Erie Indemnity Company ( ERIE)

Q2 2011 Earnings Call

August 3, 2011 10:00 am ET

Executives

Karen Kraus Phillips – Vice President and Director, Investor Relations

Terrence W. Cavanaugh – President and Chief Executive Officer

Marcia A. Dall – Executive Vice President and Chief Financial Officer

Analysts

Bill Broomall – Macquarie Research Equities

Presentation

Operator

Hello and welcome to the Erie Indemnity Company Second Quarter 2011 Earnings Conference. I’d like to introduce to your host for today’s conference call Karen Kraus Phillips, Vice President of Investor Relations.

Karen Kraus Phillips

Thank you, Alley and good morning everyone. We appreciate all of you joining us. On today’s call, management will discuss our second quarter 2011 results and other matters. Joining me are Terry Cavanaugh, President and CEO; Marcia Dall, Executive Vice President and Chief Financial Officer; Chip Dufala, Executive Vice President, Services; John Kearns, Executive Vice President, Sales and Marketing; Jim Tanous, Executive Vice President, Secretary and General Counsel; and Mike Zavasky, Executive Vice President, Insurance Operations.

Our earnings release and financial supplements are issued yesterday afternoon and it’s been posted to our website erieinsurance.com. As a reminder, Indemnity’s second quarter 2011 results do not include the results of the property and casualty insurance operations or life operations that result to the Exchange. However the direct written premium produced by the Exchange’s property and casualty operations is a primary driver of Indemnity’s financial results and therefore (inaudible) to our discussion.

On today’s call, management will share important information about current and future company initiatives, as a result forward-looking statements may be incorporated into their comments. These forward-looking statements reflect the company’s current views about future events and are based on assumptions subject to known and unknown risks and uncertainties. These risks and uncertainties may cause results to differ materially from those anticipated as described in those statements.

For information on important factors that may cause such difference, please see the Safe Harbor statements in our latest 10-Q filing with the SEC dated August 2, 2011 and in the related press release. This call is being recorded and the recording is the property of Erie Indemnity Company. It is not intended for reproduction or rebroadcast by any other parties without the prior written consent of Erie Indemnity Company. A replay will be available on our website today after 12:30 p.m. eastern time. Your participation on this call will constitute consents to the recording, publication, webcast, broadcast and use of your name, voice and comments by Erie Indemnity, if you do not agree with these terms, please disconnect at this time.

I'll now turn the call over to Erie’s President and CEO Terry Cavanaugh. Terry?

Terrence W. Cavanaugh

Good morning and thanks for joining us. Today I’ll provide some context around our second quarter performance and then turn the call over to Marcia for a high level financial review.

As we talked before on prior calls, Erie is focused on five key business strength that we believe creates strong performance in our property and casualty, and life and annuity business, understanding our target customers, supporting the success of our independent agencies, developing our internal talent, improving process and technology, and ensuring the strength of our balance sheet.

The progress we’re making on all fronts thus far in 2011 is encouraging and continues to produce sound results. Indemnity finished the second quarter 2011 with net income per share of $0.94; net operating income was $0.87 per share. For the first six months of 2011, net income per share was $1.72.

Total revenue from management operations for the second quarter 2011 was up almost 5% driven by a 5.3% increase in direct written premium of the Exchange’s property and casualty group. Modest rate increases and our strong retention rate now 90.8% contributed to this result.

Although policy enforced increases were modest in the second quarter, written premium for both our personal and commercial lines was up again. Higher retention and increases in average premium per policy drove this result. As a reminder, Indemnity sold its P&C subsidiaries to the Exchange at the end of 2010. However, I would like to comment on the P&C Group’s combined ratio result for the second quarter, even though the underwriting results of the P&C Group have no effect on Indemnity’s financial results.

Beginning late in the first quarter and continuing through the second quarter, the Exchange’s operating territories experienced six severe weather events. For the second quarter of 2011, the Exchange’s combined ratio totaled 140 and included 52 points or $537 million of catastrophe losses.

During the first half of 2011, we saw a significant number of catastrophe claims. And in times like these, Erie’s above on service reputation is put to the test. And in true Erie fashion, our agents and employees continue to deliver. I’m proud and grateful for the committed and compassionate way our Erie team has responded.

Despite the more significant levels of catastrophe losses, the Exchange surplus grew by $80 million in the first half to more than $5.1 billion. A few items to note before I turn the call over to Marcia. As you recall, Indemnity sold its minority share Erie Family Life to the Exchange at the end of the first quarter 2011.

While no longer directly contributing to Indemnity’s results, our life business remains an important component of our product offerings.

Erie Family Life performed well in the second quarter and the first half of 2011. We refreshed our term product and pricing strategies to more effectively compete in the life market and to continue to meet the needs of our customers.

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