ERIE INDEMNITY CO - 10-Q Quarterly Report

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2004

Commission file number 0-24000

ERIE INDEMNITY COMPANY

(Exact name of registrant as specified in its charter)


PENNSYLVANIA		25-0466020

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

100 Erie Insurance Place, Erie, Pennsylvania		16530

(Address of principal executive offices)		(Zip Code)

(814) 870-2000

Registrant’s telephone number, including area code

Not applicable

Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes þ No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Class A Common Stock, no par value, with a stated value of $.0292 per share—63,045,097 shares as of October 15, 2004.

Class B Common Stock, no par value, with a stated value of $70 per share—2,878 shares as of October 15, 2004.

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

PART I. FINANCIAL INFORMATION

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION


	(Dollars in thousands)
	September 30		December 31
	2004		2003
	(Unaudited)
ASSETS
INVESTMENTS
Fixed maturities at fair value (amortized cost of $944,585 and $834,649, respectively)	$	981,989	$	879,361
Equity securities at fair value (cost of $147,910 and $152,338, respectively)		180,380		189,403
Limited partnerships, under equity method (cost of $110,328 and $105,594, respectively)		122,111		111,218
Real estate mortgage loans		5,079		5,182

Total investments		1,289,559		1,185,164

Cash and cash equivalents		79,167		87,192
Accrued investment income		13,732		11,119
Premiums receivable from policyholders		295,119		266,957
Reinsurance recoverable from Erie Insurance Exchange on unpaid losses		734,636		687,819
Ceded unearned premiums to Erie Insurance Exchange		122,535		97,249
Notes receivable from Erie Family Life Insurance Company		40,000		40,000
Other receivables from Erie Insurance Exchange and affiliates		222,499		199,078
Reinsurance recoverable non-affiliates		381		480
Deferred policy acquisition costs		17,767		16,761
Property and equipment		13,525		13,868
Equity in Erie Family Life Insurance Company		58,104		56,072
Prepaid pension		53,231		52,666
Other assets		41,742		40,182

Total assets	$	2,981,997	$	2,754,607

See Notes to Consolidated Financial Statements

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Continued)


	(Dollars in thousands)
	September 30			December 31
	2004			2003
	(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses	$	905,930		$	845,536
Unearned premiums		493,313			449,606
Commissions payable and accrued		179,182			152,869
Securities lending collateral		33,430			34,879
Accounts payable and accrued expenses		59,400			46,317
Federal income taxes payable		6,546			117
Deferred income taxes		28,258			27,515
Dividends payable		13,666			13,872
Employee benefit obligations		23,720			19,726

Total liabilities		1,743,445			1,590,437

SHAREHOLDERS’ EQUITY
Capital Stock
Class A common, stated value $.0292 per share; authorized 74,996,930 shares; 67,492,800 shares issued; 63,133,176 and 64,089,906 shares outstanding, respectively		1,969			1,969
Class B common, convertible at a rate of 2,400 Class A shares for one Class B share, stated value $70 per share; 2,878 shares authorized, issued and outstanding		201			201
Additional paid-in capital		7,830			7,830
Accumulated other comprehensive income		61,505			66,402
Retained earnings		1,313,473			1,189,628

Total contributed capital and retained earnings		1,384,978			1,266,030
Treasury stock, at cost, 4,359,624 and 3,402,894 shares in 2004 and 2003, respectively		(146,426	)		(101,860	)

Total shareholders’ equity		1,238,552			1,164,170

Total liabilities and shareholders’ equity	$	2,981,997		$	2,754,607

See Notes to Consolidated Financial Statements

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	Three Months Ended				Nine Months Ended
	September 30				September 30
	2004		2003		2004		2003
	(Amounts in thousands, except per share data)
OPERATING REVENUE
Management fee revenue — net	$	232,837	$	219,001	$	684,539	$	634,785
Premiums earned		52,862		48,358		154,576		140,759
Service agreement revenue		5,384		6,667		16,207		20,014

Total operating revenue		291,083		274,026		855,322		795,558


OPERATING EXPENSES
Cost of management operations		177,659		160,416		521,599		467,030
Losses and loss expenses incurred		34,602		38,723		112,642		115,587
Policy acquisition and other underwriting expenses		12,153		11,168		35,906		32,302

Total operating expenses		224,414		210,307		670,147		614,919

INVESTMENT INCOME — UNAFFILIATED
Investment income, net of expenses		14,795		14,477		45,048		43,015
Net realized gains on investments		859		1,846		6,743		5,815
Equity in earnings (losses) of limited partnerships		3,845		1,311		5,765		(1,435	)

Total investment income — unaffiliated		19,499		17,634		57,556		47,395

Income before income taxes and equity in earnings of Erie Family Life Insurance Co.		86,168		81,353		242,731		228,034
Provision for income taxes		29,141		27,124		81,865		76,107
Equity in earnings of Erie Family Life Insurance Company, net of tax		1,539		2,008		4,227		4,668

Net income	$	58,566	$	56,237	$	165,093	$	156,595

Net income per share — basic	$	0.83	$	0.79	$	2.34	$	2.21

Net income per share — diluted	$	0.83	$	0.79	$	2.34	$	2.20

Weighted average shares outstanding		70,186		70,997		70,584		70,997

Dividends declared per share:
Class A	$	0.215	$	0.19	$	0.645	$	0.57
Class B		32.25		28.50		96.75		85.50

See Notes to Consolidated Financial Statements

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	Three Months Ended						Nine Months Ended
	September 30						September 30
	2004			2003			2004			2003
	(Dollars in thousands)
Net Income	$	58,566		$	56,237		$	165,093		$	156,595

Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period		24,125			(13,867	)		(791	)		48,481
Less: Gains included in net income		(859	)		(1,846	)		(6,743	)		(5,815	)

Net unrealized holding gains (losses) arising during period		23,266			(15,713	)		(7,534	)		42,666
Income tax (expense) benefit related to unrealized gains (losses)		(8,143	)		5,500			2,637			(14,933	)

Net appreciation (depreciation) of investments		15,123			(10,213	)		(4,897	)		27,733

Comprehensive income	$	73,689		$	46,024		$	160,196		$	184,328

See Notes to Consolidated Financial Statements

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine Months Ended September 30
	2004			2003
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Management fee received	$	657,176		$	596,368
Service agreement fee received		16,207			20,014
Premiums collected		150,398			149,536
Net investment income received		45,876			44,607
Dividends received from Erie Family Life		1,349			1,288
Salaries and wages paid		(76,144	)		(81,693	)
Commissions paid to agents		(383,023	)		(342,888	)
General operating expenses paid		(51,986	)		(50,726	)
Losses and loss adjustment expenses paid		(98,966	)		(98,055	)
Underwriting and acquisition costs paid		(9,654	)		(11,058	)
Income taxes paid		(73,001	)		(61,404	)

Net cash provided by operating activities		178,232			165,989

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities		(275,490	)		(391,390	)
Equity securities		(23,937	)		(29,780	)
Limited partnership investments		(24,047	)		(26,433	)
Sales/maturities of investments:
Fixed maturity sales		83,145			149,915
Fixed maturity calls/maturities		86,994			110,872
Equity securities		29,413			44,938
Limited partnership distributions		25,078			16,575
(Decrease) increase in collateral from securities lending		(1,449	)		18,769
Purchase of property and equipment		(1,887	)		(2,083	)
Collections (net of distributions) on agent loans		1,943			780

Net cash used in investing activities		(100,237	)		(107,837	)

CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders		(41,454	)		(36,762	)
Purchase of treasury stock		(44,566	)		0
Issuance of note receivable to Erie Family Life Insurance Company		0			(25,000	)

Cash used in financing activities		(86,020	)		(61,762	)

Net decrease in cash and cash equivalents		(8,025	)		(3,610	)
Cash and cash equivalents at beginning of period		87,192			85,712

Cash and cash equivalents at end of period	$	79,167		$	82,102

See Notes to Consolidated Financial Statements

ERIE INDEMNITY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(All dollar amounts are in thousands except per share data)

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements, which include the accounts of Erie Indemnity Company and its wholly owned property/casualty insurance subsidiaries, Erie Insurance Company (EIC), Erie Insurance Company of New York (EINY) and Erie Insurance Property & Casualty Company (EIPC), have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on March 8, 2004.

NOTE 2 — RECLASSIFICATONS

Certain amounts previously reported in the 2003 financial statements have been reclassified to conform to the current period’s presentation. Such reclassifications did not impact earnings.

NOTE 3 — EARNINGS PER SHARE

Basic earnings per share is based on the weighted average number of Class A shares outstanding (63,133,176 and 64,089,906 at September 30, 2004 and 2003, respectively), giving effect to the conversion of the weighted average number of Class B shares outstanding (2,878 in 2004 and 2003) at a rate of 2,400 Class A shares for one Class B share. Weighted average equivalent shares outstanding totaled 70,186,222 for the quarter ended September 30, 2004 and 70,997,106 for the same period one year ago. For the nine months ended September 30, 2004 weighted average equivalent shares outstanding were 70,584,070 compared to 70,997,106 for the nine months ended September 30, 2003.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3 — EARNINGS PER SHARE (Continued)

The following table reconciles the numerators and denominators of the basic and diluted per-share computations.


	Three months ended September 30						Nine months ended September 30
	(Shares in thousands)						(Shares in thousands)

	Net		Shares				Net		Shares
	Income		Outstanding		Per-Share		Income		Outstanding		Per-Share
	(Numerator)		(Denominator)		Earnings		(Numerator)		(Denominator)		Earnings
2004
Basic earnings per share	$	58,566		70,186	$	0.83	$	165,093		70,584	$	2.34
Restricted stock awards not yet vested				73						73

Diluted earnings per share	$	58,566		70,259	$	0.83	$	165,093		70,657	$	2.34

2003
Basic earnings per share	$	56,237		70,997	$	0.79	$	156,595	$	70,997		2.21
Restricted stock awards not yet vested				104						104

Diluted earnings per share	$	56,237		71,101	$	0.79	$	156,595		71,101	$	2.20

Included in the restricted stock awards not yet vested are awards of 68,176 and 97,061 for the third quarter and nine months ended September 30, 2004 and 2003, 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 4,829 and 6,523 for the third quarters and nine months ended September 30, 2004 and 2003, respectively.

NOTE 4 — INVESTMENTS

Fixed maturities and marketable equity securities are classified as “available-for-sale.” Equity securities consist primarily of common and nonredeemable preferred stocks while fixed maturities consist of bonds, notes and redeemable preferred stock. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of deferred tax, reflected in shareholders’ equity in accumulated other comprehensive income. When a decline in the value of an investment is considered to be other-than-temporary by management, the investment is written down to 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. Adjustments to the carrying value of limited partnerships that are considered impaired are recorded as a component of equity in losses or earnings of limited partnerships in the Consolidated Statements of Operations.

The Company had loaned securities, included as part of its invested assets, with a market value of $32,531 and $33,986 at September 30, 2004 and December 31, 2003, respectively. Securities lending collateral is recorded by the Company as a liability. The proceeds from the collateral are invested in cash and short-term investments and are reported on the Consolidated Statements of Financial Position as cash and cash equivalents. The Company shares a portion of the interest on these short-term investments with the lending agent. The Company has incurred no losses on the loan program since the program’s inception.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 4 — INVESTMENTS (Continued)

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


			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
September 30, 2004
Fixed maturities:
U.S. treasuries & government agencies	$	15,813	$	469	$	55	$	16,227
States & political subdivisions		81,945		2,833		146		84,632
Special revenue		127,277		3,802		97		130,982
Public utilities		60,951		4,660		52		65,559
U.S. industrial & miscellaneous		424,947		16,283		1,104		440,126
Mortgage-backed securities		52,111		915		332		52,694
Asset-backed securities		22,058		71		223		21,906
Foreign		127,054		8,929		615		135,368

Total bonds		912,156		37,962		2,624		947,494
Redeemable preferred stock		32,429		2,139		73		34,495

Total fixed maturities		944,585		40,101		2,697		981,989

Equity securities:
Common stock:
U.S. banks, trusts & insurance companies		1,020		2,866		0		3,886
U.S. industrial & miscellaneous		13,838		19,924		0		33,762
Foreign		1,076		631		0		1,707
Nonredeemable preferred stock:
Public utilities		23,122		1,770		44		24,848
U.S. banks, trusts & insurance companies		40,346		3,069		429		42,986
U.S. industrial & miscellaneous		56,276		3,598		480		59,394
Foreign		12,232		1,595		30		13,797

Total equity securities		147,910		33,453		983		180,380

Total fixed maturities and equity securities	$	1,092,495	$	73,554	$	3,680	$	1,162,369


PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Consolidated Statements of Financial Position—September 30, 2004 and December 31, 2003
		Consolidated Statements of Operations—Three months and Nine months ended September 30, 2004 and 2003
		Consolidated Statements of Comprehensive Income—Three months and Nine months ended September 30, 2004 and 2003
		Consolidated Statements of Cash Flows—Nine months ended September 30, 2004 and 2003
		Notes to Consolidated Financial Statements—September 30, 2004
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures About Market Risk
Item 4.		Controls and Procedures
PART II. OTHER INFORMATION
Item 2.		Changes in Securities, and Use of Proceeds and Issuer Purchases of Equity Securities
Item 6.		Exhibits and Reports on Form 8-K
SIGNATURES
Exhibit 31.1
Exhibit 31.2
Exhibit 32

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents