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

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8-K - LIVE FILING - ERIE INDEMNITY CO	htm_44359.htm
EX-99.1 - EX-99.1 - ERIE INDEMNITY CO	exhibit1.htm

Exhibit 99.2

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars 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	2011			2010		2011			2010
Premiums earned	$	1,076		$	1,015	$	4,214		$	3,987
Net investment income		107			111		433			433
Net realized investment gains (losses)		230			196		(4	)		313
Net impairment losses recognized in earnings		(2	)		0		(2	)		(6	)
Equity in (losses) earnings of limited partnerships		(1	)		70		149			128
Other income		8			9		34			35

Total revenues		1,418			1,401		4,824			4,890

Benefits and expenses
Insurance losses and loss expenses		720			692		3,444			2,900
Policy acquisition and underwriting expenses		273			270		1,022			969
Goodwill impairment		—			22		—			22

Total benefits and expenses		993			984		4,466			3,891

Income from operations before income taxes
and noncontrolling interest		425			417		358			999
Provision for income taxes		144			163		90			339

Net income		281			254		268			660
Less: Net income attributable to noncontrolling
interest in consolidated entity – Exchange		255			242		99			498

Net income attributable to Indemnity	$	26		$	12	$	169		$	162

Earnings Per Share
Net income attributable to Indemnity per share
Class A common stock – basic	$	0.55		$	0.25	$	3.45		$	3.18

Class A common stock – diluted	$	0.49		$	0.22	$	3.08		$	2.85

Class B common stock – basic and diluted	$	81.76		$	40.93	$	522.47		$	462.83

Weighted average shares outstanding attributable to
Indemnity – Basic
Class A common stock		47,982,703			50,137,565		48,875,316			50,705,607

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

Weighted average shares outstanding attributable to
Indemnity – Diluted
Class A common stock		54,164,824			56,316,852		55,057,437			56,884,894

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

Dividends declared per share
Class A common stock	$	0.5525		$	0.515	$	2.0975		$	1.955

Class B common stock	$	82.875		$	77.25	$	314.625		$	293.25

ERIE INDEMNITY COMPANY

RESULTS OF THE ERIE INSURANCE GROUP’S OPERATIONS BY INTEREST (unaudited)

(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			2011		2010			Percent		2011			2010			2011			2010			2011			2010
Management operations:

Management fee revenue, net		100.0	%	$	251	$	236				$	—		$	—		$	(251	)	$	(236	)	$	—		$	—
Service agreement revenue		100.0	%		8		8					—			—			—			—			8			8

Total revenue from management operations					259		244					—			—			(251	)		(236	)		8			8
Cost of management operations		100.0	%		225		215					—			—			(225	)		(215	)		—			—

*Income from management operations before taxes*					34		29					—			—			(26	)		(21	)		8			8

Property and casualty insurance operations: ⁽²⁾

Net premiums earned		5.5%⁽²⁾			—		55			94.5%⁽²⁾		1,060			944			—			—			1,060			999
Losses and loss expenses		5.5%⁽²⁾			—		37			94.5%⁽²⁾		696			633			(1	)		(1	)		695			669
Policy acquisition and other underwriting expenses		5.5%⁽²⁾			—		15			94.5%⁽²⁾		296			269			(29	)		(23	)		267			261

Income from property and casualty insurance operations before taxes					—		3					68			42			30			24			98			69

Life insurance operations:⁽¹⁾

Total revenue		21.6%⁽³⁾			—		9			78.4%⁽³⁾		43			36			(1	)		0			42			45
Total benefits and expenses		21.6%⁽³⁾			—		6			78.4%⁽³⁾		31			26			0			0			31			32

*Income from life insurance operations before taxes*					—		3					12			10			(1	)		0			11			13

Investment operations:

Net investment income ⁽²⁾					4		9					83			80			(3	)		(3	)		84			86
Net realized gains (losses) on investments ⁽²⁾					2		(8	)				227			202			—			—			229			194
Net impairment losses recognized in earnings⁽²⁾					0		0					(1	)		0			—			—			(1	)		0
Equity in earnings (losses) of limited partnerships					1		10					(5	)		59			—			—			(4	)		69
Goodwill impairment					—		—					—			(22	)		—			—			—			(22	)

*Income from investment operations before taxes* ⁽²⁾					7		11					304			319			(3	)		(3	)		308			327

Income from operations before income taxes and noncontrolling interest					41		46					384			371			—			—			425			417
Provision for income taxes					15		34					129			129			—			—			144			163
Net income				$	26	$	12				$	255		$	242		$	-		$	-		$	281		$	254

(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 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 interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after December 31, 2010.

(3)

Prior to and through March 31, 2011, Indemnity retained a 21.6% ownership interest in EFL, which accrued to the Indemnity shareholder interest, and the Exchange retained a 78.4% ownership interest in EFL, which accrued to the interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest. Due to the sale of Indemnity’s 21.6% ownership interest in EFL to the Exchange on March 31, 2011, 100% of the life insurance results of EFL accrue to the interest 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
				Years ended							Years ended						Years ended						Years ended
				December 31,							December 31,						December 31,						December 31,
	Percent			2011		2010			Percent		2011			2010			2011			2010			2011			2010
Management operations:

Management fee revenue, net		100.0	%	$	1,067	$	1,009				$	—		$	—		$	(1,067	)	$	(1,009	)	$	—		$	—
Service agreement revenue		100.0	%		33		34					—			—			—			—			33			34

Total revenue from management operations					1,100		1,043					—			—			(1,067	)		(1,009	)		33			34
Cost of management operations		100.0	%		892		841					—			—			(892	)		(841	)		—			—

*Income from management operations before taxes*					208		202					—			—			(175	)		(168	)		33			34

Property and casualty insurance operations: ⁽²⁾

Net premiums earned		5.5%⁽²⁾			—		216			94.5%⁽²⁾		4,149			3,709			—			—			4,149			3,925
Losses and loss expenses		5.5%⁽²⁾			—		155			94.5%⁽²⁾		3,349			2,660			(5	)		(5	)		3,344			2,810
Policy acquisition and other underwriting expenses		5.5%⁽²⁾			—		61			94.5%⁽²⁾		1,178			1,052			(183	)		(174	)		995			939

*Income (loss) from property and casualty insurance operations before taxes*					—		0					(378	)		(3	)		188			179			(190	)		176

Life insurance operations:⁽¹⁾

Total revenue		21.6%⁽³⁾			10		37			78.4%⁽³⁾		167			135			(2	)		(2	)		175			170
Total benefits and expenses		21.6%⁽³⁾			7		26			78.4%⁽³⁾		120			96			0			(2	)		127			120

*Income from life insurance operations before taxes*					3		11					47			39			(2	)		0			48			50

Investment operations:

Net investment income ⁽²⁾					16		37					335			312			(11	)		(11	)		340			338
Net realized gains (losses) on investments ⁽²⁾					3		(1	)				(20	)		301			—			—			(17	)		300
Net impairment losses recognized in earnings⁽²⁾					0		(1	)				(1	)		(3	)		—			—			(1	)		(4	)
Equity in earnings of limited partnerships					26		21					119			106			—			—			145			127
Goodwill impairment					—		—					—			(22	)		—			—			—			(22	)

*Income from investment operations before taxes* ⁽²⁾					45		56					433			694			(11	)		(11	)		467			739

Income from operations before income taxes and noncontrolling interest					256		269					102			730			—			—			358			999
Provision for income taxes					87		107					3			232			—			—			90			339
Net income				$	169	$	162				$	99		$	498		$	-		$	-		$	268		$	660

(1)

(2)

(3)

ERIE INDEMNITY COMPANY

RECONCILIATION OF OPERATING INCOME TO NET INCOME

Reconciliation of operating income to net income

We disclose operating income, a non-GAAP financial measure, to enhance our investors’ understanding of our performance related to the Indemnity shareholder interest. Our method of calculating this measure may differ from those used by other companies, and therefore comparability may be limited.

Indemnity defines operating income as income generated from management operations, life insurance operations⁽¹⁾, property and casualty insurance underwriting operations⁽²⁾, net investment income⁽²⁾, and equity in earnings or losses of limited partnerships, net of related federal income taxes. It does not include realized capital gains and losses, impairment losses and related federal income taxes.

Indemnity uses operating income to evaluate the results of its operations. It reveals trends 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 which are not related to our ongoing operations. 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. generally accepted accounting principles (“GAAP”) and does not reflect Indemnity’s overall profitability.

The following table reconciles operating income and net income for the Indemnity shareholder interest:^{(1) (2)}


	Indemnity Shareholder interest
	Three			Three			Year			Year
	months ended			months ended			ended			ended
	December 31,			December 31,			December 31,			December 31,
	2011			2010			2011			2010
(in millions, except per share data)
	(unaudited)			(unaudited)
Operating income attributable to Indemnity	$	25		$	17		$	167		$	163

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

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

Net income attributable to Indemnity	$	26		$	12		$	169		$	162

Per Indemnity Class A common share – diluted:
Operating income attributable to Indemnity	$	0.47		$	0.32		$	3.04		$	2.88

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

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

Net income attributable to Indemnity	$	0.49		$	0.22		$	3.08		$	2.85

(1)

Prior to and through March 31, 2011, Indemnity retained a 21.6% ownership interest in EFL, which accrued to the Indemnity shareholder interest, and the Exchange retained a 78.4% ownership interest in EFL, which accrued to the interest of the subscribers (policyholders) of the Exchange or noncontrolling interest. Due to the sale of Indemnity’s 21.6% ownership interest in EFL to the Exchange on March 31, 2011, 100% of the life insurance results of EFL accrue to the interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after March 31, 2011.

(2)

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in millions)


	December 31,		December 31,
Assets	2011		2010
Investments-Indemnity
Available-for-sale securities, at fair value:
Fixed maturities	$	548	$	264
Equity securities		25		24
Trading securities, at fair value		27		28
Limited partnerships		208		216
Other invested assets		1		1
Investments-Exchange
Available-for-sale securities, at fair value:
Fixed maturities		7,292		7,279
Equity securities		564		570
Trading securities, at fair value		2,308		2,306
Limited partnerships		1,082		1,108
Other invested assets		19		19

Total investments		12,074		11,815
Cash and cash equivalents (Exchange portion of $174 and $120, respectively)		185		430
Premiums receivable from policyholders – Exchange		976		942
Reinsurance recoverable – Exchange		166		201
Deferred income taxes – Indemnity		19		0
Deferred acquisition costs – Exchange		487		467
Other assets (Exchange portion of $322 and $357, respectively)		441		489
Total assets	$	14,348	$	14,344

Liabilities and shareholders’ equity
Liabilities
Indemnity liabilities
Deferred income taxes	$	0	$	26
Other liabilities		455		382
Exchange liabilities
Losses and loss expense reserves		3,499		3,584
Life policy and deposit contract reserves		1,671		1,603
Unearned premiums		2,178		2,082
Deferred income taxes		147		257
Other liabilities		105		76

Total liabilities		8,055		8,010

Indemnity’s shareholders’ equity		781		912
Noncontrolling interest in consolidated entity-Exchange		5,512		5,422

Total equity		6,293		6,334

Total liabilities, shareholders’ equity and noncontrolling interest	$	14,348	$	14,344

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