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Erie Indemnity Reports Fourth Quarter 2011 Results

PR Newswire Association LLC

ERIE, Pa., Feb. 27, 2012 /PRNewswire/ --

4Q 2011 Highlights

Indemnity Shareholder Interest:

  • Net income attributable to Indemnity per share-diluted was $0.49 per share in the fourth quarter of 2011 compared to net income per share-diluted of $0.22 per share in the fourth quarter of 2010.  The fourth quarter 2010 net income amount includes $0.13 per share-diluted of income related to operations sold to the Exchange and a $0.31 per share-diluted charge related to the sale of Erie Family Life.
  • Operating income attributable to Indemnity per share-diluted (excluding net realized gains or losses, impairments on investments and related taxes) was $0.47 per share in the fourth quarter of 2011 compared to $0.32 per share-diluted in the fourth quarter of 2010.  The fourth quarter 2010 operating income amount includes $0.13 per share-diluted of income related to operations sold to the Exchange and a $0.31 per share-diluted charge related to the sale of Erie Family Life.
  • Indemnity's management operations pretax income increased to $34 million in the fourth quarter of 2011 from $29 million in the fourth quarter of 2010.  The gross margin from management operations increased to 13.0 percent in the fourth quarter of 2011 from 12.0 percent in the fourth quarter of 2010.
  • Indemnity's investment operations pretax income totaled $7 million for the fourth quarter of 2011 compared to $11 million for the fourth quarter of 2010.

Erie Indemnity Company (NASDAQ: ERIE) today announced fourth quarter 2011 earnings of $26 million, compared to earnings of $12 million in the fourth quarter of 2010.  Operating income was $25 million in the fourth quarter of 2011, compared to operating income of $17 million in the fourth quarter of 2010.

(Logo: http://photos.prnewswire.com/prnh/20041112/ERIELOGO )

Note: The accompanying consolidated financial statements of Erie Indemnity Company ("Indemnity") reflect the consolidated results of Indemnity and the Erie Insurance Exchange ("Exchange"), which we refer to collectively as the "Erie Insurance Group."

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Indemnity or Indemnity shareholder interest refers to the interest in Erie Indemnity Company owned by the Class A and Class B shareholders.  The Exchange refers to the noncontrolling interest held for the interest of the subscribers (policyholders) and includes its interest in its property and casualty subsidiaries and Erie Family Life Insurance Company ("EFL").

The following table shows the consolidated results of the Erie Insurance Group by operating segment:


Results of the Erie Insurance Group's Operations







Indemnity
shareholder
interest

Noncontrolling
interest
(Exchange)

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Elimination of
related party
transactions

Erie
Insurance
Group

(dollars in millions)

4Q'11

4Q'10

4Q'11

4Q'10

4Q'11

4Q'10

4Q'11

4Q'10

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Management operations

$34

$29

$   -

$    -

$(26)

$(21)

$     8

$     8

Property and casualty insurance operations

-

3

68

42

30

24

98

69

Life insurance operations

-

3

12

10

(1)

0

11

13

Investment operations

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






















The following sections highlight and discuss the results of management operations, property and casualty insurance operations, life insurance operations and investment operations related to the Indemnity shareholder interest.


Management Operations







Indemnity
shareholder
interest

Noncontrolling
interest
(Exchange)

Elimination of
related party
transactions

Erie
Insurance
Group

(dollars in millions)

4Q'11

4Q'10

4Q'11

4Q'10

4Q'11

4Q'10

4Q'11

4Q'10

Management fee revenue, net

$ 251

$ 236

$ -

$ -

$(251)

$(236)

$ -

$ -

Service agreement revenue

8

8

-

-

-

-

8

8

Total revenue from management operations

259

244

-

-

(251)

(236)

8

8

Cost of management operations

225

215

-

-

(225)

(215)

-

-

Income from management operations before taxes  

$   34

$   29

$ -

$-

$  (26)

$  (21)

$8

$8

Gross margin

13.0%

12.0%




























  • The management fee rate was 25 percent for both the fourth quarters of 2011 and 2010.  Direct written premiums of the property and casualty insurance operations, upon which the management fee is calculated, increased 6.7 percent in the fourth quarter of 2011, due to a 2.5 percent increase in policies in force and an increase in average premium.  The year-over-year average premium per policy for all lines of business increased 3.3 percent at December 31, 2011, compared to an increase of 1.1 percent at December 31, 2010.
  • The cost of management operations increased to $225 million in the fourth quarter 2011 from $215 million in the fourth quarter of 2010.  Fourth quarter 2011 commissions increased $2 million compared to the fourth quarter of 2010, while fourth quarter 2011 non-commission expense increased $8 million.  The increase in non-commission expense was primarily due to increases in professional fees and software expenses of $6 million, and agent related expenses of $2 million.


Property and Casualty Insurance Operations







Indemnity
shareholder
interest

Noncontrolling
interest
(Exchange)

Elimination of
related party
transactions

Erie
Insurance
Group

(dollars in millions)

4Q'11

4Q'10

4Q'11

4Q'10

4Q'11

4Q'10

4Q'11

4Q'10

Net premiums earned

$  -

$   55

$1,060

$ 944

$    -

$    -

$1,060

$999

Losses and loss expenses

-

37

696

633

(1)

(1)

695

669

Policy acquisition and other underwriting expenses

-

15

296

269

(29)

(23)

267

261

Total losses and expenses

-

52

992

902

(30)

(24)

962

930

Income from property and casualty insurance operations before taxes

$  -

$     3

$     68

$   42

$ 30

$ 24

$     98

$  69

Combined ratio

-

95.3%

93.5%

95.3%


























  • Prior to and through December 31, 2010, the underwriting results retained by Erie Insurance Company ("EIC") and Erie Insurance Company of New York ("ENY") 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 accrue to the interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest, beginning in the first quarter of 2011.


Life Insurance Operations







Indemnity
shareholder
interest

Noncontrolling
interest
(Exchange)

Elimination of
related party
transactions

Erie
Insurance
Group

(dollars in millions)

4Q'11

4Q'10

4Q'11

4Q'10

4Q'11

4Q'10

4Q'11

4Q'10

Total revenue

$ -

$9

$43

$36

$(1)

$0

$42

$45

Total benefits and expenses

-

6

31

26

0

0

31

32

Income from life insurance operations

before taxes

$ -

$3

$12

$10

$(1)

$0

$11

$13






















  • Prior to and through March 31, 2011, Indemnity retained a 21.6 percent ownership interest in EFL which accrued to the Indemnity shareholder interest.  Due to the sale of Indemnity's ownership interest in EFL to the Exchange on March 31, 2011, 100 percent of the life insurance results accrue to the interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest, beginning in the second quarter of 2011.


Investment Operations







Indemnity  
shareholder
interest

Noncontrolling
interest
(Exchange)

Elimination of
related party
transactions

Erie
Insurance
Group

(dollars in millions)

4Q'11

4Q'10

4Q'11

4Q'10

4Q'11

4Q'10

4Q'11

4Q'10

Net investment income

$4

$ 9

$  83

$   80

$(3)

$(3)

$  84

$   86

Net realized gains (losses) on investments

2

(8)

227

202

-

-

229

194

Net impairment losses recognized in

  earnings

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

$7

$11

$304

$319

$(3)

$(3)

$308

$327






















  • Net investment income, which primarily includes interest and dividends on bonds and stocks, decreased $5 million in the fourth quarter of 2011.  The fourth quarter of 2010 includes $6 million of net investment income from EIC, ENY and Erie Insurance Property & Casualty Company which were sold to the Exchange on December 31, 2010.
  • Net realized gains on investments totaled $2 million in the fourth quarter of 2011, compared to losses of $8 million recorded in the fourth quarter of 2010.  The net realized gains generated in the fourth quarter of 2011 were primarily due to increases in the valuation on the common stock portfolio.  The net realized losses generated in the fourth quarter of 2010 were primarily due to the sale of limited partnership holdings as a part of a tax planning strategy to recapture tax paid on previous period capital gains that were due to expire.
  • Equity in earnings of limited partnerships decreased $9 million in the fourth quarter of 2011.  Losses on private equity limited partnerships totaled $3 million in the fourth quarter of 2011, compared to earnings of $5 million in the fourth quarter of 2010.

Year-to-Date 2011 Results


Results of the Erie Insurance Group's Operations







Indemnity  
shareholder
interest

Noncontrolling
interest
(Exchange)

Elimination of
related party
transactions

Erie
Insurance
Group

(dollars in millions)

2011

2010

2011

2010

2011

2010

2011

2010

Management operations      

$208

$202

$     -

$    -

$(175)

$(168)

$    33

$  34

Property and casualty insurance operations              

-

0

(378)

(3)

188

179

(190)

176

Life insurance operations

3

11

47

39

(2)

0

48

50

Investment operations

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






















  • Net income attributable to Indemnity per share-diluted was $3.08 per share for the year ending December 31, 2011 compared to net income per share-diluted of $2.85 per share for the year ending December 31, 2010.  The year ending December 31, 2011 net income amount includes $0.02 per share-diluted related to operations sold to the Exchange compared to $0.47 per share-diluted for the year ending December 31, 2010.  Also, Indemnity’s 2010 provision for income taxes reflects a charge of $18 million, or $0.31 per share-diluted, for a deferred tax expense related to the sale of its 21.6 percent ownership interest in EFL to the Exchange.
  • Operating income attributable to Indemnity per share-diluted (excluding net realized gains or losses, impairments on investments and related taxes) was $3.04 per share for the year ending December 31, 2011 compared to $2.88 per share-diluted for the year ending December 31, 2010.  The year ending December 31, 2011, operating income amount includes $0.02 per share-diluted related to operations sold to the Exchange compared to $0.42 per share-diluted for the year ending December 31, 2010.  Also, Indemnity’s 2010 provision for income taxes reflects a charge of $18 million, or $0.31 per share-diluted, for a deferred tax expense related to the sale of its 21.6 percent ownership interest in EFL to the Exchange.
  • Indemnity's management operations pretax income increased to $208 million for the year ending December 31, 2011 from $202 million for the year ending December 31, 2010, driven primarily by a 5.9 percent increase in direct written premiums of the Property and Casualty Group.  The gross margin from management operations decreased to 18.9 percent for the year ending December 31, 2011, from 19.4 percent for the year ending December 31, 2010, as a result of expense growth slightly outpacing revenue growth.
  • Indemnity's investment operations pretax income totaled $45 million for the year ending December 31, 2011 compared to $56 million for the year ending December 31, 2010.
  • Indemnity's fourth quarter of 2010 provision for income taxes reflects a charge of $18 million, or $0.31 per share-diluted, for a deferred tax expense related to the sale of its 21.6 percent ownership interest in EFL to the Exchange.

Share Repurchase Program

In the fourth quarter of 2011, we repurchased 0.3 million shares of our outstanding Class A nonvoting common stock at a total cost of $23 million in conjunction with our current stock repurchase program.  For the year, we repurchased 2.2 million shares at a total cost of $155 million.  In October 2011, our Board of Directors approved a continuation of the current stock repurchase program for a total of $150 million, with no time limitation.  As of February 17, 2012, we had approximately $128 million in repurchase authority remaining under the program.

According to A.M. Best Company, Erie Insurance Group, based in Erie, Pennsylvania, is the 12th largest automobile and 14th homeowners insurer in the United States based on direct premiums written and the 20th largest property/casualty insurer in the United States based on total lines net premium written. The Group, rated A+ (Superior) by A.M. Best Company, has over 4.3 million policies in force and operates in 11 states and the District of Columbia.  Erie Insurance Group is a FORTUNE 500 company.

Erie Insurance is proud to be named a J.D. Power and Associates' 2011 Customer Service Champion and is one of only 40 companies so named in the U.S.  Erie Insurance has also been recognized on the list of Ward's 50 Group of top performing insurance companies.  The Ward's 50 award analyzes the financial performance of 3,000 property and casualty companies and nearly 800 life and health insurance companies and recognizes the top performers for achieving outstanding financial results in safety and consistency over a five-year period (2006-2010).

News releases and more information about Erie Insurance Group are available at www.erieinsurance.com.

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995:

Statements contained herein that are not historical fact are forward-looking statements and, as such, are subject to risks and uncertainties that could cause actual events and results to differ, perhaps materially, from those discussed herein. Forward-looking statements relate to future trends, events or results and include, without limitation, statements and assumptions on which such statements are based that are related to our plans, strategies, objectives, expectations, intentions and adequacy of resources. Examples of forward-looking statements are discussions relating to premium and investment income, expenses, operating results, agency relationships, and compliance with contractual and regulatory requirements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Among the risks and uncertainties, in addition to those set forth in our filings with the Securities and Exchange Commission, that could cause actual results and future events to differ from those set forth or contemplated in the forward-looking statements include the following:

Risk factors related to the Indemnity shareholder interest:

  • dependence on Indemnity's relationship with the Exchange and the management fee under the agreement with the subscribers at the Exchange;
  • costs of providing services to the Exchange under the subscriber's agreement;
  • ability to attract and retain talented management and employees;
  • ability to maintain uninterrupted business operations, including information technology systems;
  • factors affecting the quality and liquidity of Indemnity's investment portfolio;
  • credit risk from the Exchange;
  • Indemnity's ability to meet liquidity needs and access capital; and
  • outcome of pending and potential litigations against Indemnity.

Risk factors related to the non-controlling interest owned by the Exchange, which includes the Property and Casualty Group and EFL:

  • general business and economic conditions;
  • dependence upon the independent agency system;
  • ability to maintain our reputation for customer service;
  • factors affecting insurance industry competition;
  • changes in government regulation of the insurance industry;
  • premium rates and reserves must be established from forecasts of ultimate costs;
  • emerging claims, coverage issues in the industry, and changes in reserve estimates related to the property and casualty business;
  • changes in reserve estimates related to the life business;
  • severe weather conditions or other catastrophic losses, including terrorism;
  • the Exchange's ability to acquire reinsurance coverage and collectability from reinsurers;
  • factors affecting the quality and liquidity of the Exchange's investment portfolio;
  • the Exchange's ability to meet liquidity needs and access capital;
  • the Exchange's ability to maintain acceptable financial strength rating;
  • outcome of pending and potential litigations against the Exchange; and
  • dependency upon the service provided by Indemnity.

A forward-looking statement speaks only as of the date on which it is made and reflects Indemnity's analysis only as of that date. Indemnity undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changes in assumptions, or otherwise.

Erie Indemnity Company

Consolidated Statements of Operations

(dollars in millions, except per share data)












Three months ended


Twelve months ended



December 31,


December 31,



2011


2010


2011


2010

Revenues








  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








Indemnity



Noncontrolling interest


related party








shareholder 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



-


3



68


42


30

24


98


69

      insurance operations before taxes


















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








Indemnity



Noncontrolling interest


related party








shareholder 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



-


0



(378)


(3)


188

179


(190)


176

      insurance operations before taxes


















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) 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

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


Indemnity



Shareholder interest


Shareholder interest



Three months ended


Year ended

(in millions, except per share data)


December 31,


December 31,



2011

2010


2011

2010



(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)  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.    



Erie Indemnity Company

Consolidated Statements of Financial Position

(in millions)











December 31,



December 31,




2011



2010








Assets





  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



SOURCE Erie Indemnity Company

Wordcount: 5366



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