“The Company is coming off a year of accelerated growth,” says Jeffrey A. Ludrof, president and CEO. “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.”
Details of First Quarter 2003 Results
Management fee revenue increased by 16.3 percent to $207.2 million for the quarter ended March 31, 2003, compared to $178.3 million for the same period one year ago. Management fee revenue grew 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.
The property and casualty 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. This represents growth rates of 21.3 percent in the first quarter of 2003, compared to 22.4 percent in the first quarter of 2002. 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.
Nonaffiliated assumed voluntary reinsurance premiums of Erie Insurance Exchange, upon which the Company receives a 6.0 percent service fee, totaled $1.9 million in the first quarter of 2003, down 38.3 percent from the $3.1 million recorded in the first quarter 2002. The decrease resulted from a combination of lower voluntary assumed premiums, due to non-renewal of unprofitable business, and the board’s action to reduce the service fee from 7.0 percent in 2002 to 6.0 percent for 2003.
The cost of management operations increased 19.9 percent to $154.4 million in the first quarter of 2003, from $128.8 million for the same period in 2002. Commission costs, which were impacted by the growth in policies and premium, increased 22.8 percent to $110.9 million, from $90.3 million in the first quarter 2002. First quarter costs of management operations, excluding commissions, increased 12.9 percent to $43.4 million in 2003 from $38.5 million in 2002.
Insurance underwriting operations
The Company’s insurance underwriting operations recorded losses of $5.7 million and $3.6 million in the first quarters of 2003 and 2002, respectively. This was 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.
Included in the Company’s policy acquisition and other underwriting expenses is the property and casualty insurance subsidiaries’ share of software development costs related to the eCommerce initiative. Costs associated with the eCommerce initiative totaled $0.8 million and $1.0 million for the first quarters of 2003 and 2002, respectively. These costs will continue to be incurred as the program develops through 2004.
Net revenue from investment operations for the first quarter of 2003 reflects an increase of 15.5 percent to $14.8 million, compared to $12.8 million for the same period in 2002. Net investment income increased by 12.7 percent to $14.3 million for the quarter ended March 31, 2003, from $12.7 million for the same period in 2002.
Net realized gains on investments of $0.6 million were recorded during the first quarter of 2003 compared to net realized gains of $1.2 million for the first quarter of 2002. The decrease in realized gains on investments was affected by impairment charges of $6.0 million recorded during the first quarter 2003; no impairment charges were recorded in the first quarter of 2002.
Equity in losses of limited partnerships was $1.3 million and $1.9 million for the first quarters of 2003 and 2002, respectively. Private equity and fixed income limited partnerships incurred realized losses of $1.7 million and $2.9 million in the first quarters of 2003 and 2002, respectively. Real estate limited partnerships reflected earnings of $0.4 million for the quarter ended March 31, 2003, compared to earnings of $1.0 million for the same period in 2002.
The Company’s earnings from its 21.6 percent equity ownership of EFL increased to $1.2 million for the first quarter of 2003 from $0.8 million in the first quarter 2002.
Erie Indemnity Company provides management services to the member companies of the Erie Insurance Group, which includes the Erie Insurance Exchange, Flagship City Insurance Company, Erie Insurance Company, Erie Insurance Property and Casualty Company, Erie Insurance Company of New York and Erie Family Life Insurance Company.
According to A.M. Best Company, Erie Insurance Group, based in Erie, Pennsylvania, is the 17th largest automobile insurer in the United States based on direct premiums written and the 25th 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 3.5 million policies in force and operates in 11 states and the District of Columbia. Erie Insurance Group ranked 454 on the FORTUNE 500.
News releases and more information about Erie Insurance Group are available at http://www.erieinsurance.com
“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995: Certain forward-looking statements contained herein involve risks and uncertainties. These statements include certain discussions relating to management fee revenue, cost of management operations, underwriting, premium and investment income volume, business strategies, profitability and business relationships and the Company’s other business activities during 2003 and beyond. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expect," "plan," "intend," "anticipate," "believe," "estimate," "project," "predict," "potential" and similar expressions. These forward-looking statements reflect the Company’s current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that may cause results to differ materially from those anticipated in those statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict.