,277 |
|
|
|
1,425 |
|
|
|
63 |
|
Non redeemable preferred stock |
|
|
26,615 |
|
|
|
643 |
|
|
|
4,854 |
|
|
|
355 |
|
|
|
31,469 |
|
|
|
998 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
|
45,419 |
|
|
|
1,810 |
|
|
|
7,327 |
|
|
|
613 |
|
|
|
52,746 |
|
|
|
2,423 |
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities and
equity securities |
|
$ |
490,095 |
|
|
$ |
10,080 |
|
|
$ |
151,651 |
|
|
$ |
5,777 |
|
|
$ |
641,746 |
|
|
$ |
15,857 |
|
|
|
401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Almost all of the fixed maturities in an unrealized loss position were investment grade
securities below market due to changes in interest rates from the date of purchase. Of the
fixed maturities that are below amortized cost for less than 12 months, securities that were
investment-grade had a fair value of $442.1 million at March 31, 2006. These fixed
maturities had unrealized losses as of March 31, 2006, of $8.1 million.
The remaining fair value of fixed maturities below amortized cost for less than 12 months of
$2.6 million at March 31, 2006, were non-investment grade securities and had unrealized
losses of $.2 million. An impairment charge of $.2 million was recorded for one of these
securities to write it down to its estimated market value in 2005. It is possible that
these securities may be further impaired resulting in realized losses in future periods.
Of the $144.3 million fixed maturities that were below amortized cost for 12 months or longer,
there are $138.5 million in investment-grade securities at March 31, 2006. These fixed maturities
had unrealized losses as of March 31, 2006, of $4.9 million. These unrealized losses are due to
higher market interest rates and greater spread requirements in the market in general and are not
related to the credit quality of specific issuers. The remaining $5.8 million fair value of fixed
maturities below amortized cost for greater than 12 months were non-investment grade and had
unrealized losses of $.3 million. The Company continues to monitor the financial condition of
these issuers as every security is included in the Companys portfolio monitoring process.
12
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 4 INVESTMENTS (Continued)
The components of net realized gains on investments as reported in the Consolidated Statements of
Operations are included below. Gross realized losses on fixed maturities included impairment
charges of $.9 million and $1.4 million in the first quarters of 2006 and 2005, respectively.
Gross realized losses on equity securities included impairment charges of $1.1 million and $.1
million in the first quarters of 2006 and 2005, respectively. Impairment charges on equity
securities were primarily in the media and consumer products industries in the first quarter of
2006.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
Gross realized gains |
|
$ |
978 |
|
|
$ |
1,090 |
|
Gross realized losses |
|
|
(1,633 |
) |
|
|
(2,104 |
) |
|
|
|
|
|
|
|
Net realized losses |
|
|
(655 |
) |
|
|
(1,014 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
Gross realized gains |
|
|
4,227 |
|
|
|
7,129 |
|
Gross realized losses |
|
|
(2,788 |
) |
|
|
(618 |
) |
|
|
|
|
|
|
|
Net realized gains |
|
|
1,439 |
|
|
|
6,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains on investments |
|
$ |
784 |
|
|
$ |
5,497 |
|
|
|
|
|
|
|
|
Limited partnerships
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.
Limited partnerships are recorded using the equity method, which is the Companys share of the reported value of the
partnership. Prior to the second quarter of 2005, unrealized gains and losses on limited
partnerships were reflected in shareholders equity in accumulated other comprehensive income, net
of deferred taxes. A cumulative adjustment increasing equity in
earnings of limited partnerships was made in the second
quarter of 2005 of $14.2 million to properly
record changes in the fair value of limited partnerships in the Consolidated Statements of Operations.
The components of equity in earnings of limited partnerships as reported in the Consolidated
Statements of Operations are as follows. Impairment charges on private equity limited partnerships
of $.6 million were included in the equity in earnings of limited partnerships in the first quarter
of 2005.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
Private equity |
|
$ |
1,923 |
|
|
$ |
991 |
|
Real estate |
|
|
1,521 |
|
|
|
978 |
|
Mezzanine debt |
|
|
108 |
|
|
|
142 |
|
Valuation adjustments |
|
|
590 |
|
|
|
0 |
|
|
|
|
|
|
|
|
Total equity in earnings of limited partnerships |
|
$ |
4,142 |
|
|
$ |
2,111 |
|
|
|
|
|
|
|
|
The Company had loaned securities, included as part of its invested assets, with a market
value of $25.9 million and $30.0 million at March 31, 2006 and December 31, 2005, respectively. The
Company receives marketable securities as collateral for the loaned securities. The Company
recognizes the receipt of the collateral held by the third party custodian and the obligation to
return the collateral on its Consolidated Statements of Financial Position. The proceeds from the
collateral are invested in cash and short-term investments. The Company shares a portion of the
interest charged on lent securities with the third party custodian and the borrowing institution.
13
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 5 SUMMARIZED FINANCIAL STATEMENT INFORMATION OF AFFILIATE
The Company owns 21.6% of Erie Family Life Insurance Companys (EFL) outstanding common shares and
accounts for this investment using the equity method of accounting. EFL is a
Pennsylvania-domiciled life insurance company operating in 10 states and the District of Columbia.
The following represents unaudited condensed financial statement information for EFL on a GAAP
basis:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
Revenues |
|
$ |
37,050 |
|
|
$ |
34,142 |
|
Benefits and expenses |
|
|
32,427 |
|
|
|
28,682 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
4,623 |
|
|
|
5,460 |
|
Income taxes |
|
|
1,344 |
|
|
|
1,911 |
|
|
|
|
|
|
|
|
Net income |
|
|
3,279 |
|
|
|
3,549 |
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(11,460 |
) |
|
$ |
(10,486 |
) |
|
|
|
|
|
|
|
Dividends paid to shareholders |
|
$ |
2,079 |
|
|
$ |
2,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
March 31 |
|
|
December 31 |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
Investments |
|
$ |
1,483,704 |
|
|
$ |
1,498,099 |
|
Total assets |
|
|
1,749,542 |
|
|
|
1,776,360 |
|
Liabilities |
|
|
1,507,111 |
|
|
|
1,520,390 |
|
Accumulated other comprehensive income |
|
|
732 |
|
|
|
15,471 |
|
Total shareholders equity |
|
|
242,431 |
|
|
|
255,970 |
|
See also
Note 11, Variable Interest Entity regarding the tender
offer transaction of EFLs shares.
NOTE 6 RETIREMENT BENEFIT PLANS
The Companys pension plans consist of: (1) a noncontributory-defined benefit pension plan covering
substantially all employees of the Company, (2) an unfunded supplemental employee retirement plan
for its executive management and division officers and (3) an unfunded pension plan (discontinued
as of April 1997) for certain of its outside directors. The Company also provides retiree health
benefits in the form of medical and pharmacy health plans for eligible retired employees and
eligible dependents. 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.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 6 RETIREMENT BENEFIT PLANS (Continued)
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Retiree Health Benefits |
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31 |
|
|
March 31 |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service cost |
|
$ |
4,107 |
|
|
$ |
3,641 |
|
|
$ |
374 |
|
|
$ |
315 |
|
Interest cost |
|
|
4,110 |
|
|
|
3,644 |
|
|
|
286 |
|
|
|
242 |
|
Expected return on plan assets |
|
|
(4,629 |
) |
|
|
(4,346 |
) |
|
|
0 |
|
|
|
0 |
|
Amortization of prior service cost |
|
|
114 |
|
|
|
175 |
|
|
|
(32 |
) |
|
|
(27 |
) |
Amortization of net loss |
|
|
1,205 |
|
|
|
904 |
|
|
|
107 |
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
4,907 |
|
|
$ |
4,018 |
|
|
$ |
735 |
|
|
$ |
611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A portion of the net periodic benefit cost is borne by the Erie Insurance Exchange (Exchange) and
EFL. The Company was reimbursed approximately 51% from the Exchange and EFL during the first three
months of 2006 and 53% for 2005.
Retiree Health Benefit Plan Termination
The Companys retiree health benefit plan was terminated at the Companys Board of Directors
meeting in April. Effective July 1, 2006 qualifying, active employees with less than six years remaining
until retirement will be gradually phased out of the plan. All other employees are no longer
eligible for this benefit. The Company will recognize this change in benefit as a
full curtailment for an estimated expense savings, net
of curtailment expenses of approximately $1.1 million in calendar year 2006, after
reimbursement from other entities. The annual net reduction to the Companys expense in 2007 and thereafter is
expected to be approximately $1.2 million, or $.02 per share-diluted, as a result of this
termination.
NOTE 7 NOTE RECEIVABLE FROM ERIE FAMILY LIFE INSURANCE COMPANY
The Company is due $25 million from EFL in the form of a surplus note. The note may be repaid only
out of unassigned surplus of EFL and repayment is subject to prior approval by the Pennsylvania
Insurance Commissioner. The note bears an annual interest rate of 6.70% and is payable on demand
on or after December 31, 2018. Interest is scheduled to be paid semi-annually. The Company
recorded interest receivable from EFL of $.4 million in each of the first quarters of 2006 and
2005.
NOTE 8 STATUTORY INFORMATION
Cash and securities with carrying values of $3.5 million and $3.6 million were deposited by the
Companys property and casualty insurance subsidiaries with regulatory authorities under statutory
requirements at both March 31, 2006 and December 31, 2005, respectively.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 9 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:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
49,466 |
|
|
$ |
57,771 |
|
Adjustments to reconcile net income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
8,988 |
|
|
|
9,316 |
|
Deferred income tax benefit |
|
|
(521 |
) |
|
|
(273 |
) |
Equity in earnings of limited partnerships |
|
|
(4,142 |
) |
|
|
(2,111 |
) |
Net realized gains on investments |
|
|
(784 |
) |
|
|
(5,497 |
) |
Net amortization of bond premium |
|
|
747 |
|
|
|
540 |
|
Undistributed earnings of Erie Family
Life Insurance Company |
|
|
(201 |
) |
|
|
(318 |
) |
Deferred compensation |
|
|
159 |
|
|
|
(323 |
) |
Limited partnership distributions |
|
|
12,865 |
|
|
|
13,871 |
|
Decrease in receivables and reinsurance
recoverable from the Exchange and affiliates |
|
|
5,760 |
|
|
|
24,234 |
|
Increase in prepaid expenses and other assets |
|
|
(11,103 |
) |
|
|
(14,598 |
) |
Decrease in accounts payable and
accrued expenses |
|
|
(19,427 |
) |
|
|
(9,663 |
) |
Decrease in loss reserves |
|
|
(22,334 |
) |
|
|
(448 |
) |
Decrease in unearned premiums |
|
|
(11,140 |
) |
|
|
(8,399 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
8,333 |
|
|
$ |
64,102 |
|
|
|
|
|
|
|
|
NOTE 10 COMMITMENTS AND CONTINGENCIES
The Company has contractual commitments to invest up to $290.7 million additional funds in limited
partnership investments at March 31, 2006. These commitments will be funded as required by
the partnerships agreements through 2012. At March 31, 2006, the total commitment to fund limited
partnerships that invest in private equity securities is $104.2 million, real estate activities is
$130.7 million and fixed income securities is $55.8 million. The Company expects to have sufficient cash
flows from operations and positive flows from existing limited partnership investments to meet
these partnership commitments.
The Company is involved in litigation arising in the ordinary course of business. In the opinion of
management, the effects, if any, of such litigation are not expected to be material to the
Companys consolidated financial condition, results of operations or cash flows.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 11 VARIABLE INTEREST ENTITY
The Exchange is a reciprocal insurance company, domiciled in
Pennsylvania, for which the Company serves as attorney-in-fact. The Company has a significant
interest in the financial condition of the Exchange because net management fee revenues are based
on the direct written premiums of the Exchange and the other members of the Property and Casualty
Group.
The selected financial data below is derived from the Exchanges financial statements prepared in
accordance with Statutory Accounting Principles (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 Insurance Department of the Commonwealth of Pennsylvania. In the opinion of
management, all adjustments consisting only of normal recurring accruals, considered necessary for
a fair presentation, have been included. The condensed financial data set forth below represents
the Exchanges share of underwriting results after accounting for intercompany pool transactions.
Erie
Insurance Exchange
Condensed Statutory Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
Premiums earned |
|
$ |
928,408 |
|
|
$ |
932,794 |
|
Losses and loss adjustment expenses |
|
|
509,865 |
|
|
|
553,994 |
|
Insurance underwriting and other
expenses* |
|
|
280,175 |
|
|
|
242,721 |
|
Dividends to policyholders** |
|
|
(478 |
) |
|
|
7,368 |
|
Other expense |
|
|
3,585 |
|
|
|
3,538 |
|
|
|
|
|
|
|
|
Total underwriting operations expenses |
|
|
283,282 |
|
|
|
253,627 |
|
|
|
|
|
|
|
|
Net underwriting gain |
|
|
135,261 |
|
|
|
125,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
80,064 |
|
|
|
79,635 |
|
Net realized gains |
|
|
25,532 |
|
|
|
76,599 |
|
|
|
|
|
|
|
|
Total investment income |
|
|
105,596 |
|
|
|
156,234 |
|
|
|
|
|
|
|
|
|
|
Net income before federal income tax |
|
|
240,857 |
|
|
|
281,407 |
|
|
|
|
|
|
|
|
|
|
Federal income tax expense |
|
|
68,610 |
|
|
|
88,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
172,247 |
|
|
$ |
193,209 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes management fees paid or accrued as payable to the Company and
writeoff of the ErieConnection asset of $36.5 million. This asset was previously not admitted on
the Exchanges Statement of Financial Position under SAP guidance, and thus, there is no policyholders
surplus impact as a result of this write off. |
|
** |
|
The decrease in dividends to policyholders is the result of reduced future payment amounts to
policyholders being estimated. In an effort to write and retain quality business, the Exchange
studied its workers compensation rates and dividend policy during 2005. As a result, the dividend
policy of the Exchange was discontinued starting with policies effective as of November 1, 2005 and
later. Other member companies within the Property and Casualty Group will continue the dividend
policy. At the same time, the Exchange has developed a plan to offer more competitive premium
rates to its policyholders that are determined by the Exchange to be quality risks. |
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 11 VARIABLE INTEREST ENTITY (Continued)
Erie Insurance Exchange
Condensed Statutory Statements of Financial Position
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
March 31 |
|
|
December 31 |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
4,497,134 |
|
|
$ |
4,534,116 |
|
Equity securities: |
|
|
|
|
|
|
|
|
Common stock |
|
|
1,811,368 |
|
|
|
1,736,538 |
|
Preferred stock |
|
|
644,999 |
|
|
|
648,301 |
|
Limited partnerships |
|
|
755,129 |
|
|
|
599,745 |
|
Real estate mortgage loans |
|
|
10,448 |
|
|
|
10,533 |
|
Properties occupied by the Exchange |
|
|
34,903 |
|
|
|
35,277 |
|
Cash and cash equivalents |
|
|
476,109 |
|
|
|
299,160 |
|
Surplus note from EFL |
|
|
20,000 |
|
|
|
20,000 |
|
Other assets |
|
|
18,300 |
|
|
|
33,945 |
|
|
|
|
|
|
|
|
Total invested assets |
|
|
8,268,390 |
|
|
|
7,917,615 |
|
Premium receivable |
|
|
984,617 |
|
|
|
981,844 |
|
Federal income tax recoverable |
|
|
0 |
|
|
|
76,217 |
|
Deferred income taxes |
|
|
0 |
|
|
|
17,518 |
|
Other assets |
|
|
77,655 |
|
|
|
77,069 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
9,330,662 |
|
|
$ |
9,070,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Loss and LAE reserves |
|
$ |
3,494,575 |
|
|
$ |
3,549,128 |
|
Unearned premium reserves |
|
|
1,483,462 |
|
|
|
1,509,636 |
|
Accrued liabilities |
|
|
735,049 |
|
|
|
629,749 |
|
Deferred income taxes |
|
|
7,033 |
|
|
|
0 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
5,720,119 |
|
|
|
5,688,513 |
|
|
|
|
|
|
|
|
Total policyholders surplus |
|
|
3,610,543 |
|
|
|
3,381,750 |
|
|
|
|
|
|
|
|
Total liabilities and
policyholders surplus |
|
$ |
9,330,662 |
|
|
$ |
9,070,263 |
|
|
|
|
|
|
|
|
The Exchanges Policyholders surplus increased 6.8% during 2006 primarily as a result of the
improvement in loss and loss adjustment expenses.
Common equity securities represent a significant portion of the Exchanges investment portfolio and
surplus and are exposed to price risk, volatility of the capital markets and general economic
conditions. Common stock investments made up approximately 50.2% of the Exchanges statutory
surplus at March 31, 2006 and 51.4% at December 31, 2005.
The
Exchanges investment activity impacting surplus included net
realized and unrealized capital losses, before consideration of
taxes, on its common stock portfolio of $75.1 million and $48.4
million in the first quarters of 2006 and 2005, respectively. Net
proceeds from the sale of common stock investments were $359.5
million and $197.7 million in the first quarters of 2006 and 2005,
respectively. The weighted
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 11 VARIABLE INTEREST ENTITY (Continued)
average current price to trailing 12-months earnings ratio of the Exchanges common stock portfolio
was 21.31 at March 31, 2006 and 21.08 at December 31, 2005. The Standard & Poors composite price
to trailing 12-months earnings ratio was 17.53 at March 31, 2006
and 17.39 at December 31, 2005.
If the surplus of the Exchange were to decline significantly from its current level, the Property
and Casualty Group could find it more difficult to retain its existing business and attract new
business. A decline in the business of the Property and Casualty Group would have an adverse effect
on the amount of the management fees the Company receives and the underwriting results of the
Property and Casualty Group in which the Company has a 5.5% participation. In addition, a decline
in the surplus of the Exchange from its current level would make it more likely that the management
fee rate received by the Company would be reduced.
Erie Insurance Exchange
Condensed Statutory Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Premiums collected net of reinsurance |
|
$ |
902,662 |
|
|
$ |
914,075 |
|
Net investment income received |
|
|
81,496 |
|
|
|
80,612 |
|
Losses and loss adjustment expenses paid |
|
|
(480,245 |
) |
|
|
(490,296 |
) |
Management fee and expenses paid |
|
|
(356,085 |
) |
|
|
(346,634 |
) |
Dividends
paid to policyholders |
|
|
(5,097 |
) |
|
|
(6,189 |
) |
Income taxes recovered (paid) |
|
|
55,455 |
|
|
|
(32,013 |
) |
Miscellaneous
expenses paid |
|
|
(3,585 |
) |
|
|
(3,538 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
194,601 |
|
|
|
116,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Proceeds from investment sales and
maturities |
|
|
876,400 |
|
|
|
712,868 |
|
Purchases of investments |
|
|
(950,841 |
) |
|
|
(818,492 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(74,441 |
) |
|
|
(105,624 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
56,789 |
|
|
|
25,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
176,949 |
|
|
|
36,024 |
|
Cash and cash equivalents-beginning of year |
|
|
299,160 |
|
|
|
125,933 |
|
|
|
|
|
|
|
|
Cash and cash equivalents-end of year |
|
$ |
476,109 |
|
|
$ |
161,957 |
|
|
|
|
|
|
|
|
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 11 VARIABLE INTEREST ENTITY (Continued)
Erie Family Life Insurance Company Tender Offer
In
March 2006, as part of its capital management activities, the
Company announced a
tender offer to be made by the Exchange for all of the publicly held outstanding common stock of
EFL. The Exchange currently owns 53.5% of the outstanding common stock of EFL and intends to offer
to acquire the balance of EFLs common stock at $32.00 per share in cash during the second quarter
of 2006. The aggregate consideration for the outstanding EFL shares
would be approximately $75
million. The Exchange intends to complete the transaction as soon as practicable. The Companys
21.6% stake in EFL will be unaffected by this transaction.
The offer
will be conditioned on, among other things, the tender of a majority of the shares of EFL
common stock owned by EFL shareholders other than shares owned by the Company, the Exchange, the
Erie Insurance Groups pension plan for employees, and the executive officers and directors of the
Company. The tender offer will not be conditioned on the Exchange obtaining any financing. The
Exchange intends to acquire any shares not acquired in the tender offer in a subsequent short
form merger transaction at the same $32.00 per share cash price.
NOTE 12 SEGMENT INFORMATION
The Company operates its business as three reportable segments management operations, insurance
underwriting operations and investment operations. Accounting policies for segments are the same
as those described in the summary of significant accounting policies Note 3 of the Companys Annual
Report on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange
Commission on February 22, 2006, with the exception of the management fee revenues received from
the property/casualty insurance subsidiaries. These revenues are not eliminated in the segment
detail that follows as management bases its decisions on the segment presentation. Summarized
financial information for the Companys operating segments is presented below:
20
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 12 SEGMENT INFORMATION (Continued)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
(in thousands) |
|
March 31, 2006 |
|
|
March 31, 2005 |
|
Management Operations |
|
|
|
|
|
|
|
|
Operating revenue |
|
|
|
|
|
|
|
|
Management fee revenue |
|
$ |
232,935 |
|
|
$ |
230,409 |
|
Service agreement revenue |
|
|
7,592 |
* |
|
|
4,787 |
|
|
|
|
|
|
|
|
Total operating revenue |
|
|
240,527 |
|
|
|
235,196 |
|
Cost of management operations |
|
|
193,825 |
|
|
|
177,714 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
46,702 |
|
|
$ |
57,482 |
|
|
|
|
|
|
|
|
Net income from management
operations |
|
$ |
30,862 |
|
|
$ |
38,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Underwriting Operations |
|
|
|
|
|
|
|
|
Operating revenue |
|
|
|
|
|
|
|
|
Premiums earned: |
|
|
|
|
|
|
|
|
Personal lines |
|
$ |
37,259 |
|
|
$ |
38,214 |
|
Commercial lines |
|
|
16,843 |
|
|
|
16,557 |
|
Reinsurance nonaffiliates |
|
|
(76 |
) |
|
|
(279 |
) |
Reinsurance affiliates |
|
|
0 |
** |
|
|
(844 |
) |
|
|
|
|
|
|
|
Total premiums earned |
|
|
54,026 |
|
|
|
53,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Losses and expenses: |
|
|
|
|
|
|
|
|
Personal lines |
|
|
31,885 |
|
|
|
33,541 |
|
Commercial lines |
|
|
13,823 |
|
|
|
12,966 |
|
Reinsurance nonaffiliates |
|
|
863 |
|
|
|
572 |
|
Reinsurance affiliates |
|
|
145 |
|
|
|
340 |
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
46,716 |
|
|
|
47,419 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
7,310 |
|
|
$ |
6,229 |
|
|
|
|
|
|
|
|
Net income from insurance
underwriting operations |
|
$ |
4,831 |
|
|
$ |
4,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Operations |
|
|
|
|
|
|
|
|
Investment income, net of expenses |
|
$ |
15,000 |
|
|
$ |
14,468 |
|
Net realized gains on investments |
|
|
784 |
|
|
|
5,497 |
|
Equity in earnings of limited partnerships |
|
|
4,142 |
|
|
|
2,111 |
|
|
|
|
|
|
|
|
Total investment income-unaffiliated |
|
$ |
19,926 |
|
|
$ |
22,076 |
|
|
|
|
|
|
|
|
Net income from investment operations |
|
$ |
13,168 |
|
|
$ |
14,682 |
|
|
|
|
|
|
|
|
Equity in earnings of EFL, net of tax |
|
$ |
605 |
|
|
$ |
714 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Service fees charged for installment billings increased from $3 to $5 effective January 1, 2006.
Also see Managements Discussion and Analysis-Management
Operations section, regarding an adjustment to service fee revenue. |
|
** |
|
The excess-of-loss reinsurance agreement was not renewed for the 2006 accident year and there
were no premiums paid by the Erie Insurance Company or Erie Insurance Company of New York to the
Exchange. See Managements Discussion and Analysis-Insurance Underwriting Operations section for
discussion. |
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 12 SEGMENT INFORMATION (Continued)
Reconciliation of reportable segment revenues and operating expenses to the Consolidated Statements
of Operations:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31 |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
Segment revenues, excluding investment operations |
|
$ |
294,553 |
|
|
$ |
288,843 |
|
Elimination of intersegment management fee revenue |
|
|
(12,833 |
) |
|
|
(12,672 |
) |
|
|
|
|
|
|
|
Total operating revenue |
|
$ |
281,720 |
|
|
$ |
276,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating expenses, excluding investment
operations |
|
$ |
240,541 |
|
|
$ |
225,133 |
|
Elimination of intersegment management fee revenue |
|
|
(12,833 |
) |
|
|
(12,672 |
) |
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
227,708 |
|
|
$ |
212,461 |
|
|
|
|
|
|
|
|
The intersegment revenues and expenses that are eliminated in the Consolidated Statements of
Operations relate to the Companys property/casualty insurance subsidiaries 5.5% share of the
intersegment management fees paid to the Company.
The following table presents the management fee revenue by line of business before elimination of
the intersegment management fee revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31 |
|
|
% |
|
(dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
Change |
|
Private passenger auto |
|
$ |
111,055 |
|
|
$ |
112,858 |
|
|
|
(1.6 |
)% |
Commercial auto |
|
|
21,198 |
|
|
|
20,510 |
|
|
|
3.4 |
|
Homeowners |
|
|
36,656 |
|
|
|
36,097 |
|
|
|
1.5 |
|
Commercial multi-peril |
|
|
29,436 |
|
|
|
27,624 |
|
|
|
6.6 |
|
Workers compensation |
|
|
24,316 |
|
|
|
23,994 |
|
|
|
1.3 |
|
All other lines of business |
|
|
10,674 |
|
|
|
9,726 |
|
|
|
9.7 |
|
|
|
|
|
|
|
|
|
|
|
Gross management fee |
|
|
233,335 |
|
|
|
230,809 |
|
|
|
1.1 |
% |
Allowance for management fee
returned on cancelled policies |
|
|
(400 |
) |
|
|
(400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee net of allowance |
|
$ |
232,935 |
|
|
$ |
230,409 |
|
|
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
Management fee rate |
|
|
24.75 |
% |
|
|
23.75 |
% |
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 12 SEGMENT INFORMATION (Continued)
The growth rate of policies in force and policy retention trends (the percentage of policyholders
eligible for renewals who have renewed their policies measured on a twelve-month rolling basis)
directly impact the Companys management operations and property and casualty insurance operating
segments. Below is a summary of each by line of business for the Property and Casualty Groups
insurance business.
Growth rates of policies in force for Property and Casualty Group insurance operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private |
|
12-mth. |
|
|
|
|
|
12-mth. |
|
All other |
|
12-mth. |
|
Total |
|
12-mth. |
|
|
passenger |
|
growth |
|
|
|
|
|
growth |
|
personal lines |
|
growth |
|
Personal |
|
growth |
Date |
|
|
auto |
|
|
|
rate |
|
|
|
Homeowners |
|
|
|
rate |
|
|
of business |
|
|
rate |
|
|
Lines |
|
|
rate |
|
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)% |
|
12/31/2005 |
|
|
1,640,563 |
|
|
|
(1.8)% |
|
|
|
1,353,912 |
|
|
|
0.5% |
|
|
|
286,604 |
|
|
|
2.7% |
|
|
|
3,281,079 |
|
|
|
(0.5)% |
|
03/31/2006 |
|
|
1,636,048 |
|
|
|
(1.6)% |
|
|
|
1,356,885 |
|
|
|
1.0% |
|
|
|
289,964 |
|
|
|
3.6% |
|
|
|
3,282,897 |
|
|
|
(0.1)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
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 |
% |
12/31/2005 |
|
|
118,728 |
|
|
|
1.2 |
% |
|
|
213,347 |
|
|
|
1.8 |
% |
|
|
56,218 |
|
|
|
(4.6 |
)% |
|
|
90,227 |
|
|
|
2.7 |
% |
|
|
478,520 |
|
|
|
1.0 |
% |
03/31/2006 |
|
|
118,587 |
|
|
|
1.0 |
% |
|
|
214,461 |
|
|
|
2.3 |
% |
|
|
55,254 |
|
|
|
(4.7 |
)% |
|
|
90,301 |
|
|
|
2.8 |
% |
|
|
478,603 |
|
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12-mth. |
|
|
Total |
|
growth |
Date |
|
All Lines |
|
|
rate |
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)% |
|
12/31/2005 |
|
|
3,759,599 |
|
|
|
(0.3)% |
|
03/31/2006 |
|
|
3,761,500 |
|
|
|
0.1% |
|
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 |
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 |
|
12/31/2005 |
|
|
90.0 |
|
|
|
87.9 |
|
|
|
88.2 |
|
|
|
85.4 |
|
|
|
86.2 |
|
|
|
86.0 |
|
|
|
88.6 |
|
03/31/2006 |
|
|
90.1 |
|
|
|
88.0 |
|
|
|
88.6 |
|
|
|
85.9 |
|
|
|
86.0 |
|
|
|
86.2 |
|
|
|
88.8 |
|
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 13 INFORMATION TECHNOLOGY DEVELOPMENT
On April 13, 2006, the Company determined that it would cease development of ERIEConnection, a
personal lines policy administration and Web-based agency interface system. The announcement
followed an extensive study of the viability of the system and consideration of the advancements in
technology that have occurred since the inception of the ErieConnection program. The Company
intends to develop a program of enhancements to its existing policy administration systems and the
existing agency interface system, investing in improvements that will enhance the ease of doing
business with the organization and solidify the technological infrastructure underlying these
systems. Estimates of the cost, duration and deliverables under this program are currently being
developed.
The Companys property/casualty insurance subsidiaries recorded a pre-tax charge of $2.0 million,
or $.02 per share diluted, in the first quarter of 2006 to write off the intangible assets that
had been established for the right to use that system. The charge is included in the policy
acquisition and other underwriting expenses on the Consolidated Statements of Operations.
NOTE 14
SUBSEQUENT EVENT
On May 1,
2006 the Company entered into a definitive agreement with Black
Interests Limited Partnership to repurchase 1,844,604 shares
of Class A nonvoting common stock of the Company (which included 260
shares of Class B voting common stock required to be converted into
624,000 Class A nonvoting common shares) for $106.0 million under the
Companys previously authorized share repurchase program. The
shares were purchased in a privately negotiated transaction between
the Company and Black Interests Limited Partnership. The 260 shares of Class B voting
common stock represent 9.2% of the outstanding Class B
voting common stock of the Company. The Company has sufficient
capital and liquidity to execute the repurchase.
24
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the historical financial information
and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual
Report on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange
Commission on February 22, 2006. Preceding the discussion of financial results is an introduction
discussing the relationships between the member companies of the Erie Insurance Group. The
following discussion of financial results focuses heavily on the Erie Indemnity Companys (the
Company) three primary segments: management operations, insurance underwriting operations and
investment operations consistent with the presentation in Note 12 in the Notes to Consolidated
Financial Statements. That presentation, which management uses internally to monitor and evaluate
results, is an alternative presentation of the Companys Consolidated Statements of Operations.
NATURE OF ORGANIZATION
The following organizational chart depicts the organization of the various entities of the Erie
Insurance Group:
25
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Erie Indemnity Company (the Company) has served since 1925 as the attorney-in-fact for the
policyholders of the Erie Insurance Exchange (Exchange), a reciprocal insurance exchange. The
Company is a public registrant that operates predominantly as a provider of certain management
services to the Exchange. The Company also owns subsidiaries that are property and casualty
insurers. Each applicant for insurance to a reciprocal insurance exchange signs a subscribers
agreement, which contains a power-of-attorney appointing an attorney-in-fact. Under the Companys
attorney-in-fact arrangement with subscribers to the Exchange, the Company is required to perform
services relating to the sales, underwriting and issuance of policies on behalf of the Exchange.
For its services as attorney-in-fact, the Company charges a management fee calculated as a
percentage, not to exceed 25%, of the direct and affiliated assumed
premiums written by the
Exchange.
The Exchange and its property/casualty subsidiary, Flagship City Insurance Company, and the
Companys three property/casualty subsidiaries, Erie Insurance Company (EIC), Erie Insurance
Company of New York (EINY) and Erie Insurance Property & Casualty Company (EIPC), (collectively,
the Property and Casualty Group) underwrite personal and commercial lines property and casualty
insurance exclusively through more than 1,700 independent agencies comprising over 7,600 licensed
independent agents and pool their underwriting results. The financial position or results of
operations of the Exchange are not consolidated with those of the Company. The Company, together
with the Property and Casualty Group and EFL, operate collectively as the Erie Insurance Group.
The financial information presented herein reflects the Companys management operations from
serving as attorney-in-fact for the Exchange, its insurance underwriting results from its
wholly-owned subsidiaries (EIC, EINY and EIPC) and the Companys investment operations.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Segment Overview |
|
March 31 |
|
(dollars in thousands, except per share data) |
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
Income from management operations |
|
$ |
46,702 |
|
|
$ |
57,482 |
|
Underwriting income |
|
|
7,310 |
|
|
|
6,229 |
|
Net revenue from investment operations |
|
|
20,577 |
|
|
|
22,843 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
74,589 |
|
|
|
86,554 |
|
Provision for income taxes |
|
|
25,123 |
|
|
|
28,783 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
49,466 |
|
|
$ |
57,771 |
|
|
|
|
|
|
|
|
Net income per share diluted |
|
$ |
0.73 |
|
|
$ |
0.83 |
|
|
|
|
|
|
|
|
HIGHLIGHTS
|
|
|
Net income per share diluted decreased to $.73 in 2006 due to minimal growth in
management fee revenue which was outpaced by the growth in the cost of management
operations |
|
|
|
|
Gross margins from management operations decreased to 19.4% in the first
quarter of 2006 from 24.4% in the first quarter of 2005 |
|
|
|
|
GAAP combined ratios of the insurance underwriting operations improved to 86.5%
for the three months ended March 31, 2006 compared to 88.4% for the three months ended
March 31, 2005 |
|
|
|
|
Write off of ERIEConnection intangible asset resulted in a charge to net income
of $.02 per share diluted |
|
|
|
|
Correction to unearned service agreement revenue improved net income by $.02 per
share diluted |
26
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
ANALYSIS OF BUSINESS SEGMENTS
Management
Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
(dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
Management fee revenue |
|
$ |
232,935 |
|
|
$ |
230,409 |
|
Service agreement revenue |
|
|
7,592 |
|
|
|
4,787 |
|
|
|
|
|
|
|
|
Total revenue from management operations |
|
|
240,527 |
|
|
|
235,196 |
|
Cost of management operations |
|
|
193,825 |
|
|
|
177,714 |
|
|
|
|
|
|
|
|
Income from management operations |
|
$ |
46,702 |
|
|
$ |
57,482 |
|
|
|
|
|
|
|
|
Gross margin percentage |
|
|
19.4 |
% |
|
|
24.4 |
% |
|
|
|
|
|
|
|
Management fee rate |
|
|
24.75 |
% |
|
|
23.75 |
% |
|
|
|
|
|
|
|
HIGHLIGHTS
|
|
|
Direct written premiums of the Property and Casualty Group decreased 3.0% in
the first quarter of 2006 compared to the first quarter of 2005 |
|
|
|
|
Year-over-year policies in force grew .1% to 3,761,500 at March 31, 2006 |
|
|
|
|
Year-over-year premium per policy was $1,044 and $1,066 in the first quarters
of 2006 and 2005, respectively, a decrease of 2.1% |
|
|
|
|
Premium rate changes resulted in a $26.8 million decrease in written premiums
in the first quarter of 2006 |
|
|
|
|
Cost of management operations increased 9.1% with commission costs increasing
6.3% and costs other than commissions increasing 15.9% |
|
|
|
|
In the first quarter of 2006, agent bonuses increased $9.5 million while
scheduled and accelerated commission costs decreased $2.5 million compared to the first
quarter of 2005 |
|
|
|
|
Personnel costs increased 15.3% primarily due to higher average pay rates and
increased estimated payment amounts for the executives long term incentive plans |
Management fee revenue
Management fee revenue rose 1.1% for the quarter ended March 31, 2006 compared to the quarter ended
March 31, 2005. Management fees from the Exchange represented 73.0% of the Companys total
revenues for the first quarters of 2006 and 2005, 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 higher management fee rate in 2005 of 24.75% resulted in $9.4
million more in management fee revenue for the quarter ended March 31, 2006, or an increase in net
income of $.09 per share diluted.
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
27
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
returned on mid-term policy cancellation. First quarter 2006 and 2005 revenues were both reduced
by $.4 million due to changes in the allowance year-over-year. The policy retention ratio improved
to 88.8% at March 31, 2006 from 88.6% at December 31, 2005. The year-over-year policy retention
ratio at March 31, 2005 was 88.3% compared to 88.4% at December 31, 2004.
Management fee revenue derived from the direct written premiums of the Property and Casualty Group,
before consideration of the allowance for mid-term cancellations, was $233.3 million in the first
quarter of 2006 compared to $230.8 million in the first quarter of 2005. The direct written
premiums of the Property and Casualty Group were $942.8 million and $971.8 million in the first
quarters of 2006 and 2005, respectively, reflecting a 3.0% decrease, compared to growth of 1.1% in
the first quarter of 2005 from $960.7 million in the first quarter of 2004. The decline in direct
written premiums of the Property and Casualty Group in 2006 reflects the impact of lower average
premium per policy due to rate decreases and changes in risk characteristics of policyholders and
coverages provided.
Premium production
The Property and Casualty Groups premium generated from new business increased 3.3% to $86.6
million in the first quarter of 2006 compared to $83.8 million in the first quarter of 2005. New
business policies in force were 426,651 at March 31, 2006, a decrease of 3.4% from 441,676 at March
31, 2005. (See Note 12, Segment Information which contains policies in force and policy
retention trends by line of business).
Personal
lines Personal lines new business premiums written increased 4.6% to $55.5
million in the first quarter of 2006 from $53.1 million in the first quarter of 2005.
Personal lines new policies in force decreased to 351,496 at March 31, 2006 compared to
369,376 at March 31, 2005. The Property and Casualty Groups largest personal line of
business is private passenger auto for which new business premiums written decreased 1.9% to
$35.2 million in the first quarter of 2006 from $35.9 million in the first quarter of 2005.
The main contributor to the overall increase in personal lines new business premiums written
was homeowners, for which premiums increased 16.3% to $16.4 million in the first quarter of
2006 from $14.1 million in the first quarter of 2005 principally as a result of the inflation
adjustments on replacement cost for homeowners policies.
Renewal premiums written decreased 5.3% on personal lines policies during the first quarter
of 2006. An improvement was seen in the renewal business with the year-over-year policy
retention ratio for personal lines of 89.3% at March 31, 2006 compared to 88.8% at March 31,
2005. The year-over-year policy retention ratio for private passenger auto was 90.1% and
89.9% at March 31, 2006 and 2005, respectively. The overall decrease reflects the impact of
the rate reductions taken by the Property and Casualty Group.
The Company is continuing efforts to stimulate premium growth and improve its competitive
position in the marketplace during 2006. In 2005, the Company introduced the use of
insurance scoring for underwriting purposes for private passenger auto and homeowners lines
of business in all operating states, except Maryland. The introduction of the pricing
segmentation model for personal lines, that included insurance scoring, segments
policyholders into different rate classes based on the associated risks, and helps insurers
provide a better matching of prices and related risks. The long-term impact should result in
a more desirable pool of risks contributing to improvements in claims frequency.
28
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Property and Casualty Group has also employed pricing initiatives focused on policy
growth. Rate reductions on certain coverages for new private passenger auto policyholders
with no claims or violations was effective in the majority of the states served by the
Property and Casualty Group during July 2005. Effective January 1, 2006, additional
discounts and interactions were introduced into the pricing plan for auto and home,
including number of cars and drivers in a household, multi-policy discounts for
policyholders who buy life insurance and for those who pay premiums up front. The Property
and Casualty Group is also evaluating potential new personal lines product extensions and
enhancements that could be offered in addition to new coverages, such as identity recovery
planned to be introduced in the second quarter of 2006.
Company management has dedicated resources to develop an integrated territory management
program. This program strategically aligns the Property and Casualty Groups targeted
growth objectives with various field manager incentives.
Commercial
lines The commercial lines new business premiums written rose 1.4% to $30.9
million in the first quarter of 2006 from $30.5 million in the first quarter of 2005. The
year-over-year policy retention ratio for commercial lines was 85.3% at March 31, 2006 and
85.1% at March 31, 2005. The Property and Casualty Groups largest commercial lines of
business, based on written premiums, are commercial auto and workers compensation. A more
refined process of evaluating commercial accounts using predictive modeling was implemented
and should allow a better alignment between rate and risk level, contributing to continuing
improvements in commercial lines policy growth.
All lines During the first quarter of 2006, the Company appointed 22 new agencies.
The Company expects 125 new agency appointments in 2006. For the entire year of 2005, 65 new
agencies had been appointed. Expanding the size of the agency force will contribute to
future growth as new agents build up their book of business with the Property and Casualty
Group.
Premium rates and rate change impacts
The average premium per policy decreased 2.1% to $1,044 in the first quarter of 2006 from $1,066 in
the first quarter of 2005. The average premium per personal lines policy decreased 3.1% and
commercial lines average premium per policy decreased .5% when comparing the first quarters of
2006 and 2005.
Recent improvements in underwriting results afforded the Property and Casualty Group the ability to
implement rate reductions in 2005 to be more price competitive for potential new policyholders and
improve retention of existing policyholders. Management continuously evaluates pricing actions and
estimates that those approved, filed and contemplated for filing during 2006 could reduce direct
written premiums by $114.6 million, of which approximately $26.8 million occurred in the first
quarter of 2006. 2006 premiums reflect $35.3 million in premium reductions related to the carryover
impact of pricing actions approved and effective in 2005.
29
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Personal lines The private passenger auto average premium per policy decreased 2.7% to
$1,160 in the first quarter of 2006 from $1,192 in the first quarter of 2005. The homeowners
average premium per policy decreased 2.3% to $539 in the first quarter of 2006 from $552 in
the first quarter of 2005. The most significant rate decreases approved and effective in
2005 and 2006 are in the private passenger auto and homeowners lines of business in
Pennsylvania and Maryland.
Commercial lines The commercial auto average premium per policy decreased .8% to $2,778
in the first quarter of 2006 from $2,799 in the first quarter of 2005. The workers
compensation average premium per policy increased 4.4% to $6,270 in the first quarter of
2006 from $6,004 in the first quarter of 2005. Rate decreases approved and effective in
2006 were primarily for both of these lines of business in Pennsylvania, and for commercial
auto in Tennessee.
Service agreement revenue
Service agreement revenue increased to $7.6 million for the first quarter of 2006, from $4.8
million for the same period in 2005. Service agreement revenue represents service charges the
Company collects from policyholders for providing multiple payment plans on policies written by the
Property and Casualty Group. These service charges are fixed dollar amounts per billed installment.
The increase in service charges in 2006 is the result of two factors.
First, a $2.0 million adjustment related to prior years was made during the first quarter of 2006
which increased service agreement revenue. The entire amount of service charges for each policy is
recorded on policy renewal or inception and is offset by the portion pertaining to future
installments (unearned service agreement revenue). The adjustment was made to correct the amount
of unearned service agreement revenue being deferred. Originally, the estimate of the unearned
service agreement revenue included policies with future effective dates for which service charge
revenue had not yet been recorded. The impact of this adjustment increased net income $.02 per
share-diluted. Restatement was not considered necessary as the impact of correcting this error was
not material to the current or prior periods net income or financial position.
Second, the remaining increase relates to changes in the service fees charged to policyholders.
Effective for policies renewing on or after January 1, 2006 which are paid in installments, the
service charge assessed policyholders increased from $3 to $5 per installment. This
per-installment fee increase is positively impacting service agreement revenue. Service agreement
revenue is negatively affected by changes in billing plans from plans which charge a fee on
installments to those that do not. Service charges were eliminated for policies renewing on or
after January 1, 2006 using the direct debit payment method. As a result, the policy count of
policyholders using the direct debit payment method increased to 49,306 at March 31, 2006 compared
to 44,878 at December 31, 2005. A shift has also occurred in policyholders electing to make full
payment at inception of the policy for which there is no related service fee and for which a
discount was offered on auto policies effective March 1, 2006, with a count of 996,112 at March 31,
2006, up from 979,523 at December 31, 2005.
30
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Cost of management operations
The cost of management operations increased 9.1% for the first quarter of 2006 to $193.8 million
from $177.7 million during the first quarter of 2005. Commission costs increased 6.3% while
operating costs other than commissions rose 15.9%. Personnel costs increased 15.3% as a result of
higher average pay rates and higher bonus and incentive compensation accruals. Bonuses are based,
in part, on Property and Casualty Group profitability, which has steadily improved during the
performance periods that are the basis for the bonuses. Also impacting other operating costs is
the use of insurance scoring. The cost for using insurance scoring for all new and renewal business
totaled $1.0 million in the first quarter of 2006 compared to $.5 million in the first quarter of
2005. Insurance scoring was initially used for pricing purposes in March 2005 for new business and
in April 2005 for renewal business. The first quarter of 2006 includes a full quarters expense
for insurance scores on new and renewal business.
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 |
|
|
|
|
|
|
March 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
(dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
|
(Unaudited) |
|
|
|
|
|
Scheduled rate commissions |
|
$ |
109,364 |
|
|
$ |
110,046 |
|
|
|
(.6 |
)% |
Accelerated rate commissions |
|
|
1,173 |
|
|
|
3,042 |
|
|
|
(61.4 |
) |
Agent bonuses |
|
|
22,424 |
|
|
|
12,899 |
|
|
|
73.8 |
|
Promotional incentives |
|
|
1,326 |
|
|
|
0 |
|
|
|
100.0 |
|
Allowance for mid-term policy cancellations |
|
|
(200 |
) |
|
|
200 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
Total commissions |
|
$ |
134,087 |
|
|
$ |
126,187 |
|
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
Scheduled
and accelerated rate commissions Scheduled rate commissions were impacted by a 3.0%
decrease in the direct written premiums of the Property and Casualty Group in the first quarter of
2006 compared to the same period in 2005. The 3.0% decrease in direct written premiums was
concentrated in the personal lines of business which have lower commission rates than commercial
lines of business. The decrease in scheduled rate commissions of only .6%, when compared to the
3.0% reduction in direct written premiums, is reflective of this shift in the mix of premium
dollars.
Accelerated rate commissions are offered under certain circumstances to some newly-recruited agents
for their initial three years. In 2003 and 2004, the Company slowed agency appointments in
conjunction with its efforts to control exposure growth. With fewer new agency appointments and
the expiration of existing accelerated commission contracts, accelerated commission costs have been
decreasing. Accelerated rate commissions in 2005 included the final year of accelerated commission
contracts from 2002, which had 225 new agent appointments. Agency appointments have remained much
lower with new additions of 46, 33 and 65 new agencies in 2003, 2004 and 2005, respectively. During
the first quarter of 2006 there have been 22 new agencies added, with the expectation to appoint
125 new agents for the year. Accelerated commissions are expected to increase as new agent
appointments increase in 2006.
31
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Agency bonuses Agency bonuses are based predominantly on an individual agencys
property/casualty underwriting profitability over a three-year period. The agent bonus award is
estimated at $84 million for 2006. 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. There is also a growth component to the bonus. The increase in agent bonuses reflects
the impact of improved underwriting profitability of the Property and Casualty Group in 2005 and
2004. Beginning in 2006, the growth component bonus is being paid in advance in the first and
second quarters, only if the agency is profitable and on track for their annual new premium
production. The year end payout of the total agent bonus will be reduced by advance bonus payments
made in the first or second quarters of 2006. If for the year the agent does not meet the criteria
for the annual award, they will not have an obligation related to any advance bonuses received.
Other
costs of management operations The cost of management operations excluding commission
costs, increased 15.9% for the three months ended March 31, 2006 to $59.7 million from
$51.5 million recorded in the first quarter of 2005. Personnel related costs, which are the second
largest component in cost of management operations, increased 15.3% to $36.9 million for the three
months ended March 31, 2006, compared to $32.0 million for the same period in 2005. Salaries
contributed $4.2 million to the increase and employee benefit expense increased $.7 million in the
first quarter of 2006. A 6% increase in the average pay rate and a 1.5% increase in staff levels
contributed $2.7 million to the increase in salaries, while the expected payout amount for
long-term incentive plans was $1.1 million higher for the first quarter of 2006 compared to the
first quarter of 2005. The 11.6% increase in employee benefit costs in the first quarter of 2006
was primarily driven by a reduction in the discount rate assumption used to calculate the pension
expense from 6.00% in 2005 to 5.75% in 2006. Pension costs are expected to increase by about $1.0
million per quarter over 2005 levels as a result of the discount rate change.
The competitive position of the Property and Casualty Group is based on many factors including
price considerations, service levels, product features and billing arrangements, among others.
Pricing of Property and Casualty Group policies is directly affected by the cost structure of the
Property and Casualty Group and the underlying costs of underwriting activities performed by the
Company for the Property and Casualty Group. The Company has continued to formalize its cost
management processes in an effort to better align its costs and growth in costs with premium levels
and growth in premium over the long term.
Insurance Underwriting Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
(dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
Premiums earned |
|
$ |
54,026 |
|
|
$ |
53,648 |
|
Losses and loss adjustment expenses incurred |
|
|
30,053 |
|
|
|
32,677 |
|
Policy acquisition and other underwriting expenses |
|
|
16,663 |
|
|
|
14,742 |
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
46,716 |
|
|
|
47,419 |
|
|
|
|
|
|
|
|
Underwriting income |
|
$ |
7,310 |
|
|
$ |
6,229 |
|
|
|
|
|
|
|
|
32
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
HIGHLIGHTS
|
|
|
Favorable development of prior accident years, excluding salvage and
subrogation recoveries, improved combined ratio by 7.9 points in the first quarter of 2006
and by 4.9 points in the first quarter of 2005 |
|
|
|
|
Write off of $2.0 million intangible asset related to the eCommerce initiative
contributed 3.8 points to the Companys GAAP combined ratio in 2006 |
|
|
|
|
Low level of catastrophe losses contributed only .6 points and .5 points in the
first quarters of 2006 and 2005, respectively |
|
|
|
|
The intercompany excess-of-loss reinsurance agreement was terminated effective
December 31, 2005, for the 2006 accident year |
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. The
detail of the Property and Casualty Group provides financial data for the direct business and the
reinsurance business separately.
Reconciliation of Property and Casualty Group Underwriting Results to the Company Underwriting Results
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
(dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
Property and Casualty Group Insurance
|
|
|
|
|
|
|
|
|
Underwriting Operations (SAP Basis) |
|
|
|
|
|
|
|
|
Direct underwriting results: |
|
|
|
|
|
|
|
|
Direct written premium |
|
$ |
942,768 |
|
|
$ |
971,825 |
|
|
|
|
|
|
|
|
Premium earned |
|
|
983,829 |
|
|
|
991,283 |
|
Loss and loss adjustment expenses incurred |
|
|
522,490 |
|
|
|
574,052 |
|
Policy acquisition and other underwriting expenses |
|
|
301,474 |
|
|
|
270,613 |
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
823,964 |
|
|
|
844,665 |
|
|
|
|
|
|
|
|
Direct underwriting income |
|
|
159,865 |
|
|
|
146,618 |
|
Nonaffiliated reinsurance underwriting resultsnet |
|
|
(16,805 |
) |
|
|
(15,256 |
) |
|
|
|
|
|
|
|
Net underwriting gain (SAP Basis) |
|
|
143,060 |
|
|
|
131,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erie Indemnity Company Insurance
|
|
|
|
|
|
|
|
|
Underwriting Operations (SAP to GAAP Basis) |
|
|
|
|
|
|
|
|
Percent of pool assumed by Company |
|
|
5.5 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
|
Company preliminary underwriting income (loss): |
|
|
|
|
|
|
|
|
Direct |
|
|
8,792 |
|
|
|
8,064 |
|
Nonaffiliated reinsurance |
|
|
(924 |
) |
|
|
(839 |
) |
|
|
|
|
|
|
|
Net underwriting gain (SAP Basis) |
|
|
7,868 |
|
|
|
7,225 |
|
|
|
|
|
|
|
|
|
|
Excess-of-loss premiums ceded to the Exchange |
|
|
0 |
|
|
|
(844 |
) |
Excess-of-loss changes to recoveries under the
agreement* |
|
|
(145 |
) |
|
|
(340 |
) |
SAP to GAAP adjustments |
|
|
(413 |
) |
|
|
188 |
|
|
|
|
|
|
|
|
Company underwriting income (GAAP Basis) |
|
$ |
7,310 |
|
|
$ |
6,229 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
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. |
33
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
COMBINED RATIO SAP AND GAAP
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31 |
|
|
|
2006 |
|
|
|
2005 |
Company GAAP combined ratio (1) |
|
|
86.5% |
|
|
|
88.4% |
P&C Group statutory combined ratio |
|
|
86.5 |
|
|
|
86.8 |
|
P&C Group statutory combined ratio, excluding catastrophes |
|
|
85.9 |
|
|
|
86.3 |
|
P&C Group adjusted statutory combined ratio (2) |
|
|
82.3 |
|
|
|
81.4 |
|
P&C Group adjusted statutory combined ratio, excluding catastrophes |
|
|
81.7 |
|
|
|
80.9 |
|
|
Loss ratio
points from prior accident year reserve development
redundancy |
|
|
(7.9) |
|
|
|
(4.9) |
Loss ratio points from salvage and subrogation recoveries collected |
|
|
(3.1) |
|
|
|
(3.0) |
|
|
|
|
|
|
|
|
|
Total loss ratio points from prior accident years |
|
|
(11.0) |
|
|
|
(7.9) |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The GAAP combined ratio represents the ratio of losses, loss adjustment, acquisition
and other underwriting expenses incurred to premiums earned. The GAAP combined ratios of
the Company are different than the results of the Property and Casualty Group due to
certain GAAP adjustments and the effects of the excess-of-loss reinsurance agreement
between the Companys property/casualty insurance subsidiaries and the Exchange. |
|
(2) |
|
The adjusted statutory combined ratio removes the profit component of the management
fee earned by the Company. |
Direct Underwriting Results
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
(dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
Property and Casualty Group direct
underwriting income |
|
$ |
159,865 |
|
|
$ |
146,618 |
|
Percent of pool assumed by Company |
|
|
5.5 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
|
Company direct underwriting income,
before adjustments |
|
$ |
8,792 |
|
|
$ |
8,064 |
|
|
|
|
|
|
|
|
P&C Group direct business only combined
ratio |
|
|
84.7 |
% |
|
|
85.0 |
% |
|
|
|
|
|
|
|
Development of direct loss reserves
The improvement in 2006 underwriting results on direct business is primarily the result of
continued favorable development of prior accident years. The Companys 5.5% share of the Property
and Casualty Groups positive development was $6.0 million and $4.3 million in the first quarters
of 2006 and 2005, respectively. The positive development on losses of prior accident years in the
first quarter of 2006 was experienced primarily in the personal auto, homeowners and workers
compensation lines of business. Severity trends appear to be flattening out compared to those anticipated at year end
based on historical patterns. Also in general a slow down in policy growth contributes to an
improved combined ratio as the proportion of new business, which generates higher loss ratios, to
seasoned business decreases.
34
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Catastrophe losses
Catastrophes are an inherent risk of the property/casualty insurance business and can have a
material impact on the Companys insurance underwriting results. In addressing this risk, the
Company employs what it believes are reasonable underwriting standards. The Company models
potential losses which supports the catastrophic reinsurance coverage that is ultimately selected
consistent with industry coverages. The Property and Casualty Group maintains catastrophe
reinsurance coverage from unaffiliated insurers. The 2006 property catastrophe reinsurance treaty
provides coverage of up to 95.0% of a loss of $400 million in excess of the Property and Casualty
Groups loss retention of $300 million per occurrence. No loss recoverables were recorded under
this treaty at March 31, 2006. During each of the first quarters of 2006 and 2005, the Companys share of
catastrophe losses, as defined by the Property and Casualty Group, amounted to $.3 million.
The first quarter of the year typically has the lowest non-catastrophe claim volume of the year.
Catastrophe losses incurred by the Property and Casualty Group were not significant and therefore
the lower claim volume, coupled with improving underwriting, resulted in seasonally low losses at
March 31, 2006. Underwriting losses are seasonally higher in the second and fourth quarters and as
a consequence, the Companys property/casualty combined ratio generally increases as the year
progresses. In the first quarter of 2006, the Companys share of the reduction to incurred but not
reported reserves related to seasonality adjustments was $2.3 million, compared to $2.7 million in
the first quarter of 2005.
Reinsurance Underwriting Results
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
(dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
Erie Indemnity Company Insurance |
|
|
|
|
|
|
|
|
Underwriting Operations: |
|
|
|
|
|
|
|
|
Nonaffiliated reinsurance, net |
|
|
$(924 |
) |
|
|
$ (839 |
) |
|
|
|
|
|
|
|
|
Affiliated reinsurance |
|
|
|
|
|
|
|
|
Premiums ceded to Exchange |
|
|
0 |
|
|
|
(844 |
) |
Change to recoveries under the
excess-of-loss agreement |
|
|
(145 |
) |
|
|
(340 |
) |
|
|
|
|
|
|
|
|
Net affiliated reinsurance |
|
|
$(145 |
) |
|
|
$(1,184 |
) |
|
|
|
|
|
|
|
|
The losses from nonaffiliated reinsurance increased as claims activity from the 2005 hurricanes was
reported to the Property and Casualty Group in the first quarter of 2006 from the North Carolina
involuntary programs. Offsetting the losses were adjustments improving premiums for
runoff activity of the voluntary assumed business that the Property and Casualty Group exited as of
December 2003.
The Property and Casualty Group did not renew the all lines excess-of-loss reinsurance agreement
between the Exchange and the Companys property/casualty insurance subsidiaries. The agreement
required that any unpaid loss recoverables be commuted 60 months after an annual period. While the
excess-of-loss agreement was not renewed for 2006, the unexpired accident years of 2001 through
2005 will be settled and losses will be commuted as the 60-month periods expire. The remaining
effects of the excess-of-loss reinsurance agreement between the Companys property/casualty
insurance subsidiaries and the Exchange is also reflected in the reinsurance business when looking
at the Companys results on a segment basis. The excess-of-loss reinsurance agreement is not
subject to the intercompany pooling agreement. The premium paid to the Exchange for this agreement
in the
35
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
first quarter of 2005 was $1.7 million, of which $.8 million was recorded as incurred expense
during the first quarter of 2005.
The net charges recorded under the excess-of-loss reinsurance agreement include two components, 1)
the charges, or reversal of previously recorded charges, of the current accident years as they
develop and 2) any charges related to the settlement of accident years that have expired in
accordance with the contract. In both the first quarter of 2006 and 2005 an accident year was
settled and related charges recorded, in addition to the charges related to the development of open
accident years in the current year.
In the first quarter of 2006, the Companys property/casualty insurance subsidiaries recorded net
charges under the excess-of-loss reinsurance agreement with the Exchange of $.1 million. First
quarter 2006 charges for current period development under the agreement were $.2 million. The 2001
accident year will be settled at the end of 2006 at the present value of the estimated loss
recoverable amount recorded. The 2001 accident year loss recoverable is estimated at $7.6 million.
The actuarially developed present value of these losses is $6.4 million. In the first quarter of
2006, $.1 million offset the recorded charges under the agreement and represented a prorated
portion of the estimated discount related to the 2001 accident year loss recoverable. The discount
will continue to be recorded ratably throughout the remainder of the year.
The Companys property/casualty insurance subsidiaries recorded net charges under the
excess-of-loss reinsurance agreement with the Exchange of $.3 million in the first quarter of 2005.
Included in the net charges of $.3 million are recoveries for the first quarter of 2005 of $.1
million offset by the commutation of the 1999 accident year which resulted in a charge to the
Company of $.4 million. The 1999 accident year loss recoverable was $3.4 million and the present
value of the estimated losses from the 1999 accident year were $3.0 million.
The 2000 accident year had been commuted as of December 31, 2005, with settlement of the cash
payment of the $1.7 million received from the Exchange occurring in the first quarter of 2006.
An increase in the recoverable in any given year reduces the Companys losses and loss adjustment
expenses on the Consolidated Statements of Operations while a decrease in the recoverable results
in an increase in the Companys losses and loss adjustment expenses.
Policy acquisition and other underwriting expenses
Policy acquisition and other underwriting expenses of the Property and Casualty Group include the
management fee due to the Company of $233.3 million and $230.8 million for the first quarters of
2006 and 2005, respectively. The amount presented on the Companys Statements of Operations as
management fee revenue reflects the allowance for mid-term policy cancellations and the elimination
of intercompany management fee revenue between the EIC, EINY and the Company. Included in policy
acquisition and other underwriting expenses is the write off of the $2.0 million intangible asset,
which had been established for the Companys property/casualty insurance subsidiaries right to use
the ERIEConnection system, for which development has ceased. This charge decreased net income by
$.02 per share.
36
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Investment Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
(dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
Net investment income |
|
$ |
15,000 |
|
|
$ |
14,468 |
|
Net realized gains on investments |
|
|
784 |
|
|
|
5,497 |
|
Equity in earnings of EFL |
|
|
651 |
|
|
|
767 |
|
Equity in earnings of limited partnerships |
|
|
4,142 |
|
|
|
2,111 |
|
|
|
|
|
|
|
|
Net revenue from investment operations |
|
$ |
20,577 |
|
|
$ |
22,843 |
|
|
|
|
|
|
|
|
|
|
|
Net realized gains on investments decreased to $.8 million in the first quarter
of 2006 as the first quarter of 2005 reflects sales of common equity securities during a
transition from internal to external portfolio managers. |
|
|
|
|
Equity in earnings of limited partnerships increased $2.0 million as additional
investments in partnerships were made during the latter half of 2005 that are generating
additional earnings; valuation adjustments accounted for $.6 million of the increase in
limited partnerships in the first quarter of 2006. |
|
|
|
|
Funds used to repurchase Company stock amounted to $40.7 million in the first
quarter of 2006 compared to $14.6 million in the first quarter of 2005 which lowered the
cash available for other investments. |
Net investment income, which increased 3.7% in the first quarter of 2006, primarily includes
interest and dividends on the Companys fixed maturity and equity security portfolios. Net
investment income in the first quarter of 2006 remained at a comparable level to the first quarter
of 2005 as the Company continued to repurchase shares of its common stock under its three-year
stock repurchase program, which diverted some available funds away from the investment market.
Net realized gains on investments included impairment charges of $.9 million on fixed maturities
and $1.1 million on equity securities in the first quarter of 2006. Included in the first quarter
2005 net realized gains were impairment charges of $1.4 million on fixed maturities and $.1 million
on equity securities.
37
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The performance of the Companys fixed maturities and preferred stock portfolios compared to
selected market indices is presented below.
|
|
|
|
|
|
|
Pre-tax annualized total returns |
|
|
Two Year Period Ended |
|
|
March 31, 2006(1) |
Company Performance: |
|
|
|
|
Fixed maturities corporate |
|
|
2.38 |
% |
Fixed maturities municipal |
|
|
2.23 |
|
Preferred stock |
|
|
4.14 |
|
Common stock |
|
|
9.57 |
(1) |
|
|
|
|
|
Market indices: |
|
|
|
|
Lehman Brothers U.S. Aggregate |
|
|
1.70 |
% |
S&P500 Composite Index |
|
|
9.17 |
|
|
|
|
(1) |
|
Return is net of fees to external managers. |
Private equity and mezzanine debt limited partnerships generated earnings of $2.0 million and
$1.1 million for the three months ended March 31, 2006 and 2005, respectively. Real estate limited
partnerships generated earnings of $1.5 million and $1.0 million in the first quarters of 2006 and
2005, respectively. Beginning in the second quarter of 2005, limited partnership market value
adjustments were recorded to the equity in earnings of limited partnerships in the Consolidated
Statements of Operations. In the first quarter of 2006 such market value adjustments contributed
$.6 million to the total earnings in limited partnerships. Prior to the second quarter of 2005, the
unrealized market adjustments were recorded as a component of shareholders equity. There were
impairment charges of $.6 million on limited partnerships in the first quarter of 2005 related to
private equity limited partnerships.
FINANCIAL CONDITION
Investments
The Companys investment strategy takes a long-term perspective emphasizing investment quality,
diversification and superior investment returns. Investments are managed on a total return approach
that focuses on current income and capital appreciation. The Companys investment strategy also
provides for liquidity to meet the short- and long-term commitments of the Company. At March 31,
2006, the Companys investment portfolio of investment-grade bonds and preferred stock, common
stock and cash and cash equivalents represents $1.1 billion, or 38.2%, of total assets. These
investments provide the liquidity the Company requires to meet the demands on its funds.
The Company continually reviews the investment portfolio to evaluate positions that might incur
other-than-temporary declines in value. For all investment holdings, general economic conditions
and/or conditions specifically affecting the underlying issuer or its industry, including
downgrades by the major rating agencies, are considered in evaluating impairment in value. In
addition to specific factors, other factors considered in the Companys review of investment
valuation are the length of time the market value is below cost and the amount the market value is
below cost.
There is a presumption of impairment for common equity securities and equity limited partnerships
when the decline is, in managements opinion significant and of an extended duration. The Company
considers market conditions, industry characteristics and the fundamental operating results of the
issuer to determine if sufficient objective evidence exists to refute the presumption of
impairment. When the
38
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 limited partnerships, the impairment charge is included as a
component of equity in losses or earnings of limited partnerships in the Consolidated Statements of
Operations.
For fixed maturity and preferred stock investments, the Company individually analyzes all positions
with emphasis on those that have, in managements opinion, declined significantly below cost. The
Company considers market conditions, industry characteristics and the fundamental operating results
of the issuer to determine if the decline is due to changes in interest rates, changes relating to
a decline in credit quality, or other issues affecting the investment. A charge is recorded in the
Consolidated Statements of Operations for positions that have experienced other-than-temporary
impairments due to credit quality or other factors, or for which it is not the intent or ability of
the Company to hold the position until recovery has occurred. (See Analysis of Investment
Operations section).
If the Companys policy for determining the recognition of impaired positions were different, the
Companys Consolidated Results of Operations could be significantly impacted. Management believes
its investment valuation philosophy and accounting practices result in appropriate and timely
measurement of value and recognition of impairment.
The Companys investments are subject to certain risks, including interest rate and price risk.
The Companys exposure to interest rates is concentrated in the fixed maturities portfolio. The
fixed maturities portfolio comprises 68.6% and 69.6% of invested assets at March 31, 2006 and
December 31, 2005, respectively. The Company calculates the duration and convexity of the fixed
maturities portfolio each month to measure the price sensitivity of the portfolio to interest rate
changes. Duration measures the relative sensitivity of the fair value of an investment to changes
in interest rates. Convexity measures the rate of change of duration with respect to changes in
interest rates. These factors are analyzed monthly to ensure that both the duration and convexity
remain in the targeted ranges established by management.
The Companys portfolio of marketable equity securities, which is carried on the Consolidated
Statements of Financial Position at estimated fair value, has exposure to price risk, the risk of
potential loss in estimated fair value resulting from an adverse change in prices. The Company
does not hedge its exposure to equity price risk inherent in its equity investments. The Companys
objective is to earn competitive relative returns by investing in a diverse portfolio of
high-quality, liquid securities. Portfolio holdings are diversified across industries and among
exchange traded mid- to large-cap stocks. The Company measures risk by comparing the performance
of the marketable equity portfolio to benchmark returns such as the S&P 500.
The Companys portfolio of limited partnership investments has exposure to market risks, primarily
relating to the financial performance of the various entities in which they invested. The limited
partnership portfolio comprises 13% and 11% of invested assets at March 31, 2006 and
December 31, 2005, 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 96 partnerships that have approximately
1,695 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.
39
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Property/casualty loss reserves
Loss reserves are established to account for the estimated ultimate costs of loss and loss
adjustment expenses for claims that have been reported but not yet settled and claims that have
been incurred but not reported.
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.
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 whose cost is
significantly different from that seen in the past, and claims patterns on current business that
differ significantly from historical claims patterns.
Loss and loss adjustment expense reserves are presented on the Companys Statements of Financial
Position on a gross basis for EIC, ENY, and EPC, the property/casualty insurance subsidiaries of
the Company that wrote about 17% of the direct property/casualty premiums of the Property and
Casualty Group. Under the terms of the Property and Casualty Groups quota share and intercompany
pooling arrangement, a significant portion of these reserve liabilities are recoverable.
Recoverable amounts are reflected as an asset on the Companys Statements of Financial Position.
The direct and assumed loss and loss adjustment expense reserves by major line of business and the
related amount recoverable under the intercompany pooling arrangement and excess-of-loss
reinsurance agreement are presented below:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
March 31, |
|
|
December 31, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
|
(Unaudited) |
|
Gross reserve liability |
|
|
|
|
|
|
|
|
Personal: |
|
|
|
|
|
|
|
|
Private passenger auto |
|
$ |
397,938 |
|
|
$ |
413,118 |
|
Catastrophic injury |
|
|
121,509 |
|
|
|
123,875 |
|
Homeowners |
|
|
22,051 |
|
|
|
23,995 |
|
Other personal |
|
|
7,054 |
|
|
|
6,978 |
|
Commercial: |
|
|
|
|
|
|
|
|
Workers compensation |
|
|
223,636 |
|
|
|
231,858 |
|
Commercial auto |
|
|
85,450 |
|
|
|
83,688 |
|
Commercial multi-peril |
|
|
66,884 |
|
|
|
65,891 |
|
Catastrophic injury |
|
|
459 |
|
|
|
468 |
|
Other commercial |
|
|
16,107 |
|
|
|
15,894 |
|
Reinsurance |
|
|
56,036 |
|
|
|
53,694 |
|
|
|
|
|
|
|
|
Gross reserves |
|
|
997,124 |
|
|
|
1,019,459 |
|
Reinsurance recoverables |
|
|
808,820 |
|
|
|
828,447 |
|
|
|
|
|
|
|
|
Net reserve liability |
|
$ |
188,304 |
|
|
$ |
191,012 |
|
|
|
|
|
|
|
|
40
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 $178.2 million to $442.4 million for the
Property and Casualty Group. The reserve carried by the Property and Casualty Group, which is
managements best estimate of this liability at this time, was $252.8 million at March 31, 2006,
which is net of $128.5 million of anticipated reinsurance recoverables. The Companys
property/casualty subsidiaries share of the net automobile catastrophic injury liability reserve is
$13.9 million at March 31, 2006.
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 390 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 assumptions that must be made for mortality rates,
medical inflation costs, changes in medical technologies and variations in claimant health over
time.
It is anticipated that these automobile no-fault claims will require payments over approximately
the next 40 years. The impact of medical cost inflation in future years is a significant variable
in estimating this liability over 40 years. A 100-basis point change in the medical cost inflation
assumption would result in a change in net liability for the Company of $3.0 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.
Off-balance sheet arrangements
There are no off-balance sheet obligations related to the variable interest the Company has in the
Exchange. Any liabilities between the Exchange and the Company are recorded in the Consolidated
Statements of Financial Position of the Company. The Company has no other material off-balance
sheet obligations or guarantees.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of an entitys ability to secure enough cash to meet its contractual
obligations and operating needs. The Companys major sources of funds from operations are the net
cash flow generated from the Companys management operations, the net cash flow from EICs and
EINYs 5.5% participation in the underwriting results of the reinsurance pool with the Exchange,
and investment income from affiliated and non-affiliated investments. With respect to the
management fee, funds are generally received from the Exchange on a premiums collected basis. The
Company has a receivable from the Exchange and affiliates related to the management fee receivable
from premiums written, but not yet collected, as well as the management fee receivable on premiums
collected in the current month. The Company pays nearly all general and administrative expenses on
behalf of the Exchange and other affiliated companies. The Exchange generally reimburses the
Company for these expenses on a paid basis each month.
Management fee and other cash settlements due from the Exchange were $218.2 million at March 31,
2006, and $194.8 million at December 31, 2005. A receivable from EFL for cash settlements totaled
$3.0 million at March 31, 2006, compared to $3.9 million at December 31, 2005. The receivable
due
41
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
from the Exchange for reinsurance recoverable from unpaid loss and loss adjustment expenses and
unearned premium balances ceded to the intercompany reinsurance pool decreased to $933.6 million at
March 31, 2006 from $952.7 million at December 31, 2005. The changes are the result of
corresponding changes in direct loss reserves, loss adjustment expense reserves and unearned
premium reserves of the Companys property/casualty insurance subsidiaries that are ceded to the
Exchange under the intercompany pooling agreement. The change in the property/casualty insurance
subsidiaries reserves ceded to the Exchange is a result of a corresponding increase or decrease in
direct premium written by the Companys property/casualty insurance subsidiaries. Direct written
premium of the property/casualty insurance subsidiaries decreased 6.3% in the first quarter of 2006
compared to the first quarter of 2005.
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 cash flow requirements for claims have not historically been
significant to the Companys liquidity. Historically, about 50% of losses and loss adjustment
expenses included in the reserve are paid out in the subsequent 12-month period and approximately
89% is paid out within a five year period. Such payments are reduced by recoveries under the
intercompany reinsurance pooling agreement.
The Company has historically generated sufficient net positive cash flow from its operations to
fund its commitments and build the investment portfolio. The Company also maintains a high degree
of liquidity in its investment portfolio in the form of readily marketable fixed maturities, equity
securities and short-term investments. The Company has made a commitment to use operating cash
flows to reinvest in its common stock through its share repurchase plan.
Cash flows
generated from operating activities in the first quarter of 2006 were
$8.3 million, compared to $64.1 million in the first quarter of 2005.
Cash inflows from management fee revenue in the first quarter of 2006
were approximately $34 million less than the first quarter of 2005
primarily due to the decline in direct written premiums of the
Property and Casualty Group. Also, the annual agent bonus award
payment, which increased as a result of improved underwriting
performance of recent years, required an additional $25.1 million in
cash in the first quarter of 2006.
During the first quarter of 2006, the Company repurchased 772,447 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 $40.7 million. The plan allows the Company to
repurchase up to $250 million of its outstanding Class A common stock through December 31, 2006.
In February 2006, the Companys Board approved a continuation of the current stock program,
allowing the Company to repurchase an additional $250 million of its Class A common stock through
December 31, 2009. (See Part II of Item 2., Issuer Purchases of Equity Securities.)
Cash paid in the first quarter of 2006 for agent bonuses was $71.5 million, for which $70.2 million
was accrued at December 31, 2005. There were no contributions to the employee pension plan in the
first quarters of 2006 or 2005. The Company has generally contributed the maximum deductible amount
to its pension plan for employees under IRS Code Section 404(a)(1). The Company expects to make a
$7.5 million contribution to its pension plan in 2006. In 2005, the maximum contribution was zero,
therefore no contribution could be made by the Company to the plan.
Proceeds from the sales of equity securities totaled $63.0 million and $40.9 million in the first
quarters of 2006 and 2005, respectively. The Company has liquidated certain of its internally
managed equity securities to allow the external investment managers to manage the portfolio.
Purchases of equity securities were $33.3 million and $47.1 million in the first quarters of 2006
and 2005, respectively. The higher first quarter 2005 activity represents the external investment
managers building the equity securities portfolio.
42
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
FACTORS THAT MAY AFFECT FUTURE RESULTS
Financial
condition of the Exchange
The Company has a direct interest in the financial condition of the Exchange because management fee
revenues are based on the direct written premiums of the Exchange and the other members of the
Property and Casualty Group. Additionally, the Company participates in the underwriting results of
the Exchange through the pooling arrangement in which the Companys insurance subsidiaries have
5.5% participation. A concentration of credit risk also exists related to the unsecured receivables
due from the Exchange for certain fees, costs and reimbursements.
To the extent that the Exchange incurs underwriting losses or investment losses resulting from
declines in the value of its marketable securities, the Exchanges policyholders surplus would be
adversely affected. If the surplus of the Exchange were to decline significantly from its current
level, the Property and Casualty Group could find it more difficult to retain its existing business
and attract new business. A decline in the business of the Property and Casualty Group would have
an adverse effect on the amount of the management fees the Company receives and the underwriting
results of the Property and Casualty Group in which the Company has 5.5% participation. In
addition, a substantial decline in the surplus of the Exchange from its current level would make it
more likely that the management fee rate would be reduced.
Additional
information, including condensed statutory financial statements of the Exchange, are presented in Note 11 to the Consolidated Financial Statements.
Insurance premium rates
The changes in premiums written attributable to rate changes of the Property and Casualty Group
directly affects underwriting profitability of the Property and Casualty Group, the Exchange and
the Company. Rate reductions have been implemented and continue to be sought in 2006 by the
Property and Casualty Group to recognize improved underwriting results and to be more price
competitive. 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 2006, will also have an effect on the
market competitiveness of the Property and Casualty Groups insurance products. Such pricing
actions, and those of competitors, could affect the ability of the Companys agents to sell and/or
renew business. Management estimates that pricing actions approved,
contemplated or filed and
awaiting approval through 2006, could reduce premium for the Property and Casualty Group by an
additional $88 million through the remainder of the year.
The Property and Casualty Group continues refining its pricing segmentation model 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 for
policyholders with varying degrees of risk. Insurance scoring is among the most significant risk
factors the Company has recently incorporated into the rating plan. Refining pricing segmentation
should enable the Company to provide more competitive rates to policyholders with varying risk
characteristics, as risks can be more accurately priced over time.
The continued introduction of new pricing variables could impact retention of existing
policyholders and could affect the Property and Casualty Groups ability to attract new
policyholders. These outcomes will then impact the Property and Casualty Groups premium dollars
and ultimately the Companys management fee revenue.
43
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Policy growth
Premium
levels attributable to growth in policies in force of the Property and Casualty Group
directly affects the profitability of management operations of the Company. The continued focus on
underwriting discipline and implementation of the new rate classification plan through the pricing
segmentation model resulted in a reduction in new policy sales and policy retention ratios, as
expected. The growth of the policy base 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.
Retiree health benefit plan termination
The Companys retiree health benefit plan was terminated at the Companys Board of Directors
meeting in April. Effective July 1, 2006 qualifying active employees with less than six years remaining until
retirement will be gradually phased out of the plan. All other
employees are no longer eligible for
this benefit. The Company will recognize this change in benefit as a
full curtailment for an estimated expense savings net
of curtailment expenses of approximately $1.1 million in
calendar year 2006, after reimbursement from other entities. The
annual net reduction to the Companys expense in 2007 and
thereafter is expected to be
approximately $1.2 million, or $.02 per share-diluted, as a result of this termination.
Catastrophe losses
The Property and Casualty Group conducts business in 11 states and the District of Columbia,
primarily in the mid-Atlantic, midwestern and southeastern portions of the United States. A
substantial portion of the business is private passenger and commercial automobile, homeowners and
other commercial lines of business in Ohio, Maryland, Virginia and particularly, Pennsylvania. As
a result, a single catastrophe occurrence or destructive weather pattern could materially adversely affect the results of
operations and surplus position of the members of the Property and Casualty Group. Common
catastrophe events include severe winter storms, hurricanes, earthquakes, tornadoes, wind and hail
storms. In its homeowners line of insurance, the Property and Casualty Group is particularly
exposed to an Atlantic hurricane, which might strike the states of North Carolina, Maryland,
Virginia and Pennsylvania. The Property and Casualty Group maintains catastrophe occurrence
reinsurance coverage to mitigate the future potential catastrophe loss exposure.
44
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Information
technology costs
On April 13, 2006, the Company announced its decision to cease development of ErieConnection, the
web based policy processing and administration system under development since 2002. The
announcement followed an extensive study of the viability of the system and consideration of the
advancements in technology that have occurred since the inception of the ErieConnection program.
The Company intends to develop a program of enhancements to its existing policy administration
systems and the existing agency interface system, investing in improvements that will enhance the
ease of doing business with the organization and solidify the technological infrastructure
underlying these systems. Estimates of the cost, duration and deliverables under this program are
currently being developed.
The Property and Casualty Groups ability to attract new policyholders and to retain existing
policyholders, which bears significantly on the Companys management fee revenue, is directly
influenced by the Companys independent agents decisions to place business with the Property and
Casualty Group. To the extent that technological capabilities of alternative carriers represented
by the Companys agents are greater than those of the Property and Casualty Group, the Property and
Casualty Groups sales could be adversely affected, thereby reducing the Companys management fee.
45
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Companys exposure to market risk is primarily related to fluctuations in prices and interest
rates. Quantitative and qualitative disclosures about market risk resulting from changes in prices
and interest rates are included in Item 7A. in the Companys 2005 Annual Report on Form 10-K. There
have been no material changes in such risks or the Companys periodic reviews of asset and
liability positions during the three months ended March 31, 2006. The information contained in the
investments section of Managements Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference.
The Companys objective is to earn competitive returns by investing in a diversified portfolio of
securities. The Company is exposed to credit risk through its portfolios of fixed maturity
securities, nonredeemable preferred stock, mortgage loans and to a lesser extent short-term
investments. This risk is defined as the potential loss in market value resulting from adverse
changes in the borrowers ability to repay the debt. The Company manages this risk by performing
up front underwriting analysis and ongoing reviews of credit quality by position and for the fixed
maturity portfolio in total. The Company does not hedge credit risk inherent in its fixed maturity
investments.
The Company has significant receivables from the Exchange, which are subject to credit risk.
Company results are directly related to the financial strength of the Exchange. Credit risks
related to the receivables from the Exchange are evaluated periodically by Company management.
Since the Companys inception, it has collected all amounts due from the Exchange in a timely
manner (generally within 120 days).
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Certain
forward-looking statements contained herein involve risks and uncertainties. These statements
include certain discussions relating to management fee revenue, cost of management operations,
underwriting, premium and investment income volume, business strategies, profitability and business
relationships and the Companys other business activities during 2006 and beyond. In some cases,
you can identify forward-looking statements by terms such as may, will, should, could,
would, expect, plan, intend, anticipate, believe, estimate, project, predict,
potential and similar expressions. These forward-looking statements reflect the Companys current
views about future events, are based on assumptions and are subject to known and unknown risks and
uncertainties that may cause results to differ materially from those anticipated in those
statements. Many of the factors that will determine future events or achievements are beyond our
ability to control or predict.
46
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, with the participation of the Companys management,
including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the Companys disclosure controls and procedures (pursuant to Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures are effective for gathering, analyzing and
disclosing the information the Company is required to disclose in the reports it files under the
Securities Exchange Act of 1934, within the time periods specified in the SECs rules and forms.
Our management evaluated, with the participation of the Companys Chief Executive Officer and Chief
Financial Officer, any change in the Companys internal control over financial reporting and
determined that there has been no change in the Companys internal control over financial reporting
during the quarter ended March 31, 2006 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
47
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 |
|
January 1 - 31, 2006** |
|
|
363,921 |
|
|
$ |
52.67 |
|
|
|
361,500 |
|
|
|
|
|
February 1 - 28, 2006 |
|
|
410,947 |
|
|
|
52.69 |
|
|
|
410,947 |
|
|
|
|
|
March 1 - 31, 2006* |
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
774,868 |
|
|
|
|
|
|
|
772,447 |
|
|
$ |
306,000,000 |
*** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The Company was in a blackout period with respect to its repurchase program during the month of
March 2006. |
|
** |
|
The month of January 2006 includes 2,421 shares that vested under the stock compensation plan
for the Companys outside directors. Included in this amount are the vesting of 2,240 of awards
previously granted and 181 dividend equivalent shares that vest as they are granted (as dividends
are declared by the Company). |
|
*** |
|
The Companys Board of Directors reauthorized the stock repurchase program for an additional
$250 million in February 2006. At March 31, 2006, $56 million remained of the previous repurchase
authorization for a total of $306 million. The reauthorized stock repurchase program is effective
once the available funds from the current repurchase program are expended and continues through
December 31, 2009. |
48
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 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
49
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: May 3, 2006
|
|
/s/ Jeffrey A. Ludrof |
|
|
|
|
|
|
|
|
|
Jeffrey A. Ludrof, President & CEO |
|
|
|
|
|
|
|
|
|
/s/ Philip A. Garcia |
|
|
|
|
|
|
|
|
|
Philip A. Garcia, Executive Vice President & CFO |
|
|
50
Ex-31.1
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey A. Ludrof, Chief Executive Officer of Erie Indemnity Company, certify that:
|
1. |
|
I have reviewed this quarterly report on Form 10-Q of Erie Indemnity Company; |
|
|
2. |
|
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report; |
|
|
4. |
|
The registrants other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a. |
|
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; |
|
|
b. |
|
Designed such internal control over financial reporting or caused
such internal control over financial reporting to be designated under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; |
|
|
c. |
|
Evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and |
|
|
d. |
|
Disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting;
and |
|
5. |
|
The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of registrants board of directors: |
|
a. |
|
All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting, which are reasonably
likely to adversely affect the registrants ability to record, process,
summarize and report financial information; and |
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b. |
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Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting. |
Date: May 3, 2006
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/s/ Jeffrey A. Ludrof
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Jeffrey A. Ludrof, President & CEO |
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Ex-31.2
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Philip A. Garcia, Chief Financial Officer of Erie Indemnity Company, certify that:
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1. |
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I have reviewed this quarterly report on Form 10-Q of Erie Indemnity Company; |
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2. |
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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; |
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3. |
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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; |
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4. |
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The registrants other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
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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; |
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b. |
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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; |
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c. |
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Evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and |
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d. |
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Disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrants internal control over financial reporting;
and |
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5. |
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The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of registrants board of directors: |
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a. |
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All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting, which are reasonably
likely to adversely affect the registrants ability to record, process,
summarize and report financial information; and |
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b. |
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Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting. |
Date: May 3, 2006
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/s/ Philip A. Garcia
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Philip A. Garcia, Executive Vice President & CFO |
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52
Ex-32
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
We, Jeffrey A. Ludrof, Chief Executive Officer of the Company, and Philip A. Garcia, Chief
Financial Officer of the Company, certify, pursuant to § 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. § 1350, that:
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(1) |
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The Quarterly Report on Form 10-Q of the Company for the quarterly period March 31,
2006 (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 |
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(2) |
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The information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company. |
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/s/ Jeffrey A. Ludrof
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Jeffrey A. Ludrof |
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President and Chief Executive Officer |
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/s/ Philip A. Garcia |
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Philip A. Garcia |
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Executive Vice President and Chief Financial Officer |
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May 3, 2006
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.
53