Business context and reporting period
Erie Indemnity Company filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. Indemnity acts as attorney-in-fact for the Erie Insurance Exchange, which owns and operates the property-and-casualty and life insurance businesses. The consolidated statements include the Exchange; its results are largely attributable to policyholders as noncontrolling interest, not to Indemnity shareholders.
Financial performance and position
Amounts below are in millions except per-share data and ratios.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total consolidated revenues | $1,346 | $1,426 | $4,583 | $4,535 |
| Consolidated net income | $33 | $108 | $366 | $320 |
| Net income attributable to Indemnity | $50 | $47 | $145 | $142 |
| Indemnity diluted Class A EPS | $0.94 | $0.90 | $2.75 | $2.71 |
| Net cash from operating activities | — | $663 | $549 |
- Insurance growth and underwriting: Property and casualty earned premiums rose 8.5% in Q3 and 8.7% year to date. Underwriting income was $115 in Q3 versus $38, and $120 year to date versus a $249 loss. The combined ratio improved to 92.1% from 97.1% in Q3, and to 97.1% from 106.3% year to date.
- Investment results: Consolidated net investment income was $120 in Q3 and $360 year to date, up from $115 and $335. Net realized investment losses were $292 in Q3 and $243 year to date, compared with losses of $85 and gains of $104 in the prior-year periods. The 2015 losses were primarily due to declines in fair value of Exchange common-stock trading holdings.
- Cash and balance sheet: At September 30, total assets were $18,115, total liabilities $9,990, and total equity $8,125. Indemnity shareholder equity was $750; Exchange noncontrolling interest was $7,375. Cash and cash equivalents were $618, and total investments were $14,650.
- Debt and liquidity: Neither Indemnity nor the Exchange had credit-line borrowings at quarter end. Indemnity had $98 available on its $100 revolving facility; the Exchange had $299 available on its $300 facility. Both facilities were amended after quarter end; the Exchange facility was increased to $400 and both maturities extended to 2020.
- Shareholder returns: Nine-month dividends paid were $95, versus $89 in 2014. Dividends declared per Class A share were $2.043 for the first nine months.
Changes versus the prior comparable period
- Q3 consolidated net income fell to $33 from $108, chiefly reflecting larger investment losses. The Exchange recorded a $17 net loss attributable to noncontrolling interest in Q3 2015, versus $61 of income in Q3 2014; Indemnity-attributable income nevertheless increased to $50 from $47.
- Year-to-date consolidated net income increased to $366 from $320, while Indemnity-attributable income rose to $145 from $142. Improved P&C underwriting was partly offset by investment operations’ shift from gains to losses.
- Management fee revenue increased 7.5% in Q3 and 7.6% year to date, reflecting P&C premium growth; the fee rate remained at its 25% maximum. Indemnity management-operations gross margin was 17.2% in Q3 versus 16.5%, but 16.6% year to date versus 17.5%, with higher agent incentive costs weighing on the year-to-date margin.
- Year-to-date catastrophe losses declined to $214 from $388, while favorable prior-year reserve development increased to $100 from $53. Q3 catastrophe losses rose to $77 from $51.
Outlook, risks and unusual items
- Management described plans to continue growing premiums through existing territories, agency expansion, and market penetration, while maintaining underwriting discipline. The filing provides no quantified earnings or premium guidance and cautions that nine-month results are not necessarily indicative of full-year results.
- Management said operating cash needs are expected to be met from operations and that liquidity is believed sufficient for 2015, including under continued market volatility. Investment-market volatility and limited liquidity in some fixed maturities and limited partnerships could affect asset values or access to cash.
- ASU 2015-02 is expected to result in retrospective deconsolidation of the Exchange in the 2015 Form 10-K, materially changing reported assets, liabilities, revenues, expenses and presentation. Management said net income and equity attributable to Indemnity shareholders would be unchanged.
- Limited partnership investment commitments totaled up to $547, including $20 for Indemnity and $527 for the Exchange. Loss reserves, particularly lifetime medical and massive-injury claims, depend on estimates and can vary with inflation, claims experience, legal changes and other factors.
- Legal matters include the Sullivan policyholder lawsuit alleging retention of approximately $308 in service charges; the Pennsylvania Insurance Department found the challenged practices compliant, but plaintiffs appealed. EFL’s West Virginia unclaimed-property case returned to the trial court after the state supreme court ruled for the Treasurer. An ongoing multijurisdictional unclaimed-property audit may lead to additional claims, escheatment and possible fines; the potential loss cannot currently be reasonably estimated.
- The filing reports no material off-balance-sheet obligations or guarantees other than limited partnership commitments. Indemnity reported no material change in risk factors from its prior Form 10-K.
Investor facts to verify
- Whether the Q3 investment losses reflect temporary market-value changes or persistent weakness in the Exchange’s equity portfolio, and how they affect policyholder surplus and ratings.
- How sustainable the improved underwriting results are, given catastrophe experience, favorable reserve development, and slower new-business growth in some lines.
- The reserve adequacy for long-tail and massive-injury claims, and the impact of medical, repair-cost and other inflation.
- The consequences and timing of retrospective Exchange deconsolidation under ASU 2015-02 for reported financial statements and comparability.
- Developments in the service-charge litigation, unclaimed-property audit and West Virginia case, including any estimable financial exposure.