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

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8-K - 8-K - ERIE INDEMNITY CO	erie8-k09302014.htm
EX-99.1 - EXHIBIT - ERIE INDEMNITY CO	ex-99109302014.htm

Exhibit 99.2

Erie Indemnity Company

Consolidated Statements of Operations

(dollars in millions, except per share data)



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Revenues	(Unaudited)						(Unaudited)
Premiums earned	$	1,355		$	1,241		$	3,962		$	3,631
Net investment income	115			109			335			316
Net realized investment (losses) gains	(85		)	191			104			501
Net impairment losses recognized in earnings	(1		)	(9		)	(1		)	(10		)
Equity in earnings of limited partnerships	34			37			111			112
Other income	8			8			24			24
Total revenues	1,426			1,577			4,535			4,574
Benefits and expenses
Insurance losses and loss expenses	935			868			3,095			2,571
Policy acquisition and underwriting expenses	341			311			987			906
Total benefits and expenses	1,276			1,179			4,082			3,477

Income from operations before income taxes and noncontrolling interest	150			398			453			1,097
Provision for income taxes	42			131			133			363
Net income	$	108		$	267		$	320		$	734

Less: Net income attributable to noncontrolling interest in consolidated entity – Exchange	61			221			178			607

Net income attributable to Indemnity	$	47		$	46		$	142		$	127


Earnings Per Share
Net income attributable to Indemnity per share
Class A common stock – basic	$	1.01		$	0.98		$	3.05		$	2.71
Class A common stock – diluted	$	0.90		$	0.87		$	2.71		$	2.41
Class B common stock – basic	$	151		$	147		$	458		$	406
Class B common stock – diluted	$	151		$	147		$	457		$	406

Weighted average shares outstanding attributable to Indemnity – Basic
Class A common stock	46,189,068			46,656,911			46,267,694			46,707,971
Class B common stock	2,542			2,542			2,542			2,542

Weighted average shares outstanding attributable to Indemnity – Diluted
Class A common stock	52,387,164			52,851,250			52,465,790			52,902,310
Class B common stock	2,542			2,542			2,542			2,542

Dividends declared per share
Class A common stock	$	0.6350		$	0.5925		$	1.9050		$	1.7775
Class B common stock	$	95.2500		$	88.8750		$	285.7500		$	266.6250

Erie Indemnity Company

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

(in millions)



	Indemnity shareholder interest				Noncontrolling interest (Exchange)						Eliminations of related party transactions						Erie Insurance Group
	Three months ended September 30,				Three months ended September 30,						Three months ended September 30,						Three months ended September 30,
	2014		2013		2014			2013			2014			2013			2014			2013
Management operations:
Management fee revenue, net	$	362	$	333	$	—		$	—		$	(362	)	$	(333	)	$	—		$	—
Service agreement revenue	8		8		—			—			—			—			8			8
Total revenue from management operations	370		341		—			—			(362		)	(333		)	8			8
Cost of management operations	308		281		—			—			(308		)	(281		)	—			—
Income from management operations before taxes	62		60		—			—			(54		)	(52		)	8			8
Property and casualty insurance operations:
Net premiums earned	—		—		1,333			1,221			—			—			1,333			1,221
Losses and loss expenses	—		—		908			841			(1		)	(1		)	907			840
Policy acquisition and underwriting expenses	—		—		387			356			(56		)	(54		)	331			302
Income from property and casualty insurance operations before taxes	—		—		38			24			57			55			95			79
Life insurance operations: ⁽¹⁾
Total revenue	—		—		48			47			0			(1		)	48			46
Total benefits and expenses	—		—		38			37			0			0			38			37
Income from life insurance operations before taxes	—		—		10			10			0			(1		)	10			9
Investment operations: ⁽¹⁾
Net investment income	4		4		90			83			(3		)	(2		)	91			85
Net realized gains (losses) on investments	0		1		(88		)	188			—			—			(88		)	189
Net impairment losses recognized in earnings	0		0		0			(9		)	—			—			0			(9		)
Equity in earnings of limited partnerships	4		5		30			32			—			—			34			37
Income from investment operations before taxes	8		10		32			294			(3		)	(2		)	37			302
Income from operations before income taxes and noncontrolling interest	70		70		80			328			—			—			150			398
Provision for income taxes	23		24		19			107			—			—			42			131
Net income	$	47	$	46	$	61		$	221		$	—		$	—		$	108		$	267

(1) Earnings on life insurance related invested assets are integral to the evaluation of the life insurance operations because of the long duration of life products. On that basis, for presentation purposes, the life insurance operations in the table above include life insurance related investment results.

Erie Indemnity Company

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

(in millions)



	Indemnity shareholder interest				Noncontrolling interest (Exchange)						Eliminations of related party transactions						Erie Insurance Group
	Nine months ended September 30,				Nine months ended September 30,						Nine months ended September 30,						Nine months ended September 30,
	2014		2013		2014			2013			2014			2013			2014			2013
Management operations:
Management fee revenue, net	$	1,047	$	965	$	—		$	—		$	(1,047	)	$	(965	)	$	—		$	—
Service agreement revenue	23		23		—			—			—			—			23			23
Total revenue from management operations	1,070		988		—			—			(1,047		)	(965		)	23			23
Cost of management operations	882		820		—			—			(882		)	(820		)	—			—
Income from management operations before taxes	188		168		—			—			(165		)	(145		)	23			23
Property and casualty insurance operations:
Net premiums earned	—		—		3,899			3,573			—			—			3,899			3,573
Losses and loss expenses	—		—		3,016			2,495			(4		)	(4		)	3,012			2,491
Policy acquisition and underwriting expenses	—		—		1,132			1,032			(173		)	(151		)	959			881
(Loss) income from property and casualty insurance operations before taxes	—		—		(249		)	46			177			155			(72		)	201
Life insurance operations: ⁽¹⁾
Total revenue	—		—		144			139			(1		)	(2		)	143			137
Total benefits and expenses	—		—		111			105			0			0			111			105
Income from life insurance operations before taxes	—		—		33			34			(1		)	(2		)	32			32
Investment operations: ⁽¹⁾
Net investment income	12		11		263			243			(11		)	(8		)	264			246
Net realized gains on investments	1		1		95			492			—			—			96			493
Net impairment losses recognized in earnings	0		0		0			(9		)	—			—			0			(9		)
Equity in earnings of limited partnerships	13		13		97			98			—			—			110			111
Income from investment operations before taxes	26		25		455			824			(11		)	(8		)	470			841
Income from operations before income taxes and noncontrolling interest	214		193		239			904			—			—			453			1,097
Provision for income taxes	72		66		61			297			—			—			133			363
Net income	$	142	$	127	$	178		$	607		$	—		$	—		$	320		$	734

Erie Indemnity Company

Reconciliation of Operating Income to Net Income

Reconciliation of operating income to net income

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

Indemnity defines operating income as net income excluding realized capital gains and losses, impairment losses and related federal income taxes.

Indemnity uses operating income to evaluate the results of its operations. It reveals trends that may be obscured by the net effects of realized capital gains and losses including impairment losses. Realized capital gains and losses, including impairment losses, may vary significantly between periods and are generally driven by business decisions and economic developments such as capital market conditions which are not related to our ongoing operations. We are aware that the price to earnings multiple commonly used by investors as a forward-looking valuation technique uses operating income as the denominator. Operating income should not be considered as a substitute for net income prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and does not reflect Indemnity’s overall profitability.

The following table reconciles operating income and net income for the Indemnity shareholder interest:



	Indemnity Shareholder Interest
	Three months ended September 30,				Nine months ended September 30,
(in millions, except per share data)	2014		2013		2014			2013
	(Unaudited)				(Unaudited)
Operating income attributable to Indemnity	$	47	$	45	$	141		$	126
Net realized gains and impairments on investments	0		1		1			1
Income tax expense	0		0		0			0
Realized gains and impairments, net of income taxes	0		1		1			1
Net income attributable to Indemnity	$	47	$	46	$	142		$	127

Per Indemnity Class A common share-diluted:
Operating income attributable to Indemnity	$	0.90	$	0.86	$	2.70		$	2.40
Net realized gains and impairments on investments	0.00		0.01		0.02			0.01
Income tax expense	0.00		0.00		(0.01		)	0.00
Realized gains and impairments, net of income taxes	0.00		0.01		0.01			0.01
Net income attributable to Indemnity	$	0.90	$	0.87	$	2.71		$	2.41

Erie Indemnity Company

Consolidated Statements of Financial Position

(in millions)



	September 30, 2014		December 31, 2013
	(Unaudited)
Assets
Investments – Indemnity
Available-for-sale securities, at fair value:
Fixed maturities	$	563	$	526
Equity securities	25		50
Limited partnerships	134		146
Other invested assets	1		1
Investments – Exchange
Available-for-sale securities, at fair value:
Fixed maturities	8,902		8,162
Equity securities	917		819
Trading securities, at fair value	3,125		3,202
Limited partnerships	939		940
Other invested assets	20		20
Total investments	14,626		13,866

Cash and cash equivalents (Exchange portion of $334 and $403, respectively)	379		452
Premiums receivable from policyholders – Exchange	1,323		1,167
Reinsurance recoverable – Exchange	165		172
Deferred income taxes – Indemnity	2		2
Deferred acquisition costs – Exchange	603		566
Other assets (Exchange portion of $366 and $337, respectively)	480		451
Total assets	$	17,578	$	16,676

Liabilities and shareholders’ equity
Liabilities
Indemnity liabilities
Other liabilities	$	482	$	476
Exchange liabilities
Losses and loss expense reserves	3,933		3,747
Life policy and deposit contract reserves	1,801		1,758
Unearned premiums	2,896		2,598
Deferred income taxes	465		450
Other liabilities	165		97
Total liabilities	9,742		9,126

Indemnity's shareholders’ equity	771		734

Noncontrolling interest in consolidated entity – Exchange	7,065		6,816
Total equity	7,836		7,550
Total liabilities, shareholders’ equity and noncontrolling interest	$	17,578	$	16,676

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