Erie Indemnity Q1 Net Up Slightly, Despite Operating Losses

Pennsylvania-based Erie Indemnity Company’s announcement of its first quarter results for 2003 contained both good and bad news.

While net income increased by 3.8 percent or $1.7 million to $45.9 million, up from $44.2 million at March 31, 2002, the company’s insurance underwriting operations recorded losses of $5.7 million during the period, compared to a $3.6 million loss in Q1 2002.

As a result, although Erie’s earnings per share rose from 62 cents in the first quarter of 2002 to 65 cents this year, the increase fell below analysts consensus estimates of 68 cents a share. While management fee revenue grew by 16.3 percent to $207.2 million, up from $178.3 million for the same period last year, total operating expenses increased by around 18 percent from $169.6 million in Q1 2002 to $205.2 million this year.

President and CEO Jeffrey Ludrof was nevertheless upbeat. “The Company is coming off a year of accelerated growth,” he stated. “Because of our strong retention ratio – 91.2 percent at March 31, 2003 – we continue to see healthy growth in direct written premium and, consequently, positive increases in management fee revenue.”

As a holding company, Erie’s management fee revenue is an important source of its income. The bulletin noted that growth from this source was “at a slower rate than the growth in direct written premiums in the first quarter of 2003 due to the action taken by the board of directors in December 2002 to reduce the management fee rate from 25 percent to 24 percent.”

It also noted that P/C “direct written premiums of the Erie Insurance Group, upon which management fee revenue is calculated totaled $865.2 million in the first quarter 2003, compared to $713.0 million in the first quarter 2002,” a 21.3 percent increase for Q1 2003, compared to 22.4 percent in Q1 2002.

The bulletin also indicated that “Direct written premium for the quarter was positively impacted by a 12.4 percent increase in policies in force and the effect of rate actions taken in 2001 and 2002. The average written premium per policy increased by 10.0 percent to $920, as compared to $836 at March 31, 2002. New written premium grew by 8.2 percent in the first quarter of 2003, a slower rate when compared to the same period in 2002. This was primarily due to the initial effects of ERIE’s underwriting profitability program and the December 2002 close of a major sales incentive contest.”

Erie said the operating losses were “due primarily to increases in catastrophe losses for the quarter, as well as other weather-related losses. These losses resulted in increased frequency in the private passenger automobile and homeowners lines of business in the first quarter 2003. The company’s share of catastrophe losses totaled $1.1 million and $0.5 million for the three-month periods ended March 31, 2003 and 2002, respectively. These losses include catastrophe losses previously reported by the company as a result of severe winter storms in February 2003 affecting many of the company’s operating territories.”