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

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8-K - 8-K - ERIE INDEMNITY CO	erie8-k09302013.htm
EX-99.1 - EXHIBIT - ERIE INDEMNITY CO	ex-99109302013.htm

Exhibit 99.2

Erie Indemnity Company

Consolidated Statements of Operations (Unaudited)

(dollars in millions, except per share data)



	Three months ended September 30,					Nine months ended September 30,
	2013			2012		2013			2012
Revenues
Premiums earned	$	1,241		$	1,137	$	3,631		$	3,333
Net investment income	109			105		316			326
Net realized investment gains	191			169		501			358
Net impairment losses recognized in earnings	(9		)	0		(10		)	0
Equity in earnings of limited partnerships	37			41		112			99
Other income	8			8		24			24
Total revenues	1,577			1,460		4,574			4,140
Benefits and expenses
Insurance losses and loss expenses	868			912		2,571			2,571
Policy acquisition and underwriting expenses	311			278		906			835
Total benefits and expenses	1,179			1,190		3,477			3,406
Income from operations before income taxes and noncontrolling interest	398			270		1,097			734
Provision for income taxes	131			86		363			234
Net income	$	267		$	184	$	734		$	500

Less: Net income attributable to noncontrolling interest in consolidated entity – Exchange	221			133		607			370
Net income attributable to Indemnity	$	46		$	51	$	127		$	130

Earnings Per Share
Net income attributable to Indemnity per share
Class A common stock – basic	$	0.98		$	1.08	$	2.71		$	2.73
Class A common stock – diluted	$	0.87		$	0.96	$	2.41		$	2.43
Class B common stock – basic and diluted	$	147		$	162	$	406		$	411

Weighted average shares outstanding attributable to Indemnity – Basic
Class A common stock	46,656,911			47,188,741		46,707,971			47,476,693
Class B common stock	2,542			2,544		2,542			2,544

Weighted average shares outstanding attributable to Indemnity – Diluted
Class A common stock	52,851,250			53,374,846		52,902,310			53,662,798
Class B common stock	2,542			2,544		2,542			2,544

Dividends declared per share
Class A common stock	$	0.5925		$	0.5525	$	1.7775		$	1.6575
Class B common stock	$	88.8750		$	82.8750	$	266.6250		$	248.6250

Erie Indemnity Company

Results of the Erie Insurance Group's Operations by Interest (Unaudited)

(in millions)



	Indemnity shareholder interest				Noncontrolling interest (Exchange)						Eliminations of related party transactions						Erie Insurance Group
	Three months ended September 30,				Three months ended September 30,						Three months ended September 30,						Three months ended September 30,
	2013		2012		2013			2012			2013			2012			2013			2012
Management operations:
Management fee revenue, net	$	333	$	305	$	—		$	—		$	(333	)	$	(305	)	$	—		$	—
Service agreement revenue	8		8		—			—			—			—			8			8
Total revenue from management operations	341		313		—			—			(333		)	(305		)	8			8
Cost of management operations	281		247		—			—			(281		)	(247		)	—			—
Income from management operations before taxes	60		66		—			—			(52		)	(58		)	8			8
Property and casualty insurance operations:
Net premiums earned	—		—		1,221			1,118			—			—			1,221			1,118
Losses and loss expenses	—		—		841			890			(1		)	(2		)	840			888
Policy acquisition and underwriting expenses	—		—		356			329			(54		)	(59		)	302			270
Income (loss) from property and casualty insurance operations before taxes	—		—		24			(101		)	55			61			79			(40		)
Life insurance operations: ⁽¹⁾
Total revenue	—		—		47			44			(1		)	0			46			44
Total benefits and expenses	—		—		37			32			0			0			37			32
Income from life insurance operations before taxes	—		—		10			12			(1		)	0			9			12
Investment operations:
Net investment income	4		4		83			81			(2		)	(3		)	85			82
Net realized gains on investments	1		2		188			165			—			—			189			167
Net impairment losses recognized in earnings	0		0		(9		)	0			—			—			(9		)	0
Equity in earnings of limited partnerships	5		6		32			35			—			—			37			41
Income from investment operations before taxes	10		12		294			281			(2		)	(3		)	302			290
Income from operations before income taxes and noncontrolling interest	70		78		328			192			—			—			398			270
Provision for income taxes	24		27		107			59			—			—			131			86
Net income	$	46	$	51	$	221		$	133		$	—		$	—		$	267		$	184

(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.

Erie Indemnity Company

Results of the Erie Insurance Group's Operations by Interest (Unaudited)

(in millions)



	Indemnity shareholder interest				Noncontrolling interest (Exchange)						Eliminations of related party transactions						Erie Insurance Group
	Nine months ended September 30,				Nine months ended September 30,						Nine months ended September 30,						Nine months ended September 30,
	2013		2012		2013			2012			2013			2012			2013			2012
Management operations:
Management fee revenue, net	$	965	$	882	$	—		$	—		$	(965	)	$	(882	)	$	—		$	—
Service agreement revenue	23		23		—			—			—			—			23			23
Total revenue from management operations	988		905		—			—			(965		)	(882		)	23			23
Cost of management operations	820		734		—			—			(820		)	(734		)	—			—
Income from management operations before taxes	168		171		—			—			(145		)	(148		)	23			23
Property and casualty insurance operations:
Net premiums earned	—		—		3,573			3,279			—			—			3,573			3,279
Losses and loss expenses	—		—		2,495			2,501			(4		)	(4		)	2,491			2,497
Policy acquisition and underwriting expenses	—		—		1,032			963			(151		)	(153		)	881			810
Income (loss) from property and casualty insurance operations before taxes	—		—		46			(185		)	155			157			201			(28		)
Life insurance operations: ⁽¹⁾
Total revenue	—		—		139			133			(2		)	(1		)	137			132
Total benefits and expenses	—		—		105			99			0			0			105			99
Income from life insurance operations before taxes	—		—		34			34			(2		)	(1		)	32			33
Investment operations:
Net investment income	11		12		243			251			(8		)	(8		)	246			255
Net realized gains on investments	1		4		492			348			—			—			493			352
Net impairment losses recognized in earnings	0		0		(9		)	0			—			—			(9		)	0
Equity in earnings of limited partnerships	13		10		98			89			—			—			111			99
Income from investment operations before taxes	25		26		824			688			(8		)	(8		)	841			706
Income from operations before income taxes and noncontrolling interest	193		197		904			537			—			—			1,097			734
Provision for income taxes	66		67		297			167			—			—			363			234
Net income	$	127	$	130	$	607		$	370		$	—		$	—		$	734		$	500

Erie Indemnity Company

Reconciliation of Operating Income to Net Income (Unaudited)

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 net income excluding 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:



	Indemnity Shareholder Interest
	Three months ended September 30,					Nine months ended September 30,
(in millions, except per share data)	2013		2012			2013		2012
	(Unaudited)					(Unaudited)
Operating income attributable to Indemnity	$	45	$	50		$	126	$	128
Net realized gains and impairments on investments	1		2			1		4
Income tax expense	0		(1		)	0		(2		)
Realized gains and impairments, net of income taxes	1		1			1		2
Net income attributable to Indemnity	$	46	$	51		$	127	$	130

Per Indemnity Class A common share-diluted:
Operating income attributable to Indemnity	$	0.86	$	0.93		$	2.40	$	2.38
Net realized gains and impairments on investments	0.01		0.05			0.01		0.08
Income tax expense	0.00		(0.02		)	0.00		(0.03		)
Realized gains and impairments, net of income taxes	0.01		0.03			0.01		0.05
Net income attributable to Indemnity	$	0.87	$	0.96		$	2.41	$	2.43

Erie Indemnity Company

Consolidated Statements of Financial Position

(in millions)



	September 30, 2013		December 31, 2012
	(Unaudited)
Assets
Investments – Indemnity
Available-for-sale securities, at fair value:
Fixed maturities	$	499	$	452
Equity securities	48		55
Limited partnerships	158		180
Other invested assets	1		1
Investments – Exchange
Available-for-sale securities, at fair value:
Fixed maturities	7,921		7,707
Equity securities	849		945
Trading securities, at fair value	2,945		2,417
Limited partnerships	979		1,037
Other invested assets	20		20
Total investments	13,420		12,814

Cash and cash equivalents (Exchange portion of $502 and $388, respectively)	535		400
Premiums receivable from policyholders – Exchange	1,203		1,062
Reinsurance recoverable – Exchange	174		168
Deferred income taxes – Indemnity	42		37
Deferred acquisition costs – Exchange	574		504
Other assets (Exchange portion of $329 and $339, respectively)	436		456
Total assets	$	16,384	$	15,441

Liabilities and shareholders’ equity
Liabilities
Indemnity liabilities
Other liabilities	$	574	$	515
Exchange liabilities
Losses and loss expense reserves	3,712		3,598
Life policy and deposit contract reserves	1,754		1,708
Unearned premiums	2,654		2,365
Deferred income taxes	368		365
Other liabilities	123		99
Total liabilities	9,185		8,650

Indemnity's shareholders’ equity	657		642

Noncontrolling interest in consolidated entity – Exchange	6,542		6,149
Total equity	7,199		6,791
Total liabilities, shareholders’ equity and noncontrolling interest	$	16,384	$	15,441

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