FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2005
Commission file number 0-24000
ERIE INDEMNITY COMPANY
(Exact name of registrant as specified in its charter)
| PENNSYLVANIA | 25-0466020 | |
| (State or other jurisdiction of | (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
Not applicable
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—62,690,756 shares as of April 18, 2005.
Class B Common Stock, no par value, with a stated value of $70 per share—2,843 shares as of April 18, 2005.
The common stock is the only class of stock the Registrant is presently authorized to issue.
1
INDEX
ERIE INDEMNITY COMPANY
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
| (Dollars in thousands) | ||||||||
| March 31 | December 31 | |||||||
| 2005 | 2004 | |||||||
| (Unaudited) | ||||||||
ASSETS |
||||||||
INVESTMENTS |
||||||||
Fixed maturities at fair value
(amortized cost of $963,341 and
$939,280, respectively) |
$ | 981,572 | $ | 974,512 | ||||
Equity securities at fair value (cost of $192,310
and $175,860, respectively) |
209,330 | 202,694 | ||||||
Limited partnerships
(cost of $117,338 and $116,097, respectively) |
132,723 | 130,464 | ||||||
Real estate mortgage loans |
4,997 | 5,044 | ||||||
Total investments |
1,328,622 | 1,312,714 | ||||||
Cash and cash equivalents |
53,307 | 50,061 | ||||||
Accrued investment income |
14,131 | 12,480 | ||||||
Premiums receivable from policyholders |
272,870 | 275,721 | ||||||
Federal income taxes recoverable |
0 | 3,331 | ||||||
Reinsurance recoverable from Erie Insurance
Exchange on unpaid losses |
762,272 | 765,563 | ||||||
Ceded unearned premiums to Erie Insurance
Exchange |
131,315 | 128,187 | ||||||
Notes receivable from Erie Family Life
Insurance Company |
40,000 | 40,000 | ||||||
Other receivables from Erie Insurance
Exchange and affiliates |
190,313 | 211,488 | ||||||
Reinsurance recoverable from non-affiliates |
305 | 351 | ||||||
Deferred policy acquisition costs |
16,904 | 17,112 | ||||||
Property and equipment |
13,209 | 13,581 | ||||||
Equity in Erie Family Life Insurance Company |
56,010 | 58,728 | ||||||
Prepaid pension |
47,835 | 50,860 | ||||||
Other assets |
49,512 | 39,567 | ||||||
Total assets |
$ | 2,976,605 | $ | 2,979,744 | ||||
See Accompanying Notes to Consolidated Financial Statements.
3
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Continued)
| (Dollars in thousands) | ||||||||
| March 31 | December 31 | |||||||
| 2005 | 2004 | |||||||
| (Unaudited) | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
LIABILITIES |
||||||||
Unpaid losses and loss adjustment expenses |
$ | 942,586 | $ | 943,034 | ||||
Unearned premiums |
464,154 | 472,553 | ||||||
Commissions payable and accrued |
148,126 | 179,284 | ||||||
Securities lending collateral |
10,128 | 0 | ||||||
Accounts payable and accrued expenses |
61,346 | 49,025 | ||||||
Federal income taxes payable |
19,669 | 0 | ||||||
Deferred income taxes |
15,223 | 24,122 | ||||||
Dividends payable |
20,529 | 20,612 | ||||||
Employee benefit obligations |
25,654 | 24,233 | ||||||
Total liabilities |
1,707,415 | 1,712,863 | ||||||
SHAREHOLDERS’ EQUITY |
||||||||
Capital Stock |
||||||||
Class A common, stated value $.0292 per share;
authorized 74,996,930 shares; 67,574,400 and
67,540,800 shares issued, respectively; 62,741,013
and 62,992,841 shares outstanding, respectively |
1,971 | 1,970 | ||||||
Class B common, convertible at a rate of 2,400
Class A shares for one Class B share, stated
value $70 per share; 2,844 and 2,858 shares
authorized, issued and outstanding, respectively |
199 | 200 | ||||||
Additional paid-in capital |
7,830 | 7,830 | ||||||
Accumulated other comprehensive income |
38,295 | 58,611 | ||||||
Retained earnings |
1,391,422 | 1,354,181 | ||||||
Total contributed capital and retained earnings |
1,439,717 | 1,422,792 | ||||||
Treasury stock, at cost, 4,833,387 and 4,547,959
shares, respectively |
( | 170,527 | ) | ( | 155,911 | ) | ||
Total shareholders’ equity |
1,269,190 | 1,266,881 | ||||||
Total liabilities and shareholders’ equity |
$ | 2,976,605 | $ | 2,979,744 | ||||
See Accompanying Notes to Consolidated Financial Statements.
4
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| Three Months Ended March 31 | ||||||||
| 2005 | 2004 | |||||||
| (Dollars in thousands, except per share data) | ||||||||
OPERATING REVENUE |
||||||||
Management fee revenue - net |
$ | 217,736 | $ | 209,664 | ||||
Premiums earned |
53,648 | 50,649 | ||||||
Service agreement revenue |
4,787 | 5,598 | ||||||
Total operating revenue |
276,171 | 265,911 | ||||||
OPERATING EXPENSES |
||||||||
Cost of management operations |
167,940 | 161,821 | ||||||
Losses and loss adjustment expenses incurred |
32,677 | 38,037 | ||||||
Policy acquisition and other underwriting
expenses |
11,844 | 11,318 | ||||||
Total operating expenses |
212,461 | 211,176 | ||||||
INVESTMENT INCOME - UNAFFILIATED |
||||||||
Investment income, net of expenses |
14,468 | 14,686 | ||||||
Net realized gains on investments |
5,497 | 2,853 | ||||||
Equity in earnings of limited
partnerships |
2,111 | 418 | ||||||
Total investment income - unaffiliated |
22,076 | 17,957 | ||||||
Income before income taxes and equity in earnings
of Erie Family Life Insurance Company |
85,786 | 72,692 | ||||||
Provision for income taxes |
28,729 | 24,435 | ||||||
Equity in earnings of Erie Family Life
Insurance Company, net of tax |
714 | 1,315 | ||||||
Net income |
$ | 57,771 | $ | 49,572 | ||||
Net income per share – basic |
||||||||
Class A common stock |
$ | .91 | $ | .77 | ||||
Class B common stock |
138.84 | 117.87 | ||||||
Net income per share – diluted |
.83 | .70 | ||||||
Weighted average shares outstanding |
||||||||
Basic: |
||||||||
Class A common stock |
62,926,683 | 63,950,847 | ||||||
Class B common stock |
2,851 | 2,878 | ||||||
Diluted Shares |
69,845,958 | 70,926,223 | ||||||
Dividends declared per share: |
||||||||
Class A common stock |
$ | 0.325 | $ | 0.215 | ||||
Class B common stock |
48.75 | 32.25 | ||||||
See Accompanying Notes to Consolidated Financial Statements.
5
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| Three Months Ended March 31 | ||||||||
| 2005 | 2004 | |||||||
| (Dollars in thousands) | ||||||||
Net income |
$ | 57,771 | $ | 49,572 | ||||
Unrealized gains on securities: |
||||||||
Unrealized holding (losses) gains
arising during period |
( | 25,759 | ) | 22,942 | ||||
Less: Gains included in net income |
( | 5,497 | ) | ( | 2,853 | ) | ||
Net unrealized holding (losses) gains
arising during period |
( | 31,256 | ) | 20,089 | ||||
Income tax benefit (expense) related to
unrealized (losses) gains |
10,940 | ( | 7,031 | ) | ||||
Change in other comprehensive income,
net of tax |
( | 20,316 | ) | 13,058 | ||||
Comprehensive income |
$ | 37,455 | $ | 62,630 | ||||
See Accompanying Notes to Consolidated Financial Statements.
6
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Three Months Ended March 31 | ||||||||
| 2005 | 2004 | |||||||
| (Dollars in thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Management fee received |
$ | 231,991 | $ | 200,016 | ||||
Service agreement fee received |
4,553 | 5,598 | ||||||
Premiums collected |
51,307 | 49,348 | ||||||
Net investment income received |
14,030 | 13,916 | ||||||
Dividends received from Erie Family Life |
450 | 429 | ||||||
Salaries and wages paid |
( | 24,853 | ) | ( | 20,217 | ) | ||
Pension funding and employee benefits paid |
( | 1,724 | ) | ( | 10,892 | ) | ||
Commissions paid to agents |
( | 110,959 | ) | ( | 108,220 | ) | ||
Agent bonuses paid |
( | 46,399 | ) | ( | 23,753 | ) | ||
General operating expenses paid |
( | 17,574 | ) | ( | 17,114 | ) | ||
Losses and loss adjustment expenses paid |
( | 29,790 | ) | ( | 35,097 | ) | ||
Other underwriting and acquisition costs paid |
( | 2,506 | ) | ( | 4,612 | ) | ||
Income taxes paid |
( | 6,057 | ) | ( | 4,811 | ) | ||
Net cash provided by operating activities |
62,469 | 44,591 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchase of investments: |
||||||||
Fixed maturities |
( | 97,260 | ) | ( | 107,003 | ) | ||
Equity securities |
( | 50,791 | ) | ( | 5,151 | ) | ||
Limited partnerships |
( | 13,583 | ) | ( | 4,974 | ) | ||
Sales/maturities of investments: |
||||||||
Fixed maturity sales |
48,657 | 40,286 | ||||||
Fixed maturity calls/maturities |
22,969 | 31,535 | ||||||
Equity securities |
40,917 | 4,959 | ||||||
Limited partnership sales/distributions |
14,344 | 4,707 | ||||||
Increase in collateral from securities lending |
10,128 | 4,852 | ||||||
Purchase of property and equipment |
( | 301 | ) | ( | 264 | ) | ||
Net collections on agent loans |
925 | 376 | ||||||
Net cash used in investing activities |
( | 23,995 | ) | ( | 30,677 | ) | ||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Dividends paid to shareholders |
( | 20,612 | ) | ( | 13,872 | ) | ||
Purchase of treasury stock |
( | 14,616 | ) | ( | 6,343 | ) | ||
Cash used in financing activities |
( | 35,228 | ) | ( | 20,215 | ) | ||
Net increase (decrease) in cash and cash equivalents |
3,246 | ( | 6,301 | ) | ||||
Cash and cash equivalents at beginning of period |
50,061 | 87,192 | ||||||
Cash and cash equivalents at end of period |
$ | 53,307 | $ | 80,891 | ||||
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, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on February 24, 2005.
NOTE 2 – RECLASSIFICATONS
Certain amounts previously reported in the 2004 financial statements have been reclassified to conform to the current period’s presentation. Such reclassifications did not impact earnings.
NOTE 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. Weighted average shares used in the Class A basic earnings per share calculation were 62.9 million in the first quarter of 2005 and 64.0 million in the first quarter of 2004. Weighted average Class B shares used in the basic earnings per share calculation were 2,851 shares and 2,878 shares in 2005 and 2004, respectively. The computation of diluted earnings per share reflects the conversion of Class B shares and the effect of potentially dilutive outstanding employee stock-based awards under the long-term incentive plan. In January 2005, four shares of Class B voting stock, and in March 2005, 10 shares of Class B voting stock, were converted to 9,600 and 24,000 non-voting shares of Class A stock, respectively. The total weighted average number of Class A equivalent shares outstanding (including conversion of Class B shares) was 69.8 million and 70.9 million for the first quarters of 2005 and 2004, respectively.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3 – EARNINGS PER SHARE (Continued)
The following table displays the basic and diluted per-share computations.
| Three Months Ended March 31 | ||||||||
| (net income amounts in thousands) | ||||||||
| 2005 | 2004 | |||||||
Basic: |
||||||||
Allocated net income – Class A |
$ | 57,376 | $ | 49,233 | ||||
Class A shares of common stock |
62,926,683 | 63,950,847 | ||||||
Class A earnings per share – basic |
$ | .91 | $ | .77 | ||||
Allocated net income – Class B |
$ | 395 | $ | 339 | ||||
Class B shares of common stock |
2,851 | 2,878 | ||||||
Class B earnings per share – basic |
$ | 138.84 | $ | 117.87 | ||||
Diluted: |
||||||||
Net income |
$ | 57,771 | $ | 49,572 | ||||
Class A shares of common stock |
62,926,683 | 63,950,847 | ||||||
Assumed conversion of Class B common
stock and restricted stock awards |
6,919,275 | 6,975,376 | ||||||
Class A shares of common and equivalent
shares |
69,845,958 | 70,926,223 | ||||||
Earnings per share – diluted |
$ | .83 | $ | .70 | ||||
Included in the restricted stock awards not yet vested are awards of 75,399 and 68,176 for the first quarter of 2005 and 2004, 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 1,476 and 2,174 for the first quarters of 2005 and 2004, 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 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. 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 $9.8 million at March 31, 2005. There were no loaned securities at December 31, 2004. Securities lending collateral is recorded by the Company as a liability. The proceeds from the collateral are 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.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 4 – INVESTMENTS (Continued)
The following is a summary of fixed maturities and equity securities:
| (in thousands) | Gross | Gross | Estimated | |||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| March 31, 2005 | Cost | Gains | Losses | Value | ||||||||||||
Fixed maturities |
||||||||||||||||
U.S. treasuries & government
agencies |
$ | 9,979 | $ | 333 | $ | 62 | $ | 10,250 | ||||||||
States & political subdivisions |
106,542 | 1,678 | 689 | 107,531 | ||||||||||||
Special revenue |
136,066 | 2,008 | 900 | 137,174 | ||||||||||||
Public utilities |
68,218 | 3,791 | 274 | 71,735 | ||||||||||||
U.S. industrial & miscellaneous |
417,446 | 9,480 | 4,608 | 422,318 | ||||||||||||
Mortgage-backed securities |
44,823 | 409 | 535 | 44,697 | ||||||||||||
Asset-backed securities |
20,033 | 60 | 441 | 19,652 | ||||||||||||
Foreign |
125,580 | 7,157 | 771 | 131,966 | ||||||||||||
Total bonds |
928,687 | 24,916 | 8,280 | 945,323 | ||||||||||||
Redeemable preferred stock |
34,654 | 1,737 | 142 | 36,249 | ||||||||||||
Total fixed maturities |
963,341 | 26,653 | 8,422 | 981,572 | ||||||||||||
Equity securities |
||||||||||||||||
Common stock: |
||||||||||||||||
Public utilities |
1,100 | 32 | 23 | 1,109 | ||||||||||||
U.S. banks, trusts &
insurance companies |
7,453 | 1,371 | 438 | 8,386 | ||||||||||||
U.S. industrial &
miscellaneous |
41,370 | 8,800 | 1,976 | 48,194 | ||||||||||||
Foreign |
2,887 | 72 | 108 | 2,851 | ||||||||||||
Nonredeemable preferred stock: |
||||||||||||||||
Public utilities |
24,645 | 1,748 | 208 | 26,185 | ||||||||||||
U.S. banks, trusts &
insurance companies |
46,615 | 2,359 | 51 | 48,923 | ||||||||||||
U.S. industrial &
miscellaneous |
56,008 | 4,451 | 431 | 60,028 | ||||||||||||
Foreign |
12,232 | 1,461 | 39 | 13,654 | ||||||||||||
Total equity securities |
192,310 | 20,294 | 3,274 | 209,330 | ||||||||||||
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