Attached files
file | filename |
---|---|
EX-32 - EX-32 - ERIE INDEMNITY CO | l40164exv32.htm |
EX-31.1 - EX-31.1 - ERIE INDEMNITY CO | l40164exv31w1.htm |
EX-31.2 - EX-31.2 - ERIE INDEMNITY CO | l40164exv31w2.htm |
EX-3.1.A - EX-3.1.A - ERIE INDEMNITY CO | l40164exv3w1wa.htm |
EX-3.1.C - EX-3.1.C - ERIE INDEMNITY CO | l40164exv3w1wc.htm |
EX-3.1.B - EX-3.1.B - ERIE INDEMNITY CO | l40164exv3w1wb.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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
THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended June 30, 2010
Commission file number 0-24000
ERIE INDEMNITY COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA | 25-0466020 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
100 Erie Insurance Place, Erie, Pennsylvania | 16530 | |
(Address of principal executive offices) | (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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o 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):
Large Accelerated Filer þ | Accelerated Filer o | Non-Accelerated Filer o | Smaller Reporting Company o | |||
(Do not check if a smaller reporting company) |
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 50,662,752 at July
21, 2010.
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 2,546 at July 21,
2010.
The common stock is the only class of stock the registrant is presently authorized to issue.
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in millions, except per share data)
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(As adjusted | (As adjusted | |||||||||||||||
Note 2) | Note 2) | |||||||||||||||
Revenues |
||||||||||||||||
Premiums earned |
$ | 989 | $ | 964 | $ | 1,967 | $ | 1,921 | ||||||||
Net investment income |
108 | 105 | 212 | 222 | ||||||||||||
Net realized investment (losses) gains |
(213 | ) | 208 | (88 | ) | 53 | ||||||||||
Net impairment losses recognized in earnings |
(4 | ) | (12 | ) | (6 | ) | (83 | ) | ||||||||
Equity in earnings (losses) of limited partnerships |
27 | (126 | ) | 30 | (287 | ) | ||||||||||
Other income |
9 | 10 | 17 | 18 | ||||||||||||
Total revenues |
916 | 1,149 | 2,132 | 1,844 | ||||||||||||
Benefits and expenses |
||||||||||||||||
Insurance losses and loss expenses |
737 | 660 | 1,498 | 1,463 | ||||||||||||
Policy acquisition and underwriting expenses |
230 | 231 | 457 | 463 | ||||||||||||
Total benefits and expenses |
967 | 891 | 1,955 | 1,926 | ||||||||||||
(Loss) income from operations before income taxes
and noncontrolling interests |
(51 | ) | 258 | 177 | (82 | ) | ||||||||||
(Benefit) provision for income taxes |
(20 | ) | (13 | ) | 46 | (102 | ) | |||||||||
Net (loss) income |
$ | (31 | ) | $ | 271 | $ | 131 | $ | 20 | |||||||
Less: Net (loss) income attributable to
noncontrolling
interest in consolidated entity Exchange |
(80 | ) | 238 | 35 | (24 | ) | ||||||||||
Net income attributable to Indemnity |
$ | 49 | $ | 33 | $ | 96 | $ | 44 | ||||||||
Earnings Per Share |
||||||||||||||||
Net income attributable to Indemnity per share |
||||||||||||||||
Class A common stock basic |
$ | 0.96 | $ | 0.63 | $ | 1.87 | $ | 0.85 | ||||||||
Class A common stock diluted |
$ | 0.86 | $ | 0.57 | $ | 1.68 | $ | 0.76 | ||||||||
Class B common stock basic and diluted |
$ | 138.21 | $ | 93.19 | $ | 271.03 | $ | 127.98 | ||||||||
Weighted average shares outstanding attributable to
Indemnity Basic |
||||||||||||||||
Class A common stock |
51,013,358 | 51,240,693 | 51,099,071 | 51,255,385 | ||||||||||||
Class B common stock |
2,546 | 2,551 | 2,546 | 2,551 | ||||||||||||
Weighted average shares outstanding attributable to
Indemnity Diluted |
||||||||||||||||
Class A common stock |
57,146,855 | 57,390,302 | 57,231,936 | 57,404,994 | ||||||||||||
Class B common stock |
2,546 | 2,551 | 2,546 | 2,551 | ||||||||||||
Dividends declared per share |
||||||||||||||||
Class A common stock |
$ | 0.48 | $ | 0.45 | $ | 0.96 | $ | 0.90 | ||||||||
Class B common stock |
$ | 72.00 | $ | 67.50 | $ | 144.00 | $ | 135.00 | ||||||||
See accompanying notes to Consolidated Financial Statements.
3
Table of Contents
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(dollars in millions, except per share data)
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Investments Indemnity |
||||||||
Available-for-sale securities, at fair value: |
||||||||
Fixed maturities (amortized cost of $637 and $642, respectively) |
$ | 671 | $ | 664 | ||||
Equity securities (cost of $41 and $35, respectively) |
45 | 38 | ||||||
Trading securities, at fair value (cost of $36 and $36, respectively) |
40 | 42 | ||||||
Limited partnerships (cost of $273 and $281, respectively) |
234 | 235 | ||||||
Other invested assets |
1 | 1 | ||||||
Investments Exchange |
||||||||
Available-for-sale securities, at fair value: |
||||||||
Fixed maturities (amortized cost of $6,379 and $6,277, respectively) |
6,789 | 6,517 | ||||||
Equity securities (cost of $477 and $425, respectively) |
523 | 472 | ||||||
Trading securities, at fair value (cost of $1,604 and $1,556, respectively) |
1,712 | 1,835 | ||||||
Limited partnerships (cost of $1,341 and $1,392, respectively) |
1,123 | 1,116 | ||||||
Other invested assets |
19 | 20 | ||||||
Total investments |
11,157 | 10,940 | ||||||
Cash and cash equivalents (Exchange portion of $189 and $158, respectively) |
223 | 234 | ||||||
Premiums receivable from policyholders (Exchange portion of $770 and $715, respectively) |
977 | 906 | ||||||
Reinsurance recoverable (Exchange portion of $198 and $212, respectively) |
201 | 215 | ||||||
Deferred income taxes (Exchange portion of $72 and $75, respectively) |
101 | 116 | ||||||
Deferred acquisition costs (Exchange portion of $417 and $416, respectively) |
473 | 467 | ||||||
Other assets (Exchange portion of $322 and $306, respectively) |
438 | 409 | ||||||
Total assets |
$ | 13,570 | $ | 13,287 | ||||
Liabilities and shareholders equity |
||||||||
Liabilities |
||||||||
Indemnity liabilities |
||||||||
Losses and loss expense reserves |
$ | 739 | $ | 752 | ||||
Unearned premiums |
345 | 325 | ||||||
Other liabilities |
350 | 387 | ||||||
Exchange liabilities |
||||||||
Losses and loss expense reserves |
2,883 | 2,846 | ||||||
Life policy and deposit contract reserves |
1,574 | 1,540 | ||||||
Unearned premiums |
1,748 | 1,656 | ||||||
Other liabilities |
62 | 56 | ||||||
Total liabilities |
7,701 | 7,562 | ||||||
Indemnitys shareholders equity |
||||||||
Class A common stock, stated value $0.0292 per share; authorized 74,996,930 shares;
68,289,600 issued; 50,759,754 and 51,203,473 shares outstanding, respectively |
2 | 2 | ||||||
Class B common stock, convertible at a rate of 2,400 Class A shares for one Class B
share, stated value $70 per share; 2,546 authorized, issued and outstanding, respectively |
0 | 0 | ||||||
Additional paid-in-capital |
8 | 8 | ||||||
Accumulated other comprehensive loss |
(32 | ) | (43 | ) | ||||
Retained earnings, before cumulative effect adjustment |
1,796 | 1,743 | ||||||
Cumulative effect of accounting changes, net of tax |
0 | 6 | ||||||
Retained earnings, after cumulative effect adjustment |
1,796 | 1,749 | ||||||
Total contributed capital and retained earnings |
1,774 | 1,716 | ||||||
Treasury stock, at cost, 17,529,846 and 17,086,127 shares, respectively |
(834 | ) | (814 | ) | ||||
Total Indemnity shareholders equity |
940 | 902 | ||||||
Noncontrolling interest in consolidated entity Exchange |
4,929 | 4,823 | ||||||
Total equity |
5,869 | 5,725 | ||||||
Total liabilities, shareholders equity and noncontrolling interest |
$ | 13,570 | $ | 13,287 | ||||
See accompanying notes to Consolidated Financial Statements. See Note 14 for supplemental
consolidating statements of financial position information.
4
Table of Contents
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in millions)
Erie Insurance Group | ||||||||||||||||
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(As adjusted | (As adjusted | |||||||||||||||
Note 2) | Note 2) | |||||||||||||||
Accumulated other comprehensive loss: |
||||||||||||||||
Balance, beginning of period |
$ | (37 | ) | $ | (138 | ) | $ | (43 | ) | $ | (136 | ) | ||||
Adjustments to opening balance, net of tax* |
| (6 | ) | | (6 | ) | ||||||||||
Adjusted balance, beginning of period |
(37 | ) | (144 | ) | (43 | ) | (142 | ) | ||||||||
Gross unrealized holding gains on investments arising during period |
7 | 60 | 14 | 54 | ||||||||||||
Reclassification adjustment for gross losses included in net income |
0 | 6 | 3 | 9 | ||||||||||||
Unrealized holding gains excluding realized losses, gross |
7 | 66 | 17 | 63 | ||||||||||||
Income tax expense related to unrealized gains |
(2 | ) | (23 | ) | (6 | ) | (22 | ) | ||||||||
Change in other comprehensive income, net of tax Indemnity |
5 | 43 | 11 | 41 | ||||||||||||
Balance, end of period Indemnity |
$ | (32 | ) | $ | (101 | ) | $ | (32 | ) | $ | (101 | ) | ||||
Change in other comprehensive income, net of tax Indemnity |
$ | 5 | $ | 43 | $ | 11 | $ | 41 | ||||||||
Change in other comprehensive income, net of tax Exchange |
$ | 26 | $ | 293 | $ | 71 | $ | 292 | ||||||||
Change in other comprehensive income, net of tax Erie Insurance Group |
$ | 31 | $ | 336 | $ | 82 | $ | 333 | ||||||||
Comprehensive income: |
||||||||||||||||
Net (loss) income Erie Insurance Group |
$ | (31 | ) | $ | 271 | $ | 131 | $ | 20 | |||||||
Change in other comprehensive income, net of tax Erie Insurance Group |
31 | 336 | 82 | 333 | ||||||||||||
Total comprehensive income Erie Insurance Group |
0 | 607 | 213 | 353 | ||||||||||||
Less: Noncontrolling interest in consolidated entity Exchange |
54 | 531 | 106 | 268 | ||||||||||||
Total comprehensive income Indemnity |
$ | 54 | $ | 76 | $ | 107 | $ | 85 | ||||||||
* | Previously recognized non-credit other-than-temporary impairment losses were reclassified from retained earnings to other comprehensive income upon the implementation of FASB ASC 320, Investments Debt and Equity Securities, during the second quarter of 2009. |
5
Table of Contents
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in millions)
Six months ended June 30, | ||||||||
2010 | 2009 | |||||||
(As adjusted | ||||||||
Note 2) | ||||||||
Cash flows from operating activities |
||||||||
Premiums collected |
$ | 2,011 | $ | 1,947 | ||||
Net investment income received |
217 | 210 | ||||||
Limited partnership distributions |
48 | 44 | ||||||
Service agreement fee received |
17 | 17 | ||||||
Commissions and bonuses paid to agents |
(290 | ) | (300 | ) | ||||
Losses paid |
(1,216 | ) | (1,145 | ) | ||||
Loss expenses paid |
(212 | ) | (205 | ) | ||||
Other underwriting and acquisition costs paid |
(278 | ) | (259 | ) | ||||
Income taxes (paid) recovered |
(85 | ) | 162 | |||||
Net cash provided by operating activities |
212 | 471 | ||||||
Cash flows from investing activities |
||||||||
Purchase of investments: |
||||||||
Fixed maturities |
(930 | ) | (866 | ) | ||||
Preferred stock |
(112 | ) | (77 | ) | ||||
Common stock |
(546 | ) | (854 | ) | ||||
Limited partnerships |
(59 | ) | (97 | ) | ||||
Sales/maturities of investments: |
||||||||
Fixed maturity sales |
359 | 277 | ||||||
Fixed maturity calls/maturities |
509 | 327 | ||||||
Preferred stock |
66 | 96 | ||||||
Common stock |
538 | 819 | ||||||
Sale of and returns on limited partnerships |
15 | 6 | ||||||
Purchase of property and equipment |
(21 | ) | (8 | ) | ||||
Net distributions on agent loans |
1 | (2 | ) | |||||
Net cash used in investing activities |
(180 | ) | (379 | ) | ||||
Cash flows from financing activities |
||||||||
Annuity and supplementary contract deposits and interest |
61 | 88 | ||||||
Annuity and supplementary contract surrenders and withdrawals |
(39 | ) | (88 | ) | ||||
Universal life deposits and interest |
21 | 14 | ||||||
Universal life surrenders |
(19 | ) | (18 | ) | ||||
Purchase of treasury stock |
(17 | ) | (1 | ) | ||||
Dividends paid to shareholders |
(50 | ) | (46 | ) | ||||
Decrease in collateral from securities lending |
0 | (70 | ) | |||||
Redemption of securities lending collateral |
0 | 70 | ||||||
Net cash used in financing activities |
(43 | ) | (51 | ) | ||||
Net (decrease) increase in cash and cash equivalents |
(11 | ) | 41 | |||||
Cash and
cash equivalents at beginning of period |
234 | 277 | ||||||
Cash and cash equivalents at end of period |
$ | 223 | $ | 318 | ||||
See accompanying notes to Consolidated Financial Statements. See Note 14 for supplemental cash flow
information.
6
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Nature of Operations
Erie Indemnity Company (Indemnity) is a publicly held Pennsylvania business corporation that
since 1925 has been the managing Attorney-in-Fact for the subscribers (policyholders) of Erie
Insurance Exchange (Exchange). The Exchange is a subscriber (policyholder) owned
Pennsylvania-domiciled reciprocal insurer that writes property and casualty insurance.
Indemnitys primary function is to perform certain services for the Exchange relating to sales,
underwriting and issuance of policies on behalf of the Exchange. This is done in accordance with a
subscribers agreement (a limited power of attorney) executed by each subscriber (policyholder),
appointing Indemnity as their common attorney-in-fact to transact business on their behalf and to
manage the affairs of the Exchange. Indemnity earns a management fee from the Exchange for these
services, which is paid from the premiums collected from subscribers (policyholders).
Indemnity also operates as a property and casualty insurer through its wholly-owned subsidiaries,
Erie Insurance Company (EIC), Erie Insurance Company of New York (ENY) and the Erie Insurance
Property and Casualty Company (EPC).
The Property and Casualty Group refers to the Exchange and its wholly-owned subsidiary, Flagship
City Insurance Company (Flagship) and Indemnitys wholly-owned subsidiaries. The Property and
Casualty Group operates in 11 Midwestern, Mid-Atlantic and Southeastern states and the District of
Columbia and primarily writes personal auto insurance, which comprises 48% of its 2009 direct
premiums.
Erie Family Life Insurance Company (EFL) is an affiliated life insurance company that underwrites
and sells nonparticipating individual and group life insurance policies and fixed annuities.
Indemnity and Exchange own 21.6% and 78.4% of EFL, respectively.
Indemnity shareholder interest refers to the interest in Erie Indemnity Company owned by the
Class A and Class B shareholders. In addition to referring to Erie Insurance Exchange, the term
Exchange sometimes refers to the noncontrolling interest held for the benefit of the subscribers
(policyholders) and includes its interests in Flagship and EFL.
The accompanying consolidated financial statements of Erie Indemnity Company reflect the
consolidated results of Indemnity and its variable interest entity, the Exchange, which we refer to
collectively as Erie Insurance Group.
Note 2. Significant Accounting Policies
Basis of presentation and principles of consolidation
The accompanying consolidated financial statements have been prepared in conformity with U.S.
generally accepted accounting principles (GAAP) and include the accounts of Indemnity together
with its affiliate companies in which Indemnity holds a majority voting or economic interest. In
addition, we consolidate the Exchange as a variable interest entity for which Indemnity is the
primary beneficiary. All intercompany accounts and transactions have been eliminated in
consolidation. The required presentation of noncontrolling interests is reflected in the
consolidated financial statements. Noncontrolling interests represent the ownership interests of
the Exchange, all of which is held by parties other than Indemnity (i.e. the Exchanges subscribers
(policyholders)). Noncontrolling interests also include the Exchange subscribers 78.4% ownership
interest in EFL. See the discussion Retrospective adoption of new accounting principle that
follows for additional consolidation information.
The preparation of financial statements in conformity with GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. 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 three month period
ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2010. For further information, refer to the consolidated financial statements
and footnotes for
7
Table of Contents
the year ended December 31, 2009 included in our Form 8-K as filed with the Securities and Exchange
Commission on May 6, 2010.
Presentation of assets and liabilities While the assets of the Exchange are presented separately
in the Consolidated Statements of Financial Position, the Exchanges assets can only be used to
satisfy the Exchanges liabilities or for other unrestricted activities. ASC 810, Consolidation,
does not require separate presentation of the Exchanges assets. However, because the shareholders
of Indemnity have no rights to the assets of the Exchange and, conversely, the Exchange has no
rights to the assets of Indemnity, we have presented the invested assets of the Exchange separately
on the Consolidated Statements of Financial Position along with the remaining consolidated assets
reflecting the Exchanges portion parenthetically. Liabilities are required under ASC 810,
Consolidation, to be presented separately for the Exchange on the Consolidated Statements of
Financial Position as the Exchanges creditors do not have recourse to the general credit of
Indemnity.
Rights of shareholders of Indemnity and subscribers (policyholders) of the Exchange The
shareholders of Indemnity, through the management fee, have a controlling financial interest in the
Exchange, however, they have no other rights to or obligations arising from assets and liabilities
of the Exchange. The shareholders of Indemnity own its equity but have no rights or interest in the
Exchanges (noncontrolling interest) income or equity. The noncontrolling interest equity
represents the Exchanges equity held for the benefit of its subscribers (policyholders), who have
no rights or interest in the Indemnity shareholder interest income or equity.
All intercompany assets, liabilities, revenues and expenses between Indemnity and the Exchange have
been eliminated in the Consolidated Statements of Financial Position.
Retrospective adoption of new accounting principle
On June 12, 2009, the Financial Accounting Standards Board (FASB) updated ASC 810, Consolidation,
which amended the existing guidance for determining whether an enterprise is the primary
beneficiary of a variable interest entity (VIE). As of January 1, 2010, Indemnity adopted the new
accounting principle on a retrospective basis since inception.
This guidance changed the methodology for assessing whether an enterprise is the primary
beneficiary of a VIE by requiring a qualitative analysis to determine if an enterprises variable
interest gives it a controlling financial interest. The qualitative analysis looks at the power to
direct activities of the VIE that most significantly impact economic performance and the right to
receive benefits (or obligation to absorb losses) from the VIE that could potentially be
significant.
In accordance with the new accounting guidance, Indemnity is deemed to be the primary beneficiary
of the Exchange given the significance of the management fee to the Exchange and Indemnitys power
to direct the Exchanges significant activities. Under the previously issued accounting guidance,
Indemnity was not deemed the primary beneficiary of the Exchange and its financial position and
operating results were not consolidated with Indemnitys. Following adoption of the new accounting
guidance, as primary beneficiary of the Exchange, Erie Indemnity Company has consolidated Indemnity
and the Exchanges financial position and operating results.
Furthermore, upon consolidation of the Exchange, 100% of the ownership of EFL resides within the
consolidated entity and consequently EFLs financial results are also consolidated. The financial
statements and notes to the financial statements presented herein have all been adjusted to reflect
the retrospective adoption of the new accounting principle.
There was no cumulative effect to Indemnitys shareholders equity from consolidation of the
Exchange and EFL. The noncontrolling interest in total equity represents the amount of the
Exchanges subscribers (policyholders) equity.
Recent Accounting Updates
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements.
This guidance updated the disclosures for FASB ASC 820, Fair Value Measurements and Disclosures.
The additional disclosures include the amounts and reasons for significant transfers between the
levels in the fair value hierarchy, the expansion of fair market disclosures by each class of
assets, disclosure of the policy for recognition of level transfers, and disclosure of the
valuation techniques used for all Level 2 and Level 3 assets. These disclosures are effective for
periods beginning after December 15, 2009 and have been included in Note 6. An additional
disclosure requirement to present purchases, sales, issuances, and settlements of Level 3 activity
on a gross basis becomes effective with periods beginning after December 15, 2010.
8
Table of Contents
Note 3. Earnings Per Share
Basic earnings per share is 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 is 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 and awards not yet vested related to the outside
directors stock compensation plan.
A reconciliation of the numerators and denominators used in the basic and diluted per-share
computations is presented as follows for each class of Indemnity common stock:
Indemnity Earnings Per Share Calculation | ||||||||||||||||||||||||
(dollars in millions, | Three months ended June 30, | |||||||||||||||||||||||
except per share data) | 2010 | 2009 | ||||||||||||||||||||||
Allocated | Weighted | Per- | Allocated | Weighted | Per- | |||||||||||||||||||
net income | shares | share | net income | shares | share | |||||||||||||||||||
(numerator) | (denominator) | amount | (numerator) | (denominator) | amount | |||||||||||||||||||
Class A Basic EPS: |
||||||||||||||||||||||||
Income available to Class A stockholders |
$ | 49 | 51,013,358 | $ | 0.96 | $ | 33 | 51,240,693 | $ | 0.63 | ||||||||||||||
Dilutive effect of stock awards |
0 | 23,097 | | 0 | 27,209 | | ||||||||||||||||||
Assumed conversion of Class B shares |
0 | 6,110,400 | | 0 | 6,122,400 | | ||||||||||||||||||
Class A Diluted EPS: |
||||||||||||||||||||||||
Income available to Class A stockholders
on Class A equivalent shares |
$ | 49 | 57,146,855 | $ | 0.86 | $ | 33 | 57,390,302 | $ | 0.57 | ||||||||||||||
Class B Basic and diluted EPS: |
||||||||||||||||||||||||
Income available to Class B stockholders |
$ | 0 | 2,546 | $ | 138.21 | $ | 0 | 2,551 | $ | 93.19 | ||||||||||||||
Indemnity Earnings Per Share Calculation | ||||||||||||||||||||||||
(dollars in millions, | Six months ended June 30, | |||||||||||||||||||||||
except per share data) | 2010 | 2009 | ||||||||||||||||||||||
Allocated | Weighted | Per- | Allocated | Weighted | Per- | |||||||||||||||||||
net income | shares | share | net income | Shares | share | |||||||||||||||||||
(numerator) | (denominator) | amount | (numerator) | (denominator) | amount | |||||||||||||||||||
Class A Basic EPS: |
||||||||||||||||||||||||
Income available to Class A stockholders |
$ | 95 | 51,099,071 | $ | 1.87 | $ | 44 | 51,255,385 | $ | 0.85 | ||||||||||||||
Dilutive effect of stock awards |
0 | 22,465 | | 0 | 27,209 | | ||||||||||||||||||
Assumed conversion of Class B shares |
1 | 6,110,400 | | 0 | 6,122,400 | | ||||||||||||||||||
Class A Diluted EPS: |
||||||||||||||||||||||||
Income available to Class A stockholders
on Class A equivalent shares |
$ | 96 | 57,231,936 | $ | 1.68 | $ | 44 | 57,404,994 | $ | 0.76 | ||||||||||||||
Class B Basic and diluted EPS: |
||||||||||||||||||||||||
Income available to Class B stockholders |
$ | 1 | 2,546 | $ | 271.03 | $ | 0 | 2,551 | $ | 127.98 | ||||||||||||||
Included in the diluted earnings per share calculations for the second quarters of 2010 and
2009, respectively, were 10,612 and 12,809 shares of awards not yet vested related to our outside
directors stock compensation plan, and 11,200 and 14,400 shares of other stock-based awards not
yet vested. The second quarter and first half of 2010 diluted earnings per share calculations also
include 1,285 and 653, respectively, weighted average shares related to our long-term incentive
plan for executive and senior management for the 2007-2009 performance period, as 39,406 shares
were granted and vested in June. These shares were delivered in July 2010.
Note 4. Variable Interest Entity
Exchange
The Exchange is a reciprocal insurance exchange domiciled in Pennsylvania, for which Indemnity
serves as attorney-in-fact. Indemnity holds a variable interest in the Exchange because of the
absence of decision-making capabilities by the equity owners (i.e. subscribers (policyholders)) of
the Exchange and because of the significance of the management fees the Exchange pays to Indemnity
as the decision maker. The new accounting guidance, which we adopted on January 1, 2010, requires
entities to perform a qualitative analysis to determine the primary
9
Table of Contents
beneficiary of variable interest entities. As a result of adopting the new guidance, Indemnity is
deemed to have a controlling financial interest in the Exchange and is considered the primary
beneficiary. The Exchanges results have been consolidated with those of Indemnity. We have
retrospectively applied the new accounting guidance and have consolidated the Exchange for all
periods presented in this report for comparability purposes. See Note 2.
Consolidation of the Exchange is required given the significance of the management fee to the
Exchange and because Indemnity has the power to direct the activities of the Exchange that most
significantly impact the Exchanges economic performance. Indemnity earns management fee revenues
from the Exchange for services provided as attorney-in-fact for the Exchange. Indemnitys
management fee revenues are based on the direct written premiums of the Exchange and the other
members of the Property and Casualty Group. Indemnitys Board of Directors determines the
management fee rate paid by the Exchange to Indemnity. This rate cannot exceed 25% of the direct
and affiliated assumed written premiums of the Exchange, as defined by the subscriber agreement
signed by each policyholder. The management fee revenues and management fee expenses are eliminated
in consolidation.
Indemnity participates in the underwriting results of the Exchange through the pooling arrangement
in which its insurance subsidiaries have a 5.5% participation. If the Exchange were to default,
Indemnitys insurance subsidiaries would be liable for the policies that they wrote directly.
Indemnitys property and casualty insurance subsidiaries wrote approximately 16% of the 2009 direct
written premiums of the Property and Casualty Group. Indemnitys Board of Directors determines the
continuation and participation percentage of Indemnitys property and casualty subsidiaries in the
reinsurance pooling arrangement.
Indemnity has no obligation related to any underwriting and/or investment losses experienced by the
Exchange. Indemnity would however be adversely impacted if the Exchange incurred significant
underwriting and/or investment losses. If the surplus of the Exchange were to decline significantly
from its current level, its financial strength ratings could be reduced and as a consequence the
Exchange could find it more difficult to retain its existing business and attract new business. A
decline in the business of the Exchange would have an adverse effect on the amount of the
management fees Indemnity receives and the underwriting results of the Property and Casualty Group
in which Indemnity has a 5.5% participation. In addition, a decline in the surplus of the Exchange
from its current level may impact the management fee rate received by Indemnity. Indemnity also has
an exposure to a concentration of credit risk related to the unsecured receivables due from the
Exchange for its management fee, reinsurance recoverables from unpaid losses and loss expenses and
unearned premium balances ceded under the pooling arrangement and cost reimbursements.
Indemnity has not provided financial or other support to the Exchange for the reporting periods
presented. At June 30, 2010, there are no explicit or implicit arrangements that would require
Indemnity to provide future financial support to the Exchange. Indemnity is not liable if the
Exchange was to be in violation of its debt covenants or was unable to meet its obligation for
unfunded commitments to limited partnerships.
Note 5. Segment Information
As a result of the changes in our reporting entity at January 1, 2010 (see Note 2), our reportable
segments have increased from three to four. Our reportable segments include management operations,
property and casualty insurance operations, life insurance operations and investment operations.
The segment information presented below includes reclassification of all comparative prior period
segment information. Accounting policies for segments are the same as those described in the
summary of significant accounting policies. For further information, refer to the consolidated
financial statements and footnotes for the year ended December 31, 2009 included in our Form 8-K as
filed with the Securities and Exchange Commission on May 6, 2010. Assets are not allocated to the
segments but rather are reviewed in total for purposes of decision-making. No single customer or
agent provides 10% or more of revenues.
Our management operations segment reflects the results of serving as attorney-in-fact for the
Exchange. Indemnity operates in this capacity solely for the Exchange. We evaluate profitability of
our management operations segment principally on the gross margin from management operations.
Indemnity earns management fees from the Exchange for providing sales, underwriting and policy
issuance services. The management fee revenue, which is eliminated in consolidation, is calculated
as a percentage of the direct written premium of the Property and Casualty Group. The Exchange
issues policies with annual terms only. Management
10
Table of Contents
fees are recorded upon policy issuance or renewal, as substantially all of the services required to
be performed by Indemnity have been satisfied at that time. Certain activities are performed and
related costs are incurred by Indemnity subsequent to policy issuance in connection with the
services provided to the Exchange; however, these activities are inconsequential and perfunctory.
Although these management fee revenues and expenses are eliminated in consolidation, the amount of
the fee directly impacts allocations of our consolidated net income between noncontrolling
interest, which bears the management fee expense and represents the interests of the Exchange
subscribers, and Indemnitys interests, which earns the management fee revenue and represents
Indemnity shareholder interest in net income.
Our property and casualty insurance operations segment includes personal and commercial lines
business. Personal lines consist primarily of personal auto and homeowners and are marketed to
individuals. Commercial lines consist primarily of commercial multi-peril, commercial auto and
workers compensation and are marketed to small- and medium-sized businesses. Our property and
casualty policies are sold by independent agents. Our property and casualty insurance underwriting
operations are conducted through Indemnity subsidiaries and the Exchange, and includes assumed
voluntary reinsurance from nonaffiliated domestic and foreign sources, assumed involuntary and
ceded reinsurance business. The Exchange exited the assumed voluntary reinsurance business
effective December 31, 2003, and therefore unaffiliated reinsurance includes only run-off activity
of the previously assumed voluntary reinsurance business. We evaluate profitability of the
property and casualty operations principally based on net underwriting results represented by the
combined ratio.
Our life insurance operations segment includes traditional and universal life insurance products
and fixed annuities marketed to individuals using the same independent agency force utilized by our
property and casualty operations. We evaluate profitability of the life insurance operations
segment principally based on segment net income, including investments, which for segment purposes
are reflected in the investment operations segment. At the same time, we recognize that
investment-related income is integral to the evaluation of the life insurance segment because of
the long duration of life products. For the second quarter 2010 and 2009, investment activities on
life insurance-related assets generated revenues of $25 million and $20 million, respectively,
resulting in EFL reporting income before income taxes of $11 million and $6 million, respectively,
before intercompany eliminations. For the six months ended June 30, 2010 and 2009, investment
activities on life insurance and related assets generated revenues of
$52 million and $26 million,
respectively, resulting in EFL reporting income before taxes of
$21 million and $0 million,
respectively, before intercompany eliminations. See Note 15 for EFL supplemental information.
The investment operations segment performance is evaluated based on appreciation of assets, rate of
return and overall return. Investment-related income for the life operations is included in the
investment segment results.
The following tables summarize the components of the Consolidated Statements of Operations by
reportable business segments:
Erie Insurance Group | ||||||||||||||||||||||||
For the three months ended June 30, 2010 | ||||||||||||||||||||||||
Property | ||||||||||||||||||||||||
and | Life | |||||||||||||||||||||||
Management | casualty | insurance | Investment | |||||||||||||||||||||
(in millions) | operations | operations | operations | operations | Eliminations | Consolidated | ||||||||||||||||||
Premiums earned/life policy revenue |
$ | 974 | $ | 16 | $ | (1 | ) | $ | 989 | |||||||||||||||
Net investment income |
$ | 110 | (2 | ) | 108 | |||||||||||||||||||
Net realized investment losses |
(213 | ) | (213 | ) | ||||||||||||||||||||
Net impairment losses recognized in earnings |
(4 | ) | (4 | ) | ||||||||||||||||||||
Equity in earnings of limited partnerships |
27 | 27 | ||||||||||||||||||||||
Management fee revenue |
$ | 270 | (270 | ) | | |||||||||||||||||||
Service agreement and other revenue |
9 | 0 | 9 | |||||||||||||||||||||
Total revenues (losses) |
279 | 974 | 16 | (80 | ) | (273 | ) | 916 | ||||||||||||||||
Cost of management operations |
217 | (217 | ) | | ||||||||||||||||||||
Insurance losses and loss expenses |
717 | (2 | ) | 715 | ||||||||||||||||||||
Benefits and other changes in policy reserves |
22 | 22 | ||||||||||||||||||||||
Policy acquisition and underwriting expense |
275 | 9 | (54 | ) | 230 | |||||||||||||||||||
Total benefits and expenses |
217 | 992 | 31 | | (273 | ) | 967 | |||||||||||||||||
Income (loss) before income taxes |
62 | (18 | ) | (15 | ) | (80 | ) | | (51 | ) | ||||||||||||||
Provision (benefit) for income taxes |
21 | (7 | ) | (5 | ) | (29 | ) | | (20 | ) | ||||||||||||||
Net income (loss) |
$ | 41 | $ | (11 | ) | $ | (10 | ) | $ | (51 | ) | $ | | $ | (31 | ) | ||||||||
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Erie Insurance Group | ||||||||||||||||||||||||
For the six months ended June 30, 2010 | ||||||||||||||||||||||||
Property | ||||||||||||||||||||||||
and | Life | |||||||||||||||||||||||
Management | casualty | insurance | Investment | |||||||||||||||||||||
(in millions) | operations | operations | operations | operations | Eliminations | Consolidated | ||||||||||||||||||
Premiums earned/life policy revenue |
$ | 1,936 | $ | 32 | $ | (1 | ) | $ | 1,967 | |||||||||||||||
Net investment income |
$ | 217 | (5 | ) | 212 | |||||||||||||||||||
Net realized investment losses |
(88 | ) | (88 | ) | ||||||||||||||||||||
Net impairment losses recognized in earnings |
(6 | ) | (6 | ) | ||||||||||||||||||||
Equity in earnings of limited partnerships |
30 | 30 | ||||||||||||||||||||||
Management fee revenue |
$ | 507 | (507 | ) | | |||||||||||||||||||
Service agreement and other revenue |
17 | 0 | 17 | |||||||||||||||||||||
Total revenues |
524 | 1,936 | 32 | 153 | (513 | ) | 2,132 | |||||||||||||||||
Cost of management operations |
409 | (409 | ) | | ||||||||||||||||||||
Insurance losses and loss expenses |
1,455 | (3 | ) | 1,452 | ||||||||||||||||||||
Benefits and other changes in policy reserves |
46 | 46 | ||||||||||||||||||||||
Policy acquisition and underwriting expense |
540 | 18 | (101 | ) | 457 | |||||||||||||||||||
Total benefits and expenses |
409 | 1,995 | 64 | | (513 | ) | 1,955 | |||||||||||||||||
Income (loss) before income taxes |
115 | (59 | ) | (32 | ) | 153 | | 177 | ||||||||||||||||
Provision (benefit) for income taxes |
39 | (21 | ) | (11 | ) | 39 | | 46 | ||||||||||||||||
Net income (loss) |
$ | 76 | $ | (38 | ) | $ | (21 | ) | $ | 114 | $ | | $ | 131 | ||||||||||
Erie Insurance Group | ||||||||||||||||||||||||
For the three months ended June 30, 2009 | ||||||||||||||||||||||||
Property | ||||||||||||||||||||||||
and | Life | |||||||||||||||||||||||
Management | casualty | insurance | Investment | |||||||||||||||||||||
(in millions) | operations | operations | operations | operations(1) | Eliminations | Consolidated | ||||||||||||||||||
Premiums earned/life policy revenue |
$ | 947 | $ | 18 | $ | (1 | ) | $ | 964 | |||||||||||||||
Net investment income |
$ | 107 | (2 | ) | 105 | |||||||||||||||||||
Net realized investment gains |
208 | 208 | ||||||||||||||||||||||
Net impairment losses recognized in earnings |
(12 | ) | (12 | ) | ||||||||||||||||||||
Equity in losses of limited partnerships |
(126 | ) | (126 | ) | ||||||||||||||||||||
Management fee revenue |
$ | 259 | (259 | ) | | |||||||||||||||||||
Service agreement and other revenue |
9 | 1 | 10 | |||||||||||||||||||||
Total revenues |
268 | 947 | 19 | 177 | (262 | ) | 1,149 | |||||||||||||||||
Cost of management operations |
208 | (208 | ) | | ||||||||||||||||||||
Insurance losses and loss expenses |
638 | (2 | ) | 636 | ||||||||||||||||||||
Benefits and other changes in policy reserves |
24 | 24 | ||||||||||||||||||||||
Policy acquisition and underwriting expense |
274 | 9 | (52 | ) | 231 | |||||||||||||||||||
Total benefits and expenses |
208 | 912 | 33 | | (262 | ) | 891 | |||||||||||||||||
Income (loss) before income taxes |
60 | 35 | (14 | ) | 177 | | 258 | |||||||||||||||||
Provision (benefit) for income taxes |
16 | 12 | (5 | ) | (36 | ) | | (13 | ) | |||||||||||||||
Net income (loss) |
$ | 44 | $ | 23 | $ | (9 | ) | $ | 213 | $ | | $ | 271 | |||||||||||
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Erie Insurance Group | ||||||||||||||||||||||||
For the six months ended June 30, 2009 | ||||||||||||||||||||||||
Property | ||||||||||||||||||||||||
and | Life | |||||||||||||||||||||||
Management | casualty | insurance | Investment | |||||||||||||||||||||
(in millions) | operations | operations | operations | operations(1) | Eliminations | Consolidated | ||||||||||||||||||
Premiums earned/life policy revenue |
$ | 1,888 | $ | 34 | $ | (1 | ) | $ | 1,921 | |||||||||||||||
Net investment income |
$ | 227 | (5 | ) | 222 | |||||||||||||||||||
Net realized investment gains |
53 | 53 | ||||||||||||||||||||||
Net impairment losses recognized in earnings |
(83 | ) | (83 | ) | ||||||||||||||||||||
Equity in losses of limited partnerships |
(287 | ) | (287 | ) | ||||||||||||||||||||
Management fee revenue |
$ | 489 | (489 | ) | | |||||||||||||||||||
Service agreement and other revenue |
17 | 1 | 18 | |||||||||||||||||||||
Total revenues (losses) |
506 | 1,888 | 35 | (90 | ) | (495 | ) | 1,844 | ||||||||||||||||
Cost of management operations |
401 | (401 | ) | | ||||||||||||||||||||
Insurance losses and loss expenses |
1,420 | (3 | ) | 1,417 | ||||||||||||||||||||
Benefits and other changes in policy reserves |
46 | 46 | ||||||||||||||||||||||
Policy acquisition and underwriting expense |
539 | 15 | (91 | ) | 463 | |||||||||||||||||||
Total benefits and expenses |
401 | 1,959 | 61 | | (495 | ) | 1,926 | |||||||||||||||||
Income (loss) before income taxes |
105 | (71 | ) | (26 | ) | (90 | ) | | (82 | ) | ||||||||||||||
Provision (benefit) for income taxes |
30 | (25 | ) | (9 | ) | (98 | ) | | (102 | ) | ||||||||||||||
Net income (loss) |
$ | 75 | $ | (46 | ) | $ | (17 | ) | $ | 8 | $ | | $ | 20 | ||||||||||
(1) | The significant realized losses, impairment charges and market value adjustments on limited partnership investments were impacted by the significant disruption in the financial markets. |
See the Results of the Erie Insurance Groups operations by interest table in the
Managements Discussion and Analysis for the composition of income attributable to Indemnity and
income attributable to the noncontrolling interest (Exchange).
Note 6. Fair Value
Our available-for-sale and trading securities are recorded at fair value, which is the price that
would be received to sell the asset in an orderly transaction between willing market participants
as of the measurement date.
Valuation techniques used to derive the 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 fair market value for these securities.
Although the majority of our prices are obtained from third party sources, we also perform an
internal pricing review for securities with low trading volumes in the current market conditions.
Financial instruments are categorized based upon the following characteristics or inputs to the
valuation techniques:
Level 1 | Quoted prices for identical instruments in active markets not subject to adjustments or discounts. | ||
Level 2 | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. | ||
Level 3 | Instruments whose significant value drivers are unobservable and reflect managements estimate of fair value based on assumptions used by market participants in an orderly transaction as of the valuation date. |
13
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The following table represents the fair value measurements on a recurring basis for our
consolidated available-for-sale and trading securities by asset class and level of input at June
30, 2010:
Erie Insurance Group | ||||||||||||||||
June 30, 2010 | ||||||||||||||||
Fair value measurements using: | ||||||||||||||||
Quoted prices in | Significant | |||||||||||||||
active markets for | Significant | unobservable | ||||||||||||||
identical assets | observable inputs | inputs | ||||||||||||||
(in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Indemnity |
||||||||||||||||
Available for sale securities: |
||||||||||||||||
Fixed maturities |
||||||||||||||||
U.S. treasuries and government agencies |
$ | 4 | $ | 4 | $ | 0 | $ | 0 | ||||||||
U.S. government sponsored enterprises |
19 | 0 | 19 | 0 | ||||||||||||
Foreign government |
2 | 0 | 2 | 0 | ||||||||||||
Municipal securities |
253 | 0 | 253 | 0 | ||||||||||||
U.S. corporate debt non-financial |
177 | 0 | 177 | 0 | ||||||||||||
U.S. corporate debt financial |
136 | 0 | 134 | 2 | ||||||||||||
Foreign corporate debt non-financial |
29 | 0 | 29 | 0 | ||||||||||||
Foreign corporate debt financial |
17 | 0 | 17 | 0 | ||||||||||||
Structured securities: |
||||||||||||||||
Asset-backed securities auto loans |
3 | 0 | 3 | 0 | ||||||||||||
Collateralized debt obligations |
10 | 0 | 2 | 8 | ||||||||||||
Commercial mortgage-backed |
5 | 0 | 5 | 0 | ||||||||||||
Residential mortgage-backed: |
||||||||||||||||
Government sponsored enterprises |
13 | 0 | 13 | 0 | ||||||||||||
Non-government sponsored enterprises |
3 | 0 | 3 | 0 | ||||||||||||
Total fixed maturities-Indemnity |
$ | 671 | $ | 4 | $ | 657 | $ | 10 | ||||||||
Equity securities |
||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||
Financial |
$ | 26 | $ | 7 | $ | 18 | $ | 1 | ||||||||
Non-financial |
14 | 6 | 8 | 0 | ||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||
Financial |
4 | 0 | 4 | 0 | ||||||||||||
Non-financial |
1 | 0 | 1 | 0 | ||||||||||||
Total equity securities Indemnity |
$ | 45 | $ | 13 | $ | 31 | $ | 1 | ||||||||
Total available-for-sale securities Indemnity |
$ | 716 | $ | 17 | $ | 688 | $ | 11 | ||||||||
Trading securities: |
||||||||||||||||
Common stock |
$ | 40 | $ | 40 | $ | 0 | $ | 0 | ||||||||
Total trading securities |
$ | 40 | $ | 40 | $ | 0 | $ | 0 | ||||||||
Total Indemnity |
$ | 756 | $ | 57 | $ | 688 | $ | 11 | ||||||||
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Erie Insurance Group | ||||||||||||||||
June 30, 2010 | ||||||||||||||||
Fair value measurements using: | ||||||||||||||||
Quoted prices in | Significant | |||||||||||||||
active markets for | Significant | unobservable | ||||||||||||||
identical assets | observable inputs | inputs | ||||||||||||||
(in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Exchange |
||||||||||||||||
Available for sale securities: |
||||||||||||||||
Fixed maturities |
||||||||||||||||
U.S. treasuries and government agencies |
$ | 5 | $ | 5 | $ | 0 | $ | 0 | ||||||||
U.S. government sponsored enterprises |
91 | 0 | 91 | 0 | ||||||||||||
Foreign government |
15 | 0 | 15 | 0 | ||||||||||||
Municipal securities |
1,441 | 0 | 1,441 | 0 | ||||||||||||
U.S. corporate debt non-financial |
2,296 | 5 | 2,282 | 9 | ||||||||||||
U.S. corporate debt financial |
1,659 | 6 | 1,653 | 0 | ||||||||||||
Foreign corporate debt non-financial |
396 | 0 | 396 | 0 | ||||||||||||
Foreign corporate debt financial |
372 | 0 | 372 | 0 | ||||||||||||
Structured securities: |
||||||||||||||||
Asset-backed securities auto loans |
47 | 0 | 47 | 0 | ||||||||||||
Asset-backed securities other |
28 | 0 | 23 | 5 | ||||||||||||
Collateralized debt obligations |
86 | 0 | 33 | 53 | ||||||||||||
Commercial mortgage-backed |
150 | 0 | 150 | 0 | ||||||||||||
Residential mortgage-backed: |
||||||||||||||||
Government sponsored enterprises |
171 | 0 | 171 | 0 | ||||||||||||
Non-government sponsored enterprises |
32 | 0 | 32 | 0 | ||||||||||||
Total fixed maturities Exchange |
$ | 6,789 | $ | 16 | $ | 6,706 | $ | 67 | ||||||||
Equity securities |
||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||
Financial |
$ | 311 | $ | 96 | $ | 211 | $ | 4 | ||||||||
Non-financial |
153 | 60 | 93 | 0 | ||||||||||||
Government sponsored enterprises |
1 | 1 | 0 | 0 | ||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||
Financial |
50 | 15 | 35 | 0 | ||||||||||||
Non-financial |
8 | 0 | 8 | 0 | ||||||||||||
Total equity securities Exchange |
$ | 523 | $ | 172 | $ | 347 | $ | 4 | ||||||||
Total available for sale securities Exchange |
$ | 7,312 | $ | 188 | $ | 7,053 | $ | 71 | ||||||||
Trading securities: |
||||||||||||||||
Common stock |
$ | 1,712 | $ | 1,702 | $ | 0 | $ | 10 | ||||||||
Total trading securities |
$ | 1,712 | $ | 1,702 | $ | 0 | $ | 10 | ||||||||
Total Exchange |
$ | 9,024 | $ | 1,890 | $ | 7,053 | $ | 81 | ||||||||
Total Erie Insurance Group |
$ | 9,780 | $ | 1,947 | $ | 7,741 | $ | 92 | ||||||||
15
Table of Contents
Level 3 Assets Quarterly Change:
Erie Insurance Group | ||||||||||||||||||||||||
Beginning | Included in other | Purchases, | Transfers in | Ending | ||||||||||||||||||||
balance at | Included in | comprehensive | sales and | and (out) of | balance at | |||||||||||||||||||
(in millions) | March 31, 2010 | earnings (1) | income | adjustments | Level 3 (2) | June 30, 2010 | ||||||||||||||||||
Indemnity |
||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. corporate debt financial |
$ | 2 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 2 | ||||||||||||
Collateralized debt obligations |
9 | 0 | 1 | 0 | (2 | ) | 8 | |||||||||||||||||
Total fixed maturities |
11 | 0 | 1 | 0 | (2 | ) | 10 | |||||||||||||||||
Preferred stock: |
||||||||||||||||||||||||
U.S. nonredeemable financial |
2 | 0 | (1 | ) | 0 | 0 | 1 | |||||||||||||||||
Total preferred stock |
2 | 0 | (1 | ) | 0 | 0 | 1 | |||||||||||||||||
Total Level 3 assets Indemnity |
$ | 13 | $ | 0 | $ | 0 | $ | 0 | $ | (2 | ) | $ | 11 | |||||||||||
Exchange |
||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. corporate debt non-financial |
$ | 9 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 9 | ||||||||||||
Asset backed securities other |
5 | 0 | 0 | 0 | 0 | 5 | ||||||||||||||||||
Collateralized debt obligations |
70 | 1 | 3 | 0 | (21 | ) | 53 | |||||||||||||||||
Total fixed maturities |
84 | 1 | 3 | 0 | (21 | ) | $ | 67 | ||||||||||||||||
Preferred stock: |
||||||||||||||||||||||||
U.S. nonredeemable financial |
5 | 0 | (1 | ) | 0 | 0 | 4 | |||||||||||||||||
Total preferred stock |
5 | 0 | (1 | ) | 0 | 0 | 4 | |||||||||||||||||
Trading securities: |
||||||||||||||||||||||||
Common stock |
10 | 0 | 0 | 0 | 0 | 10 | ||||||||||||||||||
Total Level 3 assets Exchange |
$ | 99 | $ | 1 | $ | 2 | $ | 0 | $ | (21 | ) | $ | 81 | |||||||||||
Total Level 3 assets Erie Insurance Group |
$ | 112 | $ | 1 | $ | 2 | $ | 0 | $ | (23 | ) | $ | 92 | |||||||||||
16
Table of Contents
Level 3 Assets Year-to-Date Change:
Erie Insurance Group | ||||||||||||||||||||||||
Beginning | ||||||||||||||||||||||||
balance at | Included in other | Purchases, | Transfers in | Ending | ||||||||||||||||||||
December 31, | Included in | comprehensive | sales and | and (out) of | balance at | |||||||||||||||||||
(in millions) | 2009 | earnings (1) | income | adjustments | Level 3 (2) | June 30, 2010 | ||||||||||||||||||
Indemnity |
||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. corporate debt financial |
$ | 2 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 2 | ||||||||||||
Collateralized debt obligations |
8 | 0 | 1 | 0 | (1 | ) | 8 | |||||||||||||||||
Total fixed maturities |
10 | 0 | 1 | 0 | (1 | ) | 10 | |||||||||||||||||
Preferred stock: |
||||||||||||||||||||||||
U.S. nonredeemable financial |
1 | 0 | 0 | 0 | 0 | 1 | ||||||||||||||||||
Total preferred stock |
1 | 0 | 0 | 0 | 0 | 1 | ||||||||||||||||||
Total Level 3 assets Indemnity |
$ | 11 | $ | 0 | $ | 1 | $ | 0 | $ | (1 | ) | $ | 11 | |||||||||||
Exchange |
||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. corporate debt non-financial |
$ | 17 | $ | 0 | $ | 0 | $ | 0 | $ | (8 | ) | $ | 9 | |||||||||||
Asset backed securities other |
5 | 0 | 0 | 0 | 0 | 5 | ||||||||||||||||||
Collateralized debt obligations |
49 | 1 | 6 | 0 | (3 | ) | 53 | |||||||||||||||||
Total fixed maturities |
71 | 1 | 6 | 0 | (11 | ) | 67 | |||||||||||||||||
Preferred stock: |
||||||||||||||||||||||||
U.S. nonredeemable financial |
4 | 0 | 0 | 0 | 0 | 4 | ||||||||||||||||||
Total preferred stock |
4 | 0 | 0 | 0 | 0 | 4 | ||||||||||||||||||
Trading securities: |
||||||||||||||||||||||||
Common stock |
9 | 1 | 0 | 0 | 0 | 10 | ||||||||||||||||||
Total Level 3 assets Exchange |
$ | 84 | $ | 2 | $ | 6 | $ | 0 | $ | (11 | ) | $ | 81 | |||||||||||
Total Level 3 assets Erie Insurance Group |
$ | 95 | $ | 2 | $ | 7 | $ | 0 | $ | (12 | ) | $ | 92 | |||||||||||
(1) | Includes losses as a result of other-than-temporary impairments and accrual of discount and amortization of premium. These amounts are reported in the Consolidated Statement of Operations. There were no unrealized gains or losses included in earnings for the three or six months ended June 30, 2010 on Level 3 securities. | |
(2) | Transfers in and out of Level 3 are attributable to changes in the availability of market observable information for individual securities within the respective categories. There were no significant transfers in and out of Level 3. Transfers in and out of levels are recognized at the end of the period. |
There were no significant transfers between Levels 1 and 2 during the six months ended June
30, 2010.
17
Table of Contents
The following table represents the fair value measurements on a recurring basis for our
consolidated available-for-sale and trading securities by asset class and level of input at
December 31, 2009:
Erie Insurance Group | ||||||||||||||||
At December 31, 2009 | ||||||||||||||||
Fair value measurements using: | ||||||||||||||||
Quoted prices | ||||||||||||||||
in active | Significant | Significant | ||||||||||||||
markets for | observable | unobservable | ||||||||||||||
identical assets | inputs | inputs | ||||||||||||||
(in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Indemnity |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Fixed maturities |
$ | 664 | $ | 6 | $ | 648 | $ | 10 | ||||||||
Preferred stock |
38 | 9 | 28 | 1 | ||||||||||||
Trading securities common stock |
42 | 42 | 0 | 0 | ||||||||||||
Total Indemnity |
$ | 744 | $ | 57 | $ | 676 | $ | 11 | ||||||||
Exchange |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Fixed maturities |
$ | 6,517 | $ | 31 | $ | 6,415 | $ | 71 | ||||||||
Preferred stock |
472 | 157 | 311 | 4 | ||||||||||||
Trading securities common stock |
1,835 | 1,826 | 0 | 9 | ||||||||||||
Total Exchange |
$ | 8,824 | $ | 2,014 | $ | 6,726 | $ | 84 | ||||||||
Total Erie Insurance Group |
$ | 9,568 | $ | 2,071 | $ | 7,402 | $ | 95 | ||||||||
18
Table of Contents
Level 3 Assets Quarterly Change:
Erie Insurance Group | ||||||||||||||||||||||||
Beginning | Included in other | Purchases, | Transfers in | Ending | ||||||||||||||||||||
balance at | Included in | comprehensive | sales and | and (out) of | balance at | |||||||||||||||||||
(in millions) | March, 2009 | earnings (1) | income | adjustments | Level 3 (2) | June 30, 2009 | ||||||||||||||||||
Indemnity |
||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. corporate debt financial |
$ | 5 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 5 | ||||||||||||
Collateralized debt obligations |
6 | (1 | ) | 3 | 1 | 0 | 9 | |||||||||||||||||
Commercial mortgage backed securities |
2 | 0 | 0 | 0 | (2 | ) | 0 | |||||||||||||||||
Total fixed maturities |
13 | (1 | ) | 3 | 1 | (2 | ) | 14 | ||||||||||||||||
Preferred stock: |
||||||||||||||||||||||||
U.S. nonredeemable financial |
6 | 0 | 1 | 0 | 0 | 7 | ||||||||||||||||||
U.S. nonredeemable non-financial |
4 | 0 | 0 | 0 | 0 | 4 | ||||||||||||||||||
Total preferred stock |
10 | 0 | 1 | 0 | 0 | 11 | ||||||||||||||||||
Total Level 3 assets Indemnity |
$ | 23 | $ | (1 | ) | $ | 4 | $ | 1 | $ | (2 | ) | $ | 25 | ||||||||||
Exchange |
||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. corporate debt financial |
$ | 33 | $ | 0 | $ | 3 | $ | (16 | ) | $ | (3 | ) | $ | 17 | ||||||||||
U.S. corporate debt non-financial |
21 | 0 | 0 | (2 | ) | 0 | 19 | |||||||||||||||||
Foreign corporate debt financial |
1 | 0 | 0 | (1 | ) | 0 | 0 | |||||||||||||||||
Foreign corporate debt non-financial |
1 | 0 | 0 | 0 | 0 | 1 | ||||||||||||||||||
Asset backed securities other |
5 | 0 | 0 | 0 | 0 | 5 | ||||||||||||||||||
Collateralized debt obligations |
32 | (4 | ) | 28 | 11 | 9 | 76 | |||||||||||||||||
Commercial mortgage backed securities |
9 | 0 | 0 | 0 | (9 | ) | 0 | |||||||||||||||||
Total fixed maturities |
102 | (4 | ) | 31 | (8 | ) | (3 | ) | 118 | |||||||||||||||
Preferred stock: |
||||||||||||||||||||||||
U.S. nonredeemable financial |
19 | 0 | 1 | 0 | 0 | 20 | ||||||||||||||||||
U.S. nonredeemable non-financial |
23 | 0 | 1 | 0 | 0 | 24 | ||||||||||||||||||
Total preferred stock |
42 | 0 | 2 | 0 | 0 | 44 | ||||||||||||||||||
Total Level 3 assets Exchange |
$ | 144 | $ | (4 | ) | $ | 33 | $ | (8 | ) | $ | (3 | ) | $ | 162 | |||||||||
Total Level 3 assets Erie Insurance Group |
$ | 167 | $ | (5 | ) | $ | 37 | $ | (7 | ) | $ | (5 | ) | $ | 187 | |||||||||
19
Table of Contents
Level 3 Assets Year-to-Date Change:
Erie Insurance Group | ||||||||||||||||||||||||
Beginning | ||||||||||||||||||||||||
balance at | Included in other | Purchases, | Transfers in | Ending | ||||||||||||||||||||
December 31, | Included in | comprehensive | sales and | and (out) of | balance at | |||||||||||||||||||
(in millions) | 2008 | earnings (1) | income | adjustments | Level 3 (2) | June 30, 2009 | ||||||||||||||||||
Indemnity |
||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. corporate debt financial |
$ | 5 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 5 | ||||||||||||
Collateralized debt obligations |
7 | (1 | ) | 2 | 1 | 0 | 9 | |||||||||||||||||
Commercial
mortgage-backed securities |
2 | 0 | 0 | 0 | (2 | ) | 0 | |||||||||||||||||
Total fixed maturities |
14 | (1 | ) | 2 | 1 | (2 | ) | 14 | ||||||||||||||||
Preferred stock: |
||||||||||||||||||||||||
U.S. nonredeemable financial |
7 | 0 | 0 | 0 | 0 | 7 | ||||||||||||||||||
U.S. nonredeemable non-financial |
4 | 0 | 0 | 0 | 0 | 4 | ||||||||||||||||||
Total preferred stock |
11 | 0 | 0 | 0 | 0 | 11 | ||||||||||||||||||
Total Level 3 assets Indemnity |
$ | 25 | $ | (1 | ) | $ | 2 | $ | 1 | $ | (2 | ) | $ | 25 | ||||||||||
Exchange |
||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. corporate debt financial |
$ | 36 | $ | (3 | ) | $ | 3 | $ | (16 | ) | $ | (3 | ) | $ | 17 | |||||||||
U.S. corporate debt non-financial |
21 | 0 | 0 | (2 | ) | 0 | 19 | |||||||||||||||||
Foreign corporate debt financial |
1 | 0 | 0 | (1 | ) | 0 | 0 | |||||||||||||||||
Foreign corporate debt non-financial |
2 | 0 | 0 | (1 | ) | 0 | 1 | |||||||||||||||||
Asset backed securities other |
5 | 0 | 0 | 0 | 0 | 5 | ||||||||||||||||||
Collateralized debt obligations |
36 | (2 | ) | 16 | 11 | 15 | 76 | |||||||||||||||||
Commercial
mortgage-backed securities |
7 | 0 | 0 | 0 | (7 | ) | 0 | |||||||||||||||||
Total fixed maturities |
108 | (5 | ) | 19 | (9 | ) | 5 | 118 | ||||||||||||||||
Preferred stock: |
||||||||||||||||||||||||
U.S. nonredeemable financial |
24 | 0 | (2 | ) | 0 | (2 | ) | 20 | ||||||||||||||||
U.S. nonredeemable non-financial |
22 | 0 | 2 | 0 | 0 | 24 | ||||||||||||||||||
Total preferred stock |
46 | 0 | 0 | 0 | (2 | ) | 44 | |||||||||||||||||
Total Level 3 assets Exchange |
$ | 154 | $ | (5 | ) | $ | 19 | $ | (9 | ) | $ | 3 | $ | 162 | ||||||||||
Total Level 3 assets Erie Insurance Group |
$ | 179 | $ | (6 | ) | $ | 21 | $ | (8 | ) | $ | 1 | $ | 187 | ||||||||||
(1) | Includes losses as a result of other-than-temporary impairments and accrual of discount and amortization of premium. These amounts are reported in the Consolidated Statement of Operations. There were no unrealized gains or losses included in earnings for the three or six months ended June 30, 2009 on Level 3 securities. | |
(2) | Transfers in and out of Level 3 are attributable to changes in the availability of market observable information for individual securities within the respective categories. Transfers in and out of levels are recognized at the end of the period. |
Estimates of fair values for our investment portfolio are obtained primarily from a nationally
recognized pricing service. Our Level 1 category includes those securities valued using an
exchange traded price provided by the pricing service. The methodologies used by the pricing
service that support a Level 2 classification of a financial instrument include multiple
verifiable, observable inputs including benchmark yields, reported trades, broker/dealer quotes,
issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Pricing
service valuations for Level 3 securities are based on proprietary models and are used when
observable inputs are not available in illiquid markets. In limited circumstances we adjust the
price received from the pricing service when in our judgment a better reflection of fair value is
available based on corroborating information and our knowledge and monitoring of market conditions.
At June 30, 2010, we adjusted some prices received by the pricing service to reflect an alternate
fair market value based on observable market data such as a disparity in price of comparable
securities and/or non-binding broker quotes.
20
Table of Contents
The following table displays the number and values of these adjustments at June 30, 2010:
Value of | Value of | |||||||||||
securities | securities used in | |||||||||||
Number of | using pricing | the financial | ||||||||||
(dollars in millions) | holdings | service | statements | |||||||||
Indemnity |
5 | $ | 4 | $ | 3 | |||||||
Exchange |
14 | 39 | 42 | |||||||||
Total Erie Insurance Group |
$ | 43 | $ | 45 | ||||||||
We perform continuous reviews of the prices obtained from the pricing service. This includes
evaluating the methodology and inputs used by the pricing service to ensure we determine the proper
level classification of the financial instrument. Price variances, including large periodic
changes, are investigated and corroborated by market data. We have reviewed the pricing
methodologies of our pricing service and believe that their prices adequately consider market
activity in determining fair value.
In cases in which a price from the pricing service is not available, values are determined by
obtaining non-binding broker quotes and/or market comparables. When available, we obtain multiple
quotes for the same security. The ultimate value for these securities is determined based on our
best estimate of fair value using corroborating market information. Our evaluation includes the
consideration of benchmark yields, reported trades, issuer spreads, two-sided markets, benchmark
securities, bids, offers and reference data. For certain structured securities in an illiquid
market, there may be no prices available from a pricing service and no comparable market quotes
available. In these situations, we value the security using an internally-developed risk-adjusted
discounted cash flow model.
21
Table of Contents
The following table sets forth the fair value of the consolidated fixed maturity and preferred
stock securities by pricing source:
Erie Insurance Group | ||||||||||||||||
June 30, 2010 | ||||||||||||||||
(in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Indemnity |
||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
Priced via pricing services |
$ | 659 | $ | 4 | $ | 655 | $ | 0 | ||||||||
Priced via market comparables/non-binding broker quote(1) |
2 | 0 | 2 | 0 | ||||||||||||
Priced via internal modeling (2) |
10 | 0 | 0 | 10 | ||||||||||||
Total fixed maturity securities |
671 | 4 | 657 | 10 | ||||||||||||
Preferred stock securities: |
||||||||||||||||
Priced via pricing services |
41 | 13 | 28 | 0 | ||||||||||||
Priced via market comparables/non-binding broker quote (1) |
4 | 0 | 3 | 1 | ||||||||||||
Priced via internal modeling (2) |
0 | 0 | 0 | 0 | ||||||||||||
Total preferred stock securities |
45 | 13 | 31 | 1 | ||||||||||||
Common stock securities: |
||||||||||||||||
Priced via pricing services |
40 | 40 | 0 | 0 | ||||||||||||
Priced via market comparables/non-binding broker quote (1) |
0 | 0 | 0 | 0 | ||||||||||||
Priced via internal modeling (2) |
0 | 0 | 0 | 0 | ||||||||||||
Total common stock securities |
40 | 40 | 0 | 0 | ||||||||||||
Total available-for-sale/trading securities Indemnity |
$ | 756 | $ | 57 | $ | 688 | $ | 11 | ||||||||
Exchange |
||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
Priced via pricing services |
$ | 6,665 | $ | 16 | $ | 6,649 | $ | 0 | ||||||||
Priced via market comparables/non-binding broker quote (1) |
51 | 0 | 51 | 0 | ||||||||||||
Priced via internal modeling (2) |
73 | 0 | 6 | 67 | ||||||||||||
Total fixed maturity securities |
6,789 | 16 | 6,706 | 67 | ||||||||||||
Preferred stock securities: |
||||||||||||||||
Priced via pricing services |
506 | 172 | 334 | 0 | ||||||||||||
Priced via market comparables/non-binding broker quote (1) |
17 | 0 | 13 | 4 | ||||||||||||
Priced via internal modeling (2) |
0 | 0 | 0 | 0 | ||||||||||||
Total preferred stock securities |
523 | 172 | 347 | 4 | ||||||||||||
Common stock securities: |
||||||||||||||||
Priced via pricing services |
1,701 | 1,701 | 0 | 0 | ||||||||||||
Priced via market comparables/non-binding broker quote (1) |
0 | 0 | 0 | 0 | ||||||||||||
Priced via internal modeling (2) |
11 | 1 | 0 | 10 | ||||||||||||
Total common stock securities |
1,712 | 1,702 | 0 | 10 | ||||||||||||
Total available-for-sale/trading securities Exchange |
$ | 9,024 | $ | 1,890 | $ | 7,053 | $ | 81 | ||||||||
Total available-for-sale/trading securities Erie Insurance Group |
$ | 9,780 | $ | 1,947 | $ | 7,741 | $ | 92 | ||||||||
(1) | All broker quotes obtained for securities were non-binding. When a non-binding broker quote was the only price available, the security was classified as Level 3. | |
(2) | Internal modeling using a discounted cash flow model was performed on 14 fixed maturities and 3 common equity securities representing less than 0.8% of the total portfolio. |
We have no assets that were measured at fair value on a nonrecurring basis during the six
months ended June 30, 2010.
22
Table of Contents
Note 7. Investments
The following tables summarize the cost and fair value of our available-for-sale securities at June
30, 2010 and December 31, 2009:
Erie Insurance Group | ||||||||||||||||
June 30, 2010 | ||||||||||||||||
Amortized | Gross unrealized | Gross unrealized | Estimated | |||||||||||||
(in millions) | cost | gains | losses | fair value | ||||||||||||
Available-for-sale securities |
||||||||||||||||
Indemnity |
||||||||||||||||
Fixed maturities |
||||||||||||||||
U.S. treasuries and government agencies |
$ | 4 | $ | 0 | $ | 0 | $ | 4 | ||||||||
U.S. government sponsored enterprises |
19 | 0 | 0 | 19 | ||||||||||||
Foreign government |
2 | 0 | 0 | 2 | ||||||||||||
Municipal securities |
242 | 11 | 0 | 253 | ||||||||||||
U.S. corporate debt non-financial |
164 | 13 | 0 | 177 | ||||||||||||
U.S. corporate debt financial |
130 | 7 | 1 | 136 | ||||||||||||
Foreign corporate debt non-financial |
26 | 3 | 0 | 29 | ||||||||||||
Foreign corporate debt financial |
17 | 1 | 1 | 17 | ||||||||||||
Structured securities: |
||||||||||||||||
Asset-backed securities auto loans |
3 | 0 | 0 | 3 | ||||||||||||
Collateralized debt obligations |
10 | 1 | 1 | 10 | ||||||||||||
Commercial mortgage-backed |
5 | 0 | 0 | 5 | ||||||||||||
Residential mortgage-backed: |
0 | |||||||||||||||
Government sponsored enterprises |
12 | 1 | 0 | 13 | ||||||||||||
Non-government sponsored enterprises |
3 | 0 | 0 | 3 | ||||||||||||
Total fixed maturities-Indemnity |
$ | 637 | $ | 37 | $ | 3 | $ | 671 | ||||||||
Equity securities |
||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||
Financial |
$ | 24 | $ | 3 | $ | 1 | $ | 26 | ||||||||
Non-financial |
13 | 1 | 0 | 14 | ||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||
Financial |
3 | 1 | 0 | 4 | ||||||||||||
Non-financial |
1 | 0 | 0 | 1 | ||||||||||||
Total equity securities Indemnity |
$ | 41 | $ | 5 | $ | 1 | $ | 45 | ||||||||
Total available-for-sale securities Indemnity |
$ | 678 | $ | 42 | $ | 4 | $ | 716 | ||||||||
Exchange |
||||||||||||||||
Fixed maturities |
||||||||||||||||
U.S. treasuries and government agencies |
$ | 5 | $ | 0 | $ | 0 | $ | 5 | ||||||||
U.S. government sponsored enterprises |
89 | 2 | 0 | 91 | ||||||||||||
Foreign government |
14 | 1 | 0 | 15 | ||||||||||||
Municipal securities |
1,380 | 62 | 1 | 1,441 | ||||||||||||
U.S. corporate debt non-financial |
2,119 | 184 | 7 | 2,296 | ||||||||||||
U.S. corporate debt financial |
1,552 | 119 | 12 | 1,659 | ||||||||||||
Foreign corporate debt non-financial |
367 | 30 | 1 | 396 | ||||||||||||
Foreign corporate debt financial |
357 | 16 | 1 | 372 | ||||||||||||
Structured securities: |
||||||||||||||||
Asset-backed securities auto loans |
44 | 3 | 0 | 47 | ||||||||||||
Asset-backed securities other |
28 | 1 | 1 | 28 | ||||||||||||
Collateralized debt obligations |
85 | 9 | 8 | 86 | ||||||||||||
Commercial mortgage-backed |
144 | 7 | 1 | 150 | ||||||||||||
Residential mortgage-backed: |
||||||||||||||||
Government sponsored enterprises |
162 | 9 | 0 | 171 | ||||||||||||
Non-government sponsored enterprises |
33 | 0 | 1 | 32 | ||||||||||||
Total fixed maturities Exchange |
$ | 6,379 | $ | 443 | $ | 33 | $ | 6,789 | ||||||||
Equity securities |
||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||
Financial |
$ | 271 | $ | 47 | $ | 7 | $ | 311 | ||||||||
Non-financial |
148 | 7 | 2 | 153 | ||||||||||||
Government sponsored enterprises |
1 | 0 | 0 | 1 | ||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||
Financial |
$ | 49 | $ | 4 | $ | 3 | $ | 50 | ||||||||
Non-financial |
$ | 8 | $ | 0 | $ | 0 | $ | 8 | ||||||||
Total equity securities Exchange |
$ | 477 | $ | 58 | $ | 12 | $ | 523 | ||||||||
Total available-for-sale securities Exchange |
$ | 6,856 | $ | 501 | $ | 45 | $ | 7,312 | ||||||||
Total available-for-sale securities Erie Insurance Group |
$ | 7,534 | $ | 543 | $ | 49 | $ | 8,028 | ||||||||
23
Table of Contents
Erie Insurance Group | ||||||||||||||||
December 31, 2009 | ||||||||||||||||
Amortized | Gross unrealized | Gross unrealized | Estimated | |||||||||||||
(in millions) | cost | gains | losses | fair value | ||||||||||||
Available-for-sale securities |
||||||||||||||||
Indemnity |
||||||||||||||||
Fixed maturities |
||||||||||||||||
U.S. treasuries and government agencies |
$ | 3 | $ | 0 | $ | 0 | $ | 3 | ||||||||
U.S. government sponsored enterprises |
14 | 0 | 0 | 14 | ||||||||||||
Foreign government |
2 | 0 | 0 | 2 | ||||||||||||
Municipal securities |
235 | 9 | 0 | 244 | ||||||||||||
U.S. corporate debt non-financial |
172 | 10 | 1 | 181 | ||||||||||||
U.S. corporate debt financial |
135 | 7 | 4 | 138 | ||||||||||||
Foreign corporate debt non-financial |
26 | 2 | 0 | 28 | ||||||||||||
Foreign corporate debt financial |
19 | 2 | 1 | 20 | ||||||||||||
Structured securities: |
||||||||||||||||
Asset-backed securities auto loans |
4 | 0 | 0 | 4 | ||||||||||||
Collateralized debt obligations |
10 | 0 | 2 | 8 | ||||||||||||
Commercial mortgage-backed |
5 | 0 | 0 | 5 | ||||||||||||
Residential mortgage-backed: |
||||||||||||||||
Government sponsored enterprises |
14 | 0 | 0 | 14 | ||||||||||||
Non-government sponsored enterprises |
3 | 0 | 0 | 3 | ||||||||||||
Total fixed maturities-Indemnity |
$ | 642 | $ | 30 | $ | 8 | $ | 664 | ||||||||
Equity securities |
||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||
Financial |
$ | 20 | $ | 3 | $ | 1 | $ | 22 | ||||||||
Non-financial |
9 | 1 | 0 | 10 | ||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||
Financial |
5 | 0 | 0 | 5 | ||||||||||||
Non-financial |
1 | 0 | 0 | 1 | ||||||||||||
Total equity securities Indemnity |
$ | 35 | $ | 4 | $ | 1 | $ | 38 | ||||||||
Total available-for-sale securities Indemnity |
$ | 677 | $ | 34 | $ | 9 | $ | 702 | ||||||||
Exchange |
||||||||||||||||
Fixed maturities |
||||||||||||||||
U.S. treasuries and government agencies |
$ | 5 | $ | 0 | $ | 0 | $ | 5 | ||||||||
U.S. government sponsored enterprises |
76 | 1 | 0 | 77 | ||||||||||||
Foreign government |
10 | 1 | 0 | 11 | ||||||||||||
Municipal securities |
1,389 | 55 | 3 | 1,441 | ||||||||||||
U.S. corporate debt non-financial |
2,078 | 125 | 10 | 2,193 | ||||||||||||
U.S. corporate debt financial |
1,498 | 82 | 28 | 1,552 | ||||||||||||
Foreign corporate debt non-financial |
375 | 22 | 2 | 395 | ||||||||||||
Foreign corporate debt financial |
292 | 11 | 4 | 299 | ||||||||||||
Structured securities: |
||||||||||||||||
Asset-backed securities auto loans |
48 | 3 | 0 | 51 | ||||||||||||
Asset-backed securities credit cards |
5 | 0 | 0 | 5 | ||||||||||||
Asset-backed securities other |
35 | 0 | 2 | 33 | ||||||||||||
Collateralized debt obligations |
88 | 5 | 16 | 77 | ||||||||||||
Commercial mortgage-backed |
127 | 5 | 5 | 127 | ||||||||||||
Residential mortgage-backed: |
||||||||||||||||
Government sponsored enterprises |
192 | 6 | 0 | 198 | ||||||||||||
Non-government sponsored enterprises |
59 | 0 | 6 | 53 | ||||||||||||
Total fixed maturities Exchange |
$ | 6,277 | $ | 316 | $ | 76 | $ | 6,517 | ||||||||
Equity securities |
||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||
Financial |
$ | 259 | $ | 53 | $ | 11 | $ | 301 | ||||||||
Non-financial |
111 | 4 | 2 | 113 | ||||||||||||
Government sponsored enterprises |
1 | 2 | 0 | 3 | ||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||
Financial |
46 | 4 | 3 | 47 | ||||||||||||
Non-financial |
8 | 0 | 0 | 8 | ||||||||||||
Total equity securities Exchange |
$ | 425 | $ | 63 | $ | 16 | $ | 472 | ||||||||
Total available-for-sale securities Exchange |
$ | 6,702 | $ | 379 | $ | 92 | $ | 6,989 | ||||||||
Total available-for-sale securities Erie Insurance Group |
$ | 7,379 | $ | 413 | $ | 101 | $ | 7,691 | ||||||||
24
Table of Contents
The amortized cost and estimated fair value of fixed maturities at June 30, 2010, are shown
below by remaining contractual term to maturity. Mortgage-backed securities are allocated based on
their stated maturity dates. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call or prepayment
penalties.
Erie Insurance Group | ||||||||
Amortized | Estimated | |||||||
(in millions) | cost | fair value | ||||||
Indemnity |
||||||||
Due in one year or less |
$ | 33 | $ | 36 | ||||
Due after one year through five years |
253 | 265 | ||||||
Due after five years through ten years |
256 | 272 | ||||||
Due after ten years |
95 | 98 | ||||||
Total fixed maturities Indemnity |
$ | 637 | $ | 671 | ||||
Exchange |
||||||||
Due in one year or less |
$ | 330 | $ | 346 | ||||
Due after one year through five years |
2,238 | 2,380 | ||||||
Due after five years through ten years |
2,531 | 2,716 | ||||||
Due after ten years |
1,280 | 1,347 | ||||||
Total fixed maturities Exchange |
$ | 6,379 | $ | 6,789 | ||||
Total fixed maturities Erie Insurance Group |
$ | 7,016 | $ | 7,460 | ||||
Fixed maturities and equity securities in a gross unrealized loss position at June 30, 2010 are as
follows for Indemnity. Data is provided by length of time securities were in a gross unrealized
loss position.
June 30, 2010
Erie Insurance Group | |||||||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | No. of | |||||||||||||||||||||||
(dollars in millions) | value | losses | value | losses | Value | losses | holdings | ||||||||||||||||||||||
Indemnity |
|||||||||||||||||||||||||||||
Fixed maturities: |
|||||||||||||||||||||||||||||
U.S. government sponsored enterprises |
$ | 8 | $ | 0 | $ | 0 | $ | 0 | $ | 8 | $ | 0 | 2 | ||||||||||||||||
Municipal securities |
9 | 0 | 4 | 0 | 13 | 0 | 6 | ||||||||||||||||||||||
U.S. corporate debt non-financial |
8 | 0 | 3 | 0 | 11 | 0 | 11 | ||||||||||||||||||||||
U.S. corporate debt financial |
23 | 0 | 13 | 1 | 36 | 1 | 22 | ||||||||||||||||||||||
Foreign corporate debt non-financial |
0 | 0 | 2 | 0 | 2 | 0 | 2 | ||||||||||||||||||||||
Foreign corporate debt financial |
0 | 0 | 2 | 1 | 2 | 1 | 1 | ||||||||||||||||||||||
Structured securities: |
|||||||||||||||||||||||||||||
Collateralized debt obligations |
0 | 0 | 3 | 1 | 3 | 1 | 4 | ||||||||||||||||||||||
Commercial mortgage-backed |
1 | 0 | 0 | 0 | 1 | 0 | 1 | ||||||||||||||||||||||
Residential mortgage-backed: |
|||||||||||||||||||||||||||||
Non-government sponsored enterprises |
0 | 0 | 2 | 0 | 2 | 0 | 1 | ||||||||||||||||||||||
Total fixed maturities Indemnity |
$ | 49 | $ | 0 | $ | 29 | $ | 3 | $ | 78 | $ | 3 | 50 | ||||||||||||||||
Equity securities: |
|||||||||||||||||||||||||||||
U.S. nonredeemable preferred securities: |
|||||||||||||||||||||||||||||
Financial |
$ | 2 | $ | 0 | $ | 5 | $ | 1 | $ | 7 | $ | 1 | 6 | ||||||||||||||||
Non-financial |
5 | 0 | 2 | 0 | 7 | 0 | 3 | ||||||||||||||||||||||
Foreign nonredeemable preferred securities: |
|||||||||||||||||||||||||||||
Financial |
2 | 0 | 1 | 0 | 3 | 0 | 2 | ||||||||||||||||||||||
Total equity securities Indemnity |
$ | 9 | $ | 0 | $ | 8 | $ | 1 | $ | 17 | $ | 1 | 11 | ||||||||||||||||
Quality breakdown of fixed maturities at June 30, 2010 | |||||||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | No. of | |||||||||||||||||||||||
(dollars in millions) | value | losses | value | losses | Value | losses | holdings | ||||||||||||||||||||||
Indemnity |
|||||||||||||||||||||||||||||
Investment grade |
$ | 43 | $ | 0 | $ | 27 | $ | 2 | $ | 70 | $ | 2 | 42 | ||||||||||||||||
Non-investment grade |
6 | 0 | 2 | 1 | 8 | 1 | 8 | ||||||||||||||||||||||
Total fixed maturities Indemnity |
$ | 49 | $ | 0 | $ | 29 | $ | 3 | $ | 78 | $ | 3 | 50 | ||||||||||||||||
25
Table of Contents
Fixed maturities and equity securities in a gross unrealized loss position at June 30, 2010
are as follows for the Exchange. Data is provided by length of time securities were in a gross
unrealized loss position.
June 30, 2010
Erie Insurance Group | ||||||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | No. of | ||||||||||||||||||||||
(dollars in millions) | value | losses | value | losses | Value | losses | holdings | |||||||||||||||||||||
Exchange |
||||||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||||||
U.S. government sponsored enterprises |
$ | 38 | $ | 0 | $ | 0 | $ | 0 | $ | 38 | $ | 0 | 5 | |||||||||||||||
Municipal securities |
37 | 1 | 24 | 0 | 61 | 1 | 10 | |||||||||||||||||||||
U.S. corporate debt non-financial |
62 | 2 | 55 | 5 | 117 | 7 | 24 | |||||||||||||||||||||
U.S. corporate debt financial |
99 | 2 | 122 | 10 | 221 | 12 | 50 | |||||||||||||||||||||
Foreign corporate debt non-financial |
15 | 0 | 21 | 1 | 36 | 1 | 6 | |||||||||||||||||||||
Foreign corporate debt financial |
13 | 0 | 39 | 1 | 52 | 1 | 8 | |||||||||||||||||||||
Structured securities: |
||||||||||||||||||||||||||||
Asset backed auto loans |
4 | 0 | 0 | 0 | 4 | 0 | 1 | |||||||||||||||||||||
Asset backed other |
0 | 0 | 9 | 1 | 9 | 1 | 2 | |||||||||||||||||||||
Collateralized debt obligations |
0 | 0 | 35 | 8 | 35 | 8 | 8 | |||||||||||||||||||||
Commercial mortgage-backed |
0 | 0 | 13 | 1 | 13 | 1 | 4 | |||||||||||||||||||||
Residential mortgage-backed: |
||||||||||||||||||||||||||||
Non-government sponsored enterprises |
0 | 0 | 27 | 1 | 27 | 1 | 5 | |||||||||||||||||||||
Total fixed maturities Exchange |
$ | 268 | $ | 5 | $ | 345 | $ | 28 | $ | 613 | $ | 33 | 123 | |||||||||||||||
Equity securities: |
||||||||||||||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||||||||||||||
Financial |
$ | 36 | $ | 2 | $ | 35 | $ | 5 | $ | 71 | $ | 7 | 16 | |||||||||||||||
Non-financial |
13 | 1 | 26 | 1 | 39 | 2 | 7 | |||||||||||||||||||||
Government sponsored enterprises |
0 | 0 | 0 | 0 | 0 | 0 | 4 | |||||||||||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||||||||||||||
Financial |
12 | 1 | 19 | 2 | 31 | 3 | 6 | |||||||||||||||||||||
Total equity securities Exchange |
$ | 61 | $ | 4 | $ | 80 | $ | 8 | $ | 141 | $ | 12 | 33 | |||||||||||||||
Quality breakdown of fixed maturities at June 30, 2010
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | No. of | ||||||||||||||||||||||
(dollars in millions) | value | losses | value | losses | Value | losses | holdings | |||||||||||||||||||||
Exchange |
||||||||||||||||||||||||||||
Investment grade |
$ | 229 | $ | 3 | $ | 246 | $ | 19 | $ | 475 | $ | 22 | 87 | |||||||||||||||
Non-investment grade |
39 | 2 | 99 | 9 | 138 | 11 | 36 | |||||||||||||||||||||
Total fixed maturities Exchange |
$ | 268 | $ | 5 | $ | 345 | $ | 28 | $ | 613 | $ | 33 | 123 | |||||||||||||||
The above securities for Indemnity and the Exchange have been evaluated and determined to be
temporary impairments for which we expect to recover our entire principal plus interest. The
primary components of this analysis are a general review of market conditions and financial
performance of the issuer along with the extent and duration of which fair value is less than cost.
A large portion of the unrealized losses greater than 12 months are related to U.S. financial
sector securities. Any debt securities that we intend to sell or will more likely than not be
required to sell before recovery are included in other-than-temporary impairments with the
impairment charges recognized in earnings.
26
Table of Contents
Fixed maturities and equity securities in a gross unrealized loss position at December 31, 2009 are
as follows for Indemnity. Data is provided by length of time securities were in a gross unrealized
loss position.
December 31, 2009
Erie Insurance Group | ||||||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | No. of | ||||||||||||||||||||||
(dollars in millions) | value | losses | value | losses | Value | losses | holdings | |||||||||||||||||||||
Indemnity |
||||||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||||||
U.S. government sponsored enterprises |
$ | 8 | $ | 0 | $ | 0 | $ | 0 | $ | 8 | $ | 0 | 2 | |||||||||||||||
Municipal securities |
18 | 0 | 5 | 0 | 23 | 0 | 12 | |||||||||||||||||||||
U.S. corporate debt non-financial |
19 | 0 | 8 | 1 | 27 | 1 | 16 | |||||||||||||||||||||
U.S. corporate debt financial |
16 | 1 | 40 | 3 | 56 | 4 | 42 | |||||||||||||||||||||
Foreign corporate debt non-financial |
0 | 0 | 4 | 0 | 4 | 0 | 3 | |||||||||||||||||||||
Foreign corporate debt financial |
2 | 0 | 3 | 1 | 5 | 1 | 4 | |||||||||||||||||||||
Structured securities: |
||||||||||||||||||||||||||||
Collateralized debt obligations |
0 | 0 | 3 | 2 | 3 | 2 | 6 | |||||||||||||||||||||
Commercial mortgage-backed |
0 | 0 | 1 | 0 | 1 | 0 | 1 | |||||||||||||||||||||
Residential mortgage-backed: |
||||||||||||||||||||||||||||
Government sponsored enterprises |
6 | 0 | 0 | 0 | 6 | 0 | 2 | |||||||||||||||||||||
Non-government sponsored enterprises |
0 | 0 | 3 | 0 | 3 | 0 | 2 | |||||||||||||||||||||
Total fixed maturities Indemnity |
$ | 69 | $ | 1 | $ | 67 | $ | 7 | $ | 136 | $ | 8 | 90 | |||||||||||||||
Equity securities: |
||||||||||||||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||||||||||||||
Financial |
$ | 5 | $ | 0 | $ | 5 | $ | 1 | $ | 10 | $ | 1 | 8 | |||||||||||||||
Non-financial |
3 | 0 | 4 | 0 | 7 | 0 | 3 | |||||||||||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||||||||||||||
Financial |
0 | 0 | 1 | 0 | 1 | 0 | 1 | |||||||||||||||||||||
Total equity securities Indemnity |
$ | 8 | $ | 0 | $ | 10 | $ | 1 | $ | 18 | $ | 1 | 12 | |||||||||||||||
Quality breakdown of fixed maturities at December 31, 2009
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | No. of | ||||||||||||||||||||||
(dollars in millions) | value | losses | value | losses | value | losses | holdings | |||||||||||||||||||||
Indemnity |
||||||||||||||||||||||||||||
Investment grade |
$ | 69 | $ | 1 | $ | 49 | $ | 4 | $ | 118 | $ | 5 | 71 | |||||||||||||||
Non-investment grade |
0 | 0 | 18 | 3 | 18 | 3 | 19 | |||||||||||||||||||||
Total fixed maturities Indemnity |
$ | 69 | $ | 1 | $ | 67 | $ | 7 | $ | 136 | $ | 8 | 90 | |||||||||||||||
27
Table of Contents
Fixed maturities and equity securities in a gross unrealized loss position at December 31,
2009 are as follows for the Exchange. Data is provided by length of time securities were in a
gross unrealized loss position.
December 31, 2009
Erie Insurance Group | ||||||||||||||||||||||||||||
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | No. of | ||||||||||||||||||||||
(dollars in millions) | value | losses | value | losses | Value | losses | holdings | |||||||||||||||||||||
Exchange |
||||||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||||||
U.S. government sponsored enterprises |
$ | 50 | $ | 0 | $ | 0 | $ | 0 | $ | 50 | $ | 0 | 6 | |||||||||||||||
Municipal securities |
105 | 2 | 26 | 1 | 131 | 3 | 24 | |||||||||||||||||||||
U.S. corporate debt non-financial |
128 | 3 | 129 | 7 | 257 | 10 | 56 | |||||||||||||||||||||
U.S. corporate debt financial |
159 | 2 | 318 | 26 | 477 | 28 | 98 | |||||||||||||||||||||
Foreign corporate debt non-financial |
12 | 0 | 36 | 2 | 48 | 2 | 9 | |||||||||||||||||||||
Foreign corporate debt financial |
17 | 0 | 68 | 4 | 85 | 4 | 17 | |||||||||||||||||||||
Structured securities: |
||||||||||||||||||||||||||||
Asset backed credit cards |
0 | 0 | 5 | 0 | 5 | 0 | 1 | |||||||||||||||||||||
Asset backed other |
0 | 0 | 18 | 2 | 18 | 2 | 3 | |||||||||||||||||||||
Collateralized debt obligations |
8 | 1 | 28 | 15 | 36 | 16 | 15 | |||||||||||||||||||||
Commercial mortgage-backed |
1 | 0 | 34 | 5 | 35 | 5 | 6 | |||||||||||||||||||||
Residential mortgage-backed: |
||||||||||||||||||||||||||||
Government sponsored enterprises |
28 | 0 | 0 | 0 | 28 | 0 | 4 | |||||||||||||||||||||
Non-government sponsored enterprises |
0 | 0 | 45 | 6 | 45 | 6 | 9 | |||||||||||||||||||||
Total fixed maturities Exchange |
$ | 508 | $ | 8 | $ | 707 | $ | 68 | $ | 1,215 | $ | 76 | 248 | |||||||||||||||
Equity securities: |
||||||||||||||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||||||||||||||
Financial |
$ | 36 | $ | 2 | $ | 72 | $ | 9 | $ | 108 | $ | 11 | 20 | |||||||||||||||
Non-financial |
14 | 0 | 43 | 2 | 57 | 2 | 10 | |||||||||||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||||||||||||||
Financial |
0 | 0 | 18 | 3 | 18 | 3 | 4 | |||||||||||||||||||||
Total equity securities Exchange |
$ | 50 | $ | 2 | $ | 133 | $ | 14 | $ | 183 | $ | 16 | 34 | |||||||||||||||
Quality breakdown of fixed maturities at December 31, 2009
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | No. of | ||||||||||||||||||||||
(dollars in millions) | value | losses | value | losses | value | losses | holdings | |||||||||||||||||||||
Exchange |
||||||||||||||||||||||||||||
Investment grade |
$ | 494 | $ | 8 | $ | 522 | $ | 50 | $ | 1,016 | $ | 58 | 191 | |||||||||||||||
Non-investment grade |
14 | 0 | 185 | 18 | 199 | 18 | 57 | |||||||||||||||||||||
Total fixed maturities Exchange |
$ | 508 | $ | 8 | $ | 707 | $ | 68 | $ | 1,215 | $ | 76 | 248 | |||||||||||||||
28
Table of Contents
Investment income, net of expenses, was generated from the following portfolios:
Erie Insurance Group | ||||||||||||||||
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Indemnity |
||||||||||||||||
Fixed maturities |
$ | 9 | $ | 9 | $ | 17 | $ | 19 | ||||||||
Equity securities |
1 | 1 | 2 | 3 | ||||||||||||
Cash equivalents and other |
0 | 0 | 0 | 1 | ||||||||||||
Total investment income |
10 | 10 | 19 | 23 | ||||||||||||
Less: investment expenses |
1 | 1 | 1 | 1 | ||||||||||||
Investment income, net of expenses Indemnity |
$ | 9 | $ | 9 | $ | 18 | $ | 22 | ||||||||
Exchange |
||||||||||||||||
Fixed maturities |
$ | 87 | $ | 83 | $ | 173 | $ | 174 | ||||||||
Equity securities |
18 | 17 | 34 | 34 | ||||||||||||
Cash equivalents and other |
0 | 1 | 0 | 4 | ||||||||||||
Total investment income |
105 | 101 | 207 | 212 | ||||||||||||
Less: investment expenses |
6 | 5 | 13 | 12 | ||||||||||||
Investment income, net of expenses Exchange |
$ | 99 | $ | 96 | $ | 194 | $ | 200 | ||||||||
Total consolidated investment income, net of
expenses Erie Insurance Group |
$ | 108 | $ | 105 | $ | 212 | $ | 222 | ||||||||
Dividend income is recognized as earned and recorded to net investment income.
Realized gains (losses) on investments were as follows:
Erie Insurance Group | ||||||||||||||||
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Indemnity |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Fixed maturities |
||||||||||||||||
Gross realized gains |
$ | 1 | $ | 1 | $ | 3 | $ | 1 | ||||||||
Gross realized (losses) |
0 | (1 | ) | 0 | (3 | ) | ||||||||||
Net realized gains (losses) |
1 | 0 | 3 | (2 | ) | |||||||||||
Equity securities |
||||||||||||||||
Gross realized gains |
1 | 0 | 1 | 3 | ||||||||||||
Gross realized (losses) |
(1 | ) | (2 | ) | (1 | ) | (3 | ) | ||||||||
Net realized gains |
0 | (2 | ) | 0 | 0 | |||||||||||
Trading securities: |
||||||||||||||||
Common stock |
||||||||||||||||
Gross realized gains |
0 | 1 | 1 | 1 | ||||||||||||
Gross realized (losses) |
0 | (1 | ) | 0 | (3 | ) | ||||||||||
Valuation adjustments |
(4 | ) | 6 | (2 | ) | 4 | ||||||||||
Net realized gains (losses) |
(4 | ) | 6 | (1 | ) | 2 | ||||||||||
Net realized gains (losses) on investments Indemnity |
$ | (3 | ) | $ | 4 | $ | 2 | $ | 0 | |||||||
29
Table of Contents
Erie Insurance Group | ||||||||||||||||
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Exchange |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Fixed maturities |
||||||||||||||||
Gross realized gains |
$ | 7 | $ | 6 | $ | 28 | $ | 9 | ||||||||
Gross realized (losses) |
(3 | ) | (13 | ) | (12 | ) | (28 | ) | ||||||||
Net realized gains (losses) |
4 | (7 | ) | 16 | (19 | ) | ||||||||||
Equity securities |
||||||||||||||||
Gross realized gains |
3 | 6 | 7 | 13 | ||||||||||||
Gross realized (losses) |
(1 | ) | (9 | ) | (1 | ) | (13 | ) | ||||||||
Net realized gains (losses) |
2 | (3 | ) | 6 | 0 | |||||||||||
Trading securities: |
||||||||||||||||
Common stock |
||||||||||||||||
Gross realized gains |
44 | 33 | 89 | 48 | ||||||||||||
Gross realized (losses) |
(18 | ) | (66 | ) | (30 | ) | (162 | ) | ||||||||
Valuation adjustments |
(242 | ) | 247 | (171 | ) | 186 | ||||||||||
Net realized gains (losses) |
(216 | ) | 214 | (112 | ) | 72 | ||||||||||
Net realized gains (losses) on investments Exchange |
$ | (210 | ) | $ | 204 | $ | (90 | ) | $ | 53 | ||||||
Net realized gains (losses) on investments Erie
Insurance Group |
$ | (213 | ) | $ | 208 | $ | (88 | ) | $ | 53 | ||||||
The components of other-than-temporary impairments on investments are included below.
Erie Insurance Group | ||||||||||||||||
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Indemnity |
||||||||||||||||
Fixed maturities |
$ | (1 | ) | $ | (1 | ) | $ | (1 | ) | $ | (4 | ) | ||||
Equity securities |
0 | (1 | ) | 0 | (3 | ) | ||||||||||
Total |
(1 | ) | (2 | ) | (1 | ) | (7 | ) | ||||||||
Portion recognized in other comprehensive income |
0 | 0 | 0 | 0 | ||||||||||||
Net impairment losses recognized in earnings
Indemnity |
$ | (1 | ) | $ | (2 | ) | $ | (1 | ) | $ | (7 | ) | ||||
Exchange |
||||||||||||||||
Fixed maturities |
$ | (2 | ) | $ | (6 | ) | $ | (4 | ) | $ | (32 | ) | ||||
Equity securities |
(1 | ) | (4 | ) | (1 | ) | (44 | ) | ||||||||
Total |
(3 | ) | (10 | ) | (5 | ) | (76 | ) | ||||||||
Portion recognized in other comprehensive income |
0 | 0 | 0 | 0 | ||||||||||||
Net impairment losses recognized in earnings
Exchange |
$ | (3 | ) | $ | (10 | ) | $ | (5 | ) | $ | (76 | ) | ||||
Net impairment losses recognized in earnings
Erie Insurance Group |
$ | (4 | ) | $ | (12 | ) | $ | (6 | ) | $ | (83 | ) | ||||
In considering if fixed maturity securities were credit impaired some of the factors considered
include: potential for the default of interest and/or principal, level of subordination, collateral
of the issue, compliance with financial covenants, credit ratings and industry conditions. We have
the intent to sell all credit-impaired fixed maturity securities, therefore the entire amount of
the impairment charges were included in earnings and no non-credit impairments were recognized in
other comprehensive income. Prior to the second quarter of 2009 when new impairment guidance was
issued for debt securities, the impairment policy for fixed maturities was consistent with that of
equity securities.
30
Table of Contents
Limited partnerships
Our limited partnership investments are recorded using the equity method of accounting as we do not
exercise significant influence over any of these partnerships. As these investments are generally
reported on a one-quarter lag, our limited partnership results through June 30, 2010 are comprised
of general partnership financial results for the fourth quarter of 2009 and the first quarter of
2010. Given the lag in reporting, our limited partnership results do not reflect the market
conditions of the second quarter of 2010. Cash contributions made to and distributions received
from the partnerships are recorded in the period in which the transaction occurs.
We have provided summarized financial information in the following table for the six months ended
June 30, 2010 and for the year ended December 31, 2009. Amounts provided in the table are presented
using the latest available financial statements received from the partnerships. Limited partnership
financial information has been presented based on the investment percentage in the partnerships for
the Erie Insurance Group consistent with how management evaluates the investments.
31
Table of Contents
As these investments are generally reported on a one-quarter lag, our limited partnership results
through
June 30, 2010 include the general partnership financial results for the fourth quarter of 2009 and
first quarter of 2010.
(dollars in millions)
As of and for the six months ended June 30, 2010 | ||||||||||||||||
Income (loss) | ||||||||||||||||
recognized | ||||||||||||||||
due to | ||||||||||||||||
valuation | ||||||||||||||||
adjustments | Income | |||||||||||||||
Investment percentage in partnership | Number of | Asset | by the | (loss) | ||||||||||||
for Erie Insurance Group | partnerships | recorded | partnerships | recorded | ||||||||||||
Indemnity |
||||||||||||||||
Private equity: |
||||||||||||||||
Less than 10% |
26 | $ | 81 | $ | 7 | $ | 0 | |||||||||
Greater than or equal to 10% but less than 50% |
3 | 7 | 1 | 0 | ||||||||||||
Greater than 50% |
1 | 3 | 0 | 0 | ||||||||||||
Total private equity |
30 | 91 | 8 | 0 | ||||||||||||
Mezzanine debt: |
||||||||||||||||
Less than 10% |
12 | 32 | 3 | 1 | ||||||||||||
Greater than or equal to 10% but less than 50% |
3 | 17 | 2 | (2 | ) | |||||||||||
Greater than 50% |
1 | 2 | 0 | 0 | ||||||||||||
Total mezzanine debt |
16 | 51 | 5 | (1 | ) | |||||||||||
Real estate: |
||||||||||||||||
Less than 10% |
19 | 69 | (2 | ) | (2 | ) | ||||||||||
Greater than or equal to 10% but less than 50% |
5 | 14 | (1 | ) | (1 | ) | ||||||||||
Greater than 50% |
4 | 9 | 1 | (1 | ) | |||||||||||
Total real estate |
28 | 92 | (2 | ) | (4 | ) | ||||||||||
Total limited partnerships Indemnity |
74 | $ | 234 | $ | 11 | $ | (5 | ) | ||||||||
Exchange |
||||||||||||||||
Private equity: |
||||||||||||||||
Less than 10% |
41 | $ | 490 | $ | 29 | $ | 5 | |||||||||
Greater than or equal to 10% but less than 50% |
3 | 34 | 4 | (1 | ) | |||||||||||
Greater than 50% |
1 | 6 | 0 | 0 | ||||||||||||
Total private equity |
45 | 530 | 33 | 4 | ||||||||||||
Mezzanine debt: |
||||||||||||||||
Less than 10% |
14 | 146 | 10 | 2 | ||||||||||||
Greater than or equal to 10% but less than 50% |
4 | 47 | 1 | (2 | ) | |||||||||||
Greater than 50% |
3 | 27 | 0 | 1 | ||||||||||||
Total mezzanine debt |
21 | 220 | 11 | 1 | ||||||||||||
Real estate: |
||||||||||||||||
Less than 10% |
32 | 287 | (15 | ) | (4 | ) | ||||||||||
Greater than or equal to 10% but less than 50% |
7 | 52 | (3 | ) | (3 | ) | ||||||||||
Greater than 50% |
4 | 34 | 5 | (5 | ) | |||||||||||
Total real estate |
43 | 373 | (13 | ) | (12 | ) | ||||||||||
Total limited partnerships Exchange |
109 | $ | 1,123 | $ | 31 | $ | (7 | ) | ||||||||
Total limited partnerships Erie Insurance Group |
$ | 1,357 | $ | 42 | $ | (12 | ) | |||||||||
Per the limited partner financial statements, total partnership assets were $56 billion and total
partnership liabilities were $10 billion at June 30, 2010 (as recorded in the March 31, 2010
limited partnership financial statements). For the six month period comparable to that presented in
the preceding table (fourth quarter of 2009 and first quarter of 2010), total partnership valuation
adjustment gains were $3 billion and total partnership net income was $55 million.
32
Table of Contents
As these investments are generally reported on a one-quarter lag, our limited partnership results
through
December 31, 2009 include the general partnership results for the fourth quarter of 2008 and the
first three quarters of 2009.
(dollars in millions)
As of and for the year ended December 31, 2009 | ||||||||||||||||
(Loss) | ||||||||||||||||
income | ||||||||||||||||
recognized | ||||||||||||||||
due to | ||||||||||||||||
valuation | ||||||||||||||||
adjustments | (Loss) | |||||||||||||||
Investment percentage in partnership | Number of | Asset | by the | income | ||||||||||||
for Erie Insurance Group | partnerships | recorded | partnerships | recorded | ||||||||||||
Indemnity |
||||||||||||||||
Private equity: |
||||||||||||||||
Less than 10% |
26 | $ | 76 | $ | (11 | ) | $ | (1 | ) | |||||||
Greater than or equal to 10% but less than 50% |
3 | 6 | 0 | 0 | ||||||||||||
Greater than 50% |
1 | 3 | 0 | 0 | ||||||||||||
Total private equity |
30 | 85 | (11 | ) | (1 | ) | ||||||||||
Mezzanine debt: |
||||||||||||||||
Less than 10% |
12 | 30 | (4 | ) | (1 | ) | ||||||||||
Greater than or equal to 10% but less than 50% |
3 | 18 | (2 | ) | 2 | |||||||||||
Greater than 50% |
1 | 3 | (1 | ) | 0 | |||||||||||
Total mezzanine debt |
16 | 51 | (7 | ) | 1 | |||||||||||
Real estate: |
||||||||||||||||
Less than 10% |
19 | 65 | (31 | ) | 1 | |||||||||||
Greater than or equal to 10% but less than 50% |
5 | 17 | (6 | ) | 1 | |||||||||||
Greater than 50% |
4 | 17 | (21 | ) | (2 | ) | ||||||||||
Total real estate |
28 | 99 | (58 | ) | 0 | |||||||||||
Total limited partnerships Indemnity |
74 | $ | 235 | $ | (76 | ) | $ | 0 | ||||||||
Exchange |
||||||||||||||||
Private equity: |
||||||||||||||||
Less than 10% |
41 | $ | 466 | $ | (46 | ) | $ | 14 | ||||||||
Greater than or equal to 10% but less than 50% |
3 | 31 | 1 | (1 | ) | |||||||||||
Greater than 50% |
1 | 6 | (1 | ) | (1 | ) | ||||||||||
Total private equity |
45 | 503 | (46 | ) | 12 | |||||||||||
Mezzanine debt: |
||||||||||||||||
Less than 10% |
14 | 138 | (11 | ) | 4 | |||||||||||
Greater than or equal to 10% but less than 50% |
4 | 48 | (4 | ) | 9 | |||||||||||
Greater than 50% |
3 | 30 | (2 | ) | 2 | |||||||||||
Total mezzanine debt |
21 | 216 | (17 | ) | 15 | |||||||||||
Real estate: |
||||||||||||||||
Less than 10% |
32 | 302 | (164 | ) | (8 | ) | ||||||||||
Greater than or equal to 10% but less than 50% |
7 | 61 | (40 | ) | (1 | ) | ||||||||||
Greater than 50% |
4 | 34 | (48 | ) | 4 | |||||||||||
Total real estate |
43 | 397 | (252 | ) | (5 | ) | ||||||||||
Total limited partnerships Exchange |
109 | $ | 1,116 | $ | (315 | ) | $ | 22 | ||||||||
Total limited partnerships Erie Insurance Group |
$ | 1,351 | $ | (391 | ) | $ | 22 | |||||||||
Per the limited partner financial statements, total partnership assets were $53 billion and total
partnership liabilities were $11 billion at December 31, 2009 (as recorded in the September 30,
2009 limited partnership financial statements). For the twelve month period comparable to that
presented in the preceding table (fourth quarter of 2008 and first three quarters of 2009), total
partnership valuation adjustment losses were $8 billion and total partnership net losses were $1
billion.
See also Note 12 for investment commitments related to limited partnerships.
33
Table of Contents
Note 8. Bank Line of Credit
As of June 30, 2010, Indemnity has available a $100 million line of credit that expires on December
31, 2011. There were no borrowings outstanding on the line of credit as of June 30, 2010. Bonds
with a fair value of $132 million are pledged as collateral on the line at June 30, 2010.
As of June 30, 2010, the Exchange has available a $200 million revolving line of credit that
expires on September 30, 2012. There were no borrowings outstanding on the line of credit as of
June 30, 2010. Bonds with a fair value of $262 million are pledged as collateral on the lines at
June 30, 2010.
Securities pledged as collateral on both lines have no restrictions and are reported as
available-for-sale fixed maturities in the Consolidated Statements of Financial Position as of June
30, 2010. The banks require compliance with certain covenants, which include statutory surplus and
risk based capital ratios for the Exchanges line of credit and minimum net worth and leverage
ratios for Indemnitys line of credit. We are in compliance with all covenants at June 30, 2010.
Note 9. Income Tax
Deferred tax assets and liabilities are recognized 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 June 30, 2010, we recorded a net deferred tax asset of $101 million on our Consolidated
Statements of Financial Position. Although realization is not assured, management believes it is
more likely than not that the deferred tax asset will be realized based on our assessment that the
losses ultimately recognized for tax purposes will be fully utilized. As such, there was no
deferred tax valuation allowance recorded at June 30, 2010. The Exchange uses the period-to-date
tax rate rather than the annual projected tax rate. This is primarily due to the volatility related to
investment income under the current economic conditions and catastrophic activity.
Note 10. Postretirement Benefits
The liabilities for the plans described in this note are presented in total for all employees of
the Erie Insurance Group. The gross liability for the pension plans is presented in the
Consolidated Statements of Financial Position as part of other liabilities. A portion of annual
expenses related to the pension plans is allocated to related entities within the Erie Insurance
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
(SERP) for certain members of executive and senior management of the Erie Insurance Group. The
components of net periodic benefit cost for our pension benefits are:
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Service cost |
$ | 4 | $ | 4 | $ | 8 | $ | 8 | ||||||||
Interest cost |
5 | 5 | 10 | 10 | ||||||||||||
Expected return on plan assets |
(7 | ) | (6 | ) | (13 | ) | (12 | ) | ||||||||
Amortization of actuarial loss |
1 | 0 | 2 | 1 | ||||||||||||
Net periodic benefit cost |
$ | 3 | $ | 3 | $ | 7 | $ | 7 | ||||||||
34
Table of Contents
Note 11. Reconciliation of shareholders equity
A reconciliation of shareholders equity follows for the year to date December 31, 2009 and June
30, 2010:
Noncontrolling | ||||||||||||
interest in | ||||||||||||
Total Indemity | consolidated | |||||||||||
Total | shareholders | entity | ||||||||||
(in millions, except per share data) | equity | equity | Exchange | |||||||||
Balance at December 31, 2008 |
$ | 4,759 | $ | 792 | $ | 3,967 | ||||||
Comprehensive income: |
||||||||||||
Net income |
446 | 108 | 338 | |||||||||
Other comprehensive income, net of tax: |
||||||||||||
Unrealized gains on securities |
593 | 75 | 518 | |||||||||
Postretirement plans: |
||||||||||||
Prior service cost |
0 | 0 | | |||||||||
Net actuarial gain |
27 | 27 | | |||||||||
Loss due to amendments |
(2 | ) | (2 | ) | | |||||||
Curtailment/settlement loss |
(1 | ) | (1 | ) | | |||||||
Postretirement plans |
24 | 24 | | |||||||||
Other comprehensive income, net of tax |
617 | 99 | 518 | |||||||||
Comprehensive income |
1,063 | 207 | 856 | |||||||||
Purchase of treasury stock |
(3 | ) | (3 | ) | | |||||||
Conversion of Class B shares to Class A shares |
0 | 0 | | |||||||||
Dividends declared: |
||||||||||||
Class A $1.83 per share |
(94 | ) | (94 | ) | | |||||||
Class B $274.50 per share |
0 | 0 | | |||||||||
Balance at December 31, 2009 |
$ | 5,725 | $ | 902 | $ | 4,823 | ||||||
Comprehensive income: |
||||||||||||
Net income |
131 | 96 | 35 | |||||||||
Other comprehensive income, net of tax: |
||||||||||||
Unrealized gains on securities |
82 | 11 | 71 | |||||||||
Other comprehensive income, net of tax |
82 | 11 | 71 | |||||||||
Comprehensive income |
213 | 107 | 106 | |||||||||
Purchase of treasury stock |
(20 | ) | (20 | ) | | |||||||
Dividends declared: |
||||||||||||
Class A $0.96 per share |
(49 | ) | (49 | ) | | |||||||
Class B $144.00 per share |
0 | 0 | | |||||||||
Balance at June 30, 2010 |
$ | 5,869 | $ | 940 | $ | 4,929 | ||||||
35
Table of Contents
Note 12. Commitments and Contingencies
Indemnity has contractual commitments to invest up to $62 million related to its limited
partnership investments at June 30, 2010. These commitments are split between private equity
securities of $29 million, real estate activities of $20 million and mezzanine debt securities of
$13 million. These commitments will be funded as required by the partnership agreements.
The Exchange, including EFL, has contractual commitments to invest up to $503 million related to
its limited partnership investments at June 30, 2010. These commitments are split between private
equity securities of $232 million, real estate activities of $177 million and mezzanine debt
securities of $94 million. These commitments will be funded as required by the partnership
agreements.
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, operations or cash flows.
Note 13. Statutory Information
Cash and
securities with a carrying value of $14 million and $13 million were deposited by the property and
casualty and life entities with regulatory authorities under statutory requirements at June 30,
2010 and December 31, 2009, respectively.
36
Table of Contents
Note 14. Indemnity supplemental information
Consolidated Statement of Financial Position | ||||||||||||||||
Indemnity | Exchange | Reclassifications | Erie | |||||||||||||
June 30, 2010 | shareholder | noncontrolling | and | Insurance | ||||||||||||
(in millions) | interest | Interest | eliminations | Group | ||||||||||||
Assets |
||||||||||||||||
Investments |
||||||||||||||||
Available-for-sale securities, at fair value: |
||||||||||||||||
Fixed maturities |
$ | 671 | $ | 6,789 | $ | | $ | 7,460 | ||||||||
Equity securities |
45 | 523 | | 568 | ||||||||||||
Trading securities, at fair value |
40 | 1,712 | | 1,752 | ||||||||||||
Limited partnerships |
234 | 1,123 | | 1,357 | ||||||||||||
Other invested assets |
1 | 19 | | 20 | ||||||||||||
Total investments |
991 | 10,166 | | 11,157 | ||||||||||||
Cash and cash equivalents |
34 | 189 | | 223 | ||||||||||||
Premiums receivable from policyholders |
256 | 980 | (259 | ) | 977 | |||||||||||
Reinsurance recoverable |
2 | 199 | | 201 | ||||||||||||
Deferred income taxes |
29 | 72 | | 101 | ||||||||||||
Deferred acquisition costs |
56 | 417 | | 473 | ||||||||||||
Other assets |
114 | 324 | | 438 | ||||||||||||
Reinsurance recoverables and receivables from
Exchange and other affiliates |
1,068 | | (1,068 | ) | | |||||||||||
Note receivable from EFL |
25 | | (25 | ) | | |||||||||||
Equity in EFL |
81 | | (81 | ) | | |||||||||||
Total assets |
$ | 2,656 | $ | 12,347 | $ | (1,433 | ) | $ | 13,570 | |||||||
Liabilities |
||||||||||||||||
Losses and loss expense reserves(1) |
$ | 928 | $ | 3,451 | $ | (757 | ) | $ | 3,622 | |||||||
Life policy and deposit contract reserves |
| 1,574 | | 1,574 | ||||||||||||
Unearned premiums(1) |
459 | 1,977 | (343 | ) | 2,093 | |||||||||||
Other liabilities |
329 | 335 | (252 | ) | 412 | |||||||||||
Total liabilities |
1,716 | 7,337 | (1,352 | ) | 7,701 | |||||||||||
Shareholders equity and noncontrolling interest |
||||||||||||||||
Total Indemnity shareholders equity |
940 | | | 940 | ||||||||||||
Noncontrolling interest in consolidated entity
Exchange |
| 5,010 | (81 | ) | 4,929 | |||||||||||
Total equity |
940 | 5,010 | (81 | ) | 5,869 | |||||||||||
Total liabilities, shareholders equity
and noncontrolling interest |
$ | 2,656 | $ | 12,347 | $ | (1,433 | ) | $ | 13,570 | |||||||
(1) | Indemnitys insurance related accounts in this table include its wholly-owned property and casualty insurance subsidiaries direct business in addition to their share of the pooling transactions, which represents 5.5% of the total Property and Casualty Group business. The Consolidated Statements of Financial Position include direct business only as the 5.5% of activity assumed in accordance with the intercompany pooling arrangement has been eliminated in the consolidated presentation. |
37
Table of Contents
Consolidated Statement of Financial Position | ||||||||||||||||
Indemnity | Exchange | Reclassifications | Erie | |||||||||||||
December 31, 2009 | shareholder | noncontrolling | and | Insurance | ||||||||||||
(in millions) | interest | interest | eliminations | Group | ||||||||||||
Assets |
||||||||||||||||
Investments |
||||||||||||||||
Available-for-sale securities, at fair value: |
||||||||||||||||
Fixed maturities |
$ | 664 | $ | 6,517 | $ | | $ | 7,181 | ||||||||
Equity securities |
38 | 472 | | 510 | ||||||||||||
Trading securities, at fair value |
42 | 1,835 | | 1,877 | ||||||||||||
Limited partnerships |
235 | 1,116 | | 1,351 | ||||||||||||
Other invested assets |
1 | 20 | | 21 | ||||||||||||
Total investments |
980 | 9,960 | | 10,940 | ||||||||||||
Cash and cash equivalents |
76 | 158 | | 234 | ||||||||||||
Premiums receivable from policyholders |
237 | 872 | (203 | ) | 906 | |||||||||||
Reinsurance recoverable |
2 | 213 | | 215 | ||||||||||||
Deferred income taxes |
41 | 75 | | 116 | ||||||||||||
Deferred acquisition costs |
17 | 450 | | 467 | ||||||||||||
Other assets |
102 | 308 | (1 | ) | 409 | |||||||||||
Reinsurance recoverables and receivables from
Exchange and other affiliates |
1,115 | | (1,115 | ) | | |||||||||||
Note receivable from EFL |
25 | | (25 | ) | | |||||||||||
Equity in EFL |
72 | | (72 | ) | | |||||||||||
Total assets |
$ | 2,667 | $ | 12,036 | $ | (1,416 | ) | $ | 13,287 | |||||||
Liabilities |
||||||||||||||||
Losses and loss expense reserves(1) |
$ | 965 | $ | 3,424 | $ | (791 | ) | $ | 3,598 | |||||||
Life policy and deposit contract reserves |
| 1,540 | | 1,540 | ||||||||||||
Unearned premiums(1) |
434 | 1,872 | (325 | ) | 1,981 | |||||||||||
Other liabilities |
366 | 305 | (228 | ) | 443 | |||||||||||
Total liabilities |
1,765 | 7,141 | (1,344 | ) | 7,562 | |||||||||||
Shareholders equity and noncontrolling interest |
||||||||||||||||
Total Indemnity shareholders equity |
902 | | | 902 | ||||||||||||
Noncontrolling
interest in consolidated entity Exchange |
| 4,895 | (72 | ) | 4,823 | |||||||||||
Total equity |
902 | 4,895 | (72 | ) | 5,725 | |||||||||||
Total liabilities, shareholders equity
and noncontrolling interest |
$ | 2,667 | $ | 12,036 | $ | (1,416 | ) | $ | 13,287 | |||||||
(1) | Indemnitys insurance related accounts in this table include its wholly-owned property and casualty insurance subsidiaries direct business in addition to their share of the pooling transactions, which represents 5.5% of the total Property and Casualty Group business. The Consolidated Statements of Financial Position include direct business only as the 5.5% of activity assumed in accordance with the intercompany pooling arrangement has been eliminated in the consolidated presentation. |
Indemnity is due $25 million from EFL in the form of a surplus note that was issued in 2003.
The note may be repaid only out of unassigned surplus of EFL. Both principal and interest payments
are subject to prior approval by the Pennsylvania Insurance Commissioner. The note bears an annual
interest rate of 6.7% and will be payable on demand on or after December 31, 2018, with interest
scheduled to be paid semi-annually. EFL accrued interest to Indemnity of $0.4 million in each of
the second quarters ended June 30, 2010 and 2009.
38
Table of Contents
Income attributable to Indemnity shareholder interest | ||||||||||||||||||||
Three months ended | Six months ended | |||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||
(in millions) | Percent | 2010 | 2009 | 2010 | 2009 | |||||||||||||||
Management operations |
||||||||||||||||||||
Management fee revenue, net |
100.0 | % | $ | 270 | $ | 259 | $ | 507 | $ | 489 | ||||||||||
Service agreement revenue |
100.0 | % | 9 | 9 | 17 | 17 | ||||||||||||||
Total revenue from management operations |
279 | 268 | 524 | 506 | ||||||||||||||||
Cost of management operations |
100.0 | % | 217 | 208 | 409 | 401 | ||||||||||||||
Income from management operations before taxes |
62 | 60 | 115 | 105 | ||||||||||||||||
Property and casualty operations |
||||||||||||||||||||
Premiums earned |
5.5 | % | 53 | 52 | 106 | 104 | ||||||||||||||
Losses and loss expenses |
5.5 | % | 40 | 35 | 80 | 78 | ||||||||||||||
Underwriting expenses |
5.5 | % | 15 | 15 | 30 | 30 | ||||||||||||||
Income (loss) from property and casualty
operations before taxes |
(2 | ) | 2 | (4 | ) | (4 | ) | |||||||||||||
Life insurance operations |
||||||||||||||||||||
Total revenue |
21.6 | % | 9 | 8 | 18 | 13 | ||||||||||||||
Total benefits and expenses |
21.6 | % | 6 | 7 | 13 | 13 | ||||||||||||||
Income from life operations before taxes |
3 | 1 | 5 | 0 | ||||||||||||||||
Investment operations |
||||||||||||||||||||
Investment income, net of expenses |
9 | 9 | 18 | 22 | ||||||||||||||||
Net realized (losses) gains on investments |
(3 | ) | 4 | 2 | 0 | |||||||||||||||
Impairment losses recognized in earnings |
(1 | ) | (2 | ) | (1 | ) | (7 | ) | ||||||||||||
Equity in earnings (losses) of limited partnerships |
6 | (27 | ) | 6 | (55 | ) | ||||||||||||||
Total investment income (loss) before taxes |
11 | (16 | ) | 25 | (40 | ) | ||||||||||||||
Income from operations before income taxes and
noncontrolling interests |
74 | 47 | 141 | 61 | ||||||||||||||||
Provision for income taxes |
25 | 14 | 45 | 17 | ||||||||||||||||
Net income |
$ | 49 | $ | 33 | $ | 96 | $ | 44 | ||||||||||||
Indemnitys components of direct cash flows as presented in the Consolidated Statements of
Cash Flows is as follows for the six months ended June 30:
Direct method of cash flows | ||||||||
Indemnity | ||||||||
(in millions) | 2010 | 2009 | ||||||
Management fee received |
$ | 467 | $ | 453 | ||||
Service agreement fee received |
17 | 17 | ||||||
Premiums collected |
109 | 105 | ||||||
Net investment income received |
23 | 23 | ||||||
Limited partnership distributions |
7 | 7 | ||||||
(Decrease) increase in reimbursements collected from affiliates |
(11 | ) | 12 | |||||
Commissions and bonuses paid to agents |
(290 | ) | (300 | ) | ||||
Salaries and wages paid |
(56 | ) | (58 | ) | ||||
Pension contribution and employee benefits paid |
(20 | ) | (11 | ) | ||||
Losses paid |
(67 | ) | (63 | ) | ||||
Loss expenses paid |
(11 | ) | (11 | ) | ||||
Other underwriting and acquisition costs paid |
(30 | ) | (30 | ) | ||||
General operating expenses paid |
(59 | ) | (54 | ) | ||||
Income taxes paid |
(37 | ) | (45 | ) | ||||
Net cash provided by operating activities |
42 | 45 | ||||||
Net cash used in investing activities |
(17 | ) | (33 | ) | ||||
Net cash used in financing activities |
(67 | ) | (47 | ) | ||||
Net decrease in cash |
(42 | ) | (35 | ) | ||||
Cash and
cash equivalents at beginning of period |
76 | 61 | ||||||
Cash and cash equivalents at end of period |
$ | 34 | $ | 26 | ||||
39
Table of Contents
Note 15. EFL Supplemental Information
EFL is a Pennsylvania-domiciled life insurance company operating in 10 states and the District of
Columbia. Indemnity owns 21.6% of EFLs common shares outstanding and accounts for its ownership
interest using the equity method of accounting.
The following presents condensed financial information for EFL on a U.S. GAAP basis:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
(in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Policy and other revenues |
$ | 16 | $ | 19 | $ | 32 | $ | 35 | ||||||||
Net investment income |
25 | 20 | 52 | 26 | ||||||||||||
Benefits and expenses |
30 | 33 | 63 | 61 | ||||||||||||
Income (loss) before income
taxes |
11 | 6 | 21 | 0 | ||||||||||||
Income tax expense (benefit) |
4 | (5 | ) | 3 | (2 | ) | ||||||||||
Net income |
7 | 11 | 18 | 2 | ||||||||||||
Comprehensive income |
20 | 74 | 44 | 76 | ||||||||||||
EFL recorded impairment charges of $2 million in the second quarter of 2010 compared to $1 million
in the second quarter of 2009. Realized gains on investments totaled $3 million in 2010 compared to
gains of less than $100 thousand recorded in the second quarter of 2009. Equity in earnings of
limited partnerships improved by $2 million in the second quarter of 2010 compared to the second
quarter of 2009.
Net income in the second quarter of 2009 was positively impacted by a reduction in the deferred tax
valuation allowance of $7 million. As a result of improved market conditions, the valuation
allowance was reduced by $4 million to $0 in the first quarter of 2010 and remains at $0 at June
30, 2010.
EFL experienced unrealized gains, after tax of $12 million in the second quarter of 2010 which
contributed to the change in comprehensive income. Comprehensive income for the second quarter of
2009 included unrealized gains after tax of $63 million.
For the six months ended June 30, 2010, net investment income increased $27 million over the six
months ended June 30, 2009 as a result of a $10 million increase in realized gains, a $13 million
decrease in impairment losses and a $4 million decrease in equity in losses of limited
partnerships.
At June 30, | At December 31, | |||||||
(in millions, except per share data) | 2010 | 2009 | ||||||
Investments |
$ | 1,762 | $ | 1,639 | ||||
Total assets |
2,036 | 1,941 | ||||||
Liabilities |
1,660 | 1,609 | ||||||
Accumulated other comprehensive income |
43 | 18 | ||||||
Cumulative effect adjustment |
| 27 | ||||||
Total shareholders equity |
376 | 333 | ||||||
Book value per share |
$ | 39.81 | $ | 35.19 |
EFL shareholders equity increased $44 million at June 30, 2010 compared to December 31, 2009. The
main factors driving this increase were $25 million in unrealized gains, net of tax and net income
of $18 million.
In 2009, Indemnity made a $12 million capital contribution to EFL and the Exchange made a $43
million capital contribution to EFL to strengthen its surplus. The $55 million in capital
contributions increased EFLs investments and total shareholders equity. Also in 2009, a required
cumulative effect adjustment reclassified previously recognized non-credit other-than-temporary
impairments of $27 million out of retained earnings. Deferred taxes of $9 million related to this
cumulative effect adjustment were offset by a reduction in the valuation allowance in the same
amount related to previously recognized impairments.
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Note 16. Capital Stock
Stock repurchase plan
In April 2010, our Board of Directors approved a
continuation of the current stock repurchase program through June 30,
2011 for a total of $100 million.
Note 17. Subsequent Events
We have evaluated for recognized and nonrecognized subsequent events through the date of financial
statement issuance. No items were identified in this period subsequent to the financial statement
date that required adjustment or disclosure.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On June 12, 2009, the Financial Accounting Standards Board (FASB) updated ASC 810, Consolidation,
which amended the existing guidance for determining whether an enterprise is the primary
beneficiary of a variable interest entity (VIE). As of January 1, 2010 Erie Indemnity Company
(Indemnity) adopted the new accounting principle on a retrospective basis since inception.
The following discussion of financial condition and results of operations highlights significant
factors influencing Erie Insurance Group (we, us, our). This discussion should be read in
conjunction with the historical financial information and the related notes thereto included in
Item 1. Financial Statements of this Quarterly Report on Form 10-Q and with Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations for the year ended
December 31, 2009 contained in our Form 8-K as filed with the Securities and Exchange Commission on
May 6, 2010.
INDEX
Page Number | ||||
Cautionary statement regarding forward-looking information |
42 | |||
Recent accounting pronouncements |
43 | |||
Operating review |
44 | |||
Results of operations |
50 | |||
Management operations |
50 | |||
Property and casualty insurance operations |
52 | |||
Life insurance operations |
56 | |||
Investment operations |
57 | |||
Financial condition |
59 | |||
Investments |
59 | |||
Liabilities |
63 | |||
Impact of inflation |
64 | |||
Liquidity and capital resources |
65 | |||
Critical accounting estimates |
67 |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
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, may, 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 underwriting, premium and investment income volumes, expenses 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 and 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 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; |
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| 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; | ||
| Indemnitys dependence on its relationship with 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 2009 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 Erie
Insurance Groups analysis only as of that date. The Erie Insurance Group 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.
RECENT ACCOUNTING PRONOUNCEMENTS
Indemnity adopted amended guidance related to the consolidation of affiliated entities that became
effective January 1, 2010 as required under generally accepted accounting principles (GAAP). As a
result of this new guidance, Indemnity is considered to have a controlling financial interest in
its affiliated entity, the Erie Insurance Exchange (Exchange). Indemnity is named as, and serves
as, the Exchanges attorney-in-fact. Consolidation of the Exchange is required given the
significance of the management fee to the Exchange and because Indemnity has the power to direct
the activities of the Exchange that most significantly impact the Exchanges economic performance.
The consolidation of the Exchange resulted in no change to Indemnitys net income or equity. The
Exchanges net income and equity is identified as the noncontrolling interest net income or
equity.
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OPERATING REVIEW
Overview
Erie Insurance Group represents the consolidated results of Indemnity and the results of its VIE,
the Exchange. The Erie Insurance Group operates as a property and casualty insurer through its
regional insurance carriers that write a broad line of personal and commercial lines coverages. The
property and casualty insurance companies include the Exchange, a consolidated affiliate and its
property and casualty insurance subsidiary, Flagship City Insurance Company (Flagship), and
Indemnitys three wholly-owned property and casualty insurance subsidiaries, Erie Insurance Company
(EIC), Erie Insurance Property and Casualty Company (EPC) and Erie Insurance Company of New
York (ENY). These entities operate collectively as the Property and Casualty Group. The Erie
Insurance Group also operates as a life insurer through its affiliate, Erie Family Life Insurance
Company (EFL), which is owned 21.6% by Indemnity and 78.4% by the Exchange. EFL underwrites and
sells nonparticipating individual and group life insurance policies and fixed annuities.
The Exchange is a reciprocal insurance exchange, which is an unincorporated association of
individuals, partnerships and corporations that agree to insure one another. Each applicant for
insurance to the Exchange signs a subscribers agreement, which contains an appointment of
Indemnity as their attorney-in-fact to transact the business of the Exchange on their behalf. As
attorney-in-fact, Indemnity is required to perform certain services relating to the sales,
underwriting and issuance of policies on behalf of the Exchange. The Exchange is a VIE.
The Exchanges equity, which is comprised of its retained earnings and accumulated other
comprehensive income, is held for the benefit of its subscribers (policyholders) and meets the
definition of a noncontrolling interest and is reflected as such in our consolidated financial
statements. Indemnity shareholders benefit from their interest in Indemnitys income and equity but
not in the noncontrolling interests income or equity.
Generally, Indemnity shareholders interest in income comprises:
| a 25% management fee on all property and casualty insurance policies written, less the costs associated with the sales, underwriting and issuance of these policies, | ||
| a 5.5% interest in the net underwriting results of the property and casualty lines operations, | ||
| a 21.6% equity interest in the net earnings of EFL, | ||
| net investment income and results on investments that do not belong to the Exchange or its subsidiaries, and | ||
| other income and expenses, including income taxes, that are not the responsibility of the Exchange or its subsidiaries. |
Generally, the noncontrolling interests income comprises:
| a 94.5% interest in the net underwriting results of the property and casualty lines operations, | ||
| a 78.4% equity interest in the net earnings of EFL, | ||
| net investment income and related results on investments that belong to the Exchange and its subsidiaries, and | ||
| other income and expenses, including income taxes, that are the responsibility of the Exchange and its subsidiaries. |
Indemnity shareholder interest refers to the interest in Indemnity owned by the Class A and Class
B shareholders. Exchange refers to the noncontrolling interest held for the benefit of the
subscribers (policyholders) and includes its interests in Flagship and EFL.
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The following tables represent a breakdown of the composition of the income attributable to
Indemnity and the income attributable to the noncontrolling interest (Exchange) for the three and
six months ended June 30, 2010. For purposes of this discussion, EFLs investments are included in
the life insurance operations.
Results of the Erie Insurance Groups operations by interest (unaudited)
Eliminations of | ||||||||||||||||||||||||||||||||||||||||
Indemnity shareholder | Noncontrolling interest | related party | ||||||||||||||||||||||||||||||||||||||
interest | (Exchange) | transactions | Erie Insurance Group | |||||||||||||||||||||||||||||||||||||
Three months | ||||||||||||||||||||||||||||||||||||||||
ended | Three months ended | Three months ended | Three months ended | |||||||||||||||||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||||||||||||||||||
(in millions) | Percent | 2010 | 2009 | Percent | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||||||||
Management operations |
||||||||||||||||||||||||||||||||||||||||
Management fee revenue, net |
100.0 | % | $ | 270 | $ | 259 | $ | | $ | | $ | (270 | ) | $ | (259 | ) | $ | | $ | | ||||||||||||||||||||
Service agreement revenue |
100.0 | % | 9 | 9 | | | | | 9 | 9 | ||||||||||||||||||||||||||||||
Total revenue from management
operations |
279 | 268 | | | (270 | ) | (259 | ) | 9 | 9 | ||||||||||||||||||||||||||||||
Cost of management operations |
100.0 | % | 217 | 208 | | | (217 | ) | (208 | ) | | | ||||||||||||||||||||||||||||
Income from management operations
before taxes |
62 | 60 | | | (53 | ) | (51 | ) | 9 | 9 | ||||||||||||||||||||||||||||||
Property and casualty operations |
||||||||||||||||||||||||||||||||||||||||
Premiums earned |
5.5 | % | 53 | 52 | 94.5 | % | 921 | 895 | | | 974 | 947 | ||||||||||||||||||||||||||||
Losses and loss expenses |
5.5 | % | 40 | 35 | 94.5 | % | 677 | 603 | (2 | ) | (2 | ) | 715 | 636 | ||||||||||||||||||||||||||
Underwriting expenses |
5.5 | % | 15 | 15 | 94.5 | % | 261 | 259 | (54 | ) | (52 | ) | 222 | 222 | ||||||||||||||||||||||||||
(Loss) income from property and
casualty operations before taxes |
(2 | ) | 2 | (17 | ) | 33 | 56 | 54 | 37 | 89 | ||||||||||||||||||||||||||||||
Life insurance operations (1) |
||||||||||||||||||||||||||||||||||||||||
Total revenue |
21.6 | % | 9 | 8 | 78.4 | % | 32 | 31 | (1 | ) | (1 | ) | 40 | 38 | ||||||||||||||||||||||||||
Total benefits and expenses |
21.6 | % | 6 | 7 | 78.4 | % | 24 | 26 | 0 | 0 | 30 | 33 | ||||||||||||||||||||||||||||
Income from life operations before
taxes |
3 | 1 | 8 | 5 | (1 | ) | (1 | ) | 10 | 5 | ||||||||||||||||||||||||||||||
Investment operations |
||||||||||||||||||||||||||||||||||||||||
Investment income, net of expenses |
9 | 9 | 78 | 75 | (2 | ) | (2 | ) | 85 | 82 | ||||||||||||||||||||||||||||||
Net realized (losses) gains on
investments |
(3 | ) | 4 | (213 | ) | 203 | | | (216 | ) | 207 | |||||||||||||||||||||||||||||
Impairment losses recognized in
earnings |
(1 | ) | (2 | ) | (1 | ) | (8 | ) | | | (2 | ) | (10 | ) | ||||||||||||||||||||||||||
Equity in earnings (losses) of limited
partnerships |
6 | (27 | ) | 20 | (97 | ) | | | 26 | (124 | ) | |||||||||||||||||||||||||||||
Total investment income (loss)
before taxes |
11 | (16 | ) | (116 | ) | 173 | (2 | ) | (2 | ) | (107 | ) | 155 | |||||||||||||||||||||||||||
Income (loss) from operations before
income taxes and noncontrolling
interests |
74 | 47 | (125 | ) | 211 | | | (51 | ) | 258 | ||||||||||||||||||||||||||||||
Provision for income taxes |
25 | 14 | (45 | ) | (27 | ) | | | (20 | ) | (13 | ) | ||||||||||||||||||||||||||||
Net income (loss) |
$ | 49 | $ | 33 | $ | (80 | ) | $ | 238 | $ | | $ | | $ | (31 | ) | $ | 271 | ||||||||||||||||||||||
(1) | Earnings on life insurance-related invested assets are integral to the evaluation of the life insurance operations because of the long duration of life products. On that basis, for presentation purposes, the life insurance operations in the table above include life insurance related investment results. However, the life insurance investment results are included in the investment operations segment discussion as part of the Exchanges investment results. |
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Results of the Erie Insurance Groups operations by interest (unaudited)
Eliminations of | ||||||||||||||||||||||||||||||||||||||||
Indemnity shareholder | Noncontrolling interest | related party | ||||||||||||||||||||||||||||||||||||||
interest | (Exchange) | transactions | Erie Insurance Group | |||||||||||||||||||||||||||||||||||||
Six months | ||||||||||||||||||||||||||||||||||||||||
ended | Six months ended | Six months ended | Six months ended | |||||||||||||||||||||||||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||||||||||||||||||||||||||
(in millions) | Percent | 2010 | 2009 | Percent | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||||||||
Management operations |
||||||||||||||||||||||||||||||||||||||||
Management fee revenue, net |
100.0 | % | $ | 507 | $ | 489 | $ | | $ | | $ | (507 | ) | $ | (489 | ) | $ | | $ | | ||||||||||||||||||||
Service agreement revenue |
100.0 | % | 17 | 17 | | | | | 17 | 17 | ||||||||||||||||||||||||||||||
Total revenue from management
operations |
524 | 506 | | | (507 | ) | (489 | ) | 17 | 17 | ||||||||||||||||||||||||||||||
Cost of management operations |
100.0 | % | 409 | 401 | | | (409 | ) | (401 | ) | | | ||||||||||||||||||||||||||||
Income from management operations
before taxes |
115 | 105 | | | (98 | ) | (88 | ) | 17 | 17 | ||||||||||||||||||||||||||||||
Property and casualty operations |
||||||||||||||||||||||||||||||||||||||||
Premiums earned |
5.5 | % | 106 | 104 | 94.5 | % | 1,830 | 1,784 | | | 1,936 | 1,888 | ||||||||||||||||||||||||||||
Losses and loss expenses |
5.5 | % | 80 | 78 | 94.5 | % | 1,375 | 1,342 | (3 | ) | (3 | ) | 1,452 | 1,417 | ||||||||||||||||||||||||||
Underwriting expenses |
5.5 | % | 30 | 30 | 94.5 | % | 511 | 509 | (100 | ) | (90 | ) | 441 | 449 | ||||||||||||||||||||||||||
(Loss) Income from property and
casualty operations before taxes |
(4 | ) | (4 | ) | (56 | ) | (67 | ) | 103 | 93 | 43 | 22 | ||||||||||||||||||||||||||||
Life insurance operations(1) |
||||||||||||||||||||||||||||||||||||||||
Total revenue |
21.6 | % | 18 | 13 | 78.4 | % | 66 | 48 | (1 | ) | (1 | ) | 83 | 60 | ||||||||||||||||||||||||||
Total benefits and expenses |
21.6 | % | 13 | 13 | 78.4 | % | 50 | 48 | (1 | ) | (1 | ) | 62 | 60 | ||||||||||||||||||||||||||
Income from life operations before
taxes |
5 | 0 | 16 | 0 | 0 | 0 | 21 | 0 | ||||||||||||||||||||||||||||||||
Investment operations |
||||||||||||||||||||||||||||||||||||||||
Investment income, net of expenses |
18 | 22 | 153 | 158 | (5 | ) | (5 | ) | 166 | 175 | ||||||||||||||||||||||||||||||
Net realized gains (losses) on
investments |
2 | 0 | (98 | ) | 54 | | | (96 | ) | 54 | ||||||||||||||||||||||||||||||
Impairment losses recognized in
earnings |
(1 | ) | (7 | ) | (3 | ) | (61 | ) | | | (4 | ) | (68 | ) | ||||||||||||||||||||||||||
Equity in earnings (losses) of limited
partnerships |
6 | (55 | ) | 24 | (227 | ) | | | 30 | (282 | ) | |||||||||||||||||||||||||||||
Total investment income (loss)
before taxes |
25 | (40 | ) | 76 | (76 | ) | (5 | ) | (5 | ) | 96 | (121 | ) | |||||||||||||||||||||||||||
Income (loss) from operations before
income taxes and noncontrolling
interests |
141 | 61 | 36 | (143 | ) | | | 177 | (82 | ) | ||||||||||||||||||||||||||||||
Provision for income taxes |
45 | 17 | 1 | (119 | ) | | | 46 | (102 | ) | ||||||||||||||||||||||||||||||
Net income (loss) |
$ | 96 | $ | 44 | $ | 35 | $ | (24 | ) | $ | | $ | | $ | 131 | $ | 20 | |||||||||||||||||||||||
(1) | Earnings on life insurance-related invested assets are integral to the evaluation of the life insurance operations because of the long duration of life products. On that basis, for presentation purposes, the life insurance operations in the table above include life insurance related investment results. However, the life insurance investment results are included in the investment operations segment discussion as part of the Exchanges investment results. |
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Reconciliation of operating income to net income
We believe that investors understanding of our performance related to the Indemnity shareholder
interest is enhanced by the disclosure of the following non-GAAP financial measure. Our method of
calculating this measure may differ from those used by other companies and therefore comparability
may be limited.
Operating income is net income excluding realized capital gains and losses, impairment losses and
related federal income taxes. Our common stock portfolio is measured at fair value. As such,
changes in fair value related to common stocks are reported in earnings. These unrealized gains or
losses are included in the net realized gains and losses on investments in our Consolidated
Statements of Operations that is used to calculate operating income. Equity in earnings or losses
of EFL and equity in earnings or losses of limited partnerships are included in the calculation of
operating income. Equity in earnings or losses of limited partnerships includes the respective
investments realized capital gains and losses, as well as unrealized gains and losses.
Net income is the generally accepted accounting principle (GAAP) measure that is most directly
comparable to operating income. We use operating income to evaluate the results of operations. It
reveals trends in our management services, insurance underwriting and investment operations that
may be obscured by the net effects of realized capital gains and losses including impairment
losses. Realized capital gains and losses, including impairment losses, may vary significantly
between periods and are generally driven by business decisions and economic developments such as
capital market conditions, the timing of which is unrelated to our management services and
insurance underwriting processes. We believe it is useful for investors to evaluate these
components separately and in the aggregate when reviewing our performance. We are aware that the
price to earnings multiple commonly used by investors as a forward-looking valuation technique uses
operating income as the denominator. Operating income should not be considered as a substitute for
net income and does not reflect our overall profitability.
The following table reconciles operating income and net income for Indemnity shareholder interest:
Indemnity Shareholder Interest | ||||||||||||||||
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(in millions, except per share data) | (Unaudited) | (Unaudited) | ||||||||||||||
Operating income attributable to Indemnity |
$ | 51 | $ | 32 | $ | 95 | $ | 49 | ||||||||
Net realized (losses) gains and impairments on investments |
(4 | ) | 2 | 1 | (7 | ) | ||||||||||
Income tax
benefit (expense) |
2 | (1 | ) | 0 | 2 | |||||||||||
Realized (losses) gains and impairments, net of income
taxes |
(2 | ) | 1 | 1 | (5 | ) | ||||||||||
Net income attributable to Indemnity |
$ | 49 | $ | 33 | $ | 96 | $ | 44 | ||||||||
Per Indemnity Class A common share-diluted: |
||||||||||||||||
Operating income attributable to Indemnity |
$ | 0.89 | $ | 0.56 | $ | 1.66 | $ | 0.85 | ||||||||
Net realized (losses) gains and impairments on investments |
(0.07 | ) | 0.02 | 0.02 | (0.13 | ) | ||||||||||
Income tax
benefit (expense) |
0.04 | (0.01 | ) | 0.00 | 0.04 | |||||||||||
Realized (losses) gains and impairments, net of income
taxes |
(0.03 | ) | 0.01 | 0.02 | (0.09 | ) | ||||||||||
Net income attributable to Indemnity |
$ | 0.86 | $ | 0.57 | $ | 1.68 | $ | 0.76 | ||||||||
The increase in operating income was primarily the result of Indemnitys limited partnerships
investments generating earnings of $6 million in the second quarter of 2010 compared to generating
losses of $27 million in the second quarter of 2009. For the six months ended June 30, 2010,
limited partnership earnings totaled $6 million compared to limited partnership losses of $55
million recorded for the same period in 2009.
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Operating Segments
As a result of the changes in our reporting entity at January 1, 2010 (see Note 2), our reportable
segments have increased from three to four. Our reportable segments include management operations,
property and casualty insurance operations, life insurance operations and investment operations.
The segment information presented below includes reclassification of all comparative prior period
segment information.
Management operations
Management operations generate internal fee revenue by providing services to the Exchange.
Management fee revenue is based upon the management fee rate, determined by our Board of Directors,
and the direct written premiums of the Property and Casualty Group.
Property and casualty insurance operations
The property and casualty insurance industry is highly cyclical, with periods of rising premium
rates and shortages of underwriting capacity followed by periods of substantial price competition
and excess capacity. The cyclical nature of the insurance industry has a direct impact on the
direct written premiums of the Property and Casualty Group. The Property and Casualty Groups
economically sensitive lines, such as workers compensation and commercial auto, continue to
experience reduced exposures and reduced average premium per policy due to economic conditions.
Industry premium exposures in property and casualty lines were suppressed in 2009, with premium
rates for personal lines showing signs of firming and most commercial lines reflecting rate
reductions.
The property and casualty insurance business is driven by premium growth, the combined ratio and
investment returns. The property and casualty operations premium growth strategy focuses on growth
by expansion of existing operations including a careful agency selection process and increased
market penetration in existing operating territories. Expanding the size of our existing agency
force of over 2,000 independent agencies will contribute to future growth as new agents build up
their books of business with the Property and Casualty Group. The Property and Casualty Group
appointed 57 new agencies through the six months ended June 30, 2010. In 2009, we appointed 120 new
agencies and plan to appoint a similar number during 2010.
The property and casualty insurance operations insure standard and preferred risks while adhering
to a set of consistent underwriting standards. Nearly 50% of premiums are derived from personal
auto, 20% from homeowners and 30% from commercial lines. Pennsylvania, Maryland and Virginia made
up 64% of the property and casualty lines insurance business based on 2009 direct written premium.
As a result of the intercompany pooling arrangement, Indemnity retains a 5.5% interest in the net
underwriting results of the Property and Casualty Group. The Exchange retains 94.5% of the net
underwriting results of the Property and Casualty Group.
The combined ratio, expressed as a percentage, is the key measure of underwriting profitability
traditionally used in the property and casualty insurance industry. It is the sum of the ratio of
losses and loss expenses to premiums earned (loss ratio) plus the ratio of policy acquisition and
other underwriting expenses to premiums earned (expense ratio). When the combined ratio is less
than 100%, underwriting results are generally considered profitable; when the combined ratio is
greater than 100%, underwriting results are generally considered unprofitable.
Factors affecting loss and loss expenses include the frequency and severity of losses, the nature
and severity of catastrophic losses, the quality of risks underwritten and underlying claims and
settlement expenses related to medical costs and litigation.
Investments held by the Property and Casualty Group are reported in the investment operations
segment, separate from the underwriting business.
Life insurance operations
EFL generates revenues through sales of its individual and group life insurance policies and fixed
individual and group annuities. These products provide our property and casualty agency force an
opportunity to cross-sell both personal and commercial accounts. EFLs profitability depends
principally on the ability to develop, price and distribute insurance products, attract and retain
deposit funds, generate investment returns and manage expenses. Other drivers include mortality and
morbidity experience, persistency experience to enable the recovery of acquisition costs,
maintaining interest spreads over the amounts credited to deposit funds and the maintenance of
strong ratings from rating agencies.
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Earnings on life insurance-related invested assets are integral to the evaluation of the life
insurance operations because of the long duration of life products. On that basis, for presentation
purposes in the Managements Discussion and Analysis, the life insurance operations include life
insurance related investment results. However, for presentation purposes in the segment footnote,
the life insurance investment results are included in the investment operations segment discussion
as part of the Exchanges investment results.
Investment operations
We generate revenues from our fixed maturity, equity security and alternative investment
portfolios. The portfolios are managed with a view toward maximizing after-tax returns on a
risk-adjusted basis. Management actively evaluates the portfolios for impairments. We record
impairment writedowns on investments in circumstances where the fair value of the investment is
substantially below cost, and we conclude that the decline in fair value is other-than-temporary.
Our investment operations reflect the improvement experienced in the financial markets. During the
second quarter 2010, we impaired $4 million of securities compared to $11 million in the second
quarter 2009.
Our alternative investments benefited from improving financial market conditions in the fourth
quarter of 2009 and the first quarter of 2010. In particular, the improvement in the private
equity and mezzanine debt markets had a positive impact on our limited partnership portfolio.
Equity in earnings of limited partnerships was $31 million through June 30, 2010 compared to losses
of $287 million through June 30, 2009. The valuation adjustments in the limited partnerships are
based on financial statements received from our general partners, which are generally received on a
quarter lag. As a result, the second quarter partnership earnings do not reflect the valuation
changes from the second quarter of 2010.
General conditions and trends affecting our business
Financial conditions
Unfavorable changes in economic conditions, including declining consumer confidence, inflation,
unemployment, recession or other changes, may lead the Property and Casualty Groups customers to
cancel insurance policies, modify coverage or not renew policies. Our key challenge is to generate
profitable revenue growth in a highly competitive market that is currently experiencing the effects
of these economic conditions.
Market volatility
Our portfolio of fixed income, preferred and common stocks and limited partnerships is subject to
market volatility. Depending upon market conditions, this could cause considerable fluctuation in
reported total investment income.
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Table of Contents
RESULTS OF OPERATIONS
The information below is presented on a segment basis prior to eliminations.
Management operations
Management fee
revenue earned by Indemnity from services provided to the Exchange is eliminated upon
consolidation.
Erie Insurance Group | |||||||||||||||||||||||||
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||||
2010 | 2009 | % Change | 2010 | 2009 | % Change | ||||||||||||||||||||
(in millions) | (Unaudited) | (Unaudited) | |||||||||||||||||||||||
Management fee revenue |
$ | 270 | $ | 259 | 4.3 | % | $ | 507 | $ | 489 | 3.6 | % | |||||||||||||
Service agreement revenue |
9 | 9 | (1.6 | ) | 17 | 17 | (1.6 | ) | |||||||||||||||||
Total revenue from management operations |
279 | 268 | 4.1 | 524 | 506 | 3.5 | |||||||||||||||||||
Cost of management operations |
217 | 208 | 4.7 | 409 | 401 | 2.0 | |||||||||||||||||||
Income from management operations Indemnity (1) |
$ | 62 | $ | 60 | 2.0 | % | $ | 115 | $ | 105 | 9.1 | % | |||||||||||||
Gross margin |
22.0 | % | 22.5 | % | (0.5 | ) pts. | 21.9 | % | 20.8 | % | 1.1 | pts. | |||||||||||||
(1) | Indemnity retains 100% of the income from management operations. |
Management fee revenue
The following table presents the direct written premium of the Property and Casualty Group and the
calculation of the management fee revenue.
Erie Insurance Group | ||||||||||||||||||||||||
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
2010 | 2009 | % Change | 2010 | 2009 | % Change | |||||||||||||||||||
(dollars in millions) | (Unaudited) | (Unaudited) | ||||||||||||||||||||||
Property and Casualty Group direct
written premiums |
$ | 1,088 | $ | 1,044 | 4.1 | % | $ | 2,036 | $ | 1,965 | 3.6 | % | ||||||||||||
Management fee rate |
25.00 | % | 25.00 | % | 25.00 | % | 25.00 | % | ||||||||||||||||
Management fee revenue, gross |
$ | 271 | $ | 260 | 4.1 | % | $ | 509 | $ | 491 | 3.6 | % | ||||||||||||
Change in allowance for management fee
returned on cancelled
policies(1) |
(1 | ) | (1 | ) | NM | (2 | ) | (2 | ) | NM | ||||||||||||||
Management fee revenue, net of allowance |
$ | 270 | $ | 259 | 4.3 | % | $ | 507 | $ | 489 | 3.6 | % | ||||||||||||
NM | = not meaningful | |||
(1) | 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. |
Management fee revenue is based upon the management fee rate, determined by our Board of
Directors, and the direct written premiums of the Property and Casualty Group. Changes in the
management fee rate can affect the segments revenue and net income significantly. The management
fee rate was set at 25%, the maximum rate, for both 2010 and 2009.
Direct written premiums of the Property and Casualty Group increased 4.1% in the second quarter of
2010, compared to the second quarter of 2009, due to an increase in
policies in force of 3.5%. The year-over-year average premium per
policy improved from a decrease of 2.5% at June 30, 2009, to a
decrease of 0.5% at June 30, 2010. The policy retention ratio was 90.5% at June 30,
2010, compared to 90.6% at December 31, 2009, and 90.8% at June 30, 2009. See the segment
discussion of Property and casualty insurance operations for a complete discussion of property
and casualty premiums.
Service agreement revenue
Service agreement revenue includes service charges Indemnity collects from policyholders for
providing extended payment terms on policies written by the Property and Casualty Group and late
payment and policy reinstatement fees. The service charges are fixed dollar amounts per billed
installment. Service agreement revenue totaled $9 million in both second quarters of 2010 and 2009.
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Table of Contents
Cost of management operations
Erie Insurance Group | ||||||||||||||||||||||||
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
2010 | 2009 | % Change | 2010 | 2009 | % Change | |||||||||||||||||||
(in millions) | (Unaudited) | (Unaudited) | ||||||||||||||||||||||
Commissions |
$ | 149 | $ | 143 | 3.5 | % | $ | 277 | $ | 273 | 1.6 | % | ||||||||||||
Non-commission expense |
68 | 65 | 7.3 | 132 | 128 | 2.8 | ||||||||||||||||||
Total cost of management operations |
$ | 217 | $ | 208 | 4.7 | % | $ | 409 | $ | 401 | 2.0 | % | ||||||||||||
Scheduled rate commissions increased $6 million in the second quarter of 2010 and $10 million for
the six months ended June 30, 2010, compared to the same periods in 2009, impacted by the 4.1% and
3.6%, respectively, increase in direct written premiums of the Property and Casualty Group.
Offsetting this increase was a slight decrease in agent bonuses in the second quarter of 2010 and a
$5 million decrease for the six months ended June 30, 2010.
Non-commission expense increased $3 million in the second quarter of 2010 compared to the second
quarter of 2009, primarily due a $3 million increase in personnel costs, the second largest
component in the cost of management operations, as a result of higher average pay rates and an
increase in management incentive plan expense.
For the
six months ended June 30, 2010, non-commission expense increased
$3 million. Driving this increase is a $3 million increase in
software costs related to various technology initiatives and a $3 million
increase in personnel costs, as salaries and wages were impacted by
higher average pay rates and staffing levels offset by a $5 million
reduction for a favorable ruling related to an outstanding judgment
against us.
The gross margin of 21.9% for the six months ended June 30, 2010, was positively impacted by a $5
million reduction for a favorable court ruling. Excluding this adjustment, the gross margin would
have been 21.0%, compared to 20.8% for the first six months of 2009. The improved gross margin in
the first half of 2010 resulted from revenue growth slightly outpacing expense growth compared to
the first half of 2009.
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Table of Contents
Property and casualty insurance operations
A summary of the results of operations of our property and casualty insurance business is as
follows:
Property and Casualty Group | ||||||||||||||||||||||||
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
2010 | 2009 | % Change | 2010 | 2009 | % Change | |||||||||||||||||||
(dollars in millions) | (unaudited) | (unaudited) | ||||||||||||||||||||||
Direct written premium |
$ | 1,088 | $ | 1,044 | 4.1 | % | $ | 2,036 | $ | 1,965 | 3.6 | % | ||||||||||||
Reinsurance assumed and ceded |
(4 | ) | 1 | NM | (6 | ) | 2 | NM | ||||||||||||||||
Net written premium |
1,084 | 1,045 | 3.6 | 2,030 | 1,967 | 3.1 | ||||||||||||||||||
Change in unearned premium |
110 | 98 | 11.7 | 94 | 79 | 18.3 | ||||||||||||||||||
Net premiums earned |
974 | 947 | 2.7 | 1,936 | 1,888 | 2.5 | ||||||||||||||||||
Losses and loss expenses |
717 | 638 | 12.4 | 1,455 | 1,420 | 2.5 | ||||||||||||||||||
Policy acquisition and other underwriting expenses |
276 | 274 | 0.1 | 541 | 539 | 0.2 | ||||||||||||||||||
Total losses and expenses |
993 | 912 | 8.7 | 1,996 | 1,959 | 1.8 | ||||||||||||||||||
Underwriting income (loss) Erie Insurance Group |
$ | (19 | ) | $ | 35 | NM | $ | (60 | ) | $ | (71 | ) | 15.3 | % | ||||||||||
Underwriting income (loss) Indemnity |
$ | (2 | ) | $ | 2 | $ | (4 | ) | $ | (4 | ) | |||||||||||||
Underwriting income (loss) Exchange |
$ | (17 | ) | $ | 33 | $ | (56 | ) | $ | (67 | ) | |||||||||||||
Loss and loss expense ratio |
73.7 | % | 67.3 | % | 6.4 | pts. | 75.2 | % | 75.2 | % | 0.0 | pts. | ||||||||||||
Policy acquisition and other underwriting expense ratio |
28.1 | 29.3 | (1.2 | ) | 28.0 | 28.7 | (0.7 | ) | ||||||||||||||||
Combined ratio |
101.8 | % | 96.6 | % | 5.2 | pts. | 103.2 | % | 103.9 | % | (0.7 | )pts. | ||||||||||||
NM = not meaningful |
We measure profit or loss for our property and casualty segment based upon underwriting
results, which represent net earned premium less loss and loss expenses and underwriting expenses
on a pre-tax basis. Loss and combined ratios are key performance indicators that we use to assess
business trends and to make comparisons to industry results. Investment results of our property and
casualty insurance company subsidiaries are included in our investment operations segment.
Direct written premiums
Direct written premiums of the Property and Casualty Group increased 4.1% to nearly $1.1 billion in
the second quarter of 2010 compared to the second quarter of 2009
primarily driven by an increase in policies in force.
Premiums generated from new business increased 6.5% in the second quarter of 2010, compared to 2.9%
in the second quarter of 2009. Underlying the trend in new business premiums was an increase in new
business policies in force of 6.9% in the second quarter of 2010, and 6.1% in the second quarter of
2009, while year-over-year average premiums per policy on new business decreased 0.1% at June 30,
2010, and 2.2% at June 30, 2009.
Premiums generated from renewal business increased 3.9% in the second quarter of 2010, compared to
1.2% in the second quarter of 2009. Renewal policies in force increased 3.0% in both the second
quarters of 2010 and 2009. The year-over-year average premium per policy on renewal business
decreased 0.5% at June 30, 2010, compared to 2.5% at June 30, 2009. The Property and Casualty
Groups year-over-year policy retention ratio was 90.5% at June 30, 2010, compared to 90.6% at
December 31, 2009, and 90.8% at June 30, 2009.
Personal lines Total personal lines premiums written increased 5.5% to $792 million in the
second quarter of 2010, compared to $750 million in the second quarter of 2009. Total personal
lines policies in force increased 3.5% in the second quarter of 2010, and the total personal lines
year-over-year average premium per policy increased 1.3%.
The Property and Casualty Groups personal lines new business premiums written increased 4.7% in
the second quarter of 2010, compared to 7.7% in the second quarter of 2009. Personal lines new
business policies in force increased 6.3% in the second quarter of 2010, compared to 7.7% in the
second quarter of 2009. The year-over-year average premium per policy on personal lines new
business increased 0.6% at June 30, 2010, compared to a decline of 0.3% at June 30, 2009.
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| Private passenger auto new business premiums written increased 3.3% in the second quarter of 2010, compared to 4.5% in the second quarter of 2009. Private passenger auto new business policies in force increased 5.0% in the second quarter of 2010, compared to 9.8% in the second quarter of 2009. The new business year-over-year average premium per policy for private passenger auto increased 1.4% at June 30, 2010, compared to a decrease of 1.6% at June 30, 2009. | ||
| Homeowners new business premiums written increased 9.3% in the second quarter of 2010, compared to 12.6% in the second quarter of 2009, while homeowners new business policies in force increased 9.0% compared to 3.8% in the second quarters of 2010 and 2009, respectively. The new business year-over-year average premium per policy for homeowners increased 1.0% at June 30, 2010, compared to 0.3% at June 30, 2009. |
Renewal premiums written on personal lines increased 5.6% in the second quarter 2010, compared to
3.3% in the second quarter of 2009, driven by a modest increase in average premium per policy and
steady policy retention ratio trends. The year-over-year average premium per policy on personal
lines renewal business increased 1.5% at June 30, 2010, compared to a decline of 1.0% at June 30,
2009. The year-over-year policy retention ratio for personal lines was 91.3% at June 30, 2010,
91.5% at December 31, 2009, and 91.7% at June 30, 2009.
| Private passenger auto renewal premiums written increased 4.9% in the second quarter of 2010 compared to 1.6% in the second quarter of 2009. The year-over-year average premium per policy on private passenger auto renewal business increased 1.1% at June 30, 2010, compared to a decline of 1.0% at June 30, 2009. The private passenger auto year-over-year policy retention ratio remained steady at 91.8% at June 30, 2010, compared to 91.9% at December 31, 2009 and June 30, 2009. | ||
| Homeowners renewal premiums written increased 6.9% in the in the second quarter of 2010, compared to 6.2% in the second quarter of 2009. The year-over-year average premium per policy on homeowners renewal business increased 3.7% at June 30, 2010, compared to 0.4% at June 30, 2009. The homeowners year-over-year policyholder retention ratio was 90.9% at June 30, 2010, 91.2% at December 31, 2009, and 91.6% at June 30, 2009. |
Commercial lines Total commercial lines premiums written increased 0.7% to $296 million in the
second quarter of 2010, compared to $294 million in the second quarter of 2009. Total commercial
lines policies in force increased 3.6% while the total commercial lines year-over-year average
premium per policy decreased 5.2%.
Commercial lines new business premiums written increased 9.9% in the second quarter of 2010,
compared to a decrease of 5.2% in the second quarter of 2009. Commercial lines new business
policies in force increased 9.6% in the second quarter of 2010 compared to a decline of 0.9% in the
second quarter of 2009. The year-over-year average premium per policy on commercial lines new
business decreased 3.0% at June 30, 2010 compared to 2.0% at June 30, 2009, driven by reductions in
exposure as a result of continued economic pressures on commercial customers.
Renewal premiums for commercial lines decreased 0.8% in the second quarter of 2010, compared to a
decrease of 3.9% in the second quarter of 2009. The year-over-year average premium per policy on
commercial lines renewal business declined 5.2% at June 30, 2010, compared to a decline of 6.1% at
June 30, 2009, primarily driven by the workers compensation and commercial auto lines of business
in both years. The workers compensation and commercial auto year-over-year average premium per
policy decreased 13.8% and 3.8%, respectively, at June 30, 2010, compared to declines of 12.8% and
3.9%, respectively, at June 30, 2009. Contributing to the workers compensation lower average
premium per policy were shifts in the mix of our book of business and lower exposures driven by
reductions in payroll levels. The commercial auto average premium per policy decrease was driven by
shifts in the mix of our book of business and fewer insured vehicles. The commercial lines
year-over-year policy retention ratio was 85.2% at June 30, 2010, 84.9% at December 31, 2009, and
85.1% at June 30, 2009.
Future trendspremium revenue We are continuing our efforts to grow Property and Casualty Group
premiums and improve our competitive position in the marketplace. Expanding the size of the agency
force will contribute to future growth as existing and new agents build up their book of business
with the Property and Casualty Group. Through the first six months of 2010, we appointed 57 new
agencies, which increased our total to 2,091 agencies. We expect our pricing actions to result in a
net increase in direct written premium in 2010, however, exposure reductions and changes in our mix
of business could impact the average premium written by the Property and Casualty Group as
customers may continue to reduce coverages.
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Current year losses and loss expenses
The current accident year loss and loss expense ratio, excluding catastrophe losses was 67.9% in
the second quarter of 2010 compared to 66.7% in the second quarter of 2009.
The personal lines loss and loss expense ratio related to the current accident year, excluding
catastrophe losses, was 67.4% in the second quarter of 2010 compared to 67.9% in the second quarter
of 2009. The personal auto loss and loss expense ratio related to the current accident year,
excluding catastrophe losses, decreased to 68.8% in the second quarter of 2010 from 70.1% in the
second quarter of 2009, while the homeowners loss and loss expense ratio decreased to 64.8% from
65.6% for the same periods, respectively.
The commercial lines loss and loss expense ratio related to the current accident year, excluding
catastrophe losses, was 68.3% in the second quarter of 2010 compared to 64.0% in the second quarter
of 2009. Excluding catastrophe losses, the current accident year loss and loss expense ratios for
the second quarters of 2010 and 2009, respectively were 83.3% and 73.2% for the workers
compensation line of business, 67.6% and 57.6% for the commercial multi-peril line of business, and
67.8% and 66.8% for the commercial auto line of business.
Catastrophe losses
Catastrophes are an inherent risk of the property and casualty insurance business and can have a
material impact on our insurance underwriting results. In addressing this risk, we employ what we
believe are reasonable underwriting standards and monitor our exposure by geographic region. The
Property and Casualty Groups definition of catastrophes includes those weather-related or other
loss events which we consider significant to our geographic footprint which, individually or in the
aggregate, may not reach the level of a national catastrophe as defined by the Property Claim
Service (PCS). The Property and Casualty Group maintains sufficient property catastrophe
reinsurance coverage from unaffiliated reinsurers and no longer participates in the voluntary
assumed reinsurance business, which lowers the variability of the underwriting results of the
Property and Casualty Group.
Catastrophe losses, as defined by the Property and Casualty Group, totaled $80 million in the
second quarter of 2010 and $15 million in the second quarter of 2009. These catastrophe losses
contributed 8.1 points and 1.5 points to the combined ratios at June 30, 2010 and 2009,
respectively. Catastrophe losses in the second quarter of 2010 were the result of flooding, hail
and wind storms primarily in the states of Pennsylvania, Maryland and Ohio. In the second quarter
of 2009, catastrophe losses resulted from flooding, wind and rain storms primarily in Indiana and
Illinois. Catastrophe losses incurred for the first half of 2010 and 2009 were $193 million and $87
million, respectively, and contributed 9.9 points and 4.6 points to the combined ratio,
respectively.
Prior year loss development
The following table provides the details of the prior year loss reserve development:
Erie Insurance Group | ||||||||||||||||
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(in millions) | (unaudited) | (unaudited) | ||||||||||||||
Prior year loss development: |
||||||||||||||||
Direct business including salvage and subrogation |
$ | (13 | ) | $ | (2 | ) | $ | (56 | ) | $ | 35 | |||||
Assumed reinsurance business |
(8 | ) | (7 | ) | (11 | ) | (8 | ) | ||||||||
Ceded reinsurance business |
(1 | ) | (1 | ) | (5 | ) | 2 | |||||||||
Total prior year loss development |
$ | (22 | ) | $ | (10 | ) | $ | (72 | ) | $ | 29 | |||||
Negative amounts represent a redundancy (decrease in reserves), while positive amounts
represent a deficiency (increase in reserves).
Development of loss reserves
Direct business including salvage and subrogation Favorable development of prior accident years,
including the effects of salvage and subrogation recoveries totaled $13 million and improved the
combined ratio 1.3 points in the second quarter of 2010, compared to
$2 million, or 0.1 points in the second quarter of 2009. The favorable development in the second quarter of 2010 was primarily
the result of improved severity trends, of which $7 million related to the workers compensation
line of business and $7 million related to the commercial multi-peril line of business. In the
second quarter of 2009, frequency and severity trends were relatively stable.
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Favorable development of prior accident years, including the effects of salvage and subrogation
recoveries totaled $56 million and improved the combined ratio 2.9 points in the first half of
2010, while adverse development of prior accident years totaled $35 million and contributed 1.9
points to the combined ratio in the first half of 2009. Driving the prior accident year development
through June 30, 2010 was favorable development of $26 million related to the commercial
multi-peril line of business, $22 million related to the personal auto line of business, $8 million
related to the homeowners line of business, and $5 million related to the workers compensation line
of business. The favorable development experienced in the commercial multi-peril line of business
was primarily the result of improvements in severity trends. Of the $22 million of favorable
development in the personal auto line of business, $13 million was the result of improvements in
frequency trends on automobile bodily injury and uninsured/underinsured motorist bodily injury and
$7 million was the result of two claims closing. The favorable development in the homeowners line
of business was primarily the result of the settlement of one large claim, while the favorable
development in the workers compensation line of business was primarily the result of improvements
in severity trends. The adverse development in 2009 was primarily the result of one large workers
compensation claim combined with increasing loss cost trends on automobile bodily injury and
commercial liability claims.
Assumed reinsurance The Property and Casualty Groups favorable development of prior accident
year loss reserves on its assumed reinsurance business was relatively flat at $8 million in the second quarter
of 2010, compared to $7 million in the second quarter of 2009. For the first half of 2010, favorable
development of prior accident year loss reserves on assumed reinsurance totaled $11 million,
compared to $8 million in the first half of 2009. The favorable development was due to less than
anticipated growth in involuntary reinsurance.
Ceded reinsurance Favorable development of ceded reinsurance reserves was flat at $1 million in
the second quarters of 2010 and 2009. In the first half of 2010, ceded reinsurance reserves, which
is reflected as favorable development of reserves, increased $8 million related primarily to the
business catastrophe liability line, offset by a $4 million reduction in ceded reserves
related to the pre-1986 automobile massive injury reserves.
Policy acquisition and other underwriting expenses
Our expense ratio decreased 1.2 points in the second quarter of 2010, compared to the second
quarter of 2009. The management fee rate was 25% at both June 30, 2010 and 2009. The second quarter
and first half of 2009 amounts include a charge for the North Carolina Escrow account of $6 million
and $10 million, respectively, which added 0.6 points to both the second quarter and first half of
2009 policy acquisition and other underwriting expense ratios. The final rate that was approved by
North Carolina approximated our filed rates and the charge was reversed in the third quarter of
2009.
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Table of Contents
Life insurance operations
EFL is a Pennsylvania-domiciled life insurance company which underwrites and sells nonparticipating
individual and group life insurance policies and fixed annuities and operates in 10 states and the
District of Columbia.
Erie Family Life Insurance Company | ||||||||||||||||||||||||
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
2010 | 2009 | % Change | 2010 | 2009 | % Change | |||||||||||||||||||
(in millions) | (unaudited) | (unaudited) | ||||||||||||||||||||||
Individual life premiums, net of reinsurance |
$ | 16 | $ | 19 | (8.8 | )% | $ | 31 | $ | 34 | (3.7 | )% | ||||||||||||
Group life and other premiums |
0 | 0 | NM | 1 | 1 | (6.2 | ) | |||||||||||||||||
Other revenue |
0 | 0 | NM | 0 | 0 | NM | ||||||||||||||||||
Total net policy revenue |
16 | 19 | (8.3 | ) | 32 | 35 | (3.9 | ) | ||||||||||||||||
Net investment income |
24 | 23 | 3.7 | 47 | 48 | (1.3 | ) | |||||||||||||||||
Net realized gains (losses) on investments |
3 | 0 | NM | 8 | (2 | ) | NM | |||||||||||||||||
Impairment losses recognized in earnings |
(2 | ) | (1 | ) | (80.5 | ) | (2 | ) | (15 | ) | 87.3 | |||||||||||||
Equity in losses of limited partnerships |
0 | (2 | ) | 95.0 | (1 | ) | (5 | ) | 79.4 | |||||||||||||||
Total revenues |
41 | 39 | 10.4 | 84 | 61 | 42.7 | ||||||||||||||||||
Benefits and other changes in policy reserves |
22 | 24 | (5.4 | ) | 46 | 46 | 1.4 | |||||||||||||||||
Amortization of deferred policy acquisition costs |
4 | 4 | 0.2 | 9 | 7 | 41.2 | ||||||||||||||||||
Other operating expenses |
4 | 5 | (9.6 | ) | 8 | 8 | 0.2 | |||||||||||||||||
Total benefits and expenses |
30 | 33 | (5.2 | ) | 63 | 61 | 5.6 | |||||||||||||||||
Income before income taxes |
$ | 11 | $ | 6 | 96.6 | % | $ | 21 | $ | 0 | NM | |||||||||||||
Income before taxes Indemnity(1) |
$ | 3 | $ | 1 | 96.6 | % | $ | 5 | $ | 0 | NM | |||||||||||||
Income before taxes Exchange |
$ | 8 | $ | 5 | 96.6 | % | $ | 16 | $ | 0 | NM | |||||||||||||
NM = not meaningful | ||
(1) | The Exchange has a 78.4% ownership interest in EFL, with the remaining 21.6% owned by Indemnity. |
Premiums
Gross policy revenues increased 4% to $27 million in the second quarter of 2010, compared to $26
million in the second quarter of 2009. EFL reinsures a large portion of its traditional products in
order to reduce claims volatility. Our reinsurers assume 75% of the risk on new term business.
Ceded reinsurance premiums were $11 million and $9 million in the second quarters of 2010 and 2009,
respectively. For the first half of 2010 compared to the first half of 2009, gross policy revenues
totaled $52 million and $50 million, respectively, while ceded reinsurance premiums totaled $20
million and $17 million, respectively.
Premiums received on annuity and universal life products totaled $29 million in the second quarter
of 2010, compared to $43 million in the second quarter of 2009. Of this amount, annuity and
universal life premiums recorded as deposits and therefore not reflected in revenue on the
Consolidated Statements of Operations were $25 million and $39 million in the second quarters of
2010 and 2009, respectively. For the first half of 2010 compared to the first half of 2009,
premiums received on annuity and universal life products totaled $62 million and $83 million,
respectively, while annuity and universal life deposits totaled $54 million and $75 million,
respectively.
Investments
Due to continued improvements in market conditions in the second quarter and first half of 2010,
EFL experienced low levels of impairments and net realized gains on investments compared to the
second quarter and first half of 2009. Equity in earnings of limited partnerships also reflected
the improvement in market conditions, as limited partnership activity is reported on a one quarter
lag. See additional discussion of investments in the Investment Operations segment that follows.
Benefits and expenses
In the
second quarter of 2010, benefits and other changes in policy reserves
were impacted by decreases in death benefits and interest on annuity
deposits. In the first half of 2010, the amortization of deferred policy acquisition costs
increased $2 million as a result of a significant reduction in impairments and due to experiencing
realized gains compared to realized losses in the first half of 2009.
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Investment operations
Erie Insurance Group | ||||||||||||||||
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(in millions) | (unaudited) | (unaudited) | ||||||||||||||
Indemnity |
||||||||||||||||
Net investment income |
$ | 9 | $ | 9 | $ | 18 | $ | 22 | ||||||||
Net realized gains (losses) on investments |
(3 | ) | 4 | 2 | 0 | |||||||||||
Net impairment losses recognized in earnings |
(1 | ) | (2 | ) | (1 | ) | (7 | ) | ||||||||
Equity in (losses) earnings of limited
partnerships |
6 | (27 | ) | 6 | (55 | ) | ||||||||||
Net revenue (loss) from investment
operations Indemnity |
$ | 11 | $ | (16 | ) | $ | 25 | $ | (40 | ) | ||||||
Exchange |
||||||||||||||||
Net investment income |
$ | 101 | $ | 98 | $ | 199 | $ | 205 | ||||||||
Net realized gains (losses) on investments |
(210 | ) | 204 | (90 | ) | 53 | ||||||||||
Net impairment losses recognized in earnings |
(3 | ) | (10 | ) | (5 | ) | (76 | ) | ||||||||
Equity in gains (losses) of limited partnerships |
21 | (99 | ) | 24 | (232 | ) | ||||||||||
Net revenue (loss) from investment
operations Exchange(1) |
$ | (91 | ) | $ | 193 | $ | 128 | $ | (50 | ) | ||||||
(1) | The Exchanges results for the second quarter of 2010 and 2009 include net revenues of EFL operations of $25 million and $20 million, respectively. The Exchanges results for the first six months of 2010 and 2009 include net revenues of EFL operations of $53 million and $26 million, respectively. |
Investment income
Net investment income primarily includes interest and dividends on our fixed maturity and equity
security portfolios. Net investment income was relatively flat in both Indemnity and the Exchange.
Though our invested balances have increased, yields on new security purchases are down.
Realized gains and losses
Realized gains on investments decreased in both Indemnity and the Exchange in large part due to the
valuation decreases on the common stock trading portfolios. Indemnitys common stock trading
portfolio contributed $4 million in valuation adjustment losses for the quarter ended June 30, 2010
compared to $6 million in valuation adjustment gains for the quarter ended June 30, 2009. The
Exchange generated valuation adjustment losses for the quarter ended June 30, 2010 of $242 million
compared to valuation adjustment gains of $247 million for the quarter ended June 30, 2009.
Impairment losses recognized in earnings
Impairment losses recognized in earnings for Indemnity decreased $1 million in the second quarter
of 2010 compared to the second quarter of 2009. Impairment losses recognized in earnings for the
Exchange decreased $7 million for the same period. Year-to-date 2010 impairment losses are down $6
million in Indemnity and $71 million in the Exchange from the prior year-to-date as a result of
improved market conditions.
Equity in earnings of limited partnerships
Indemnitys equity in earnings of limited partnerships was $6 million through June 30, 2010
compared to losses of $55 million through June 30, 2009. The Exchanges equity in earnings of
limited partnerships was $24 million through June 30, 2010 compared to losses of $232 million
through June 30, 2009.
Limited partnership earnings pertain to investments in U.S. and foreign private equity, real estate
and mezzanine debt partnerships. Valuation adjustments are recorded to reflect the fair value of
limited partnerships. These adjustments are recorded as a component of equity in earnings of
limited partnerships in the Consolidated Statements of Operations.
We experienced an increase in earnings as a result of fair value increases in our private equity
and mezzanine debt limited partnerships which were offset by losses in our real estate limited
partnerships. Limited partnership earnings tend to be cyclical based on market conditions, the age
of the partnership and the nature of the investments. Generally,
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limited partnership earnings are recorded on a quarter lag from financial statements we receive
from our general partners. As a consequence, earnings from limited partnerships reported at June
30, 2010 reflect investment valuation changes resulting from the financial markets and the economy
in the first quarter of 2010.
The breakdown of our net realized (losses) gains on investments is as follows:
Erie Insurance Group | ||||||||||||||||
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(in millions) | (unaudited) | (unaudited) | ||||||||||||||
Indemnity |
||||||||||||||||
Securities sold: |
||||||||||||||||
Fixed maturities |
$ | 1 | $ | 0 | $ | 3 | $ | (2 | ) | |||||||
Preferred stock equity securities |
0 | (2 | ) | 0 | 0 | |||||||||||
Common stock equity securities |
0 | 0 | 1 | (2 | ) | |||||||||||
Common stock valuation adjustments |
(4 | ) | 6 | (2 | ) | 4 | ||||||||||
Total net realized gains (losses) Indemnity |
$ | (3 | ) | $ | 4 | $ | 2 | $ | 0 | |||||||
Exchange |
||||||||||||||||
Securities sold: |
||||||||||||||||
Fixed maturities |
$ | 4 | $ | (7 | ) | $ | 16 | $ | (19 | ) | ||||||
Preferred stock equity securities |
2 | (3 | ) | 6 | 0 | |||||||||||
Common stock equity securities |
26 | (33 | ) | 59 | (114 | ) | ||||||||||
Common stock valuation adjustments |
(242 | ) | 247 | (171 | ) | 186 | ||||||||||
Total net realized gains (losses) Exchange (1) |
$ | (210 | ) | $ | 204 | $ | (90 | ) | $ | 53 | ||||||
(1) | The Exchanges net realized gains (losses) include net realized gains from EFL operations of $3 million in the second quarter of 2010 and net realized losses of $0 million in the second quarter of 2009. The Exchanges results for the first six months of 2010 include net realized gains from EFL of $8 million and net realized losses of $2 million for the same period in 2009. |
The components of equity in earnings (losses) of limited partnerships are as follows:
Erie Insurance Group | ||||||||||||||||
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(in millions) | (unaudited) | (unaudited) | ||||||||||||||
Indemnity |
||||||||||||||||
Private equity |
$ | 3 | $ | (6 | ) | $ | 8 | $ | (16 | ) | ||||||
Real estate |
0 | (14 | ) | (6 | ) | (37 | ) | |||||||||
Mezzanine debt |
3 | (7 | ) | 4 | (2 | ) | ||||||||||
Total equity in earnings
(losses) of limited
partnerships
Indemnity |
$ | 6 | $ | (27 | ) | $ | 6 | $ | (55 | ) | ||||||
Exchange |
||||||||||||||||
Private equity |
$ | 15 | $ | (18 | ) | $ | 37 | $ | (65 | ) | ||||||
Real estate |
(3 | ) | (67 | ) | (25 | ) | (163 | ) | ||||||||
Mezzanine debt |
9 | (14 | ) | 12 | (4 | ) | ||||||||||
Total equity in earnings
(losses) of limited
partnerships
Exchange(1) |
$ | 21 | $ | (99 | ) | $ | 24 | $ | (232 | ) | ||||||
(1) | The Exchanges results for the second quarter of 2010 and 2009 include equity in losses of limited partnerships from EFL of $0 million and $2 million, respectively. The Exchanges results for the first six months of 2010 and 2009 include equity in losses of limited partnerships from EFL of $1 million and $5 million, respectively. |
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FINANCIAL CONDITION
Investments
Our investment strategy takes 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. Investments, along with our operating cash
flow, provide the liquidity we require to meet the demands on our funds.
Distribution of investments (unaudited)
Erie Insurance Group | ||||||||||||||||
Carrying value at | Carrying value at | |||||||||||||||
June 30, | December 31, | |||||||||||||||
(in millions) | 2010 | % to total | 2009 | % to total | ||||||||||||
Indemnity |
||||||||||||||||
Fixed maturities |
$ | 671 | 68 | % | $ | 664 | 68 | % | ||||||||
Equity securities: |
||||||||||||||||
Preferred stock |
45 | 5 | 38 | 4 | ||||||||||||
Common stock |
40 | 4 | 42 | 4 | ||||||||||||
Limited partnerships: |
||||||||||||||||
Real estate |
92 | 9 | 99 | 10 | ||||||||||||
Private equity |
91 | 9 | 85 | 9 | ||||||||||||
Mezzanine debt |
51 | 5 | 51 | 5 | ||||||||||||
Real estate mortgage loans |
1 | 0 | 1 | 0 | ||||||||||||
Total investments Indemnity |
$ | 991 | 100 | % | $ | 980 | 100 | % | ||||||||
Exchange |
||||||||||||||||
Fixed maturities |
$ | 6,789 | 67 | % | $ | 6,517 | 65 | % | ||||||||
Equity securities: |
||||||||||||||||
Preferred stock |
523 | 5 | 472 | 5 | ||||||||||||
Common stock |
1,712 | 17 | 1,835 | 18 | ||||||||||||
Limited partnerships: |
||||||||||||||||
Real estate |
373 | 4 | 397 | 4 | ||||||||||||
Private equity |
530 | 5 | 503 | 5 | ||||||||||||
Mezzanine debt |
220 | 2 | 216 | 2 | ||||||||||||
Policy loans |
14 | 0 | 15 | 1 | ||||||||||||
Real estate mortgage loans |
5 | 0 | 5 | 0 | ||||||||||||
Total investments Exchange |
$ | 10,166 | 100 | % | $ | 9,960 | 100 | % | ||||||||
Total investments Erie Insurance Group |
$ | 11,157 | $ | 10,940 | ||||||||||||
We continually review the investment portfolio to evaluate positions that might incur
other-than-temporary declines in value. For all investment holdings, general economic conditions
and/or conditions specifically affecting the underlying issuer or its industry, including
downgrades by the major rating agencies, are considered in evaluating impairment in value. In
addition to specific factors, other factors considered in our review of investment valuation are
the length of time and amount the fair value is below cost.
We individually analyze all positions with emphasis on those that have, in managements opinion,
declined significantly below costs. With the issuance of new impairment guidance for debt
securities in the second quarter of 2009, we further analyze debt securities to determine if a
credit-related impairment has occurred. Some of the factors considered in determining whether a
debt security is credit impaired include potential for the default of interest and/or principal,
level of subordination, collateral of the issue, compliance with financial covenants, credit
ratings and industry conditions. We have the intent to sell all credit-impaired debt securities,
therefore the entire amount of the impairment charges were included in earnings and non-credit
impairments were recorded in other comprehensive income. Prior to the second quarter of 2009, there
was no differentiation between impairments related to credit loss and those related to other
factors, declines in the fair value of debt securities were deemed other-than-temporary if we did
not have the intent and ability to hold a security to recovery. For available-for-sale equity
securities, a charge is recorded in the Consolidated Statement of Operations for positions that
have
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experienced other-than-temporary impairments due to credit quality or other factors (See
Investment Operations section herein).
If our policy for determining the recognition of impaired positions was 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
impairment recognition.
Fixed maturities
Under our investment strategy, we maintain a fixed maturities portfolio that is of high quality and
well diversified within each market sector. This investment strategy also achieves a balanced
maturity schedule. The fixed maturities portfolio is managed with the goal of achieving reasonable
returns while limiting exposure to risk. The municipal bond portfolio accounts for $252 million, or
38%, of the total fixed maturity portfolio for Indemnity and $1.4 billion, or 21% of the fixed
maturity portfolio for the Exchange at June 30, 2010. The overall credit rating of the municipal
portfolio without consideration of the underlying insurance is AA. Because of the rating
downgrades of municipal bond insurers, the insurance does not improve the overall credit rating.
Fixed maturities classified as available-for-sale are carried at fair value with unrealized gains
and losses, net of deferred taxes, included in shareholders equity. At June 30, 2010, Indemnitys
net unrealized gains on fixed maturities, net of deferred taxes, amounted to $22 million compared
to net unrealized gains of $14 million at December 31, 2009. At June 30, 2010, the Exchange had net
unrealized gains on fixed maturities of $267 million compared to net unrealized gains of $156
million at December 31, 2009.
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Table of Contents
The following tables present a breakdown of the fair value of our fixed maturities portfolio by
sector and rating as of June 30, 2010 for Indemnity and the Exchange, respectively:
Erie Insurance Group | ||||||||||||||||||||||||
(in millions) | (unaudited) | |||||||||||||||||||||||
Indemnity | Not Investment | Fair | ||||||||||||||||||||||
Industry Sector | AAA | AA | A | BBB | Grade | value | ||||||||||||||||||
Structured securities(1) |
$ | 21 | $ | 3 | $ | 0 | $ | 5 | $ | 6 | $ | 35 | ||||||||||||
Basic materials |
0 | 0 | 1 | 6 | 1 | 8 | ||||||||||||||||||
Communications |
0 | 0 | 12 | 20 | 0 | 32 | ||||||||||||||||||
Consumer |
0 | 4 | 20 | 36 | 2 | 62 | ||||||||||||||||||
Diversified |
0 | 0 | 1 | 0 | 0 | 1 | ||||||||||||||||||
Energy |
2 | 1 | 2 | 23 | 0 | 28 | ||||||||||||||||||
Financial |
5 | 19 | 69 | 47 | 13 | 153 | ||||||||||||||||||
Government-municipal |
62 | 133 | 53 | 4 | 0 | 252 | ||||||||||||||||||
Industrial |
0 | 0 | 6 | 17 | 2 | 25 | ||||||||||||||||||
U.S. treasury and government
agencies |
20 | 0 | 2 | 0 | 0 | 22 | ||||||||||||||||||
Government |
4 | 0 | 0 | 0 | 0 | 4 | ||||||||||||||||||
Technology |
0 | 0 | 2 | 3 | 0 | 5 | ||||||||||||||||||
Utilities |
0 | 0 | 6 | 35 | 3 | 44 | ||||||||||||||||||
Total |
$ | 114 | $ | 160 | $ | 174 | $ | 196 | $ | 27 | $ | 671 | ||||||||||||
Exchange | Not Investment | Fair | ||||||||||||||||||||||
Industry Sector | AAA | AA | A | BBB | Grade | value | ||||||||||||||||||
Structured securities(1) |
$ | 366 | $ | 33 | $ | 15 | $ | 30 | $ | 70 | $ | 514 | ||||||||||||
Basic materials |
0 | 0 | 47 | 114 | 4 | 165 | ||||||||||||||||||
Communications |
0 | 0 | 146 | 308 | 20 | 474 | ||||||||||||||||||
Consumer |
0 | 24 | 206 | 371 | 63 | 664 | ||||||||||||||||||
Diversified |
0 | 0 | 21 | 0 | 0 | 21 | ||||||||||||||||||
Energy |
17 | 10 | 69 | 290 | 23 | 409 | ||||||||||||||||||
Financial |
24 | 247 | 1,021 | 581 | 167 | 2,040 | ||||||||||||||||||
Funds |
0 | 0 | 0 | 5 | 0 | 5 | ||||||||||||||||||
Government-municipal |
394 | 787 | 235 | 22 | 3 | 1,441 | ||||||||||||||||||
Industrial |
0 | 5 | 70 | 208 | 28 | 311 | ||||||||||||||||||
U.S. treasury and government
agencies |
5 | 0 | 0 | 0 | 0 | 5 | ||||||||||||||||||
Government |
89 | 0 | 12 | 6 | 0 | 107 | ||||||||||||||||||
Technology |
0 | 0 | 37 | 61 | 0 | 98 | ||||||||||||||||||
Utilities |
0 | 3 | 83 | 400 | 49 | 535 | ||||||||||||||||||
Total |
$ | 895 | $ | 1,109 | $ | 1,962 | $ | 2,396 | $ | 427 | $ | 6,789 | ||||||||||||
(1) | Structured securities include asset-backed securities, collateral, lease and debt obligations, commercial mortgage-backed securities and residential mortgage-backed securities. |
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Equity securities
Our equity securities consist of common stock and nonredeemable preferred stock. Investment
characteristics of common stock and nonredeemable preferred stock differ substantially from one
another. Our nonredeemable preferred stock portfolio provides a source of current income that is
competitive with investment-grade bonds.
The following tables present an analysis of the fair value of our non-redeemable preferred and
common stock securities by sector for Indemnity and Exchange, respectively.
Indemnity | ||||||||||||||||
(unaudited) | ||||||||||||||||
Fair Value at June 30, | Fair Value at December 31, | |||||||||||||||
2010 | 2009 | |||||||||||||||
(in millions) | Preferred | Common | Preferred | Common | ||||||||||||
Industry sector | stock | stock | stock | stock | ||||||||||||
Basic materials |
$ | 0 | $ | 1 | $ | 0 | $ | 2 | ||||||||
Communications |
1 | 3 | 1 | 2 | ||||||||||||
Consumer |
0 | 13 | 0 | 15 | ||||||||||||
Diversified |
0 | 1 | 0 | 1 | ||||||||||||
Energy |
0 | 3 | 0 | 3 | ||||||||||||
Financial |
30 | 10 | 27 | 9 | ||||||||||||
Funds |
0 | 3 | 0 | 3 | ||||||||||||
Government |
0 | 0 | 0 | 0 | ||||||||||||
Industrial |
2 | 5 | 2 | 6 | ||||||||||||
Technology |
3 | 1 | 3 | 1 | ||||||||||||
Utilities |
9 | 0 | 5 | 0 | ||||||||||||
Total |
$ | 45 | $ | 40 | $ | 38 | $ | 42 | ||||||||
Exchange | ||||||||||||||||
(unaudited) | ||||||||||||||||
Fair Value at June 30, | Fair Value at December 31, | |||||||||||||||
2010 | 2009 | |||||||||||||||
(in millions) | Preferred | Common | Preferred | Common | ||||||||||||
Industry sector | stock | stock | stock | stock | ||||||||||||
Basic materials |
$ | 0 | $ | 76 | $ | 0 | $ | 95 | ||||||||
Communications |
8 | 129 | 8 | 170 | ||||||||||||
Consumer |
5 | 453 | 0 | 457 | ||||||||||||
Diversified |
0 | 5 | 0 | 8 | ||||||||||||
Energy |
0 | 117 | 0 | 157 | ||||||||||||
Financial |
372 | 225 | 348 | 231 | ||||||||||||
Funds |
0 | 283 | 0 | 298 | ||||||||||||
Government |
1 | 0 | 3 | 0 | ||||||||||||
Industrial |
5 | 209 | 5 | 207 | ||||||||||||
Technology |
16 | 195 | 12 | 190 | ||||||||||||
Utilities |
116 | 20 | 96 | 22 | ||||||||||||
Total |
$ | 523 | $ | 1,712 | $ | 472 | $ | 1,835 | ||||||||
Our preferred stock equity securities are classified as available-for-sale and are carried at fair
value on the Consolidated Statements of Financial Position with all changes in unrealized gains and
losses reflected in other comprehensive income. At June 30, 2010, the unrealized gain on preferred
stock classified as available-for-sale securities, net of deferred taxes amounted to $3 million for
Indemnity and $30 million for the Exchange compared to a $2 million gain for Indemnity and $31
million gain for the Exchange at December 31, 2009.
The common stock portfolio is classified as a trading portfolio and measured at fair value with all
changes in unrealized gains and losses reflected in our Consolidated Statements of Operations.
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Table of Contents
Limited partnerships
In the second quarter of 2010, investments in limited partnerships remained relatively flat from
the investment levels at December 31, 2009. Increases in fair value in our private equity and
mezzanine debt limited partnerships were offset by reductions in fair value in our real estate
limited partnerships.
The components of limited partnership investments are as follows:
Erie Insurance Group | ||||||||
At June 30, | December 31, | |||||||
2010 | 2009 | |||||||
(in millions) | (unaudited) | |||||||
Indemnity |
||||||||
Private equity |
$ | 91 | $ | 85 | ||||
Real estate |
92 | 99 | ||||||
Mezzanine debt |
51 | 51 | ||||||
Total limited partnerships Indemnity |
$ | 234 | $ | 235 | ||||
Exchange |
||||||||
Private equity |
$ | 530 | $ | 503 | ||||
Real estate |
373 | 397 | ||||||
Mezzanine debt |
220 | 216 | ||||||
Total limited partnerships Exchange |
$ | 1,123 | $ | 1,116 | ||||
Liabilities
Property and casualty loss reserves
Loss reserves are established to account for the estimated ultimate costs of loss and loss expenses
for claims that have been reported but not yet settled and claims that have been incurred but not
reported.
The factors which 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 with costs
significantly different from those seen in the past, and claims patterns on current business that
differ significantly from historical claims patterns.
Loss and loss expense reserves are presented on our Consolidated Statements of Financial Position
on a gross basis. The following tables represent the direct and assumed loss and loss expense
reserves by major line of business for Indemnity and Exchange, respectively. The reinsurance
recoverable amount represents the related ceded amounts which results in the net liability
attributable to Indemnity and Exchange, respectively.
Erie Insurance Group | ||||||||
At June 30, | At December 31, | |||||||
2010 | 2009 | |||||||
(in millions) | (unaudited) | |||||||
Indemnity |
||||||||
Gross reserve liability: |
||||||||
Personal auto |
$ | 214 | $ | 221 | ||||
Automobile massive injury |
147 | 147 | ||||||
Homeowners |
17 | 22 | ||||||
Workers compensation |
167 | 169 | ||||||
Workers compensation massive injury |
12 | 12 | ||||||
Commercial auto |
56 | 56 | ||||||
Commercial multi-peril |
71 | 68 | ||||||
All other lines of business |
55 | 57 | ||||||
Gross reserves |
739 | 752 | ||||||
Reinsurance recoverable |
1 | 1 | ||||||
Net reserve liability Indemnity |
$ | 738 | $ | 751 | ||||
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Erie Insurance Group | ||||||||
At June 30, | At December 31, | |||||||
2010 | 2009 | |||||||
(in millions) | (unaudited) | |||||||
Exchange |
||||||||
Gross reserve liability: |
||||||||
Personal auto |
$ | 876 | $ | 887 | ||||
Automobile massive injury |
299 | 316 | ||||||
Homeowners |
234 | 178 | ||||||
Workers compensation |
344 | 342 | ||||||
Workers compensation massive injury |
127 | 132 | ||||||
Commercial auto |
223 | 226 | ||||||
Commercial multi-peril |
492 | 475 | ||||||
All other lines of business |
288 | 290 | ||||||
Gross reserves |
2,883 | 2,846 | ||||||
Reinsurance recoverable |
188 | 199 | ||||||
Net reserve liability Exchange |
$ | 2,695 | $ | 2,647 | ||||
The reserves that have the greatest potential for variation are the massive injury claim reserves.
The Property and Casualty Group is currently reserving for about 300 claimants requiring lifetime
medical care, of which about 120 involve massive injuries. The reserve carried by the Property and
Casualty Group for the massive injury claimants, which includes automobile and workers compensation
massive injury reserves, totaled $410 million at June 30, 2010, which is net of $175 million of
anticipated reinsurance recoverables, compared to $428 million at December 31, 2009. The pre-1986
automobile massive injury and workers compensation massive injury reserves decreased at June 30,
2010 compared to December 31, 2009 due to settling two claims each.
The reserves above are presented on a gross basis. After the effects of the intercompany pooling
transactions are considered, Indemnity retains 5.5% of the gross reserves and the Exchange retains
94.5% of the gross reserves.
Indemnitys 5.5% share of the massive injury liability reserves, net of unaffiliated reinsurance
recoveries, totaled $23 million at June 30, 2010, and $24 million at December 31, 2009.
Life insurance reserves
EFLs primary commitment is its obligation to pay future policy benefits under the terms of its
life insurance and annuity contracts. To meet these future obligations, EFL establishes life
insurance reserves based on the type of policy, the age, gender and risk class of the insured and
the number of years the policy has been in force. EFL also establishes annuity and universal life
reserves based on the amount of policyholder deposits (less applicable insurance and expense
charges) plus interest earned on those deposits. Life insurance and annuity reserves are supported
primarily by EFLs long-term, fixed income investments as the underlying policy reserves are
generally also of a long-term nature.
IMPACT OF INFLATION
Property and casualty insurance premiums are established before losses and loss expenses, and
therefore, before the extent to which inflation may impact such costs are known. Consequently, in
establishing premium rates, we attempt to anticipate the potential impact of inflation, including
medical cost inflation, construction and auto repair cost inflation and tort issues. Medical costs
are a broad element of inflation that impacts personal and commercial auto, general liability,
workers compensation and commercial multi-peril lines of insurance written by the Property and
Casualty Group.
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LIQUIDITY AND CAPITAL RESOURCES
Sources and uses of cash
Liquidity is a measure of a companys ability to generate sufficient cash flows to meet the short-
and long-term cash requirements of its business operations and growth needs. Our liquidity
requirements have been met primarily by funds generated from premiums collected and income from
investments. The insurance operations provide liquidity in that premiums are collected in advance
of paying losses under the policies purchased with those premiums. Cash outflows for the property
and casualty business are generally variable since settlement dates for liabilities for unpaid
losses and the potential for large losses, whether individual or in the aggregate, cannot be
predicted with absolute certainty. Accordingly, after satisfying our operating cash requirements,
excess cash flows are used to build our investment portfolio in order to increase future investment
income, which then may be used as a source of liquidity if cash from our insurance operations would
not be sufficient to meet our obligations. Cash provided from these sources is used primarily to
fund losses and policyholder benefits, fund the costs of operations including
commissions, salaries and wages, pension plans, share repurchases, dividends to shareholders and the purchase and
development of information technology. We expect that our operating cash needs will be met by funds
generated from operations.
Continuing volatility in the financial markets presents challenges to us as we do occasionally
access our investment portfolio as a source of cash. Some of our fixed income investments, despite
being publicly traded, are illiquid due to current credit market conditions. Further volatility in
these markets could impair our ability to sell certain of our fixed income securities or cause such
securities to sell at deep discounts. Additionally, our limited partnership investments are
illiquid. We believe we have sufficient liquidity to meet our needs from other sources even if
market volatility persists throughout 2010.
Cash flow activities
The following table is a summary of our condensed consolidated cash flows:
Erie Insurance Group | ||||||||
Six months ended | ||||||||
June 30, | ||||||||
(in millions) | 2010 | 2009 | ||||||
(unaudited) | ||||||||
Net cash provided by operating activities |
$ | 212 | $ | 471 | ||||
Net cash used in investing activities |
(180 | ) | (379 | ) | ||||
Net cash used in financing activities |
(43 | ) | (51 | ) | ||||
Net (decrease) increase in cash |
$ | (11 | ) | $ | 41 | |||
The
decrease in cash flows from operating activities in the first six months of 2010 was primarily
driven by the payment of federal income taxes of $85 million, compared to the recovery of federal
income taxes of $162 million in the first six months of 2009. Also decreasing the cash flows from
operating activities in 2010 was an increase in loss, loss expenses and other underwriting expenses
paid, offset somewhat by an increase in premiums collected.
At June 30, 2010, we recorded a net deferred tax asset of $101 million, which included capital loss
carry-forwards of $13 million. There was no valuation allowance at June 30, 2010. We have the
ability to carry-back capital losses of $281 million as a result of gains recognized in prior
years. At June 30, 2010, the carry-back relating to the 2009 capital losses has not been received.
This carry-back is estimated to be $250 million with a tax refund expected to be $88 million.
Cash flows used in investing activities decreased in the first six months of 2010 compared to the
same period in 2009. In the first half of 2010, we generated more proceeds from certain fixed
maturities and used more cash for the purchase of other fixed maturities, while generating fewer
proceeds from common stocks and using less cash for the purchase of other common stocks. At June
30, 2010, we had contractual commitments to invest up to $565 million related to our limited
partnership investments to be funded as required by the partnerships agreements. At June 30, 2010,
the total remaining commitment to fund limited partnerships that invest in private equity
securities was $261 million, real estate activities was $197 million and mezzanine debt securities
was $107 million.
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Cash flow activities Indemnity
The following table summarizes Indemnity cash flows:
Indemnity | ||||||||
Six months ended | ||||||||
June 30, | ||||||||
(in millions) | 2010 | 2009 | ||||||
(unaudited) | ||||||||
Net cash provided by operating activities |
$ | 42 | $ | 45 | ||||
Net cash used in investing activities |
(17 | ) | (33 | ) | ||||
Net cash used in financing activities |
(67 | ) | (47 | ) | ||||
Net decrease in cash |
$ | (42 | ) | $ | (35 | ) | ||
See Indemnitys supplemental information footnote (Note 14) for more detail on Indemnity cash
flows.
Indemnitys cash flows provided from operating activities decreased slightly to $42 million in the
first six months of 2010, compared to $45 million for the same period in 2009. Lower operating cash
flows in 2010 were primarily due to a decrease in reimbursements collected from affiliates offset
by an increase in management fee revenues received. Management fee revenues were higher reflecting
the increase in the Property and Casualty Groups direct written premium. Cash paid for agent
commissions and bonuses decreased to $290 million in the first six months of 2010, compared to $300
million in the first six months of 2009, as a result of a decrease in cash paid for agent bonuses.
Also, the first six months of 2010 includes a pension contribution of $13 million to our pension
plan. Our 2009 pension contribution was made in the third quarter of 2009 and totaled $14 million.
Indemnitys policy is to contribute at least the minimum required contribution to its pension plan
that is in accordance with the Pension Protection Act of 2006 and to fund the annual normal costs
of the pension. Indemnity is generally reimbursed about 50% of the net periodic benefit cost of the
pension plan from its affiliates.
At June 30, 2010, Indemnity recorded a net deferred tax asset of $29 million, which included
capital loss carry-forwards of $4 million. There was no valuation allowance at June 30, 2010.
Indemnity has the ability to carry back capital losses of $40 million as a result of gains
recognized in prior years. At June 30, 2010, the carry-back relating to the 2009 capital losses has
not been received. This carry-back is estimated to be $31 million with a tax refund expected to be
$11 million. Indemnitys capital gain and loss strategies take into consideration its ability to
offset gains and losses in future periods, further capital loss carry-back opportunities to the
three preceding years, and capital loss carry-forward opportunities to apply against future capital
gains over the next five years.
Cash flows used in Indemnity investing activities decreased to $17 million in the first half of
2010 compared to $33 million for the same period in 2009.
Investing activities in 2009 include a capital
contribution to EFL in the amount of $12 million to support EFLs life insurance and annuity
business and to strengthen its surplus. Impacting future investing activities are limited
partnership commitments, which totaled $62 million at June 30, 2010, and will be funded as required
by the partnerships agreements.
The increase in cash used in financing activities in the second quarter of 2010 was primarily
driven by increases in the cash outlay for share repurchases and dividends paid to shareholders.
During the second quarter of 2010, Indemnity repurchased 368,752 shares of our Class A nonvoting
common stock at a total cost of $17 million. Of this amount, 329,346 shares were repurchased in
conjunction with our current stock repurchase plan for a total cost of $15 million. The remaining
39,406 shares were purchased in conjunction with our long-term incentive plan for executive and
senior management at a total cost of $2 million, or $45.92 per share. During the first half of
2010, 443,719 shares were repurchased at a total cost of
$20 million, of which $3 million occurred the last week of June
which was settled in cash in July. In the first half of 2009,
42,200 shares were repurchased at a total cost of $1 million. In April 2010, our Board of Directors
approved a continuation of the current stock repurchase program through June 30, 2011 for a total
of $100 million. Indemnity has approximately $85 million of repurchase authority remaining under
this plan at June 30, 2010. Indemnity plans to continue to repurchase shares through this program
as cash becomes available for this purpose. (See Part II, Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds, Issuer Purchases of Equity Securities.) Dividends paid to
shareholders totaled $50 million and $46 million for the first six months of 2010 and 2009,
respectively. Indemnity increased both its Class A and Class B shareholder quarterly dividend by
6.7% in 2010, compared to 2009. There are no regulatory restrictions on the payment of dividends to
Indemnity shareholders, although there are state law restrictions on the payment of dividends from
Indemnitys property and casualty insurance subsidiaries.
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Capital outlook
If the financial market volatility continues, we have the ability to meet our future funding
requirements through various alternatives available to us. Outside of our normal operating and
investing cash activities, future funding requirements could be met through (1) a $200 million bank
line of credit held by the Exchange, from which there were no borrowings at June 30, 2010, (2) a
$100 million bank line of credit held by Indemnity, from which there were no borrowings as of June
30, 2010, and (3) our more liquid investments that can be sold, such as our common stock and cash
and cash equivalents, which total approximately $2.0 billion at June 30, 2010. Indemnity has no
rights to the assets or capital of the Exchange and, conversely, the Exchange has no rights to the
assets or capital of Indemnity.
Additionally, Indemnity has the ability to curtail or modify discretionary cash outlays such as
those related to shareholder dividends and our share repurchase activities. We believe we have the
funding sources available to us to support future cash flow requirements in 2010.
The Exchange and Indemnity had no borrowings under their respective lines of credit at June 30,
2010. At June 30, 2010, bonds with fair values of $262 million and $132 million were pledged as
collateral on the Exchanges and Indemnitys lines of credit, respectively. These securities have
no restrictions. The bank requires compliance with certain covenants, which include statutory
surplus and risk based capital ratios for the Exchange line of credit and minimum net worth and
leverage ratios for Indemnity line of credit. The Exchange and Indemnity were in compliance with
all bank covenants at June 30, 2010.
Off-Balance Sheet Arrangements
Off-balance sheet arrangements include those with unconsolidated entities that may have a material
current or future effect on our financial condition or results of operations, including material
variable interests in unconsolidated entities that conduct certain activities. We have no material
off-balance sheet obligations or guarantees, other than the limited partnership investment
commitments.
Surplus notes
The Exchange has a surplus note for $20 million with EFL that is payable on demand on or after
March 31, 2025. EFL accrued interest to the Exchange on the surplus note of $0.6 million through
June 30, 2010 and 2009. No other interest is charged or received on these intercompany balances due
to the timely settlement terms and nature of the items.
Indemnity has a surplus note for $25 million with EFL that is payable on demand on or after March
31, 2018. EFL accrued interest to Indemnity on the surplus note of $0.8 million through June 30,
2010 and 2009. No other interest is charged or received on these intercompany balances due to the
timely settlement terms and nature of the items.
Capital contribution
In June 2009, the Exchange made a $43 million capital contribution to EFL and Indemnity made a $12
million capital contribution to EFL to strengthen its surplus. This $55 million in capital
contributions increased EFLs investments and total shareholders equity.
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 the valuation of
investments, reserves for property/casualty insurance unpaid losses and loss adjustment expenses,
life insurance and annuity policy reserves, deferred taxes 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 for the year ended December 31, 2009
of our Form 8-K as filed with the Securities and Exchange Commission on May 6, 2010. See Note 6,
Fair Value, for additional information on our valuation of investments.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is primarily related to fluctuations in prices and interest rates.
Quantitative and qualitative disclosures about market risk resulting from changes in prices and
interest rates for the year ended December 31, 2009 are included in Item 7A. in our Form 8-K as
filed with the Securities and Exchange Commission on May 6, 2010. There have been no material
changes that impact our portfolio or reshape our periodic investment reviews of asset allocation
during the six months ended June 30, 2010. The information contained in the investments section of
Managements Discussion and Analysis of Financial Condition and Results of Operations is
incorporated herein by reference.
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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 there has been
no change in our internal control over financial reporting during the six months ended June 30,
2010 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
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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, 2009.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes Indemnitys Class A common stock repurchased each month, based on
trade date, in the quarter ended June 30, 2010:
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 | ||||||||||||
April 1 30, 2010 |
4,759 | $ | 43.02 | 4,759 | ||||||||||||
May 1 31, 2010 |
150,039 | $ | 45.66 | 150,039 | ||||||||||||
June 1 30, 2010 |
213,954 | $ | 45.81 | 174,548 | ||||||||||||
Total |
368,752 | 329,346 | $ | 85,000,000 | ||||||||||||
In April 2010, our Board of Directors approved a continuation of the current stock repurchase
program, authorizing repurchases through June 30, 2011 for a total of $100 million.
In addition, the month of June 2010 includes a repurchase of 39,406 shares of our Class A nonvoting
common stock for $2 million, or $45.92 per share, for the 2007-2009 long-term incentive plan
performance period. The payment to plan participants occurred in July 2010.
As discussed in our 8-K filing with the Securities and Exchange Commission on June 24, 2010, Erie
Indemnity Company has adopted an open market trading plan pursuant to Rule 10b5-1 under the
Securities Exchange Act of 1934, as amended, (the 10b5-1 Plan). The 10b5-1 Plan provides that a
broker selected by Indemnity has the authority to repurchase shares pursuant to the terms and
limitations specified in the 10b5-1 Plan, including compliance with Rule 10b-18 under the
Securities Exchange Act. This will allow Indemnitys existing repurchase program to continue when
Indemnity would normally not be active in the market due to its internal trading blackout periods
or due to its possession of material nonpublic information. Because the repurchases under the
10b5-1 Plan are subject to certain parameters, there is no certainty as to the exact number of
shares that will be repurchased under the 10b5-1 Plan, or that there will be any repurchases at all
pursuant to the 10b5-1 Plan during any given period. The timing of the share repurchases under the
repurchase program outside of the 10b5-1 Plan will depend on a variety of factors, including market
conditions. The repurchase of shares outside of the 10b5-1 Plan may be suspended or discontinued at
any time, while any suspension or termination under the 10b5-1 Plan must be in compliance with Rule
10b5-1.
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ITEM 6. EXHIBITS
Exhibit | |||
Number | Description of Exhibit | ||
3.1
|
Articles of Incorporation of Registrant. Such exhibit is incorporated by reference to the like numbered exhibit in the Registrants Form 10 Registration Statement Number 0-24000 filed with the Securities and Exchange Commission on May 2, 1994. | ||
3.1
|
A | Amendment to the Articles of Incorporation of Registrant effective May 2, 1996 | |
3.1
|
B | Amendment to the Articles of Incorporation of Registrant effective May 4, 2001 | |
3.1
|
C | Amendment to the Articles of Incorporation of Registrant effective May 10, 2007 | |
10.1
|
Form of Subscribers Agreement whereby policyholders of Erie Insurance Exchange appoint Registrant as their Attorney-in-Fact. Such exhibit is incorporated by reference to the like titled but renumbered exhibit in the Registrants Form 10-Q that was filed with the Securities and Exchange Commission on November 6, 2002. | ||
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 |
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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: July 29, 2010
|
/s/ Terrence W. Cavanaugh | |
Terrence W. Cavanaugh, President & CEO | ||
/s/ Marcia A. Dall | ||
Marcia A. Dall, Executive Vice President & CFO |
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