ERIE INDEMNITY CO - FORM 8-K - EX-99.2

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8-K - LIVE FILING - ERIE INDEMNITY CO	htm_40874.htm
EX-99.1 - EX-99.1 - ERIE INDEMNITY CO	exhibit1.htm

Exhibit 99.2

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)


	Three		Three			Twelve			Twelve
	months		months			months			months
	ended		ended			ended			ended
	December 31,		December 31,			December 31,			December 31,
Revenues	2010		2009*			2010			2009
Premiums earned	$	1,015	$	971		$	3,987		$	3,869
Net investment income		111		109			433			433
Net realized investment gains		196		108			313			412
Net impairment losses recognized in earnings		0		(27	)		(6	)		(126	)
Equity in earnings (losses) of limited partnerships		70		(45	)		128			(369	)
Other income		9		9			35			36

Total revenues		1,401		1,125			4,890			4,255

Benefits and expenses
Insurance losses and loss expenses		692		634			2,900			2,728
Policy acquisition and underwriting expenses		270		241			969			1,003
Goodwill impairment		22		0			22			0

Total benefits and expenses		984		875			3,891			3,731

Income from operations before income taxes
and noncontrolling interest		417		250			999			524
Provision for income taxes		163		76			339			78

Net income	$	254	$	174		$	660		$	446
Less: Net income attributable to noncontrolling
interest in consolidated entity – Exchange		242		150			498			338

Net income attributable to Indemnity	$	12	$	24		$	162		$	108

Earnings Per Share
Net income attributable to Indemnity per share
Class A common stock – basic	$	0.25	$	0.48		$	3.18		$	2.10

Class A common stock – diluted	$	0.22	$	0.43		$	2.85		$	1.89

Class B common stock – basic and diluted	$	40.93	$	72.49		$	462.83		$	312.45

Weighted average shares outstanding attributable to
Indemnity – Basic
Class A common stock		50,137,565		51,244,073			50,705,607			51,250,606

Class B common stock		2,546		2,546			2,546			2,549

Weighted average shares outstanding attributable to
Indemnity – Diluted
Class A common stock		56,316,852		57,415,266			56,884,894			57,428,999

Class B common stock		2,546		2,546			2,546			2,549

Dividends declared per share
Class A common stock	$	0.515	$	0.48		$	1.955		$	1.83

Class B common stock	$	77.25	$	72.00		$	293.25		$	274.50

• The 2009 results have been adjusted to reflect the retrospective adoption of new accounting guidance in ASC 810, Consolidation.

ERIE INDEMNITY COMPANY

RESULTS OF THE ERIE INSURANCE GROUP’S OPERATIONS BY INTEREST

(in millions)


																		Eliminations of
																		related party
	Indemnity shareholder interest									Noncontrolling interest (Exchange)								transactions						Erie Insurance Group
				Three months ended								Three months ended						Three months ended						Three months ended
				December 31,								December 31,						December 31,						December 31,
	Percent			2010			2009			Percent		2010			2009			2010			2009			2010			2009
Management operations

Management fee revenue, net		100.0	%	$	236		$	223				$	0		$	0		$	(236	)	$	(223	)	$	0		$	0
Service agreement revenue		100.0	%		8			9					0			0			0			0			8			9

Total revenue from management operations					244			232					0			0			(236	)		(223	)		8			9
Cost of management operations		100.0	%		215			198					0			0			(215	)		(198	)		0			0

*Income from management operations before taxes*					29			34					0			0			(21	)		(25	)		8			9

Property and casualty insurance operations

Net premiums earned		5.5%⁽²⁾			55			52			94.5%⁽²⁾		944			904			0			0			999			956
Losses and loss expenses		5.5%⁽²⁾			37			33			94.5%⁽²⁾		633			578			(1	)		(1	)		669			610
Policy acquisition and other underwriting expenses		5.5%⁽²⁾			15			15			94.5%⁽²⁾		269			246			(23	)		(27	)		261			234

*Income from property and casualty insurance operations before taxes*					3			4					42			80			24			28			69			112

Life insurance operations⁽¹⁾

Total revenue		21.6%⁽³⁾			9			7			78.4%⁽³⁾		36			26			0			0			45			33
Total benefits and expenses		21.6%⁽³⁾			6			7			78.4%⁽³⁾		26			24			0			0			32			31

*Income from life insurance operations before taxes*					3			0					10			2			0			0			13			2

Investment operations

Net investment income ⁽²⁾					9			10					80			80			(3	)		(3	)		86			87
Net realized (losses) gains on investments ⁽²⁾					(8	)		5					202			99			0			0			194			104
Net impairment losses recognized in earnings ⁽²⁾					0			(2	)				0			(20	)		0			0			0			(22	)
Equity in earnings (losses) of limited partnerships					10			(12	)				59			(30	)		0			0			69			(42	)
Goodwill impairment					0			0					(22	)		0			0			0			(22	)		0

*Income from investment operations before taxes* ⁽²⁾					11			1					319			129			(3	)		(3	)		327			127

Income from operations before income taxes and noncontrolling interest					46			39					371			211			0			0			417			250
Provision for income taxes					34			15					129			61			0			0			163			76
Net income				$	12		$	24				$	242		$	150		$	0		$	0		$	254		$	174

(1)

Earnings on life insurance related invested assets are integral to the evaluation of the life insurance operations because of the long duration of life products. On that basis, for presentation purposes, the life insurance operations in the table above include life insurance related investment results.

(2)

Prior to and through December 31, 2010, the underwriting results retained by EIC and ENY and the investment results of EIC, ENY and EPC accrued to the benefit of the Indemnity shareholder interest. Due to the sale of Indemnity’s property and casualty subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting results and all investment results for these companies accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after December 31, 2010.

(3)

As a result of the pending sale of Indemnity’s 21.6% ownership interest in EFL to the Exchange, which is scheduled to close by March 31, 2011, all earnings of EFL will accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after March 31, 2011.

ERIE INDEMNITY COMPANY

RESULTS OF THE ERIE INSURANCE GROUP’S OPERATIONS BY INTEREST

(in millions)


																		Eliminations of
																		related party
	Indemnity shareholder interest									Noncontrolling interest (Exchange)								transactions						Erie Insurance Group
																		Twelve months
				Twelve months ended								Twelve months ended						ended						Twelve months ended
				December 31,								December 31,						December 31,						December 31,
	Percent			2010			2009			Percent		2010			2009			2010			2009			2010			2009
Management operations

Management fee revenue, net		100.0	%	$	1,009		$	965					0		$	0		$	(1,009	)	$	(965	)	$	0		$	0
Service agreement revenue		100.0	%		34			35					0			0			0			0			34			35

Total revenue from management operations					1,043			1,000					0			0			(1,009	)		(965	)		34			35
Cost of management operations		100.0	%		841			813					0			0			(841	)		(813	)		0			0

*Income from management operations before taxes*					202			187					0			0			(168	)		(152	)		34			35

Property and casualty insurance operations

Net premiums earned		5.5%⁽²⁾			216			209			94.5%⁽²⁾		3,709			3,599			0			0			3,925			3,808
Losses and loss expenses		5.5%⁽²⁾			155			145			94.5%⁽²⁾		2,660			2,499			(5	)		(5	)		2,810			2,639
Policy acquisition and other underwriting expenses		5.5%⁽²⁾			61			63			94.5%⁽²⁾		1,052			1,072			(174	)		(158	)		939			977

Income(loss) from property and casualty insurance operations before taxes					0			1					(3	)		28			179			163			176			192

Life insurance operations⁽¹⁾

Total revenue		21.6%⁽³⁾			37			27			78.4%⁽³⁾		135			100			(2	)		(2	)		170			125
Total benefits and expenses		21.6%⁽³⁾			26			25			78.4%⁽³⁾		96			92			(2	)		(2	)		120			115

*Income from life insurance operations before taxes*					11			2					39			8			0			0			50			10

Investment operations

Net investment income ⁽²⁾					37			42					312			311			(11	)		(11	)		338			342
Net realized (losses) gains on investments ⁽²⁾					(1	)		10					301			397			0			0			300			407
Net impairment losses recognized in earnings ⁽²⁾					(1	)		(12	)				(3	)		(91	)		0			0			(4	)		(103	)
Equity in earnings (losses) of limited partnerships					21			(76	)				106			(283	)		0			0			127			(359	)
Goodwill impairment					0			0					(22	)		0			0			0			(22	)		0

*Income (loss) from investment operations before taxes* ⁽²⁾					56			(36	)				694			334			(11	)		(11	)		739			287

Income from operations before income taxes and noncontrolling interest					269			154					730			370			0			0			999			524
Provision for income taxes					107			46					232			32			0			0			339			78
Net income				$	162		$	108				$	498		$	338		$	0		$	0		$	660		$	446

(1)

(2)

(3)

ERIE INDEMNITY COMPANY

RECONCILIATION OF OPERATING INCOME TO NET INCOME

Reconciliation of operating income to net income

We believe that investors’ understanding of our performance related to the Indemnity shareholder interest is enhanced by the disclosure of the following non-GAAP financial measure. Our method of calculating this measure may differ from those used by other companies and therefore comparability may be limited.

Operating income is net income excluding realized capital gains and losses, impairment losses and related federal income taxes. Our common stock portfolio is measured at fair value. As such, changes in fair value related to common stocks are reported in earnings. These unrealized gains or losses are included in the net realized gains and losses on investments in our Consolidated Statements of Operations that are used to calculate operating income. Equity in earnings or losses of EFL and equity in earnings or losses of limited partnerships are included in the calculation of operating income. Equity in earnings or losses of limited partnerships includes the respective investment’s realized capital gains and losses, as well as unrealized gains and losses, but does not include the realized gain or loss when a limited partnership is sold in the secondary market.

We use operating income to evaluate the results of our operations. It reveals trends in our management services, property and casualty insurance underwriting⁽¹⁾ and investment operations that may be obscured by the net effects of realized capital gains and losses including impairment losses. Realized capital gains and losses, including impairment losses, may vary significantly between periods and are generally driven by business decisions and economic developments such as capital market conditions, the timing of which is unrelated to our management services and property and casualty insurance underwriting processes.⁽¹⁾ We believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our performance. We are aware that the price to earnings multiple commonly used by investors as a forward-looking valuation technique uses operating income as the denominator. Operating income should not be considered as a substitute for net income prepared in accordance with U.S.GAAP and does not reflect our overall profitability.

The following table reconciles operating income and net income for Indemnity shareholder interest:


	Indemnity Shareholder interest
	Three			Three			Twelve			Twelve
	months ended			months ended			months ended			months ended
	December 31,			December 31,			December 31,			December 31,
	2010			2009			2010			2009
(in millions, except per share data)
	(Unaudited)						(Unaudited)
Operating income attributable to Indemnity	$	17		$	22		$	163		$	109

Net realized (losses) gains and impairments on investments		(8	)		3			(2	)		(2	)
Income tax benefit (expense)		3			(1	)		1			1

Realized (losses) gains and impairments, net of income taxes		(5	)		2			(1	)		(1	)

Net income attributable to Indemnity	$	12		$	24		$	162		$	108

Per Indemnity Class A common share – diluted:
Operating income attributable to Indemnity	$	0.32		$	0.39		$	2.88		$	1.91

Net realized (losses) gains and impairments on investments		(0.15	)		0.06			(0.04	)		(0.03	)
Income tax benefit (expense)		0.05			(0.02	)		0.01			0.01

Realized (losses) gains and impairments, net of income taxes		(0.10	)		0.04			(0.03	)		(0.02	)

Net income attributable to Indemnity	$	0.22		$	0.43		$	2.85		$	1.89

(1)

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in millions)


	December 31,		December 31,
	2010		2009
Assets
Investments-Indemnity
Available-for-sale securities, at fair value:
Fixed maturities⁽¹⁾	$	264	$	664
Equity securities⁽¹⁾		24		38
Trading securities, at fair value		28		42
Limited partnerships		216		235
Other invested assets		1		1
Investments-Exchange
Available-for-sale securities, at fair value:
Fixed maturities⁽¹⁾		7,279		6,517
Equity securities⁽¹⁾		570		472
Trading securities, at fair value		2,306		1,835
Limited partnerships		1,108		1,116
Other invested assets		19		20

Total investments		11,815		10,940
Cash and cash equivalents (Exchange portion of $120 and $158, respectively)		430		234
Premiums receivable from policyholders (Exchange portion of $942 and $715, respectively)⁽¹⁾		942		906
Reinsurance recoverable (Exchange portion of $201 and $212, respectively)⁽¹⁾		201		215
Deferred income taxes (Exchange portion of $0 and $75, respectively)		0		116
Deferred acquisition costs (Exchange portion of $467 and $416, respectively)⁽¹⁾		467		467
Other assets (Exchange portion of $357 and $306, respectively)		489		409
Total assets	$	14,344	$	13,287

Liabilities and shareholders’ equity
Liabilities
Indemnity liabilities
Losses and loss expense reserves⁽¹⁾	$	0	$	752
Unearned premiums⁽¹⁾		0		325
Deferred income taxes		26		0
Other liabilities		382		387
Exchange liabilities
Losses and loss expense reserves⁽¹⁾		3,584		2,846
Life policy and deposit contract reserves		1,603		1,540
Unearned premiums⁽¹⁾		2,082		1,656
Deferred income taxes		257		0
Other liabilities		76		56

Total liabilities		8,010		7,562

Indemnity’s shareholders’ equity		912		902
Noncontrolling interest in consolidated entity – Exchange		5,422		4,823

Total equity		6,334		5,725

Total liabilities, shareholders’ equity and noncontrolling interest	$	14,344	$	13,287

(1)

Prior to December 31, 2010, the underwriting assets and liabilities retained by EIC and ENY were the responsibility of the Indemnity shareholder interest. Due to the sale of Indemnity’s property and casualty subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting assets and liabilities are the responsibility of the subscribers (policyholders) of the Exchange, or noncontrolling interest beginning December 31, 2010.

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