Erie Indemnity Co (ERIE) 2003 Q1 法說會逐字稿

Hello and welcome to the Erie Indemnity Company's First Quarter Earnings Conference. At the request of Erie Indemnity this conference is being recorded for replay purposes. At this time all participants are in a listen-only mode. Following prepared remarks from management, we will open the call for questions and answers. Now I'd like to introduce your host for today's conference call, Karen Kraus Phillips, Assistant Vice President and Manager of Corporate Communications and Investor Relations.

Thank you Lisa and good morning. We appreciate all of you joining us. On today's call, management will discuss our first quarter 2003 results. Joining me are Jeff Ludrof, President and CEO, Executive Vice President and Chief Financial Officer Phil Garcia and Jan Van Gorder, Senior Executive Vice President and General Counsel.

Prepared remarks will be relatively short today. Following those remarks we will open the call for questions. We ask that you please keep to one question and a followup. We issued our earnings release and additional supplements yesterday afternoon. If you need a copy of the press release or any of the exhibits you can find these in the investor section of our Web site at erieinsurance.com. We also filed form 10-Q with the SEC.

Before I turn the call over to our CEO, Jeff Ludrof, I'd also like to extend an invitation to all of you to join us for the annual meeting of shareholders on Tuesday, April 29th at 3 p.m., here at Erie's headquarters here in Erie, PA.

On today's call, management of Erie Indemnity Company will share important information about current and future initiatives being undertaken at the company. As a result, certain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 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. Many of the factors that will determine future events or achievements are beyond our ability to control or predict. For information on important factors that may cause such differences, please see the Safe Harbor statement in our latest 10-Q filing with the SEC dated April 24th, 2003, 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 party without the prior consent of Erie Indemnity Company. A replay will be available on our Web site today after 12:30 p.m. Eastern time. Your participation on the call will constitute consent to the recording, publication, Web cast, broadcast and the use of your name, voice and comments by Erie Indemnity. If you do not agree with these terms, please disconnect.

Thank you. I'd now like to turn the call over to Erie's President and CEO, Jeff Ludrof.

Thank you, Karen, and good morning everyone.

Before I have Phil Garcia review the Company's first quarter financial results, I'd like to share some key observations about our Company's performance in the first quarter. Let me start by saying we had an extremely busy and challenging first quarter. Our results were affected by the conclusion of our year long sales incentive contest in 2002. We launched several initiatives to affect our underwriting results and we were hit by a series of repeated snowstorms affecting many of our underwriting territories well beyond what could be classified as catastrophe losses. Given our renewal business and rate increases, our direct written premiums continued to be strong which had a corresponding effect on management revenue. All of these dynamics plus the positive results from our investment operations contributed to a net income increase of 3.8 percent and a net income per share of 65 cents, compared 62 cents a year earlier.

As I stated on our year-end earnings call, with the backdrop of a very strong growth rates in 2002 and a need to affect our underwriting results, our focus for 2003 is on improved underwriting profitability. During the first quarter we launched several initiatives to impact our underwriting results and I'm pleased to say that these are already showing some promise. While the results aren't quantifiable as yet, anecdotally we know that agents and employees understand the Company's focus on underwriting profitability and are taking action. This multifaceted approach includes managing exposure growth, honing our risk selection approach, controlling our loss severity and taking rate increases where warranted. The goals of these initiatives are to improve the Company's underwriting profitability by reemphasizing Erie's underwriting and re-underwriting fundamentals and to focus employees and agents on agency performance matters. During the first quarter we took this message out to all of our agents and underwriting employees through the Aware program, which is an acronym for Agents Writing And Re-underwriting Excellence. The idea here is to concentrate on quality growth and write only the most desirable risk. As expected, this focus on underwriting profitability is having an affect on our rate of premium growth. In the first quarter of this year, our growth rate has begun to level off from the very strong growth we were experiencing over the last several quarters. At this point, we have not seen a material impact on the growth in our policies in force due to our renewal rate, but we have experienced a slower rate of growth in new business in the first quarter.

As noted in the press release, policies in force were up 12.4 percent for the twelve months ended March 31, 2003. This compares to the 12.8 percent for the period ending December 31, 2002. In the first quarter our new policy production moderated. New business premium grew by 8.2 percent, compared to 38.7 percent in the fourth quarter of 2002. As I've stated, we believe this is due primarily to our focus on underwriting profitability and the after effects of our 2002 yearlong sales incentive contest.

Obviously the underwriting profitability initiatives we put in place in the first quarter will take time to realize lasting results. And unfortunately, due to catastrophe and higher non-catastrophe weather-related losses, our underwriting results in the first quarter for the Property Casualty Group were not favorable.

In March we announced catastrophe losses incurred from the winter snowstorms that affected much of the East Coast. This totaled $19.1 million for the Property and Casualty Group, resulting in a 1.1 million pretax underwriting loss for the Indemnity Company. As a result of non-catastrophe weather-related events, we also experienced increased frequency in the private passenger automobile and homeowners lines of business. Prior to this quarter, we were experiencing a downward trend in claims frequency.

Another key factor affecting underwriting profitability is our ability to obtain additional rate in this hard market. This year we anticipate about $210 million in additional premium from rate increases. Direct written premium in the first quarter continued to grow due to pricing actions that we've already realized in the first quarter 2003, as well as more appropriate rating classification on policies. At March 31, 2003, direct written premium was up by 21.3 percent compared to the first quarter of 2002. This premium growth translates into increased management fee revenue for the Erie Indemnity Company. As you are aware, the board of directors reduced the management fee for 2003 from 25 percent to 24 percent, yet management fee revenues still saw a notable increase of 16.3 percent for the quarter.

Our performance in the first quarter is reflective of our focus on improving underwriting profitability. Unfortunately, the long, hard winter in the Northeast and Mid-Atlantic regions produced above normal losses, and an underwriting result that is disappointing. Erie's culture is such that, when you tell agents and employees what needs to be done, they do it. We're asking agents to write the most desirable risk, and to re-underwrite their current book of business. That is precisely what they are doing. We're feeling affects in the short-term that in the long-term will result in greater levels of underwriting profitability.

Before I turn the call over to Phil, I'd like to briefly address decision to lower the rating of Erie's Property Casualty Group from the A++ Superior to A+ Superior. While we would have liked to retain our A++, the A+ Superior rating is reflective of our continued very strong financial condition. We continue to be included in highest rating category, and counted among the top 10 percent of property casualty companies and groups in the United States for financial strength.

One question I'm sure you have is, how will this affect our business? Candidly, I don't believe it will. First of all, we remain in the highest financial strength category. Secondly, most policy holders and prospects don't give much consideration to A.M. Best ratings.

The announcement ranking Erie 454th on the Fortune 500 list will likely have more impact with customers. Undoubtedly, some competitors will use these ratings to sway policyholders and prospects. But again, we're in a good position. We continue to be in A.M. Best's highest rating category, superior.

Now, having said that, we certainly want to retain high ratings from A.M. Best and balance that goal with our operational objectives. Achieving the results from our underwriting profitability initiatives such as the Aware Program will help us strike that balance.

Phil, I'd like to turn the call over to you to review our financial results for the first quarter.

Thanks, Jeff and good morning everyone.

As Jeff indicated, our first quarter 2003 results were affected by a number of variables. Continued strong premium growth, but slower new written premium growth with the corresponding effects and our management fee revenue.

Lower levels of assumed reinsurance premium written due to the cancellation of some unprofitable treaties with corresponding lower service agreement revenue. Increased underwriting losses from our insurance underwriting segment and strong growth in net investment income.

For the first quarter 2003, net income increased 3.8 percent to $45.9 million or 65 cents per share compared to $44.2 million for the first quarter of 2002. Net income, excluding the effects of realized capital gains and the income taxes on those gains, rose 4.9 percent for the quarter to $45.5 million up from $43.4 million for the same quarter in 2002.

As I review the management operations, you can refer to the exhibit labeled consolidated statement of operations segment basis, which was included in the supplemental data included with the press release.

First, I'd to discuss our performance in our management operations segment. Management fee revenue grew by 16.3 percent to $207.2 million for the first quarter compared to $178.3 million or 22.4 percent in the first quarter of 2002.

Management fee revenue grew at slower rate in the first quarter of 2003 than the increase in premiums written due to the action of our Board of Directors to reduce the fee rate from 25 percent to 24 percent.

Direct written premium in the first quarter grew by 21.3 percent totaling $865.2 million compared to $713 million a year earlier. This growth rate was driven primarily by year over year policies in force growth of 12.4 percent and a 10 percent year over year increase in average premium per policy.

The 12.4 percent increase in policies resulted primarily from our continued high retention ratio of 91.2 percent at March 31, 2003. Policies in force totaled 3.6 million at March 31st, 2003 compared to 3.2 million at March 31, 2002.

As Jeff mentioned, with the end of the 2002 agents sales incentive contest and the rollout of the Aware Program, new policy written premium growth has slowed from the strong rates we saw in 2002.

Also contributing to the slower new policy premium growth is the late start of our traditional spring branch sales contest. In previous years these contests were launched during the first quarter of the year but this year these contests will be run in the second quarter. As a result of these factors, written premium growth on new policies was 8.2 percent overall with personal lines growing at 12.2 percent and commercial lines growth up 2.1 percent for the three months ended March 31, 2003, versus the same period in the prior year.

In the fourth quarter 2002, written premium growth on new policies was 38.7 percent overall with personal lines growing at 32 percent and commercial lines growth at 33.3 percent versus the fourth quarter of 2001.

We were also effected by our reduction in service fee income on voluntary assumed reinsurance premiums written by the exchange, which were down 38.3 percent to 1.9 million dollars in the first quarter 2003 compared to 3.1 million dollars in the first quarter 2002. The decrease resulted from a combination of lower voluntary assumed written premiums due do the cancellation of unprofitable treaties and a reduction in the service fee rate of 7 percent in 2002 to 6 percent in 2003.

Voluntary assumed reinsurance premiums decreased 28 percent to 32.4 million dollars in the first quarter of 2003, from 35 million dollars in the first quarter of 2002.

The cost of management operations increased by 19.9 percent in the first quarter to 154.4 million dollars from 128.8 million dollars for the same period in 2002. The largest component of this increase is commission costs, which rose 22.8 percent to 110.9 million dollars in the first quarter 2003 compared to 90.3 million dollars in the first quarter of 2002.

Commissions grew slightly faster than premium due to the slightly higher mix of commercial business written and continued payment of accelerated commissions to new agencies. Other operating expenses, excluding commissions, increased by 12.9 percent to 43.4 million dollars, compared to 38.5 million dollars a year earlier.

Personnel costs, including salaries and wages, employee benefits and payroll taxes, which encompass the largest component of our other operating expenses were 25.3 million dollars, an increase of 11 percent over last years' first quarter. Included in employee benefit costs are the costs of the company's share of retirement costs, which increased about 500 thousand dollars in the quarter compared to the first quarter of 2002, due to lower asset return and discount interest rate assumptions.

The gross margin from management operations was 27.8 percent for the first quarter. If the management fee and the service fees had been at the same rates as last year, the gross margin would have been 30.7 percent at the end of the first quarter 2003, compared to 38.6 percent in the first quarter of 2002.

Next, I'd like to discuss our insurance underwriting segment. The Erie Indemnity Company retains a 5.5 percent share of the underwriting results to the Property/Casualty Group. In the first quarter, Erie Indemnity recorded underwriting losses of $5.7 million, compared to $3.6 million at March 31st, 2002. As Jeff mentioned, the increased underwriting losses were primarily the result of previously reported catastrophe losses during the quarter and weather related non-catastrophe losses in the private passenger automobile line, which experienced higher claims frequencies. Automobile bodily injury claims rose 22 percent for the quarter, which translated into a 9.2 percent increase in bodily injury frequency. Automobile physical damage claims rose 24 percent for the quarter, which translated into a 12.2 percent increase in physical damage frequency. Our automobile frequency trends have been favorable over the last several years which leads us to believe the frequency results we're observing in the first quarter are weather driven.

Also included in our insurance underwriting results is the Company's share of the cost of a preliminary settlement in the Class Action lawsuit on after-market parts filed against us in February 2000, in Philadelphia County, Pennsylvania. During the first quarter of 2003 we reached an Agreement in Principle to settle the litigation for $6.25 million, the Company's share being $344 thousand. The settlement would result in the dismissal of all claims nationwide against the Erie related to this matter.

Our investment operations during the first quarter recorded income of $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 first quarter, from $12.7 million at March 31, 2002. The Company realized gains on investments of .6 million, compared to net realized gains of 1.2 million a year earlier. The Company recorded realized gains of 7.7 million for the quarter, which were offset by $7.1 million in realized losses and impairment charges on investments for the quarter.

The Company also recorded equity and losses from limited partnerships in the first quarter 2003 of $1.3 million, compared to losses of $1.9 million in the first quarter 2002. Impairment charges of $1.2 million were recorded on private equity limited partnerships in both the first quarter of 2003 and the first quarter of 2002. The Company's earnings from its 21.6 percent equity ownership of Erie Family Life Insurance Company increased to $1.2 million in the first quarter of 2003, from $.8 million for the first quarter of 2002. We issued a separate press release yesterday summarizing the results of Erie Family Life's first quarter.

Now I'd like to turn the call back over to Karen.

Thank you, Phil. That concludes our prepared remarks. Lisa, if you could now open the call for questions from our phone audience.

Thank you, ma'am. Today's question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit 1, on your touchtone telephone. If you are on a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that is star, 1, to ask a question.

We'll go first to Adam Klauber with Cochran, Caronia.

Good morning, everyone.

Good morning.

Good morning, Adam, how are you?

Very good. A significant portion of your growth has been driven by expansion of the agency force and also movement into new states. Could you talk about your plans on both fronts, as far as how much you plan on extending the agency force this year, and how is the growth going in some of the newer states?

Adam, this is Jeff. Our plans for 2003 involve a fewer number of new agents, compared to the prior three years when our new agency appointments exceeded 200, reaching as high as, I believe, 242 several years ago. In the year 2003, we expect to add approximately 130 agents, with many of them coming in our newest territories, Illinois and Wisconsin. We have some targeted areas of our existing states where we see opportunities to expand further. Western Tennessee, as an example, still holds a lot of territory for us. As you're aware, in 2004, at the end of the year, we will enter the state of Minnesota, and so we'll have expansion opportunities there as well.

OK. Thank you. Also, could you talk about going forward, growth of non-commission related expenses. Do you think the level will be similar to what we saw in this quarter?

Well, the biggest component of non-commission expenses is personnel costs, and as I mentioned on the prepared remarks, they were up 11 percent. Yeah, I think that is a reasonable target.

Ok. And finally, would you venture a guess on what limited partnership income will look like for the rest of the year?

As I mentioned in the call, we did record another $1.3 million loss on limited partnerships for the quarter. That's kind of been a recurring theme over the last few quarters. As we review our limited partnerships and we sit here today on the balance sheet day, it doesn't look like we're going to have any impairments going out into the future, but we've thought that on prior quarters. What happens is, our GPs will send us updated quarterly information as each quarter progresses, and what they've been showing us, what the numbers are showing us every quarter when they report are deterioration in the results.

So, I really can't give you any guidance on that, Adam. You know, these limited partnerships tend to lag the public markets. So, when the public markets deteriorated in 2000, 2001, we didn't see much effect on the limiteds, and now we are. So, as the markets improve, there will be a lag effect. So, I'm not giving you much guidance, but that's about all I can tell you.

OK. Thank you very much, Bill.

Our next question comes from Matthew Roswell with Legg Mason.

Yes. Good morning, gentlemen. First, could I get some background on the accelerated commission payments to agents? Are those related to contingencies or something else? And then I have a follow up question.

Yes. The accelerated payments are really paid to new scratch agents that we appoint. We give them bonus commissions in the first three years they're appointed with us, really to help them get started. And so, after three years, they go back to a normal commission schedule. And the reason those expenses have accelerated is, we've appointed a lot of new agents in the last few years.

OK. So, with the lower number of new agents this year looking out two or three years, that should start pulling in a little bit?

Yes, yes. You saw in the queue, if you read it, our accelerated commission expense was $2.6 million for the quarter ...

Right.

About a half a million more than the same quarter prior year. As Jeff mentioned, we're going to be appointing fewer agents this year. Each year that goes by, more will drop off and obviously the numbers we're adding are lesser than the ones we have in prior years.

OK. On a different topic -- now that it looks like the surplus at the Exchange is starting to stabilize, any thoughts of share repurchases, dividend increases? Anything like that?

Matthew, those are topics we continue to talk about with our Board of Directors. It's one of the several capital management tools that we have available to us.

There have been no decisions made at this point in time to pursue that repurchase program, but we have done that in the past, as you know, purchasing over $100 million in share repurchase. And I expect our Board to continue to talk about that possibility along with other alternatives.

OK. Thank you very much.

We'll go to with CP&E Partners.

Hey, Jeff. Hey, Phil.

Hi, , how are you?

Good. Can you quantify on the exchange level how much you think the severe winter cost us?

Well, we know that catastrophes added up to $19.1 million. And our loss ratio is much higher than we expected. Off the top of my head I don't think I could really give you a number.

The $19.1 million -- that was on the exchange level?

Yes. The group level.

OK.

Exchange gets 94.5 percent of that number. Catastrophe's.

What's your definition of catastrophe? Is it just one storm or a collection of storms?

Well, our definition of catastrophe would be a concentration of claims, you know, during a 72 hour period. We've had, you know, continuous events, particularly the President's Day storm. And then several days after that a subsequent snow storm that effected much of the East Coast.

You know, what's difficult to quantify about the catastrophe as well as just weather related events is the prolonged severe winter that we've experienced. Here in Erie, Pennsylvania we had snow yesterday. And we had snow in November.

And so, unfortunately, winter tends to add up to six months out of the year. Because of the prolonged winter conditions throughout much of the Mid-Atlantic states, we had -- as Phil pointed out -- increased frequency in our collision as well as our bodily injury claims.

Many of these were caused by arguably the poor road conditions. It's difficult for us to quantify when a vehicle slides into another vehicle, you know, is it truly a weather related event or is it operator caused?

Did you guys mention what your agent retention ratio was? I know what your customer retention ratio was.

We didn't mention that. And we have a very high retention. I don't have the exact number in front of me, but we go through a thorough process every year of review our agency force. We call it Agency Review. And in that process what we're primarily focused on is looking for ways to enhance the overall performance of our agency plan. We, throughout that process, do find a few agents that will no longer continue to do business with us, but on a population of nearly 1800 agencies, we're talking about a number of terminations that numbers in the small double digits, 10-12.

And, on the exchange level, level, the equity portion of your investment portfolio, would you happen to have a look-through TE on that -- on what you think the estimates for 2003 and 2004. You know how Buffett has a look-though TE for his core holdings.

Yes.

You guys have that?

we do have that but I don't have it with me today.

OK, thanks. In the future do you think you can report that? Either in the quarter release, I mean I know it's just a pure estimate but it gives, it helps us the shareholders understand the true potential value of the company.

Sure.

OK, last question, I just got the proxy yesterday and I just want to review long term growth... Can you give us what -- It gave a list of growth, like EPS growth, all very fine and good -- could you tell us what are the greatest or how you decided the greatest ? Are the consistent or do they change depending on what the compensation committee thinks is most important for that year?

Are you talking about the incentives plan, ?

That's correct, the long term incentive plans.

Oh, the long term incentive plan. The long term incentive plan?

Right, what's the greatest weighting in terms of -- was it -- there's like six qualifications in there. Is there one at greater weighting than the other or their all just basically...

Well it's based upon the calculation of the award is based upon the growth and retained earnings of Erie Indemnity Company compared to a target established by the compensation committee and board of directors.

When was that target established for 2003?

It was just established in March.

OK, is there any way you could make that public?

Sure. It's 19.6 percent. It's a three year annual compound growth rate in the retained earnings for Erie Indemnity Company.

any share buyback or dividend?

Correct.

OK, thank you.

We adjust for share buyback and it doesn't include dividends.

Great, thank you.

We'll go to Charles Gates with Credit Suisse First Boston.

Hey, good morning, gentleman.

Hi, Charlie.

Good morning.

I thought that my notification wasn't right, that is I hadn't adequately... I guess the first question I have... well, can you hear me all right?

Yes, Charlie.

OK, ff I look at the growth in what you call group direct premiums written. Up 21.3 percent for the quarter. And I know that you spoke to various factors, including the fact that you had taken rate you hid. The sales contest that is occuring later this year is typical, I think the third thing you made reference to was: What is the anachronism? It's something like "AWARE" or...

AWARE

AWARE

AWARE

A-W-A-R-E

And that stands for Agents Writing and Reunderwriting Excellence. It gives the agents focus on Underwriting discipline.

Here's the question. Could you speak to how you would foresee sales growth might evolve as we continue into 2003.

Charlie, I would say that with the focus on the Aware program, the agents focusing their attention on writing the best of the best, the most desirable business, combined with our efforts to focus on overall agency performance, re-underwriting their book of business, that we would expect to see slower growth. Certainly the growth is still very healthy; we're coming off growth that was very significant and we expect that growth is going to be at a slower pace, but involve higher quality. And that's been the focus of the attention both with the Aware program and the other initiatives that I mentioned.

gates By more modest growth do you think perhaps growth in group premiums written in the 15 percent area might be a good guesstimate?

We're not giving any guidance...

OK.

... early on what the growth number will be, but we will continue to report our retention ratios and, you know, growth in policies by line of business so that you can kind of see what's happening and extrapolate it out and make a reasoned guess.

You said that the plan was to write the best of the best. I thought you guys already wrote the best of the best, though.

Well, that's always been our emphasis, Charlie, but I think it's fair to say as you're appointing a number of new agents, as we have, as you're expanding the existing agencies that we have by adding additional producers, you have more people controlling the underwriting decisions for the Erie. And this recommitment to the best of the best, going back to some of the fundamentals to make sure that anyone that's wavered from those is brought back into fold, so it's a recommitment to the fundamentals that have driven the results for our Company for now over 78 years.

If I'm an agent for the Erie, how does my payout work? Do I get a contingent commission based on the profitability of my book?

Absolutely. The agents earn a base commission based on written--actually based on collected premiums, but they also have an opportunity to earn additional commissions based on producing profitable business. It's a three year profitability.

In the three years, so it takes into account the development of losses over time?

Yes, it does.

Over three years.

Thank you, guys.

And Charlie, remember that we also have $210 million in programmed rate increases for 2003...

Yes, sir.

... you want to also factor in.

The last question I'll ask and then I'll let somebody else, is it correct to say that your strategy from a growth standpoint has historically been to, and maybe I'm going to get this wrong, allow other companies to raise rates first. That causes some towing of their books of business as the better driver looks for a better home. And then at some point later, you elect to raise rates. Is that a fair comment?

Well, I think at times that comment is true, but I wouldn't say that that's the guiding principle. What we try to do is take steady rate changes. And what that enables us to do is not be as reactive as some of the other competitors. We'll take a little bit of rate up or down on a regular basis, as needed. It's allowed for a steady, as-we-grow approach that doesn't shock our policyholders.

Oftentimes we see the competition taking larger swings. And so, it would appear that we're allowing them to get out in front of us, when it's part of our consistent approach to take a little bit all the time instead of a big amount once in a while.

Thank you.

Thank you.

Next is with AdBest.

Hi. Thank you. Good morning. I just have a couple of questions. On the losses that were experienced by the Property Casualty Group, what, did the combined ratio that gets reported at the Indemnity Company, it is impacted by a reinsurance agreement between the two parties, right?

Right.

So, what would have been the combined ratio of the Property Casualty Group so it takes out the impact of that reinsurance agreement?

The combined ratio of our Property Casualty Group for the first quarter, our combined Property Casualty Group Companies, the five companies, was 113.2. Now, that's a statutory combined ratio, not a GAAP. Remember that our, Erie Indemnity Company, we GAAP our combined ratio. What I mean by that is, expenses and losses are compared to earned premiums in a GAAP-combined ratio. And the stat-combined ratio, the expenses are compared to written. So, it was 113.2.

If you GAAP that, you're going to get a higher number. And then what you're going to do is subtract the effect, in our case in the first quarter you're going to subtract from your Indemnity Company's result from its combined ratio, the effect of the Aggregate Excessive Loss Reinsurance Agreement between the companies, because there was a recovery of $2 million during the quarter under that agreement. So, I hope I didn't lose everybody with that explanation.

Well, that, when you subtract that aggregate of loss, $2 million, what does that equate to in terms of fine ratio?

Well, if you take the earned premium for the quarter and take $2 million over the earned premium for the quarter, and that's how much it amounts to. I can quickly do that calculation.

Now, based, and I know you already got asked this question about how much did the additional, we know what the cap losses were, but the additional losses you believe were related to weather, do you know, and the increased frequency, you can't really quantify exactly how much.

It's very hard to quantify what the very severe, prolonged cold weather, other than the catastrophes did to our results.

OK. So, I guess my last question on this subject is, what are, even though you can't really quantify that, was the first quarter, is that a satisfactory combined ratio on the Property business, Property Casualty Group, even taking in, let's take into account the catastrophic and the weather-related and exclude those somehow. Were you satisfied with the level of loss that you incurred on the Property Casualty Group?

Well, obviously it's, as we pointed out in our prepared comments, that it was not a good underwriting result for us. Now, we lost, on the combined Property Casualty companies we lost $126 million. You can see that in the condensed financial information in the Q for the exchange. Actually, the exchange is a litle less than that, 'cause it's 94.5 percent. You know, so if you take 19 million off of that -- you really can't exclude all the catastrophes, though. Because we normally have a couple of points of catastrophes in a normal underwriting year.

It's just -- you're just going to have it every year. So, it was not a good quarter. We're thinking that it's related to the weather and we're hopeful that the rest of the year if the weather improves that we'll have a lot better underwriting results.

Now -- I'm sorry. Go ahead. Did you want to ask another question?

Oh, just -- yes, sorry. I was just thinking -- you all have been successful in getting rate increases in your book of business. In some cases double-digit. It would appear to be a pretty favorable result.

Are those, with the experience you've had, do you believe your rates are now at the right level or will you be seeking more rate increases as we go through 2003? And do you believe you'll be able to get those rate increases in the current market conditions?

Well, the answer is different for every line of business and every territory. But in general, we feel that we're getting the rate that we need to be profitable on a current basis.

OK. And one last question. Another one of your peer companies reported that they had had issues or development in their worker's comp and they write small commercial in regions that overlap with your own.

Did you see any development in your own worker's comp books that was different from what you anticipated?

No. No, we didn't experience any unusual severity or frequency trends in the first quarter in worker's comp.

OK, thank you.

Our next question comes from Ira Malis with Legg Mason.

Hi, Ira.

Hi, guys. I have a couple of questions for a surprise regarding capital.

The first one is could you give us a little more detail on the Life Company? What percent of that company do you all own now? What percent does the Exchange own? What does the public own? And you know, do you ever consider as a use of capital to take in the rest of that company? Can you just tell us what the thinking is on that?

The Exchange owns 52.3 percent and the Erie Indemnity Company owns 21.6 percent. And we do consider some strategic issues with Erie Family Life from time to time and we do discuss them with our Board, but at this time we're not ready to announce anything.

OK. Secondly -- and this is going to be a rambling question. I'm going to apologize in advance. I imagine you've had a Board meeting recently -- sometime between -- in the last few months.

And the Board most likely saw a higher level of excess capital at the public company. Kind of a stabilization of the Exchange surplus and a clarity in the A.M. Best rating. And that being said, as you -- I guess you've mentioned -- stock repurchase was discussed, but nothing was done.

I guess my question is, are we as, you know, we as shareholders believe that the Boards are going to act kind of rationally in the long-term interest to shareholders. Are we really ever going to see anything done with 900 million or whatever the number is of excess capital?

Or are we just kind of in a situation where we're likely to see this, you know, whether it's disagreements at the Board level or whatever, just continue to see this excess capital continue to build? I mean, is there -- should we expect to really see something done? I guess that's my -- I'm boiling it down.

Well, Ira, let me say that, you know, as I mentioned, there's been nothing decided specifically at this time. We did have a Board meeting at the beginning of March and we do periodically talk about the alternative uses of capital. At our March board meeting we had not yet received our rating from the organization, that came subsequent. We will continue talk about it. What we will do, I can't say that, I'm one member of the board. I think our past performance in utilizing a repurchase program should give you some indication that we have favored that tool in the past and therefore are not opposed to such a program.

OK. Are there parts, presently parts of the board that have something inherently against the notion or just we're kind of waiting and getting more information like we -- like you described, we now have the best rating we didn't have before.

I wouldn't describe that there are parts of the board, members of the board that are adamantly opposed by any means to repurchase.

OK, great. OK, well thank you for your candor, I appreciate it.

We'll go next to Dave Sheusi with JP Morgan.

Good morning, everyone.

Morning.

Morning, David.

A couple quick question drilling down on the frequency side. Phil do you have the numbers of how that compares to the prior quarter and last year?

I don't have it broken down here by bodily injury and physical damage, which is the numbers I gave you.

Right.

I mean, I have our private passenger auto trends which I haven't gone back 8 quarters. Frequency trends. And they've been flat to modestly down the last 8 quarters. So we have a trend here which I think the rest of the industry is experiencing in auto. And some of our competitors have even announced that they had increased favorable frequency continuing in the first quarter of this year. So I think the overall trend, the underlying trend here is improved frequency in the auto business, modestly improving frequency in the auto business, and we saw a sharp departure from that in the first quarter.

Right, it sounds like it's an aberration as you guys work through some of the underwriting initiatives going forward. What -- can you give us a sense in terms of your goals in terms of the timing of improvement, just say, over the next several years. How should we see this trend from current levels?

Well, as Jeff mentioned, I think it's going to take time, I mean, we're working with our agents, as he said on new business, submitting the best new business to our company and re-underwriting their book of business. Re-underwriting their book of business doesn't necessarily mean just canceling people, it means getting the right rate for the right risk. Looking at the rating classes on our auto book and the distribution of rating classes and making sure we're rating people correctly for the risk they present to us. So, some of those re-underwriting initiatives aren't just culling the book.

They are getting increased premiums. So all of those initiatives are important and I think they're going to take time. I don't think you're going to see our combined ratio last year was -- our reported combined was 118 for our property/casualty group. You're not going to see that drop to 100 during the year. It's just going to be -- we're hopeful that we will have several points of improvement in that normalized loss ratio. Now, in the 118 last year was some other unusual items, as you know. We had six points of adverse development of prior year losses in that 118, so in our year results we're trying to improve them a point and a half to two points a year.

Great. Thanks, that's helpful.

We have a follow-up question from Charles Gates with Credit Suisse First Boston.

Actually I have two. My first question, is there a difference in the profitability of your agency plan between, say Pennsylvania and Maryland and other states?

Well, the difference in profitability from agent to agent and from state to state has to deal with the distribution of the business that they write. Now generally speaking, the agents in Pennsylvania and Maryland, as an example, have a similar distribution, but it does vary, you know, depending on agents that have maybe a larger writing of commercial lines versus personal lines. There are some coverages that are specific to a given state that have different break even ratios associated with that coverage line and what rate the state has allowed us to acquire for that line of business. So there are some variations.

Thank you. That was my only question.

And we have a follow up question from James with CP&E Partners.

Hi. Just a question; we all know that you have great claims service. I guess I was a little surprised that we didn't get more operating leverage of the personnel line. given that your premiums grew--the number of policies grew by 12 percent year-over-year and we had to increase our expenses by 11 percent, in the long run do you think that that's how it's going to be, you know, that we'll--whatever we--whatever our increase in policies are, that's how much our increase in personnel costs are, or do you think we'll get leverage out of that soon or within a reasonable...

We still--we are still experience productivity improvement in our workforce. You know we pointed out this half million dollar additional expense in the quarter from the retirement plans to let you know that that item's included in there and is affecting the result because that's merely a, you know, a FAS 87 adjustment recognizing the fact that we have adopted a lower discount rate on our retirement plan and lower return on assets in our retirement plan.

Right.

So we are continuing to experience productivity increases. Now what I mean by that is--which we compare every month, what I mean by that is our policy count is growing faster than our employee count. That's how you measure it.

OK. So, I mean, are the number of employees up 11 percent year-over-year?

Off the top of my head I don't have that number.

OK. Well what do you think the bulk of the 11 percent was? I mean, maybe a couple of points for inflation and half a million for this retirement plan?

Yes, and we had some other expense items in the quarter related to things, like on our commercial lines of business we incurred a couple hundred thousand dollars of postage costs related to this terrorism bill; we had to mail out a packet of information to every one of our commercial policyholders, for instance, during the quarter.

OK.

We had some expenses related to the rollout of this Aware program; we visited every one of our branches and talked to every one of our agencies.

OK.

You know, so there's always that--those types of items in the other expenses other than commissions.

OK. Just another follow up question to the competition. You know, I think 19.6 is a very reasonable goal on an absolute level, but what I don't understand, and I guess, Jeff, if you can get your, I'd like your comment on this since you're a member of the board, but this is a question for all the board members. Why shouldn't this be more challenging, given the fact that you are not capital insensitive, but the fact that the bulk of your profits are basically an agency management type of situation, which requires zero capital? Why shouldn't we, as partners/shareholder, demand a much higher target?

Well, I think it's important to look at it over time. This number is up from where it was just a few years ago. It was 19.6 for the prior performance period, and this is 19.6 over the next three years, during a period of time where we're focusing on these underwriting initiatives to try and bring more quality to the book. I can tell you that our executive compensation and development committee at the board level is very actively involved in driving that process and will continue to evaluate all the metrics used. And they will continue to serve all of the shareholders in making sure that there's nothing in the way of a layup associated with those targets that are established.

OK. Thanks.

At this time we have no more questions in our Q. I'd like to turn the call back over to Karen Krauss Phillips for any additional or closing remarks.

Well, thank you all. Obviously that concludes the call. Again, a recording of the call will be posted on our Web site, erieinsurance.com, after 12:30 this afternoon. As a reminder to you, the annual meeting is scheduled for Tuesday, April 29th at 3:00 in the afternoon here at our Erie headquarters in Erie, Pennsylvania. And if you have any questions at all, please give me a call at 814-870-4665. Thank you again, and have a good day.

That concludes today's conference call. We thank you for your participation. You may disconnect your line at this time.