Erie Indemnity Co (ERIE) 2004 Q1 法說會逐字稿

Hello, and welcome to the Erie Indemnity Company first-quarter 2004 earnings conference call. At the request of Erie Indemnity, this conference is being recorded for instant replay purposes. At this time all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). Now I'd like to introduce your host for today's conference, Karen Kraus Phillips, Vice President and Manager of Corporate Communications and Investor Relations. Please go ahead.

We appreciate all of you joining us today. On today's call, management will discuss our first-quarter 2004 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. Today's prepared marks will be approximately 30 minutes. Following those remarks, we will open the call for questions. We ask that you please keep to one question and a follow-up.

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 Website, at Erieinsurance.com. We also filed Form 10-Q with the SEC.

On today's call, the 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 Private Securities Litigation Reform Act of 1995 may be incorporated into our 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 22, 2004 and the related press release and 8-K.

In this call, we will discuss some non-GAAP measures. You can find a reconciliation of those measures to GAAP measures in the press release and in the supplement posted on our investor Website at Erieinsurance.com. This call is being recorded and a 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 Website today after 12;30 PM Eastern time. Your participation on the call will constitute consent 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.

Before I turn the call over to Jeff, I'd also like to invite you to join us at the Company's annual shareholder meeting on Tuesday, April 27 at 2 PM Eastern time at our headquarters in Erie, Pennsylvania. And now Erie's President and CEO, Jeff Ludrof. Jeff?

Thank you, Karen. Good morning, everyone, and thank you for joining us on today's call. Today I will talk about our accomplishments during the first quarter, including our improved underwriting profitability. As the release indicates, Erie Indemnity Company had a solid first quarter, with net income up by 8 percent to 70 cents per share. Net income excluding net realized gains or losses on investments and related income taxes was up by 4.8 percent to 67 cents per share. We've made considerable progress on our goal of improved underwriting profitability. For the first quarter 2004, the group's reported statutory combined ratio is 100.2 percent, a significant improvement over the 113.2 percent we recorded in the same period last year. Erie Indemnity company finished the first quarter with a recorded GAAP combined ratio of 102.9. These results for the Property and Casualty Group, combined with our long-term approach to doing business, has again earned us the A+ superior rating with a stable outlook from AM Best. This rating continues to place the Property and Casualty affiliates of the Erie Group among the top 10 percent of approximately 300, or rather 3,000 property casualty insurers. AM Best cited many positive reasons for its action, including the group's strong, risk-adjusted capitalization and modest premium leverage, its relationship to Erie Indemnity Company, our strong market presence, relationships with our independent agencies and our reputation for excellent customer service. AM Best also referenced our improved underwriting experience in 2003 and related this result to our comprehensive plan to address underwriting profitability. Also during the quarter, Erie Insurance Group was again named to the Fortune 500, earning number 368 on the list.

Our plan to improve underwriting profitability continues in 2004. You may recall the plan consists of four key elements, improving risk selection, managing exposure growth, maintaining appropriate pricing and controlling loss severity. We designed a plan to fit Erie's unique corporate culture and to support our defined business model. It involves continued use of our front-line underwriting approach and leverages the relationships we've established. The numbers bear out the plan's effectiveness. And I have no doubt our achievements are directly related to the strong commitment Erie employees and agents have to our plan and to our Company's long-term success.

We said we'd improve underwriting profitability and we have done it. Last February, we launched the AWARE program, Agents Writing and Re-underwriting Excellence, and by February 2004, we saw positive results. But we're not finished yet. As we adjust our book of business to ensure we have only the most desirable risk, we are experiencing other predictable results. Our retention ratio fell below 90 percent to 89.8, all lines. Our largest and most competitive line of business, Private Passenger Auto, still carries a retention ratio of 91.2 percent. Also expected is a continued slowdown in new business. As of March 31, 2004, the year-over-year growth rate for policies in force was 4.7 percent, down from 6.7 at December 31, 2003.

So where are we going from here? We will continue to focus on underwriting profitability in 2004 and not abandon the progress we're making. We will continue to manage our expenses wisely, conserving when it's prudent and devoting resources when it's in the Company's best interest. We'll grow the business profitably, just as we are doing now to achieve growth targets over the long-term. Our objective is smart growth, profitable growth. And we're working closely with our agents to seek input on our plans to meet that objective. Right now, we're full swing into our annual dinner meeting season. This involves production contests in nine of our 18 branch offices. In the third quarter, our other nine branches will have their dinner meeting production contests. We've begun deployment of Erie Connection, our new agent interface system. We continue our efforts to gain a license in Minnesota. And in our existing states, we are recruiting new agencies again. Our peak performance plan introduced last year has put us on the path to improved results. With the full commitment of our employees and agents, we are working together and gaining momentum. Now, I will turn it over to Phil to talk more about our financial results.

Thanks, Jeff, and good morning, everybody. As Jeff remarked, we achieved some significant milestones during the first quarter of 2004, particularly relating to underwriting probability. In the fourth quarter of 2003, and again in the first quarter of 2004, we've seen marked improvement in the property and casualty group's underwriting results as reflected in our statutory combined ratio. For the quarter, we recorded a 100.2 statutory combined ratio, an achievement that all of our employees and agents can be extremely proud of. Adjusting for the profit component paid to the Erie indemnity Company the statutory combined ratio in the first quarter 2004 was 94.6. These results are evidence of the tremendous team effort that positions the Erie to move forward and to grow profitably.

For the first quarter 2004, net income increased by 8 percent to $49.6 million or 70 cents per share compared to $45.9 million or 65 cents per share for the first quarter 2003. Net income, excluding the effects of net realized capital gains and income taxes on those gains rose 4.8 percent for the quarter to $47.7 million or 67 cents per share, up from $45.5 million or 64 cents per share for the same quarter in 2003. Net income for the quarter was reduced about 2 cents per share as a result of our change in the allowance for returned management fees, due to higher mid-term policy cancellation trends. As I review the management operations, you can refer to the exhibit Consolidated Statement of Operations Segment Basis, which was included in the supplemental data issued with the press release.

First, I'd like to discuss the performance in our management operations segment. Management fee revenue grew by 7.1 percent to $221.9 million for the first quarter 2004 compared to $207.2 million in the first quarter of 2003. Management fee revenue grew at a slower rate in the first quarter 2004 for two primary reasons. The reduction of the fee rate in 2004 and the reduced volume of the direct premiums written by the property casualty group. The management fee rate was reduced from 24 percent to 23.5 percent as of January 1, 2004. This 0.5 percent reduction in management fee represents 4.8 million less in revenue or a reduction in net income of 4 cents per share. If the management fee rates were equal for the comparable periods, the management fee revenue would have grown by 9.4 percent during the first quarter 2004.

Direct written premium of the Property and Casualty Group in the first quarter 2004 grew by 11 percent, totaling $960.7 million compared to $865.2 million a year earlier. Year-over-year policies in force growth was 4.7 percent, a slower rate than the 6.7 percent at the end of December 2003. The year-over-year increase in average premium per policy was 8.9 percent to $1,002 from $920 for the 12 months ended March 31, 2003. In addition, as Jeff mentioned, our year-over-year policy retention ratio declined from 90.2 percent at December 31, 2003 to 89.8 at March 31, 2004. The lower retention rate is an expected result of our effort to improve underwriting profitability.

Another consequence of our focus on underwriting profitability is the continued decline in new policy premium. For the quarter, new written premium decreased by 30.1 percent overall from the high levels of new policy premium written in the first quarter of 2003. Personal lines new written premium decreased by 20.9 percent, while commercial lines new written premium decreased by 45.6 percent for the three months ended March 31, 2004 versus the same period in the prior year. As we've indicated previously, the direction is in line with the steps we've taken to mitigate exposure grow and refine our risk selection.

The rating actions we've taken have continued to partially offset the impact on premium volume related to these anticipated declines in new unit growth. However, we have modified our rate change projections for 2004 from $320.3 million in additional written premium we estimated at December 31, 2003 to $308.3 million estimate today. This decrease in projected rate change is due to improved experience as well as competitive factors. As I mentioned earlier, management fee revenue was also affected by an increase in the allowance for returned management fees, which increased by $3.9 million during the quarter. This was partially offset by a reduction in commission expense of $2 million, which represents an estimate for commissions that will not be incurred due to mid-term policy cancellations.

Service agreement revenue decreased for the first quarter 2004 to $5.6 million from $6.5 million during the first quarter of 2003. Included in service agreement revenue is the service fee income received from the Erie Insurance Exchange's compensation for the management and administration of voluntary assumed reinsurance from nonaffiliated insurers. These fees decreased substantially during the first quarter of 2004 due to our winding down of the assumed reinsurance business. For that reason, the reduction in service fee income on voluntary assumed reinsurance premiums written by the Exchange was down 62.3 percent to $700,000 in the first quarter 2004 from $1.9 million in the first quarter 2003. Voluntary assumed reinsurance premiums decreased to $12.2 million in the first quarter of 2004 from 32.4 million in the first quarter of 2003. These premiums are expected to taper off by the end of the second quarter as the remaining treaties expire.

Also included in the service agreement revenue are service charges the Company collects from policyholders for providing extended payment plans on policies. The service charge revenue for the first quarter 2004 was $4.9 million compared to revenue of $4.5 million for the same quarter a year earlier, up 7.2 percent. The cost of management operations increased by 10.9 percent for the first quarter 2004 to $171.2 million from $154.4 million for the same period in 2003. Commissions paid to our independent agency force account for the majority of these costs. Commission costs totaled $122.9 million for the first quarter of 2004, a 10.8 percent increase over the $110.9 million recorded for the first quarter 2003. This was driven primarily by the 11 percent increase in direct written premiums that I referenced earlier and increased charges for agency contingency bonuses for the quarter. During the third quarter of 2003, we announced changes in our agency contingency bonus plan that went into effect January 1, 2004. This bonus plan was re-designed to insent quality growth and reward truly profitable agencies. The expense for agency contingency bonuses increased in the quarter to $7.8 million from $5.4 million in the first quarter of 2003. Other operating expenses, excluding commissions, increased by 11.2 percent to $48.3 million compared to $43.5 million a year earlier.

Personnel costs, including salaries and wages, employee benefits and payroll taxes, which encompass the largest component of other operating expenses, increased 17.6 percent to $29.8 million for the first quarter of 2004 compared to $25.3 million for the same period in 2003. The increase in personnel costs was driven by salary and wage growth of 15.6 percent as well as a 29.3 percent increase in employee benefit expenses. Attributing to the salary and wage growth were increases to staffing levels as well as increases in the average rates paid to employees from a year ago. The Company continues to take a longer-term view of investments in its human resources. Contributing to the employee benefit cost increase was higher employee retirement benefits resulting from lower planned asset returns and discount interest rate assumptions. In the first quarter of 2004, pension plan costs increased to $2.4 million from $1.5 million in the first quarter of 2003. We expect pension plan costs to be about $750,000 higher per quarter in 2004 than in 2003.

The gross margin from management operations was 24.7 percent for the first quarter. If the management fee were consistent with last year's rate, the gross margins would have been 26.3 percent at the end of the first quarter 2004 compared to 27.8 percent in the first quarter of 2003. We plan for a gross margin of about 25 percent in the first quarter 2004 at the 23.5 percent management fee rate. Because of the seasonality in our revenues, we are expecting margins in the 25 to 27 percent range for the remaining quarters of 2004.

The story for the quarter is truly the remarkable improvement in our underwriting results. And while Jeff and I have already provided some highlights, I'd like to offer more details on the Insurance Underwriting segment. As you know, the Erie Indemnity Company's Property and Casualty Insurance subsidiaries retain a 5.5 percent share of the underwriting results of the Property Casualty Group. I'd like to discuss these positive statutory underwriting results further with you for a moment. These lines of business combined ratios are reported results and, therefore, include the profit component of the management fee paid to Erie Indemnity Company. As we said previously, the reported statutory combined ratio for the Group was 102.2 percent for the first quarter 2004. Our catastrophe experience during the quarter was light, adding only 0.8 percent to the statutory combined ratio. For the quarter, the Property and Casualty Group's personal lines had a direct statutory combined ratio of 100.3 percent. The group's commercial lines showed significant improvement in the quarter with a direct statutory combined ratio of 95.7 percent.

Drilling down further into our Group's personal lines, direct homeowners' business produced a statutory combined ratio of 84.4 percent, a remarkable turnaround from combined ratios in 2002 and 2003 that were clearly of concern. In our Group's commercial lines, we saw marked improvement in workers' compensation, producing a direct statutory combined ratio of 109.8 compared to 122.4 in the comparable period a year earlier. Commercial automobile came in at 88.8 percent and commercial multi-peril produced a 91.4 percent statutory combined ratio.

As Jeff said, Erie Indemnity Company's reported GAAP combined ratio for the first quarter was 102.9 compared to a combined ratio of 112.6 during the same period in 2003. In total, Erie Indemnity Company recorded underwriting losses on a net basis of $1.5 million in the first quarter of 2004 compared to losses of $5.7 million for the first quarter of 2003.

Investment operations reported income of $19.4 million for the first quarter compared to $14.8 million for the same period in 2003, an increase of 31.3 percent. The increase was driven by net realized gains of $2.9 million in the first quarter of 2004, which reflected no impairment charges, compared to net realized gains of $0.6 million in the first quarter of 2003 that included $6 million of impairment charges. Net investment income increased by 2.6 percent to $14.7 million for the first quarter 2004 from $14.3 million for the first quarter of 2003. The Company also recorded equity and earnings from limited partnerships in the first quarter 2004 of $.04 million compared to losses of $1.3 million in the first quarter 2003.

Our capital management strategy and dividend program demonstrated our commitment to shareholders during the quarter. Erie Indemnity Company repurchased 139,059 shares during the first quarter 2004 at an average cost of $45.61 for a total outlay of $6.3 million. Also during the first quarter, we paid nearly $14 million in dividends to our shareholders. As a result, share repurchases and shareholder dividends represented about 45 percent of the cash flow from the Company's operations for the quarter.

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

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

(OPERATOR INSTRUCTIONS). Beth Malone, Advest.

I just have a couple of questions this morning. First, could you talk a little bit about -- I understand the combined ratio certainly was improved. Some of that was better catastrophe or weather-related. Could you just talk a little bit, quantify, if you take out better weather, the improvement -- is it directly -- can you directly quantify it to your underwriting strategy that you deployed? Or is some of that pricing, as well?

It's Phil. Well, certainly, frequency, we had very positive frequency during the quarter and we had normal severity. So -- and we also had very good improvement in average premium per policy. So what you had was -- obviously, we had a very low cap quarter, very good weather during the quarter, decreased frequency, with good increases in average premium. And that's what's resulting in the good underwriting result for the quarter.

So would you -- I guess the assumption is this is going to continue?

Well, the frequency trends we are experiencing during the quarter are the same frequency trends we've experienced for the last four or five quarters. So frequency -- I think you've heard in listening to some of the other calls, some of the other companies report that frequency trends in the industry are very good. We hope that continues. And we hope catastrophe losses are low. But what we have is we have an improvement -- when you look at the improvement in frequency and the severity, the modest severity increases we are experiencing, you are seeing improvement in our pure premium. And we are adding a lot of premium to the mix. So when that happens, our underwriting results are improving, and in the quarter they improved quite dramatically because of the low cap numbers.

Fine, thank you. Next question -- on the personnel costs and expenses, is there any -- it sounds like that's getting to be a larger component of your expenses. Should we anticipate that that continues? Are you going to continue to invest in that relative to total revenues? Or should we anticipate that that levels off and starts to decline with this growth in the topline?

Well, what's happening is our unit growth is falling pretty quickly, as you can see from the numbers. Our employment growth has not moved down that quickly. We have slowed our employment growth, but we do continue to make investments in several key areas, particularly in claims and in information technology. So what is happening is our unit growth has fallen faster than our ability to slow the growth in personnel. And we are adding some key people in some areas. So our goal for operating -- other operating expense growth is about 10 percent for the year.

Okay.

That's our target growth.

Okay, fine.

Of course wages and salaries is the largest component of other operating expenses other than commissions.

Okay. Just a couple more quick questions. On the investment portfolio, now that you've changed your management of the fund, what kind of -- what focus are you making, going forward. Will you continue to be very heavily weighted in equity in the Property Casualty or are there going to be changes to that mix of equity? What can we anticipate?

Well, you're talking about the exchange's portfolio?

Yes.

As you know at year-end, we pretty much changed the mix, the common stock mix in the portfolio. We took the common stocks down quite a bit, about over $1 billion. And we have not changed that mix since we did that in the fourth quarter of 2003. The mix is still the same. Our new managers only have one quarter of results under their belt. And they have been deploying the cash we gave them early in the first quarter. So their results are just starting to come in on the cash we've given them to invest.

Okay. And just two more quick questions. On the private placement, it finally turned positive -- profitable.

Yes.

Is that more market conditions that have benefited that? Or should we anticipate that -- or have you made changes in the investment there that also helped results?

The investment mix really hasn't changed. We are seeing improved economic conditions and improvement in the capital markets. And those things all bode well for the limited portfolio -- limited partnership portfolio. So I think it's not a change in the portfolio. It's a change in, you know, economic activity and the capital markets.

Okay. And one final question on the Life Insurance Company, which you have a minority interest. That continues to show pretty good results. Is that also just due to market conditions and the more attractive yields you're getting on that portfolio?

Well, it's really a result of some good underwriting trends, some good mortality trends in our life insurance business, that we've just experienced recently. And the second thing is, our spreads have widened a little bit on the business. We haven't been that aggressive in taking up our credited rates. So our spreads are good on the interest sensitive contracts we have and our mortality results have been good.

Patrick O'Brien, Alex Brown Investment Management.

It looks like a pretty good quarter, but can you give me some help on what the -- call it involuntary lapse rate was? In other words, the people that you got rid of that you wanted to get rid of? (Multiple speakers). What sort of crosscurrents do you have here? What sort of growth rate might you have had if you weren't doing the re-underwriting?

Are you referring to the mid-term cancellation rate, that rate that we quote in the Q?

Right.

-- and press release.

Yes.

Remember that all our insurance contracts are one-year contracts. So, generally, our policyholders, when they decide to leave us, do it at renewal. And if we decide to part company with them, we generally do it at renewal, okay?

Okay.

The mid-term cancellation rate -- and therefore, we are not booking -- since the policies are not renewing, we are not booking a premium and a management fee on them. The mid-term cancellation allowance is really an estimate of management fee -- or premiums that we've booked and consequently management fees that we've booked on those contracts that we estimate will cancel mid-term, not at renewal, okay? And we've just seen -- and we are not doing that; that's really done at the election of the policyholders. And so the increase in that rate, that mid-term cancellation rate, is really a result of our policyholders at an increasing rate deciding to cancel mid-term. And they can be doing that for a variety of reasons. The most common reason is probably price. Does that help? Did that answer your question?

Not really. What I'm wondering is -- you know the growth in policies in force is adversely affected by your nonrenewals.

Yes.

What is the rate of nonrenewal now as opposed to that rate a year ago?

Well, our rate of cancellation or nonrenewal is up substantially from a year ago. Our cancellation -- we track our cancellation premiums. I don't have the number from a year ago, but this year, the amount of premium that we are canceling year-over-year versus a year ago is up 48 percent, 49 percent. So we are canceling a lot more premium than we did last year.

And what percentage of your book does that represent?

Well, it's about 100 through -- on a rolling three-month basis, I am trying to do some quick math here while I'm on the phone with you.

Okay.

Actually, I do not have that number, but I can get you that number offline.

Okay, good.

We will post that number as part of the Webcast presentation, because I don't believe that number is in the Q, was it?

No, no.

That would be interesting.

(multiple speakers) publicly.

There is an underlying growth rate here that's better than the published growth rate and -- that will become manifest once you guys get through this period of re-underwriting.

Yes, what you want to do is break apart what is our renewal rate, what is our cancellation rate and what is our new policy rate. Yes.

Also, how long will this re-underwriting take to totally flush out the stuff you don't want? Twelve months?

Yes, 12 months -- at least 12 months. The first time through, we'll obviously take 12 months because all our policies are one-year policies.

Yes.

Okay? And you know we've started going through the commercial book in the third and fourth quarters last year -- the commercial book of business. So we are going to get through it the first time midyear this year.

Yes, and that's probably the period --

The lion's share of the cancellations?

Yes.

Yes.

The most rapid cancellation rate would be in that period.

Yes. But that doesn't mean that we're not going to go through it again and re-underwrite it a second time because this is an iterative process. You're not going to catch everything the first time through.

Pat, let me add -- this is Jeff. Thank you for joining us -- that re-underwriting is an ongoing process. Re-underwriting has been one of the cornerstones of our company. The AWARE program, the emphasis on fundamentals, the commitment and re-commitment to those re-underwriting fundamentals are what has occurred in this past 12-month cycle. So going forward, there are a lot of factors that change with individual risk that our agents and our underwriting staff will continuously evaluate. I think you understand this correctly in that this is the large part of it right now because of the focus and re-commitment. But going forward, I would expect our re-underwriting to be continuous.

Okay, thanks, guys. And it was a pretty good quarter, it's just a little fuzzy.

Sure. I think it's helped contribute to the improved underwriting result, which bodes well for the Indemnity Company, as part of our long-term strategy.

Yes. Personally that's been my greatest frustration over the last couple of years with the stock is the continued underwriting losses. But this looks pretty good. I mean, you're showing results. Way to go.

Charlie Smith, Fort Pitt Capital.

The preponderance of cancellation, do they come in the commercial or the personal lines? I mean, how is that shaking out?

Again, we will publish that data subsequent to the call so that everybody can get the benefit of it.

Okay. The big improvement in the combined ratio in your homeowners', can you talk about the trend behind that -- in terms of -- are there certain risks you're just not writing any more? Or is it the big premium increase? What's going on there?

Sure. During the quarter, we had a 5.7 percent improvement in our pure premium, which is our actual loss cost in that line of business. And at the same time, our average premium was rising fairly dramatically because we've been increasing our rates in our homeowners' book. So what that does is it drives our combined ratios down pretty dramatically in the homeowners' line, you see the result of that.

In addition to that, Charlie, we've focused on training efforts with our claims adjusters. We've provided them with Vailtec national training, which has given them opportunities to write estimates on their own; they are using new technology tools to allow them to write those estimates on the spot. And so there's a number of factors, both price related and performance related, that have contributed to the improvement.

Adam Klauber, Cochran, Caronia.

The unit growth is coming down as expected. However, in the last six months, the environment has definitely gotten more competitive. Could you give us an idea of how much of the reduction in unit growth is due to competition and how much is due to your actions?

I really don't know that number, Adam.

I am not looking for a specific number, Phil, obviously. I am just looking for a sense. Is it the majority of the reduction -- is that based on your re-underwriting, or there's a fair amount of the reduced growth because the market has become more competitive at the same time?

Well, of course we talked about cancellations here. And our cancellations are up as we re-underwrite the book. But the majority of the decline is the result of -- and we've given you the numbers, the declines in new premium -- is a 30 percent decline. So really the decline in units is driven by the decline in new units, not the decline, necessarily decline in our book or the renewals. And that is a result of a whole bunch of conditions. That is a result of -- we have taken pricing up fairly dramatically in some lines of business like homeowners', not so much in auto. And our competitive position has changed. We think we still have a good competitive condition relative to our major competitors. But things are tighter. So that's one of the reasons, as in all hard markets, we have tightened our underwriting. We have -- we are asking our agents to give us better business when they prospect. So what they need to do is they need to prospect more so they can get us more really good customers. So all those things have had an effect. But it's really new business, the decline in new business, that is driving the decline in units.

And Phil, I'd add to that, Adam, that our agents have focused considerable time on their re-underwriting efforts, as well as on retaining their very best accounts. They have had to spend a lot more time because of the environment that we all operate in to retain those best accounts and focus on the re-underwriting fundamentals that we have been talking about. So it is a combination of factors.

Okay. Thank you. Another question, the pretax margin in the management operations, obviously has come down in part due to reduction in the management fee level. It's down several points, if you look at from the first quarter of '03 to the first quarter of '04. Would you expect that reduction to be relatively consistent for the next three quarters of the year?

Well, again, we have a lot of seasonality to our quarters. And what that does is that takes the margins up in quarter two and quarter three, Adam, as you're well aware, because as you get that additional volume, there is a certain amount of our expenses, other operating expenses, which are fixed. So what you have is you have much higher margins in the second and third quarter than you have in the first and the fourth. In the first quarter, we were affected by two things, the rate coming down, the management fee rate coming down half a point and the other thing was a little slower growth than we anticipated, which really has an effect on the margins, as you know. Because the commission is a pure variable expense. But the other expenses are pretty much semi-variable or fixed expenses. So as our volume drops, we get a little bit of margin pressure; and of course, the converse is true, as our sales grow, we get margin expansion. So I would take a look at, of course, like I said at the beginning, our quarters are very seasonal. So I would take a look at the second and third quarter historical margins. And we've said -- I just said on the call that we expect them to be in the 25 to 27 range.

(OPERATOR INSTRUCTIONS). Ron Bobbin, Capital Returns.

I had a question -- I'm sorry if I missed this, what was the -- a couple questions about the personal auto line and then a long-term objective question. What was the combined ratio for personal auto in the quarter? How's that trend?

I am trying to think if that information is in our Q or our press release.

You made a point in the prepared remarks just sort of highlight the combined ratio and I think all the other lines.

We did not give the auto one?

No, and given its size --

Given it's our largest line.

Exactly.

I will ask our general counsel if we should --

Well they're disclosed in the Q or in the press release, because we need to disclose it equally to everyone.

Yes, but you're disclosing all sorts of information on this call. People are asking you questions about --

But it has to be disseminated in accordance with Regulation FD. And we have no reason to hide it by any means. But if we are going to disseminate it, we want to make sure we disseminate it. And we'll post it.

We'll put it out with the cancellation data that we are going to publish. We had a -- for the quarter, we had a -- now this is the number -- this is the reported number before the management fee comes off. And remember -- well I will give you both numbers. It was 106.2 but adjusted for the profit component that we pay Erie Indemnity Company was 98.4 because again --

And how did that -- can you give me some indication of how that moved quarter over quarter, either like quarter last year or the prior trailing quarter?

No, but I can provide that for you because I do not have it in front of me.

I mean is it improving, can you give me directionally?

I don't know. I think -- my sense is that it did improve, but don't -- (multiple speakers) -- give you the data.

I guess what I'm -- maybe much more importantly is, we listen to Progressive's approach to segmenting and pricing its potential customer base and those obviously choose to bind Allstate, Safeco are all banging on the table and telling us how great their tiered, in effect, sort of tiered risk segmented pricing models are in the auto line, I think in particular. Can you give some insight as to you know how many different prices do you have in a given region -- geographic market and the other half of that is, how do you protect yourself from being sort of adversely selected against competitors who are at least representing that their database and their pricing models enable them to cherry pick or at least deliver segmented pricing?

Well, Ron, let me make a few comments. This is Jeff. We are very familiar with the studies and predictability associated with the use of credit scoring. We are also very much aware of the tremendous amount of marketing that is being done by our fellow competitors. We, as an organization, because of our strong relationships with our front-line underwriters, our agency force, have been very comfortable through the decades with their commitment to underwriting discipline. So we had less of a need, arguably, than other carriers to resort to credit scoring because of our agents being strong front-line underwriters. While we don't currently use credit scoring in writing business, we've studied our book-of-business periodically to check to see whether our accounts are skewed toward low credit scores, and found that wasn't the case. In fact, we recently completed another review of new business written in the past year following this re-dedication to fundamentals in our business. And what we found is that our overall credit score for new business has actually gone up. We believe this demonstrates actually a reverse correlation to the underwriting discipline and fundamentals that our agents have embraced and recently re-embraced with credit score usage. So we are seeing, certainly, examples of accounts being cherry picked away from our agents. There are many different variables at play. There are many different ways to segment your pricing. We have many different attributes of our pricing models relative to drivers and other attributes of the risk that enable us to have different prices. And we are continuing to evaluate this and discuss it openly with our agency force as we work through the best way to leverage our strong front-line underwriting from our agents and embrace the various tools and techniques that are being used.

I don't -- listen, I feel that the combined ratios in underwriting profitability -- you've made a lot of progress and you're surely moving in the right direction. But to hear you make -- and you deserve a lot of credit and the whole organization and constituents deserve a tremendous amount of credit to have made and delivered the move you've made. But to compliment the front-line, the agents, candidly, Progressives and Safeco and All State, you know their personal lines combined ratios are 9 to maybe 15 points superior, beyond that even, than yours. And it's not all expense ratio efficiency. So those -- I think those are the facts that indicate something other than what you're saying or guide me to the right path here.

Well, let me start by saying our company is a completely different company than an organization like Progressive. For starters, Progressive doesn't write homeowners' business. Progressive doesn't write other lines of business. Having the ability to write across multiple lines gives our agents the underwriting judgment to evaluate a risk, such as automobile, through many different perspectives. They understand how they treat their homeowners' exposure, and there is a correlation to how people do that and how they operate their automobiles. In many cases, these are business owners, again, that our agents understand their risk tolerance. So there are a number of factors in that regard that I believe are unique to our agents. Also, our agents have focused more on writing preferred business, where arguably a Progressive is writing I will say a wider spectrum. So I think those are just a couple of factors, Ron, that account for the difference.

And Ron, I don't think our auto combined ratio is where we want it to be. We still have work to do. Our -- traditionally, our auto line has been our most profitable line of business. And in the past, our auto line has actually subsidized our homeowner and small commercial lines of business, which have produced loses. So our auto combined ratio of 98 for the quarter is not where we want it to be, and that's not where we've been historically. So we still have work to do. We've made dramatic progress, as you pointed out, during the quarter, last two quarters in getting our combined ratios down in almost all of our lines the business. Are we done? By no means. Our auto line, particularly in Pennsylvania, has been our very profitable book of business for us. And these combined ratios are higher than our historic averages. So we still have work to do.

All right. Good luck and I hope the trend-line continues.

Thanks, very much, Ron.

Thanks, Ron.

Beth Malone, Advest.

Thank you. One follow-up, you probably touched on this pretty much during your presentation, but I was just interested to know what you -- there's been a lot of general reports out there about pricing, and we talked a little bit about softening. Could you quantify a little bit what kind of price increases you think you're going to -- that you've seen in both your homeowners, personal lines and in the general market? Is it starting to get soft in those markets, and how are you reacting?

Well, we told you what price increases we expect for 2004 -- the $308 million, which comes out to about an 8.4 percent increase across our book of business, based on our premium volume for 2003. Our indicated need because of our -- when I say indicated rate need -- because our improving result is moderating -- so you've seen our projections for estimated premium for 2004 come down two quarters in a row. And that's really a result of our moderating losses, as well some of the competition we're facing out there. So I would say that our results are improving, and we are reflecting that in our rates, and they're coming down a little bit. And we are seeing some more rate competition out there.

And at this time, we have no more questions in our queue. I'd like to turn the call back to Ms. Phillips for any concluding remarks.

I just want to thank you all for joining us on the call today and to remind you that the recording of the call will be posted on our Website, Erieinsurance.com after 12;30 Eastern time today. If you have any questions, as always, give me a call at 814-870-4665. Thanks, so much, and have a great day.

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