e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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þ |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-24000
(Exact name of registrant as specified in its charter)
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Pennsylvania
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25-0466020 |
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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100 Erie Insurance Place, Erie, Pennsylvania
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16530 |
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(Address of principal executive offices)
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(Zip code) |
(814) 870-2000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class A common stock, stated value $0.0292 per share, listed on the NASDAQ Stock Market, LLC
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(Title of each class)
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(Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: None
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 if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 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 (Do not check if a smaller reporting company) |
Smaller Reporting Company o |
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
Aggregate market value of voting and non-voting common stock held by non-affiliates as of the last
business day of the registrants most recently completed second fiscal quarter: $1.0 billion of
Class A non-voting common stock as of June 30, 2009. There is no active market for the Class B
voting common stock. The Class B common stock is closely held by few shareholders.
Indicate the number of shares outstanding of each of the registrants classes of common stock, as
of the latest practicable date: 51,203,473 shares of Class A common stock and 2,546 shares of
Class B common stock outstanding on February 19, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Part III of this Form 10-K (Items 10, 11, 12, 13, and 14) are incorporated by reference
to the information statement on Form 14(C) to be filed with the Securities and Exchange Commission
no later than 120 days after December 31, 2009.
PART I
Item 1. Business
General
Erie Indemnity Company (we, us, our) is a publicly held Pennsylvania business corporation
that since 1925 has been the managing Attorney-in-Fact for the subscribers at Erie Insurance
Exchange (Exchange). The Exchange is a subscriber (policyholder) owned Pennsylvania-domiciled
reciprocal insurer that writes property/casualty insurance. Our 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 us as their common
attorney-in-fact to transact business on their behalf and to manage their affairs at the Exchange.
We earn a management fee from the Exchange for these services.
The Exchange and its wholly-owned subsidiary, Flagship City Insurance Company (Flagship) and the
Indemnitys wholly-owned subsidiaries, Erie Insurance Company (EIC), Erie Insurance Company of
New York (ENY) and the Erie Insurance Property and Casualty Company (EPC), comprise the
Property and Casualty Group. The Property and Casualty Group is a regional insurance group
operating in 11 Midwestern, Mid-Atlantic, and Southeastern states and the District of Columbia. The
Property and Casualty Group primarily writes personal auto insurance, which comprises 48% of its
direct premiums.
The Indemnity owns 21.6% of the common stock of the Erie Family Life Insurance Company (EFL), an
affiliated life insurance company; the Exchange owns the remaining 78.4%. EFL underwrites and sells
nonparticipating individual and group life insurance policies and fixed annuities.
The Indemnity, together with the members of the Property and Casualty Group and EFL, operate
collectively as the Erie Insurance Group (Group).
Business segments
We operate our business as three reportable segments management operations, insurance
underwriting operations and investment operations. Financial information about these segments is
set forth in and referenced to Item 8. Financial Statements and Supplementary Data Note 22 of
Notes to Consolidated Financial Statements contained within this report. Further discussion of
financial results by operating segment is provided in and referenced to Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations contained within this
report.
Management operations For our services as attorney-in-fact, we charge the policyholders
of the Exchange a management fee of up to 25%. Management fees accounted for approximately 81% of
our total revenue in 2009, 84% in 2008 and 72% in 2007. The proportion of management fee revenue to
total revenues was greater in 2009 and 2008 due to lower revenues generated from our investment
operations as a result of market conditions. Excluding limited partnership losses and market value
adjustments, 2009 management fee revenues accounted for 76% of total revenues. Excluding
impairment charges, 2008 management fee revenues accounted for 79% of total revenues.
We have an interest in the growth and financial condition of the Exchange as 1) the Exchange is our
sole customer and 2) our earnings are largely generated from management fees based on the direct
written premiums of the Exchange and other members of the Property and Casualty Group.
Historically, due to policy renewal and sales patterns, the Property and Casualty Groups direct
written premiums are greater in the second and third quarters than in the first and fourth quarters
of the calendar year. Consequently, there is seasonality in our management fees and we have higher
gross margins in our management operations in those quarters.
Insurance underwriting operations The members of the Property and Casualty Group pool
their underwriting results. Under the reinsurance pooling arrangement, the Exchange assumes 94.5%
of the pool. Accordingly, the underwriting risk of the Property and Casualty Groups business is
largely borne by the Exchange, which had $4.5 billion and $4.0 billion of statutory surplus at
December 31, 2009 and December 31, 2008, respectively. Through the pool, our property/casualty
insurance subsidiaries currently assume 5.5% of the Property and Casualty Groups underwriting
results, and therefore, we also have a direct incentive to manage the insurance underwriting
operations of the Property and Casualty Group effectively.
3
The Property and Casualty Group seeks to insure standard and preferred risks with personal lines
comprising 72% of the 2009 direct written premiums and commercial lines the remaining 28%. The
principal personal lines products based on 2009 direct written premiums were private passenger
automobile (48%) and homeowners (21%). The principal commercial lines products based on 2009 direct
written premiums were commercial multi-peril (11%), commercial automobile (8%) and workers
compensation (6%). The Property and Casualty Group ranked as the 14th largest automobile
insurer in the United States based on 2008 direct written premiums and as the 18th
largest property/casualty insurer in the United States based on 2008 total lines net premium
written according to AM Best.
The Property and Casualty Group writes business in Illinois, Indiana, Maryland, New York, North
Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, Wisconsin and the District of
Columbia. The states of Pennsylvania, Maryland and Virginia made up 64% of the Property and
Casualty Groups 2009 direct written premium.
The Property and Casualty Group is represented by over 2,000 independent agencies comprising over
9,200 licensed representatives and is our sole distribution channel. In addition to their principal
role as salespersons, the independent agents play a significant role as underwriting and service
providers and are fundamental to the Property and Casualty Groups success.
While sales, underwriting and policy issuance services are centralized at our home office, the
Property and Casualty Group maintains 23 field offices throughout its operating region to provide
claims services to policyholders and marketing support for the independent agencies that represent
us.
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 yields and limiting credit risk. Revenues and losses included in investment operations
consist of net investment income, net realized gains and losses, and impairment losses
recognized in earnings for our fixed maturity and equity portfolios. Equity in earnings and losses
from our alternative investments, which include private equity, mezzanine, and real estate
partnerships, are also included as a component of investment operations. Additionally, our 21.6%
investment in EFL is included in the investment operation results.
Competition
Property and casualty insurers generally compete on the basis of customer service, price, consumer
recognition, coverages offered, claim handling, financial stability and geographic coverage.
Vigorous competition, particularly in the personal lines automobile and homeowners lines of
business, is provided by large, well-capitalized national companies, some of which have broad
distribution networks of employed or captive agents, by smaller regional insurers and by large
companies who market and sell personal lines products directly to consumers. In addition, because
the insurance products of the Property and Casualty Group are marketed exclusively through
independent insurance agents, the Property and Casualty Group faces competition within its
appointed agencies based on ease of doing business, product, price and service relationships. The
market is competitive with some carriers filing rate decreases while others focus on acquiring
business through other means.
Market competition bears directly on the price charged for insurance products and services subject
to regulatory limitations. Growth is driven by a companys ability to provide insurance services
and competitive prices while maintaining target profit margins. Industry capital levels can also
significantly affect prices charged for coverage. Growth is a product of a companys ability to
retain existing customers and to attract new customers, as well as movement in the average premium
per policy.
The Erie Insurance Group has a strategic focus that we believe will result in long-term
underwriting performance. First, the Erie Insurance Group employs an underwriting philosophy and
product mix targeted to produce a Property and Casualty Group underwriting profit on a long-term
basis through careful risk selection and rational pricing. The careful selection of risks allows
for lower claims frequency and loss severity, thereby enabling insurance to be offered at favorable
prices. The Property and Casualty Group has continued to refine its risk measurement and price
segmentation model used in the underwriting and pricing processes. Second, the Property and
Casualty Group focuses on consistently providing superior service to policyholders and agents.
Third, the Property and Casualty Groups business model is designed to provide the advantages of
localized marketing and claims servicing with the economies of scale and low cost of operations
from centralized accounting, administrative, underwriting, investment, information management and
other support services.
4
Finally, we carefully select the independent agencies that represent the Property and Casualty
Group. The Property and Casualty Group seeks to be the lead insurer with its agents in order to
enhance the agency relationship and the likelihood of receiving the most desirable underwriting
opportunities from its agents. We have ongoing, direct communications with the agency force. Agents
have access to a number of venues we sponsor designed to promote sharing of ideas, concerns and
suggestions with the senior management of the Property and Casualty Group with the goal of
improving communications and service. We continue to evaluate new ways to support our agents
efforts, from marketing programs to identifying potential customer leads, to grow the business of
the Property and Casualty Group and sustain our long-term agency partnerships. The higher agency
penetration and long-term relationships allow for greater efficiency in providing agency support
and training.
Employees
We employed 4,200 people at December 31, 2009, of which approximately 2,125, or 51%, provide claims
specific services exclusively for the Property and Casualty Group and approximately 65, or 2%,
perform services exclusively for EFL. Both the Exchange and EFL reimburse us at least quarterly for
the cost of these services.
Reserves for losses and loss expenses
The table that follows illustrates the change over time of the loss and loss expense reserves
established for our property/casualty insurance subsidiaries at the end of the last ten calendar
years. The development of loss and loss expenses are presented on a gross basis (gross of ceding
transactions in the intercompany pool) and a net basis (the amount remaining as our exposure after
ceding and assuming amounts through the intercompany pool, as well as transactions under the
excess-of-loss reinsurance agreement prior to 2006, with the Exchange). Incurred but not reported
reserves (IBNR) are developed for the Property and Casualty Group as a whole and then allocated to
members of the Property and Casualty Group based on each members proportionate share of earned
premiums. We do not develop IBNR reserves for each of the property/casualty insurance subsidiaries
based on their direct and assumed writings. Consequently, the gross liability data contained in
this table for our property/casualty insurance subsidiaries includes allocated amounts for IBNR
reserves.
Our 5.5% share of the loss and loss expense reserves of the Property and Casualty Group are shown
in the net presentation and are more representative of the actual development of the
property/casualty insurance losses accruing to our subsidiaries. The gross presentation is shown to
be consistent with the balance sheet presentation of reinsurance transactions which requires direct
and ceded amounts to be presented separate from one another, thus the gross liability for unpaid
losses and loss expenses of $965.4 million at December 31, 2009 agrees to the gross balance sheet
amount. When factoring in the $778.5 million in reinsurance recoverables under the pooling
agreement, the net obligation to us is $186.9 million at December 31, 2009. Additional discussion
of our reserve methodology can be found in and is referenced to Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations Critical Accounting Estimates
contained within this report.
The Property and Casualty Group discounts only workers compensation reserves. These reserves are
discounted on a nontabular basis as prescribed by the Insurance Department of the Commonwealth of
Pennsylvania. The interest rate of 2.5% used to discount these reserves is based upon the Property
and Casualty Groups historical workers compensation payout pattern. Our unpaid losses and loss
expenses reserve was reduced by $7.5 million and $5.4 million at December 31, 2009 and 2008,
respectively, as a result of this discounting. The increase in 2009 was the result of segregating
massive injury workers compensation claims that have longer payout patterns in the discount
calculation.
Additional discussion of reserve activity can be found in and is referenced to Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations Financial
Condition section contained within this report.
5
Property and Casualty Subsidiaries of Erie Indemnity Company
Reserves for Unpaid Losses and Loss Expenses
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At December 31, |
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(in millions) |
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2000 |
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2001 |
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2002 |
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2003 |
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2004 |
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2005 |
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2006 |
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2007 |
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2008 |
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2009 |
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Gross liability for unpaid losses and
loss expenses (LAE) |
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$ |
477.9 |
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$ |
557.3 |
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$ |
717.0 |
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$ |
845.5 |
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$ |
943.0 |
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$ |
1,019.5 |
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$ |
1,073.6 |
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$ |
1,026.5 |
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$ |
965.1 |
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$ |
965.4 |
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Gross liability re-estimated as of: |
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One year later |
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516.2 |
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622.6 |
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727.2 |
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844.5 |
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955.3 |
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1,034.1 |
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992.8 |
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945.8 |
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909.1 |
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Two years later |
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567.1 |
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635.1 |
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730.5 |
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886.2 |
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1,004.1 |
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1,006.1 |
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942.9 |
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897.6 |
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Three years later |
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567.2 |
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644.3 |
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781.2 |
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958.5 |
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1,014.4 |
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971.5 |
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901.2 |
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Four years later |
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562.2 |
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699.4 |
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856.4 |
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983.0 |
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982.8 |
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938.7 |
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Five years later |
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619.0 |
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779.2 |
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888.0 |
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952.8 |
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954.2 |
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Six years later |
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701.0 |
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816.5 |
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858.9 |
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922.6 |
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Seven years later |
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721.5 |
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788.2 |
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828.9 |
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Eight years later |
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702.6 |
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758.2 |
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Nine years later |
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681.1 |
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Cumulative (deficiency) redundancy |
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(203.2 |
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(200.9 |
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( 111.9 |
) |
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(77.1 |
) |
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(11.2 |
) |
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80.8 |
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172.4 |
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128.9 |
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56.0 |
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Gross liability for unpaid losses and LAE |
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$ |
477.9 |
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$ |
557.3 |
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$ |
717.0 |
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$ |
845.5 |
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$ |
943.0 |
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$ |
1,019.5 |
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$ |
1,073.6 |
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$ |
1,026.5 |
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$ |
965.1 |
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$ |
965.4 |
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Reinsurance recoverable on unpaid losses |
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375.6 |
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438.6 |
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577.9 |
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687.8 |
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765.6 |
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828.0 |
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873.0 |
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834.4 |
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778.3 |
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778.5 |
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Net liability for unpaid losses and LAE |
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$ |
102.3 |
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$ |
118.7 |
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$ |
139.1 |
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$ |
157.7 |
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$ |
177.4 |
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$ |
191.5 |
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$ |
200.6 |
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$ |
192.1 |
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$ |
186.8 |
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$ |
186.9 |
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Net re-estimated liability as of: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
$ |
109.8 |
|
|
$ |
126.6 |
|
|
$ |
140.9 |
|
|
$ |
162.6 |
|
|
$ |
181.2 |
|
|
$ |
183.0 |
|
|
$ |
185.1 |
|
|
$ |
181.7 |
|
|
$ |
181.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two years later |
|
|
116.0 |
|
|
|
127.0 |
|
|
|
144.6 |
|
|
|
171.9 |
|
|
|
179.3 |
|
|
|
175.5 |
|
|
|
180.6 |
|
|
|
176.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three years later |
|
|
116.2 |
|
|
|
131.9 |
|
|
|
155.7 |
|
|
|
173.8 |
|
|
|
173.7 |
|
|
|
173.9 |
|
|
|
177.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
120.9 |
|
|
|
143.6 |
|
|
|
157.6 |
|
|
|
170.3 |
|
|
|
172.1 |
|
|
|
171.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
132.5 |
|
|
|
146.2 |
|
|
|
155.1 |
|
|
|
169.4 |
|
|
|
170.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
|
135.0 |
|
|
|
144.7 |
|
|
|
153.2 |
|
|
|
167.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
|
132.8 |
|
|
|
142.6 |
|
|
|
153.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
|
131.2 |
|
|
|
142.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
|
131.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative (deficiency) redundancy |
|
$ |
( 28.9 |
) |
|
$ |
(23.5 |
) |
|
$ |
(14.3 |
) |
|
$ |
(9.7 |
) |
|
$ |
7.0 |
|
|
$ |
19.8 |
|
|
$ |
23.6 |
|
|
$ |
15.2 |
|
|
$ |
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
(in millions) |
|
2000 |
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Cumulative amount of gross
liability paid through: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
$ |
174.4 |
|
|
$ |
194.3 |
|
|
$ |
217.0 |
|
|
$ |
259.1 |
|
|
$ |
271.4 |
|
|
$ |
271.7 |
|
|
$ |
257.4 |
|
|
$ |
248.0 |
|
|
$ |
239.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two years later |
|
|
270.9 |
|
|
|
302.1 |
|
|
|
351.0 |
|
|
|
410.6 |
|
|
|
435.0 |
|
|
|
427.0 |
|
|
|
404.4 |
|
|
|
377.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three years later |
|
|
326.1 |
|
|
|
372.4 |
|
|
|
434.8 |
|
|
|
508.4 |
|
|
|
530.0 |
|
|
|
519.1 |
|
|
|
483.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
361.3 |
|
|
|
418.9 |
|
|
|
488.0 |
|
|
|
561.4 |
|
|
|
586.1 |
|
|
|
570.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
384.9 |
|
|
|
450.6 |
|
|
|
514.8 |
|
|
|
593.8 |
|
|
|
619.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
|
405.9 |
|
|
|
466.9 |
|
|
|
534.9 |
|
|
|
614.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
|
415.8 |
|
|
|
481.0 |
|
|
|
548.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
|
427.8 |
|
|
|
491.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
|
436.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative amount of
net liability paid through: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
$ |
41.2 |
|
|
$ |
47.2 |
|
|
$ |
51.3 |
|
|
$ |
58.0 |
|
|
$ |
53.9 |
|
|
$ |
51.9 |
|
|
$ |
56.0 |
|
|
$ |
57.3 |
|
|
$ |
56.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two years later |
|
|
64.8 |
|
|
|
73.6 |
|
|
|
81.3 |
|
|
|
85.3 |
|
|
|
81.9 |
|
|
|
82.8 |
|
|
|
89.2 |
|
|
|
86.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three years later |
|
|
79.2 |
|
|
|
91.2 |
|
|
|
95.3 |
|
|
|
100.3 |
|
|
|
101.5 |
|
|
|
104.1 |
|
|
|
107.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
88.5 |
|
|
|
97.4 |
|
|
|
100.9 |
|
|
|
111.9 |
|
|
|
114.6 |
|
|
|
116.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
89.8 |
|
|
|
97.9 |
|
|
|
107.3 |
|
|
|
120.1 |
|
|
|
122.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
|
94.1 |
|
|
|
101.8 |
|
|
|
112.5 |
|
|
|
125.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
|
96.4 |
|
|
|
105.6 |
|
|
|
115.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
|
98.5 |
|
|
|
107.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
Government Regulation
The Property and Casualty Group is subject to supervision and regulation in the states in which it
transacts business. The extent of such regulation varies, but generally derives from state statutes
that delegate regulatory, supervisory and administrative authority to state insurance departments.
Accordingly, the authority of the state insurance departments includes the establishment of
standards of solvency that must be met and maintained by insurers, the licensing to do business of
insurers and agents, the nature of the limitations on investments, the approval of premium rates
for property/casualty insurance, the provisions that insurers must make for current losses and
future liabilities, the deposit of securities for the benefit of policyholders, the approval of
policy forms, notice requirements for the cancellation of policies and the approval of certain
changes in control. In addition, many states have enacted variations of competitive rate-making
laws that allow insurers to set certain premium rates for certain classes of insurance without
having to obtain the prior approval of the state insurance department. State insurance departments
also conduct periodic examinations of the affairs of insurance companies and require the filing of
quarterly and annual reports relating to the financial condition of insurance companies.
The Property and Casualty Group is also required to participate in various involuntary insurance
programs for automobile insurance, as well as other property/casualty lines, in states in which
such companies operate. These involuntary programs provide various insurance coverages to
individuals or other entities that otherwise are unable to purchase such coverage in the voluntary
market. These programs include joint underwriting associations, assigned risk plans, fair access to
insurance requirements (FAIR) plans, reinsurance facilities and windstorm plans. Legislation
establishing these programs generally provides for participation in proportion to voluntary
writings of related lines of business in that state. The loss ratio on insurance written under
involuntary programs has traditionally been greater than the loss ratio on insurance in the
voluntary market.
Most states have enacted legislation that regulates insurance holding company systems such as the
Erie Insurance Group. Each insurance company in the holding company system is required to register
with the insurance supervisory authority of its state of domicile and furnish information regarding
the operations of companies within the holding company system that may materially affect the
operations, management or financial condition of the insurers within the system. Pursuant to these
laws, the respective insurance departments may examine us and the Property and Casualty Group at
any time, require disclosure of material transactions with the insurers and us as an insurance
holding company and require prior approval of certain transactions between the Property and
Casualty Group and us.
All transactions within the holding company system affecting the insurers we manage are filed with
the applicable insurance departments and must be fair and reasonable. Approval of the applicable
insurance commissioner is required prior to the consummation of transactions affecting the control
of an insurer. In some states, the acquisition of 10% or more of the outstanding common stock of an
insurer or its holding company is presumed to be a change in control. Approval of the applicable
insurance commissioner is also required in order to declare extraordinary dividends. See Item 8,
Financial Statements and Supplementary Data Note 19 of Notes to Consolidated Financial
Statements contained within this report.
Website access
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
all amendments to those reports are available free of charge on our website at
www.erieinsurance.com as soon as reasonably practicable after such material is filed electronically
with the SEC. Our Code of Conduct is available on our website and in printed form upon request. Our
annual report on Form 10-K and the information statement on Form 14(C) are also available free of
charge at www.erieinsurance.com. Copies of our annual report on Form 10-K will be made available,
free of charge, upon written request as well.
7
Item 1A. Risk Factors
Our business involves various risks and uncertainties, including, but not limited to those
discussed in this section. The events described in the risk factors below, or any additional risk
outside of those discussed below, could have a material adverse effect on our business, financial
condition, operating results or liquidity if they actually occur. This information should be
considered carefully together with the other information contained in this report, including
managements discussion and analysis of financial condition and results of operations, the
consolidated financial statements and the related notes.
Our formal enterprise risk management (ERM) activities fall under the leadership of our Chief
Executive Officer and executive management. Actual supervision of the ERM program is the
responsibility of our Chief Risk Officer (CRO). There is no universally accepted ERM standard of
practice and, as such, approaches take on different forms throughout the insurance industry. Our
formal ERM effort is meant to create an atmosphere of risk-intelligent decision making and, in
turn, add greater likelihood to the successful achievement of our corporate objectives. To achieve
these goals, our ERM program focuses on the following priorities:
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identifying, assessing and prioritizing potential risk events (using both
quantitative and qualitative techniques); |
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cataloguing effective risk responses; |
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monitoring actual losses and learning from historical risk events; |
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educating and encouraging employees at all levels to consider the risks and
rewards of the decisions they make; |
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managing corporate risks from an enterprise portfolio viewpoint; |
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defining risk tolerances, including aligning strategic and operational
objectives within those tolerances, and enforcing subsequent decision standards and limits;
and |
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planning for extreme adverse risk events. |
Our ERM policy statement establishes the framework, principles and guidelines for our ERM program
so that aggregated risks are acceptable to us or any of our subsidiaries or affiliates, including
the Erie Insurance Exchange. Besides leading and directing the program, the CRO is responsible for
reporting risk information to executive management and the Board of Directors, advising decision
makers from a risk perspective, and improving our overall risk-readiness. Our ERM committee
consists of a cross-functional team of representatives from all major business functions as well as
a technical team which is responsible for risk quantification and identification on an integrated
basis. General day-to-day risk management responsibility lies within our functional divisions,
ensuring execution by those most familiar with the related risks. A compliance department within
our law division is charged with monitoring regulatory, legal, and ethical requirements and
ensuring that appropriate responses are initiated.
An essential part of our ERM infrastructure is a stochastic modeling capability for our
property/casualty insurance operations as well as the investment operations for the Property and
Casualty Group. The modeling capability is a significant component in our quantification of
insurance and investment risk. Model output is used to assess the variability of risk inherent in
our operations and the sufficiency of enterprise capital levels given our defined tolerance for
risk. The model further provides additional insights into capital management, strategic asset
allocation of our investment portfolios, capital required for product lines sold by the enterprise,
catastrophe exposure management and reinsurance purchasing and risk management strategy.
As our ERM program continues to evolve, new techniques are being used at the enterprise and
individual project levels to consider key risks not inherently quantifiable, such as scenario
analysis. ERM tools continue to be developed and modified to identify and assess risk on a
consistent basis, providing management with more information to respond effectively and
efficiently.
Risk factors related to our business
If the management fee rate paid by the Exchange is reduced, if there is a significant decrease in
the amount of premiums written by the Exchange, or if the costs of providing services to the
Exchange are not controlled, revenues and profitability could be materially adversely affected.
We are dependent upon management fees paid by the Exchange, which represent our principal source of
revenue. Management fee revenue from the Exchange is calculated by multiplying the management fee
rate by the direct premiums written by the Exchange and the other members of the Property and
Casualty Group, which are assumed by the Exchange under an intercompany pooling arrangement.
Accordingly, any reduction in direct premiums written by the Property and Casualty Group would have
a proportional negative effect on our revenues and net
8
income. See the Risk Factors relating to the business of the Property and Casualty Group section,
herein, for a discussion of risks impacting direct written premium.
The management fee rate is determined by the Board of Directors and may not exceed 25% of the
direct written premiums of the Property and Casualty Group. The Board of Directors sets the
management fee rate each December for the following year. At their discretion, the rate can be
changed at any time. The factors considered by the Board in setting the management fee rate include
our financial position in relation to the Exchange and the long-term needs of the Exchange for
capital and surplus to support its continued growth and competitiveness. If the Exchanges surplus
were significantly reduced, the management fee rate could be reduced and our revenues and
profitability could be materially adversely affected.
Pursuant to the attorney-in-fact agreements with the policyholders of the Exchange, we are
appointed to perform certain services, regardless of the cost to us of providing those services.
These services relate to the sales, underwriting and issuance of policies on behalf of the
Exchange. We would lose money or be less profitable if the cost of providing those services
increases significantly.
We are subject to credit risk from the Exchange because the management fees from the Exchange are
not paid immediately when earned. Our property/casualty insurance subsidiaries are subject to
credit risk from the Exchange because the Exchange assumes a higher insurance risk under an
intercompany reinsurance pooling arrangement than is proportional to its direct business
contribution to the pool.
We recognize management fees due from the Exchange as income when the premiums are written because
at that time we have performed substantially all of the services we are required to perform,
including sales, underwriting and policy issuance activities. However, such fees are not paid to us
by the Exchange until the Exchange collects the premiums from policyholders. As a result, we hold
receivables for management fees earned and due to us.
Two of our wholly-owned property/casualty insurance subsidiaries, Erie Insurance Company and Erie
Insurance Company of New York, are parties to the intercompany pooling arrangement with the
Exchange. Under this pooling arrangement, our insurance subsidiaries cede 100% of their
property/casualty underwriting business to the Exchange, which retrocedes 5% of the pooled business
to Erie Insurance Company and 0.5% to Erie Insurance Company of New York. In 2009, approximately
84% of the pooled direct property/casualty business was originally generated by the Exchange and
its subsidiary, while 94.5% of the pooled business is retroceded to the Exchange under the
intercompany pooling arrangement. Accordingly, the Exchange assumes a higher insurance risk than is
proportional to the insurance business it contributes to the pool. This poses a credit risk to our
property/casualty subsidiaries participating in the pool as they retain the responsibility to their
direct policyholders if the Exchange is unable to meet its reinsurance obligations.
We hold receivables from the Exchange for costs we pay on the Exchanges behalf and for reinsurance
under the intercompany pooling arrangement. Our total receivable from the Exchange, including the
management fee, reimbursable costs we paid on behalf of the Exchange and total amounts recoverable
from the intercompany reinsurance pool, totaled $1.1 billion or 41.8% of our total assets at
December 31, 2009.
Our financial condition may suffer because of declines in the value of the securities held in our
investment portfolio that constitute a significant portion of our assets. The continuing
volatility in the financial markets and the ongoing economic downturn could have a material adverse
effect on our results of operations or financial condition.
Markets in the United States and around the world, which experienced extreme volatility and
disruption since mid-2007 began to stabilize in 2009. The financial stress that affected the
banking system so severely has diminished and the U.S. and most other economies grew in the second
half of 2009. Government stimulus and the stock market recovery bolstered consumer and business
confidence. Nevertheless, conditions remain fragile and the outlook for the financial markets
remains uncertain. Although we continue to monitor market conditions, we cannot predict future
market conditions or their impact on our investment portfolio. We could incur additional realized
and unrealized losses in future fiscal periods, which could have a material adverse effect on our
results of operations, financial condition or liquidity. In addition, financial market volatility
and other economic variables could have a material adverse affect on third parties with which we do
business. We cannot predict the impact that this would have on our business or results of
operations.
9
Credit conditions improved during the second half of 2009, with most credit spreads falling from
previous wide levels. The narrowing of credit spreads enabled businesses to refinance outstanding
debt and raise new capital. While our fixed income portfolio is well diversified, volatility in the
credit markets could adversely affect the values and liquidity of our corporate and municipal bonds
and our asset-backed and mortgage-backed securities, which could have a material adverse affect on
our financial condition. We do not hedge our exposure to credit risk as we control industry and
issuer exposure within our diversified portfolio. Inflation remains low, and the Federal Reserve
has indicated that the federal funds rate would likely remain low for an extended period,
reiterating its intent to promote economic recovery and maintain price stability. Our investment
strategy achieves a balanced maturity schedule in order to moderate investment income in the event
of interest rate declines in a year in which a large amount of securities could be redeemed or
mature. We do not hedge our exposure to interest rate risk as we have the ability to hold fixed
income securities to maturity.
At December 31, 2009, we had investments in equity securities of $79.9 million and investments in
limited partnerships of $235.0 million, or 3.0% and 8.8% of total assets, respectively. In
addition, we are obligated to invest up to an additional $68.8 million in limited partnerships,
including private equity, real estate and fixed income partnership investments. Limited
partnerships are less liquid and generally involve higher degrees of price risk than publicly
traded securities. Limited partnerships, like publicly traded securities, have exposure to market
volatility; but unlike publicly traded securities, cash flows and return expectations are less
predictable. The primary basis for the valuation of limited partnership interests are financial
statements prepared by the general partner. Because of the timing of the preparation and delivery
of these financial statements, the use of the most recently available financial statements provided
by the general partners result in a quarter delay in the inclusion of the limited partnership
results in our Consolidated Statements of Operations. Due to this delay, these financial statements
do not reflect market conditions experienced in the fourth quarter 2009. We expect additional
deterioration, primarily from our real estate limited partnerships, to be reflected in the general
partners year end financial statements, which we will receive in 2010. Such declines could be
significant.
All of our marketable securities are subject to market volatility. Our marketable securities have
exposure to price risk and the volatility of the equity markets and general economic conditions. To
the extent that future market volatility negatively impacts our investments, our financial
condition will be negatively impacted. We review the investment portfolio on a continuous basis to
evaluate positions that might have incurred other-than-temporary declines in value. The primary
factors considered in our review of investment valuation include the extent and duration to which
fair value is less than cost, historical operating performance and financial condition of the
issuer, short- and long-term prospects of the issuer and its industry, specific events that
occurred affecting the issuer including rating downgrades and, depending on the type of security,
our intent to sell or our ability and intent to retain the investment for a period of time
sufficient to allow for a recovery in value. If our policy for determining the recognition of
impaired positions were different, our Consolidated Statements of Financial Position and Statements
of Operations could be significantly impacted. See also Item 7A. Quantitative and Qualitative
Disclosures about Market Risk.
Ineffective business relationships, including partnering and outsourcing, could affect our ability
to compete.
The inability to successfully build business relationships through partnering or outsourcing could
have a material adverse effect on our business. As we purchase technologies or services from
others, we are reliant upon our partners employee skill, performance and ability to fulfill
fundamental business functions. This places our business performance at risk. The severity of such
risk would be commensurate with the level of aptitude of the external vendors knowledge and/or
technology. If the business partner does not act within the intended limits of their authority or
does not perform in a manner consistent with our business objectives, this could lead to
ineffective operational performance. The potential also exists for an agency or policyholder to
experience dissatisfaction with a vendor which may have an adverse effect on our business and/or
agency relationships.
Risk factors relating to the business of the Property and Casualty Group
The Property and Casualty Group faces significant competition from other regional and national
insurance companies which may result in lower revenues. Additionally, we face the operational risk
of potential loss resulting from inadequate or failed internal processes, people, and systems, or
from external events.
The Property and Casualty Group competes with regional and national property/casualty insurers
including direct writers of insurance coverage. Many of these competitors are larger and many have
greater financial, technical and
10
operating resources. In addition, there is competition within each insurance agency that represents
other carriers as well as the Property and Casualty Group.
If we are unable to perform at industry best practice levels in terms of quality, cost containment,
and speed-to-market due to inferior operating resources and/or problems with external
relationships, our business performance may suffer. As the business environment changes, if we are
unable to adapt timely to emerging industry changes, or if our people do not conform to the
changes, our business could be materially impacted.
The property/casualty insurance industry is highly competitive on the basis of product, price and
service. If competitors offer property/casualty products with more coverage and/or better service
or offer lower rates, and we are unable to implement product or service improvements quickly enough
to keep pace, the Property and Casualty Groups ability to grow and renew its business may be
adversely impacted.
The internet continues to grow as a method of product distribution, and as a preferred method of
product and price comparison. We compete against established direct to consumer insurers as well
as insurers that use a combination of agent and online distribution. We expect the competitors in
this channel to grow. Failure to position our distribution technology effectively in light of these
trends and changing demographics could inhibit our ability to grow and maintain our customer base.
Our growth could also be adversely impacted by an inability to accommodate prospective customers
based on lack of geographic agency presence.
If the Erie Insurance Group is unable to keep pace with technological advancements in the insurance
industry or is unable to ensure system availability or to secure system information, the ability of
the Property and Casualty Group to compete effectively could be impaired.
Technological development is necessary to reduce our cost and the Property and Casualty Groups
operating costs and to facilitate agents and policyholders ability to do business with the
Property and Casualty Group. If the Erie Insurance Group is unable to keep pace with the
advancements being made in technology, its ability to compete with other insurance companies who
have advanced technological capabilities will be negatively affected. Further, if the Erie
Insurance Group is unable to update or replace its legacy policy administration systems as they
become obsolete or as emerging technology renders them competitively inefficient, the Property and
Casualty Groups competitive position would be adversely affected.
We have an established business continuity plan to ensure the continuation of core business
operations in the event that normal business operations could not be performed due to a
catastrophic event. While we continue to test and assess our business continuity plan to ensure it
meets the needs of our core business operations and addresses multiple business interruption
events, there is no assurance that core business operations could be performed upon the occurrence
of such an event.
Advancements in technology continue to make it easier to store, share and transport information. A
security breach of our computer systems could interrupt or damage our operations or harm our
reputation if confidential company or customer information were to be misappropriated from our
systems. Cases where sensitive data is exposed or lost may lead to a loss in competitive advantage
or lawsuits. We implement standard information security procedures, such as user authentication
protocols and intrusion detection systems, to control data access and storage, including that which
is available on the internet.
Premium rates and reserves must be established for members of the Property and Casualty Group from
forecasts of the ultimate costs expected to arise from risks underwritten during the policy period.
Our underwriting profitability could be adversely affected to the extent such premium rates or
reserves are too low or by the effects of inflation.
One of the distinguishing features of the property and casualty insurance industry in general is
that its products are priced before its costs are known, as premium rates are generally determined
before losses are reported. 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. Accordingly, premium rates must be
established from forecasts of the ultimate costs expected to arise from risks underwritten during
the policy period and may not prove to be adequate. Further, property and casualty insurers
establish reserves for losses and loss expenses based upon estimates, and it is possible that the
ultimate liability will exceed these estimates because of the future development of known
11
losses, the existence of losses that have occurred but are currently unreported and larger than
historical settlements on pending and unreported claims. The process of estimating reserves is
inherently judgmental and can be influenced by factors that are subject to variation. If pricing or
reserves established by a member of the Property and Casualty Group are not sufficient, our
underwriting profitability may be adversely impacted.
Not completely knowing costs before products are priced has caused the property and casualty
insurance industry to cycle through periods of pricing corrections, resulting in an oscillation of
profitability and premium growth. The Property and Casualty Group seeks an appropriate balance
between profitability and premium growth, but the need to remain competitive prevents it from being
completely immune to the cyclical routine.
The financial performance of members of the Property and Casualty Group could be adversely affected
by severe weather conditions or other catastrophic losses, including terrorism.
The Property and Casualty Group conducts business in 11 states and the District of Columbia,
primarily in the Mid-Atlantic, Midwestern and Southeastern portions of the United States. A
substantial portion of this business is private passenger and commercial automobile, homeowners and
workers compensation insurance in Ohio, North Carolina, Maryland, Virginia and particularly,
Pennsylvania. As a result, a single catastrophe occurrence, destructive weather pattern, change in
climate condition, general economic trend, terrorist attack, regulatory development or other
condition disproportionately affecting one or more of the states in which the Property and Casualty
Group conducts substantial business could adversely affect the results of operations of members of
the Property and Casualty Group. Common natural catastrophe events include hurricanes, earthquakes,
tornadoes, hail storms and severe winter weather. The frequency and severity of these catastrophes
is inherently unpredictable. The extent of losses from a catastrophe is a function of both the
total amount of insured exposures in the area affected by the event and the severity of the event.
Terrorist attacks could cause losses from insurance claims related to the property/casualty
insurance operations, as well as a decrease in our shareholders equity, net income or revenue. The
federal Terrorism Risk Insurance Program Reauthorization and Extension Act of 2007 requires that
some coverage for terrorist loss be offered by primary commercial property insurers and provides
federal assistance for recovery of claims through 2014. While the Property and Casualty Group is
exposed to terrorism losses in commercial lines and workers compensation, these lines are afforded
a limited backstop above insurer deductibles for acts of terrorism under this federal program. The
Property and Casualty Group has no personal lines terrorist coverage in place. The Property and
Casualty Group could incur large net losses if future terrorist attacks occur.
The Property and Casualty Group maintains a property catastrophe reinsurance treaty that was
renewed effective January 1, 2010 that provides coverage of 95% of a loss up to $500 million in
excess of the Property and Casualty Groups loss retention of $400 million per occurrence. This
treaty excludes losses from acts of terrorism. Nevertheless, catastrophe reinsurance may prove
inadequate if a major catastrophic loss exceeds the reinsurance limit which could adversely affect
our underwriting profitability.
The Property and Casualty Group depends on independent insurance agents, which exposes the Property
and Casualty Group to risks not applicable to companies with dedicated agents or other forms of
distribution.
The Property and Casualty Group markets and sells its insurance products through independent,
non-exclusive agencies. These agencies are not obligated to sell only the Property and Casualty
Groups insurance products, and generally they also sell competitors insurance products. As a
result, the Property and Casualty Groups business depends in large part on the marketing and sales
efforts of these agencies. To the extent these agencies marketing efforts cannot be maintained at
their current levels of volume or they bind the Property and Casualty Group to unacceptable
insurance risks, fail to comply with established underwriting guidelines or otherwise improperly
market the Property and Casualty Groups products, the results of operations and business of the
Property and Casualty Group could be adversely affected. Also, to the extent these agencies place
business with competing insurers due to compensation arrangements, product differences, price
differences, ease of doing business or other reasons, the results of operations of the Property and
Casualty Group could be adversely affected. If we are unsuccessful in maintaining and increasing
the number of agencies in our independent agent distribution system, the results of operations of
the Property and Casualty Group could be adversely affected.
To the extent that consumer preferences cause the business to migrate to a delivery system other
than independent agencies, the business of the Property and Casualty Group could be adversely
affected. Also, to the extent the
12
agencies choose to place significant portions or all of their business with competing insurance
companies, the results of operations and business of the Property and Casualty Group could be
adversely affected.
If there were a failure to maintain a commercially acceptable financial strength rating, the
Property and Casualty Groups competitive position in the insurance industry would be adversely
affected.
Financial strength ratings are an important factor in establishing the competitive position of
insurance companies and may be expected to have an effect on an insurance companys sales. Higher
ratings generally indicate greater financial stability and a stronger ability to meet ongoing
obligations to policyholders. Ratings are assigned by rating agencies to insurers based upon
factors that they believe are relevant to policyholders. Currently the Property and Casualty
Groups pooled AM Best rating is an A+ (superior). A significant future downgrade in this or
other ratings would reduce the competitive position of the Property and Casualty Group making it
more difficult to attract profitable business in the highly competitive property/casualty insurance
market.
Changes in applicable insurance laws, regulations or changes in the way regulators administer those
laws or regulations could adversely change the Property and Casualty Groups operating environment
and increase its exposure to loss or put it at a competitive disadvantage.
Property and casualty insurers are subject to extensive supervision in the states in which they do
business. This regulatory oversight includes, by way of example, matters relating to licensing and
examination, rate setting, market conduct, policy forms, limitations on the nature and amount of
certain investments, claims practices, mandated participation in involuntary markets and guaranty
funds, reserve adequacy, insurer solvency, transactions between affiliates and restrictions on
underwriting standards. Such regulation and supervision are primarily for the benefit and
protection of policyholders and not for the benefit of shareholders. For instance, members of the
Property and Casualty Group are subject to involuntary participation in specified markets in
various states in which it operates, and the rate levels the Property and Casualty Group is
permitted to charge do not always correspond with the underlying costs associated with the coverage
issued. Although the federal government does not directly regulate the insurance industry, federal
initiatives, such as federal terrorism backstop legislation, from time-to-time, also can impact the
insurance industry. In addition to specific insurance regulation, we must also comply with other
regulatory, legal and ethical requirements relating to the general operation of a business. Our
Chief Compliance Officer oversees insurance regulations as well as other compliance issues.
Our ability to attract, develop and retain talented executives, key managers and employees is
critical to our success.
Our future performance is substantially dependent upon our ability to attract, motivate and retain
executives and other key management. The loss of the services and leadership of certain key
officers and the failure to attract, motivate and develop talented new executives and managers
could prevent us from successfully communicating, implementing and executing business strategies,
and therefore have a material adverse effect on our financial condition and results of operations.
Our success also depends on our ability to attract, develop and retain a talented employee base.
The inability to staff all functions of our business with employees possessing the appropriate
technical expertise could have an adverse effect on our business performance. Staffing
appropriately skilled employees for the deployment and maintenance of information technology
systems and the appropriate handling of claims and rendering of disciplined underwriting, is
critical to the success of our business.
Item 1B. Unresolved Staff Comments
None.
13
Item 2. Properties
The member companies of the Erie Insurance Group share a corporate home office complex in Erie,
Pennsylvania, which is comprised of approximately 500,000 square feet. The home office complex is
owned by the Exchange. We are charged rent for the related square footage we occupy.
The Erie Insurance Group also operates 23 field offices in 11 states. Seventeen of these offices
provide both agency support and claims services and are referred to as branch offices, while the
remaining six provide only claims services and are considered claims offices. While we own three of
these field offices, we lease the remaining field offices from other parties as detailed below.
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Year ended December 31, 2009 |
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Net rent expense |
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Number of field |
|
incurred by |
(dollars in thousands) |
|
offices |
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Indemnity |
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Field office ownership: |
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|
|
|
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|
Unaffiliated parties |
|
|
15 |
(1) |
|
$ |
2,603 |
|
Erie Insurance Exchange (including home office complex) |
|
|
4 |
|
|
|
5,460 |
|
Erie Family Life Insurance Company |
|
|
1 |
(1) |
|
|
340 |
|
|
|
|
|
20 |
|
|
|
8,403 |
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Erie Indemnity Company |
|
|
3 |
|
|
|
|
|
|
|
|
|
23 |
|
|
$ |
8,403 |
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|
|
|
|
(1) |
|
Lease commitments for these properties expire periodically through 2014. |
The total operating expense for all office space we occupied in 2009 including rent expense of
$22.2 million was reduced by reimbursements from affiliates of $14.7 million. This net amount after
allocations is reflected in our cost of management operations.
Item 3. Legal Proceedings
Reference is made to Item 8. Financial Statements and Supplementary Data Note 21 of Notes to
Consolidated Financial Statements contained within this report.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of 2009.
14
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Common stock market prices and dividends
Our Class A, non-voting common stock trades on The NASDAQ Stock MarketSM LLC under the
symbol ERIE. No established trading market exists for the Class B voting common stock. American
Stock Transfer & Trust Company serves as our transfer agent and registrar. As of February 19, 2010,
there were approximately 879 beneficial shareholders of record of our Class A non-voting common
stock and 11 beneficial shareholders of record of our Class B voting common stock.
We historically have declared and paid cash dividends on a quarterly basis at the discretion of the
Board of Directors. The payment and amount of future dividends on the common stock will be
determined by the Board of Directors and will depend on, among other things, our operating results,
financial condition, cash requirements and general business conditions at the time such payment is
considered.
The common stock high and low sales prices and dividends for each full quarter of the last two
years were as follows:
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|
|
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|
|
2009 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
Cash Dividend |
|
|
|
|
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|
|
Cash Dividend |
|
|
Sales Price |
|
Declared |
|
Sales Price |
|
Declared |
Quarter ended |
|
High |
|
Low |
|
Class A |
|
Class B |
|
High |
|
Low |
|
Class A |
|
Class B |
|
March 31 |
|
$ |
38.67 |
|
|
$ |
28.57 |
|
|
$ |
0.45 |
|
|
$ |
67.50 |
|
|
$ |
52.39 |
|
|
$ |
48.13 |
|
|
$ |
0.44 |
|
|
$ |
66.00 |
|
June 30 |
|
|
36.47 |
|
|
|
32.72 |
|
|
|
0.45 |
|
|
|
67.50 |
|
|
|
56.04 |
|
|
|
46.15 |
|
|
|
0.44 |
|
|
|
66.00 |
|
September 30 |
|
|
38.67 |
|
|
|
35.01 |
|
|
|
0.45 |
|
|
|
67.50 |
|
|
|
49.00 |
|
|
|
40.61 |
|
|
|
0.44 |
|
|
|
66.00 |
|
December 31 |
|
|
40.18 |
|
|
|
35.21 |
|
|
|
0.48 |
|
|
|
72.00 |
|
|
|
43.66 |
|
|
|
31.52 |
|
|
|
0.45 |
|
|
|
67.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
1.83 |
|
|
$ |
274.50 |
|
|
|
|
|
|
|
|
|
|
$ |
1.77 |
|
|
$ |
265.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock performance
The following graph depicts the cumulative total shareholder return (assuming reinvestment of
dividends) for the periods indicated for our Class A common stock compared to the Standard & Poors
500 Stock Index and the Standard & Poors Property-Casualty Insurance Index:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
Erie Indemnity Company Class A common stock |
|
$ |
100 |
* |
|
$ |
104 |
|
|
$ |
116 |
|
|
$ |
107 |
|
|
$ |
82 |
|
|
$ |
89 |
|
Standard & Poors 500 Stock Index |
|
|
100 |
* |
|
|
105 |
|
|
|
121 |
|
|
|
128 |
|
|
|
81 |
|
|
|
102 |
|
Standard & Poors Property-Casualty
Insurance Index |
|
|
100 |
* |
|
|
115 |
|
|
|
130 |
|
|
|
113 |
|
|
|
80 |
|
|
|
89 |
|
|
|
|
|
* |
|
Assumes $100 invested at the close of trading on the last trading day preceding the first day
of the fifth preceding fiscal year in our Class A common stock, Standard & Poors 500 Stock Index
and Standard & Poors Property-Casualty Insurance Index. |
15
Issuer Purchases of Equity Securities
A stock repurchase plan was authorized January 1, 2004 allowing us to repurchase up to $250 million
of our outstanding Class A common stock through December 31, 2006. Our Board of Directors approved
continuations of this stock repurchase program for an additional $250 million in February 2006,
$100 million in September 2007, $100 million in April 2008, and again in May 2009 which authorized
repurchases of $100 million through June 30, 2010. As of December 31, 2009, we have approximately
$98 million available for the repurchase of securities under this publicly announced share
repurchase plan. We may purchase the shares, from time-to-time, in the open market or through
privately negotiated transactions, depending on prevailing market conditions and alternative uses
of our capital. Shares repurchased during 2009 totaled 91,420 at a total cost of $3.1 million.
Cumulative shares repurchased under this plan since inception were 11.8 million at a total cost of
$613.2 million. See Item 8. Financial Statements and Supplementary Data Note 13 of Notes to
Consolidated Financial Statements contained within this report for discussion of additional shares
repurchased outside of this plan from the F. William Hirt Estate in 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
October 1 - 31, 2009 |
|
|
0 |
|
|
$ |
0.00 |
|
|
|
0 |
|
|
|
|
|
November 1 - 30, 2009 |
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
|
|
December 1 - 31, 2009 |
|
|
49,220 |
|
|
|
38.57 |
|
|
|
49,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
49,220 |
|
|
|
|
|
|
|
49,220 |
|
|
$ |
98,100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Item 6. Selected Consolidated Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ERIE INDEMNITY COMPANY |
|
|
Years Ended December 31, |
(in thousands, except per share data) |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
Operating data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue |
|
$ |
1,156,263 |
|
|
$ |
1,137,231 |
|
|
$ |
1,132,291 |
|
|
$ |
1,133,982 |
|
|
$ |
1,124,950 |
|
Operating expenses |
|
|
968,145 |
|
|
|
951,397 |
|
|
|
930,454 |
|
|
|
934,204 |
|
|
|
900,731 |
|
Investment (loss) income unaffiliated |
|
|
(36,043 |
) |
|
|
(63,128 |
) |
|
|
107,331 |
|
|
|
99,021 |
|
|
|
115,237 |
|
Income before income taxes and equity in
earnings of Erie Family Life Insurance |
|
|
152,075 |
|
|
|
122,706 |
|
|
|
309,168 |
|
|
|
298,799 |
|
|
|
339,456 |
|
Net income |
|
$ |
108,490 |
|
|
$ |
69,238 |
|
|
$ |
212,945 |
|
|
$ |
204,025 |
|
|
$ |
231,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per Class A share diluted |
|
$ |
1.89 |
|
|
$ |
1.19 |
|
|
$ |
3.43 |
|
|
$ |
3.13 |
|
|
$ |
3.34 |
|
Book value per share Class A common and
equivalent B shares |
|
|
15.74 |
|
|
|
13.79 |
|
|
|
17.68 |
|
|
|
18.17 |
(5) |
|
|
18.81 |
|
Dividends declared per Class A share |
|
|
1.830 |
|
|
|
1.770 |
|
|
|
1.640 |
|
|
|
1.480 |
|
|
|
1.335 |
|
Dividends declared per Class B share |
|
|
274.50 |
|
|
|
265.50 |
|
|
|
246.00 |
|
|
|
222.00 |
|
|
|
200.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial position data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments (1) |
|
$ |
1,051,934 |
|
|
$ |
981,675 |
|
|
$ |
1,277,781 |
|
|
$ |
1,380,219 |
|
|
$ |
1,452,431 |
|
Receivables due from the Exchange and affiliates |
|
|
1,139,712 |
|
|
|
1,130,610 |
|
|
|
1,177,830 |
|
|
|
1,238,852 |
|
|
|
1,193,503 |
|
Total assets |
|
|
2,666,517 |
|
|
|
2,613,386 |
|
|
|
2,878,623 |
|
|
|
3,039,361 |
|
|
|
3,101,261 |
|
Shareholders equity |
|
|
901,977 |
(2) |
|
|
791,875 |
(3) |
|
|
1,051,279 |
|
|
|
1,161,848 |
(5) |
|
|
1,278,602 |
|
Treasury stock |
|
|
814,102 |
|
|
|
810,961 |
|
|
|
708,943 |
|
|
|
472,230 |
|
|
|
254,877 |
|
Cumulative number of shares repurchased at
December 31, |
|
|
17,086 |
|
|
|
16,995 |
|
|
|
14,939 |
(4) |
|
|
10,448 |
|
|
|
6,438 |
|
|
|
|
(1) |
|
Includes investment in Erie Family Life Insurance. |
|
(2) |
|
On April 1, 2009, we adopted the accounting guidance related to non-credit
other-than-temporary impairments for our debt security portfolio. The net impact of the
cumulative effect adjustment on April 1, 2009 increased retained earnings and reduced other
comprehensive income by $6.7 million, net of tax, resulting in no effect on shareholders
equity. |
|
(3) |
|
On January 1, 2008, we adopted the fair value option for our common stock portfolio. The
net impact of the cumulative effect adjustment increased retained earnings and reduced other
comprehensive income by $11.2 million, net of tax, resulting in no effect on shareholders
equity. |
|
(4) |
|
Includes 1.9 million shares of our Class A non-voting common stock from the F. William
Hirt Estate separate from our stock repurchase program. |
|
(5) |
|
On December 31, 2006, shareholders equity decreased by $21.1 million, net of taxes, as a
result of initially applying the recognition provisions for employers accounting for
defined benefit pension and other postretirement plans. |
17
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion of financial condition and results of operations highlights significant
factors influencing our Company. This discussion should be read in conjunction with the audited
financial statements and related notes and all other items contained within this Annual Report on
Form 10-K, as they contain important information helpful in evaluating our financial condition and
operating results.
Certain statements contained herein are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are not in the present or past tense and can generally be identified by
the use of words such as anticipate, believe, estimate, expect, intend, likely, plan,
project, seek, should, target, will, and other expressions that indicate future trends
and events. Forward-looking statements include, without limitation, statements and assumptions on
which such statements are based that are related to our plans, strategies, objectives,
expectations, intentions and adequacy of resources. Examples of such statements are discussions
relating to management fee revenue, cost of management operations, underwriting, premium and
investment income volumes, and agency appointments. Such statements are not guarantees of future
performance and involve risks and uncertainties that are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted in such
forward-looking statements. Among the risks and uncertainties that could cause actual results and
future events to differ materially from those set forth or contemplated in the forward-looking
statements are the following:
|
|
|
factors affecting the property/casualty and life insurance industries generally,
including price competition, legislative and regulatory developments; |
|
|
|
|
government regulation of the insurance industry including approval of rate
increases; |
|
|
|
|
the size, frequency and severity of claims; |
|
|
|
|
natural disasters; |
|
|
|
|
exposure to environmental claims; |
|
|
|
|
fluctuations in interest rates; |
|
|
|
|
inflation and general business conditions; |
|
|
|
|
the geographic concentration of our business as a result of being a regional
company; |
|
|
|
|
the accuracy of our pricing and loss reserving methodologies; |
|
|
|
|
changes in driving habits; |
|
|
|
|
our ability to maintain our business operations including our information
technology system; |
|
|
|
|
our dependence on the independent agency system; |
|
|
|
|
the quality and liquidity of our investment portfolio; |
|
|
|
|
our dependence on our relationship with Erie Insurance Exchange; and |
|
|
|
|
the other risks and uncertainties discussed or indicated in all documents filed
by the Company with the Securities and Exchange Commission, including those described in
Part I, Item 1A. Risk Factors and elsewhere in this report. |
A forward-looking statement speaks only as of the date on which it is made and reflects the
Companys analysis only as of that date. The Company undertakes no obligation to publicly update or
revise any forward-looking statement, whether as a result of new information, future events,
changes in assumptions, or otherwise.
OVERVIEW
We are a Pennsylvania business corporation that since 1925 has been the managing attorney-in-fact
for the subscribers of the Erie Insurance Exchange (Exchange), a reciprocal insurer that writes
property/casualty insurance. Our primary function is to perform certain services relating to
sales, underwriting and issuance of policies on behalf of the Exchange. We earn a management fee
from the Exchange for these services.
We have three operating segments: management operations, insurance operations and investment
operations.
Management operations
Our earnings are driven primarily by the management fee revenue we collect from the Exchange that
is based on the direct written premiums of the Property and Casualty Group and the management fee
rate we charge. Because of this
18
relationship, our income from management operations is directly impacted by the cyclical nature of
the insurance industry. The property/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 property/casualty insurance industry is in stable
financial condition however, the economic recession has reduced premium and loss exposures
affecting the financial performance of the industry. Industry premium exposures in both personal
and commercial lines continued to be suppressed in 2009, with premium rates for personal lines
showing some firming and most commercial lines still reflecting rate reductions.
Our management fee revenue reflected growth of 1.6% in 2009, as the direct written premiums of the
Property and Casualty Group increased 1.6% compared to 2008. The Property and Casualty Group grew
premiums in 2009 through increased new policies sold and stable policyholder retention. While
modest price increases were implemented in 2009, they were offset by exposure reductions and
changes in our mix of business which reduced our average premium per policy. We expect our pricing
actions in 2010 to result in a net increase in direct written premiums, however, delayed economic
recovery could adversely impact the average premium written of the Property and Casualty Group.
The management fee is calculated as a percentage, not to exceed 25%, of the direct written premiums
of the Property and Casualty Group. The Board of Directors establishes the rate at least annually
and considers such factors as relative financial strength of the Exchange and Company and projected
revenue streams. Our Board set the 2010 rate at 25%, its maximum level.
Insurance underwriting operations
We generate revenues from our property/casualty insurance subsidiaries, which consist of our share
of the pooled insurance business of the Property and Casualty Group. Members of the Property and
Casualty Group participate in an intercompany reinsurance pooling agreement where all insurance
business is pooled in the Exchange. Under the pooling agreement, the Exchange assumes 94.5% of the
Property and Casualty Groups underwriting results. Through the pool, our subsidiaries Erie
Insurance Company and Erie Insurance Company of New York, currently assume 5.5% of the Property and
Casualty Groups underwriting results, providing a direct incentive for us to manage the insurance
underwriting discipline as effectively as possible.
The property/casualty insurance business is driven by premium growth and the combined ratio. The
Property and Casualty Groups 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 120 new
agencies in 2009. We plan to appoint a similar number of agencies during 2010. The Property and
Casualty Group focuses on insuring standard and preferred risks and adheres to a set of consistent
underwriting standards. Nearly 50% of premiums are derived from personal auto, 20% from homeowners
and 30% from commercial lines. 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.
Both personal lines and commercial lines net written premiums are experiencing highly competitive
market conditions with the recessionary economic conditions. A light catastrophe season for the
industry, coupled with some recovery in the financial markets, indicate increasing industry surplus
and underwriting capacity. Despite an increase in loss cost drivers as a result of an increasing
frequency trend, the Property and Casualty Group has experienced lower losses, primarily due to a
reduction in large claims. The Property and Casualty Groups economically sensitive lines, such as
workers compensation and commercial auto, experienced reduced exposures and reduced average premium
per policy due to economic conditions.
19
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 yields and limiting
credit risk, and management actively evaluates the portfolios for impairments. We record impairment
writedowns on investments in instances 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, while still showing overall losses driven primarily from our alternative
investments, reflected the improvement experienced in the financial markets in the latter half of
2009. During 2009, we impaired $12.1 million of securities compared to $69.5 million in 2008. The
decrease in our 2009 impairments included the change in impairment policy as a result of the new
impairment guidance for debt securities effective for the second quarter of 2009. As a result, only
debt securities that have a credit related issue, or we intend to sell, or more than likely will be
required to sell, are now included as impairments recognized in earnings.
Unrealized gains (losses) on our investment portfolio showed improvements due to more favorable
market conditions during 2009. Net unrealized gains on fixed maturities were $21.8 million at
December 31, 2009, compared to $34.2 million in net unrealized losses at December 31, 2008. Net
unrealized gains in equity securities were $2.9 million at December 31, 2009, compared to $4.7
million in unrealized losses at December 31, 2008. Our trading securities portfolio was similarly
affected, with a net unrealized gain of $6.4 million at December 31, 2009, compared to $4.5 million
of unrealized losses at December 31, 2008.
Our alternative investments were impacted by the weak financial market conditions in the fourth
quarter of 2008 and the first three quarters of 2009. In particular, the downturn in the
commercial real estate market had a significant impact on the portfolios of our real estate
partnerships. Equity in losses of limited partnerships were $76.1 million in 2009 compared to gains
of $5.7 million in 2008. 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 2009 partnership earnings do not reflect the valuation changes from the
fourth quarter of 2009.
Financial overview
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
|
|
|
% Change |
|
|
|
|
|
% Change |
|
|
|
|
|
|
|
|
2009 over |
|
|
|
|
|
2008 over |
|
|
(in thousands, except per share data) |
|
2009 |
|
2008 |
|
2008 |
|
2007 |
|
2007 |
|
Income from management operations |
|
$ |
186,482 |
|
|
|
8.1 |
% |
|
$ |
172,525 |
|
|
|
(2.6 |
)% |
|
$ |
177,174 |
|
Underwriting income |
|
|
1,636 |
|
|
|
(87.7 |
) |
|
|
13,309 |
|
|
|
(46.0 |
) |
|
|
24,663 |
|
Net (loss) revenue from investment
operations |
|
|
(30,450 |
) |
|
|
60.8 |
|
|
|
(77,755 |
) |
|
NM |
|
|
110,464 |
|
|
Income before income taxes |
|
|
157,668 |
|
|
|
45.9 |
|
|
|
108,079 |
|
|
|
(65.4 |
) |
|
|
312,301 |
|
Provision for income taxes |
|
|
49,178 |
|
|
|
26.6 |
|
|
|
38,841 |
|
|
|
(60.9 |
) |
|
|
99,356 |
|
|
Net income |
|
$ |
108,490 |
|
|
|
56.7 |
|
|
$ |
69,238 |
|
|
|
(67.5 |
) |
|
$ |
212,945 |
|
|
Net income per sharediluted |
|
$ |
1.89 |
|
|
|
58.3 |
% |
|
$ |
1.19 |
|
|
|
(65.2 |
)% |
|
$ |
3.43 |
|
|
NM = not meaningful
Key points
|
|
|
Increase in net income per share-diluted in 2009 was impacted by improved
performance in our investment operations overall as the financial markets showed signs of
recovery in 2009 compared to 2008. |
|
|
|
|
Gross margins from management operations increased to 18.7% in 2009 from 17.6%
in 2008. |
|
|
|
|
GAAP combined ratios of the insurance underwriting operations increased to 99.2
in 2009 from 93.6 in 2008. Favorable development of prior accident year loss reserves
improved the combined ratio by 2.4 points and 5.0 points in 2009 and 2008, respectively. |
Management operations
|
|
|
Management fee revenue increased 1.6% and 0.3% in 2009 and 2008, respectively.
The two components of management fee revenue are the management fee rate we charge, and the
direct written premiums of the Property and Casualty Group. The management fee rate was 25%
for both 2009 and 2008. The direct written premiums of the Property and Casualty Group were
$3.9 billion in 2009 compared to $3.8 billion in 2008. |
20
|
|
|
In 2009, the direct written premiums of the Property and Casualty Group increased 1.6%
compared to 0.4% in 2008. Policies in force grew 3.5% in 2009, compared to 2.9% in 2008. The
growth in policies in force for both years is the result of continuing strong policyholder
retention rates and increased new policies sold. Reductions in the average premium per policy
were 1.9% in 2009 compared to 2.5% in 2008. While modest rate increases were implemented in
2009, these were offset by exposure reductions and changes in our mix of business, which
resulted in a slight decrease in our average premium per policy in 2009. Rate reductions
implemented by the Property and Casualty Group were the primary driver of the reduction in the
average premium per policy in 2008. |
|
|
|
|
The cost of management operations increased 0.5%, or $3.9 million, to $813.4
million in 2009, primarily due to an increase in non-commission expenses: |
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|
Commissions Total commission costs decreased 0.3%, or $1.6 million, to
$552.4 million in 2009 driven by a decrease in agent bonuses as a result of a reduction
in the profitability component of the award. Offsetting this reduction were increases in
normal scheduled rate commissions and other promotional incentives. |
|
|
|
|
Total costs other than commissions All other non-commission expense
increased 2.1%, to $261.1 million in 2009. Personnel costs increased primarily due to
higher pension benefit costs and increased management incentive plan expense. Increased
salaries and wages were offset by the capitalization of internal labor costs related to
various technology initiatives. Survey and underwriting costs rose due to increased
application activity. Other operating cost increases were driven by contract labor costs
related to various technology initiatives. |
Insurance underwriting operations
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|
|
Contributing to underwriting income of $1.6 million and a GAAP combined ratio of
99.2 in 2009, compared to income of $13.3 million and a GAAP combined ratio of 93.6 in 2008,
were the following factors: |
|
|
|
current accident year loss and loss expense ratio, excluding catastrophe losses,
was 0.7 points higher than 2008; |
|
|
|
|
favorable development of prior accident year loss reserves of 2.4 points, or $5.1
million, in 2009 compared to 5.0 points, or $10.3 million, of favorable development in
2008; |
|
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|
|
catastrophe losses contributed 3.4 points to the GAAP combined ratio in both 2009
and 2008; and |
|
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|
|
our share of the Property and Casualty Groups write-off of assumed involuntary
reinsurance premium contributed 1.3 points to our 2009 GAAP combined ratio. |
Investment operations
|
|
|
Net realized gains on investments totaled $10.4 million in 2009 compared to
realized losses of $43.5 million in 2008. Our common stock trading portfolio contributed
$10.9 million in valuation adjustment gains to the 2009 results and $21.7 million in valuation adjustment losses to
the 2008 results. |
|
|
|
|
Impairment charges decreased significantly totaling $12.1 million in 2009
compared to $69.5 million in 2008. |
|
|
|
|
Equity in losses of limited partnerships in 2009 of $76.1 million compared to
earnings of $5.7 million in 2008 as a result of fair value declines primarily in real estate
limited partnerships. |
|
|
|
|
Equity in earnings of EFL was $5.6 million in 2009 compared to losses of $14.6
million in 2008 driven by lower impairment charges of $22.9 million in 2009 compared to
$83.5 million in 2008. |
The topics addressed in this overview are discussed in more detail in the sections that follow.
21
Reconciliation of operating income to net income
We believe that investors understanding of our performance 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. We elected the fair value measurement option for our common stock
portfolio effective January 1, 2008. As such, changes in value related to common stocks are
reported in earnings. These unrealized gains or losses are included in the net realized
gains/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 not excluded from 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 the periods ended December 31:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change |
|
|
|
|
|
% Change |
|
|
|
|
|
|
|
|
2009 over |
|
|
|
|
|
2008 over |
|
|
(in thousands, except per share data) |
|
2009 |
|
2008 |
|
2008 |
|
2007 |
|
2007 |
|
Operating income |
|
$ |
109,571 |
|
|
|
(23.2 |
)% |
|
$ |
142,700 |
|
|
|
(34.0 |
)% |
|
$ |
216,320 |
|
|
Net realized losses and impairments on
investments |
|
|
(1,663 |
) |
|
NM |
|
|
(113,019 |
) |
|
NM |
|
|
(5,192 |
) |
Income tax benefit |
|
|
582 |
|
|
NM |
|
|
39,557 |
|
|
NM |
|
|
1,817 |
|
|
Realized losses and impairments, net of
income taxes |
|
|
(1,081 |
) |
|
NM |
|
|
(73,462 |
) |
|
NM |
|
|
(3,375 |
) |
|
Net income |
|
$ |
108,490 |
|
|
|
56.7 |
% |
|
$ |
69,238 |
|
|
|
(67.5 |
)% |
|
$ |
212,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Class A share-diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
1.91 |
|
|
|
(22.3 |
)% |
|
$ |
2.46 |
|
|
|
(29.4 |
)% |
|
$ |
3.48 |
|
|
Net realized losses and impairments on
investments |
|
|
(0.03 |
) |
|
NM |
|
|
(1.95 |
) |
|
NM |
|
|
(0.08 |
) |
Income tax benefit |
|
|
0.01 |
|
|
NM |
|
|
0.68 |
|
|
NM |
|
|
0.03 |
|
|
Realized losses and impairments, net of
income taxes |
|
|
(0.02 |
) |
|
NM |
|
|
(1.27 |
) |
|
NM |
|
|
(0.05 |
) |
|
Net income |
|
$ |
1.89 |
|
|
|
58.3 |
% |
|
$ |
1.19 |
|
|
|
(65.2 |
)% |
|
$ |
3.43 |
|
|
The decrease in operating income was primarily the result of equity in losses of limited
partnerships of $76.1 million in 2009 compared to earnings of
$5.7 million in 2008.
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements include amounts based on estimates and assumptions that have
a significant effect on reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period and
related disclosures. Management considers an accounting estimate to be critical if (1) it requires
assumptions to be made that were uncertain at the time the estimate was made, and (2) different
estimates that could have been used, or changes in the estimate that are likely to occur from
period-to-period, could have a material impact on our consolidated statements of operations or
financial position.
22
The following presents a discussion of those accounting policies surrounding estimates that we
believe are the most critical to our reported amounts and require the most subjective and complex
judgment. If actual events differ significantly from the underlying assumptions, there could be
material adjustments to prior estimates that could potentially adversely affect our results of
operations, financial condition and cash flows. The estimates and the estimating methods used are
reviewed continually, and any adjustments considered necessary are reflected in current earnings.
Investment valuation
We make estimates concerning the valuation of all investments. Valuation techniques are used to
derive the fair value of the available-for-sale and trading securities we hold. Fair value is the
price that would be received to sell an asset in an orderly transaction between willing market
participants at the measurement date.
Fair value measurements are based upon observable and unobservable inputs. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs reflect our view
of market assumptions in the absence of observable market information. We utilize valuation
techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
For purposes of determining whether the market is active or inactive, the classification of a
financial instrument was based on the following definitions:
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|
An active market is one in which transactions for the assets being valued occur
with sufficient frequency and volume to provide reliable pricing information. |
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|
An inactive (illiquid) market is one in which there are few and infrequent
transactions, where the prices are not current, price quotations vary substantially, and/or
there is little information publicly available for the asset being valued. |
We continually assess whether or not an active market exists for all of our investments and as of
each reporting date re-evaluate the classification in the fair value hierarchy.
All assets carried at fair value are classified and disclosed in one of the following three
categories:
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|
Level 1 Quoted prices for identical instruments in active markets not subject
to adjustments or discounts. |
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|
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. |
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|
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. |
Level 1 primarily consists of publicly traded common stock, nonredeemable preferred stocks and
treasury securities and reflects market data obtained from independent sources, such as prices
obtained from an exchange or a nationally recognized pricing service for identical instruments in
active markets.
Level 2 includes those financial instruments that are valued using industry-standard models that
consider various inputs, such as the interest rate and credit spread for the underlying financial
instruments. All significant inputs are observable, or derived from observable information in the
marketplace, or are supported by observable levels at which transactions are executed in the
marketplace. Financial instruments in this category primarily include municipal securities, asset
backed securities, collateralized-mortgage obligations, foreign and domestic corporate bonds and
redeemable preferred stocks and certain nonredeemable preferred stocks.
Level 3 securities are valued based upon unobservable inputs, reflecting our estimates of value
based on assumptions used by market participants. Securities are assigned to Level 3 in cases where
non-binding broker quotes are significant to the valuation and there is a lack of transparency as
to whether these quotes are based on information that is observable in the marketplace. Fair value
estimates for securities valued using unobservable inputs require significant judgment due to the
illiquid nature of the market for these securities and represent the best estimate of the fair
value that would occur in an orderly transaction between willing market participants at the
23
measurement date under current market conditions. Fair value for these securities are generally
determined using comparable securities or non-binding broker quotes received from outside broker
dealers based on security type and market conditions. Remaining un-priced securities are valued
using an estimate of fair value based on indicative market prices that include significant
unobservable inputs not based on, nor corroborated by, market information, including the
utilization of discounted cash flow analyses which have been risk-adjusted to take into account
illiquidity and other market factors. This category primarily consists of certain private preferred
stock and bond securities, collateralized debt and loan obligations, and credit linked notes.
As of each reporting period, financial instruments recorded at fair value are classified based on
the lowest level of input that is significant to the fair value measurement. The presence of at
least one unobservable input would result in classification as a Level 3 instrument. Our assessment
of the significance of a particular input to the fair value measurement requires judgment, and
considers factors specific to the asset, such as the relative impact on the fair value as a result
of including a particular input and market conditions. We did not make any other significant
judgments except as described above.
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 such as a disparity
in price of comparable securities and/or non-binding broker quotes. 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.
Investments are evaluated monthly for other-than-temporary impairment loss. Some factors considered
in evaluating whether or not a decline in fair value is other-than-temporary include:
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the extent and duration for which fair value is less than cost; |
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|
historical operating performance and financial condition of the issuer; |
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|
short- and long-term prospects of the issuer and its industry based on analysts
recommendations; |
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|
specific events that occurred affecting the issuer, including rating downgrades; |
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|
our intent to sell or more likely than not be required to sell (debt
securities); and |
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|
our ability and intent to retain the investment for a period of time sufficient
to allow for a recovery in value (equity securities). |
For debt securities in which we do not expect full recovery of amortized cost, the security is
deemed to be credit-impaired. Credit-related impairments and impairments on securities we intend
to sell or more likely than not will be required to sell are recorded in the Consolidated
Statements of Operations. It is our intention to sell all debt securities with credit impairments.
For available-for-sale equity securities, a charge is recorded in the Consolidated Statements of
Operations for positions that have experienced other-than-temporary impairments due to credit
quality or other factors.
The primary basis for the valuation of limited partnership interests is financial statements
prepared by the general partner. Because of the timing of the preparation and delivery of these
financial statements, the use of the most recently available financial statements provided by the
general partners generally result in a quarter delay in the inclusion of the limited partnership
results in our Consolidated Statements of Operations. Due to this delay, these financial statements
do not reflect the market conditions experienced in the fourth quarter 2009. We expect additional
deterioration,
24
primarily from our real estate partnerships, to be reflected in the general partners year end
financial statements, which we will receive in 2010. Nearly all of the underlying investments in
our limited partnerships are valued using a source other than quoted prices in active markets. Our
limited partnership holdings are considered investment companies where the general partners record
assets at fair value. Several factors are to be considered in determining whether an entity is an
investment company. Among these factors are a large number of investors, low level of individual
ownership and passive ownership that indicate the entity is an investment company.
We have three types of limited partnership investments: private equity, mezzanine debt and real
estate. Our private equity and mezzanine debt partnerships are diversified among numerous
industries and geographies to minimize potential loss exposure. The fair value amounts for our
private equity and mezzanine debt partnerships are based on the financial statements of the general
partners, who use various methods to estimate fair value including the market approach, income
approach and the cost approach. The market approach uses prices and other pertinent information
from market-generated transactions involving identical or comparable assets or liabilities. Such
valuation techniques often use market multiples derived from a set of comparables. The income
approach uses valuation techniques to convert future cash flows or earnings to a single discounted
present value amount. The measurement is based on the value indicated by current market
expectations about those future amounts. The cost approach is derived from the amount that is
currently required to replace the service capacity of an asset. If information becomes available
that would impair the cost of investments owned by the partnerships, then the general partner would
generally adjust to the net realizable value.
Real estate limited partnerships are recorded by the general partner at fair value based on
independent appraisals and/or internal valuations. Real estate projects under development are
generally valued at cost and impairment tested by the general partner. We minimize the risk of
market decline by avoiding concentration in a particular geographic area and are diversified across
residential, commercial, industrial and retail real estate investments.
We perform various procedures in review of the general partners valuations, and while we rely on
the general partners financial statements as the best available information to record our share of
the partnership unrealized gains and losses resulting from valuation changes, we adjust our
financial statements for impairments of the partnership investments where appropriate. As there is
no ready market for these investments, they have the greatest potential for variability. We survey
each of the general partners quarterly about expected significant changes (plus or minus 10%
compared to previous quarter) to valuations prior to the release of the funds quarterly and annual
financial statements. Based on that information from the general partner, we consider whether
additional disclosure is warranted.
Property/casualty insurance liabilities
Reserves for property/casualty insurance unpaid losses and loss expenses reflect our best estimate
of future amounts needed to pay losses and related expenses with respect to insured events. These
reserves include estimates for both claims that have been reported and those that have been
incurred but not reported. They also include estimates of all future payments associated with
processing and settling these claims. Reported losses represent cumulative loss and loss expenses
paid plus case reserves for outstanding reported claims. Case reserves are established by a claims
handler on each individual claim and are adjusted as new information becomes known during the
course of handling the claims. Incurred but not reported reserves represent the difference between
the actual reported loss and loss expenses and the estimated ultimate cost of all claims.
The process of estimating the liability for property/casualty unpaid loss and loss expense reserves
is complex and involves a variety of actuarial techniques. This estimation process is based largely
on the assumption that past development trends are an appropriate indicator of future events.
Reserve estimates are based on our assessment of known facts and circumstances, review of
historical settlement patterns, estimates of trends in claims frequency and severity, legal
theories of liability and other factors. Variables in the reserve estimation process can be
affected by 1) internal factors, including changes in claims handling procedures and changes in the
quality of risk selection in the underwriting process, and 2) external events, such as economic
inflation, regulatory and legislative changes. Due to the inherent complexity of the assumptions
used, final loss settlements may vary significantly from the current estimates, particularly when
those settlements may not occur until well into the future.
Our actuaries review reserve estimates for both current and prior accident years using the most
current claim data, on a quarterly basis, for all direct reserves except the reserves for the
pre-1986 automobile massive injury claims and the workers compensation massive injury claims which
are reviewed semi-annually. These massive injury reserves are reviewed semi-annually because of the
relatively low number of cases and the long-term nature of these claims. For reserves that are
reviewed semi-annually, our actuaries monitor the emergence of paid and reported losses in the
25
intervening quarters to either confirm that the estimate of ultimate losses should not change, or
if necessary, perform a reserve review to determine whether the reserve estimate should change.
Significant changes to the factors discussed above, which are either known or reasonably projected
through analysis of internal and external data, are quantified in the reserve estimates each
quarter.
The quarterly reserve reviews incorporate a variety of actuarial methods and judgments and involve
rigorous analysis. The various methods generate different estimates of ultimate losses by product
line and product coverage combination. Thus, there are no reserve ranges, but rather point
estimates of the ultimate losses developed from the various methods. The methods that are
considered more credible vary by product coverage combination based primarily on the maturity of
the accident quarter, the mix of business and the particular internal and external influences
impacting the claims experience or the method.
Paid loss development patterns, generated from historical data, are generally less useful for the
more recent accident quarters of long-tailed lines since a low percentage of ultimate losses are
paid in early periods of development. Reported loss (including cumulative paid losses and case
reserves) development patterns, generated from historical data, estimate only the unreported losses
rather than the total unpaid losses as this technique is affected by changes in case reserving
practices. Combinations of the paid and reported methods are used in developing estimated ultimate
losses for short-tail coverages, such as private passenger auto property and homeowners claims, and
more mature accident quarters of long-tail coverages, such as private passenger auto liability
claims and commercial liability claims, including workers compensation. The Bornhuetter-Ferguson
method combines a reported development technique with an expected loss ratio technique. An expected
loss ratio is developed through a review of historical loss ratios by accident quarter, as well as
expected changes to earned premium, mix of business and other factors that are expected to impact
the loss ratio for the accident quarter being evaluated. This method is generally used on the first
four to eight accident quarters on long-tail coverages because a low percentage of losses are paid
in the early period of development.
The reserve review process involves a comprehensive review by our actuaries of the various
estimation methods and reserve levels produced by each. These multiple reserve point estimates are
reviewed by our reserving actuaries and reserve best estimates are selected. The selected reserve
estimates are discussed with management. Numerous factors are considered in setting reserve levels,
including, but not limited to, the assessed reliability of key loss trends and
assumptions that may be significantly influencing the current actuarial indications, the maturity
of the accident year, pertinent claims frequency and severity trends observed over recent years,
the level of volatility within a particular line of business and the improvement or deterioration
of actuarial indications in the current period as compared to prior periods.
We also perform analyses to evaluate the adequacy of past reserve levels. Using subsequent
information, we perform retrospective reserve analyses to test whether previously established
estimates for reserves were reasonable. Our 2009 retrospective reserve analysis indicated the
Property and Casualty Groups December 31, 2008 direct reserves, excluding salvage and subrogation
recoveries, had an estimated redundancy of approximately $22 million, which was 0.6% of reserves at
December 31, 2008. Our 5.5% share of this favorable development was $1.2 million.
|
|
|
Workers compensation reserves were reduced in 2009 by the settlement of eight
massive injury workers compensation claims related to the 2003 accident year. In 2009, the
mortality assumptions used for massive injury workers compensation claims was changed to a
100% weighting of the disabled pensioner mortality table and gender specific mortality
tables were used. In 2008, our mortality assumption gave 75% weighting to our own experience
and 25% weighting to the disabled pensioner mortality table. Additionally, the workers
compensation discount on reserves increased in 2009 as a result of segregating massive
injury workers compensation claims, which have longer payout patterns, from other workers
compensation claims in the discount calculation. The Property and Casualty Groups workers
compensation reserves were $655.4 million and $788.6 million at December 31, 2009 and 2008,
respectively. |
|
|
|
|
Reserves on pre-1986 automobile massive injury reserves were increased $32.6
million in 2009. In 2009, the mortality assumptions used for pre-1986 automobile massive
injury claims was changed to a 100% weighting of the disabled pensioner mortality table and
gender specific mortality tables were used. The Property and Casualty Group had pre-1986
automobile massive injury reserves of $297.9 million at December 31, 2009 and $265.1 million
at December 31, 2008, which are net of $165.4 million and $153.9 million of anticipated
reinsurance recoverables for 2009 and 2008, respectively. |
26
In 2008 and 2007, the Property and Casualty Groups direct reserves had an estimated redundancy at
December 31 of $122.0 million, or 3.5% of reserves, and $200.6 million, or 5.6% of reserves,
respectively. In 2008, the Property and Casualty Group reduced automobile bodily injury and
uninsured/underinsured motorist (UM/UIM) reserves by approximately $75 million primarily due to
improved frequency trends. The pre-1986 automobile massive injury claims were reduced approximately
$30 million in 2008 driven by lower than expected future attendant care costs. In 2007, the
favorable frequency and severity trends in automobile BI and UM/UIM that began in 2006 became more
fully developed.
The Property and Casualty Groups coverage with the greatest potential for variation are the
massive injury reserves. The automobile no-fault law in Pennsylvania before 1986 and workers
compensation policies provide for unlimited medical benefits. The estimate of ultimate liabilities
for these claims is subject to significant judgment due to variations in claimant health, mortality
over time and health care cost trends. Workers compensation massive injury claims have been
segregated from the total population of workers compensation claims. Because the coverage related
to the automobile no-fault and workers compensation claims is unique and the number of claims is
about 120, the previously discussed methods are not used; rather ultimate losses are estimated on a
claim-by-claim basis. An annual payment assumption is made for each of these claimants who
sustained massive injuries and then projected into the future based upon a particular assumption of
the future inflation rate, including medical inflation and life expectancy of the claimant. The
most significant variable in estimating this liability is medical cost inflation. Changes were also
made in 2009 to mortality assumptions and the discount calculation.
|
|
|
Our medical inflation rate assumption in setting this reserve for 2009 is an 8% annual
increase grading down 0.5% per year to an ultimate rate of 5%. Our medical inflation rate
assumption in setting this reserve for 2008 was a 9% annual increase grading down 1% after
the first year, then grading down 0.5% per year to an ultimate rate of 5%. The Property and
Casualty Group massive injury reserves were reduced $25.6 million as a result of this
change. Our share of this reserve change was $1.4 million. |
|
|
|
|
The mortality rate assumption in 2009 gives 100% weighting to the disabled pensioner
mortality table by gender. In 2008, our mortality rate assumption gave 75% weighting to our
own mortality experience and 25% weighting to the male-female combined disabled pensioner
mortality table. We believe weighting the mortality assumption to incorporate the disabled
pensioner mortality table by gender, which more appropriately weighs male and female life
expectancies, is reasonable in estimating our ultimate liability for these claims. Actual
experience, different than that assumed, could have a significant impact on the reserve
estimate. The Property and Casualty Group massive injury reserves increased $73.3 million
as a result of this change. Our share of this reserve change was $4.0 million. |
|
|
|
|
Loss reserves are set at full expected cost, except for workers compensation loss
reserves, which are discounted on a nontabular basis using an interest rate of 2.5% based
upon the Property and Casualty Groups historical workers compensation payout patterns. In
2009, we changed our workers compensation discounting method to segregate the workers
compensation massive injury claims that have longer payout patterns in the discount
calculation from the non-massive injury workers compensation claims. The Property and
Casualty Group workers compensation reserves were reduced by $45.1 million related to this
change. Our share of this change was $2.5 million. |
At December 31, 2009, the reserve carried by the Property and Casualty Group for the pre-1986
automobile massive injury liabilities, which is our best estimate of this liability at this time,
was $297.9 million, which is net of $165.4 million of anticipated reinsurance recoverables. Our
property/casualty subsidiaries share of the net automobile massive injury liability reserve is
$16.4 million at December 31, 2009. Each 100-basis point change in the medical cost inflation
assumption would result in a change in net liability for us of $3.5 million. At December 31, 2009,
the reserve carried by the Property and Casualty Group for workers compensation massive injury
reserves, which is our best estimate of this liability at this time, was $129.8 million, which is
net of $13.5 million of anticipated reinsurance recoverables. Our property/casualty insurance
subsidiaries share of the workers compensation massive injury reserves is $7.1 million at December
31, 2009. Each 100-basis point change in the medical cost inflation assumption would result in a
change in net liability for us of $1.4 million.
27
Retirement benefit plans
Our pension plan for employees is the largest and only funded defined benefit plan we offer. Our
pension and other retirement benefit obligations are developed from actuarial estimates. Several
statistical and other factors, which attempt to anticipate future events, are used in calculating
the expense and liability related to the plans. Key factors include assumptions about the discount
rates and expected rates of return on plan assets. We review these assumptions annually and modify
them considering historical experience, current market conditions, including changes in investment
returns and interest rates, and expected future trends.
Accumulated and projected benefit obligations are expressed as the present value of future cash
payments. We discount those cash payments using the prevailing market rate of a portfolio of
high-quality fixed-income debt instruments with maturities that correspond to the payment of
benefits. Lower discount rates increase present values and subsequent year pension expense; higher
discount rates decrease present values and subsequent year pension expense. In determining the
discount rate, we performed a bond-matching study. The study developed a portfolio of non-callable
bonds rated AA- or higher with at least $25 million outstanding at December 31, 2009. These bonds
had maturities primarily between zero and twenty-six years. For years beyond year twenty-seven,
there were no appropriate bonds maturing. In these instances, the study estimated the appropriate
bond by assuming that there would be bonds available with the same characteristics as the available
bond maturing in the immediately preceding year. Outlier bonds were excluded from the study. The
cash flows from the bonds were matched against our projected benefit payments in the pension plan,
which have a duration of about 18 years. This bond-matching study supported the selection of a
6.11% discount rate for the 2010 pension expense. The 2009 expense was based on a discount rate
assumption of 6.06%. A change of 25 basis points in the discount rate assumption, with other
assumptions held constant, would have an estimated $2.1 million impact on net pension and other
retirement benefit costs in 2010, before consideration of expense allocation to affiliates.
Unrecognized actuarial gains and losses are being recognized over a 15-year period, which
represents the expected remaining service period of the employee group. Unrecognized actuarial
gains and losses arise from several factors, including experience and assumption changes in the
obligations and from the difference between expected returns and actual returns on plan assets.
These unrecognized gains and losses are recorded in the pension plan obligation on the Statements
of Financial Position and Accumulated Other Comprehensive Income. These amounts are systematically
recognized to future net periodic pension expense in future periods, with gains decreasing and
losses increasing future pension expense.
The expected long-term rate of return for the pension plan represents the average rate of return to
be earned on plan assets over the period the benefits included in the benefit obligation are to be
paid. The expected long-term rate of return is less susceptible to annual revisions, as there are
typically not significant changes in the asset mix. The long-term rate of return is derived from
expected future returns for each asset category based on applicable indices and their historical
relationships under various market conditions. These expected future returns are then weighed based
on our target asset allocation percentages for each asset category. A reasonably possible change of
25 basis points in the expected long-term rate of return assumption, with other assumptions held
constant, would have an estimated $0.8 million impact on net pension benefit cost before
consideration of reimbursement from affiliates.
We use a four year averaging method to determine the market-related value of plan assets, which is
used to determine the expected return component of pension expense. Under this methodology, asset
gains or losses that result from returns that differ from our long-term rate of return assumption
are recognized in the market-related value of assets on a level basis over a four year period. The
component of the actuarial gain generated during 2009 that related to the actual investment return
being different from assumed during the prior year was $27.3 million. Recognition of this gain will
be deferred over a four year period, consistent with the market-related asset value methodology.
Once factored into the market-related asset value, these experience gains will be amortized over a
period of 15 years, which is the remaining service period of the employee group.
The actuarial assumptions used by us in determining our pension and retirement benefits may differ
materially from actual results due to changing market and economic conditions, higher or lower
withdrawal rates or longer or shorter life spans of participants. While we believe that the
assumptions used are appropriate, differences in actual experience or changes in assumptions may
materially affect our financial position, results of operations or cash flows.
28
NEW ACCOUNTING STANDARDS
In June 2009, the FASB amended the guidance for determining whether an enterprise is the primary
beneficiary of a variable interest entity (VIE) by requiring a qualitative analysis to determine
if an enterprises variable interest gives it a controlling financial interest. A primary
beneficiary is expected to be identified through qualitative analysis, which looks at the power to
direct activities of the VIE, including its economic performance and the right to receive benefits
from the VIE that are significant. This guidance is effective for fiscal years that begin after
November 15, 2009. Under the current quantitative analysis, although we hold a variable interest
in it, we are not deemed to be the primary beneficiary of the Exchange, and the Exchanges
financial statements are not consolidated with ours. Under the new guidance we will be deemed to
have a controlling financial interest in the Exchange, by virtue of our attorney-in-fact
relationship with the Exchange, and consolidation of the Exchange in our financial statements will
be required effective for our first quarter 2010 financial statements. This will require that the
Exchanges financial statements, which are currently prepared only in accordance with statutory
accounting principles, be prepared in accordance with GAAP. Given the materiality of the
Exchanges operations, consolidating the Exchanges financial statements with the Companys will
materially change our reporting entitys assets, liabilities, revenues, expenses, related footnote
disclosures and the overall presentation of managements discussion and analysis. The Exchanges
equity will be shown as noncontrolling interests in such consolidated statements. Erie Indemnity
Companys net income and equity will be unchanged by this presentation.
RESULTS OF OPERATIONS
MANAGEMENT OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
|
|
|
|
|
% Change |
|
|
|
|
|
% Change |
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
2008 |
|
|
(in thousands) |
|
2009 |
|
over 2008 |
|
2008 |
|
over 2007 |
|
2007 |
|
Management fee revenue
|
|
$ |
965,110 |
|
|
|
1.6 |
% |
|
$ |
949,775 |
|
|
|
0.3 |
% |
|
$ |
947,023 |
|
Service agreement revenue
|
|
|
34,783 |
|
|
|
7.7 |
|
|
|
32,298 |
|
|
|
8.6 |
|
|
|
29,748 |
|
|
Total revenue from management
operations
|
|
|
999,893 |
|
|
|
1.8 |
|
|
|
982,073 |
|
|
|
0.5 |
|
|
|
976,771 |
|
Cost of management operations
|
|
|
813,411 |
|
|
|
0.5 |
|
|
|
809,548 |
|
|
|
1.2 |
|
|
|
799,597 |
|
|
Income from management operations
|
|
$ |
186,482 |
|
|
|
8.1 |
% |
|
$ |
172,525 |
|
|
|
(2.6 |
)% |
|
$ |
177,174 |
|
|
Gross margin
|
|
|
18.7 |
% |
|
|
|
|
|
|
17.6 |
% |
|
|
|
|
|
|
18.1 |
% |
|
Key points
|
|
|
The management fee rate was 25% in 2009 and 2008. |
|
|
|
|
Direct written premiums of the Property and Casualty Group increased 1.6% in
2009. |
|
|
|
|
Year-over-year policies in force increased 3.5% to 4,144,004 in 2009, compared
to 4,002,209 in 2008. |
|
|
|
|
Year-over-year average premium per policy declined 1.9% to $932 in 2009 from
$949 in 2008. |
|
|
|
|
Costs of management operations increased 0.5%. Commission costs decreased 0.3%,
while non-commission expense increased 2.1%, driven by higher personnel, survey and
underwriting costs and other operating costs in 2009 compared to 2008. |
29
Management fee revenue
The following table presents the direct written premium of the Property and Casualty Group, shown
by major line of business, and the calculation of our management fee revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
|
|
|
|
|
% Change |
|
|
|
|
|
% Change |
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
2008 |
|
|
(in thousands) |
|
2009 |
|
over 2008 |
|
2008 |
|
over 2007 |
|
2007 |
|
Private passenger auto |
|
$ |
1,865,508 |
|
|
|
2.2 |
% |
|
$ |
1,826,143 |
|
|
|
1.3 |
% |
|
$ |
1,802,603 |
|
Homeowners |
|
|
792,688 |
|
|
|
6.6 |
|
|
|
743,325 |
|
|
|
1.4 |
|
|
|
732,883 |
|
Commercial multi-peril |
|
|
440,552 |
|
|
|
1.1 |
|
|
|
435,767 |
|
|
|
0.0 |
|
|
|
435,630 |
|
Commercial auto |
|
|
301,006 |
|
|
|
(3.2 |
) |
|
|
311,090 |
|
|
|
(1.5 |
) |
|
|
315,851 |
|
Workers compensation |
|
|
248,114 |
|
|
|
(11.6 |
) |
|
|
280,743 |
|
|
|
(8.4 |
) |
|
|
306,563 |
|
All other lines of business |
|
|
212,971 |
|
|
|
5.0 |
|
|
|
202,833 |
|
|
|
6.0 |
|
|
|
191,361 |
|
|
Property and Casualty Group
direct written premiums |
|
$ |
3,860,839 |
|
|
|
1.6 |
% |
|
$ |
3,799,901 |
|
|
|
0.4 |
% |
|
$ |
3,784,891 |
|
Management fee rate |
|
|
25.00 |
% |
|
|
|
|
|
|
25.00 |
% |
|
|
|
|
|
|
25.00 |
% |
|
Management fee revenue, gross |
|
$ |
965,210 |
|
|
|
1.6 |
% |
|
$ |
949,975 |
|
|
|
0.4 |
% |
|
$ |
946,223 |
|
Change in allowance for management fee
returned on cancelled policies(1) |
|
|
(100 |
) |
|
NM |
|
|
(200 |
) |
|
NM |
|
|
800 |
|
|
Management fee revenue, net of allowance |
|
$ |
965,110 |
|
|
|
1.6 |
% |
|
$ |
949,775 |
|
|
|
0.3 |
% |
|
$ |
947,023 |
|
|
|
|
|
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 rate
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 our revenue and net income significantly. The management fee rate was set at 25%,
the maximum rate, for both 2009 and 2008. The management fee rate for 2010 has again been set at
the maximum rate of 25% by our Board of Directors.
Estimated allowance
Management fees are returned to the Exchange when policyholders cancel their insurance coverage
mid-term and unearned premiums are refunded to them. We maintain an allowance for management fees
returned on mid-term policy cancellations that recognizes the management fee anticipated to be
returned to the Exchange based on historical mid-term cancellation experience. In 2009, although
the mid-term cancellations of policies for the Property and Casualty Group continued to trend
downward, a slight increase in the unearned premium reserve in 2009, as in 2008, resulted in an
increase in the allowance for management fees returned on cancelled policies. Our cash flows are
unaffected by the recording of this allowance.
Direct written premiums of the Property and Casualty Group
Direct written premiums of the Property and Casualty Group increased 1.6% to nearly $3.9 billion in
2009, compared to nearly $3.8 billion in 2008, due to an increase in policies in force offset by
reductions in average premium. Total year-over-year policies in force increased by 3.5% as the
result of continuing strong policyholder retention rates and increased new policies sold. The
year-over-year average premium per policy for all lines of business declined 1.9% in 2009, the
impact of which was seen primarily in the commercial lines renewal premiums.
Premiums generated from new business increased 5.0% in 2009 from 2008, which was 2.9% greater than
2007. Underlying the trend in new business premiums was an increase in new business policies in
force of 7.7% in 2009 compared to 3.1% in 2008, offset by a decline in the year-over-year average
premium per policy on new business of 2.5% in 2009 and 0.2% in 2008.
Premiums generated from renewal business increased 1.2% to just over $3.4 billion in 2009 compared
to 2008, which was 0.1% more than in 2007. Renewal policies in force increased 3.0% in 2009
compared to a 2.9% increase in 2008. The year-over-year average premium per policy on renewal
business decreased 1.7% in 2009 from 2008, which was 2.7% less than 2007. The Property and Casualty
Groups year-over-year policy retention ratio was 90.6% in both 2009 and 2008, which was up from
90.2% in 2007.
30
The Property and Casualty Group implemented modest rate increases in 2009 in order to meet lost
cost expectations, whereas rate reductions were taken in 2008 and 2007 to be more price-competitive
for potential new policyholders and to improve retention of existing policyholders. Our modest rate
increases in 2009 were offset by exposure reductions and changes in our mix of business which
resulted in a slight decrease in our average premium per policy in 2009. We continuously evaluate
our pricing actions and currently, rate increases are planned for 2010.
The Property and Casualty Group writes only one-year policies. Consequently, rate actions take 12
months to be fully recognized in written premium and 24 months to be recognized fully in earned
premiums. Since rate changes are realized at renewal, it takes 12 months to implement a rate change
to all policyholders and another 12 months to earn the decreased or increased premiums in full. As
a result, certain rate actions approved in 2008 were reflected in 2009, and certain rate actions in
2009 will be reflected in 2010.
Personal lines Total personal lines premiums written increased 3.7% to nearly $2.8
billion in 2009, compared to nearly $2.7 billion in 2008. Total personal lines policies in force
increased 3.7% in 2009 and total personal lines year-over-year average premium per policy increased
0.1%.
The Property and Casualty Groups personal lines new business premiums written increased 9.1% in
2009 compared to 2008, which was 2.5% greater than 2007. Personal lines new business policies in
force increased 8.6% in 2009 from 2008, which was 3.3% higher than 2007. The year-over-year average
premium per policy on personal lines new business increased 0.4% from 2008, which was 0.7% less
than 2007.
|
|
|
Private passenger auto new business premiums written increased 8.2% in 2009
driven by an 8.7% increase in new business policies in force in 2009 compared to 2008. An
incentive program for private passenger auto has been in place since July 2006 to stimulate
policy growth and has contributed to the increase in new business policies in force. The
new business year-over-year average premium per policy for private passenger auto decreased
0.4% in 2009 from 2008. In 2008, the private passenger auto new business premiums written
increased 5.3% compared to 2007 as new policies in force increased 7.3%, while the average
premium per policy declined 1.8%. |
Renewal premiums written on personal lines increased 3.2% in 2009 compared to an increase of 1.6%
in 2008. The 2009 increase in renewal premiums was driven by a slight increase in average premium
per policy and improving policy retention ratio trends. The year-over-year average premium per
policy on personal lines renewal business increased 0.1% in 2009, compared to a decrease of 1.3% in
2008. The year-over-year policy retention ratio for personal lines improved to 91.5% in 2009, from
91.4% in 2008 and 90.8% in 2007.
|
|
|
Private passenger auto renewal business premiums written increased 1.6% in 2009
from 2008. The private passenger auto year-over-year policy retention ratio was 91.9%,
91.8% and 91.5% in 2009, 2008 and 2007, respectively. Driving a 6.1% increase in homeowners
renewal premiums written in 2009 compared to 2008 was an increase in year-over-year
policyholder retention ratio to 91.2% in 2009, compared to 91.1% and 90.3% in 2008 and
2007, respectively. |
Commercial lines Total commercial lines premiums written decreased 3.6% to almost $1.1
billion in 2009, compared to just over $1.1 billion in 2008. Total commercial lines policies in
force increased 2.7% while the total commercial lines year-over-year average premium per policy
decreased 6.1%.
Commercial lines new business premiums written decreased 2.5% in 2009 from 2008, which had
increased 3.9% from 2007. The year-over-year average premium per policy on commercial lines new
business decreased 6.0% from 2008, which had increased 1.3% from 2007. Commercial lines new
business policies in force increased 3.7% in 2009 from 2008, which was up 2.6% from 2007. The
decrease in commercial lines new business year-over-year average premium per policy was driven by
reductions in exposure as a result of continued economic pressures on commercial customers. In
2008, the factors contributing to the increase in new commercial lines premiums written included
more proactive communications between us and our commercial agents, continued refinement and
enhancements to our quote processing systems and our use of more refined pricing based on
predictive modeling, all of which were initiated in 2007.
31
Renewal premiums for commercial lines decreased 3.8% in 2009 from 2008, which was 3.4% less
than 2007. Renewal policies in force increased 2.5% in 2009 compared to 3.1% in 2008. The
year-over-year average premium per policy on commercial lines renewal business declined 6.1% in
2009 compared to 6.3% in 2008, due primarily to the workers compensation and commercial auto lines
of business. The workers compensation and commercial auto year-over-year average premium per policy
decreased 14.4% and 4.2%, respectively, in 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. In 2008, the 3.4%
decrease in renewal premiums for commercial lines was reflective of the impact of rate reductions
and changes in the mix of business. The year-over-year policy retention ratio for commercial lines
was 84.9%, 85.3% and 85.7% in 2009, 2008 and 2007, respectively.
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. In 2009, we appointed 120 new agencies and had a
total of 2,054 agencies as of December 31, 2009. We will continue to appoint a similar number of
new agencies in 2010. 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.
Service agreement revenue
Service agreement revenue includes service charges we collect 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 $34.8 million, $32.3 million and $29.7 million in 2009, 2008 and
2007, respectively. Service agreement revenue increased by $5.8 million in 2009 and $2.9 million in
2008 due to the implementation of late payment and policy reinstatement fees that became effective
in March 2008. These increases were offset somewhat by continued shifts to the no-fee, single
payment plan driven by a discount in pricing offered for paid-in-full policies as well as
consumers desire to not incur service charges.
Cost of management operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
|
|
|
% Change 2009 |
|
|
|
|
|
% Change 2008 |
|
|
(in thousands) |
|
2009 |
|
over 2008 |
|
2008 |
|
over 2007 |
|
2007 |
|
Commissions |
|
$ |
552,351 |
|
|
|
(0.3 |
)% |
|
$ |
553,958 |
|
|
|
(0.6 |
)% |
|
$ |
557,359 |
|
|
Personnel costs |
|
|
145,563 |
|
|
|
0.9 |
|
|
|
144,281 |
|
|
|
3.8 |
|
|
|
138,948 |
|
Survey and underwriting costs |
|
|
26,785 |
|
|
|
12.3 |
|
|
|
23,841 |
|
|
|
0.6 |
|
|
|
23,710 |
|
Sales and policy issuance costs |
|
|
27,996 |
|
|
|
(2.3 |
) |
|
|
28,665 |
|
|
|
27.1 |
|
|
|
22,556 |
|
All other operating costs |
|
|
60,716 |
|
|
|
3.3 |
|
|
|
58,803 |
|
|
|
3.1 |
|
|
|
57,024 |
|
|
Non-commission expense |
|
|
261,060 |
|
|
|
2.1 |
|
|
|
255,590 |
|
|
|
5.5 |
|
|
|
242,238 |
|
|
Total cost of management operations |
|
$ |
813,411 |
|
|
|
0.5 |
% |
|
$ |
809,548 |
|
|
|
1.2 |
% |
|
$ |
799,597 |
|
|
Key points
|
|
|
Commissions in 2009 decreased 0.3% as a result of a $12.7 million decrease in the
estimate for agent bonuses, offset by a $11.1 million increase in scheduled rate
commissions. |
|
|
|
|
Personnel costs were impacted by increases in employee benefit costs,
management incentive plan expenses and regular salaries and wages. Offsetting these
increases were capitalized labor costs related to technology initiatives. |
|
|
|
|
Survey and underwriting costs increased $2.9 million as a result of an increase in
application activity that resulted in additional underwriting costs. |
|
|
|
|
All other operating costs increased $1.9 million primarily as a result of increased
contract labor costs related to various technology initiatives. |
32
Commissions
Commissions to independent agents, which are the largest component of the cost of management
operations, include scheduled commissions earned by independent agents on premiums written,
accelerated commissions and agent bonuses and are outlined in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
(in thousands) |
|
2009 |
|
2008 |
|
2007 |
|
Scheduled rate commissions |
|
$ |
467,821 |
|
|
$ |
456,711 |
|
|
$ |
451,987 |
|
Accelerated rate commissions |
|
|
3,799 |
|
|
|
4,326 |
|
|
|
2,880 |
|
Agent bonuses |
|
|
68,508 |
|
|
|
81,227 |
|
|
|
95,854 |
|
Promotional incentives and other bonuses |
|
|
12,223 |
|
|
|
11,694 |
|
|
|
6,638 |
|
|
Total commissions |
|
$ |
552,351 |
|
|
$ |
553,958 |
|
|
$ |
557,359 |
|
|
Scheduled and accelerated rate commissions Scheduled rate commissions were impacted by a
1.6% increase in the direct written premiums of the Property and Casualty Group in 2009. Also,
commission rates were increased for certain commercial lines new business premiums effective in
July 2008, which added $2.1 million to 2009 scheduled rate commissions. In 2008, these commercial
rate increases added $1.5 million to scheduled rate commissions. Also in 2008, an increase in
workers compensation commission rates, which became effective in the latter half of 2007 in certain
states, added $2.8 million of commission expense.
Accelerated rate commissions are offered under specific circumstances to certain newly-recruited
agencies for their initial three years of operation. Accelerated rate commissions decreased in 2009
as existing accelerated commission contracts are expiring. This is reflective of the fact that
although new agency appointments continue, the number of such appointments has been declining. We
appointed 120 new agencies in 2009, 156 in 2008 and 214 in 2007.
Agent bonuses Agent bonuses are based on an individual agencys property/casualty
underwriting profitability over a three-year period. There is also a growth component to the bonus,
paid only if the agency is profitable. The estimate for the bonus is modeled on a monthly basis
using the two prior years actual underwriting data by agency combined with the current
year-to-date actual data. Agent bonuses decreased $12.7 million in 2009 as our estimate of the
profitability component of the bonus decreased when factoring in the most recent years
underwriting data. The agent bonus award is estimated at $67.6 million for 2009. The $14.6 million
decrease in 2008 compared to 2007 also reflected the profitability component of the bonus
decreasing when factoring in the most recent years underwriting data.
Promotional incentives and other bonuses In July 2006, an incentive program was
implemented that paid a bonus to agents for each qualifying new private passenger auto policy
issued to stimulate growth. A tiered payout structure was introduced for this bonus effective in
June 2008. This tiered bonus structure resulted in additional commission expense of $4.7 million in
2009 and $3.2 million in 2008. This bonus structure ended on January 31, 2010. A new commission
structure became effective February 1, 2010 which will increase commissions for qualifying new
private passenger auto policies.
Other costs of management operations
Personnel costs, the second largest component in the cost of management operations, increased 0.9%,
or $1.3 million, in 2009. Employee benefit costs increased $3.3 million, primarily driven by higher
pension benefit costs due to the change in the discount rate assumption used to calculate the
pension expense to 6.06% in 2009 from 6.62% in 2008. Expense for management incentive plans
increased $2.0 million, resulting from an increase in the estimate of the plan payouts. Salaries
and wages were impacted by a $1.1 million increase due to higher average pay rates offset by the
capitalization of $2.5 million of labor costs related to our technology initiatives. Also, 2008
included $2.9 million of executive severance costs and other compensation expense.
Survey and underwriting costs increased $2.9 million in 2009. A 7.5% increase in submitted
applications for potential policyholders contributed to higher underwriting costs. All other
operating costs increased 3.3%, or $1.9 million, in 2009 driven by a $2.7 million increase
primarily in contract labor costs related to various technology initiatives. This increase is net
of $5.7 million of capitalized contract labor costs.
33
Future trendscost of management operations The cost structure and competitive position
of the Property and Casualty Group is based on many factors including price considerations, service
levels, ease of doing business, product features and billing arrangements. Pricing of Property and
Casualty Group policies is directly affected by the cost structure of the Property and Casualty
Group and the underlying costs of sales, underwriting activities, policy issuance activities and
billing arrangements performed by us for the Property and Casualty Group. Managements objective is
to better align our growth in costs to our growth in premium over the long-term. We will continue
our various information technology initiatives aimed at improving our operating performance in 2010
and beyond.
INSURANCE UNDERWRITING OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
|
|
|
% Change 2009 |
|
|
|
|
|
% Change 2008 |
|
|
(in thousands) |
|
2009 |
|
over 2008 |
|
2008 |
|
over 2007 |
|
2007 |
|
Premiums earned |
|
$ |
209,457 |
|
|
|
1.0 |
% |
|
$ |
207,407 |
|
|
|
(0.1 |
)% |
|
$ |
207,562 |
|
|
Losses and loss expenses incurred |
|
|
145,452 |
|
|
|
6.0 |
|
|
|
137,167 |
|
|
|
9.0 |
|
|
|
125,903 |
|
Policy acquisition and other
underwriting expenses |
|
|
62,369 |
|
|
|
9.6 |
|
|
|
56,931 |
|
|
|
(0.1 |
) |
|
|
56,996 |
|
|
Total losses and expenses |
|
|
207,821 |
|
|
|
7.1 |
|
|
|
194,098 |
|
|
|
6.1 |
|
|
|
182,899 |
|
|
Underwriting income |
|
$ |
1,636 |
|
|
|
(87.7 |
)% |
|
$ |
13,309 |
|
|
|
(46.0 |
)% |
|
$ |
24,663 |
|
|
NM = not meaningful
Key points
|
|
|
The loss and loss expense ratio related to the current accident year, excluding
catastrophe losses, was 68.4% in 2009, which was 0.7 points higher than the 67.7% in 2008. |
|
|
|
|
Development of prior accident year loss reserves improved the GAAP combined ratio by
2.4 points, or $5.1 million, in 2009 compared to 5.0 points, or $10.3 million, in 2008. |
|
|
|
|
Catastrophe losses contributed 3.4 points to the GAAP combined ratio in both 2009 and
2008. |
|
|
|
|
In 2009, the Property and Casualty Groups underwriting income was reduced by a net
$50.5 million related to the write-off of assumed involuntary reinsurance premium related
to the North Carolina Beach and Coastal Plans deemed uncollectible as a result of recent
state legislation. Our $2.8 million share of this write off is reflected in policy
acquisition and other underwriting expense and contributed 1.3 points to our 2009 GAAP
combined ratio. |
34
Profitability measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
Erie Indemnity Company GAAP loss and LAE ratio(1) |
|
|
69.4 |
|
|
|
66.1 |
|
|
|
60.7 |
|
Erie Indemnity Company GAAP combined ratio(2) |
|
|
99.2 |
|
|
|
93.6 |
|
|
|
88.1 |
|
P&C Group statutory combined ratio |
|
|
96.9 |
|
|
|
93.3 |
|
|
|
87.7 |
|
P&C Group adjusted statutory combined ratio(3) |
|
|
92.9 |
|
|
|
89.6 |
|
|
|
83.8 |
|
Direct business(statutory basis): |
|
|
|
|
|
|
|
|
|
|
|
|
Personal lines adjusted statutory combined ratio |
|
|
98.0 |
(4) |
|
|
88.3 |
(4) |
|
|
83.9 |
|
Commercial lines adjusted statutory combined ratio |
|
|
82.2 |
(5) |
|
|
94.2 |
(5) |
|
|
84.7 |
|
|
Prior accident year reserve developmentredundancy |
|
|
(0.6 |
) |
|
|
(3.2 |
) |
|
|
(5.3 |
) |
Prior year salvage and subrogation recoveries collected |
|
|
(1.9 |
) |
|
|
(1.8 |
) |
|
|
(1.7 |
) |
|
Total loss ratio points from prior accident years |
|
|
(2.5 |
) |
|
|
(5.0 |
) |
|
|
(7.0 |
) |
|
|
|
|
(1) |
|
The GAAP loss and LAE ratio, expressed as a percentage, is the ratio of losses and loss
expenses incurred to earned premiums for our property/casualty insurance subsidiaries. |
|
(2) |
|
The GAAP combined ratio, expressed as a percentage, is the ratio of losses, loss expenses,
acquisition and other underwriting expenses incurred to earned premiums for our
property/casualty insurance subsidiaries. Our GAAP combined ratios are different than the
results of the Property and Casualty Group due to certain GAAP adjustments. |
|
(3) |
|
The adjusted statutory combined ratio removes the profit margin on the management fee we earn
from the Property and Casualty Group. |
|
(4) |
|
The personal lines adjusted statutory combined ratio increase in 2009 over 2008 was primarily
impacted by reserve increases resulting from assumption changes and increasing frequency
trends. In 2008, favorable development on prior accident year loss reserves was experienced on
automobile bodily injury and uninsured/underinsured motorist bodily injury. |
|
(5) |
|
The commercial lines adjusted statutory combined ratio decrease in 2009 over 2008 is
primarily due to reserve decreases resulting from assumption changes combined with the
settlement of eight massive injury workers compensation claims. Impacting 2008 was one large
fire claim in Pennsylvania and losses related to Hurricane Ike in Ohio, Pennsylvania and
Indiana. |
The following table provides the details of the prior year loss reserve development for our
wholly-owned property/casualty insurance subsidiaries:
Prior year loss development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
(in thousands) |
|
2009 |
|
2008 |
|
2007 |
|
Direct business excluding salvage
and subrogation |
|
$ |
(1,204 |
) |
|
$ |
(6,729 |
) |
|
$ |
(11,031 |
) |
Assumed reinsurance business |
|
|
(2,094 |
) |
|
|
(3,675 |
) |
|
|
(3,624 |
) |
Ceded reinsurance business |
|
|
(1,307 |
) |
|
|
167 |
|
|
|
(902 |
) |
Salvage and subrogation |
|
|
(451 |
) |
|
|
(104 |
) |
|
|
47 |
|
|
Total prior year loss development |
|
$ |
(5,056 |
) |
|
$ |
(10,341 |
) |
|
$ |
(15,510 |
) |
|
NM = not meaningful
Negative amounts represent a redundancy (decrease in reserves) while positive amounts
represent a deficiency (increase in reserves).
Development of loss reserves
Direct Our 5.5% share of the Property and Casualty Groups favorable development of
prior accident year direct losses, after removing the effects of salvage and subrogation
recoveries, was $1.2 million in 2009 and improved the combined ratio by 0.6 points. Driving the
prior accident year development are $7.3 million of favorable development related to workers
compensation reserves offset by adverse development of $4.3 million related to the pre-1986
automobile massive injury reserves. The favorable workers compensation development was a function
of 1) the settlement of several massive injury workers compensation claims, 2) changes to mortality
assumptions and 3) a change in the payout patterns used in the calculation to discount workers
compensation reserves. The adverse development on the pre-1986 automobile massive injury reserves
was the result of changes made to the mortality assumption, specifically the use of gender specific
mortality tables, coupled with increasing frequency trends. Adverse development was also
experienced on the commercial multi-peril line in 2009 as a result of some reserve strengthening
and the outcome of certain court decisions.
35
In 2008, our 5.5% share of the Property and Casualty Groups favorable development of prior
accident year direct losses, after removing the effects of salvage and subrogation recoveries, was
$6.7 million and improved the combined ratio by 3.2 points. Of the $6.7 million, $4.3 million
related to the personal auto line of business. The Property and Casualty Group reduced reserves in
2008 on prior accident years as a result of improvements in frequency trends and slight
improvements in severity trends on automobile bodily injury and on uninsured/underinsured motorist
bodily injury. In 2007, our share of the Property and Casualty Groups favorable development of
prior accident year direct losses, after removing the effects of salvage and subrogation
recoveries, was $11.0 million and improved the combined ratio by 5.3 points. Of the $11.0 million,
$8.1 million related to the personal auto line of business. The Property and Casualty Group reduced
reserves in 2007 on prior accident years as a result of sustained improved severity trends on
automobile bodily injury and on uninsured/underinsured motorist bodily injury.
Assumed reinsurance The Property and Casualty Group experienced favorable development of
prior accident year loss reserves on its assumed reinsurance business of $38.1 million, $66.8
million and $65.9 million in 2009, 2008 and 2007, respectively. Our 5.5% share of this development
was $2.1 million, $3.7 million and $3.6 million in 2009, 2008 and 2007, respectively. The
favorable development was due to less than anticipated growth in involuntary reinsurance and, to a
lesser extent, reductions in reserve levels related to World Trade Center (WTC) losses.
Ceded reinsurance Ceded reinsurance reserves are primarily related to the pre-1986
automobile massive injury claims. As mentioned in the discussion of direct business above, the
pre-1986 automobile massive injury reserves increased in 2009 due to assumption changes and
frequency trends. These reserve increases drove the corresponding increase in the 2009 receivable
from the ceded reinsurer.
Catastrophe losses
Catastrophes are an inherent risk of the property/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 also maintains property catastrophe reinsurance
coverage from unaffiliated insurers. 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.
Our share of catastrophe losses, as defined by the Property and Casualty Group, totaled $7.1
million, $7.0 million and $3.6 million in 2009, 2008 and 2007, respectively. Both 2009 and 2008
catastrophes amounted to 3.4 points of the respective loss ratios and 2007 comprised 1.7 points of
the 2007 loss ratio. Catastrophe losses in 2009 were impacted by flooding,
hail, tornado and wind storms primarily in Pennsylvania, Ohio and Indiana. In 2008, catastrophe
losses resulted from flooding, tornado and wind storms related to Hurricane Ike primarily in Ohio
and Pennsylvania. Storm-related losses were at lower than expected levels in 2007, with wind and
rainstorms primarily in Ohio and Pennsylvania.
INVESTMENT OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
|
|
|
% Change 2009 |
|
|
|
|
|
% Change 2008 |
|
|
(in thousands) |
|
2009 |
|
over 2008 |
|
2008 |
|
over 2007 |
|
2007 |
|
Net investment income |
|
$ |
41,728 |
|
|
|
(5.6 |
)% |
|
$ |
44,181 |
|
|
|
(16.4 |
)% |
|
$ |
52,833 |
|
Net realized gains (losses) on investments |
|
|
10,396 |
|
|
NM |
|
|
(43,515 |
) |
|
NM |
|
|
17,265 |
|
Net impairment losses recognized in earnings |
|
|
(12,059 |
) |
|
|
82.6 |
|
|
|
(69,504 |
) |
|
NM |
|
|
(22,457 |
) |
Equity in (losses) earnings of limited
partnerships |
|
|
(76,108 |
) |
|
NM |
|
|
5,710 |
|
|
|
(90.4 |
) |
|
|
59,690 |
|
Equity in earnings (losses) of EFL |
|
|
5,593 |
|
|
NM |
|
|
(14,627 |
) |
|
NM |
|
|
3,133 |
|
|
Net (loss) revenue from investment operations |
|
$ |
(30,450 |
) |
|
|
60.8 |
% |
|
$ |
(77,755 |
) |
|
NM |
|
$ |
110,464 |
|
|
NM = not meaningful
36
Key points
|
|
|
Net investment income decreased 5.6% in 2009 primarily due to decreased
dividend income on our non-redeemable preferred stock portfolio as a result of disposals of
these securities. |
|
|
|
|
We incurred net realized gains on investments in 2009 of $10.4 million compared
to losses of $43.5 million in 2008. Our common stock trading portfolio contributed $10.9
million in valuation adjustment gains to the 2009 results, compared to $21.7 million in valuation adjustment losses
to the 2008 results. |
|
|
|
|
Impairment losses recognized in earnings decreased $57.4 million in 2009
due to market conditions as well as the change in impairment policies related to credit
impaired debt securities. |
|
|
|
|
Equity in losses of limited partnerships were $76.1 million in 2009 compared to
gains of $5.7 million in 2008, primarily as a result of fair value declines in our real
estate limited partnerships. |
|
|
|
|
Equity in earnings of EFL was $5.6 million in 2009 compared to losses of $14.6
million in 2008, driven primarily by lower impairment charges. Our share of impairment
charges recorded by EFL totaled $5.0 million in 2009 compared to $18.1 million in 2008. |
The breakdown of our net realized gains (losses) on investments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
(in thousands) |
|
2009 |
|
2008 |
|
2007 |
|
Securities sold |
|
$ |
(504 |
) |
|
$ |
(23,413 |
) |
|
$ |
16,789 |
|
Common stock valuation adjustments |
|
|
10,900 |
|
|
|
(21,730 |
) |
|
|
0 |
|
Limited partnerships |
|
|
0 |
|
|
|
1,628 |
|
|
|
476 |
|
|
Total net realized gains (losses) |
|
$ |
10,396 |
|
|
$ |
(43,515 |
) |
|
$ |
17,265 |
|
|
The components of other-than-temporary impairments are included below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
(in thousands) |
|
2009 |
|
2008 |
|
2007 |
|
Impairments: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
(6,876 |
) |
|
$ |
(35,974 |
) |
|
$ |
(5,101 |
) |
Equity securities |
|
|
(5,183 |
) |
|
|
(33,530 |
) |
|
|
(17,356 |
) |
|
Total net impaired losses
recognized in earnings |
|
$ |
(12,059 |
) |
|
$ |
(69,504 |
) |
|
$ |
(22,457 |
) |
|
We terminated our securities lending program and completed the process of unwinding the current
securities on loan in December 2009. Consequently, there were no loaned securities included as
part of our invested assets at December 31, 2009, compared to $17.5 million at December 31, 2008.
The components of equity in (losses) earnings of limited partnerships are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
(in thousands) |
|
2009 |
|
2008 |
|
2007 |
|
Private equity |
|
$ |
(12,543 |
) |
|
$ |
3,813 |
|
|
$ |
22,948 |
|
Real estate |
|
|
(58,590 |
) |
|
|
(3,710 |
) |
|
|
30,206 |
|
Mezzanine debt |
|
|
(4,975 |
) |
|
|
5,607 |
|
|
|
6,536 |
|
|
Total equity in (losses) earnings of
limited partnerships |
|
$ |
(76,108 |
) |
|
$ |
5,710 |
|
|
$ |
59,690 |
|
|
37
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. Private equity and mezzanine
debt limited partnerships generated earnings, excluding valuation adjustments, of $0.1 million,
$13.6 million and $21.6 million in 2009, 2008 and 2007, respectively. Real estate limited
partnerships included losses of $0.5 million, and earnings of $13.1 million and $15.6 million in
2009, 2008 and 2007, respectively. We experienced a decline in earnings as a result of asset value
reductions recognized in 2009 due to adverse market conditions resulting in lower than normal
transaction volume and, subsequently, lower sales prices and gains on sales of investments. Limited
partnership earnings tend to be cyclical based on market conditions, the age of the partnership and
the nature of the investments. Generally, limited partnership earnings are recorded by us on a
quarter lag from financial statements we receive from our general partners. As a consequence,
earnings from limited partnerships reported at December 31, 2009 do not reflect investment
valuation changes that may have resulted from the financial markets and the economy in general in
the fourth quarter of 2009.
Our $5.6 million equity in earnings of EFL in 2009 included lower impairment charges compared to
2008. EFL recorded pre-tax impairment charges of $22.9 million in 2009, of which our share was
$5.0 million before tax. EFLs impairment charges were $83.5 million in 2008, of which our share
was $18.1 million before tax. EFLs net income was positively impacted by a reduction in the
deferred tax valuation allowance of $18.9 million in 2009. The net loss in 2008 was negatively
impacted by $32.7 million due to the establishment of a deferred tax valuation allowance. EFLs
valuation allowance at December 31, 2009 was $4.4 million. The allowance was established because it
is more likely than not that the related deferred tax asset will not be realized.
In June 2009, we made an $11.9 million capital contribution to EFL and the Exchange made a $43.1
million capital contribution to EFL to strengthen its surplus. The $55 million in capital
contributions increased EFLs investments and total shareholders equity.
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. At December 31, 2009 and 2008, our
investment portfolio of investment-grade bonds, preferred stock, common stock and cash and cash
equivalents represents 29% and 26%, respectively, of total assets. These investments, along with
our operating cash flow, provide the liquidity we require to meet the demands on our funds.
Distribution of investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value at December 31, |
(in thousands) |
|
2009 |
|
% to total |
|
2008 |
|
% to total |
|
Fixed maturities |
|
$ |
664,026 |
|
|
|
68 |
% |
|
$ |
563,429 |
|
|
|
59 |
% |
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
37,725 |
|
|
|
4 |
|
|
|
55,281 |
|
|
|
6 |
|
Common stock |
|
|
42,153 |
|
|
|
4 |
|
|
|
33,338 |
|
|
|
3 |
|
Limited partnerships: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate |
|
|
98,715 |
|
|
|
10 |
|
|
|
149,499 |
|
|
|
16 |
|
Private equity |
|
|
85,568 |
|
|
|
8 |
|
|
|
94,512 |
|
|
|
10 |
|
Mezzanine debt |
|
|
50,697 |
|
|
|
5 |
|
|
|
55,165 |
|
|
|
5 |
|
Real estate mortgage loans |
|
|
1,116 |
|
|
|
1 |
|
|
|
1,215 |
|
|
|
1 |
|
|
Total investments |
|
$ |
980,000 |
|
|
|
100 |
% |
|
$ |
952,439 |
|
|
|
100 |
% |
|
We continually review the available-for-sale debt and equity portfolios 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. Other factors considered in our review of investment valuation are the length of time the
fair value is below cost and the amount the fair value is below cost.
38
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 are included in earnings and no
credit-related impairments are 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 and declines in fair values 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 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 were different, our
Consolidated Results of Operations could be significantly impacted. Management believes its
investment valuation philosophy and accounting practices result in appropriate and timely
measurement of value and recognition of impairment.
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 $243.7 million,
or 36.7%, of the total fixed maturity portfolio. 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 ratings.
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 December 31, 2009, the net
unrealized gain on fixed maturities, net of deferred taxes, amounted to $14.2 million, compared to
a $22.3 million loss at December 31, 2008.
The following is a breakdown of the fair value of our fixed maturity portfolio by sector and rating
as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment |
|
Fair |
|
|
|
|
Industry Sector |
|
AAA |
|
AA |
|
A |
|
BBB |
|
Grade |
|
value |
|
|
|
|
|
|
|
|
|
Basic materials |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
537 |
|
|
$ |
5,536 |
|
|
$ |
1,370 |
|
|
$ |
7,443 |
|
|
|
|
|
Communications |
|
|
0 |
|
|
|
0 |
|
|
|
10,891 |
|
|
|
20,298 |
|
|
|
0 |
|
|
|
31,189 |
|
|
|
|
|
Consumer |
|
|
0 |
|
|
|
3,181 |
|
|
|
18,700 |
|
|
|
39,158 |
|
|
|
2,113 |
|
|
|
63,152 |
|
|
|
|
|
Diversified |
|
|
0 |
|
|
|
0 |
|
|
|
1,086 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,086 |
|
|
|
|
|
Energy |
|
|
0 |
|
|
|
1,053 |
|
|
|
1,921 |
|
|
|
28,852 |
|
|
|
0 |
|
|
|
31,826 |
|
|
|
|
|
Financial |
|
|
16,830 |
|
|
|
17,015 |
|
|
|
62,544 |
|
|
|
52,740 |
|
|
|
22,191 |
|
|
|
171,320 |
|
|
|
|
|
Government sponsored enterprises |
|
|
0 |
|
|
|
0 |
|
|
|
2,100 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2,100 |
|
|
|
|
|
US Treasury |
|
|
2,916 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2,916 |
|
|
|
|
|
Municipal |
|
|
39,222 |
|
|
|
131,807 |
|
|
|
66,539 |
|
|
|
6,166 |
|
|
|
0 |
|
|
|
243,734 |
|
|
|
|
|
Industrial |
|
|
0 |
|
|
|
0 |
|
|
|
5,680 |
|
|
|
18,445 |
|
|
|
1,906 |
|
|
|
26,031 |
|
|
|
|
|
Structured securities (1) |
|
|
23,830 |
|
|
|
1,938 |
|
|
|
0 |
|
|
|
3,104 |
|
|
|
5,344 |
|
|
|
34,216 |
|
|
|
|
|
Technology |
|
|
0 |
|
|
|
0 |
|
|
|
2,058 |
|
|
|
3,221 |
|
|
|
0 |
|
|
|
5,279 |
|
|
|
|
|
Utilities |
|
|
0 |
|
|
|
381 |
|
|
|
4,259 |
|
|
|
37,200 |
|
|
|
1,894 |
|
|
|
43,734 |
|
|
|
|
|
|
|
|
Total |
|
$ |
82,798 |
|
|
$ |
155,375 |
|
|
$ |
176,315 |
|
|
$ |
214,720 |
|
|
$ |
34,818 |
|
|
$ |
664,026 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Structured securities include asset-backed securities, collateral, lease and debt
obligations, commercial mortgage-backed securities and residential mortgage-backed
securities |
39
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 preferred and common stock
securities by sector at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
2008 |
|
|
Preferred |
|
Common |
|
Preferred |
|
Common |
Industry sector |
|
stock |
|
stock |
|
stock |
|
stock |
|
Basic materials |
|
$ |
0 |
|
|
$ |
1,823 |
|
|
$ |
0 |
|
|
$ |
1,626 |
|
Communications |
|
|
1,016 |
|
|
|
2,460 |
|
|
|
1,620 |
|
|
|
2,921 |
|
Consumer |
|
|
0 |
|
|
|
14,869 |
|
|
|
1,740 |
|
|
|
11,878 |
|
Diversified |
|
|
0 |
|
|
|
735 |
|
|
|
0 |
|
|
|
444 |
|
Energy |
|
|
0 |
|
|
|
3,169 |
|
|
|
4,860 |
|
|
|
1,398 |
|
Financial |
|
|
26,932 |
|
|
|
9,119 |
|
|
|
35,944 |
|
|
|
7,862 |
|
Funds |
|
|
0 |
|
|
|
2,844 |
|
|
|
0 |
|
|
|
1,768 |
|
Government |
|
|
345 |
|
|
|
0 |
|
|
|
179 |
|
|
|
0 |
|
Industrial |
|
|
1,676 |
|
|
|
5,975 |
|
|
|
1,292 |
|
|
|
3,300 |
|
Technology |
|
|
2,921 |
|
|
|
752 |
|
|
|
2,383 |
|
|
|
866 |
|
Utilities |
|
|
4,835 |
|
|
|
407 |
|
|
|
7,263 |
|
|
|
1,275 |
|
|
|
|
Total |
|
$ |
37,725 |
|
|
$ |
42,153 |
|
|
$ |
55,281 |
|
|
$ |
33,338 |
|
|
|
|
Our equity securities are carried at fair value on the Consolidated Statements of Financial
Position. At December 31, 2009, the unrealized gain on available-for-sale equity securities, net of
deferred taxes, amounted to $1.9 million, compared to a $3.0 million loss at December 31, 2008.
Effective January 1, 2008, we adopted the fair value option for our common stock portfolio. As a
result, all changes in unrealized gains and losses on our Consolidated Statements of Financial
Position are reflected in our Consolidated Statements of Operations. A one-time cumulative-effect
adjustment of approximately $11.2 million, net of tax, was recorded as an increase to retained
earnings with an offsetting reduction to other comprehensive income on January 1, 2008.
Limited partnership investments
During 2009, investments in limited partnerships decreased $64.2 million to $235.0 million due to
current market conditions. Mezzanine debt and real estate limited partnerships, which comprise
63.6% of the total limited partnerships, produce a more predictable earnings stream while private
equity limited partnerships, which comprise 36.4% of the total limited partnerships, tend to
provide a less predictable earnings stream but the potential for greater long-term returns. At
December 31, 2009, our investments in limited partnerships represented 24.0% of total investments,
compared to 31.4% at December 31, 2008.
Liabilities
Property/casualty loss reserves
Loss reserves are established to account for the estimated ultimate costs of losses 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 for EIC, ENY and EPC. Our property/casualty insurance subsidiaries wrote about 16%
of the direct property/casualty premiums of the Property and Casualty Group in 2009. Under the
terms of the Property and Casualty Groups quota share and intercompany pooling arrangement, a
significant portion of these reserve liabilities are recoverable.
40
Recoverable amounts are reflected as an asset on our Statements of Financial Position. The direct
and assumed loss and loss expense reserves by major line of business and the related amount
recoverable under the intercompany pooling arrangement are presented as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
(in thousands) |
|
2009 |
|
2008 |
|
Gross reserve liability: |
|
|
|
|
|
|
|
|
Private passenger auto |
|
$ |
297,988 |
|
|
$ |
295,174 |
|
Pre-1986 automobile massive injury |
|
|
172,773 |
|
|
|
167,748 |
|
Homeowners |
|
|
34,287 |
|
|
|
28,984 |
|
Workers compensation |
|
|
162,122 |
|
|
|
162,898 |
|
Workers compensation massive injury |
|
|
58,877 |
|
|
|
92,019 |
|
Commercial auto |
|
|
72,681 |
|
|
|
75,480 |
|
Commercial multi-peril |
|
|
99,145 |
|
|
|
76,584 |
|
All other lines of business |
|
|
67,547 |
|
|
|
66,194 |
|
|
Gross reserves |
|
|
965,420 |
|
|
|
965,081 |
|
Reinsurance recoverable(1) |
|
|
778,543 |
|
|
|
778,328 |
|
|
Net reserve liability |
|
$ |
186,877 |
|
|
$ |
186,753 |
|
|
|
|
|
(1) |
|
Includes $778.0 million in 2009 and $777.8 million in 2008 due from the Exchange. |
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 is our best estimate of this
liability at this time, was $427.7 million at December 31, 2009, which is net of $178.9 million of
anticipated reinsurance recoverables. Our property/casualty subsidiaries share of the net massive
injury liability reserves was $23.5 million at December 31, 2009 compared to $28.3 million at
December 31, 2008. The increase in the pre-1986 automobile massive injury direct and assumed
reserves in the above table at December 31, 2009 compared to December 31, 2008 was primarily due to
changes impacting the mortality rate assumption in 2009. The decrease in the direct and assumed
workers compensation massive injury reserve at December 31, 2009, compared to December 31, 2008,
was driven by the settlement of several massive injury workers compensation claims, changes to our
mortality rate assumption and a change in the discount calculation, which all had the effect of
reducing reserves in 2009.
It is anticipated that these massive injury claims will require payments over the next 30 to 40
years. In 2009, we changed our medical inflation rate assumption for these reserves to an 8% annual
increase grading down 0.5% per year to an ultimate rate of 5%. In 2008, this assumption was a 9%
annual increase grading down 1% after the first year, then grading down 0.5% per year to an
ultimate rate of 5%. The impact on the massive injury liability reserves due to the change in our
medical inflation rate assumption in 2009 resulted in a reserve reduction of $25.6 million for the
Property and Casualty Group, of which our property/casualty subsidiaries share was $1.4 million.
In 2009, we changed our mortality rate assumption to give 100% weighting to the disabled pensioner
mortality table by gender to more appropriately weigh male versus female life expectancies. In
2008, this assumption gave 75% weighting to our own mortality experience and 25% weighting to the
male-female combined disabled pensioner mortality table. The impact on the massive injury liability
reserves due to the change in our mortality rate assumption in 2009 resulted in a reserve increase
of $73.3 million for the Property and Casualty Group, of which our property/casualty subsidiaries
share was $4.0 million. Our share of the massive injury claim payments made during 2009, 2008 and
2007 was $0.9 million, $0.8 million and $1.0 million, respectively.
Loss reserves are set at full expected cost, except for workers compensation loss reserves, which
are discounted on a nontabular basis using an interest rate of 2.5% based upon the Property and
Casualty Groups historical workers compensation payout patterns. In 2009, the workers compensation
massive injury claims that have longer payout patterns were segregated in the discount calculation
from the non-massive injury workers compensation claims. The impact on the massive injury liability
reserves due to this change resulted in a reserve reduction of $45.1 million for the Property and
Casualty Group, of which our property/casualty subsidiaries share was $2.5 million.
41
Shareholders equity
Pension plan
The funded status of our postretirement benefit plans is recognized in the statement of financial
position, with a corresponding adjustment to accumulated other comprehensive income, net of tax. At
December 31, 2009, shareholders equity increased by $24.5 million, net of tax, of which $2.4
million represents amortization of the prior service cost and net actuarial loss and $22.1 million
represents the current period actuarial gain. The 2009 actuarial gain was primarily due to actual
investment returns greater than expected. Also contributing to the gain were assumption changes
made based on actual experience, such as the decrease in the assumed rate of compensation increase.
Although we are the sponsor of these postretirement plans and record on our balance sheet the
funded status of these plans, generally the Exchange and EFL reimburse the Company for
approximately 50% of the annual benefit expense of these plans. At December 31, 2008, shareholders
equity decreased by $90.6 million, net of tax, of which $0.1 million represented amortization of
the prior service cost and net actuarial gain and $90.7 million represented the current period
actuarial loss. The 2008 net actuarial loss was primarily due to the actual investment returns
being significantly less than expected investment returns, driven by 2008 market conditions and a
change in the discount rate used to estimate the future benefit obligations to 6.06% in 2008 from
6.62% in 2007.
IMPACT OF INFLATION
Property/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.
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. Our liquidity requirements have been
met primarily by funds generated from management operations, the net cash flows of our insurance
subsidiaries 5.5% participation in the underwriting results of the reinsurance pool with the
Exchange, and investment income from nonaffiliated investments. Cash provided from these sources is
used primarily to fund the costs of management operations including salaries and wages and
commissions, 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. When cash provided by operating activities is in excess of our operating
cash needs, we may use this excess to fund our investment portfolios or share repurchase
activities. When funding requirements exceed operating cash flows, our investment portfolios may be
used as a funding source. Continuing volatility in the financial markets presents challenges to us
as we occasionally access our investment portfolio as a source of cash. Some of our fixed income
investments, despite being publicly traded, are illiquid due to 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. See Item 7A. Quantitative and
Qualitative Disclosures about Market Risk, for further information on the risk of market
volatility and Item 1A. Risk Factors, for a discussion of certain matters that may affect our
investment portfolio and capital position.
Management fees from the Exchange generate a majority of our operating cash flows. We have a
receivable from the Exchange and affiliates related to the management fee receivable from premiums
written, but not yet collected, as well as the management fee receivable on premiums collected in
the current month. We pay nearly all general and administrative expenses on behalf of the Exchange
and other affiliated companies including EFL. The Exchange and EFL reimburse us for these expenses
on a paid-basis quarterly.
42
We generate cash from our property/casualty insurance subsidiaries, which consist of our share of
the pooled underwriting results of the Property and Casualty Group. All members of the Property and
Casualty Group pool their underwriting results. Through the pool, our subsidiaries assume 5.5% of
the Property and Casualty Groups underwriting results. We also generate cash from the income
earned on our fixed maturity and equity security investment portfolios and earnings on our limited
partnership investments.
Management fee and other cash settlements due at December 31 from the Exchange were $209.3 million
and $214.3 million in 2009 and 2008, respectively. A receivable from EFL for cash settlements
totaled $3.2 million at December 31, 2009, compared to $3.9 million at December 31, 2008. The
receivable due from the Exchange for reinsurance recoverable from unpaid loss and loss expenses and
unearned premium balances ceded to the intercompany reinsurance pool increased 1.7% to $902.2
million from $887.4 million at December 31, 2009 and 2008, respectively. This increase is the
result of corresponding increases in direct loss and loss expense reserves of our property/casualty
insurance subsidiaries that are ceded to the Exchange under the intercompany pooling agreement. The
amounts due us from the Exchange represented 22% of the Exchanges total liabilities at December
31, 2009 and 2008.
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 $100 million
bank line of credit, from which we have no borrowings at December 31, 2009, (2) dividend payments
from our wholly-owned property/casualty insurance subsidiaries, EIC, EPC and ENY, up to their
statutory limits totaling $26.4 million under current regulatory restrictions as of December 31,
2009, (3) our more liquid investments that can be sold, such as our common stock and cash and cash
equivalents, which totaled approximately $118.7 million at December 31, 2009, and (4) 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.
Cash flow activities
Cash flows provided by operating activities totaled $180.2 million in 2009, compared to $150.8
million in 2008 and $253.8 million in 2007. Higher operating cash flows in 2009 were primarily due
to increased management fee revenues received offset by lower distributions from our limited
partnerships. Management fee revenues were higher reflecting the increase in the Property and
Casualty Groups direct written premium. Limited partnership distributions were lower as a result
of a decline in performance of our limited partnership investments in 2009.
Cash paid for agent commissions increased to $453.6 million in 2009, compared to $439.2 million in
2008, as a result of an increase in direct written premiums of the Property and Casualty Group and
rate increases for certain commercial lines new business premiums. Cash paid for agent bonuses
totaled $81.1 million during 2009 compared to $95.1 million in 2008. Agent bonuses expected to be
paid in 2010, that relate to the period ended in 2009, total $67.6 million reflecting the impact of
the decline in underwriting profitability of the Property and Casualty Group. We made contributions
to our pension plan of $14.3 million and $15.0 million in 2009 and 2008, respectively. Our policy
is to contribute at least the minimum required contribution that is in accordance with the Pension
Protection Act of 2006 and to fund the annual normal costs of the pension. For 2010, the expected
contribution amount is $15.0 million, which does exceed the minimum required amount. Our affiliated
entities generally reimburse us about 50% of the net periodic benefit cost of the pension plan.
At December 31, 2009, we recorded a gross deferred tax asset of $42.3 million, which included
capital loss carryforwards of $4.5 million. A valuation allowance of $1.5 million was recorded
because it is more likely than not that the deferred tax asset will not be realized for a portion
of the deferred tax asset related to losses on investments.
We have the ability to carry back capital losses of $71.4 million as a result of gains recognized
in prior years. We have disposed of assets with tax losses of approximately $29.0 million to carry
back against these gains in 2009. Approximately $2.1 million of these losses expired in 2009. Our
capital gain and loss strategies take into consideration our 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 our investing activities totaled $68.6 million in 2009, compared to cash
provided of $73.5 million and $44.8 million in 2008 and 2007, respectively. Our investing
operations were impacted by less reinvestments in 2007 and 2008 due to the significant share
repurchase activity in those years. Also impacting our future investing
43
activities are our limited partnership commitments, which at December 31, 2009, totaled $68.8
million and will be funded as required by the partnerships agreements.
In the second quarter of 2009, we made a capital contribution to EFL in the amount of $11.9 million
to support EFLs life insurance and annuity business and strengthen its surplus.
Cash flows used in financing activities were $96.1 million, $194.3 million and $327.8 million in
2009, 2008 and 2007, respectively. In 2009, we reduced our cash outlay for share repurchase
activity. Our cost of Class A nonvoting common stock repurchased was $3.1 million in 2009, compared
to $102.0 million in 2008 and $236.7 million in 2007. Dividends paid to shareholders totaled $93.0
million, $92.3 million and $91.1 million in 2009, 2008 and 2007, respectively. We increased both
our Class A and Class B shareholder quarterly dividends for 2009. There are no regulatory
restrictions on the payment of dividends to our shareholders, although there are state law
restrictions on the payment of dividends from our subsidiaries to us. Dividends have been approved
at a 6.7% increase for 2010.
During 2009, we repurchased 91,420 shares of our outstanding Class A nonvoting common stock at a
total cost of $3.1 million in conjunction with our stock repurchase plan. We repurchased 2.1
million shares of our outstanding Class A nonvoting common stock at a total cost of $102.0 million
in 2008. In May 2009, our Board of Directors approved a continuation of the current stock
repurchase program through June 30, 2010. We have approximately $98 million of repurchase authority
remaining under this plan at December 31, 2009. We plan to continue to repurchase shares through
this program as cash becomes available for such purpose.
In October 2008, we terminated our securities lending program. The process of unwinding the
securities on loan was complete in December 2009. Consequently, there were no loaned securities
included as part of our invested assets at December 31, 2009.
Financing activities through December 31, 2008 included short-term borrowings of $75 million on our
bank line of credit for certain intercompany cash settlement needs. We made payments on the line of
credit of $45 million and $30 million in the third and fourth quarters of 2008, respectively,
reducing the outstanding balance to zero at December 31, 2008. This line of credit was extended to
December 31, 2011. There were no borrowings on this line as of December 31, 2009. The bank requires
compliance with certain covenants, which include minimum net worth and leverage ratios. We are in
compliance with all covenants at December 31, 2009. Also during the first quarter of 2008, we
borrowed $30 million from EIC, our 100% owned property/casualty insurance subsidiary, to fund
certain operating and financing activities. We repaid the entire balance during the second quarter
of 2008. This intercompany borrowing was eliminated upon consolidation and therefore had no impact
on our Consolidated Statements of Financial Position or Operations.
Contractual obligations
Cash outflows are variable because the fluctuations in settlement dates for claims payments vary
and cannot be predicted with absolute certainty. While volatility in claims payments could be
significant for the Property and Casualty Group, the effect of this volatility on our performance
is mitigated by the intercompany reinsurance pooling arrangement and our 5.5% participation. The
cash flow requirements for claims have not historically had a significant effect on our liquidity.
Based on a historical 15-year average, about 50% of losses and loss expenses included in the
reserve are paid out in the subsequent 12-month period and approximately 89% are paid out within a
five-year period. Losses that are paid out after that five-year period reflect such long-tail lines
as workers compensation and auto bodily injury. Such payments are reduced by recoveries under the
intercompany reinsurance pooling agreement.
44
We have certain obligations and commitments to make future payments under various contracts. As of
December 31, 2009, the aggregate obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 and |
(in thousands) |
|
Total |
|
2010 |
|
2011-2012 |
|
2013-2014 |
|
thereafter |
|
Fixed obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partnership commitments(1) |
|
$ |
68,778 |
|
|
$ |
47,473 |
|
|
$ |
21,305 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Pension contribution(2) |
|
|
15,000 |
|
|
|
15,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Other commitments(3) |
|
|
48,625 |
|
|
|
21,205 |
|
|
|
26,860 |
|
|
|
560 |
|
|
|
0 |
|
Operating leasesvehicles |
|
|
17,970 |
|
|
|
4,532 |
|
|
|
8,428 |
|
|
|
5,010 |
|
|
|
0 |
|
Operating leasesreal estate(4) |
|
|
8,948 |
|
|
|
2,867 |
|
|
|
3,981 |
|
|
|
2,100 |
|
|
|
0 |
|
Operating leasescomputers |
|
|
5,079 |
|
|
|
3,359 |
|
|
|
1,720 |
|
|
|
0 |
|
|
|
0 |
|
Financing arrangements |
|
|
1,674 |
|
|
|
1,537 |
|
|
|
137 |
|
|
|
0 |
|
|
|
0 |
|
|
Fixed contractual obligations |
|
|
166,074 |
|
|
|
95,973 |
|
|
|
62,431 |
|
|
|
7,670 |
|
|
|
0 |
|
Gross loss and loss expense reserves |
|
|
965,420 |
|
|
|
482,710 |
|
|
|
283,833 |
|
|
|
94,611 |
|
|
|
104,266 |
|
|
Gross contractual obligations(5) |
|
$ |
1,131,494 |
|
|
$ |
578,683 |
|
|
$ |
346,264 |
|
|
$ |
102,281 |
|
|
$ |
104,266 |
|
|
Gross contractual obligations net of estimated reinsurance recoverables and reimbursements from
affiliates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 and |
(in thousands) |
|
Total |
|
2010 |
|
2011-2012 |
|
2013-2014 |
|
thereafter |
|
Gross contractual obligations(5) |
|
$ |
1,131,494 |
|
|
$ |
578,683 |
|
|
$ |
346,264 |
|
|
$ |
102,281 |
|
|
$ |
104,266 |
|
Estimated reinsurance recoverables |
|
|
778,543 |
|
|
|
389,272 |
|
|
|
228,892 |
|
|
|
76,297 |
|
|
|
84,082 |
|
Estimated reimbursements from affiliates |
|
|
63,163 |
|
|
|
24,559 |
|
|
|
32,841 |
|
|
|
5,763 |
|
|
|
0 |
|
|
Net contractual obligations |
|
$ |
289,788 |
|
|
$ |
164,852 |
|
|
$ |
84,531 |
|
|
$ |
20,221 |
|
|
$ |
20,184 |
|
|
|
|
|
(1) |
|
Limited partnership commitments will be funded as required for capital contributions at any
time prior to the agreement expiration date. The commitment amounts are presented using the
expiration date as the factor by which to age when the amounts are due. At December 31, 2009,
the total commitment to fund limited partnerships that invest in private equity securities is
$31.8 million, real estate activities is $21.4 million and mezzanine debt is $15.6 million. We
expect to have sufficient cash flows from operations and from positive cash flows generated
from existing limited partnership investments to meet these partnership commitments. |
|
(2) |
|
The pension contribution for 2010 was estimated in accordance with the Pension Protection Act
of 2006. Contributions anticipated in future years
are expected to be an amount at least equal to the IRS minimum required contribution in
accordance with this Act. |
|
(3) |
|
Other commitments include various agreements for service, including such things as computer
software, telephones and maintenance. |
|
(4) |
|
Operating leasesreal estate are for 16 of our 23 field offices that are operated in the
states in which the Property and Casualty Group does business and three operating leases are
for warehousing facilities and remote office locations. One of the branch locations is leased
from EFL. |
|
(5) |
|
Gross contractual obligations do not include the obligations for our unfunded benefit plans,
including the Supplemental Employee Retirement Plan (SERP) for our executive and senior
management and the directors retirement plan. The recorded accumulated benefit obligations
for these plans at December 31, 2009, are $4.0 million. We expect to have sufficient cash
flows from operations to meet the future benefit payments as they become due. |
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. There are no
off-balance sheet obligations related to our variable interest in the Exchange. Any liabilities
between us and the Exchange are recorded in our Consolidated Statements of Financial Position. We
have no material off-balance sheet obligations or guarantees, other than the limited partnership
investment commitments.
45
Financial ratings
Our property/casualty insurers are rated by rating agencies that provide insurance consumers with
meaningful information on the financial strength of insurance entities. Higher ratings generally
indicate financial stability and a strong ability to pay claims. The ratings are generally based
upon factors relevant to policyholders and are not directed toward return to investors. The
insurers of the Erie Insurance Group are currently rated by AM Best Company as follows:
|
|
|
Erie Insurance Exchange
|
|
A+ |
Erie Insurance Company
|
|
A+ |
Erie Insurance Property and Casualty Company
|
|
A+ |
Erie Insurance Company of New York
|
|
A+ |
Flagship City Insurance
|
|
A+ |
Erie Family Life Insurance
|
|
A |
The outlook for all ratings is stable. According to AM Best, a Superior rating (A+) is assigned to
those companies that, in AM Bests opinion, have achieved superior overall performance when
compared to the standards established by AM Best and have a superior ability to meet their
obligations to policyholders over the long term. By virtue of its affiliation with the Property and
Casualty Group, EFL is typically rated one notch lower than the property/casualty companies by AM
Best Company. The insurers of the Property and Casualty Group are also rated by Standard & Poors,
but this rating is based solely on public information. Standard & Poors rates the
property/casualty insurers AApi, very strong, and EFL Api, strong. Financial strength ratings
continue to be an important factor in evaluating the competitive position of insurance companies.
Regulatory risk-based capital
The standard set by the National Association of Insurance Commissioners (NAIC) for measuring the
solvency of insurance companies, referred to as Risk-Based Capital (RBC), is a method of measuring
the minimum amount of capital appropriate for an insurance company to support its overall business
operations in consideration of its size and risk profile. The RBC formula is used by state
insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory
action, insurance companies that potentially are inadequately capitalized. In addition, the formula
defines minimum capital standards that will supplement the current system of low fixed minimum
capital and surplus requirements on a state-by-state basis. At December 31, 2009, the companies
comprising the Property and Casualty Group all had RBC levels substantially in excess of levels
that would require regulatory action.
TRANSACTIONS AND AGREEMENTS WITH RELATED PARTIES
Board oversight
Our Board of Directors (Board) has broad oversight responsibility over intercompany relationships
within Erie Insurance Group. As a consequence, the Board may be required to make decisions or take
actions that may not be solely in the interest of our shareholders such as:
|
|
|
setting the management fee rate paid by the Exchange to us; |
|
|
|
|
determining the continuation and participation percentages of the intercompany
pooling agreement; |
|
|
|
|
determining the level of shareholders dividend, if any; and |
|
|
|
|
ratifying any other significant intercompany activity. |
Subscribers agreement
We serve as attorney-in-fact for the Exchange, a reciprocal insurance exchange. Each applicant for
insurance to a reciprocal insurance exchange signs a subscribers agreement that contains an
appointment of an attorney-in-fact. Through the designation of attorney-in-fact, we are required
to provide sales, underwriting and policy issuance services to the policyholders of the Exchange,
as discussed previously.
46
Intercompany agreements
Pooling
Members of the Property and Casualty Group participate in an intercompany reinsurance pooling
agreement. Under the pooling agreement, all insurance business of the Property and Casualty Group
is pooled in the Exchange. The Erie Insurance Company and Erie Insurance Company of New York share
in the underwriting results of the reinsurance pool through retrocession. Since 1995, the Board of
Directors has set the allocation of the pooled underwriting results at 5.0% participation for Erie
Insurance Company, 0.5% participation for Erie Insurance Company of New York and 94.5%
participation for the Exchange.
Service agreements
We make certain payments for the account of the Groups related entities.
These amounts are reimbursed to us
on a cost basis in accordance with the service agreements. Cash transfers are settled quarterly.
Leased property
The Exchange leases certain office facilities to us on a year-to-year basis. Rents are determined
considering returns on invested capital and building operating and overhead costs. Rental costs of
shared facilities are allocated based on square footage occupied.
Intercompany cost allocation
The allocation of costs affects the financial condition of the Erie Insurance Group companies.
Management must determine that allocations are consistently made in accordance with intercompany
management service agreements, the attorney-in-fact agreements with the policyholders of the
Exchange and applicable insurance laws and regulations. While allocation of costs under these
various agreements requires management judgment and interpretation, such allocations are performed
using a consistent methodology, which in managements opinion, adheres to the terms and intentions
of the underlying agreements.
Intercompany receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total |
|
|
|
|
|
Percent of total |
|
|
|
|
|
|
Company |
|
|
|
|
|
Company |
(in thousands) |
|
2009 |
|
assets |
|
2008 |
|
assets |
|
Reinsurance recoverable from and
ceded unearned
premiums to the Exchange |
|
$ |
902,210 |
|
|
|
33.8 |
% |
|
$ |
887,367 |
|
|
|
34.0 |
% |
Other receivables from the Exchange and
affiliates
(management fees, costs and reimbursements) |
|
|
212,502 |
|
|
|
7.9 |
|
|
|
218,243 |
|
|
|
8.3 |
|
Note receivable from EFL |
|
|
25,000 |
|
|
|
1.0 |
|
|
|
25,000 |
|
|
|
1.0 |
|
|
Total intercompany receivables |
|
$ |
1,139,712 |
|
|
|
42.7 |
% |
|
$ |
1,130,610 |
|
|
|
43.3 |
% |
|
We have significant receivables from the Exchange that result in a concentration of credit risk.
These receivables include the liability for losses and unearned premiums ceded to the Exchange
under the intercompany pooling agreement and from management services performed by us for the
Exchange. The policyholder surplus of the Exchange at December 31, 2009, on a statutory accounting
basis totaled over $4.5 billion. Credit risks related to the receivables from the Exchange are
evaluated periodically by our management. Reinsurance contracts do not relieve us from our primary
obligations to policyholders if the Exchange were unable to satisfy its obligation. We collect our
reinsurance recoverable amount generally within 30 days of actual settlement of losses.
We also have a receivable from the Exchange for management fees and costs we pay on behalf of the
Exchange. We also pay certain costs for, and are reimbursed by, EFL. Since our inception, we have
collected these amounts due from the Exchange and EFL in a timely manner (normally quarterly).
There is interest charged on the outstanding balance due from the Exchange until its quarterly
settlement that is based on an independent mutual fund rate.
We have a surplus note for $25 million with EFL that is payable on demand on or after December 31,
2018, subject to prior approval by the Pennsylvania Department of Insurance. EFL paid interest to
us on the surplus note totaling $1.7 million in both 2009 and 2008. No other interest is charged or
received on these intercompany balances due to the timely settlement terms and nature of the items.
47
FACTORS THAT MAY AFFECT FUTURE RESULTS
Financial condition of the Exchange
We have a direct interest in the financial condition of the Exchange because management fee
revenues are based on the direct written premiums of the Exchange and the other members of the
Property and Casualty Group. Additionally, we participate in the underwriting results of the
Exchange through the pooling arrangement in which our insurance subsidiaries have 5.5%
participation. A concentration of credit risk exists related to the unsecured receivables due from
the Exchange for certain fees, costs and reimbursements.
To the extent that the Exchange incurs underwriting losses or investment losses resulting from
declines in the value of its marketable securities or limited partnership investments, the
Exchanges policyholders surplus would be adversely affected. If the surplus of the Exchange were
to decline significantly from its current level, the Property and Casualty Group could find it more
difficult to retain its existing business and attract new business. A decline in the business of
the Property and Casualty Group would have an adverse effect on the amount of the management fees
we receive and the underwriting results of the Property and Casualty Group. In addition, a
significant decline in the surplus of the Exchange from its current level would make it more likely
that the management fee rate would be reduced. A decline in surplus could also result from
variability in investment markets as realized and unrealized losses are recognized. Due to the
continued distress in the securities and real estate markets, the Exchange recognized impairment
charges in 2009 of $441.4 million. To the extent market volatility continues, the Exchanges
investment portfolio may continue to be impacted. Additionally, conditions may exist where the
Exchange may need to provide capital support to EFL. In the second quarter of 2009, the Exchange
made a capital contribution to EFL in the amount of $43.1 million to support EFLs life insurance
and annuity business and strengthen its surplus. At December 31, 2009, the Exchange had $4.5
billion in statutory surplus and a premium to surplus ratio of less than 1 to 1.
The Exchange has strong underlying operating cash flows and sufficient liquidity to meet its needs,
including the ability to pay the management fees owed to us. In 2009, the Exchange generated $635.8
million in cash flows from operating activities. At December 31, 2009 the Exchange had $134.5
million in cash and cash equivalents. The Exchange also has an unused $200 million bank line of
credit that expires on September 30, 2012. The bank requires compliance with certain covenants
which include minimum collateral values. The Exchange was in compliance with all bank covenants at
December 31, 2009.
Insurance premium rate actions
The changes in premiums written attributable to rate changes of the Property and Casualty Group
directly affect the direct written premium levels and underwriting profitability of the Property
and Casualty Group, the Exchange and us, and have a direct bearing on our management fees. Pricing
actions contemplated or taken by the Property and Casualty Group are also subject to various
regulatory requirements of the states in which these insurers operate. The pricing actions already
implemented, or to be implemented through 2009, will also have an effect on the market
competitiveness of the Property and Casualty Groups insurance products. Such pricing actions, and
those of competitors, could affect the ability of our agents to sell and/or renew business. We
expect our pricing actions to result in a net increase in direct written premium in 2010, however,
recessionary economic conditions could continue to adversely impact the average premium per policy
written by the Property and Casualty Group.
Policy growth
Premium levels attributable to growth in policies in force of the Property and Casualty Group
directly affect the profitability of our management operations. Our continued focus on underwriting
discipline and the maturing of our pricing segmentation model has contributed to our growth in new
policies in force and improved retention ratios. The continued growth of the policy base of the
Property and Casualty Group is dependent upon the Property and Casualty Groups ability to retain
existing and attract new policyholders. A lack of new policy growth or the inability to retain
existing customers could have an adverse effect on the growth of premium levels for the Property
and Casualty Group, and, consequently, our management fees.
Catastrophe losses
The Property and Casualty Group conducts business in 11 states and the District of Columbia,
primarily in the Mid-Atlantic, Mid-western and Southeastern portions of the United States. A
substantial portion of the business is private passenger and commercial automobile, homeowners and
workers compensation insurance in Ohio, Maryland, Virginia and, particularly, Pennsylvania. As a
result, catastrophic events, destructive weather patterns, or changes in climate condition could
materially adversely affect the results of operations and surplus position of the members of the
Property and Casualty Group. Common catastrophe events include severe winter storms, hurricanes,
earthquakes,
48
tornadoes, wind and hail storms. In its homeowners line of insurance, the Property and Casualty
Group is particularly exposed to an Atlantic hurricane, which might strike the states of North
Carolina, Maryland, Virginia and Pennsylvania. The Property and Casualty Group maintains a property
catastrophe reinsurance treaty with nonaffiliated reinsurers to mitigate the future potential
catastrophe loss exposure. The property catastrophe reinsurance coverage in 2009 provided coverage
of up to 95% of a loss of $400 million in excess of the Property and Casualty Groups loss
retention of $450 million per occurrence. This agreement was renewed for 2010 providing coverage of
up to 95% of a loss of $500 million in excess of the Property and Casualty Groups loss retention
of $400 million per occurrence.
While the Property and Casualty Group is exposed to terrorism losses in commercial lines, including
workers compensation, these lines are afforded a limited backstop above insurer deductibles for
foreign acts of terrorism under the federal Terrorism Risk Insurance Program Reauthorization and
Extension Act of 2007 that continues through December 31, 2014. The Property and Casualty Group has
no personal lines terrorism coverage in place. Although current models suggest the most likely
occurrences would not have a material impact on the Property and Casualty Group, there is a chance
that if future terrorism attacks occur, the Property and Casualty Group could incur large losses.
Incurred but not reported (IBNR) losses
The Property and Casualty Group is exposed to new claims on previously closed files and to larger
than historical settlements on pending and unreported claims. We are exposed to increased losses by
virtue of our 5.5% participation in the intercompany reinsurance pooling agreement with the
Exchange. We exercise professional diligence to establish reserves at the end of each period that
are fully reflective of the ultimate value of all claims incurred. However, these reserves are, by
their nature, only estimates and cannot be established with absolute certainty.
The reserves that have the greatest potential for variation are the massive injury reserves. The
workers compensation product and the automobile no-fault law in Pennsylvania from 1975 until 1985
provided for unlimited medical benefits. The estimation of ultimate liabilities for these claims is
subject to significant judgment due to variations in claimant health and mortality over time.
Actual experience has the potential to be impacted by changes in laws as well as costs, such as
attendant care, inflation rates and mortality. Actual experience, different than that assumed,
could have a significant impact on the reserve estimates.
Market volatility
Our portfolio of fixed income, limited partnerships, preferred and common stocks are subject to
significant market value changes especially in periods of instability in the worldwide financial
markets. Uncertainty remains surrounding the general market conditions. The current volatility in
the financial markets could have an adverse impact on our financial condition, operations and cash
flows.
As of January 1, 2008, all changes to unrealized gains and losses on the common stock portfolio are
recognized in investment income as net realized gains or losses in the Consolidated Statements of
Operations. The fair value of the common stock portfolio is subject to fluctuation from
period-to-period resulting from changes in prices. Depending upon market conditions, this could
cause considerable fluctuation in reported total investment income.
Financial conditions
Financial markets have been experiencing an improvement in recent months although overall economic
conditions remain challenging. Unfavorable changes in economic conditions, including declining
consumer confidence, inflation, recession or other changes, may lead the Property and Casualty
Groups customers to cancel insurance policies, modify coverage or not renew policies, and the
Groups premium revenue, and consequently our management fee, could be adversely affected.
Challenging economic conditions also may impair the ability of the Groups customers to pay
premiums as they fall due, and as a result, the Groups reserves and write-offs could increase. The
Group is unable to predict the uncertainty in financial markets and economic conditions in the
United States and abroad.
49
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market risk
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as
interest rates, as well as other relevant market rate or price changes. The volatility and
liquidity in the markets in which the underlying assets are traded directly influence market risk.
The following is a discussion of our primary risk exposures, including interest rate risk, equity
price risk and credit risk, and how those exposures are currently managed as of December 31, 2009.
Interest rate risk
We invest primarily in fixed maturity investments, which comprised 67.8% of invested assets at
December 31, 2009. The value of the fixed maturity portfolio is subject to interest rate risk. As
market interest rates decrease, the value of the portfolio goes up with the opposite holding true
in rising interest rate environments. We do not hedge our exposure to interest rate risk since we
have the capacity and intention to hold the fixed maturity positions until maturity. A common
measure of the interest sensitivity of fixed maturity assets is modified duration, a calculation
that utilizes maturity, coupon rate, yield and call terms to calculate an average age of the
expected cash flows. The longer the duration, the more sensitive the asset is to market interest
rate fluctuations. Convexity measures the rate of change of duration with respect to changes in
interest rates. These factors are analyzed monthly to ensure that both the duration and convexity
remain in the targeted ranges we established.
A sensitivity analysis is used to measure the potential loss in future earnings, fair values or
cash flows of market-sensitive instruments resulting from one or more selected hypothetical changes
in interest rates and other market rates or prices over a selected period. In our sensitivity
analysis model, a hypothetical change in market rates is selected that is expected to reflect
reasonably possible changes in those rates. The following pro forma information is presented
assuming a 100-basis point increase in interest rates at December 31 of each year and reflects the
estimated effect on the fair value of our fixed maturity investment portfolio. We used the modified
duration of our fixed maturity investment portfolio to model the pro forma effect of a change in
interest rates at December 31, 2009 and 2008.
Fixed maturities interest-rate sensitivity analysis
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
(in thousands) |
|
2009 |
|
2008 |
|
Fair value of fixed income portfolio |
|
$ |
664,026 |
|
|
$ |
563,429 |
|
Fair value assuming 100-basis point rise in interest rates |
|
|
635,392 |
|
|
|
552,260 |
|
|
Modified duration |
|
|
4.35 |
|
|
|
3.45 |
|
|
While the fixed income portfolio is sensitive to interest rates, the future principal cash flows
that will be received are presented as follows by contractual maturity date. Actual cash flows may
differ from those stated as a result of calls, prepayments or defaults. The $25 million surplus
note due from EFL is included in the principal cash flows and is due in 2018.
|
|
|
|
|
(in thousands) |
|
December 31, 2009 |
|
Fixed maturities, including note from EFL: |
|
|
|
|
2010 |
|
$ |
38,941 |
|
2011 |
|
|
33,717 |
|
2012 |
|
|
70,454 |
|
2013 |
|
|
81,180 |
|
2014 |
|
|
63,710 |
|
Thereafter |
|
|
381,731 |
|
|
Total |
|
$ |
669,733 |
|
|
Fair value |
|
$ |
689,026 |
|
|
50
|
|
|
|
|
(in thousands) |
|
December 31, 2008 |
|
Fixed maturities, including note from EFL: |
|
|
|
|
2009 |
|
$ |
52,212 |
|
2010 |
|
|
48,775 |
|
2011 |
|
|
45,837 |
|
2012 |
|
|
67,232 |
|
2013 |
|
|
82,105 |
|
Thereafter |
|
|
351,974 |
|
|
Total |
|
$ |
648,135 |
|
|
Fair value |
|
$ |
588,429 |
|
|
Equity price risk
Our portfolio of marketable equity securities, which is carried on the Consolidated Statements of
Financial Position at estimated fair value, has exposure to price risk, the risk of potential loss
in estimated fair value resulting from an adverse change in prices. We do not hedge our exposure to
equity price risk inherent in our equity investments. Our objective is to earn competitive relative
returns by investing in a diverse portfolio of high-quality, liquid securities. Portfolio holdings
are diversified across industries and among exchange-traded small- to large-cap stocks. We measure
risk by comparing the performance of the marketable equity portfolio to benchmark returns such as
the Standard & Poors (S&P) 500 Composite Index. Beta is a measure of a securitys systematic
(non-diversifiable) risk, which is the percentage change in an individual securitys return for a
1% change in the return of the market. The average Beta for our common stock holdings was 1.04.
Based on a hypothetical 20% reduction in the overall value of the stock market, the fair value of
the common stock portfolio would decrease by approximately $8.8 million.
Credit risk
Our objective is to earn competitive returns by investing in a diversified portfolio of securities.
Our portfolios of fixed maturity securities, nonredeemable preferred stock, mortgage loans and, to
a lesser extent, short-term investments are subject to credit risk. This risk is defined as the
potential loss in fair value resulting from adverse changes in the borrowers ability to repay the
debt. We manage this risk by performing upfront underwriting analysis and ongoing reviews of credit
quality by position and for the fixed maturity portfolio in total. We do not hedge the credit risk
inherent in our fixed maturity investments.
Generally, the fixed maturities in our portfolio are rated by external rating agencies. If not
externally rated, we rate them internally on a basis consistent with that used by the rating
agencies. We classify all fixed maturities as available-for-sale securities, allowing us to meet
our liquidity needs and provide greater flexibility to appropriately respond to changes in market
conditions. The following table shows our fixed maturity investments by S&P rating as of December
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Amortized |
|
Fair |
|
Percent |
Comparable S&P Rating |
|
cost |
|
value |
|
of total |
|
AAA, AA, A |
|
$ |
401,348 |
|
|
$ |
414,488 |
|
|
|
62.4 |
% |
BBB |
|
|
207,371 |
|
|
|
214,720 |
|
|
|
32.4 |
|
|
Total investment grade |
|
|
608,719 |
|
|
|
629,208 |
|
|
|
94.8 |
|
|
BB |
|
|
25,411 |
|
|
|
26,849 |
|
|
|
4.0 |
|
B |
|
|
5,786 |
|
|
|
5,133 |
|
|
|
0.8 |
|
CCC, CC, C |
|
|
2,291 |
|
|
|
2,836 |
|
|
|
0.4 |
|
|
Total non-investment grade |
|
|
33,488 |
|
|
|
34,818 |
|
|
|
5.2 |
|
|
Total |
|
$ |
642,207 |
|
|
$ |
664,026 |
|
|
|
100.0 |
% |
|
51
Approximately 5.2%, or $34.2 million, of our fixed income portfolio is invested in structured
products which include mortgage-backed securities (MBS), collateralized debt and loan obligations
(CDO and CLO), collateralized mortgage obligations (CMO), asset-backed (ABS) and credit-linked
notes. Our structured product portfolio has an average rating of A or higher. We believe we have no
direct exposure to the subprime residential mortgage market through investments in structured
products. However, we have indirect exposure through bond and preferred stock investments in the
financial service industry. We continually monitor these investments for material declines in
quality and value.
Our municipal bond portfolio accounts for $243.7 million, or 36.7%, of the total fixed maturity
portfolio. Of this $243.7 million, $175.4 million, or 72%, of the total municipal bond portfolio is
insured. This insurance guarantees the payment of principal and interest on a bond if the issuer
defaults. Using the underlying rating of the bonds without consideration of insurance, the overall
credit quality rating of our municipal bond portfolio is AA-. Because of the rating downgrades of
municipal bond insurers, the insurance does not improve the overall credit ratings. The following
table presents an analysis of our municipal bond ratings at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
(1) |
|
(2) |
|
(3) |
Uninsured bonds |
|
Insured bonds |
|
Underlying rating of insured bonds |
|
|
|
|
|
|
Fair value |
|
|
|
|
|
|
|
Fair value |
|
|
|
|
|
|
|
Fair value |
Rating |
|
Fair value |
|
% |
|
Rating |
|
Fair value |
|
% |
|
Rating |
|
Fair value |
|
% |
|
|
|
|
|
AAA |
|
$ |
32,275 |
|
|
|
47.2 |
% |
|
AAA |
|
$ |
6,947 |
|
|
|
3.9 |
% |
|
AAA |
|
$ |
0 |
|
|
|
0.0 |
% |
AA |
|
|
27,491 |
|
|
|
40.2 |
|
|
AA |
|
|
104,316 |
|
|
|
59.5 |
|
|
AA |
|
|
83,404 |
|
|
|
47.6 |
|
A |
|
|
7,564 |
|
|
|
11.1 |
|
|
A |
|
|
58,975 |
|
|
|
33.6 |
|
|
A |
|
|
80,350 |
|
|
|
45.8 |
|
BBB |
|
|
1,000 |
|
|
|
1.5 |
|
|
BBB |
|
|
5,166 |
|
|
|
3.0 |
|
|
BBB |
|
|
6,900 |
|
|
|
3.9 |
|
Non Inv Grade |
|
|
0 |
|
|
|
0.0 |
|
|
Non Inv Grade |
|
|
0 |
|
|
|
0.0 |
|
|
Non Inv Grade |
|
|
1,581 |
|
|
|
0.9 |
|
|
|
|
|
|
Not rated |
|
|
0 |
|
|
|
0.0 |
|
|
Not rated |
|
|
0 |
|
|
|
0.0 |
|
|
Not rated |
|
|
3,169 |
|
|
|
1.8 |
|
|
|
|
|
|
AA |
|
$ |
68,330 |
|
|
|
100.0 |
% |
|
AA- |
|
$ |
175,404 |
|
|
|
100.0 |
% |
|
A+ |
|
$ |
175,404 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) + (2) |
|
|
(1) + (3) |
|
|
|
|
|
|
|
Total bonds (with insured rating) |
|
Total bonds (with underlying rating) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
|
|
|
|
|
|
|
Fair value |
|
|
|
|
|
|
|
|
|
|
|
Rating |
|
Fair value |
|
|
% |
|
|
Rating |
|
Fair value |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA |
|
$ |
39,222 |
|
|
|
16.1 |
% |
|
AAA |
|
$ |
32,275 |
|
|
|
13.2 |
% |
|
|
|
|
|
|
|
|
|
|
AA |
|
|
131,807 |
|
|
|
54.1 |
|
|
AA |
|
|
110,895 |
|
|
|
45.5 |
|
|
|
|
|
|
|
|
|
|
|
A |
|
|
66,539 |
|
|
|
27.3 |
|
|
A |
|
|
87,914 |
|
|
|
36.1 |
|
|
|
|
|
|
|
|
|
|
|
BBB |
|
|
6,166 |
|
|
|
2.5 |
|
|
BBB |
|
|
7,900 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
Non Inv Grade |
|
|
0 |
|
|
|
0.0 |
|
|
Non Inv Grade |
|
|
1,581 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not rated |
|
|
0 |
|
|
|
0.0 |
|
|
Not rated |
|
|
3,169 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA- |
|
$ |
243,734 |
|
|
|
100.0 |
% |
|
AA- |
|
$ |
243,734 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In our limited partnership investment portfolio we are exposed to
credit risk, as well as price risk.
Price risk is defined as the potential loss in estimated fair value resulting from an adverse change in prices.
Our investments are directly affected by the impact of changes in these risk factors on the underlying investments held
by our fund managers, which could vary significantly from fund to fund. We manage these risks by performing up
front due diligence on our fund managers, ongoing monitoring and through the construction of a diversified portfolio.
We are also exposed to a concentration of credit risk with the Exchange. See the section,
Transactions and Agreements with Related Parties, for further discussion of this risk.
52
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Erie Indemnity Company
Erie, Pennsylvania
We have audited Erie Indemnity Companys internal control over financial reporting as of December
31, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Erie
Indemnity Companys management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Erie Indemnity Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated statements of financial position of Erie Indemnity Company
as of December 31, 2009 and 2008, and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three years in the period ended December 31,
2009 of Erie Indemnity Company and our report dated February 25, 2010 expressed an unqualified
opinion thereon.
|
|
|
|
|
|
|
|
/s/ Ernst & Young, LLP
|
|
|
|
Cleveland, Ohio |
|
|
February 25, 2010 |
|
|
53
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
of
Erie Indemnity Company
Erie, Pennsylvania
We have audited the accompanying consolidated statements of financial position of Erie
Indemnity Company as of December 31, 2009 and 2008, and the related consolidated statements of
operations, shareholders equity, and cash flows for each of the three years in the period ended
December 31, 2009. Our audits also include the financial statement schedules listed in the Index at
15(a). These financial statements and schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements and schedules
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Erie Indemnity Company at December 31, 2009 and
2008, and the consolidated results of its operations and its cash flows for each of the three years
in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in 2009 the Company changed its
method of accounting for recognizing other-than-temporary impairment charges for its debt
securities in connection with the adoption of the revised Financial Accounting Standards Boards
other-than-temporary impairment model. As discussed in Note 5 to the consolidated financial
statements, in 2008 the Company changed its method of accounting for its common stock portfolio in
connection with the adoption of the fair value option.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Erie Indemnity Companys internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal
Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February
25, 2010 expressed an unqualified opinion thereon.
|
|
|
|
|
|
|
|
/s/ Ernst & Young, LLP
|
|
|
|
Cleveland, Ohio |
|
|
February 25, 2010
|
|
|
54
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2009, 2008 and 2007
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Operating revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Management fee revenue, net |
|
$ |
912,023 |
|
|
$ |
897,526 |
|
|
$ |
894,981 |
|
Premiums earned |
|
|
209,457 |
|
|
|
207,407 |
|
|
|
207,562 |
|
Service agreement revenue |
|
|
34,783 |
|
|
|
32,298 |
|
|
|
29,748 |
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
|
1,156,263 |
|
|
|
1,137,231 |
|
|
|
1,132,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of management operations |
|
|
768,668 |
|
|
|
765,012 |
|
|
|
755,642 |
|
Losses and loss expenses incurred |
|
|
145,452 |
|
|
|
137,167 |
|
|
|
125,903 |
|
Policy acquisition and other underwriting
expenses |
|
|
54,025 |
|
|
|
49,218 |
|
|
|
48,909 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
968,145 |
|
|
|
951,397 |
|
|
|
930,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment (loss) income unaffiliated |
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of expenses |
|
|
41,728 |
|
|
|
44,181 |
|
|
|
52,833 |
|
Net realized gains (losses) on investments |
|
|
10,396 |
|
|
|
(43,515 |
) |
|
|
17,265 |
|
Net impairment losses recognized in earnings |
|
|
(12,059 |
) |
|
|
(69,504 |
) |
|
|
(22,457 |
) |
Equity in (losses) earnings of limited
partnerships |
|
|
(76,108 |
) |
|
|
5,710 |
|
|
|
59,690 |
|
|
|
|
|
|
|
|
|
|
|
Total investment (loss) income
unaffiliated |
|
|
(36,043 |
) |
|
|
(63,128 |
) |
|
|
107,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity in
earnings (losses) of Erie Family Life
Insurance |
|
|
152,075 |
|
|
|
122,706 |
|
|
|
309,168 |
|
Provision for income taxes |
|
|
(48,787 |
) |
|
|
(39,865 |
) |
|
|
(99,137 |
) |
Equity in earnings (losses) of Erie Family Life
Insurance, net of tax |
|
|
5,202 |
|
|
|
(13,603 |
) |
|
|
2,914 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
108,490 |
|
|
$ |
69,238 |
|
|
$ |
212,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share |
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock basic |
|
$ |
2.10 |
|
|
$ |
1.34 |
|
|
$ |
3.80 |
|
|
|
|
|
|
|
|
|
|
|
Class A common stock diluted |
|
$ |
1.89 |
|
|
$ |
1.19 |
|
|
$ |
3.43 |
|
|
|
|
|
|
|
|
|
|
|
Class B common stock basic |
|
$ |
312.45 |
|
|
$ |
204.20 |
|
|
$ |
572.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock |
|
|
51,250,606 |
|
|
|
51,824,649 |
|
|
|
55,928,177 |
|
|
|
|
|
|
|
|
|
|
|
Class B common stock |
|
|
2,549 |
|
|
|
2,551 |
|
|
|
2,563 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock |
|
|
57,385,228 |
|
|
|
57,967,144 |
|
|
|
62,096,816 |
|
|
|
|
|
|
|
|
|
|
|
Class B common stock |
|
|
2,549 |
|
|
|
2,551 |
|
|
|
2,563 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
55
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As of December 31, 2009 and 2008
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
Available-for-sale securities, at fair value: |
|
|
|
|
|
|
|
|
Fixed maturities (amortized cost of $642,207 and $597,672, respectively) |
|
$ |
664,026 |
|
|
$ |
563,429 |
|
Equity securities (cost of $34,848 and $59,958, respectively) |
|
|
37,725 |
|
|
|
55,281 |
|
Trading securities, at fair value (cost of $35,752 and $37,835, respectively) |
|
|
42,153 |
|
|
|
33,338 |
|
Limited partnerships (cost of $280,576 and $272,144, respectively) |
|
|
234,980 |
|
|
|
299,176 |
|
Real estate mortgage loans |
|
|
1,116 |
|
|
|
1,215 |
|
|
|
|
|
|
|
|
Total investments |
|
|
980,000 |
|
|
|
952,439 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
76,505 |
|
|
|
61,073 |
|
Accrued investment income |
|
|
8,654 |
|
|
|
8,420 |
|
Premiums receivable from policyholders |
|
|
237,229 |
|
|
|
244,760 |
|
Federal income taxes recoverable |
|
|
12,709 |
|
|
|
7,498 |
|
Deferred income taxes |
|
|
40,834 |
|
|
|
72,875 |
|
Reinsurance recoverable from Erie Insurance Exchange on unpaid losses and
loss expense |
|
|
777,968 |
|
|
|
777,754 |
|
Ceded unearned premiums to Erie Insurance Exchange |
|
|
124,242 |
|
|
|
109,613 |
|
Note receivable from Erie Family Life Insurance |
|
|
25,000 |
|
|
|
25,000 |
|
Other receivables due from Erie Insurance Exchange and affiliates |
|
|
212,502 |
|
|
|
218,243 |
|
Reinsurance recoverable from non-affiliates |
|
|
1,940 |
|
|
|
1,944 |
|
Deferred policy acquisition costs |
|
|
17,229 |
|
|
|
16,531 |
|
Equity in Erie Family Life Insurance |
|
|
71,934 |
|
|
|
29,236 |
|
Securities lending collateral |
|
|
0 |
|
|
|
18,155 |
|
Other assets |
|
|
79,771 |
|
|
|
69,845 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,666,517 |
|
|
$ |
2,613,386 |
|
|
|
|
|
|
|
|
56
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As of December 31, 2009 and 2008
(dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Unpaid losses and loss expenses |
|
$ |
965,420 |
|
|
$ |
965,081 |
|
Unearned premiums |
|
|
433,659 |
|
|
|
424,370 |
|
Commissions payable |
|
|
125,315 |
|
|
|
126,208 |
|
Agent bonuses |
|
|
68,902 |
|
|
|
81,269 |
|
Securities lending collateral |
|
|
0 |
|
|
|
18,155 |
|
Accounts payable and accrued expenses |
|
|
58,636 |
|
|
|
51,333 |
|
Deferred executive compensation |
|
|
15,076 |
|
|
|
15,152 |
|
Dividends payable |
|
|
24,761 |
|
|
|
23,249 |
|
Defined
benefit pension plan liability |
|
|
57,089 |
|
|
|
97,682 |
|
Employee benefit obligations |
|
|
15,682 |
|
|
|
19,012 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,764,540 |
|
|
|
1,821,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
Capital stock: |
|
|
|
|
|
|
|
|
Class A common, stated value $0.0292 per share; authorized
74,996,930 shares; 68,289,600 and 68,277,600 shares issued,
respectively; 51,203,473 and 51,282,893 shares outstanding,
respectively |
|
|
1,992 |
|
|
|
1,991 |
|
Class B common, convertible at a rate of 2,400 Class A shares
for one Class B share, stated value $70 per share; 2,546 and 2,551
shares authorized, issued and outstanding, respectively |
|
|
178 |
|
|
|
179 |
|
Additional paid-in capital |
|
|
7,830 |
|
|
|
7,830 |
|
Accumulated other comprehensive loss |
|
|
(43,330 |
) |
|
|
(135,854 |
) |
|
|
|
|
|
|
|
|
|
Retained earnings, before cumulative effect adjustment |
|
|
1,742,717 |
|
|
|
1,717,499 |
|
Cumulative effect of accounting changes, net of tax |
|
|
6,692 |
|
|
|
11,191 |
|
|
|
|
|
|
|
|
Retained earnings, after cumulative effect adjustment |
|
|
1,749,409 |
|
|
|
1,728,690 |
|
|
|
|
|
|
|
|
Total contributed capital and retained earnings |
|
|
1,716,079 |
|
|
|
1,602,836 |
|
Treasury stock, at cost, 17,086,127 and 16,994,707 shares, respectively |
|
|
(814,102 |
) |
|
|
(810,961 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
901,977 |
|
|
|
791,875 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,666,517 |
|
|
$ |
2,613,386 |
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
57
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2009, 2008 and 2007
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Management fee received |
|
$ |
912,494 |
|
|
$ |
898,128 |
|
|
$ |
889,813 |
|
Service agreement fee received |
|
|
34,583 |
|
|
|
32,097 |
|
|
|
29,648 |
|
Premiums collected |
|
|
213,588 |
|
|
|
208,097 |
|
|
|
207,491 |
|
Settlement of commutation received from Exchange |
|
|
0 |
|
|
|
0 |
|
|
|
6,782 |
|
Net investment income received |
|
|
45,162 |
|
|
|
51,941 |
|
|
|
55,031 |
|
Limited partnership distributions |
|
|
12,788 |
|
|
|
29,111 |
|
|
|
78,960 |
|
Increase (decrease) in reimbursements collected from affiliates |
|
|
3,503 |
|
|
|
(7,437 |
) |
|
|
17,861 |
|
Commissions paid to agents |
|
|
(453,570 |
) |
|
|
(439,162 |
) |
|
|
(435,163 |
) |
Agents bonuses paid |
|
|
(81,108 |
) |
|
|
(95,127 |
) |
|
|
(91,955 |
) |
Salaries and wages paid |
|
|
(109,701 |
) |
|
|
(110,813 |
) |
|
|
(111,794 |
) |
Pension contribution and employee benefits paid |
|
|
(31,827 |
) |
|
|
(48,146 |
) |
|
|
(31,989 |
) |
Losses paid |
|
|
(123,284 |
) |
|
|
(121,064 |
) |
|
|
(114,624 |
) |
Loss expenses paid |
|
|
(22,044 |
) |
|
|
(21,428 |
) |
|
|
(19,817 |
) |
Other underwriting and acquisition costs paid |
|
|
(54,403 |
) |
|
|
(52,054 |
) |
|
|
(49,115 |
) |
General operating expenses paid |
|
|
(103,816 |
) |
|
|
(104,298 |
) |
|
|
(73,458 |
) |
Interest paid on bank line of credit |
|
|
0 |
|
|
|
(1,000 |
) |
|
|
|
|
Income taxes paid |
|
|
(62,200 |
) |
|
|
(68,000 |
) |
|
|
(103,905 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
180,165 |
|
|
|
150,845 |
|
|
|
253,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
(157,934 |
) |
|
|
(162,186 |
) |
|
|
(149,826 |
) |
Preferred stock |
|
|
(13,626 |
) |
|
|
(36,874 |
) |
|
|
(87,351 |
) |
Common stock |
|
|
(24,768 |
) |
|
|
(67,578 |
) |
|
|
(92,783 |
) |
Additional investment in Erie Family Life Insurance |
|
|
(11,897 |
) |
|
|
|
|
|
|
|
|
Limited partnerships |
|
|
(25,777 |
) |
|
|
(55,974 |
) |
|
|
(87,503 |
) |
Sales/maturities of investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity sales |
|
|
56,548 |
|
|
|
128,733 |
|
|
|
180,433 |
|
Fixed maturity calls/maturities |
|
|
62,703 |
|
|
|
102,201 |
|
|
|
85,590 |
|
Preferred stock |
|
|
37,850 |
|
|
|
48,939 |
|
|
|
95,112 |
|
Common stock |
|
|
24,119 |
|
|
|
106,581 |
|
|
|
99,869 |
|
Sale of and returns on limited partnerships |
|
|
2,545 |
|
|
|
21,135 |
|
|
|
9,995 |
|
(Purchase) disposal of property and equipment |
|
|
(16,246 |
) |
|
|
(8,279 |
) |
|
|
100 |
|
Net distributions on agent loans |
|
|
(2,158 |
) |
|
|
(3,220 |
) |
|
|
(8,805 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(68,641 |
) |
|
|
73,478 |
|
|
|
44,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(3,141 |
) |
|
|
(102,018 |
) |
|
|
(236,713 |
) |
Dividends paid to shareholders |
|
|
(92,951 |
) |
|
|
(92,302 |
) |
|
|
(91,055 |
) |
(Decrease) increase in collateral from securities lending |
|
|
(18,155 |
) |
|
|
(12,216 |
) |
|
|
7,585 |
|
Redemption (acquisition) of securities lending collateral |
|
|
18,155 |
|
|
|
12,216 |
|
|
|
(7,585 |
) |
Proceeds from bank line of credit |
|
|
0 |
|
|
|
75,000 |
|
|
|
|
|
Payments on bank line of credit |
|
|
0 |
|
|
|
(75,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(96,092 |
) |
|
|
(194,320 |
) |
|
|
(327,768 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
15,432 |
|
|
|
30,003 |
|
|
|
(29,171 |
) |
Cash and cash equivalents at beginning of year |
|
|
61,073 |
|
|
|
31,070 |
|
|
|
60,241 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
76,505 |
|
|
$ |
61,073 |
|
|
$ |
31,070 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
58
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
other |
|
|
Class A |
|
|
Class B |
|
|
Additional |
|
|
|
|
|
|
shareholders |
|
|
Comprehensive |
|
|
Retained |
|
|
comprehensive |
|
|
common |
|
|
common |
|
|
paid-in |
|
|
Treasury |
|
|
|
equity |
|
|
Income (loss) |
|
|
earnings |
|
|
income (loss) |
|
|
stock |
|
|
stock |
|
|
capital |
|
|
stock |
|
|
Balance, December 31, 2006 |
|
$ |
1,161,848 |
|
|
|
|
|
|
$ |
1,618,656 |
|
|
$ |
5,422 |
|
|
$ |
1,990 |
|
|
$ |
180 |
|
|
$ |
7,830 |
|
|
$ |
(472,230 |
) |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
212,945 |
|
|
$ |
212,945 |
|
|
|
212,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities, net of tax
(Note 8) |
|
|
(11,427 |
) |
|
|
(11,427 |
) |
|
|
|
|
|
|
(11,427 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement plans (Note 8): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost, net of tax |
|
|
222 |
|
|
|
222 |
|
|
|
|
|
|
|
222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain, net of tax |
|
|
12,901 |
|
|
|
12,901 |
|
|
|
|
|
|
|
12,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss due to amendments, net of tax |
|
|
(867 |
) |
|
|
(867 |
) |
|
|
|
|
|
|
(867 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment/settlement gain, net of tax |
|
|
3,797 |
|
|
|
3,797 |
|
|
|
|
|
|
|
3,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement plans, net of tax |
|
|
16,053 |
|
|
|
16,053 |
|
|
|
|
|
|
|
16,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
$ |
217,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(236,713 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(236,713 |
) |
Conversion of Class B shares to Class A shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A $1.64 per share |
|
|
(90,797 |
) |
|
|
|
|
|
|
(90,797 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B $246.00 per share |
|
|
(630 |
) |
|
|
|
|
|
|
(630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
$ |
1,051,279 |
|
|
|
|
|
|
$ |
1,740,174 |
|
|
$ |
10,048 |
|
|
$ |
1,991 |
|
|
$ |
179 |
|
|
$ |
7,830 |
|
|
$ |
(708,943 |
) |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
69,238 |
|
|
$ |
69,238 |
|
|
|
69,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities, net of tax
(Note 8) |
|
|
(44,135 |
) |
|
|
(44,135 |
) |
|
|
|
|
|
|
(44,135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting changes, net
of tax (Note 5) |
|
|
|
|
|
|
|
|
|
|
11,191 |
|
|
|
(11,191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement plans (Note 8): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost, net of tax |
|
|
121 |
|
|
|
121 |
|
|
|
|
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss, net of tax |
|
|
(90,571 |
) |
|
|
(90,571 |
) |
|
|
|
|
|
|
(90,571 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain due to amendments, net of tax |
|
|
33 |
|
|
|
33 |
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment/settlement loss, net of tax |
|
|
(159 |
) |
|
|
(159 |
) |
|
|
|
|
|
|
(159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement plans, net of tax |
|
|
(90,576 |
) |
|
|
(90,576 |
) |
|
|
|
|
|
|
(90,576 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
$ |
(65,473 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(102,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102,018 |
) |
Dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A $1.77 per share |
|
|
(91,236 |
) |
|
|
|
|
|
|
(91,236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B $265.50 per share |
|
|
(677 |
) |
|
|
|
|
|
|
(677 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
$ |
791,875 |
|
|
|
|
|
|
$ |
1,728,690 |
|
|
$ |
(135,854 |
) |
|
$ |
1,991 |
|
|
$ |
179 |
|
|
$ |
7,830 |
|
|
$ |
(810,961 |
) |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
108,490 |
|
|
|
108,490 |
|
|
|
108,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities, net of tax
(Note 8) |
|
|
74,745 |
|
|
|
74,745 |
|
|
|
|
|
|
|
74,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting changes, net
of tax (Note 2) |
|
|
|
|
|
|
|
|
|
|
6,692 |
|
|
|
(6,692 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement plans (Note 8): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost, net of tax |
|
|
379 |
|
|
|
379 |
|
|
|
|
|
|
|
379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain, net of tax |
|
|
26,972 |
|
|
|
26,972 |
|
|
|
|
|
|
|
26,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss due to amendments, net of tax |
|
|
(2,129 |
) |
|
|
(2,129 |
) |
|
|
|
|
|
|
(2,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment/settlement loss, net of tax |
|
|
(751 |
) |
|
|
(751 |
) |
|
|
|
|
|
|
(751 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement plans, net of tax |
|
|
24,471 |
|
|
|
24,471 |
|
|
|
|
|
|
|
24,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
$ |
207,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(3,141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,141 |
) |
Conversion of Class B shares to Class A shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A $1.83 per share |
|
|
(93,764 |
) |
|
|
|
|
|
|
(93,764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B $274.50 per share |
|
|
(699 |
) |
|
|
|
|
|
|
(699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
901,977 |
|
|
|
|
|
|
$ |
1,749,409 |
|
|
$ |
(43,330 |
) |
|
$ |
1,992 |
|
|
$ |
178 |
|
|
$ |
7,830 |
|
|
$ |
(814,102 |
) |
|
See accompanying notes to Consolidated Financial Statements.
59
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of operations
Erie
Indemnity Company (Indemnity or Company) is a publicly held Pennsylvania business corporation that since
1925 has been the managing Attorney-in-Fact for the subscribers of Erie Insurance Exchange
(Exchange). The Exchange is a subscriber (policyholder) owned Pennsylvania-domiciled reciprocal
insurer that writes property/casualty insurance. Our 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 us as their common attorney-in-fact to
transact business on their behalf and to manage their affairs at the Exchange. We earn a management
fee from the Exchange for these services.
The Exchange and its wholly-owned subsidiary, Flagship City Insurance Company (Flagship) and the
Indemnitys wholly-owned subsidiaries, Erie Insurance Company (EIC), Erie Insurance Company of
New York (ENY) and the Erie Insurance Property and Casualty Company (EPC), comprise the
Property and Casualty Group. The Property and Casualty Group is a regional insurance group
operating in 11 Midwestern, Mid-Atlantic, and Southeastern states and the District of Columbia. The
Property and Casualty Group primarily writes personal auto insurance, which comprises 48% of its
2009 direct premiums.
The Indemnity also owns 21.6% of the common stock of the Erie Family Life Insurance Company
(EFL), an affiliated life insurance company; the Exchange owns the remaining 78.4%. EFL
underwrites and sells nonparticipating individual and group life insurance policies and fixed
annuities.
The Indemnity, together with the members of the Property and Casualty Group and EFL, operate
collectively as the Erie Insurance Group (Group).
Note 2. Significant accounting policies
Basis of presentation
The accompanying consolidated financial statements have been prepared in conformity with U.S.
generally accepted accounting principles (GAAP) that differ from statutory accounting practices
prescribed or permitted for insurance companies by regulatory authorities. See also Note 19. The
consolidated financial statements include our accounts and those of our wholly-owned subsidiaries.
All intercompany accounts and transactions have been eliminated in consolidation. 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.
Reclassifications
Certain amounts previously reported in the 2008 financial statements have been reclassified to
conform to the current periods presentation. Such reclassifications only affected the
Consolidated Statements of Operations and Cash Flows. The reclassifications in the Consolidated
Statements of Operations resulted from new accounting guidance (See Note 5). These
reclassifications had no effect on previously reported net income.
Investments
Available-for-sale securities Fixed maturity and preferred stock securities are classified as
available-for-sale and are reported at fair value. Unrealized holding gains and losses, net of
related tax effects, on fixed maturities and preferred stock are charged or credited directly to
shareholders equity as accumulated other comprehensive (loss) income.
Realized gains and losses on sales of fixed maturity and preferred stock securities are recognized
in income based upon the specific identification method. Interest and dividend income are
recognized as earned.
Fixed income and redeemable preferred stock (debt securities) are evaluated monthly for
other-than-temporary impairment loss. For debt securities that have experienced a decline in fair
value and we intend to sell or for which it is
60
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Significant accounting policies (continued)
more likely than not we will be required to sell the security before recovery of its amortized
cost, an other-than-temporary impairment is deemed to have occurred and is recognized in earnings.
Debt securities that have experienced a decline in fair value and that we do not intend to sell,
and that we will not be required to sell before recovery, are evaluated to determine if the decline
in fair value is other-than-temporary.
Some factors considered in this evaluation include:
|
|
|
the extent and duration to which fair value is less than cost; |
|
|
|
|
historical operating performance and financial condition of the issuer; |
|
|
|
|
short and long-term prospects of the issuer and its industry based on analysts
recommendations; |
|
|
|
|
specific events that occurred affecting the issuer, including a ratings
downgrade; |
|
|
|
|
near term liquidity position of the issuer; and |
|
|
|
|
compliance with financial covenants. |
If a decline is deemed to be other-than-temporary, an assessment is made to determine the amount of
the total impairment related to a credit loss and that related to all other factors. Consideration
is given to all available information relevant to the collectibility of the security in this
determination. If the entire amortized cost basis of the security will not be recovered, a credit
loss exists. Currently, we have the intent to sell all of our securities that have been determined
to have a credit-related impairment. As a result, the entire amount of the impairment has been
recognized in earnings. If we had securities with credit impairments that we did not intend to
sell, the non-credit portion of the impairment would have been recorded in other comprehensive
income.
Impairment charges on non-redeemable preferred securities and hybrid securities with equity
characteristics are included in earnings consistent with the treatment for equity securities. This
is a more conservative approach since the lack of a final maturity and unlikelihood of a call means
recovery is uncertain and would occur over a multi-year period.
Trading securities Common stock securities were reclassified from available-for-sale at December
31, 2007 to trading on January 1, 2008 upon our election to report our common stock portfolio at
fair value. As of January 1, 2008, unrealized gains and losses on these securities are included in
net realized (losses) gains in the Consolidated Statements of Operations. Realized gains and
losses on sales of common stock are recognized in income based upon the specific identification
method. Dividend income is recognized as earned.
Limited partnerships Limited partnerships include U.S. and foreign private equity, real estate
and mezzanine debt investments. The private equity limited partnerships invest primarily in small-
to medium-sized companies. The general partners for our limited partnerships determine the market
value of investments in the partnerships including any other-than-temporary impairments of these
individual investments.
The primary basis for the valuation of limited partnership interests are financial statements
prepared by the general partner. Because of the timing of the preparation and delivery of these
financial statements, the use of the most recently available financial statements provided by the
general partners result in a quarter delay in the inclusion of the limited partnership results in
our Consolidated Statements of Operations. Due to this delay, these financial statements do not
yet reflect the market conditions experienced in the fourth quarter of 2009.
Nearly all of the underlying investments in our limited partnerships are valued using a source
other than quoted prices in active markets. The fair value amounts for our private equity and
mezzanine debt partnerships are based on the financial statements of the general partners, who use
multiple methods to estimate fair value including the market approach, income approach and/or the
cost approach. The market approach uses prices and other pertinent information from
market-generated transactions involving identical or comparable assets or liabilities. Such
valuation techniques often use market multiples derived from a set of comparables. The income
approach uses valuation techniques to convert future cash flows
61
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Significant accounting policies (continued)
or earnings to a single discounted present value amount. The measurement is based on the
value indicated by current market expectations on those future amounts. The cost approach is
derived from the amount that is currently required to replace the service capacity of an asset. If
information becomes available that would impair the cost of these partnerships, then the general
partner would generally adjust to the net realizable value.
For real estate limited partnerships, the general partners record these at fair value based on an
independent appraisal or internal estimates of fair value.
We perform various procedures in review of the general partners valuations. While we generally
rely on the general partners financial statements as the best available information to record our
share of the partnership unrealized gains and losses resulting from valuation changes, we adjust
our financial statements for impairments at the fund level as necessary. There were no valuation
changes in 2009, 2008 or 2007. As there is a limited market for these investments, they have the
greatest potential for market price variability.
Unrealized gains and losses for these investments are reflected in equity in earnings (losses) on
limited partnerships in our Consolidated Statements of Operations in accordance with the equity
method of accounting. Cash contributions made to and distributions received from the partnerships
are recorded in the period in which the transaction occurs.
Cash and cash equivalents Cash equivalents are principally comprised of investments in bank
money market funds and approximate fair value.
Insurance liabilities
The liability for losses and loss expenses includes estimates for claims that have been reported
and those that have been incurred but not reported, and estimates of all expenses associated with
processing and settling these claims. Estimating the ultimate cost of future losses and loss
expenses is an uncertain and complex process. This estimation process is based significantly on
the assumption that past developments are an appropriate indicator of future events, and involves
a variety of actuarial techniques that analyze experience, trends and other relevant factors. The
uncertainties involved with the reserving process include internal factors, such as changes in
claims handling procedures, as well as external factors, such as economic trends and changes in
the concepts of legal liability and damage awards. Accordingly, final loss settlements may vary
from the present estimates, particularly when those payments may not occur until well into the
future.
We regularly review the adequacy of our estimated loss and loss expense reserves by line of
business. Adjustments to previously established reserves are reflected in the operating results of
the period in which the adjustment is determined to be necessary. Such adjustments could possibly
be significant, reflecting any variety of new and adverse or favorable trends.
Agent bonus estimates
Agent bonuses are based on an individual agencys property/casualty underwriting profitability and
also include a component for growth in agency property/casualty premiums if the agencys
underwriting profitability targets for our book of business are met. The estimate for agent
bonuses, which are based on the performance over 36 months, is modeled on a monthly basis using
actual underwriting data by agency for the two prior years combined with the current year-to-date
actual data. At December 31 of each year, we use actual data available and record an accrual based
on the expected payment amount. These costs are included in the cost of management operations in
the Consolidated Statements of Operations.
Deferred taxes
Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of
assets and liabilities and their reported amounts in the consolidated financial statements using
the statutory tax rates in effect for the year in which the differences are expected to reverse.
The effect on deferred tax assets and liabilities of a change in tax rates is
62
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Significant accounting policies (continued)
recognized in the results of operations in the period that includes the enactment date under
the law. Valuation allowances on deferred tax assets are estimated based on our assessment of the
realizability of such amounts.
Recognition of management fee revenue
We earn management fees from the Exchange for providing sales, underwriting and policy issuance
services. The management fee revenue 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 fees are recorded as revenue upon policy issuance or renewal, as substantially all of
the services required to be performed by us have been satisfied at that time. Certain activities
are performed and related costs are incurred by us subsequent to policy issuance in connection
with the services provided to the Exchange; however, these activities are inconsequential and
perfunctory.
Recognition of premium revenues and losses
Insurance premiums written are earned over the terms of the policies on a pro-rata basis. Unearned
premiums represent that portion of premiums written which is applicable to the unexpired terms of
policies in force. Losses and loss
expenses are recorded as incurred. Premiums earned and losses and loss expenses incurred are
reflected net of amounts ceded to the Exchange on the Consolidated Statements of Operations. See
also Note 18.
Recognition of service agreement revenue
Included in service agreement revenue are service charges we collect from policyholders for
providing multiple payment plans on policies written by the Property and Casualty Group. Service
charges, which are flat dollar charges for each installment billed beyond the first installment,
are recognized as revenue when bills are rendered to the policyholder. Service agreement revenues
also includes late payment and policy reinstatement fees.
Recent accounting pronouncements
In June 2009, the FASB updated ASC 810, Consolidations, that amended the guidance for determining
whether an enterprise is the primary beneficiary of a variable interest entity (VIE) by requiring
a qualitative analysis to determine if an enterprises variable interest results in a controlling
financial interest. A primary beneficiary is expected to be identified through qualitative
analysis, which evaluates the power to direct activities of the VIE, including its economic
performance and the right to receive benefits from the VIE that are significant. This guidance is
effective for fiscal years that begin after November 15, 2009. Under the current quantitative
analysis, although we hold a variable interest in it, we are not deemed to be the primary
beneficiary of the Exchange (see Note 17), and the Exchanges financial statements are not
consolidated with ours. Under the amended guidance we will have a controlling financial interest
in the Exchange, by virtue of our attorney-in-fact relationship with the Exchange, and
consolidation of the Exchange in our financial statements will be required effective for our first
quarter 2010 financial statements. This will require that the Exchanges financial statements,
which are currently only prepared in accordance with statutory accounting principles, be prepared
in accordance with GAAP. The Company will be required to incorporate the Exchanges financial
reporting process into its Sarbanes-Oxley 404 internal control reporting requirements. Given the
materiality of the Exchanges operations, consolidating the Exchanges financial statements with
the Companys will materially change our reporting entitys assets, liabilities, revenues,
expenses, related footnote disclosures and the overall presentation of managements discussion and
analysis. The Exchanges equity will be shown as noncontrolling interests in such consolidated
statements and the net income and equity attributable to the shareholders will be unchanged by
this presentation.
FASB ASC 855, Subsequent Events, was issued in June 2009 to establish general standards of
accounting for and disclosure of events that occur after the balance sheet date but before the
financial statements are issued or available to be issued. This statement became effective for
periods ending after June 15, 2009.
63
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Significant accounting policies (continued)
On July 1, 2009, we adopted new accounting guidance related to the codification of accounting
standards and the hierarchy of GAAP established by the Financial Accounting Standards Board (the
FASB). This accounting guidance established two levels of GAAP, authoritative and
nonauthoritative. The FASB Accounting Standards Codification (the Codification) is the source of
authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which
are also sources of authoritative GAAP for SEC registrants. All other accounting literature is
nonauthoritative. There was no impact on our consolidated financial statements upon adoption of
this standard.
In April 2009, the Financial Accounting Standards Board provided additional application guidance
and enhanced disclosure requirements regarding fair value measurements and impairments of
securities as follows:
|
|
|
FASB ASC 820, Fair Value Measurements and Disclosures, provides additional
guidance for estimating fair value when the volume and level of activity for the asset or
liability have significantly decreased in relation to normal market activity. This
guidance states a reporting entity shall evaluate circumstances to determine whether the
transaction is orderly based on the weight of the evidence. The additional disclosures
required by this guidance, including the inputs and valuation techniques used to measure
fair values and any changes in such, have been included in Note 5. |
|
|
|
|
FASB ASC 825, Financial Instruments, requires disclosures about fair value of
financial instruments for interim reporting periods as well as in annual financial
statements. We adopted this guidance in the second quarter of 2009 and the additional fair
value disclosures were provided in the interim periods. See annual disclosures in Note 5. |
|
|
|
|
On April 1, 2009, we adopted new accounting guidance under FASB ASC 320,
Investments Debt and Equity Securities. This guidance amended the other-than-temporary
impairment (OTTI) model for debt securities and requires that credit-related losses and
securities in an unrealized loss position that we intend to sell be recognized in earnings,
with the remaining decline recognized in other comprehensive income. Additionally, this
accounting guidance modified the presentation of OTTI in the statement of operations with
the total OTTI presented along with an offset for the amount of OTTI recognized in other
comprehensive income. Disclosures include further disaggregation of securities,
methodology, inputs related to credit-related loss impairments and a rollforward of
credit-related loss impairments. The adoption of this guidance required a cumulative effect
adjustment to reclass previously recognized non-credit other-than-temporary impairments
from retained earnings to other comprehensive income. The net impact of the cumulative
effect adjustment increased retained earnings and decreased other comprehensive income by
$6.7 million, net of tax. Disclosures regarding our impairment methodology are included in
this note under the caption Investments. The remaining disclosures regarding credit and
non-credit related impairments have been provided in Note 6. |
In 2007, the FASB issued guidance under FASB ASC 325, Financial Instruments, that gave us the
irrevocable option to report selected financial assets and liabilities at fair value and
established presentation and disclosure requirements. We adopted the fair value option for our
common stock portfolio. Beginning January 1, 2008, all changes in fair value of our common stock
are recognized in earnings as they occur. The net impact of the cumulative effect adjustment for
our common stock portfolio on January 1, 2008 increased retained earnings and reduced other
comprehensive income by $11.2 million, net of tax. See also Note 5.
In 2006, FASB ASC 820, Fair Value Measurements and Disclosures, was updated to provide guidance
for using fair value to measure assets and liabilities as well as enhances disclosures about fair
value measurements which became effective for us on January 1, 2008. The standard did not expand
the use of fair value in any new circumstances and thus, did not have an impact on our financial
position, results of operations or cash flows. The guidance established a fair value hierarchy
that prioritizes the inputs for valuation techniques used to measure fair value into three levels.
The required disclosures concerning inputs used to measure fair value are included in Note 5.
64
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Earnings per share
Basic earnings per share are calculated under the two-class method which allocates earnings to each
class of stock based on its dividend rights. Class B shares are convertible into Class A shares at
a conversion ratio of 2,400 to 1. See Note 13. Class A diluted earnings per share are calculated
under the if-converted method which reflects the conversion of Class B shares and the effect of a
potentially dilutive outstanding employee stock-based award and awards not yet vested related to
the outside directors stock compensation plan. The 2007 calculation also includes the effect of
potentially dilutive outstanding employee stock-based awards under the pre-2004 long term incentive
plan. See Note 11.
A reconciliation of the numerators and denominators used in the basic and diluted per-share
computations is presented below for each class of common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
Allocated |
|
Weighted |
|
Per- |
|
Allocated |
|
Weighted |
|
Per- |
|
Allocated |
|
Weighted |
|
Per- |
(dollars in thousands, |
|
net income |
|
shares |
|
share |
|
net income |
|
shares |
|
share |
|
net income |
|
shares |
|
share |
except per share data) |
|
(numerator) |
|
(denominator) |
|
amount |
|
(numerator) |
|
(denominator) |
|
amount |
|
(numerator) |
|
(denominator) |
|
Amount |
|
|
|
Class A Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
Class A stockholders |
|
$ |
107,694 |
|
|
|
51,250,606 |
|
|
$ |
2.10 |
|
|
$ |
68,718 |
|
|
|
51,824,649 |
|
|
$ |
1.34 |
|
|
$ |
211,477 |
|
|
|
55,928,177 |
|
|
$ |
3.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of
stock awards |
|
|
0 |
|
|
|
17,022 |
|
|
|
|
|
|
|
0 |
|
|
|
20,095 |
|
|
|
|
|
|
|
0 |
|
|
|
17,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed conversion
of Class B shares |
|
|
796 |
|
|
|
6,117,600 |
|
|
|
|
|
|
|
521 |
|
|
|
6,122,400 |
|
|
|
|
|
|
|
1,468 |
|
|
|
6,151,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Diluted EPS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to
Class A stockholders
on Class A equivalent
shares |
|
$ |
108,490 |
|
|
|
57,385,228 |
|
|
$ |
1.89 |
|
|
$ |
69,239 |
|
|
|
57,967,144 |
|
|
$ |
1.19 |
|
|
$ |
212,945 |
|
|
|
62,096,816 |
|
|
$ |
3.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Basic and
diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available
to Class B
stockholders |
|
$ |
796 |
|
|
|
2,549 |
|
|
$ |
312.45 |
|
|
$ |
521 |
|
|
|
2,551 |
|
|
$ |
204.20 |
|
|
$ |
1,468 |
|
|
|
2,563 |
|
|
$ |
572.98 |
|
|
|
|
Note 4. Segment information
We operate our business as three reportable segments: management operations, insurance underwriting
operations and investment operations. Accounting policies for segments are the same as those
described in the summary of significant accounting policies, with the exception of the management
fee revenues received from the property/casualty insurance subsidiaries. These revenues are not
eliminated in the segment detail below, as our decisions are based on the segment presentation. See
also Note 2. 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 for the Property
and Casualty Group.
Our principal operations consist of serving as attorney-in-fact for the Exchange, which constitutes
our management operations. We operate in this capacity solely for the Exchange. Our insurance
underwriting operations arise through direct business of our property/casualty insurance
subsidiaries and by virtue of the pooling agreement between our subsidiaries and the Exchange,
which includes assumed reinsurance from nonaffiliated domestic and foreign sources. The Exchange
exited the assumed reinsurance business effective December 31, 2003, and therefore unaffiliated
reinsurance
65
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Segment information (continued)
includes only run-off activity of the assumed reinsurance business. Insurance provided in the
insurance underwriting operations consists of personal and commercial lines and is sold by
independent agents. Personal lines consist primarily of private passenger auto and are marketed to
individuals, and commercial lines are marketed to small- and medium-sized businesses. The
performance of personal lines and commercial lines is evaluated by our management based upon the
underwriting results as determined under statutory accounting principles (SAP) for the total pooled
business of the Property and Casualty Group.
We evaluate profitability of our management operations segment principally on the gross margin from
management operations. Profitability of the insurance underwriting operations segment is evaluated
principally based on the combined ratio. Investment operations performance is evaluated based on
appreciation of assets, rate of return and overall return. Summarized financial information for
these operations is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31 |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Management operations |
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Management fee revenue |
|
$ |
965,110 |
|
|
$ |
949,775 |
|
|
$ |
947,023 |
|
Service agreement revenue |
|
|
34,783 |
|
|
|
32,298 |
|
|
|
29,748 |
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue |
|
|
999,893 |
|
|
|
982,073 |
|
|
|
976,771 |
|
Cost of management operations |
|
|
813,411 |
|
|
|
809,548 |
|
|
|
799,597 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
186,482 |
|
|
$ |
172,525 |
|
|
$ |
177,174 |
|
|
|
|
|
|
|
|
|
|
|
Net income from management operations |
|
$ |
126,657 |
|
|
$ |
116,475 |
|
|
$ |
120,362 |
|
|
|
|
|
|
|
|
|
|
|
Insurance underwriting operations |
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned: |
|
|
|
|
|
|
|
|
|
|
|
|
Personal lines |
|
$ |
150,593 |
|
|
$ |
146,826 |
|
|
$ |
145,007 |
|
Commercial lines |
|
|
58,762 |
|
|
|
61,274 |
|
|
|
62,913 |
|
Reinsurance nonaffiliates |
|
|
102 |
|
|
|
(693 |
) |
|
|
(358 |
) |
|
|
|
|
|
|
|
|
|
|
Total premiums earned |
|
|
209,457 |
|
|
|
207,407 |
|
|
|
207,562 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Losses and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Personal lines |
|
|
156,705 |
|
|
|
137,221 |
|
|
|
129,788 |
|
Commercial lines |
|
|
48,516 |
|
|
|
58,133 |
|
|
|
53,930 |
|
Reinsurance nonaffiliates |
|
|
2,600 |
|
|
|
(1,256 |
) |
|
|
(819 |
) |
|
|
|
|
|
|
|
|
|
|
Total losses and expenses |
|
|
207,821 |
|
|
|
194,098 |
|
|
|
182,899 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
1,636 |
|
|
$ |
13,309 |
|
|
$ |
24,663 |
|
|
|
|
|
|
|
|
|
|
|
Net income from insurance underwriting operations |
|
$ |
1,111 |
|
|
$ |
8,985 |
|
|
$ |
16,754 |
|
|
|
|
|
|
|
|
|
|
|
Investment operations |
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of expenses |
|
$ |
41,728 |
|
|
$ |
44,181 |
|
|
$ |
52,833 |
|
Net realized gains (losses) on investments |
|
|
10,396 |
|
|
|
(43,515 |
) |
|
|
17,265 |
|
Net impairment losses recognized in earnings |
|
|
(12,059 |
) |
|
|
(69,504 |
) |
|
|
(22,457 |
) |
Equity in (losses) earnings of limited partnerships |
|
|
(76,108 |
) |
|
|
5,710 |
|
|
|
59,690 |
|
|
|
|
|
|
|
|
|
|
|
Total investment (loss) income unaffiliated |
|
$ |
(36,043 |
) |
|
$ |
(63,128 |
) |
|
$ |
107,331 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from investment operations |
|
$ |
(24,480 |
) |
|
$ |
(42,619 |
) |
|
$ |
72,915 |
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings (losses) of EFL, net of tax |
|
$ |
5,202 |
|
|
$ |
(13,603 |
) |
|
$ |
2,914 |
|
|
|
|
|
|
|
|
|
|
|
66
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Segment information (continued)
Reconciliation of reportable segment revenues and operating expenses to the Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31 |
(in thousands) |
|
2009 |
|
2008 |
|
2007 |
Segment revenues
|
|
$ |
1,209,350 |
|
|
$ |
1,189,480 |
|
|
$ |
1,184,333 |
|
Elimination of
intersegment management
fee revenues
|
|
|
(53,087 |
) |
|
|
(52,249 |
) |
|
|
(52,042 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
$ |
1,156,263 |
|
|
$ |
1,137,231 |
|
|
$ |
1,132,291 |
|
|
|
|
|
|
|
|
|
|
|
Segment operating expenses
|
|
$ |
1,021,232 |
|
|
$ |
1,003,646 |
|
|
$ |
982,496 |
|
Elimination of
intersegment management
fee expenses
|
|
|
(53,087 |
) |
|
|
(52,249 |
) |
|
|
(52,042 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$ |
968,145 |
|
|
$ |
951,397 |
|
|
$ |
930,454 |
|
|
|
|
|
|
|
|
|
|
|
The intersegment revenues and expenses that are eliminated in the Consolidated Statements of
Operations relate to our property/casualty insurance subsidiaries 5.5% share of the management fees
paid to us.
Note 5. 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 into three levels 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. |
67
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Fair Value (continued)
The following table represents the fair value measurements on a recurring basis for our invested
assets by major category and level of input:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
Fair value measurements using: |
|
|
|
|
|
|
|
|
Quoted prices in |
|
|
|
|
|
|
|
|
|
|
active markets for |
|
Significant |
|
Significant |
|
|
|
|
|
|
identical assets |
|
observable inputs |
|
unobservable inputs |
(in thousands) |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
664,026 |
|
|
$ |
6,089 |
|
|
$ |
648,211 |
|
|
$ |
9,726 |
|
Preferred stock |
|
|
37,725 |
|
|
|
8,823 |
|
|
|
27,661 |
|
|
|
1,241 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
42,153 |
|
|
|
42,134 |
|
|
|
0 |
|
|
|
19 |
|
|
|
|
Total |
|
$ |
743,904 |
|
|
$ |
57,046 |
|
|
$ |
675,872 |
|
|
$ |
10,986 |
|
|
|
|
Level 3 Invested Assets Quarterly Change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance at |
|
|
|
|
|
Included in other |
|
Purchases, |
|
Transfers in |
|
Ending balance |
|
|
September 30, |
|
Included in |
|
comprehensive |
|
sales and |
|
and (out) of |
|
at December 31, |
(in thousands) |
|
2009 |
|
earnings (1) |
|
income |
|
adjustments |
|
Level 3 (2) |
|
2009 |
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
11,679 |
|
|
$ |
(602 |
) |
|
$ |
114 |
|
|
$ |
(48 |
) |
|
$ |
(1,417 |
) |
|
$ |
9,726 |
|
Preferred stock |
|
|
1,184 |
|
|
|
0 |
|
|
|
57 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,241 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
22 |
|
|
|
(3 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
19 |
|
|
|
|
Total Level 3 assets |
|
$ |
12,885 |
|
|
$ |
(605 |
) |
|
$ |
171 |
|
|
$ |
(48 |
) |
|
$ |
(1,417 |
) |
|
$ |
10,986 |
|
|
|
|
Level 3 Invested Assets Year-to-Date Change(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance at |
|
|
|
|
|
Included in other |
|
Purchases, |
|
Transfers in |
|
Ending balance |
|
|
December 31, |
|
Included in |
|
comprehensive |
|
sales and |
|
and (out) of |
|
at December 31, |
(in thousands) |
|
2008 |
|
earnings (1) |
|
income |
|
adjustments |
|
Level 3 (2) |
|
2009 |
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
14,217 |
|
|
$ |
(1,180 |
) |
|
$ |
1,908 |
|
|
$ |
711 |
|
|
$ |
(5,930 |
) |
|
$ |
9,726 |
|
Preferred stock |
|
|
11,818 |
|
|
|
0 |
|
|
|
672 |
|
|
|
0 |
|
|
|
(11,249 |
) |
|
|
1,241 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
22 |
|
|
|
(3 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
19 |
|
|
|
|
Total Level 3 assets |
|
$ |
26,057 |
|
|
$ |
(1,183 |
) |
|
$ |
2,580 |
|
|
$ |
711 |
|
|
$ |
(17,179 |
) |
|
$ |
10,986 |
|
|
|
|
|
|
|
(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
twelve months ended December 31, 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. |
|
(3) |
|
Year-to-date rollforward amounts may include inter-category eliminations from prior
quarter activity due to security transfers in and out of Level 3. |
68
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Fair Value (continued)
The following table represents the fair value measurements on a recurring basis for our invested
assets by major category and level of input:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
Fair value measurements using: |
|
|
|
|
|
|
|
|
Quoted prices in |
|
|
|
|
|
|
|
|
|
|
active markets for |
|
Significant |
|
Significant |
|
|
|
|
|
|
identical assets |
|
observable inputs |
|
unobservable inputs |
(in thousands) |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
563,429 |
|
|
$ |
6,272 |
|
|
$ |
542,940 |
|
|
$ |
14,217 |
|
Preferred stock |
|
|
55,281 |
|
|
|
35,207 |
|
|
|
8,256 |
|
|
|
11,818 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
33,338 |
|
|
|
33,316 |
|
|
|
0 |
|
|
|
22 |
|
|
|
|
Total |
|
$ |
652,048 |
|
|
$ |
74,795 |
|
|
$ |
551,196 |
|
|
$ |
26,057 |
|
|
|
|
Level 3 Invested Assets Quarterly Change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
|
|
|
|
|
|
|
|
|
|
balance at |
|
|
|
|
|
Included in other |
|
Purchases, |
|
Transfers in |
|
Ending balance |
|
|
September 30, |
|
Included in |
|
comprehensive |
|
sales and |
|
and (out) of |
|
at December 31, |
(in thousands) |
|
2008 |
|
earnings (1) |
|
income |
|
adjustments |
|
Level 3 (2) |
|
2008 |
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
28,063 |
|
|
$ |
(2,083 |
) |
|
$ |
(3,071 |
) |
|
$ |
(6,517 |
) |
|
$ |
(2,175 |
) |
|
$ |
14,217 |
|
Preferred stock |
|
|
13,178 |
|
|
|
(357 |
) |
|
|
(1,003 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
11,818 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
22 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
22 |
|
|
|
|
Total Level 3 assets |
|
$ |
41,263 |
|
|
$ |
(2,440 |
) |
|
$ |
(4,074 |
) |
|
$ |
(6,517 |
) |
|
$ |
(2,175 |
) |
|
$ |
26,057 |
|
|
|
|
Level 3 Invested Assets Year-to-Date Change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
|
|
|
|
|
|
|
|
|
|
balance at |
|
|
|
|
|
Included in other |
|
Purchases, |
|
Transfers in |
|
Ending balance |
|
|
December 31, |
|
Included in |
|
comprehensive |
|
sales and |
|
and (out) of |
|
at December 31, |
(in thousands) |
|
2007 |
|
earnings (1) |
|
income |
|
adjustments |
|
Level 3 (2) |
|
2008 |
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
10,941 |
|
|
$ |
(3,334 |
) |
|
$ |
(3,324 |
) |
|
$ |
(5,071 |
) |
|
$ |
15,005 |
|
|
$ |
14,217 |
|
Preferred stock |
|
|
5,858 |
|
|
|
(2,193 |
) |
|
|
(2,204 |
) |
|
|
2,000 |
|
|
|
8,357 |
|
|
|
11,818 |
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
21 |
|
|
|
0 |
|
|
|
1 |
|
|
|
0 |
|
|
|
0 |
|
|
|
22 |
|
|
|
|
Total Level 3 assets |
|
$ |
16,820 |
|
|
$ |
(5,527 |
) |
|
$ |
(5,527 |
) |
|
$ |
(3,071 |
) |
|
$ |
23,362 |
|
|
$ |
26,057 |
|
|
|
|
|
|
|
(1) |
|
These losses are a result of other-than-temporary impairments and are reported in the
Consolidated Statements of Operations. There were no unrealized gains or losses included in
earnings at December 31, 2008 on Level 3 securities. |
|
(2) |
|
Transfers in to Level 3 would be attributable to changes in the availability of market
observable information for individual securities within the respective categories. |
69
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Fair Value (continued)
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 December 31, 2009, we adjusted eight 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.
The value of these securities based on prices from the pricing service was $8.5 million, while the
ultimate value used in our financial statements was $8.6 million. 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.
The following table sets forth the fair value of our fixed maturity and preferred stock securities
by pricing source as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
December 31, 2009 |
|
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Priced via pricing services |
|
$ |
649,780 |
|
|
$ |
6,089 |
|
|
$ |
643,691 |
|
|
$ |
0 |
|
Priced via market
comparables/non-binding broker quote (1) |
|
|
5,742 |
|
|
|
0 |
|
|
|
4,520 |
|
|
|
1,222 |
|
Priced via internal modeling (2) |
|
|
8,504 |
|
|
|
0 |
|
|
|
0 |
|
|
|
8,504 |
|
|
|
|
Total fixed maturity securities |
|
|
664,026 |
|
|
|
6,089 |
|
|
|
648,211 |
|
|
|
9,726 |
|
Preferred stock securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Priced via pricing services |
|
|
31,543 |
|
|
|
8,823 |
|
|
|
22,720 |
|
|
|
0 |
|
Priced via market
comparables/non-binding broker quote (1) |
|
|
4,941 |
|
|
|
0 |
|
|
|
4,941 |
|
|
|
0 |
|
Priced via internal modeling (2) |
|
|
1,241 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,241 |
|
|
|
|
Total preferred stock securities |
|
|
37,725 |
|
|
|
8,823 |
|
|
|
27,661 |
|
|
|
1,241 |
|
|
|
|
Total available-for-sale securities |
|
$ |
701,751 |
|
|
$ |
14,912 |
|
|
$ |
675,872 |
|
|
$ |
10,967 |
|
|
|
|
|
|
|
(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 ten Level 3
securities representing less than 1.4% of the total available-for-sale portfolio. |
We have no assets that were measured at fair value on a nonrecurring basis during the year
ended December 31, 2009.
70
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Fair Value (continued)
Fair Value Option
Effective January 1, 2008, the Company adopted the fair value option for our common stock
portfolio. See Note 2. The following table represents the December 31, 2007 carrying value of these
assets, the transition adjustment booked to retained earnings and the carrying value as of January
1, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2008 |
|
|
|
December 31, 2007 |
|
|
Cumulative effect |
|
|
fair value |
|
|
|
(carrying value |
|
|
adjustment to January 1, |
|
|
(carrying value |
|
(in thousands) |
|
prior to adoption) |
|
|
2008 retained earnings |
|
|
after adoption) |
|
|
|
|
Common stock |
|
$ |
108,090 |
|
|
$ |
17,216 |
|
|
$ |
108,090 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax adjustment |
|
|
|
|
|
|
(6,025 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value, net of
deferred tax
adjustment |
|
|
|
|
|
$ |
11,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Investments
The following tables summarize the cost and fair value of available-for-sale securities at December
31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 |
|
|
Amortized |
|
Gross unrealized |
|
Gross unrealized |
|
Estimated |
(in thousands) |
|
cost |
|
gains |
|
losses |
|
fair value |
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries and government agencies |
|
$ |
2,625 |
|
|
$ |
291 |
|
|
$ |
0 |
|
|
$ |
2,916 |
|
Foreign government |
|
|
1,998 |
|
|
|
102 |
|
|
|
0 |
|
|
|
2,100 |
|
Municipal securities |
|
|
235,250 |
|
|
|
8,942 |
|
|
|
459 |
|
|
|
243,733 |
|
U.S. corporate debt non-financial |
|
|
172,231 |
|
|
|
9,800 |
|
|
|
670 |
|
|
|
181,361 |
|
U.S. corporate debt financial |
|
|
148,759 |
|
|
|
6,668 |
|
|
|
3,630 |
|
|
|
151,797 |
|
Foreign corporate debt non-financial |
|
|
26,799 |
|
|
|
1,790 |
|
|
|
210 |
|
|
|
28,379 |
|
Foreign corporate debt financial |
|
|
19,063 |
|
|
|
982 |
|
|
|
522 |
|
|
|
19,523 |
|
Structured securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities auto loans |
|
|
4,000 |
|
|
|
125 |
|
|
|
0 |
|
|
|
4,125 |
|
Collateralized debt obligations |
|
|
9,697 |
|
|
|
334 |
|
|
|
1,645 |
|
|
|
8,386 |
|
Commercial mortgage-backed |
|
|
5,516 |
|
|
|
84 |
|
|
|
146 |
|
|
|
5,454 |
|
Residential mortgage-backed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises |
|
|
13,525 |
|
|
|
228 |
|
|
|
119 |
|
|
|
13,634 |
|
Non-government sponsored enterprises |
|
|
2,744 |
|
|
|
0 |
|
|
|
126 |
|
|
|
2,618 |
|
|
|
|
Total fixed maturities |
|
$ |
642,207 |
|
|
$ |
29,346 |
|
|
$ |
7,527 |
|
|
$ |
664,026 |
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. nonredeemable preferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
$ |
20,055 |
|
|
$ |
2,607 |
|
|
$ |
1,239 |
|
|
$ |
21,423 |
|
Non-financial |
|
|
8,734 |
|
|
|
918 |
|
|
|
220 |
|
|
|
9,432 |
|
Government sponsored enterprises |
|
|
166 |
|
|
|
179 |
|
|
|
0 |
|
|
|
345 |
|
Foreign nonredeemable preferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
4,893 |
|
|
|
746 |
|
|
|
130 |
|
|
|
5,509 |
|
Non-financial |
|
|
1,000 |
|
|
|
16 |
|
|
|
0 |
|
|
|
1,016 |
|
|
|
|
Total equity securities |
|
$ |
34,848 |
|
|
$ |
4,466 |
|
|
$ |
1,589 |
|
|
$ |
37,725 |
|
|
|
|
Total available-for-sale securities |
|
$ |
677,055 |
|
|
$ |
33,812 |
|
|
$ |
9,116 |
|
|
$ |
701,751 |
|
|
|
|
71
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Investments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 |
|
|
Amortized |
|
Gross unrealized |
|
Gross unrealized |
|
Estimated |
(in thousands) |
|
cost |
|
gains |
|
losses |
|
fair value |
|
|
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries and government agencies |
|
$ |
3,078 |
|
|
$ |
345 |
|
|
$ |
51 |
|
|
$ |
3,372 |
|
Foreign government |
|
|
1,998 |
|
|
|
0 |
|
|
|
180 |
|
|
|
1,818 |
|
Municipal securities |
|
|
212,224 |
|
|
|
3,041 |
|
|
|
3,846 |
|
|
|
211,419 |
|
U.S. corporate debt non-financial |
|
|
164,419 |
|
|
|
1,963 |
|
|
|
13,181 |
|
|
|
153,201 |
|
U.S. corporate debt financial |
|
|
130,929 |
|
|
|
4,500 |
|
|
|
15,807 |
|
|
|
119,622 |
|
Foreign corporate debt non-financial |
|
|
34,900 |
|
|
|
86 |
|
|
|
2,681 |
|
|
|
32,305 |
|
Foreign corporate debt financial |
|
|
21,917 |
|
|
|
100 |
|
|
|
2,875 |
|
|
|
19,142 |
|
Structured securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities auto loans |
|
|
4,000 |
|
|
|
0 |
|
|
|
321 |
|
|
|
3,679 |
|
Collateralized debt obligations |
|
|
11,438 |
|
|
|
0 |
|
|
|
4,362 |
|
|
|
7,076 |
|
Commercial mortgage-backed |
|
|
5,098 |
|
|
|
80 |
|
|
|
484 |
|
|
|
4,694 |
|
Residential mortgage-backed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises |
|
|
3,450 |
|
|
|
219 |
|
|
|
0 |
|
|
|
3,669 |
|
Non-government sponsored enterprises |
|
|
4,221 |
|
|
|
0 |
|
|
|
789 |
|
|
|
3,432 |
|
|
|
|
Total fixed maturities |
|
$ |
597,672 |
|
|
$ |
10,334 |
|
|
$ |
44,577 |
|
|
$ |
563,429 |
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. nonredeemable preferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
$ |
34,353 |
|
|
$ |
3,045 |
|
|
$ |
5,650 |
|
|
$ |
31,748 |
|
Non-financial |
|
|
19,359 |
|
|
|
449 |
|
|
|
2,270 |
|
|
|
17,538 |
|
Government sponsored enterprises |
|
|
180 |
|
|
|
0 |
|
|
|
1 |
|
|
|
179 |
|
Foreign nonredeemable preferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
4,066 |
|
|
|
187 |
|
|
|
57 |
|
|
|
4,196 |
|
Non-financial |
|
|
2,000 |
|
|
|
0 |
|
|
|
380 |
|
|
|
1,620 |
|
|
|
|
Total equity securities |
|
$ |
59,958 |
|
|
$ |
3,681 |
|
|
$ |
8,358 |
|
|
$ |
55,281 |
|
|
|
|
Total available-for-sale securities |
|
$ |
657,630 |
|
|
$ |
14,015 |
|
|
$ |
52,935 |
|
|
$ |
618,710 |
|
|
|
|
The amortized cost and estimated fair value of fixed maturities at December 31, 2009, 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.
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Estimated |
|
(in thousands) |
|
cost |
|
|
fair value |
|
Due in one year or less |
|
$ |
38,994 |
|
|
$ |
39,533 |
|
Due after one year through five years |
|
|
253,090 |
|
|
|
265,480 |
|
Due after five years through ten years |
|
|
253,167 |
|
|
|
261,439 |
|
Due after ten years |
|
|
96,956 |
|
|
|
97,574 |
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
642,207 |
|
|
$ |
664,026 |
|
|
|
|
|
|
|
|
72
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Investments (continued)
Fixed maturities and equity securities in a gross unrealized loss position are as follows. Data is
provided by length of time securities were in a gross unrealized loss position.
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
12 months or longer |
|
Total |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
No. of |
(dollars in thousands) |
|
value |
|
losses |
|
value |
|
losses |
|
value |
|
losses |
|
holdings |
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities |
|
$ |
18,487 |
|
|
$ |
240 |
|
|
$ |
4,949 |
|
|
$ |
219 |
|
|
$ |
23,436 |
|
|
$ |
459 |
|
|
|
12 |
|
U.S. corporate debt non- financial |
|
|
18,738 |
|
|
|
260 |
|
|
|
8,079 |
|
|
|
410 |
|
|
|
26,817 |
|
|
|
670 |
|
|
|
16 |
|
U.S. corporate debt financial |
|
|
23,728 |
|
|
|
270 |
|
|
|
40,090 |
|
|
|
3,360 |
|
|
|
63,818 |
|
|
|
3,630 |
|
|
|
44 |
|
Foreign corporate debt non-financial |
|
|
0 |
|
|
|
0 |
|
|
|
3,776 |
|
|
|
210 |
|
|
|
3,776 |
|
|
|
210 |
|
|
|
3 |
|
Foreign corporate debt financial |
|
|
2,314 |
|
|
|
27 |
|
|
|
2,671 |
|
|
|
494 |
|
|
|
4,985 |
|
|
|
521 |
|
|
|
4 |
|
Structured securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations |
|
|
49 |
|
|
|
1 |
|
|
|
3,104 |
|
|
|
1,645 |
|
|
|
3,153 |
|
|
|
1,646 |
|
|
|
6 |
|
Commercial mortgage-backed |
|
|
0 |
|
|
|
0 |
|
|
|
1,361 |
|
|
|
146 |
|
|
|
1,361 |
|
|
|
146 |
|
|
|
1 |
|
Residential mortgage-backed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises |
|
|
5,856 |
|
|
|
119 |
|
|
|
0 |
|
|
|
0 |
|
|
|
5,856 |
|
|
|
119 |
|
|
|
2 |
|
Non-government sponsored enterprises |
|
|
0 |
|
|
|
0 |
|
|
|
2,618 |
|
|
|
126 |
|
|
|
2,618 |
|
|
|
126 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
69,172 |
|
|
$ |
917 |
|
|
$ |
66,648 |
|
|
$ |
6,610 |
|
|
$ |
135,820 |
|
|
$ |
7,527 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. nonredeemable preferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
$ |
4,859 |
|
|
$ |
414 |
|
|
$ |
5,487 |
|
|
$ |
824 |
|
|
$ |
10,346 |
|
|
$ |
1,238 |
|
|
|
8 |
|
Non-financial |
|
|
2,921 |
|
|
|
79 |
|
|
|
3,909 |
|
|
|
142 |
|
|
|
6,830 |
|
|
|
221 |
|
|
|
3 |
|
Foreign nonredeemable preferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
0 |
|
|
|
0 |
|
|
|
1,000 |
|
|
|
130 |
|
|
|
1,000 |
|
|
|
130 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
7,780 |
|
|
$ |
493 |
|
|
$ |
10,396 |
|
|
$ |
1,096 |
|
|
$ |
18,176 |
|
|
$ |
1,589 |
|
|
|
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 thousands) |
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
holdings |
|
Investment grade |
|
$ |
69,123 |
|
|
$ |
916 |
|
|
$ |
48,515 |
|
|
$ |
4,299 |
|
|
$ |
117,638 |
|
|
$ |
5,215 |
|
|
|
71 |
|
Non-investment grade |
|
|
49 |
|
|
|
1 |
|
|
|
18,133 |
|
|
|
2,311 |
|
|
|
18,182 |
|
|
|
2,312 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
69,172 |
|
|
$ |
917 |
|
|
$ |
66,648 |
|
|
$ |
6,610 |
|
|
$ |
135,820 |
|
|
$ |
7,527 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above securities have been evaluated and determined to be temporary impairments for which
we expect to recover our entire principal. 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 securities. The continued unrealized loss positions
in these securities are reflective of wide credit spreads due to the uncertain condition in the
U.S. financial sectors. 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.
73
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Investments (continued)
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
12 months or longer |
|
Total |
|
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
No. of |
(dollars in thousands) |
|
value |
|
losses |
|
value |
|
losses |
|
value |
|
losses |
|
holdings |
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries and government agencies |
|
$ |
948 |
|
|
$ |
51 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
948 |
|
|
$ |
51 |
|
|
|
1 |
|
Foreign government |
|
|
1,818 |
|
|
|
180 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,818 |
|
|
|
180 |
|
|
|
1 |
|
Municipal securities |
|
|
82,222 |
|
|
|
2,960 |
|
|
|
4,291 |
|
|
|
886 |
|
|
|
86,513 |
|
|
|
3,846 |
|
|
|
53 |
|
U.S. corporate debt non- financial |
|
|
98,422 |
|
|
|
8,199 |
|
|
|
18,961 |
|
|
|
4,982 |
|
|
|
117,383 |
|
|
|
13,181 |
|
|
|
92 |
|
U.S. corporate debt financial |
|
|
70,528 |
|
|
|
10,625 |
|
|
|
18,047 |
|
|
|
5,182 |
|
|
|
88,575 |
|
|
|
15,807 |
|
|
|
84 |
|
Foreign corporate debt non-financial |
|
|
24,007 |
|
|
|
1,725 |
|
|
|
1,042 |
|
|
|
956 |
|
|
|
25,049 |
|
|
|
2,681 |
|
|
|
18 |
|
Foreign corporate debt financial |
|
|
10,514 |
|
|
|
2,029 |
|
|
|
2,154 |
|
|
|
846 |
|
|
|
12,668 |
|
|
|
2,875 |
|
|
|
11 |
|
Structured securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities auto loans |
|
|
3,678 |
|
|
|
321 |
|
|
|
0 |
|
|
|
0 |
|
|
|
3,678 |
|
|
|
321 |
|
|
|
3 |
|
Collateralized debt obligations |
|
|
6,198 |
|
|
|
4,192 |
|
|
|
426 |
|
|
|
170 |
|
|
|
6,624 |
|
|
|
4,362 |
|
|
|
13 |
|
Commercial mortgage-backed |
|
|
2,064 |
|
|
|
396 |
|
|
|
1,198 |
|
|
|
88 |
|
|
|
3,262 |
|
|
|
484 |
|
|
|
4 |
|
Residential mortgage-backed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-government sponsored enterprises |
|
|
2,703 |
|
|
|
549 |
|
|
|
729 |
|
|
|
240 |
|
|
|
3,432 |
|
|
|
789 |
|
|
|
5 |
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
303,102 |
|
|
$ |
31,227 |
|
|
$ |
46,848 |
|
|
$ |
13,350 |
|
|
$ |
349,950 |
|
|
$ |
44,577 |
|
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. nonredeemable preferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
$ |
18,370 |
|
|
$ |
5,396 |
|
|
$ |
741 |
|
|
$ |
254 |
|
|
$ |
19,111 |
|
|
$ |
5,650 |
|
|
|
17 |
|
Non-financial |
|
|
10,538 |
|
|
|
1,286 |
|
|
|
5,708 |
|
|
|
984 |
|
|
|
16,246 |
|
|
|
2,270 |
|
|
|
9 |
|
Government sponsored enterprises |
|
|
15 |
|
|
|
1 |
|
|
|
0 |
|
|
|
0 |
|
|
|
15 |
|
|
|
1 |
|
|
|
1 |
|
Foreign nonredeemable preferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
1,073 |
|
|
|
57 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,073 |
|
|
|
57 |
|
|
|
1 |
|
Non-financial |
|
|
1,620 |
|
|
|
380 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,620 |
|
|
|
380 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
31,616 |
|
|
$ |
7,120 |
|
|
$ |
6,449 |
|
|
$ |
1,238 |
|
|
$ |
38,065 |
|
|
$ |
8,358 |
|
|
|
29 |
|
|
|
|
|
|
|
|
Quality breakdown of fixed maturities at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
No. of |
|
(dollars in thousands) |
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
value |
|
|
losses |
|
|
holdings |
|
Investment grade |
|
$ |
296,457 |
|
|
$ |
29,067 |
|
|
$ |
42,002 |
|
|
$ |
12,217 |
|
|
$ |
338,459 |
|
|
$ |
41,284 |
|
|
|
271 |
|
Non-investment grade |
|
|
6,645 |
|
|
|
2,160 |
|
|
|
4,846 |
|
|
|
1,133 |
|
|
|
11,491 |
|
|
|
3,293 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
303,102 |
|
|
$ |
31,227 |
|
|
$ |
46,848 |
|
|
$ |
13,350 |
|
|
$ |
349,950 |
|
|
$ |
44,577 |
|
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of expenses, was generated from the following portfolios for the years
ended December 31 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Fixed maturities |
|
$ |
36,030 |
|
|
$ |
35,806 |
|
|
$ |
42,547 |
|
Equity securities |
|
|
5,005 |
|
|
|
9,203 |
|
|
|
10,619 |
|
Cash equivalents and other |
|
|
1,219 |
|
|
|
1,687 |
|
|
|
2,002 |
|
|
|
|
|
|
|
|
|
|
|
Total investment income |
|
|
42,254 |
|
|
|
46,696 |
|
|
|
55,168 |
|
Less: investment expenses |
|
|
526 |
|
|
|
2,515 |
|
|
|
2,335 |
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of expenses |
|
$ |
41,728 |
|
|
$ |
44,181 |
|
|
$ |
52,833 |
|
|
|
|
|
|
|
|
|
|
|
74
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Investments (continued)
We adopted the fair value option for our common stock portfolio effective January 1, 2008 as it
better reflects the way we manage our common stock portfolio under a total return approach.
Dividend income is recognized as earned and recorded to net investment income.
The components of net realized losses and gains on investments as reported in the Consolidated
Statements of Operations are included below.
There were no sales of limited partnerships in 2009. We sold our interest in ten partnerships in
2008 and two partnerships in 2007 which generated net realized gains.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
$ |
4,724 |
|
|
$ |
2,507 |
|
|
$ |
2,301 |
|
Gross realized losses |
|
|
(3,589 |
) |
|
|
(4,466 |
) |
|
|
(746 |
) |
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) |
|
|
1,135 |
|
|
|
(1,959 |
) |
|
|
1,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
|
7,583 |
|
|
|
8,299 |
|
|
|
23,146 |
|
Gross realized losses |
|
|
(6,826 |
) |
|
|
(12,870 |
) |
|
|
(7,912 |
) |
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) |
|
|
757 |
|
|
|
(4,571 |
) |
|
|
15,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
|
2,300 |
|
|
|
11,921 |
|
|
|
0 |
|
Gross realized losses |
|
|
(4,696 |
) |
|
|
(28,804 |
) |
|
|
0 |
|
Valuation adjustments |
|
|
10,900 |
|
|
|
(21,730 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) |
|
|
8,504 |
|
|
|
(38,613 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partnerships |
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
|
0 |
|
|
|
3,541 |
|
|
|
538 |
|
Gross realized losses |
|
|
0 |
|
|
|
(1,913 |
) |
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
Net realized gains |
|
|
0 |
|
|
|
1,628 |
|
|
|
476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) on investments |
|
$ |
10,396 |
|
|
$ |
(43,515 |
) |
|
$ |
17,265 |
|
|
|
|
|
|
|
|
|
|
|
The components of other-than-temporary impairments on investments are included below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Fixed maturities |
|
$ |
(6,876 |
) |
|
$ |
(35,974 |
) |
|
$ |
(5,101 |
) |
Equity securities |
|
|
(5,183 |
) |
|
|
(33,530 |
) |
|
|
(17,356 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(12,059 |
) |
|
|
(69,504 |
) |
|
|
(22,457 |
) |
Portion recognized in other
comprehensive income |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses
recognized in earnings |
|
$ |
(12,059 |
) |
|
$ |
(69,504 |
) |
|
$ |
(22,457 |
) |
|
|
|
|
|
|
|
|
|
|
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
75
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Investments (continued)
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. See also Note 2.
Limited partnerships
Our limited partnership investments are recorded using the equity method of accounting as our
ownership interest is less than 50% in any limited partnership and 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 December 31, 2009 are comprised of general
partnership financial results for the fourth quarter of 2008 and the first, second, and third
quarters of 2009. Therefore, the volatility in market conditions experienced in these periods is
included in our 2009 results. Given the lag in reporting, our limited partnership results do not
reflect the market conditions of the fourth quarter of 2009. Private equity and mezzanine debt
sectors appear to be stabilizing; however, there may be additional deterioration in the real estate
sector. Such declines could be significant. Cash contributions made to and distributions received
from the partnerships are recorded in the period in which the transaction occurs.
Equity in losses from limited partnerships as reported in the Consolidated Statements of Operations
totaled $76.1 million in 2009 compared to earnings of $5.7 million and $59.7 million in 2008 and
2007, respectively.
We have provided summarized financial information in the following table for the years ended
December 31, 2009 and 2008. Amounts provided in the table are presented using the latest available
financial statements received from the partnerships.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded by Erie Indemnity Company |
(dollars in thousands) |
|
as of and for the year ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
Loss |
|
|
|
|
|
|
|
|
|
|
|
|
recognized |
|
|
|
|
|
|
|
|
|
|
|
|
due to valuation |
|
|
|
|
|
|
|
|
|
|
|
|
adjustments |
|
(Loss) |
Investment percentage in partnership |
|
Number of |
|
Asset |
|
by the |
|
income |
for Erie Indemnity Company |
|
partnerships |
|
recorded |
|
partnerships |
|
recorded |
|
Private equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
|
29 |
|
|
$ |
82,533 |
|
|
$ |
(10,828 |
) |
|
$ |
(982 |
) |
Greater than or equal to 10% but
less than 50% |
|
|
1 |
|
|
|
3,035 |
|
|
|
(226 |
) |
|
|
(507 |
) |
|
Total private equity |
|
|
30 |
|
|
|
85,568 |
|
|
|
(11,054 |
) |
|
|
(1,489 |
) |
Mezzanine debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
|
15 |
|
|
|
47,990 |
|
|
|
(5,470 |
) |
|
|
1,066 |
|
Greater than or equal to 10% but
less than 50% |
|
|
1 |
|
|
|
2,708 |
|
|
|
(1,122 |
) |
|
|
551 |
|
|
Total mezzanine debt |
|
|
16 |
|
|
|
50,698 |
|
|
|
(6,592 |
) |
|
|
1,617 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
|
24 |
|
|
|
89,436 |
|
|
|
(46,921 |
) |
|
|
(748 |
) |
Greater than or equal to 10% but
less than 50% |
|
|
4 |
|
|
|
9,278 |
|
|
|
(11,199 |
) |
|
|
278 |
|
|
Total real estate |
|
|
28 |
|
|
|
98,714 |
|
|
|
(58,120 |
) |
|
|
(470 |
) |
|
Total limited partnerships |
|
|
74 |
|
|
$ |
234,980 |
|
|
$ |
(75,766 |
) |
|
$ |
(342 |
) |
|
Per the limited partner financial statements, total partnership assets were $35.5 billion and
total partnership liabilities were $8.2 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 $5.0 billion and total partnership net loss was $0.5
billion.
76
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Investments (continued)
As these investments are generally reported on a one-quarter lag, our limited partnership results
through December 31, 2008 include the general partnership financial results for the fourth quarter
of 2007 and the first three quarters of 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded by Erie Indemnity Company |
(dollars in thousands) |
|
as of and for the year ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
(Loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
recognized |
|
|
|
|
|
|
|
|
|
|
|
|
due to |
|
|
|
|
|
|
|
|
|
|
|
|
valuation |
|
|
|
|
|
|
|
|
|
|
|
|
adjustments |
|
Income |
Investment percentage in partnership |
|
Number of |
|
Asset |
|
by the |
|
(loss) |
for Erie Indemnity Company |
|
partnerships |
|
recorded |
|
partnerships |
|
recorded |
|
Private equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
|
31 |
|
|
$ |
91,222 |
|
|
$ |
(4,668 |
) |
|
$ |
8,915 |
|
Greater than or equal to 10% but
less than 50% |
|
|
1 |
|
|
|
3,290 |
|
|
|
0 |
|
|
|
(434 |
) |
|
Total private equity |
|
|
32 |
|
|
|
94,512 |
|
|
|
(4,668 |
) |
|
|
8,481 |
|
Mezzanine debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
|
15 |
|
|
|
51,941 |
|
|
|
1,164 |
|
|
|
4,664 |
|
Greater than or equal to 10% but
less than 50% |
|
|
1 |
|
|
|
3,224 |
|
|
|
(717 |
) |
|
|
496 |
|
|
Total mezzanine debt |
|
|
16 |
|
|
|
55,165 |
|
|
|
447 |
|
|
|
5,160 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 10% |
|
|
24 |
|
|
|
127,349 |
|
|
|
(16,176 |
) |
|
|
11,224 |
|
Greater than or equal to 10% but
less than 50% |
|
|
5 |
|
|
|
22,150 |
|
|
|
(675 |
) |
|
|
1,917 |
|
|
Total real estate |
|
|
29 |
|
|
|
149,499 |
|
|
|
(16,851 |
) |
|
|
13,141 |
|
|
Total limited partnerships |