FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PERSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
Commission
file number 0-24000
ERIE INDEMNITY COMPANY
(Exact name of registrant as specified in its charter)
|
|
|
PENNSYLVANIA
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25-0466020 |
|
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|
(State or other jurisdiction of
incorporation or organization)
|
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(I.R.S. Employer
Identification No.) |
|
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|
100 Erie Insurance Place, Erie, Pennsylvania
|
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16530 |
|
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|
(Address of principal executive offices)
|
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(Zip Code) |
(814) 870-2000
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes þ No o
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 period 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 a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
The number of shares outstanding of the registrants Class A Common Stock as of the latest
practicable date, with no par value and a stated value of $.0292 per share, was 51,376,513 at
October 22, 2008.
The number of shares outstanding of the registrants Class B Common Stock as of the latest
practicable date, with no par value and a stated value of $70 per share, was 2,551 at October 22,
2008.
INDEX
ERIE INDEMNITY COMPANY
|
|
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3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
5 |
|
|
|
6 |
|
|
|
7 |
|
|
|
8 |
|
|
|
29 |
|
|
|
45 |
|
|
|
46 |
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|
|
47 |
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|
47 |
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|
47 |
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|
48 |
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SIGNATURES |
49 |
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(dollars in thousands, except share data)
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September 30, |
|
December 31, |
|
|
2008 |
|
2007 |
|
|
(Unaudited) |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
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|
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Investments |
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|
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|
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Available-for-sale securities, at fair value: |
|
|
|
|
|
|
|
|
Fixed maturities (amortized cost of $617,244 and $702,488,
respectively) |
|
$ |
596,728 |
|
|
$ |
703,406 |
|
Equity securities (cost of $74,841 and $204,005, respectively) |
|
|
68,868 |
|
|
|
218,270 |
|
Trading securities, at fair value (cost of $79,021) |
|
|
74,506 |
|
|
|
0 |
|
Limited partnerships (cost of $263,831 and $235,886, respectively) |
|
|
311,969 |
|
|
|
292,503 |
|
Real estate mortgage loans |
|
|
1,237 |
|
|
|
4,556 |
|
|
|
|
Total investments |
|
|
1,053,308 |
|
|
|
1,218,735 |
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents |
|
|
18,158 |
|
|
|
31,070 |
|
Accrued investment income |
|
|
9,831 |
|
|
|
9,713 |
|
Premiums receivable from policyholders |
|
|
261,020 |
|
|
|
243,612 |
|
Federal income taxes recoverable |
|
|
0 |
|
|
|
1,451 |
|
Deferred income taxes |
|
|
14,594 |
|
|
|
0 |
|
Reinsurance recoverable from Erie Insurance Exchange on unpaid
losses and loss adjustment expenses |
|
|
802,315 |
|
|
|
833,554 |
|
Ceded unearned premiums to Erie Insurance Exchange |
|
|
118,455 |
|
|
|
110,524 |
|
Note receivable from Erie Family Life Insurance |
|
|
25,000 |
|
|
|
25,000 |
|
Other receivables due from Erie Insurance Exchange and affiliates |
|
|
240,205 |
|
|
|
208,752 |
|
Reinsurance recoverable from non-affiliates |
|
|
2,277 |
|
|
|
2,323 |
|
Deferred policy acquisition costs |
|
|
17,113 |
|
|
|
16,129 |
|
Equity in Erie Family Life Insurance |
|
|
42,264 |
|
|
|
59,046 |
|
Securities lending collateral |
|
|
14,890 |
|
|
|
30,370 |
|
Pension plan asset |
|
|
43,968 |
|
|
|
32,460 |
|
Other assets |
|
|
71,528 |
|
|
|
55,884 |
|
|
|
|
Total assets |
|
$ |
2,734,926 |
|
|
$ |
2,878,623 |
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
3
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Continued)
(dollars in thousands, except share data)
|
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|
|
|
|
|
|
|
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September 30, |
|
December 31, |
|
|
2008 |
|
2007 |
|
|
(Unaudited) |
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Liabilities |
|
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Unpaid losses and loss adjustment expenses |
|
$ |
995,603 |
|
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$ |
1,026,531 |
|
Unearned premiums |
|
|
445,831 |
|
|
|
421,263 |
|
Commissions payable |
|
|
135,267 |
|
|
|
122,473 |
|
Agent bonuses |
|
|
58,821 |
|
|
|
94,458 |
|
Securities lending collateral |
|
|
14,890 |
|
|
|
30,370 |
|
Bank line of credit |
|
|
30,000 |
|
|
|
0 |
|
Accounts payable and accrued expenses |
|
|
54,971 |
|
|
|
41,057 |
|
Deferred executive compensation |
|
|
16,718 |
|
|
|
23,499 |
|
Deferred income taxes |
|
|
0 |
|
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|
14,598 |
|
Federal income taxes payable |
|
|
452 |
|
|
|
0 |
|
Dividends payable |
|
|
22,774 |
|
|
|
23,637 |
|
Employee benefit obligations |
|
|
25,816 |
|
|
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29,458 |
|
|
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|
Total liabilities |
|
|
1,801,143 |
|
|
|
1,827,344 |
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Shareholders Equity |
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Capital stock: |
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Class A common, stated value $.0292 per share;
authorized 74,996,930 shares; issued 68,277,600
shares; 51,376,513 and 53,338,937 shares
outstanding, respectively |
|
|
1,991 |
|
|
|
1,991 |
|
Class B common, convertible at a rate of 2,400 Class A
shares for one Class B share, stated value $70
per share; and 2,551 shares authorized, issued
and outstanding |
|
|
179 |
|
|
|
179 |
|
Additional paid-in capital |
|
|
7,830 |
|
|
|
7,830 |
|
Accumulated other comprehensive (loss) income |
|
|
(26,856 |
) |
|
|
10,048 |
|
|
|
|
|
|
|
|
|
|
Retained earnings, before cumulative effect adjustment |
|
|
1,747,050 |
|
|
|
1,740,174 |
|
Cumulative effect adjustment from adoption of
Statement of Financial Accounting Standards
No. 159, net of tax |
|
|
11,191 |
|
|
|
0 |
|
|
|
|
Retained earnings, after cumulative effect adjustment |
|
|
1,758,241 |
|
|
|
1,740,174 |
|
|
|
|
|
|
|
|
|
|
|
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Total contributed capital and retained earnings |
|
|
1,741,385 |
|
|
|
1,760,222 |
|
|
|
|
|
|
|
|
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|
Treasury stock, at cost, 16,901,087 and 14,938,663
shares, respectively |
|
|
(807,602 |
) |
|
|
(708,943 |
) |
|
|
|
Total shareholders equity |
|
|
933,783 |
|
|
|
1,051,279 |
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,734,926 |
|
|
$ |
2,878,623 |
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
4
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(dollars in thousands, except per share data)
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Three months ended |
|
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Nine months ended |
|
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|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
OPERATING REVENUE |
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Management fee revenue, net |
|
$ |
234,120 |
|
|
$ |
232,089 |
|
|
$ |
692,737 |
|
|
$ |
690,432 |
|
Premiums earned |
|
|
52,057 |
|
|
|
51,892 |
|
|
|
155,719 |
|
|
|
155,988 |
|
Service agreement revenue |
|
|
8,340 |
|
|
|
7,470 |
|
|
|
23,480 |
|
|
|
22,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
|
294,517 |
|
|
|
291,451 |
|
|
|
871,936 |
|
|
|
868,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of management operations |
|
|
195,297 |
|
|
|
200,913 |
|
|
|
577,754 |
|
|
|
576,768 |
|
Losses and loss adjustment expenses incurred |
|
|
37,185 |
|
|
|
30,766 |
|
|
|
104,768 |
|
|
|
92,789 |
|
Policy acquisition and other underwriting
expenses |
|
|
12,311 |
|
|
|
13,090 |
|
|
|
36,592 |
|
|
|
36,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
244,793 |
|
|
|
244,769 |
|
|
|
719,114 |
|
|
|
706,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT (LOSS) INCOME UNAFFILIATED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of expenses |
|
|
10,218 |
|
|
|
12,233 |
|
|
|
33,357 |
|
|
|
40,350 |
|
Net realized (losses) gains on investments |
|
|
(41,356 |
) |
|
|
3,438 |
|
|
|
(80,202 |
) |
|
|
7,550 |
|
Equity in earnings of limited partnerships |
|
|
1,057 |
|
|
|
14,169 |
|
|
|
20,310 |
|
|
|
46,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment (loss) income unaffiliated |
|
|
(30,081 |
) |
|
|
29,840 |
|
|
|
(26,535 |
) |
|
|
94,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity in
(losses) earnings of Erie Family Life
Insurance |
|
|
19,643 |
|
|
|
76,522 |
|
|
|
126,287 |
|
|
|
257,037 |
|
Provision for income taxes |
|
|
6,011 |
|
|
|
23,669 |
|
|
|
40,550 |
|
|
|
79,767 |
|
Equity in (losses) earnings of Erie Family
Life Insurance, net of tax |
|
|
(9,384 |
) |
|
|
643 |
|
|
|
(10,197 |
) |
|
|
3,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,248 |
|
|
$ |
53,496 |
|
|
$ |
75,540 |
|
|
$ |
180,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock basic |
|
$ |
0.08 |
|
|
$ |
0.97 |
|
|
$ |
1.45 |
|
|
$ |
3.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock diluted |
|
|
0.07 |
|
|
|
0.87 |
|
|
|
1.30 |
|
|
|
2.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B common stock basic and
diluted |
|
|
15.92 |
|
|
|
145.92 |
|
|
|
216.59 |
|
|
|
482.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock |
|
|
51,376,513 |
|
|
|
55,183,547 |
|
|
|
51,984,203 |
|
|
|
56,727,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B common stock |
|
|
2,551 |
|
|
|
2,559 |
|
|
|
2,551 |
|
|
|
2,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock |
|
|
57,533,591 |
|
|
|
61,370,219 |
|
|
|
58,141,281 |
|
|
|
62,935,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B common stock |
|
|
2,551 |
|
|
|
2,559 |
|
|
|
2,551 |
|
|
|
2,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock |
|
$ |
0.44 |
|
|
$ |
0.40 |
|
|
$ |
1.32 |
|
|
$ |
1.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B common stock |
|
|
66.00 |
|
|
|
60.00 |
|
|
|
198.00 |
|
|
|
180.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
5
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
(8,543 |
) |
|
$ |
(1,359 |
) |
|
$ |
10,048 |
|
|
$ |
5,422 |
|
Adjustment to opening balance, net of tax* |
|
|
0 |
|
|
|
0 |
|
|
|
(11,191 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance, beginning of period |
|
|
(8,543 |
) |
|
|
(1,359 |
) |
|
|
(1,143 |
) |
|
|
5,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized (losses) gains arising during
period |
|
|
(66,105 |
) |
|
|
1,049 |
|
|
|
(98,040 |
) |
|
|
(5,272 |
) |
Less: reclassification adjustment for gross
realized
losses (gains) included in net income |
|
|
37,932 |
|
|
|
(3,438 |
) |
|
|
58,482 |
|
|
|
(7,550 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in comprehensive loss, before tax |
|
|
(28,173 |
) |
|
|
(2,389 |
) |
|
|
(39,558 |
) |
|
|
(12,822 |
) |
Income tax benefit related to items of other
comprehensive loss |
|
|
9,860 |
|
|
|
836 |
|
|
|
13,845 |
|
|
|
4,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in other comprehensive (loss) income,
net of tax |
|
|
(18,313 |
) |
|
|
(1,553 |
) |
|
|
(25,713 |
) |
|
|
(8,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
(26,856 |
) |
|
$ |
(2,912 |
) |
|
$ |
(26,856 |
) |
|
$ |
(2,912 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,248 |
|
|
$ |
53,496 |
|
|
$ |
75,540 |
|
|
$ |
180,344 |
|
Net change in accumulated other comprehensive
(loss) income |
|
|
(18,313 |
) |
|
|
(1,553 |
) |
|
|
(25,713 |
) |
|
|
(8,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income |
|
$ |
(14,065 |
) |
|
$ |
51,943 |
|
|
$ |
49,827 |
|
|
$ |
172,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Unrealized gains related to common stock were reclassified to retained earnings upon the adoption
of the fair value option at January 1, 2008 in accordance with SFAS No. 159. See Note 6 for
further discussion. |
See accompanying notes to Consolidated Financial Statements.
6
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Management fee received |
|
$ |
660,047 |
|
|
$ |
682,700 |
|
Service agreement fee received |
|
|
23,880 |
|
|
|
22,686 |
|
Premiums collected |
|
|
157,813 |
|
|
|
157,214 |
|
Settlement of commutation received from Exchange |
|
|
0 |
|
|
|
6,782 |
|
Net investment income received |
|
|
38,318 |
|
|
|
40,811 |
|
Limited partnership distributions |
|
|
21,738 |
|
|
|
66,149 |
|
Salaries and wages paid |
|
|
(81,030 |
) |
|
|
(80,986 |
) |
Pension contribution and employee benefits paid |
|
|
(36,972 |
) |
|
|
(30,639 |
) |
Commissions paid to agents |
|
|
(326,940 |
) |
|
|
(325,963 |
) |
Agent bonuses paid |
|
|
(94,855 |
) |
|
|
(91,758 |
) |
General operating expenses paid |
|
|
(77,859 |
) |
|
|
(64,586 |
) |
Interest paid on bank line of credit |
|
|
(953 |
) |
|
|
|
|
Losses paid |
|
|
(88,748 |
) |
|
|
(85,735 |
) |
Loss adjustment expenses paid |
|
|
(15,765 |
) |
|
|
(16,002 |
) |
Other underwriting and acquisition costs paid |
|
|
(42,474 |
) |
|
|
(39,673 |
) |
Income taxes paid |
|
|
(56,360 |
) |
|
|
(61,552 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
79,840 |
|
|
|
179,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
Purchase of investments: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
(141,641 |
) |
|
|
(129,098 |
) |
Preferred stock |
|
|
(31,343 |
) |
|
|
(41,840 |
) |
Common stock |
|
|
(55,894 |
) |
|
|
(64,424 |
) |
Limited partnerships |
|
|
(44,702 |
) |
|
|
(68,319 |
) |
Sales/maturities of investments: |
|
|
|
|
|
|
|
|
Fixed maturity sales |
|
|
121,966 |
|
|
|
177,363 |
|
Fixed maturity calls/maturities |
|
|
80,088 |
|
|
|
71,427 |
|
Preferred stock |
|
|
35,560 |
|
|
|
66,038 |
|
Common stock |
|
|
72,508 |
|
|
|
68,406 |
|
Sale and return of limited partnerships |
|
|
20,368 |
|
|
|
7,723 |
|
(Purchase) disposal of property and equipment |
|
|
(8,551 |
) |
|
|
100 |
|
Net distributions on agent loans |
|
|
(2,924 |
) |
|
|
(5,643 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
45,435 |
|
|
|
81,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds from bank line of credit |
|
|
75,000 |
|
|
|
|
|
Payments on bank line of credit |
|
|
(45,000 |
) |
|
|
|
|
Purchase of treasury stock |
|
|
(98,659 |
) |
|
|
(219,827 |
) |
Dividends paid to shareholders |
|
|
(69,528 |
) |
|
|
(69,438 |
) |
(Decrease) increase in collateral from securities lending |
|
|
(15,480 |
) |
|
|
6,336 |
|
Redemption (acquisition) of securities lending collateral |
|
|
15,480 |
|
|
|
(6,336 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(138,187 |
) |
|
|
(289,265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(12,912 |
) |
|
|
(28,084 |
) |
Cash and cash equivalents at beginning of period |
|
|
31,070 |
|
|
|
60,241 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
18,158 |
|
|
$ |
32,157 |
|
|
|
|
|
|
|
|
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 our wholly owned property/casualty insurance subsidiaries, Erie Insurance
Company (EIC), Erie Insurance Company of New York (EINY) and Erie Insurance Property and 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 nine-month period ended September 30, 2008 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2008. For further information, refer to the
consolidated financial statements and footnotes included in our Form 10-K for the year ended
December 31, 2007 as filed with the Securities and Exchange Commission on February 27, 2008. Erie
Insurance Exchange (Exchange), for whom we serve as attorney-in-fact, and its property/casualty
subsidiary, Flagship City Insurance Company, our three insurance subsidiaries, EIC, EICNY and EIPC
and Erie Family Life Insurance Company (EFL) operate collectively as the Erie Insurance Group
(Group).
NOTE 2 RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159) which became effective for us on January 1, 2008. SFAS 159 gave us the irrevocable
option to report selected financial assets and liabilities at fair value. SFAS 159 also established
presentation and disclosure requirements designed to facilitate comparisons between companies that
choose different measurement bases for similar types of assets and liabilities. We adopted the
fair value option for our common stock portfolio as of January 1, 2008 because it better reflects
the way we manage our common stock portfolio under a total return approach. These assets were
formerly accounted for as available-for-sale under SFAS 115, Accounting for Certain Investments in
Debt and Equity Securities, with changes in fair value recorded in other comprehensive income.
Beginning January 1, 2008 all changes in fair value of our common stock are recognized in earnings
as they occur. The adoption of SFAS 159 required the unrealized gains and losses on these
securities at January 1, 2008 to be included in a cumulative effect adjustment to beginning
retained earnings. The net impact of the cumulative effect adjustment for our common stock
portfolio on January 1, 2008 increased retained earnings and reduced other comprehensive income by
$11.2 million, net of tax. See also Note 6 herein.
In 2006, SFAS 157, Fair Value Measurements, was issued and provides guidance for using fair
value to measure assets and liabilities as well as enhances disclosures about fair value
measurements which became effective for us on January 1, 2008. The standard applies whenever other
standards require, or permit, assets or liabilities to be measured at fair value. The standard did
not expand the use of fair value in any new circumstances and thus, did not have an impact on our
financial position, results of operations or cash flows. The statement established a fair value
hierarchy that prioritizes the observable and unobservable inputs to valuation techniques used to
measure fair value into three levels. Quantitative and qualitative disclosures focus on the
inputs used to measure fair value for these measurements and the effects of these measurements in
the financial statements. We implemented this standard during the first quarter of 2008 and have
provided the required disclosures concerning inputs used to measure fair value in Note 6 herein.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3 SIGNIFICANT ACCOUNTING POLICIES
Available-for-sale securities
Fixed maturity and preferred stock securities are classified as available-for-sale and are reported
at fair value. Unrealized holding gains and losses, net of related tax effects, on fixed
maturities and preferred stock are charged or credited directly to shareholders equity as
accumulated other comprehensive (loss) income.
Realized gains and losses on sales of fixed maturity and preferred stock securities are recognized
in income based upon the specific identification method. Interest and dividend income are
recognized as earned.
Fixed income and preferred stock securities are evaluated quarterly for other-than-temporary
impairment loss. Some factors considered in evaluating whether a decline in fair value is
other-than-temporary include:
|
|
|
the extent and duration to which fair value is less than cost; |
|
|
|
|
historical operating performance and financial condition of the issuer; |
|
|
|
|
short and long-term prospects of the issuer and its industry based on analysts
recommendations; |
|
|
|
|
specific events that occurred affecting the issuer, including a ratings downgrade; and |
|
|
|
|
our ability and intent to hold the investment for a period of time sufficient to allow
for a recovery in value. |
Perpetual preferred securities and hybrid preferred securities are evaluated without considering
any bond like characteristics. We believe this approach to be more conservative since the lack of a
final maturity and unlikelihood of a call means recovery is uncertain and would occur over a
multiyear period. If we believe we have the intent and ability to hold these types of securities
until recovery we would not record an other-than-temporary impairment.
An investment that is deemed other than temporarily impaired is written down to its estimated fair
value. Impairment charges are included in net realized (losses) gains in the Consolidated
Statements of Operations.
Trading securities
Common stock securities were reclassified from available-for-sale at December 31, 2007 to trading
in the first quarter of 2008 with our adoption of SFAS 159. Common stock securities are reported at
fair value. As of January 1, 2008, unrealized gains and losses on these securities are included in
net realized (losses) gains in the Consolidated Statements of Operations. Realized gains and
losses on sales of common stock are recognized in income based upon the specific identification
method. Dividend income is recognized as earned.
NOTE 4 RECLASSIFICATIONS
Certain amounts previously reported in the 2007 financial statements have been reclassified to
conform to the current periods presentation. Such reclassifications only affected the
Consolidated Statements of Cash Flows.
NOTE 5 EARNINGS PER SHARE
Earnings per share are calculated under the two-class method, which allocates earnings to each
class of stock based on its dividend rights. Class B shares are convertible into Class A shares at
a conversion ratio of 2,400 to 1. Class A diluted earnings per share are calculated under the
if-converted method which reflects the conversion of Class B shares and the effect of potentially
dilutive outstanding employee stock-based awards under the long-term incentive plan and awards not
yet vested.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 5 EARNINGS PER SHARE (Continued)
A reconciliation of the numerators and denominators used in the basic and diluted per-share
computations is presented below for each class of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Allocated Net |
|
|
Weighted |
|
|
|
|
|
|
Allocated Net |
|
|
Weighted |
|
|
|
|
|
|
Income |
|
|
Shares |
|
|
Per-Share |
|
|
Income |
|
|
Shares |
|
|
Per-Share |
|
(dollars in thousands except per share data) |
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
Class A Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to Class A stockholders |
|
$ |
4,208 |
|
|
|
51,376,513 |
|
|
$ |
0.08 |
|
|
$ |
53,123 |
|
|
|
55,183,547 |
|
|
$ |
0.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock awards |
|
|
|
|
|
|
34,678 |
|
|
|
|
|
|
|
|
|
|
|
45,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed conversion of Class B shares |
|
|
40 |
|
|
|
6,122,400 |
|
|
|
|
|
|
|
373 |
|
|
|
6,141,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to Class A stockholders
on Class A equivalent shares |
|
$ |
4,248 |
|
|
|
57,533,591 |
|
|
$ |
0.07 |
|
|
$ |
53,496 |
|
|
|
61,370,219 |
|
|
$ |
0.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Basic and Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to Class B stockholders |
|
$ |
40 |
|
|
|
2,551 |
|
|
$ |
15.92 |
|
|
$ |
373 |
|
|
|
2,559 |
|
|
$ |
145.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Allocated Net |
|
|
Weighted |
|
|
|
|
|
|
Allocated Net |
|
|
Weighted |
|
|
|
|
|
|
Income |
|
|
Shares |
|
|
Per-Share |
|
|
Income |
|
|
Shares |
|
|
Per-Share |
|
(dollars in thousands except per share data) |
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
Class A Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to Class A stockholders |
|
$ |
74,988 |
|
|
|
51,984,203 |
|
|
$ |
1.45 |
|
|
$ |
179,106 |
|
|
|
56,727,315 |
|
|
$ |
3.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock awards |
|
|
|
|
|
|
34,678 |
|
|
|
|
|
|
|
|
|
|
|
45,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed conversion of Class B shares |
|
|
552 |
|
|
|
6,122,400 |
|
|
|
|
|
|
|
1,238 |
|
|
|
6,163,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to Class A stockholders
on Class A equivalent shares |
|
$ |
75,540 |
|
|
|
58,141,281 |
|
|
$ |
1.30 |
|
|
$ |
180,344 |
|
|
|
62,935,587 |
|
|
$ |
2.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Basic and Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to Class B stockholders |
|
$ |
552 |
|
|
|
2,551 |
|
|
$ |
216.59 |
|
|
$ |
1,238 |
|
|
|
2,568 |
|
|
$ |
482.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the restricted stock awards not yet vested are awards of 12,535 and 37,716 for the
third quarters of 2008 and 2007, respectively, related to our pre-2004 long-term incentive plan for
executive and senior management. Awards not yet vested related to the outside directors stock
compensation plan were 6,143 and 7,356 for the third quarters of 2008 and 2007, respectively.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6 FAIR VALUE
Fair Value Measurement (SFAS 157)
SFAS 157 provides guidance for using fair value to measure assets and liabilities and enhances
disclosures about fair value measurement (see Note 2). The standard describes three levels of
inputs that may be used to measure fair value, which are provided below.
On October 10, 2008 the FASB issued Financial Staff Position
(FSP) SFAS 157-3, Determining the Fair
Value of a Financial Asset When the Market for that Asset Is Not Active. This FSP provides
clarification regarding the application of SFAS 157 in a market that is not active and provides
illustrations to consider in determining prices in such an environment. This FSP was effective upon
issuance. We have considered the guidance provided in this FSP for securities held at September
30, 2008 that were not actively traded. The adoption of FSP SFAS 157-3 during the third quarter
did not have a material effect on our results of operating financial position or
liquidity.
Valuation techniques used to derive fair value of our available-for-sale and trading securities are
based on observable and unobservable inputs. Observable inputs reflect market data obtained from
independent sources. Unobservable inputs reflect our own assumptions regarding exit market pricing
for these securities. Although the majority of our prices are obtained from third party sources, we
performed an internal review of securities due to the current unstable market conditions to
determine that inputs were observable given low trading volume on certain securities. Certain
securities were downgraded to Level 3 as a result. These techniques provide the inputs for the
following fair value hierarchy:
|
|
|
Level 1
|
|
Quoted prices for identical instruments in active markets. Such
prices are obtained from third party nationally recognized pricing
services. Level 1 securities primarily include publicly traded
common stock, nonredeemable preferred stocks and treasury
securities. |
|
|
|
Level 2
|
|
Observable inputs other than quoted prices in Level 1. These would
include prices obtained from third party pricing services that
model prices based on observable inputs. Included in this category
are primarily municipal securities, asset backed securities,
collateralized-mortgage obligations, foreign and domestic
corporate bonds and redeemable preferred stocks. Nonredeemable
preferred stocks for which a quote in an active market is
unavailable and a value is obtained from a third party pricing
service are also included in this level. |
|
|
|
Level 3
|
|
One or more of the inputs used to determine the value of the
security are unobservable. Fair values for these securities are
determined using comparable securities or valuations received from
outside brokers or dealers. Examples of Level 3 fixed maturities
may include certain private preferred stock and bond securities,
collateralized debt and loan obligations, and credit linked notes. |
The following table represents the fair value measurements on a recurring basis for our invested
assets by major category and level of input as required by SFAS 157:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
Fair value measurements using: |
|
|
|
|
|
|
|
|
Quoted prices |
|
|
|
|
|
|
|
|
|
|
|
|
in active |
|
|
|
|
|
Significant |
|
|
|
|
|
|
markets for |
|
Significant |
|
unobservable |
|
|
|
|
|
|
identical assets |
|
observable inputs |
|
inputs |
(dollars in thousands) |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
596,728 |
|
|
$ |
6,779 |
|
|
$ |
561,886 |
|
|
$ |
28,063 |
|
Preferred stock |
|
|
68,868 |
|
|
|
42,594 |
|
|
|
13,096 |
|
|
|
13,178 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
74,506 |
|
|
|
74,484 |
|
|
|
0 |
|
|
|
22 |
|
|
|
|
Total |
|
$ |
740,102 |
|
|
$ |
123,857 |
|
|
$ |
574,982 |
|
|
$ |
41,263 |
|
|
|
|
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6 FAIR VALUE (Continued)
The following tables provide a reconciliation of assets measured at fair value on a recurring basis
for securities using Level 3 inputs for the three and nine months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized/Unrealized |
|
|
|
|
|
|
|
|
|
|
Quarterly Change: |
|
|
|
|
|
Gains and Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in |
|
|
|
|
|
|
|
|
|
Ending |
|
|
Beginning |
|
|
|
|
|
other |
|
Purchases |
|
Transfers in |
|
balance at |
|
|
balance at |
|
Included in |
|
comprehensive |
|
and sales, |
|
and (out) of |
|
September |
(dollars in thousands) |
|
June 30, 2008 |
|
earnings (1) |
|
income |
|
net |
|
Level 3 (2) |
|
30, 2008 |
|
|
|
Available-for-sale
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
9,139 |
|
|
$ |
(651 |
) |
|
$ |
(623 |
) |
|
$ |
0 |
|
|
$ |
20,198 |
|
|
$ |
28,063 |
|
Preferred stock |
|
|
12,973 |
|
|
|
(1,236 |
) |
|
|
(404 |
) |
|
|
0 |
|
|
|
1,845 |
|
|
|
13,178 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
21 |
|
|
|
0 |
|
|
|
1 |
|
|
|
0 |
|
|
|
0 |
|
|
|
22 |
|
|
|
|
Total Level 3 assets |
|
$ |
22,133 |
|
|
$ |
(1,887 |
) |
|
$ |
(1,026 |
) |
|
$ |
0 |
|
|
$ |
22,043 |
|
|
$ |
41,263 |
|
|
|
|
The fixed maturities in Level 3 are primarily made up of securities in the
financial services
industry affected by the recent turmoil in the credit markets. The fair value of these securities
breaks down as follows:
|
|
|
|
|
(dollars in thousands) |
|
Fair Value |
|
Corporate Debt
|
|
|
|
|
Financial Services Industry |
|
$ |
12,544 |
|
Others |
|
|
5,551 |
|
Asset Backed Securities |
|
|
6,137 |
|
Collateralized Mortgage Obligations |
|
|
3,831 |
|
|
|
|
|
Total |
|
$ |
28,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized/Unrealized |
|
|
|
|
|
|
|
|
|
|
Year-to-Date Change: |
|
|
|
|
|
Gains and Losses |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
|
|
|
Included in |
|
|
|
|
|
|
|
|
|
Ending |
|
|
balance at |
|
|
|
|
|
other |
|
Purchases |
|
Transfers in |
|
balance at |
|
|
December 31, |
|
Included in |
|
comprehensive |
|
and sales, |
|
and (out) of |
|
September |
(dollars in thousands) |
|
2007 |
|
earnings (1) |
|
income |
|
net |
|
Level 3 (2) |
|
30, 2008 |
|
|
|
Available-for-sale
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
10,941 |
|
|
$ |
(1,250 |
) |
|
$ |
(253 |
) |
|
$ |
1,446 |
|
|
$ |
17,179 |
|
|
$ |
28,063 |
|
Preferred stock |
|
|
5,858 |
|
|
|
(1,836 |
) |
|
|
(1,201 |
) |
|
|
2,000 |
|
|
|
8,357 |
|
|
|
13,178 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
21 |
|
|
|
0 |
|
|
|
1 |
|
|
|
0 |
|
|
|
0 |
|
|
|
22 |
|
|
|
|
Total Level 3 assets |
|
$ |
16,820 |
|
|
$ |
(3,086 |
) |
|
$ |
(1,453 |
) |
|
$ |
3,446 |
|
|
$ |
25,536 |
|
|
$ |
41,263 |
|
|
|
|
|
|
|
(1) |
|
These losses are a result of other-than-temporary impairments and are reported in the
Consolidated Statements of Operations. There were no unrealized gains or losses included in
earnings at September 30, 2008 on Level 3 securities. |
|
(2) |
|
Transfers in to Level 3 would be attributable to changes in the availability of market
observable information for individual securities within the respective categories. |
We have no assets that were measured at fair value on a nonrecurring basis during the nine months
ended September 30, 2008.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 6 FAIR VALUE (Continued)
Fair Value Option (SFAS 159)
Effective January 1, 2008, the Company adopted SFAS 159 for our common stock portfolio (See Note
2). The following table represents the December 31, 2007 carrying value of these assets, the
transition adjustment booked to retained earnings and the carrying value as of January 1, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2008 |
|
|
|
December 31, 2007 |
|
|
Cumulative effect |
|
|
fair value (carrying |
|
|
|
(carrying value |
|
|
adjustment to January 1, |
|
|
value after |
|
(dollars in thousands) |
|
prior to adoption) |
|
|
2008 retained earnings |
|
|
adoption) |
|
|
|
|
Common stock |
|
$ |
108,090 |
|
|
$ |
17,216 |
|
|
$ |
108,090 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax adjustment |
|
|
|
|
|
|
(6,025 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value, net of
deferred tax
adjustment |
|
|
|
|
|
$ |
11,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7 INVESTMENTS
Fixed maturities and equity securities
Fixed maturities consist of bonds, notes and redeemable preferred stock. Equity securities include
nonredeemable preferred stock at September 30, 2008 and common and preferred stock at December 31,
2007. The following tables summarize the cost and fair value of our available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
unrealized |
|
unrealized |
|
Estimated |
(dollars in thousands) |
|
cost |
|
gains |
|
losses |
|
fair value |
|
|
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries and government agencies |
|
$ |
3,469 |
|
|
$ |
251 |
|
|
$ |
1 |
|
|
$ |
3,719 |
|
Foreign government |
|
|
1,998 |
|
|
|
0 |
|
|
|
11 |
|
|
|
1,987 |
|
Municipal securities |
|
|
212,470 |
|
|
|
206 |
|
|
|
5,511 |
|
|
|
207,165 |
|
U.S. corporate debt |
|
|
296,296 |
|
|
|
1,815 |
|
|
|
15,200 |
|
|
|
282,911 |
|
Foreign corporate debt |
|
|
66,782 |
|
|
|
441 |
|
|
|
2,205 |
|
|
|
65,018 |
|
Mortgage-backed securities |
|
|
13,647 |
|
|
|
601 |
|
|
|
537 |
|
|
|
13,711 |
|
Asset-backed securities |
|
|
12,082 |
|
|
|
24 |
|
|
|
626 |
|
|
|
11,480 |
|
|
|
|
Total bonds |
|
|
606,744 |
|
|
|
3,338 |
|
|
|
24,091 |
|
|
|
585,991 |
|
Redeemable preferred stock |
|
|
10,500 |
|
|
|
285 |
|
|
|
48 |
|
|
|
10,737 |
|
|
|
|
Total fixed maturities |
|
$ |
617,244 |
|
|
$ |
3,623 |
|
|
$ |
24,139 |
|
|
$ |
596,728 |
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. nonredeemable preferred stock |
|
$ |
70,375 |
|
|
$ |
1,250 |
|
|
$ |
6,766 |
|
|
$ |
64,859 |
|
Foreign nonredeemable preferred stock |
|
|
4,466 |
|
|
|
0 |
|
|
|
457 |
|
|
|
4,009 |
|
|
|
|
Total equity securities |
|
$ |
74,841 |
|
|
$ |
1,250 |
|
|
$ |
7,223 |
|
|
$ |
68,868 |
|
|
|
|
Total available-for-sale securities |
|
$ |
692,085 |
|
|
$ |
4,873 |
|
|
$ |
31,362 |
|
|
$ |
665,596 |
|
|
|
|
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 7 INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
unrealized |
|
unrealized |
|
Estimated |
(dollars in thousands) |
|
cost |
|
gains |
|
losses |
|
fair value |
|
|
|
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries and government agencies |
|
$ |
4,406 |
|
|
$ |
272 |
|
|
$ |
0 |
|
|
$ |
4,678 |
|
Municipal securities |
|
|
247,412 |
|
|
|
2,314 |
|
|
|
358 |
|
|
|
249,368 |
|
U.S. corporate debt |
|
|
324,218 |
|
|
|
5,231 |
|
|
|
5,921 |
|
|
|
323,528 |
|
Foreign corporate debt |
|
|
83,335 |
|
|
|
2,175 |
|
|
|
1,106 |
|
|
|
84,404 |
|
Mortgage-backed securities |
|
|
11,565 |
|
|
|
602 |
|
|
|
38 |
|
|
|
12,129 |
|
Asset-backed securities |
|
|
16,329 |
|
|
|
0 |
|
|
|
2,189 |
|
|
|
14,140 |
|
|
|
|
Total bonds |
|
|
687,265 |
|
|
|
10,594 |
|
|
|
9,612 |
|
|
|
688,247 |
|
Redeemable preferred stock |
|
|
15,223 |
|
|
|
614 |
|
|
|
678 |
|
|
|
15,159 |
|
|
|
|
Total fixed maturities |
|
$ |
702,488 |
|
|
$ |
11,208 |
|
|
$ |
10,290 |
|
|
$ |
703,406 |
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. common stock |
|
$ |
66,449 |
|
|
$ |
12,754 |
|
|
$ |
0 |
|
|
$ |
79,203 |
|
Foreign common stock |
|
|
24,408 |
|
|
|
4,549 |
|
|
|
70 |
|
|
|
28,887 |
|
U.S. nonredeemable preferred stock |
|
|
108,018 |
|
|
|
1,978 |
|
|
|
4,960 |
|
|
|
105,036 |
|
Foreign nonredeemable preferred stock |
|
|
5,130 |
|
|
|
250 |
|
|
|
236 |
|
|
|
5,144 |
|
|
|
|
Total equity securities |
|
$ |
204,005 |
|
|
$ |
19,531 |
|
|
$ |
5,266 |
|
|
$ |
218,270 |
|
|
|
|
Total available-for-sale securities |
|
$ |
906,493 |
|
|
$ |
30,739 |
|
|
$ |
15,556 |
|
|
$ |
921,676 |
|
|
|
|
Trading securities
The following table summarizes the cost and fair value of our common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
unrealized |
|
unrealized |
|
Estimated |
(dollars in thousands) |
|
cost |
|
gains |
|
losses |
|
fair value |
|
|
|
Trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. common stock |
|
$ |
54,381 |
|
|
$ |
5,065 |
|
|
$ |
7,657 |
|
|
$ |
51,789 |
|
Foreign common stock |
|
|
24,640 |
|
|
|
1,222 |
|
|
|
3,145 |
|
|
|
22,717 |
|
|
|
|
Total trading securities |
|
$ |
79,021 |
|
|
$ |
6,287 |
|
|
$ |
10,802 |
|
|
$ |
74,506 |
|
|
|
|
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 7 INVESTMENTS (Continued)
The components of net realized losses and gains on investments as reported in the Consolidated
Statements of Operations are included below. Continued declines in the financial services
industry, specifically the banking industry, and declining bond and preferred stock prices, have
resulted in further impairment charges during the third quarter of 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
$ |
137 |
|
|
$ |
1,890 |
|
|
$ |
2,311 |
|
|
$ |
2,305 |
|
Gross realized losses |
|
|
(775 |
) |
|
|
(523 |
) |
|
|
(1,115 |
) |
|
|
(745 |
) |
Impairment charges |
|
|
(15,747 |
) |
|
|
0 |
|
|
|
(29,717 |
) |
|
|
(1,635 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (losses) gains |
|
|
(16,385 |
) |
|
|
1,367 |
|
|
|
(28,521 |
) |
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
|
2,377 |
|
|
|
7,156 |
|
|
|
5,061 |
|
|
|
15,787 |
|
Gross realized losses |
|
|
(1,572 |
) |
|
|
(2,095 |
) |
|
|
(5,993 |
) |
|
|
(4,140 |
) |
Impairment charges |
|
|
(21,683 |
) |
|
|
(2,990 |
) |
|
|
(32,117 |
) |
|
|
(4,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (losses) gains |
|
|
(20,878 |
) |
|
|
2,071 |
|
|
|
(33,049 |
) |
|
|
7,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
|
3,579 |
|
|
|
0 |
|
|
|
10,275 |
|
|
|
0 |
|
Gross realized losses |
|
|
(4,247 |
) |
|
|
0 |
|
|
|
(8,814 |
) |
|
|
0 |
|
Valuation adjustments |
|
|
(3,425 |
) |
|
|
0 |
|
|
|
(21,721 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized losses |
|
|
(4,093 |
) |
|
|
0 |
|
|
|
(20,260 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partnerships: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
|
0 |
|
|
|
0 |
|
|
|
3,541 |
|
|
|
0 |
|
Gross realized losses |
|
|
0 |
|
|
|
0 |
|
|
|
(1,913 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains |
|
|
0 |
|
|
|
0 |
|
|
|
1,628 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized (losses)
gains on investments |
|
$ |
(41,356 |
) |
|
$ |
3,438 |
|
|
$ |
(80,202 |
) |
|
$ |
7,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 7 INVESTMENTS (Continued)
Limited partnerships
For the nine months ended September 30, 2008 our equity in earnings from these partnerships as
reported in the Consolidated Statements of Operations totaled 16.1% of our pre-tax income. While we
do not exert significant influence over any of these partnerships, because we account for them
under the equity method of accounting, we are providing summarized financial information in the
following tables as of September 30, 2008 and December 31, 2007. Amounts provided in the recorded
by partnerships section of the table are presented using the latest available financial statements
received from the partnerships.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded by Erie Indemnity Company |
|
|
as of and for the nine months ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
(Loss) Income |
|
|
|
|
|
|
|
|
|
|
|
|
recognized |
|
|
|
|
|
|
|
|
|
|
|
|
due to |
|
|
|
|
|
|
|
|
|
|
|
|
valuation |
|
Net |
|
|
|
|
|
|
|
|
|
|
adjustments |
|
income |
Investment percentage of partnership |
|
Number of |
|
Asset |
|
by the |
|
(loss) |
for Erie Insurance Group |
|
partnerships |
|
recorded |
|
partnerships |
|
recorded |
|
|
|
(dollars
in thousands)
|
Private equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
|
27 |
|
|
$ |
89,571 |
|
|
|
($1,209 |
) |
|
$ |
8,219 |
|
Greater than or equal to 10% but less
than 50% |
|
|
5 |
|
|
|
6,363 |
|
|
|
(954 |
) |
|
|
1,544 |
|
Greater than or equal to 50% |
|
|
1 |
|
|
|
3,984 |
|
|
|
0 |
|
|
|
(434 |
) |
|
Total private equity |
|
|
33 |
|
|
|
99,918 |
|
|
|
(2,163 |
) |
|
|
9,329 |
|
|
Mezzanine debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
|
13 |
|
|
|
36,216 |
|
|
|
1,235 |
|
|
|
1,822 |
|
Greater than or equal to 10% but less
than 50% |
|
|
3 |
|
|
|
14,142 |
|
|
|
835 |
|
|
|
545 |
|
Greater than or equal to 50% |
|
|
1 |
|
|
|
3,678 |
|
|
|
(197 |
) |
|
|
353 |
|
|
Total mezzanine debt |
|
|
17 |
|
|
|
54,036 |
|
|
|
1,873 |
|
|
|
2,720 |
|
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
|
19 |
|
|
|
103,749 |
|
|
|
(5,059 |
) |
|
|
8,833 |
|
Greater than or equal to 10% but less
than 50% |
|
|
5 |
|
|
|
30,914 |
|
|
|
225 |
|
|
|
1,067 |
|
Greater than or equal to 50% |
|
|
5 |
|
|
|
23,352 |
|
|
|
1,406 |
|
|
|
2,079 |
|
|
Total real estate |
|
|
29 |
|
|
|
158,015 |
|
|
|
(3,428 |
) |
|
|
11,979 |
|
|
Total limited partnerships |
|
|
79 |
|
|
$ |
311,969 |
|
|
|
($3,718 |
) |
|
$ |
24,028 |
|
|
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 7 INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded by Partnerships |
|
|
as of and for the nine months ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
Income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
recognized |
|
|
|
|
|
|
|
|
|
|
|
|
due to |
|
|
|
|
|
|
|
|
|
|
|
|
valuation |
|
|
|
|
|
|
|
|
|
|
|
|
adjustments |
|
|
Investment percentage of partnership |
|
Total |
|
Total |
|
by the |
|
Net income |
for Erie Insurance Group |
|
assets |
|
liabilities |
|
partnerships |
|
(loss) |
|
|
|
(dollars in thousands)
|
Private equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
$ |
22,739,440 |
|
|
$ |
464,542 |
|
|
$ |
237,477 |
|
|
$ |
879,315 |
|
Greater than or equal to 10% but
less than 50% |
|
|
516,945 |
|
|
|
1,676 |
|
|
|
30,712 |
|
|
|
9,793 |
|
Greater than or equal to 50% |
|
|
10,019 |
|
|
|
29 |
|
|
|
0 |
|
|
|
(147 |
) |
|
Total private equity |
|
|
23,266,404 |
|
|
|
466,247 |
|
|
|
268,189 |
|
|
|
888,961 |
|
|
Mezzanine debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
|
5,542,704 |
|
|
|
450,403 |
|
|
|
(80,230 |
) |
|
|
168,967 |
|
Greater than or equal to 10% but
less than 50% |
|
|
587,674 |
|
|
|
198,595 |
|
|
|
(679 |
) |
|
|
20,303 |
|
Greater than or equal to 50% |
|
|
26,693 |
|
|
|
7,056 |
|
|
|
(89 |
) |
|
|
747 |
|
|
Total mezzanine debt |
|
|
6,157,071 |
|
|
|
656,054 |
|
|
|
(80,998 |
) |
|
|
190,017 |
|
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
|
18,888,874 |
|
|
|
7,618,453 |
|
|
|
(524,149 |
) |
|
|
427,656 |
|
Greater than or equal to 10% but
less than 50% |
|
|
1,462,654 |
|
|
|
768,814 |
|
|
|
(12,993 |
) |
|
|
38,550 |
|
Greater than or equal to 50% |
|
|
246,289 |
|
|
|
123,705 |
|
|
|
13,625 |
|
|
|
26,067 |
|
|
Total real estate |
|
|
20,597,817 |
|
|
|
8,510,972 |
|
|
|
(523,517 |
) |
|
|
492,273 |
|
|
Total limited partnerships |
|
$ |
50,021,292 |
|
|
$ |
9,633,273 |
|
|
$ |
(336,326 |
) |
|
$ |
1,571,251 |
|
|
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 7 INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded by Erie Indemnity Company |
|
|
as of and for the year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
recognized |
|
|
|
|
|
|
|
|
|
|
|
|
due to |
|
|
|
|
|
|
|
|
|
|
|
|
valuation |
|
Net |
|
|
|
|
|
|
|
|
|
|
adjustments |
|
income |
Investment percentage of partnership |
|
Number of |
|
Asset |
|
by the |
|
(loss) |
for Erie Insurance Group |
|
partnerships |
|
recorded |
|
partnerships |
|
recorded |
|
|
|
(dollars in thousands)
|
Private equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
|
35 |
|
|
$ |
92,077 |
|
|
$ |
7,468 |
|
|
$ |
12,541 |
|
Greater than or equal to 10% but less
than 50% |
|
|
7 |
|
|
|
10,708 |
|
|
|
1,449 |
|
|
|
1,566 |
|
Greater than or equal to 50% |
|
|
1 |
|
|
|
3,831 |
|
|
|
0 |
|
|
|
(76 |
) |
|
Total private equity |
|
|
43 |
|
|
|
106,616 |
|
|
|
8,917 |
|
|
|
14,031 |
|
|
Mezzanine debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
|
13 |
|
|
|
30,841 |
|
|
|
109 |
|
|
|
3,446 |
|
Greater than or equal to 10% but less
than 50% |
|
|
3 |
|
|
|
10,493 |
|
|
|
(1,396 |
) |
|
|
3,243 |
|
Greater than or equal to 50% |
|
|
1 |
|
|
|
3,533 |
|
|
|
207 |
|
|
|
926 |
|
|
Total mezzanine debt |
|
|
17 |
|
|
|
44,867 |
|
|
|
(1,080 |
) |
|
|
7,615 |
|
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
|
19 |
|
|
|
88,426 |
|
|
|
8,841 |
|
|
|
14,246 |
|
Greater than or equal to 10% but less
than 50% |
|
|
9 |
|
|
|
29,707 |
|
|
|
3,357 |
|
|
|
1,293 |
|
Greater than or equal to 50% |
|
|
7 |
|
|
|
22,887 |
|
|
|
2,387 |
|
|
|
83 |
|
|
Total real estate |
|
|
35 |
|
|
|
141,020 |
|
|
|
14,585 |
|
|
|
15,622 |
|
|
Total limited partnerships |
|
|
95 |
|
|
$ |
292,503 |
|
|
$ |
22,422 |
|
|
$ |
37,268 |
|
|
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 7 INVESTMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded by Partnerships |
|
|
as of and for the year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
recognized |
|
|
|
|
|
|
|
|
|
|
|
|
due to |
|
|
|
|
|
|
|
|
|
|
|
|
valuation |
|
|
|
|
|
|
|
|
|
|
|
|
adjustments |
|
|
Investment percentage of partnership |
|
Total |
|
Total |
|
by the |
|
Net income |
for Erie Insurance Group |
|
assets |
|
liabilities |
|
partnerships |
|
(loss) |
|
|
|
(dollars in thousands)
|
Private equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
$ |
24,802,587 |
|
|
$ |
558,874 |
|
|
$ |
303,611 |
|
|
$ |
2,836,059 |
|
Greater than or equal to 10% but
less than 50% |
|
|
416,487 |
|
|
|
2,232 |
|
|
|
65,969 |
|
|
|
3,836 |
|
Greater than or equal to 50% |
|
|
10,349 |
|
|
|
25 |
|
|
|
0 |
|
|
|
(229 |
) |
|
Total private equity |
|
|
25,229,423 |
|
|
|
561,131 |
|
|
|
369,580 |
|
|
|
2,839,666 |
|
|
Mezzanine debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
|
4,284,587 |
|
|
|
366,896 |
|
|
|
(95,681 |
) |
|
|
470,929 |
|
Greater than or equal to 10% but
less than 50% |
|
|
434,269 |
|
|
|
159,209 |
|
|
|
(34,872 |
) |
|
|
84,384 |
|
Greater than or equal to 50% |
|
|
204,909 |
|
|
|
233 |
|
|
|
3,855 |
|
|
|
32,947 |
|
|
Total mezzanine debt |
|
|
4,923,765 |
|
|
|
526,338 |
|
|
|
(126,698 |
) |
|
|
588,260 |
|
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
|
23,626,981 |
|
|
|
14,153,607 |
|
|
|
766,150 |
|
|
|
629,172 |
|
Greater than or equal to 10% but
less than 50% |
|
|
1,106,697 |
|
|
|
401,752 |
|
|
|
15,824 |
|
|
|
49,592 |
|
Greater than or equal to 50% |
|
|
260,058 |
|
|
|
140,389 |
|
|
|
9,234 |
|
|
|
2,108 |
|
|
Total real estate |
|
|
24,993,736 |
|
|
|
14,695,748 |
|
|
|
791,208 |
|
|
|
680,872 |
|
|
Total limited partnerships |
|
$ |
55,146,924 |
|
|
$ |
15,783,217 |
|
|
$ |
1,034,090 |
|
|
$ |
4,108,798 |
|
|
During the first nine months of 2008, we sold our interests in 10 private equity limited
partnerships in the secondary market and completed our commitment to six real estate limited
partnerships. Proceeds from these sales totaled $18.0 million from which we recognized $1.6
million in net realized gains. The proceeds received from our sales will help to fund the
remaining commitments of existing limited partnerships that total $101 million at September 30,
2008 (See also Note 15).
Securities lending program
To generate additional investment income we participate in a program whereby marketable securities
from our investment portfolio are lent to independent brokers or dealers based on, among other
things, their creditworthiness, in exchange for collateral initially equal to 102% of the value of
the securities on loan and is thereafter maintained at a minimum of 100% of the fair value of the
securities loaned. The fair value of the securities on loan to each borrower is monitored daily by
the third-party custodian and the borrower is required to deliver additional collateral if the fair
value of the collateral falls below 100% of the fair value of the securities on loan.
We had loaned securities included as part of our invested assets with a fair value of $14.1 million
and $29.4 million at September 30, 2008 and December 31, 2007, respectively. We have incurred no
losses on the securities lending program since the programs inception.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 8 INCOME TAXES
We account for income taxes in accordance with SFAS 109, Accounting for Income Taxes. SFAS 109
requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statement or tax returns.
Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. At September 30, 2008 we recorded a net deferred tax asset of $14.6 million
on our Consolidated Statements of Financial Position. We evaluated the need for an offsetting
valuation allowance and management determined that sufficient tax planning strategies were
available to the Company that would allow it to recover the deferred tax asset in future periods,
and thus, an allowance was not recorded at September 30, 2008.
NOTE 9 BANK LINE OF CREDIT
We have available a $100 million line of credit with a bank that expires on December 31, 2008.
Borrowings outstanding on the line of credit were $30 million at September 30, 2008. We repaid $45
million of borrowings during the third quarter of 2008. Interest is
currently being charged on the line at the
Federal Funds Rate (currently at 2.0%) plus 50 basis points and totaled $0.5 million and $1.0
million for the quarter and nine months ended September 30, 2008, respectively. Bonds with a value
of $127.5 million are pledged as collateral on the loan at September 30, 2008. These securities
have no restrictions and are reported as available-for-sale fixed maturities in the Consolidated
Statement of Financial Position as of September 30, 2008. The bank requires compliance with certain covenants which
include minimum net worth and leverage ratios. We are in compliance with all bank covenants at
September 30, 2008.
NOTE 10 SUMMARIZED FINANCIAL STATEMENT INFORMATION OF EFL
EFL is an affiliated Pennsylvania-domiciled life insurance company operating in 10 states and the
District of Columbia. We own 21.6% of EFLs outstanding common shares and account for this
investment using the equity method of accounting. The remaining 78.4% of EFL is owned by Erie
Insurance Exchange.
The following represents unaudited condensed financial statement information for EFL on a GAAP
basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
(in thousands) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Revenues |
|
$ |
(7,183 |
) |
|
$ |
36,819 |
|
|
$ |
39,756 |
|
|
$ |
118,155 |
|
Benefits and expenses |
|
|
29,296 |
|
|
|
31,824 |
|
|
|
83,115 |
|
|
|
96,038 |
|
(Loss) income before income taxes |
|
|
(36,479 |
) |
|
|
4,995 |
|
|
|
(43,359 |
) |
|
|
22,117 |
|
Net (loss) income |
|
|
(46,650 |
) |
|
|
3,198 |
|
|
|
(51,081 |
) |
|
|
15,278 |
|
Comprehensive (loss) income |
|
|
(66,006 |
) |
|
|
6,156 |
|
|
|
(77,980 |
) |
|
|
9,062 |
|
|
In the third quarter of 2008 and 2007, EFL recognized pre-tax
impairment charges of $40.1
million and $2.1 million, respectively, primarily related to its bonds and preferred stock in
the financial services industry sector. Impairment charges for the nine months ended
September 30, 2008 were $75.5 million compared to $2.1 million for the same period in 2007. A
deferred tax valuation allowance of $22.7 million was also recorded at September 30, 2008
related to these impairments and remaining unrealized losses on its
securities where the deferred tax asset is not expected to be realized. |
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
September 30, |
|
December 31, |
(in thousands) |
|
2008 |
|
2007 |
Investments |
|
$ |
1,393,769 |
|
|
$ |
1,511,319 |
|
Total assets |
|
|
1,694,966 |
|
|
|
1,744,704 |
|
Liabilities |
|
|
1,499,559 |
|
|
|
1,471,317 |
|
Accumulated other comprehensive loss |
|
|
(28,363 |
) |
|
|
(1,465 |
) |
Total shareholders equity |
|
|
195,407 |
|
|
|
273,387 |
|
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 11 POSTRETIREMENT AND OTHER BENEFITS
The liabilities for the plans described in this note are presented in total for all employees of
the Group. The gross liability for the pension plans is presented in the Consolidated Statements
of Financial Position as employee benefit obligations. A portion of annual expenses related to the
pension plans is allocated to related entities within the Group.
We offer a noncontributory defined benefit pension plan that covers substantially all employees.
This is the largest benefit plan we offer. We also offer an unfunded supplemental retirement plan
for certain members of the Erie Insurance Group retirement plan for employees (SERP) for executive
and senior management. The components of net periodic benefit cost for our pension benefits are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
3,136 |
|
|
$ |
3,531 |
|
|
$ |
9,408 |
|
|
$ |
10,591 |
|
Interest cost |
|
|
4,447 |
|
|
|
4,191 |
|
|
|
13,342 |
|
|
|
12,574 |
|
Expected return on plan assets |
|
|
(6,043 |
) |
|
|
(5,257 |
) |
|
|
(18,128 |
) |
|
|
(15,771 |
) |
Amortization of prior service cost |
|
|
33 |
|
|
|
123 |
|
|
|
100 |
|
|
|
370 |
|
Amortization of actuarial loss |
|
|
78 |
|
|
|
352 |
|
|
|
233 |
|
|
|
1,057 |
|
Settlement |
|
|
97 |
|
|
|
|
|
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
1,748 |
|
|
$ |
2,940 |
|
|
$ |
5,125 |
|
|
$ |
8,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plan
The decrease in the net periodic benefit cost of the pension plans is primarily due to change in
discount rate of the defined benefit pension plan to 6.62% for 2008 compared to 6.25% in 2007.
SERP
The discount rate of the SERP was 6.62% for 2008 compared to 6.25% for 2007. The discount rate
assumption was re-evaluated on April 1, 2008 when our former president and chief executive officer
received a final lump sum distribution from the SERP, resulting in the re-measurement of the
current year net periodic benefit cost using the April 1 service date. The discount rate
assumption increased from 6.62% to 6.75% at the re-measurement date to reflect the then current
market rates. As a result of this settlement, a one-time gain of $0.1 million was realized in
2008.
As the result of the resignation of an executive officer in June 2008, a settlement charge of $0.2
million was recorded for the SERP in the second quarter of 2008. The SERP payout for the executive
officer is expected in the first quarter of 2009.
Other benefits
In the third quarter of 2008, $0.9 million was recorded as an estimate of future compensation
expense for our new chief executive officer whose employment began on July 29, 2008. Our share of
these expenses totaled $0.6 million at September 30, 2008.
NOTE 12 NOTE RECEIVABLE FROM ERIE FAMILY LIFE INSURANCE COMPANY
We are due $25 million from EFL in the form of a surplus note. The note may be repaid only out of
unassigned surplus of EFL and repayment is subject to prior approval by the Pennsylvania Insurance
Commissioner. The note bears an annual interest rate of 6.70% and is payable on demand on or after
December 31, 2018. EFL accrued interest, payable semi-annually to us, of $0.4 million in each of
the third quarters ended September 30, 2008 and 2007.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 13 STATUTORY INFORMATION
Cash and securities with carrying values of $6.6 million and $6.3 million were deposited by our
property/casualty insurance subsidiaries with regulatory authorities under statutory requirements
at September 30, 2008 and December 31, 2007, respectively.
NOTE 14 SUPPLEMENTARY DATA ON CASH FLOWS
A reconciliation of net income to net cash provided by operating activities as presented in the
Consolidated Statements of Cash Flows is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
75,540 |
|
|
$ |
180,344 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
27,528 |
|
|
|
22,399 |
|
Deferred income tax (benefit) expense |
|
|
(18,480 |
) |
|
|
7,334 |
|
Realized loss (gain) on investments |
|
|
80,202 |
|
|
|
(7,550 |
) |
Equity in earnings of limited partnerships |
|
|
(20,310 |
) |
|
|
(46,867 |
) |
Net amortization of bond premium |
|
|
1,153 |
|
|
|
1,543 |
|
Undistributed losses (earnings) of Erie Family Life Insurance |
|
|
10,965 |
|
|
|
(3,305 |
) |
Decrease in deferred compensation |
|
|
(6,781 |
) |
|
|
(8,224 |
) |
Limited partnership distributions |
|
|
21,738 |
|
|
|
66,149 |
|
(Increase) decrease in receivables and reinsurance recoverable from
the Exchange and affiliates |
|
|
(24,174 |
) |
|
|
45,073 |
|
Increase in prepaid expenses and other assets |
|
|
(44,188 |
) |
|
|
(32,841 |
) |
Increase in accounts payable and accrued expenses |
|
|
18,643 |
|
|
|
16,104 |
|
Decrease in accrued agent bonuses |
|
|
(35,637 |
) |
|
|
(22,117 |
) |
Decrease in loss reserves |
|
|
(30,928 |
) |
|
|
(58,487 |
) |
Increase in unearned premiums |
|
|
24,569 |
|
|
|
19,893 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
79,840 |
|
|
$ |
179,448 |
|
|
|
|
|
|
|
|
NOTE 15 COMMITMENTS AND CONTINGENCIES
We have contractual commitments to invest up to $101.0 million of additional funds in limited
partnership investments at September 30, 2008. These commitments will be funded as required by the
partnerships agreements through 2012. At September 30, 2008, the total commitment to fund limited
partnerships that invest in private equity securities is $45.5 million, real estate activities is
$34.7 million and mezzanine debt securities is $20.8 million. We expect to have sufficient cash
flows from operations and cash inflows (distributions) from existing limited partnership
investments to meet these future partnership commitments.
We are involved in litigation arising in the ordinary course of business. In our opinion, the
effects, if any, of such litigation are not expected to be material to our consolidated financial
condition, cash flows or operations.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 16 VARIABLE INTEREST ENTITY
Erie Insurance Exchange (Exchange) is a reciprocal insurance company, domiciled in Pennsylvania,
for which we serve as attorney-in-fact. We hold a variable interest in the Exchange, however, we
are not the primary beneficiary as defined under Financial Accounting Standards Interpretation 46,
Consolidation of Variable Interest Entities. We have a significant interest in the financial
condition of the Exchange because net management fee revenues are based on the direct written
premiums of the Exchange and the other members of the Property and Casualty Group.
The selected financial data below is derived from the Exchanges financial statements prepared in
accordance with Statutory Accounting Principles (SAP) required by the National Association of
Insurance Commissioners (NAIC) Accounting Practices and Procedures Manual, as modified to include
prescribed practices of the Insurance Department of the Commonwealth of Pennsylvania. In the
opinion of management, all adjustments, consisting only of normal recurring accruals, considered
necessary for a fair presentation, have been included. The condensed financial data set forth below
represents the Exchanges share of underwriting results after accounting for intercompany pooling
transactions.
Erie Insurance Exchange
Condensed statutory statements of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Premiums earned |
|
$ |
902,260 |
|
|
$ |
899,455 |
|
|
$ |
2,694,802 |
|
|
$ |
2,702,322 |
|
Losses, loss adjustment
expenses and other
underwriting expenses* |
|
|
892,731 |
|
|
|
786,908 |
|
|
|
2,558,171 |
|
|
|
2,347,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net underwriting income |
|
|
9,529 |
|
|
|
112,547 |
|
|
|
136,631 |
|
|
|
354,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment (loss) income |
|
|
(269,878 |
) |
|
|
109,933 |
|
|
|
(294,141 |
) |
|
|
459,514 |
|
Net (loss) income before
federal income tax |
|
|
(260,349 |
) |
|
|
222,480 |
|
|
|
(157,510 |
) |
|
|
814,037 |
|
Federal income tax expense |
|
|
15,800 |
|
|
|
101,778 |
|
|
|
129,164 |
|
|
|
284,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(276,149 |
) |
|
$ |
120,702 |
|
|
$ |
(286,674 |
) |
|
$ |
529,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Includes management fees paid and accrued as payable to the Company. |
As with our investments, the Exchanges investment portfolio was impacted by declines in the value
of securities that resulted from the recent significant disruption in the securities markets.
Driving the Exchanges third quarter 2008 investment losses were impairment charges of $103.5
million on fixed maturities, $94.8 million on common stock and $126.5 million on preferred
securities. For the nine months ended September 30, 2008, impairment charges were $194.8 million on
fixed maturities, $201.1 million on common stock and $189.6 million on preferred securities.
Impairment charges for the nine months ended September 30, 2007 were $52.3 million. Under statutory
accounting, deferred tax assets on realized capital losses from impairments of investments are
reflected as a change in surplus rather than in deferred income taxes
on the statement of operations. For the three and nine months ended
September 30, 2008, deferred taxes on impairment charges totaled
$113.6 million and $204.9 million, respectively.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 16 VARIABLE INTEREST ENTITY (Continued)
Erie Insurance Exchange
Condensed statutory statements of financial position
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
Fixed maturities |
|
$ |
4,176,488 |
|
|
$ |
4,353,977 |
|
Equity securities |
|
|
2,317,572 |
|
|
|
3,016,607 |
|
Alternative investments |
|
|
1,417,940 |
|
|
|
1,389,224 |
|
Other invested assets |
|
|
386,134 |
|
|
|
168,189 |
|
|
|
|
|
|
|
|
Total invested assets |
|
|
8,298,134 |
|
|
|
8,927,997 |
|
Other assets |
|
|
1,469,154 |
|
|
|
1,033,852 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
9,767,288 |
|
|
$ |
9,961,849 |
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense reserves |
|
$ |
3,425,560 |
|
|
$ |
3,418,221 |
|
Unearned premium reserves |
|
|
1,515,975 |
|
|
|
1,430,328 |
|
Accrued liabilities |
|
|
405,337 |
|
|
|
345,776 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
5,346,872 |
|
|
|
5,194,325 |
|
Total policyholders surplus |
|
|
4,420,416 |
|
|
|
4,767,524 |
|
|
|
|
|
|
|
|
Total liabilities and policyholders surplus |
|
$ |
9,767,288 |
|
|
$ |
9,961,849 |
|
|
|
|
|
|
|
|
Erie Insurance Exchange
Condensed statutory statements of cash flows
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
Premiums collected net of reinsurance |
|
$ |
2,711,789 |
|
|
$ |
2,713,105 |
|
Losses and loss adjustment expenses paid |
|
|
(1,528,555 |
) |
|
|
(1,475,428 |
) |
Management fee and expenses paid |
|
|
(986,404 |
) |
|
|
(1,000,567 |
) |
Net investment income received |
|
|
350,177 |
|
|
|
375,590 |
|
Federal income taxes and other expenses paid |
|
|
(150,125 |
) |
|
|
(322,920 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
396,882 |
|
|
|
289,780 |
|
Net cash used in investing activities |
|
|
(252,413 |
) |
|
|
(269,794 |
) |
Net cash (used in) provided by financing activities |
|
|
(735 |
) |
|
|
2,805 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
143,734 |
|
|
|
22,791 |
|
Cash and cash equivalents-beginning of period |
|
|
98,712 |
|
|
|
85,784 |
|
|
|
|
|
|
|
|
Cash and cash equivalents-end of period |
|
$ |
242,446 |
|
|
$ |
108,575 |
|
|
|
|
|
|
|
|
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 17 SEGMENT INFORMATION
We operate our business as three reportable segments management operations, insurance
underwriting operations and investment operations. Accounting policies for segments are the same
as those described in the summary of significant accounting policies Note 3 of our Annual Report on
Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission
on February 27, 2008. The management fee revenues received from the property/casualty insurance
subsidiaries are not eliminated in the segment detail that follows as management bases its
decisions on the segment presentation. Summarized financial information for our operating segments
is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Management Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee revenue |
|
$ |
247,723 |
|
|
$ |
245,585 |
|
|
$ |
733,131 |
|
|
$ |
730,691 |
|
Service agreement revenue |
|
|
8,340 |
|
|
|
7,470 |
|
|
|
23,480 |
|
|
|
22,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
|
256,063 |
|
|
|
253,055 |
|
|
|
756,611 |
|
|
|
752,877 |
|
Cost of management operations |
|
|
206,652 |
|
|
|
212,601 |
|
|
|
611,426 |
|
|
|
610,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
49,411 |
|
|
$ |
40,454 |
|
|
$ |
145,185 |
|
|
$ |
142,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from management
operations |
|
$ |
34,291 |
|
|
$ |
27,144 |
|
|
$ |
98,567 |
|
|
$ |
95,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Underwriting Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal lines |
|
$ |
36,826 |
|
|
$ |
36,740 |
|
|
$ |
109,874 |
|
|
$ |
108,740 |
|
Commercial lines |
|
|
15,341 |
|
|
|
15,266 |
|
|
|
46,143 |
|
|
|
47,255 |
|
Reinsurance nonaffiliates |
|
|
(110 |
) |
|
|
(114 |
) |
|
|
(298 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned |
|
|
52,057 |
|
|
|
51,892 |
|
|
|
155,719 |
|
|
|
155,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal lines |
|
|
36,554 |
|
|
|
32,501 |
|
|
|
102,387 |
|
|
|
95,141 |
|
Commercial lines |
|
|
16,343 |
|
|
|
12,687 |
|
|
|
45,758 |
|
|
|
40,354 |
|
Reinsurance nonaffiliates |
|
|
(1,153 |
) |
|
|
476 |
|
|
|
(64 |
) |
|
|
723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
51,744 |
|
|
|
45,664 |
|
|
|
148,081 |
|
|
|
136,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
313 |
|
|
$ |
6,228 |
|
|
$ |
7,638 |
|
|
$ |
19,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from insurance underwriting
operations |
|
$ |
217 |
|
|
$ |
4,179 |
|
|
$ |
5,185 |
|
|
$ |
13,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of expenses |
|
$ |
10,218 |
|
|
$ |
12,233 |
|
|
$ |
33,357 |
|
|
$ |
40,350 |
|
Net realized (losses) gains on investments |
|
|
(41,356 |
) |
|
|
3,438 |
|
|
|
(80,202 |
) |
|
|
7,550 |
|
Equity in earnings of limited partnerships |
|
|
1,057 |
|
|
|
14,169 |
|
|
|
20,310 |
|
|
|
46,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment (loss) income-unaffiliated |
|
$ |
(30,081 |
) |
|
$ |
29,840 |
|
|
$ |
(26,535 |
) |
|
$ |
94,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from investment operations |
|
$ |
(20,876 |
) |
|
$ |
20,023 |
|
|
$ |
(18,015 |
) |
|
$ |
63,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in (losses) earnings of EFL, net of tax |
|
$ |
(9,384 |
) |
|
$ |
643 |
|
|
$ |
(10,197 |
) |
|
$ |
3,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 17 SEGMENT INFORMATION (Continued)
Reconciliation of reportable segment revenues and operating expenses to the Consolidated Statements
of Operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Segment revenues,
excluding
investment operations |
|
$ |
308,120 |
|
|
$ |
304,947 |
|
|
$ |
912,330 |
|
|
$ |
908,865 |
|
Elimination of
intersegment
management fee revenue |
|
|
(13,603 |
) |
|
|
(13,496 |
) |
|
|
(40,394 |
) |
|
|
(40,259 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
$ |
294,517 |
|
|
$ |
291,451 |
|
|
$ |
871,936 |
|
|
$ |
868,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating expenses |
|
$ |
258,396 |
|
|
$ |
258,265 |
|
|
$ |
759,508 |
|
|
$ |
746,595 |
|
Elimination of
intersegment
management fee revenue |
|
|
(13,603 |
) |
|
|
(13,496 |
) |
|
|
(40,394 |
) |
|
|
(40,259 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
244,793 |
|
|
$ |
244,769 |
|
|
$ |
719,114 |
|
|
$ |
706,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intersegment revenues and expenses that are eliminated in the Consolidated Statements of
Operations relate to our property/casualty insurance subsidiaries 5.5% share of the intersegment
management fees paid to us.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 17 SEGMENT INFORMATION (Continued)
The growth rate of policies in force, policy retention (the percentage of policyholders eligible
for renewals who have renewed their policies measured on a twelve-month rolling basis) and average
premium per policy trends directly impact our management operations and insurance underwriting
operating segments. Below is a summary of each major line of business for the Property and Casualty
Group.
Growth rates of policies in force for Property and Casualty Group insurance operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private |
|
12-mth. |
|
|
|
|
|
12-mth. |
|
All Other |
|
12-mth. |
|
Total |
|
12-mth. |
|
|
Passenger |
|
growth |
|
|
|
|
|
growth |
|
Personal |
|
growth |
|
Personal |
|
growth |
Date |
|
Auto |
|
rate |
|
Homeowners |
|
rate |
|
Lines |
|
rate |
|
Lines |
|
rate |
09/30/2007 |
|
|
1,649,801 |
|
|
|
0.8 |
% |
|
|
1,408,114 |
|
|
|
2.5 |
% |
|
|
316,786 |
|
|
|
6.2 |
% |
|
|
3,374,701 |
|
|
|
2.0 |
% |
12/31/2007 |
|
|
1,651,234 |
|
|
|
1.1 |
|
|
|
1,413,712 |
|
|
|
2.6 |
|
|
|
321,431 |
|
|
|
6.6 |
|
|
|
3,386,377 |
|
|
|
2.2 |
|
03/31/2008 |
|
|
1,655,869 |
|
|
|
1.2 |
|
|
|
1,420,250 |
|
|
|
2.6 |
|
|
|
325,926 |
|
|
|
6.7 |
|
|
|
3,402,045 |
|
|
|
2.3 |
|
06/30/2008 |
|
|
1,667,446 |
|
|
|
1.4 |
|
|
|
1,433,504 |
|
|
|
2.5 |
|
|
|
332,922 |
|
|
|
6.8 |
|
|
|
3,433,872 |
|
|
|
2.4 |
|
09/30/2008 |
|
|
1,677,151 |
|
|
|
1.7 |
|
|
|
1,446,779 |
|
|
|
2.7 |
|
|
|
340,566 |
|
|
|
7.5 |
|
|
|
3,464,496 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All |
|
|
|
|
|
|
|
|
|
|
|
|
12-mth. |
|
CML* |
|
12-mth. |
|
|
|
|
|
12-mth. |
|
Other |
|
12-mth. |
|
Total |
|
12-mth. |
|
|
CML* |
|
growth |
|
Multi- |
|
growth |
|
Workers |
|
growth |
|
CML* |
|
growth |
|
CML* |
|
growth |
Date |
|
Auto |
|
rate |
|
Peril |
|
rate |
|
Comp. |
|
rate |
|
Lines |
|
rate |
|
Lines |
|
rate |
09/30/2007 |
|
|
122,154 |
|
|
|
2.2 |
% |
|
|
226,302 |
|
|
|
3.9 |
% |
|
|
54,341 |
|
|
|
(0.1 |
)% |
|
|
96,167 |
|
|
|
3.8 |
% |
|
|
498,964 |
|
|
|
3.0 |
% |
12/31/2007 |
|
|
122,558 |
|
|
|
2.3 |
|
|
|
228,214 |
|
|
|
4.4 |
|
|
|
54,720 |
|
|
|
1.5 |
|
|
|
96,464 |
|
|
|
4.1 |
|
|
|
501,956 |
|
|
|
3.5 |
|
03/31/2008 |
|
|
122,882 |
|
|
|
2.5 |
|
|
|
229,577 |
|
|
|
4.7 |
|
|
|
54,927 |
|
|
|
2.7 |
|
|
|
96,511 |
|
|
|
3.9 |
|
|
|
503,897 |
|
|
|
3.8 |
|
06/30/2008 |
|
|
123,955 |
|
|
|
1.9 |
|
|
|
234,393 |
|
|
|
4.8 |
|
|
|
55,801 |
|
|
|
3.4 |
|
|
|
97,745 |
|
|
|
3.3 |
|
|
|
511,894 |
|
|
|
3.7 |
|
09/30/2008 |
|
|
124,418 |
|
|
|
1.9 |
|
|
|
236,994 |
|
|
|
4.7 |
|
|
|
56,381 |
|
|
|
3.8 |
|
|
|
98,786 |
|
|
|
2.7 |
|
|
|
516,579 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
Date |
|
Total All Lines |
|
12-mth. growth rate |
09/30/2007 |
|
|
3,873,665 |
|
|
|
2.1 |
% |
12/31/2007 |
|
|
3,888,333 |
|
|
|
2.4 |
|
03/31/2008 |
|
|
3,905,942 |
|
|
|
2.5 |
|
06/30/2008 |
|
|
3,945,766 |
|
|
|
2.5 |
|
09/30/2008 |
|
|
3,981,075 |
|
|
|
2.8 |
|
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 17 SEGMENT INFORMATION (Continued)
Policy retention trends for Property and Casualty Group insurance operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger |
|
CML* |
|
|
|
|
|
CML* |
|
Workers |
|
All Other |
|
Total |
Date |
|
Auto |
|
Auto |
|
Homeowners |
|
Multi-Peril |
|
Comp. |
|
Lines |
|
All Lines |
09/30/2007 |
|
|
91.3 |
% |
|
|
88.2 |
% |
|
|
90.1 |
% |
|
|
86.1 |
% |
|
|
86.8 |
% |
|
|
87.5 |
% |
|
|
90.0 |
% |
12/31/2007 |
|
|
91.5 |
|
|
|
88.2 |
|
|
|
90.3 |
|
|
|
86.0 |
|
|
|
86.8 |
|
|
|
87.8 |
|
|
|
90.2 |
|
03/31/2008 |
|
|
91.6 |
|
|
|
88.4 |
|
|
|
90.5 |
|
|
|
86.5 |
|
|
|
87.6 |
|
|
|
87.9 |
|
|
|
90.4 |
|
06/30/2008 |
|
|
91.6 |
|
|
|
87.9 |
|
|
|
90.7 |
|
|
|
86.2 |
|
|
|
87.5 |
|
|
|
88.1 |
|
|
|
90.4 |
|
09/30/2008 |
|
|
91.7 |
|
|
|
87.8 |
|
|
|
91.0 |
|
|
|
86.0 |
|
|
|
87.2 |
|
|
|
88.2 |
|
|
|
90.5 |
|
Average premium per policy trends for Property and Casualty Group insurance operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private |
|
12-mth. |
|
|
|
|
|
12-mth. |
|
All Other |
|
12-mth. |
|
Total |
|
12-mth. |
|
|
Passenger |
|
percent |
|
|
|
|
|
percent |
|
Personal |
|
percent |
|
Personal |
|
percent |
Date |
|
Auto |
|
change |
|
Homeowners |
|
change |
|
Lines |
|
change |
|
Lines |
|
change |
09/30/2007 |
|
$ |
1,093 |
|
|
|
(2.6 |
)% |
|
$ |
519 |
|
|
|
(2.1 |
)% |
|
$ |
352 |
|
|
|
1.1 |
% |
|
$ |
783 |
|
|
|
(2.9 |
)% |
12/31/2007 |
|
|
1,092 |
|
|
|
(1.6 |
) |
|
|
518 |
|
|
|
(1.5 |
) |
|
|
353 |
|
|
|
1.1 |
|
|
|
782 |
|
|
|
(1.9 |
) |
03/31/2008 |
|
|
1,091 |
|
|
|
(0.8 |
) |
|
|
518 |
|
|
|
(1.1 |
) |
|
|
354 |
|
|
|
1.4 |
|
|
|
781 |
|
|
|
(1.3 |
) |
06/30/2008 |
|
|
1,088 |
|
|
|
(0.5 |
) |
|
|
514 |
|
|
|
(1.2 |
) |
|
|
353 |
|
|
|
0.6 |
|
|
|
777 |
|
|
|
(1.1 |
) |
09/30/2008 |
|
|
1,086 |
|
|
|
(0.6 |
) |
|
|
511 |
|
|
|
(1.5 |
) |
|
|
354 |
|
|
|
0.6 |
|
|
|
774 |
|
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12-mth. |
|
|
|
|
|
12-mth. |
|
All Other |
|
12-mth. |
|
Total |
|
12-mth. |
|
Total |
|
12-mth. |
|
|
CML* |
|
percent |
|
Workers |
|
percent |
|
CML* |
|
percent |
|
CML* |
|
percent |
|
All |
|
percent |
Date |
|
Auto |
|
change |
|
Comp. |
|
change |
|
Lines |
|
change |
|
Lines |
|
change |
|
Lines |
|
change |
09/30/2007 |
|
$ |
2,600 |
|
|
|
(3.9 |
)% |
|
$ |
5,780 |
|
|
|
(4.4 |
)% |
|
$ |
1,592 |
|
|
|
(4.6 |
)% |
|
$ |
2,295 |
|
|
|
(5.0 |
)% |
|
$ |
978 |
|
|
|
(3.3 |
)% |
12/31/2007 |
|
|
2,577 |
|
|
|
(4.1 |
) |
|
|
5,602 |
|
|
|
(6.4 |
) |
|
|
1,581 |
|
|
|
(4.6 |
) |
|
|
2,262 |
|
|
|
(5.5 |
) |
|
|
973 |
|
|
|
(2.8 |
) |
03/31/2008 |
|
|
2,568 |
|
|
|
(3.6 |
) |
|
|
5,453 |
|
|
|
(7.8 |
) |
|
|
1,576 |
|
|
|
(4.0 |
) |
|
|
2,240 |
|
|
|
(5.3 |
) |
|
|
969 |
|
|
|
(2.2 |
) |
06/30/2008 |
|
|
2,530 |
|
|
|
(3.7 |
) |
|
|
5,236 |
|
|
|
(11.3 |
) |
|
|
1,546 |
|
|
|
(4.3 |
) |
|
|
2,187 |
|
|
|
(6.3 |
) |
|
|
960 |
|
|
|
(2.4 |
) |
09/30/2008 |
|
|
2,514 |
|
|
|
(3.3 |
) |
|
|
5,067 |
|
|
|
(12.3 |
) |
|
|
1,536 |
|
|
|
(3.5 |
) |
|
|
2,157 |
|
|
|
(6.0 |
) |
|
|
953 |
|
|
|
(2.6 |
) |
28
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following information should be read in conjunction with the historical financial information
and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and Managements
Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual
Report on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange
Commission on February 27, 2008. The following discussion of financial results focuses heavily on
our three segments: management operations, insurance underwriting operations and investment
operations, consistent with the presentation in Item 1, Note 17 in the Notes to Consolidated
Financial Statements. That presentation, which management uses internally to monitor and evaluate
results, is an alternative presentation of our Consolidated Statements of Operations.
Certain statements contained herein are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are not in the present or past tense and can generally be identified by
the use of words such as anticipate, believe, estimate, expect, intend, likely, plan,
project, seek, should, target, will, and other expressions that indicate future trends
and events. Forward-looking statements 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 such statements are discussions
relating to management fee revenue, cost of management operations, underwriting, premium and
investment income volumes, and agency appointments. Such 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 that could cause actual results and
future events to differ materially from those set forth or contemplated in the forward-looking
statements are the following: factors affecting the property/casualty and life insurance industries
generally, including price competition, legislative and regulatory developments, government
regulation of the insurance industry including approval of rate increases, the size, frequency and
severity of claims, natural disasters, exposure to environmental claims, fluctuations in interest
rates, inflation and general business conditions; the geographic concentration of our business as a
result of being a regional company; the accuracy of our pricing and loss reserving methodologies;
changes in driving habits; our ability to maintain our business operations including our
information technology system; our dependence on the independent agency system; the quality and
liquidity of our investment portfolio; our dependence on our relationship with Erie Insurance
Exchange; and the other risks and uncertainties discussed or indicated in all documents filed by
the Company with the Securities and Exchange Commission, including those described in Part I, Item
1A. Risk Factors of the 2007 Form 10-K, which information is incorporated by reference, updated by
Part II, Item 1A. Risk Factors of this Form 10-Q. A forward-looking statement speaks only as of
the date on which it is made and reflects the Companys analysis only as of that date. The Company
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.
NATURE OF ORGANIZATION
29
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
We serve as the attorney-in-fact for the Erie Insurance Exchange (Exchange), a reciprocal insurance
exchange, and operate predominantly as a provider of certain management services to the Exchange.
We also own subsidiaries that are property and casualty insurers. The Exchange and its
property/casualty insurance subsidiary, Flagship City Insurance Company, and our three
property/casualty insurance subsidiaries, Erie Insurance Company (EIC), Erie Insurance Company of
New York (EINY) and Erie Insurance Property and Casualty Company (EIPC), (collectively, the
Property and Casualty Group) underwrite personal and commercial lines property and casualty
insurance exclusively through over 2,000 independent agencies comprising over 8,700 licensed
independent agents. The entities within the Property and Casualty Group pool their underwriting
results. The financial position and results of operations of the Exchange are not consolidated with
ours. We, together with the Property and Casualty Group and Erie Family Life Insurance Company
(EFL), operate collectively as the Erie Insurance Group.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Consolidated Financial Statements for a discussion of recently adopted accounting
pronouncements.
OVERVIEW
The property/casualty insurance industry is well capitalized, however, the turmoil in the
securities markets, the volatile economic environment, and the return of severe
tropical storm losses have all taken a toll on projected 2008 industry results. As a result,
industry forecasts project continued increases in the combined ratio, decreases in return on equity
and reductions in policyholder surplus in 2008. According to A.M. Best, for the first six months of
2008 industry premiums declined 0.7%, policyholder surplus declined 4.5%, and the industry combined
ratio deteriorated to 102.1% from 93.2% in the first six months of 2007. While favorable loss
reserve development benefited industry underwriting results, continued price softening, high
catastrophe losses and significant underwriting losses contributed to the deterioration. These
market conditions for insurers may be a precursor to increases in pricing on property and casualty
policies. The cyclical nature of the insurance industry has a direct impact on our income from
management operations, as our management fee revenues are based on the direct written premiums of
the Property and Casualty Group and the management fee rate we charge. Our management fee revenue
reflected minimal growth of 0.9%, as direct written premiums of the Property and Casualty Group
increased only 0.8% in the third quarter of 2008 compared to the third quarter of 2007.
The financial information presented herein reflects our management operations from serving as
attorney-in-fact for the Exchange, our insurance underwriting results from our wholly-owned
subsidiaries (EIC, EINY and EIPC) and our investment operations. The bases of calculations used for
segment data are described in more detail in Item 1, Note 17 in the Notes to Consolidated Financial
Statements.
Segment Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
| |
| |
|
|
Nine months ended September 30, |
| |
| |
|
(dollars in thousands, except per share data) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
|
(Unaudited) |
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Income from management operations |
|
$ |
49,411 |
|
|
$ |
40,454 |
|
|
|
22.1 |
% |
|
$ |
145,185 |
|
|
$ |
142,500 |
|
|
|
1.9 |
% |
Underwriting income |
|
|
313 |
|
|
|
6,228 |
|
|
|
(95.0 |
) |
|
|
7,638 |
|
|
|
19,770 |
|
|
|
(61.4 |
) |
Net (loss) revenue from investment operations |
|
|
(40,171 |
) |
|
|
30,532 |
|
|
NM |
|
|
|
(37,500 |
) |
|
|
98,071 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
9,553 |
|
|
|
77,214 |
|
|
|
(87.6 |
) |
|
|
115,323 |
|
|
|
260,341 |
|
|
|
(55.7 |
) |
Provision for income taxes |
|
|
5,305 |
|
|
|
23,718 |
|
|
|
(77.6 |
) |
|
|
39,783 |
|
|
|
79,997 |
|
|
|
(50.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,248 |
|
|
$ |
53,496 |
|
|
|
(92.1 |
)% |
|
$ |
75,540 |
|
|
$ |
180,344 |
|
|
|
(58.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted |
|
$ |
0.07 |
|
|
$ |
0.87 |
|
|
|
(91.5 |
)% |
|
$ |
1.30 |
|
|
$ |
2.87 |
|
|
|
(54.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
KEY POINTS
|
|
|
Decrease in net income per share-diluted in the third quarter of 2008 was driven by net
realized losses on investments due to $37.4 million of impairment charges and a drop in our
equity in earnings of limited partnerships of $13.1 million. |
|
|
|
|
Gross margins from management operations increased to 19.3% in the third quarter of 2008
from 16.0% in the third quarter of 2007. The third quarter of 2007 included $3.7 million
in severance compensation for our former chief executive officer and a $4.3 million charge
for a judgment against us. |
|
|
|
|
GAAP combined ratios of the insurance underwriting operations were 99.4% in the third
quarter of 2008 compared to 88.0% in the third quarter of 2007 driven by higher catastrophe
losses primarily related to remnants of Hurricane Ike in Ohio and
Pennsylvania offset somewhat by
favorable development of prior accident year loss reserves. |
|
|
|
|
Annualized effective tax rate of 32.9% in the third quarter of 2008 was benefited by a $0.5
million reduction to adjust our estimated current tax provision to actual 2007 returns
filed in September 2008. |
Our cost of management operations decreased 2.8% to $206.7 million in the third quarter. The third
quarter of 2007 included two charges: 1) an estimate of $4.3 million for a judgment against us and
2) an estimate of $3.7 million for our share of additional compensation due our former president
and chief executive officer. Excluding these 2007 charges, cost of management operations increased
1.0% in the third quarter of 2008. Our current estimate for growth in non-commission operating
costs is about 9% for 2008 as we plan to increase investments in information technology during the
remainder of the year.
The insurance underwriting operations experienced higher catastrophe losses of $2.9 million in the
third quarter of 2008 compared to $1.8 million in the third quarter of 2007 primarily due to the
impact of Hurricane Ike. Favorable development of prior accident year loss and loss adjustment
expense reserves continued, however not to the same extent as the third quarter of 2007.
Concerns persist surrounding the credit markets and more broadly the financial services industry.
We actively evaluate our bond and preferred stock portfolios for impairments. The impairment
charges we recognized in the third quarter of 2008 of $37.4 million were the result of continued
declines in fair value and credit deterioration on certain of our bonds and preferred stocks
predominately in the financial services industry sector. The majority of the impairments relate to
securities that are performing in line with anticipated or contractual cash flows.
31
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
ANALYSIS OF BUSINESS SEGMENTS
Management Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
| |
| |
|
|
Nine months ended September 30, |
| |
| |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
|
(Unaudited) |
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Management fee revenue |
|
$ |
247,723 |
|
|
$ |
245,585 |
|
|
|
0.9 |
% |
|
$ |
733,131 |
|
|
$ |
730,691 |
|
|
|
0.3 |
% |
Service agreement revenue |
|
|
8,340 |
|
|
|
7,470 |
|
|
|
11.6 |
|
|
|
23,480 |
|
|
|
22,186 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue from management operations |
|
|
256,063 |
|
|
|
253,055 |
|
|
|
1.2 |
|
|
|
756,611 |
|
|
|
752,877 |
|
|
|
0.5 |
|
Cost of management operations |
|
|
206,652 |
|
|
|
212,601 |
|
|
|
(2.8 |
) |
|
|
611,426 |
|
|
|
610,377 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from management operations |
|
$ |
49,411 |
|
|
$ |
40,454 |
|
|
|
22.1 |
% |
|
$ |
145,185 |
|
|
$ |
142,500 |
|
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
19.3 |
% |
|
|
16.0 |
% |
|
|
|
|
|
|
19.2 |
% |
|
|
18.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KEY POINTS
|
|
|
The management fee rate was 25% in 2008 and 2007. |
|
|
|
|
Direct written premiums of the Property and Casualty Group increased 0.8% in the third
quarter of 2008 compared to the third quarter of 2007. |
|
|
|
Year-over-year policies in force grew 2.8%, or 107,410 policies, to 3,981,075 at
September 30, 2008 compared to year-over-year growth of 80,210 policies in the third
quarter of 2007. |
|
|
|
|
Year-over-year average premium per policy was $953 and $978 at September 30, 2008
and 2007, respectively, a decrease of 2.6%. |
|
|
|
|
During the third quarter of 2008, premium rate changes resulted in a net $8.2
million reduction in written premiums. |
|
|
|
Commission costs decreased 1.1% while costs other than commissions decreased 6.5% in the
third quarter of 2008. |
|
|
|
Estimates for agent bonuses decreased $5.2 million,
offset by a $1.2 million
increase in scheduled rate commissions and a $1.4 million increase in the private
passenger auto bonus compared to the third quarter of 2007. |
|
|
|
|
Personnel costs decreased $1.8 million primarily as a result of decreases in
salaries and wages due to the third quarter of 2007 including additional severance pay
for our former chief executive officer partially offset by higher average pay rates for employees
in 2008. |
|
|
|
|
All other operating costs decreased $4.4 million due to the recording of a $4.3
million charge in September 2007 as mentioned above. |
32
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Management fee revenue
The following table presents the direct written premium of the Property and Casualty Group, shown
by major line of business, and the calculation of our management fee revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
| |
| |
|
|
Nine months ended September 30, |
| |
| |
|
(dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
|
(Unaudited) |
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Private passenger auto |
|
$ |
488,043 |
|
|
$ |
480,967 |
|
|
|
1.5 |
% |
|
$ |
1,408,259 |
|
|
$ |
1,390,442 |
|
|
|
1.3 |
% |
Homeowners |
|
|
209,065 |
|
|
|
206,355 |
|
|
|
1.3 |
|
|
|
567,224 |
|
|
|
560,992 |
|
|
|
1.1 |
|
Commercial multi-peril |
|
|
103,507 |
|
|
|
101,965 |
|
|
|
1.5 |
|
|
|
338,282 |
|
|
|
337,484 |
|
|
|
0.2 |
|
Commercial auto |
|
|
73,404 |
|
|
|
74,185 |
|
|
|
(1.1 |
) |
|
|
242,827 |
|
|
|
245,851 |
|
|
|
(1.2 |
) |
Workers compensation |
|
|
63,325 |
|
|
|
69,847 |
|
|
|
(9.3 |
) |
|
|
226,142 |
|
|
|
247,035 |
|
|
|
(8.5 |
) |
All other lines of business |
|
|
51,947 |
|
|
|
48,220 |
|
|
|
7.7 |
|
|
|
154,990 |
|
|
|
146,161 |
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty Group
direct written premiums |
|
|
989,291 |
|
|
|
981,539 |
|
|
|
0.8 |
|
|
|
2,937,724 |
|
|
|
2,927,965 |
|
|
|
0.3 |
|
Management fee rate |
|
|
25.00 |
% |
|
|
25.00 |
% |
|
|
|
|
|
|
25.00 |
% |
|
|
25.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee revenue,
gross |
|
|
247,323 |
|
|
|
245,385 |
|
|
|
0.8 |
|
|
|
734,431 |
|
|
|
731,991 |
|
|
|
0.3 |
|
Change in allowance for
management fee returned on
cancelled policies* |
|
|
400 |
|
|
|
200 |
|
|
NM |
|
|
|
(1,300 |
) |
|
|
(1,300 |
) |
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fee revenue, net
of
allowance |
|
$ |
247,723 |
|
|
$ |
245,585 |
|
|
|
0.9 |
% |
|
$ |
733,131 |
|
|
$ |
730,691 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM |
|
= not meaningful |
|
* |
|
Management fees are returned to the Exchange when policies are cancelled mid-term and
unearned premiums are refunded. We record an estimated allowance for management fees returned
on mid-term policy cancellations. |
Direct written premiums of the Property and Casualty Group increased 0.8% to $989.3 million in the
third quarter of 2008 reflecting an increase in policies in force offset by reductions in average
premium. Total year-over-year policies in force increased by 2.8% to 3,981,075 at September 30,
2008. Growth in policies in force is the result of continuing improvements in policyholder
retention and increased new policies sold. The year-over-year average premium per policy declined
2.6% to $953 at September 30, 2008 from $978 at September 30, 2007. The impact of these rate
decreases is seen primarily in the renewal premiums.
We continuously evaluate pricing and estimate that those pricing actions approved, filed and
contemplated for filing could reduce the direct written premiums of the Property and Casualty Group
by approximately $31.0 million during 2008, of which approximately $25.5 million occurred in the
first nine months of 2008. The most significant rate reductions effective in 2008 are in workers
compensation in Pennsylvania and homeowners in Maryland.
Premiums generated from new business increased 2.7% to $108.7 million from $105.9 million in the
third quarter of 2008 as compared to 2007. Underlying the trend in new business premiums is an
increase in new business policies in force of 3.3% to 475,731 for the twelve months ended September
30, 2008 from 460,685 at September 30, 2007, while the year-over-year average premium per policy on
new business remained flat at $858 at September 30, 2008 from September 30, 2007.
Premiums generated from renewal business increased 0.6% to $880.6 million at September 30, 2008
from $875.7 million at September 30, 2007. Renewal policies in force increased 2.7% to 3,505,344
from 3,412,980, offset by a decrease in the year-over-year average premium per policy on renewal
business of 2.8% to $966, from $994, for the same respective periods in 2008 and 2007.
33
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Personal lines - The Property and Casualty Groups personal lines new business premiums
written increased 3.5% to $73.7 million in the third quarter of 2008 compared to $71.3
million in the third quarter of 2007. Personal lines new policies in force increased 2.5%
to 385,190 for the twelve months ended September 30, 2008 compared to September 30, 2007,
while the year-over-year average premium per policy on personal lines new business declined
0.8% to $682 at September 30, 2008 from $687 at September 30, 2007.
Private passenger auto new premiums written increased to $46.3 million, or 5.2%, during the
third quarter of 2008 driven by a 5.8% increase in new business policies in force to
164,808. The private passenger auto new business year-over-year average premium per policy
decreased 1.4% to $1,010 at September 30, 2008. A private passenger auto incentive program
was implemented in July 2006 to stimulate policy growth and has contributed to the increase
in new business policies in force. Under the program, eligible agents receive a bonus based
on the number of new private passenger auto policies issued. This program was further
revised effective June 1, 2008. See Private Passenger Auto Bonus section herein for
further details of the change. Homeowners new business premium decreased to $21.6 million in
the third quarter of 2008 from $22.2 million in the third quarter of 2007. Homeowners new
policies in force decreased 2.4% to 165,977, while the year-over-year average premium per
policy on homeowners new business decreased 3.2% to $457. The decline in homeowners new
business policies is partly impacted by the slowdown in the housing market in our operating
region.
Renewal premiums written on personal lines policies increased during the third quarter of
2008 to $656.4 million from $646.1 million, or 1.6%. The impact of rate reductions was
offset by improving policy retention ratio trends. The year-over-year average premium per
policy on personal lines renewal business decreased 1.3% to $785 at September 30, 2008 from
$795 at September 30, 2007. The policy retention ratio for private passenger auto improved
to 91.7% at September 30, 2008, from 91.5% at December 31, 2007 and 91.3% at September 30,
2007, while the policy retention for homeowners improved to 91.0% at September 30, 2008,
from 90.3% at December 31, 2007 and 90.1% at September 30, 2007.
Commercial lines - The commercial lines new business premiums written increased 1.0% to
$34.9 million in the third quarter of 2008 from $34.5 million in the third quarter of 2007.
Commercial lines new policies in force increased 6.9% to 90,541 for the twelve months ended
September 30, 2008, while the average premium per policy on commercial lines decreased 0.7%.
Factors contributing to the increase in new commercial lines premiums written in 2008
include more proactive communications between us and our commercial agents, continued
refinement and enhancements to our quote processing systems and our use of more refined
pricing based on predictive modeling. The decrease in the average premium per policy on
commercial lines new business was primarily driven by pricing actions that decreased workers
compensation rates.
Renewal premiums for commercial lines decreased 2.4% to $224.2 million from $229.6 million
in the third quarters of 2008 and 2007, respectively. While renewal policies in force
increased 2.9% to 426,038 for the twelve months ended September 30, 2008, the year-over-year
average premium per policy on commercial lines renewal business declined 6.6% due primarily
to the workers compensation line of business trends.
Future trends premium revenue We are continuing our efforts to grow premiums and improve
our competitive position in the marketplace. The continued expansion of our agency force
will contribute to current and future growth as new agents build up their books of business
with the Property and Casualty Group. We appointed 113 new agencies in the first nine months
of 2008, for a total of 2,030 agencies at September 30, 2008. We expect to meet our goal of
appointing 140 new agencies in 2008. In 2007, we appointed 214 new agencies. In the third
quarter of 2008, we decided not to pursue our planned 2009 expansion effort into the state
of Minnesota in order to refocus our growth strategy to our current markets where we expect
to realize a higher return more quickly than by expanding into another state.
34
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Cost of management operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
| |
| |
|
|
Nine months ended September 30, |
| |
| |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
|
(Unaudited) |
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Commissions |
|
$ |
143,306 |
|
|
$ |
144,850 |
|
|
|
(1.1 |
)% |
|
$ |
421,881 |
|
|
$ |
424,554 |
|
|
|
(0.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
|
36,907 |
|
|
|
38,753 |
|
|
|
(4.8 |
) |
|
|
110,189 |
|
|
|
107,262 |
|
|
|
2.7 |
|
Survey and underwriting costs |
|
|
6,047 |
|
|
|
6,046 |
|
|
|
0.0 |
|
|
|
18,250 |
|
|
|
18,219 |
|
|
|
0.2 |
|
Sales and policy issuance costs |
|
|
6,146 |
|
|
|
6,170 |
|
|
|
(0.4 |
) |
|
|
19,323 |
|
|
|
17,136 |
|
|
|
12.8 |
|
All other operating costs |
|
|
14,246 |
|
|
|
16,782 |
|
|
|
(15.1 |
) |
|
|
41,783 |
|
|
|
43,206 |
|
|
|
(3.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-commission expense |
|
|
63,346 |
|
|
|
67,751 |
|
|
|
(6.5 |
) |
|
|
189,545 |
|
|
|
185,823 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of management operations |
|
$ |
206,652 |
|
|
$ |
212,601 |
|
|
|
(2.8 |
)% |
|
$ |
611,426 |
|
|
$ |
610,377 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KEY POINTS
|
|
|
Commissions in the third quarter of 2008 include: |
|
|
|
a decrease in the estimate for agent bonuses of $5.2 million, |
|
|
|
|
an increase in normal and accelerated rate commissions of $1.6 million in the third
quarter of 2008 driven by an increase in certain commercial commission rates and higher
accelerated commissions due to more newly appointed agents, and |
|
|
|
|
an increase in promotional incentives and the private passenger auto bonus of $2.0
million. |
|
|
|
Personnel costs decreased 4.8% in the third quarter of 2008. Salaries and wages
increased $1.6 million in the third quarter of 2008 due to higher average pay rates and
staffing levels. In the third quarter of 2007, $3.7 million of severence compensation was
recorded related to our former president and chief executive officer who voluntarily
resigned in August 2007. |
|
|
|
|
All other operating costs in the third quarter of 2008 included a $2.2 million increase
in consulting fees, primarily contract labor costs related to various technology
initiatives. The third quarter of 2007 included a $4.3 million accrual for a judgment
against us. |
Commissions - Commissions to independent agents, which are the largest component of the cost of
management operations, include scheduled commissions earned by independent agents on premiums
written, accelerated commissions and agent bonuses and are outlined in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
| |
| |
|
Nine months ended September 30, |
| |
| |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
|
(Unaudited) |
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Scheduled rate commissions |
|
$ |
119,229 |
|
|
$ |
117,994 |
|
|
|
1.0 |
% |
|
$ |
352,561 |
|
|
$ |
349,121 |
|
|
|
1.0 |
% |
Accelerated rate commissions |
|
|
1,132 |
|
|
|
805 |
|
|
|
40.6 |
|
|
|
3,237 |
|
|
|
1,970 |
|
|
|
64.3 |
|
Agent bonuses |
|
|
19,075 |
|
|
|
24,316 |
|
|
|
(21.6 |
) |
|
|
58,430 |
|
|
|
69,507 |
|
|
|
(15.9 |
) |
Promotional incentives |
|
|
755 |
|
|
|
93 |
|
|
NM |
|
|
2,262 |
|
|
|
121 |
|
|
NM |
Private passenger auto bonus |
|
|
2,915 |
|
|
|
1,542 |
|
|
|
89.0 |
|
|
|
6,191 |
|
|
|
4,535 |
|
|
|
36.5 |
|
Change in commissions allowance
for mid-term policy cancellations |
|
|
200 |
|
|
|
100 |
|
|
NM |
|
|
(800 |
) |
|
|
(700 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commissions |
|
$ |
143,306 |
|
|
$ |
144,850 |
|
|
|
(1.1 |
)% |
|
$ |
421,881 |
|
|
$ |
424,554 |
|
|
|
(0.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Scheduled and accelerated rate commissions - Scheduled rate commissions were impacted by the
0.8% increase in the direct written premiums of the Property and Casualty Group in the third
quarter of 2008 compared to the third quarter of 2007. Also, effective July 1, 2008,
commission rates were increased for certain commercial lines new business premiums which
added $0.5 million to the third quarter of 2008 scheduled rate commissions. For the nine
months ended September 2008, $1.0 million of additional commissions were related to these
increased commission rates as $0.5 million was recognized in the second quarter for those
commercial premiums written but not yet collected as of June 2008. The higher commercial
commission rates are expected to increase commission expense by approximately $0.5 million
for the remainder of 2008 and $2 million for 2009.
Accelerated rate commissions are offered under specific circumstances to certain
newly-recruited agents for their initial three years of operations. Accelerated rate
commissions increased during the third quarter of 2008 as expected, given the additional new
agency appointments in recent years as part of our growth strategy. We appointed 65 new
agencies in 2005, 139 in 2006 and 214 in 2007. In the first nine months of 2008 we appointed
113 new agencies and expect to appoint a total of 140 for the year. As new agency
appointments continue, accelerated commissions are expected to increase.
Agent bonuses - Agent bonuses are based predominantly on an individual agencys
property/casualty underwriting profitability over a three-year period. There is also a
growth component to the bonus, paid only if the agency is profitable. The estimate for the
bonus is modeled on a monthly basis using the two prior years actual underwriting data by
agency combined with the current year-to-date actual data. The decrease in the estimate for
agent bonuses in the third quarter of 2008 reflects a reduction in our estimate of the
profitability component of the bonus. The agent bonus award is estimated at $76.9 million
for 2008. Of this estimate, $73.5 million represents the profitability component and $3.4
million represents the growth component. At September 30, 2007, the agent bonus award was
estimated at an annualized $90.6 million.
Private passenger auto bonus - In July 2006, an incentive program was implemented that paid
a $50 bonus to agents for each qualifying new private passenger auto policy issued.
Effective June 1, 2008, a tiered payout structure was introduced. The new structure pays out
between $50 and $200 per private passenger auto application based on the number of
qualifying new private passenger auto policies placed by an agency. The total cost of this
program is expected to approximate $9.0 million for 2008 and, assuming current policy
levels, $9.7 million for 2009. Additional commission expense of $1.5 million was recorded as
a result of the new tiered bonus structure in the nine months ended September 30, 2008.
Other costs of management operations - The cost of management operations excluding commission costs
decreased $4.4 million, or 6.5%, for the third quarter of 2008 compared to the third quarter of
2007. Personnel costs decreased $1.8 million, or 4.8% in the third quarter of 2008. Salaries and
wages increased by $1.6 million in the third quarter of 2008 from higher average pay rates coupled
with higher staffing levels, and $0.6 million in compensation expense recognized for our new chief
executive officer, whose employment began on July 29, 2008. Offsetting this was a decrease of $0.9
million in management incentive plan expense resulting from market value adjustments and a lowering
of target projections for the 2008 performance year. In the third quarter of 2007 there was a
charge of $3.7 million for severance pay due our former president and chief executive officer. All
other operating expenses decreased $2.5 million, or 15.1%. Third quarter of 2008 consulting fees
increased $2.2 million primarily due to contract labor costs related to various technology
initiatives. The third quarter of 2007 included a charge of $4.3 million for a judgment against us
in a lawsuit arising from our termination of an agency.
For the nine months ended September 30, 2008, personnel costs increased 2.7%, or $2.9
million. Salaries and wages increased $2.4 million in 2008 due to higher average pay rates and
higher staffing levels. Executive severance costs and the recognition of certain compensation
expense for our new chief executive officer contributed an additional $2.7 million in the nine
months ended September 2008. The 2007 personnel costs included $3.7 million of additional
severance for our former president and chief executive officer.
36
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
During 2008, investments continue to be made to support our effort to remain competitive in the
marketplace. As noted previously, increased expenses related to commission and incentive changes as
well as investments in new technologies are being incurred. We
incurred $3.5 million of additional
expense in the third quarter of 2008, including consulting fees, hardware and software costs incurred in conjunction with the planning and design for the development of a
new policy administration platform. For the nine months ended
September 30, 2008, we incurred $5.4
million of additional expense related to these same technology initiatives.
See also Factors That May Affect Future Results, herein.
Future trends cost of management operations The competitive position of the Property and
Casualty Group is based on many factors including price considerations, service levels, ease of
doing business, product features and billing arrangements, among others. Our estimate for growth in
non-commission operating expenses for the year 2008 is 9%. In the remainder of 2008 we will
continue to develop the detailed planning and design of our various technology initiatives aimed at
improving our competitiveness and as a result expect to incur additional external expenses of
approximately $8 million.
Insurance Underwriting Operations
Our insurance underwriting operations originate through direct business of our property/casualty
insurance subsidiaries but net underwriting results are a product of the intercompany reinsurance
pooling agreement between our subsidiaries and the Erie Insurance Exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
| |
| |
|
|
Nine months ended September 30, |
| |
| |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
|
(Unaudited) |
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Premiums earned |
|
$ |
52,057 |
|
|
$ |
51,892 |
|
|
|
0.3 |
% |
|
$ |
155,719 |
|
|
$ |
155,988 |
|
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss
adjustment expenses
incurred |
|
|
37,185 |
|
|
|
30,766 |
|
|
|
20.9 |
|
|
|
104,768 |
|
|
|
92,789 |
|
|
|
12.9 |
|
Policy acquisition and
other underwriting
expenses |
|
|
14,559 |
|
|
|
14,898 |
|
|
|
(2.3 |
) |
|
|
43,313 |
|
|
|
43,429 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
51,744 |
|
|
|
45,664 |
|
|
|
13.3 |
|
|
|
148,081 |
|
|
|
136,218 |
|
|
|
8.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income |
|
$ |
313 |
|
|
$ |
6,228 |
|
|
|
(95.0 |
)% |
|
$ |
7,638 |
|
|
$ |
19,770 |
|
|
|
(61.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KEY POINTS
|
|
|
Catastrophe losses, a majority of which were from Hurricane Ike in 2008, contributed
5.7 points and 3.4 points to the GAAP combined ratio in the third quarters of 2008 and
2007, respectively. |
|
|
|
|
Development of prior accident year loss reserves improved the loss ratio by 0.4 points,
or $0.2 million, in the third quarter of 2008, compared to an improvement of 7.8 points
for the third quarter of 2007. |
37
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Profitability measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Erie Indemnity Company GAAP loss and LAE ratio(1) |
|
|
71.4 |
% |
|
|
59.3 |
% |
|
|
67.3 |
% |
|
|
59.5 |
% |
Erie Indemnity Company GAAP combined ratio(1) |
|
|
99.4 |
|
|
|
88.0 |
|
|
|
95.1 |
|
|
|
87.3 |
|
P&C Group statutory combined ratio |
|
|
97.7 |
|
|
|
86.1 |
|
|
|
94.0 |
|
|
|
86.0 |
|
P&C Group adjusted statutory combined ratio(2) |
|
|
93.6 |
|
|
|
82.3 |
|
|
|
89.8 |
|
|
|
81.8 |
|
Direct business: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal lines adjusted statutory combined ratio |
|
|
91.6 |
|
|
|
81.3 |
|
|
|
87.5 |
|
|
|
81.3 |
|
Commercial lines adjusted statutory combined ratio(3) |
|
|
109.4 |
|
|
|
83.6 |
|
|
|
97.0 |
|
|
|
82.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior accident year reserve development redundancy |
|
|
(0.4 |
) |
|
|
(7.8 |
) |
|
|
(3.2 |
) |
|
|
(7.5 |
) |
Prior year salvage and subrogation recoveries collected |
|
|
(1.0 |
) |
|
|
(1.0 |
) |
|
|
(2.0 |
) |
|
|
(2.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss ratio points from prior accident years |
|
|
(1.4 |
)% |
|
|
(8.8 |
)% |
|
|
(5.2 |
)% |
|
|
(9.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The GAAP loss and LAE ratio and the combined ratio, expressed as a percentage, is the ratio of
losses, loss adjustment, acquisition and other underwriting expenses incurred to earned
premiums for our property/casualty insurance subsidiaries. Our GAAP combined ratios are different
from the results of the Property and Casualty Group due to certain GAAP adjustments. |
|
(2) |
|
The adjusted statutory combined ratio removes the profit margin on the management fee we earn
from the Property and Casualty Group. |
|
(3) |
|
The commercial lines adjusted statutory combined ratio increase in the third quarter 2008 over
the third quarter 2007 is primarily due to one large fire claim in Pennsylvania and losses related
to Hurricane Ike in Ohio and Pennsylvania. |
Development of direct loss reserves
Our 5.5% share of the Property and Casualty Groups favorable development of prior accident year
losses, after removing the effects of salvage and subrogation recoveries, was $0.2 million and $4.0
million, and improved the loss ratio by 0.4 points and 7.8 points in the third quarters of 2008 and
2007, respectively. The favorable development in 2008 resulted from improvements in frequency
trends and slight improvements in severity trends on automobile bodily injury and
uninsured/underinsured motorist bodily injury. In the third quarter of 2007, the majority of the
favorable development resulted from improved severity trends on automobile bodily injury and
improved frequency trends and flattening severity trends on uninsured/underinsured motorist bodily
injury. Overall, our private passenger auto loss trends have remained favorable, which is
consistent with industry trends in this line of business.
Catastrophe losses
Our share of catastrophe losses, as defined by the Property and Casualty Group, amounted to $2.9
million and $1.8 million in the third quarters of 2008 and 2007, respectively. The third quarter of
2008 included flooding, tornado and wind storms related to Hurricane Ike primarily in Ohio and
Pennsylvania. During the third quarter of 2008, the Property and Casualty Group recorded an
increase in the incurred but not reported reserves related to catastrophe losses of $22.7 million,
of which our share was $1.2 million. This reserve is not included in the quarterly catastrophe
loss totals. Catastrophe losses incurred for the first nine months of 2008 and 2007 were $5.3
million and $3.2 million, respectively, and contributed 3.4 points and 2.0 points to the combined
ratio, respectively.
Underwriting losses are seasonally higher in the second through fourth quarters and as a
consequence, our combined ratio generally increases as the year progresses. In the third quarter of
2008, our share of the increase to incurred but not reported reserves related to seasonality
adjustments was $0.2 million, compared to $1.7 million in the third quarter of 2007. Seasonality
adjustments increased our share of incurred but not reported reserves by $0.9 million in the second
quarter of 2008, and reduced these reserves by $3.5 million in the first quarter of 2008.
38
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Investment Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
| |
| |
|
|
Nine months ended September 30, |
| |
| |
|
(in thousands) |
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
|
(Unaudited) |
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
Net investment income |
|
$ |
10,218 |
|
|
$ |
12,233 |
|
|
|
(16.5 |
)% |
|
$ |
33,357 |
|
|
$ |
40,350 |
|
|
|
(17.3 |
)% |
Net realized (losses) gains on investments |
|
|
(41,356 |
) |
|
|
3,438 |
|
|
NM |
|
|
(80,202 |
) |
|
|
7,550 |
|
|
NM |
Equity in earnings of limited partnerships |
|
|
1,057 |
|
|
|
14,169 |
|
|
|
(92.5 |
) |
|
|
20,310 |
|
|
|
46,867 |
|
|
|
(56.7 |
) |
Equity in (losses) earnings of EFL |
|
|
(10,090 |
) |
|
|
692 |
|
|
NM |
|
|
(10,965 |
) |
|
|
3,304 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue from investment operations |
|
$ |
(40,171 |
) |
|
$ |
30,532 |
|
|
NM |
|
$ |
(37,500 |
) |
|
$ |
98,071 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KEY POINTS
|
|
|
Net investment income decreased 16.5% for the quarter due to lower invested asset
balances as a result of our continued share repurchase activity. |
|
|
|
|
Net realized (losses) gains on investments in the third quarter of 2008 include $37.4 million of
impairment charges in the third quarter of 2008, and $3.4 million of unrealized losses on
common stock recognized as a result of adopting SFAS 159. Impairment charges were $1.8
million in the third quarter of 2007. |
|
|
|
|
Equity in earnings of limited partnerships decreased $13.1 million in the third quarter
of 2008 due to the general slowdown and recent economic downturn in the real estate
markets. |
|
|
|
|
Equity in (losses) earnings of EFL declined $10.8 million primarily due to our share of
impairment charges recognized by EFL in the third quarter of 2008. |
Impairment charges of $37.4 million included $15.7 million on fixed maturities and $21.7 million on
preferred stock for the three months ended September 30, 2008. Impairment charges in the third
quarter increased significantly due to the significant disruption in the securities markets
experienced in September 2008. Securities in an unrealized loss position at September 30, 2008 are
stratified below based on time in a loss position and magnitude of the loss as a percentage of book
value of the security. The majority of the declines in investment value have not been to the
severity depicted in the table for longer than one month.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross |
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Decline of Investment Value |
|
(in thousands) |
|
Value |
|
|
Losses |
|
|
<=15% |
|
|
>15% |
|
|
>25% |
|
|
>35% |
|
|
>45% |
|
Fixed Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for less than 1 quarter |
|
$ |
214,774 |
|
|
$ |
4,174 |
|
|
$ |
4,174 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Unrealized loss for 1 quarter |
|
|
97,215 |
|
|
|
5,637 |
|
|
|
5,059 |
|
|
|
578 |
|
|
|
293 |
|
|
|
293 |
|
|
|
0 |
|
Unrealized loss for 2 quarters |
|
|
95,700 |
|
|
|
6,692 |
|
|
|
5,132 |
|
|
|
1,560 |
|
|
|
1,021 |
|
|
|
745 |
|
|
|
0 |
|
Unrealized loss for 3 quarters |
|
|
12,437 |
|
|
|
1,380 |
|
|
|
987 |
|
|
|
393 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Unrealized loss for 1 year or longer |
|
|
49,437 |
|
|
|
6,256 |
|
|
|
3,166 |
|
|
|
3,090 |
|
|
|
726 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
469,563 |
|
|
$ |
24,139 |
|
|
$ |
18,518 |
|
|
$ |
5,621 |
|
|
$ |
2,040 |
|
|
$ |
1,038 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for less than 1 quarter |
|
$ |
6,386 |
|
|
$ |
1,208 |
|
|
$ |
288 |
|
|
$ |
919 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Unrealized loss for 1 quarter |
|
|
14,111 |
|
|
|
3,973 |
|
|
|
574 |
|
|
|
3,399 |
|
|
|
2,284 |
|
|
|
1,332 |
|
|
|
1,332 |
|
Unrealized loss for 2 quarters |
|
|
6,290 |
|
|
|
501 |
|
|
|
354 |
|
|
|
147 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Unrealized loss for 3 quarters |
|
|
7,377 |
|
|
|
1,156 |
|
|
|
116 |
|
|
|
1,040 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Unrealized loss for 1 year or longer |
|
|
2,801 |
|
|
|
386 |
|
|
|
7 |
|
|
|
379 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
36,965 |
|
|
$ |
7,224 |
|
|
$ |
1,339 |
|
|
$ |
5,884 |
|
|
$ |
2,284 |
|
|
$ |
1,332 |
|
|
$ |
1,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
We determined that none of the securities represented in the table above met the criteria for
other-than-temporary impairment write-downs as of September 30, 2008. We completed a thorough
review of the securities based upon our impairment and valuation review process. We continue to
have the intent and ability to hold these investments for the periods of time that we anticipate is
needed to recover while continuing to collect the interest and dividend obligations on them.
For the nine months ended September 30, 2008, impairment charges on fixed maturities were $29.7
million while impairment charges on preferred stock were $32.1 million. In the third quarter of
2008, valuation losses on common stock that were reported in earnings were $3.4 million, and $21.7
million for the nine months ended September 30, 2008. See Note 6 to the Consolidated Financial
Statements for additional information on our adoption of SFAS 159.
Private equity and mezzanine debt limited partnerships generated losses of $0.7 million and
earnings of $8.5 million for the quarters ended September 30, 2008 and 2007, respectively. Real
estate limited partnerships generated earnings of $1.8 million and $5.7 million in the third
quarters of 2008 and 2007, respectively. The reduced valuation adjustments recorded by our real
estate limited partnerships are the result of the general slow-down and recent economic downturn in
the real estate markets.
Our equity in losses of EFL totaling $10.1 million in the third quarter of 2008 resulted from EFL
recognizing pre-tax impairment charges of $40.1 million, of
which our share was $8.7 million before tax.
While EFL recognized a deferred tax asset related to these impairments, it was limited to the
amount of assets that management believed to be recoverable under SFAS 109, Accounting for Income
Taxes. As such, a valuation allowance related to these impairments was recorded on the books of
EFL at September 30, 2008, further reducing its net income for the quarter.
FINANCIAL CONDITION
Investments
Our investment strategy continues to take a long-term perspective emphasizing investment quality,
diversification and superior investment returns. Investments are managed on a total return approach
that focuses on current income and capital appreciation. Our investment strategy also provides for
liquidity to meet our short- and long-term commitments. At September 30, 2008, our investment
portfolio of investment-grade bonds and preferred stock, common stock and cash and cash equivalents
represents $729.4 million, or 26.7%, of total assets.
Our investments are subject to certain risks, including interest rate, credit and price risk. Our
exposure to interest rate risk is concentrated in our fixed maturities portfolio. This portfolio
comprises 56.7% and 57.7% of invested assets at September 30, 2008 and December 31, 2007,
respectively. We calculate the duration and convexity of the fixed maturities portfolio each month
to measure the price sensitivity of the portfolio to interest rate changes. Duration measures the
relative sensitivity of the fair value of an investment to changes in interest rates. Convexity
measures the rate of change of duration with respect to changes in interest rates. These factors
are analyzed monthly to ensure that both the duration and convexity remain in the targeted ranges
established by management.
We continually review the fixed maturity and preferred stock portfolios to evaluate positions that
potentially have incurred other-than-temporary declines in value. For fixed maturity and preferred
stock investments, we individually analyze all positions with emphasis on those that have, in
managements opinion, declined significantly below cost. We consider market conditions, industry
characteristics and the fundamental operating results of the issuer to determine if the decline is
due to changes in interest rates, changes relating to a decline in credit quality, or other issues
affecting the investment. In addition to specific factors, other factors considered in our review
of investment valuation are the length of time and extent to which the fair value is below cost and whether we have the intent to hold the security, which is affected by our desire to
generate capital losses for federal income tax reasons. A
charge is recorded in the Consolidated Statements of Operations for positions that have experienced
other-than-temporary impairments due to credit quality or other factors, or for which it is not our
intent or ability to hold the position until recovery has occurred. (See Analysis of Investment
Operations section herein.)
If our policy for determining the recognition of impaired positions were different, our
Consolidated Results of Operations could be significantly impacted. Management believes its
investment valuation philosophy and accounting practices result in appropriate and timely
measurement of value and recognition of impairment.
40
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
We adopted SFAS 157 Fair Value Measurement during the first quarter of 2008. This standard did
not require us to make any changes to our valuation methods. Furthermore, our use of Level 3 or
Unobservable inputs accounted for 6.2% of our available-for-sale and trading securities at
September 30, 2008. The amount of securities classified as unobservable increased from less than 3%
at June 30, 2008 due to the recent illiquid market conditions.
Income Taxes
As reported on our Consolidated Statements of Financial Position, we recognized a net deferred
asset of $14.6 million at September 30, 2008 that is expected to be realized in a future tax
return. This compares to a net deferred tax liability of $8.2 million at June 30, 2008. The
movement to a net deferred tax asset position during the quarter is due primarily to an increase in
our net unrealized losses on securities. We believe we have sufficient tax planning strategies in
place to recover these deferred tax assets in future tax returns, thus no deferred tax valuation allowance was
established at September 30, 2008.
Property/Casualty Loss Reserves
Loss reserves are established to account for the estimated ultimate costs of loss and loss
adjustment expenses for claims that have been reported but not yet settled and claims that have
been incurred but not reported.
Among the factors that may potentially cause the greatest variation between current reserve
estimates and the actual future paid amounts are: unforeseen changes in statutory or case law
altering the amounts to be paid on existing claim obligations, new medical procedures and/or drugs
whose cost is significantly different from that seen in the past, and claims patterns on current
business that differ significantly from historical claims patterns.
Loss and loss adjustment expense reserves are presented in our Consolidated Statements of Financial
Position on a gross basis for EIC, EINY, and EIPC. Our property/casualty insurance subsidiaries
wrote about 17% of the direct property/casualty premiums of the Property and Casualty Group during
the first nine months of 2008. Under the terms of the Property and Casualty Groups quota share and
intercompany pooling arrangement, a significant portion of these reserve liabilities are
recoverable. Recoverable amounts are reflected as an asset in our Consolidated Statements of
Financial Position. The direct and assumed loss and loss adjustment expense reserves by major line
of business and the related amount recoverable under the intercompany pooling arrangement are
presented as follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
September 30, |
|
December 31, |
(in thousands) |
|
2008 |
|
2007 |
|
|
|
Gross reserve liability: |
|
|
|
|
|
|
|
|
Private passenger auto |
|
$ |
291,890 |
|
|
$ |
321,320 |
|
Pre-1986 automobile catastrophic injury |
|
|
176,726 |
|
|
|
192,764 |
|
Homeowners |
|
|
31,719 |
|
|
|
28,506 |
|
Workers compensation |
|
|
164,496 |
|
|
|
146,402 |
|
Workers compensation catastrophic injury |
|
|
99,752 |
|
|
|
108,589 |
|
Commercial auto |
|
|
75,146 |
|
|
|
79,848 |
|
Commercial multi-peril |
|
|
81,998 |
|
|
|
75,169 |
|
All other lines of business |
|
|
73,876 |
|
|
|
73,933 |
|
|
|
|
Gross reserves |
|
|
995,603 |
|
|
|
1,026,531 |
|
Reinsurance recoverable |
|
|
803,052 |
|
|
|
834,453 |
|
|
|
|
Net reserve liability |
|
$ |
192,551 |
|
|
$ |
192,078 |
|
|
|
|
The reserves that have the greatest potential for variation are the catastrophic injury liability
reserves. We are currently reserving for about 300 claimants requiring lifetime medical care, of
which less than 150 involve catastrophic injuries. The reserve carried by the Property and Casualty
Group for the catastrophic injury claimants, which is our best estimate of this liability at this
time, was $524.4 million at September 30, 2008, which is net of $174.0 million of anticipated
reinsurance
41
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
recoverable. Our property/casualty subsidiaries share of the net catastrophic injury liability
reserves is $28.9 million at September 30, 2008 compared to $29.7 million at December 31, 2007. The
decrease in the pre-1986 automobile catastrophe injury reserve at September 2008 compared to
December 2007 was primarily due to lower cost expectations of future attendant care services.
Off-balance sheet arrangements
There are no off-balance sheet obligations related to the variable interest we have in the
Exchange. Any liabilities between the Exchange and us are recorded in our Consolidated Statements
of Financial Position. We have no other material off-balance sheet obligations or guarantees, other
than the limited partnership investment commitments discussed in Note 15 to the Consolidated
Financial Statements herein.
LIQUIDITY AND CAPITAL RESOURCES
We have historically generated sufficient positive cash flow from our operations to fund our
commitments and build our investment portfolios. In 2007 and 2008, operating cash flows have been
used to fund our financing activities, particularly our dividends to shareholders and share
repurchases. When dividends to shareholders and share repurchases exceed operating cash flows, the
investment portfolios of the Company may be used as a funding source. In the third quarter 2008,
our investment portfolio was impacted by declines in the value of securities that resulted from the
recent significant disruption in the securities markets. To the extent the market instability
continues, our investment portfolio may continue to be impacted.
We expect
to meet our future funding requirements through various alternatives
available to us. Outside of our
normal operating and investing cash activities we have available: (1) a bank line of credit limit
of $100 million of which we currently have borrowings of $30 million at September 30, 2008 thus
providing an additional $70 million if needed, (2) dividend payments from our wholly-owned
property/casualty insurance subsidiaries, EIC, EIPC and EICNY, up to their statutory limits, (3)
our more liquid investments that can be sold, such as our common stock and cash and cash
equivalents, which total approximately $93 million at September 30, 2008 and (4) the ability to
curtail or modify discretionary outlays such as those related to our share repurchase activities
until the investment markets better support our financing activities. We believe we have the
funding sources available to us to support future cash flow requirements.
Given the recent illiquid market environment for certain of our bond and preferred stock holdings,
we borrowed $75.0 million on our line of credit during the first quarter of 2008 to support our
current repurchase program while allowing us to meet our operating cash obligations. Payments on
the line of credit totaled $45.0 million in the third quarter of 2008. This line of credit expires
on December 31, 2008. Also during the first quarter of 2008, we borrowed $30.0 million from EIC,
our 100% owned property/casualty insurance subsidiary, to fund these operating and financing cash flow
activities. We repaid the entire balance during the second quarter of 2008 and paid interest of
less than $0.1 million at that time. This intercompany borrowing was eliminated upon consolidation
and therefore had no impact on our Consolidated Statements of Financial Position or Operations.
Lower operating cash flows in the first nine months of 2008, compared to the first nine months of
2007, were primarily related to a decrease in cash flow from management fees received from the Exchange, lower
distributions from our limited partnerships and higher operating expenses. We made pension
contributions of $15.0 million and $14.8 million to our pension plan in 2008 and 2007,
respectively. We also prepaid a software maintenance agreement for a three year period in 2008,
whereas in 2007 we had only prepaid the agreement for one year, resulting in higher cash outlay in
2008 of $5.8 million.
During the third quarter of 2008, we repurchased 20,000 shares of our outstanding Class A common
stock at a cost of $0.9 million in conjunction with our stock repurchase plan. Through the first
nine months of 2008, 2.0 million shares were repurchased at a total cost of $98.7 million. For the
first nine months of 2007, we repurchased 4.2 million shares at a total cost of $219.8 million. The
third quarter of 2007 included a repurchase of 1.9 million shares of our Class A nonvoting common
stock from the F. William Hirt Estate separate from the stock repurchase program for a total
purchase price of $99.0 million. At September 30, 2008, approximately $93.3 million of repurchase
authority remains under this plan. (See Item 2. of Part II. Unregistered Sales of Equity Securities
and Use of Proceeds).
42
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
As discussed in the Factors That May Affect Future Results section, herein, future operating cash
flows will also be affected by commitments made by us for our information technology initiatives.
Also impacting our future investing activities will be our limited partnership commitments, which
at September 30, 2008 total $101 million and are required to be funded through 2012.
CRITICAL ACCOUNTING ESTIMATES
We make estimates and assumptions that have a significant effect on the amounts and disclosures
reported in the financial statements. The most significant estimates relate to valuation of
investments, reserves for property/casualty insurance unpaid losses and loss adjustment expenses
and retirement benefits. While management believes its estimates are appropriate, the ultimate
amounts may differ from estimates provided. Our most critical accounting estimates are described
in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations
of our Annual Report on Form 10-K for the year ended December 31, 2007. There have been no
significant changes to the policies surrounding these estimates since that time.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Financial condition of the Exchange
We have a direct interest in the financial condition of the Exchange because management fee
revenues are based on the direct written premiums of the Exchange and the other members of the
Property and Casualty Group. Additionally, we participate in the underwriting results of the
Exchange through the pooling arrangement in which our insurance subsidiaries have 5.5%
participation. A concentration of credit risk exists related to the unsecured receivables due from
the Exchange for certain fees, costs and reimbursements.
To the extent that the Exchange incurs underwriting losses or investment losses resulting from
declines in the value of its marketable securities, the Exchanges policyholders surplus would be
adversely affected. If the surplus of the Exchange were to decline significantly from its current
level, the Property and Casualty Group could find it more difficult to retain its existing business
and attract new business. A decline in the business of the Property and Casualty Group would have
an adverse effect on the amount of the management fees we receive and the underwriting results of
the Property and Casualty Group. In addition, a significant decline in the surplus of the Exchange
from its current level would make it more likely that the management fee rate would be reduced.
During the third quarter of 2008, the Exchange recognized impairment charges on its investment
portfolio of $324.8 million due to the recent downturn experienced in the securities markets. To
the extent the market downturn continues, the Exchanges investment portfolio may continue to be
impacted. For the nine months ended September 30, 2008, the Exchange recognized impairments of
$585.5 million. Despite recent market events, at September 30, 2008, the Exchange had $4.4 billion
in statutory surplus and a premium to surplus ratio of less than 1 to 1.
The
Exchange has strong underlying operating cash flows and sufficient
liquidity to meet its needs, including the ability to pay the
management fees owed to us. Through the nine months ended September
30, 2008, the Exchange generated $397 million in cash flow from
operating activities. At September 30, 2008 the Exchange had $242
million in cash and cash equivalents. The Exchange also has a $75
million untapped bank line of credit with a bank at September 30, 2008.
Additional information, including condensed statutory financial statements of the Exchange, is
presented in Note 16 to the Consolidated Financial Statements herein.
Insurance premium rate actions
The changes in premium rates of the Property and Casualty Group directly affect direct written
premium levels and underwriting profitability of the Property and Casualty Group, the Exchange and
us, and also have a direct bearing on management fees. Rate reductions have been implemented and
continue to be sought in 2008 by the Property and Casualty Group. Pricing actions contemplated or
taken by the Property and Casualty Group are subject to various regulatory requirements of the
states in which these insurers operate. The pricing actions already implemented, or to be
implemented through 2008, will also have an effect on the market competitiveness of the Property
and Casualty Groups insurance products. Such pricing actions, and those of competitors, could
affect the ability of our agents to sell and/or renew business. Management estimates that pricing
actions approved, filed and awaiting approval or contemplated through 2008, will reduce premiums
for the Property and Casualty Group by $5.5 million through the remainder of the year for a total
of $31.0 million in 2008. Rate actions are expected to increase premiums by about 1% in
2009.
43
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Market volatility
Our portfolio of fixed income, preferred and common stocks are subject to significant market value
changes especially in the current market environment of instability in the worldwide financial markets. Uncertainty remains
surrounding the general market conditions. The current volatility in the financial markets could have an
adverse impact on our financial condition, operations and cash flows.
With the adoption of SFAS 159 as of January 1, 2008, all changes to unrealized gains and losses on
the common stock portfolio are recognized in investment income as net realized gains or losses in
the Consolidated Statements of Operations. The fair value of the common stock portfolio is subject
to fluctuation from period to period resulting from changes in prices. Depending upon market
conditions, this could cause considerable fluctuation in reported total investment income in 2008
and beyond. See Note 6 to the Consolidated Financial Statements for a discussion of the adoption
of SFAS 159.
Information technology development
During 2008, we are continuing a broad program of initiatives to enhance the functionality of our
legacy processing and agency interface systems aimed at improving the ease of doing business,
enhancing agent and employee productivity and access to information. We are also continuing a
program in 2008 to evaluate and design our policy administration platform replacement which we
initiated in 2007. In the remainder of 2008 we will continue to develop the detailed planning and
design of the policy administration platform replacement and expect to incur approximately $8
million of external consulting and contract labor fees, hardware costs and software costs as a
result. The 2009 phase of the project and the related expenses are expected to be approved before
the end of this initial phase of the project in December of 2008.
44
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in our identified market risk components as described in Item 7A of
the December 31, 2007 annual report on Form 10-K. However, during the quarter ended September 30,
2008, there were significant disruptions in the financial markets that have affected prices for
many securities due to the lack of trading and distressed selling. This market disruption has
resulted in a lack of liquidity in the credit markets and a widening of credit spreads. As a
result of these effects, we recorded net unrealized losses of $20.5 million in our fixed maturities
portfolio at September 30, 2008, compared with net unrealized gains of $0.9 million at December 31,
2007.
45
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, with the participation of management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures
(pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of
the period covered by this report. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures are effective. Our
management evaluated, with the participation of the Chief Executive Officer and Chief Financial
Officer, any change in our internal control over financial reporting and determined that there has
been no change in our internal control over financial reporting during the quarter ended September
30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
46
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in our annual report
on Form 10-K for the fiscal year ended December 31, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Value |
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
of Shares that |
|
|
|
Total Number |
|
|
Average |
|
|
Shares Purchased |
|
|
May Yet Be |
|
|
|
of Shares |
|
|
Price Paid |
|
|
as Part of Publicly |
|
|
Purchased |
|
Period |
|
Purchased |
|
|
Per Share |
|
|
Announced Plan |
|
|
Under the Plan |
|
July 1 31, 2008 |
|
|
20,000 |
|
|
$ |
45.58 |
|
|
|
20,000 |
|
|
|
|
|
August 1 31, 2008 |
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
|
|
September 1
30, 2008 |
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
20,000 |
|
|
|
|
|
|
|
20,000 |
|
|
$ |
93,300,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In April 2008, our Board of Directors approved a continuation of the stock repurchase program for
an additional $100 million authorizing repurchases through June 30, 2009.
47
PART II. OTHER INFORMATION (Continued)
ITEM 6. EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
10.1*
|
|
Employment Agreement dated July 14, 2008, between Erie Indemnity Company and Terrence W.
Cavanaugh |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 |
|
|
|
32
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
Such exhibit is incorporated by reference to the like titled exhibit in the Registrants Form 8-K
that was filed with the Commission on July 18, 2008.
|
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
Erie Indemnity Company
|
|
|
(Registrant) |
|
|
Date: November 5, 2008 |
/s/ Terrence W. Cavanaugh
|
|
|
Terrence W. Cavanaugh, President & CEO |
|
|
|
|
|
|
|
|
|
/s/ Philip A. Garcia
|
|
|
Philip A. Garcia, Executive Vice President & CFO |
|
|
|
|
|
49