Erie Indemnity Reports Second Quarter 2016 Results

Investor Supplement

Earnings Up 9.2 percent, Net Income per Diluted Share Up 9.5 percent for the Quarter

ERIE, Pa., July 28, 2016 /PRNewswire/ -- Erie Indemnity Company (NASDAQ: ERIE) today announced financial results for the quarter ending June 30, 2016.  Net income was $61.3 million, or $1.17 per diluted share, in the second quarter of 2016, compared to $56.2 million, or $1.07 per diluted share, in the second quarter of 2015.  Net income was $107.2 million, or $2.04 per diluted share, in the first six months of 2016, compared to $95.0 million, or $1.81 per diluted share, in the first six months of 2015.  Revenue growth in both the second quarter and first six months of 2016 outpaced the growth in expenses.

"Prudent expense management helped Indemnity's revenue outpace expense growth once again this quarter, resulting in an uptick in operating margin and increased earnings per share," said Terry Cavanaugh, President and CEO.

2Q and First Half 2016

(dollars in thousands)

2Q'15

2Q'16


1H'15

1H'16


Net revenue from operations

$

69,983


$

85,759



$

122,413


$

153,424



Investment income

15,705


7,404



22,244


9,963



Income before income taxes

85,688


93,163



144,657


163,387



Income tax expense

29,538


31,854



49,674


56,183



Net income

$

56,150


$

61,309



$

94,983


$

107,204



Gross margin from operations

17.4

%

20.2

%


16.3

%

19.2

%


 

2Q 2016 Highlights

Net revenue from operations before taxes increased $15.8 million, or 22.5 percent, in the second quarter of 2016 compared to the second quarter of 2015.

  • Management fee revenue increased $22.4 million, or 5.7 percent, in the second quarter of 2016 compared to the second quarter of 2015.
  • Commissions increased $12.1 million in the second quarter of 2016 compared to the second quarter of 2015, primarily as a result of the 5.8 percent increase in direct and assumed premiums written by the Exchange.
  • Non-commission expense decreased $5.6 million in the second quarter of 2016 compared to the second quarter of 2015. Information technology costs decreased $4.9 million driven by decreased professional fees and personnel costs. Customer service costs decreased $1.0 million primarily due to decreased credit card processing fees. Personnel costs in all expense categories were impacted by decreased pension costs primarily due to an increase in the pension discount rate.
  • The gross margin in the second quarter of 2016 was 20.2 percent compared to 17.4 percent in the second quarter of 2015.

Income from investments before taxes totaled $7.4 million in the second quarter of 2016 compared to $15.7 million in the second quarter of 2015.  Earnings from limited partnerships were $2.1 million in the second quarter of 2016 compared to $10.7 million in the second quarter of 2015.

First Half 2016 Highlights

Net revenue from operations before taxes increased $31.0 million, or 25.3 percent, in the first six months of 2016 compared to the first six months 2015.

  • Management fee revenue increased $46.7 million, or 6.3 percent, in the first six months of 2016 compared to the first six months 2015.
  • Commissions increased $27.1 million in the first six months of 2016 compared to the first six months 2015, primarily as a result of the 6.4 percent increase in direct and assumed premiums written by the Exchange, while approximately one-quarter of the increase was due to higher agent incentive costs primarily related to profitable growth.
  • Non-commission expense decreased $12.0 million in the first six months of 2016 compared to the first six months 2015. Information technology costs decreased $9.6 million driven by decreased professional fees and personnel costs. Customer service costs decreased $1.0 million primarily due to decreased credit card processing fees. Administrative and other expenses decreased $2.3 million primarily due to decreased personnel costs. Personnel costs in all expense categories were impacted by decreased pension costs primarily due to an increase in the pension discount rate.
  • The gross margin in the first six months of 2016 was 19.2 percent compared to 16.3 percent in the first six months 2015.

Income from investments before taxes totaled $10.0 million in the first six months of 2016 compared to $22.2 million in the first six months 2015.  Earnings from limited partnerships were $1.4 million in the first six months of 2016 compared to $13.1 million in the first six months 2015.

Webcast Information

Indemnity has scheduled a conference call and live audio broadcast on the Web for 10:00 AM ET on July 29, 2016.  Investors may access the live audio broadcast by logging on to www.erieinsurance.com.  Indemnity recommends visiting the website at least 15 minutes prior to the Webcast to download and install any necessary software.  A Webcast audio replay will be available on the Investor Relations page of the Erie Insurance website by 12:30 PM ET.

Erie Insurance Group

According to A.M. Best Company, Erie Insurance Group, based in Erie, Pennsylvania, is the 10th largest homeowners insurer and 12th largest automobile insurer in the United States based on direct premiums written and the 16th largest property/casualty insurer in the United States based on total lines net premium written. The Group, rated A+ (Superior) by A.M. Best Company, has more than 5 million policies in force and operates in 12 states and the District of Columbia. Erie Insurance Group is a FORTUNE 500 company, a Barron's 500 company and has been recognized by Forbes as one of America's 50 Most Trustworthy Financial Companies.

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

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

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

  • dependence upon our relationship with the Erie Insurance Exchange ("Exchange") and the management fee under the agreement with the subscribers at the Exchange;
  • costs of providing services to the Exchange under the subscriber's agreement;
  • credit risk from the Exchange;
  • dependence upon our relationship with the Exchange and the growth of the Exchange, including:
    • general business and economic conditions;
    • factors affecting insurance industry competition;
    • dependence upon the independent agency system; and
    • ability to maintain our reputation for customer service;
  • dependence upon our relationship with the Exchange and the financial condition of the Exchange, including:
    • the Exchange's ability to maintain acceptable financial strength ratings;
    • factors affecting the quality and liquidity of the Exchange's investment portfolio;
    • changes in government regulation of the insurance industry;
    • emerging claims and coverage issues in the industry; and
    • severe weather conditions or other catastrophic losses, including terrorism;
  • ability to attract and retain talented management and employees;
  • ability to maintain uninterrupted business operations;
  • factors affecting the quality and liquidity of our investment portfolio;
  • our ability to meet liquidity needs and access capital; and
  • outcome of pending and potential litigation.

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

(ERIE-F)

 

Erie Indemnity Company 
Statements of Operations


(dollars in thousands, except per share data)


Three months ended June 30,


Six months ended June 30,




2016



2015


2016



2015




(Unaudited)


(Unaudited)


Operating revenue












Management fee revenue, net


$

416,665



$

394,224


$

784,123



$

737,458


Service agreement revenue


7,219



7,436


14,489



15,033


Total operating revenue


423,884



401,660


798,612



752,491














Operating expenses












Commissions


235,794



223,731


444,508



417,448


Salaries and employee benefits


55,025



57,354


108,314



112,373


All other operating expenses


47,306



50,592


92,366



100,257


Total operating expenses


338,125



331,677


645,188



630,078


Net revenue from operations


85,759



69,983


153,424



122,413














Investment income












Net investment income


4,891



4,435


9,553



8,976


Net realized investment gains (losses)


399



598


(689)



358


Net impairment losses recognized in earnings


0



(35)


(345)



(155)


Equity in earnings of limited partnerships


2,114



10,707


1,444



13,065


Total investment income


7,404



15,705


9,963



22,244


Income before income taxes


93,163



85,688


163,387



144,657


Income tax expense


31,854



29,538


56,183



49,674


Net income


$

61,309



$

56,150


$

107,204



$

94,983


























Earnings Per Share












Net income per share












Class A common stock – basic


$

1.32



$

1.21


$

2.30



$

2.04


Class A common stock – diluted


$

1.17



$

1.07


$

2.04



$

1.81


Class B common stock – basic


$

197



$

181


$

345



$

306


Class B common stock – diluted


$

197



$

180


$

345



$

305














Weighted average shares outstanding – Basic












Class A common stock


46,188,867



46,189,068


46,188,967



46,189,068


Class B common stock


2,542



2,542


2,542



2,542














Weighted average shares outstanding – Diluted












Class A common stock


52,392,862



52,562,514


52,458,394



52,598,633


Class B common stock


2,542



2,542


2,542



2,542














Dividends declared per share












Class A common stock


$

0.730



$

0.681


$

1.460



$

1.362


Class B common stock


$

109.500



$

102.150


$

219.000



$

204.300


 

Erie Indemnity Company 
Reconciliation of Operating Income to Net Income

Reconciliation of operating income to net income

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

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

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

The following table reconciles operating income and net income:



Three months ended June 30,



Six months ended June 30,


(in thousands, except per share data)


2016


2015



2016



2015




(Unaudited)



(Unaudited)


Operating income


$

61,049



$

55,784



$

107,876



$

94,851


Net realized gains (losses) and impairments on investments


399



563



(1,034)



203


Income tax (expense) benefit


(139)



(197)



362



(71)


Realized gains (losses) and impairments, net of income taxes


260



366



(672)



132


Net income


$

61,309



$

56,150



$

107,204



$

94,983















Per Class A common share-diluted:













Operating income


$

1.17



$

1.07



$

2.05



$

1.81


Net realized gains (losses) and impairments on investments


0.00



0.00



(0.02)



0.00


Income tax (expense) benefit


0.00



0.00



0.01



0.00


Realized gains (losses) and impairments, net of income taxes


0.00



0.00



(0.01)



0.00


Net income


$

1.17



$

1.07



$

2.04



$

1.81


 

 

 

Erie Indemnity Company 
Statements of Financial Position 
(in thousands)




June 30, 2016



December 31, 2015




(Unaudited)





Assets







Current assets:







Cash and cash equivalents


$

124,111



$

182,889


Available-for-sale securities


46,087



62,067


Trading securities


496




Receivables from Erie Insurance Exchange and affiliates


387,273



348,055


Prepaid expenses and other current assets


33,885



24,697


Federal income taxes recoverable


0



11,947


Accrued investment income


5,816



5,491


Total current assets


597,668



635,146









Available-for-sale securities


607,548



537,874


Limited partnership investments


70,952



88,535


Fixed assets, net


58,986



59,087


Deferred income taxes, net


35,780



40,686


Note receivable from Erie Family Life Insurance Company


25,000



25,000


Other assets


18,892



20,968


Total assets


$

1,414,826



$

1,407,296









Liabilities and shareholders' equity







Current liabilities:







Commissions payable


$

217,203



$

195,542


Agent bonuses


58,235



106,752


Accounts payable and accrued liabilities


90,856



88,532


Dividends payable


33,996



33,996


Deferred executive compensation


13,252



20,877


Federal income taxes payable


1,960



0


Total current liabilities


415,502



445,699









Defined benefit pension plans


170,619



172,700


Employee benefit obligations


910



1,234


Deferred executive compensation


12,461



16,580


Other long-term liabilities


140



1,580


Total liabilities


599,632



637,793









Shareholders' equity


815,194



769,503


Total liabilities and shareholders' equity


$

1,414,826



$

1,407,296




CONTACT: Scott Beilharz, Investor Relations, 1-800-458-0811 ext. 7312, or 814/870-7312, scott.beilharz@erieinsurance.com

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