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Operator
Hello and welcome to Erie Indemnity Company fourth quarter and year end results 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. Following prepared remarks from management we will open the call for questions and answers. Now I would like to introduce your host for today's conference call, Karen Kraus Phillips -- Vice President and Manager of Corporate Communications and Investor Relations. Please go ahead, Ma'am.
Karen Kraus Phillips - VP, Mgr of Corporate Communications, IR
Good morning, everyone. We appreciate all of you joining us today. On today's call management will discuss our fourth quarter and year end 2004 results. Joining me are Jeff Ludrof, President and CEO; Executive Vice President and Chief Financial Officer Phil Garcia; and Brian Bolash (ph), Associate General Counsel. Today's prepared remarks 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 can the investor section of our website at erieinsurance.com. We also filed the form 8-K and 10-K with the SEC.
On today's call the management of Erie Indemnity Company will share important information about current and future initiatives being undertaken by 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 8-K filing with the SEC dated February 23rd, 2005 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 website today after 12:30 PM Eastern time.
Your participation on this call will constitute consent to 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.
Thank you, again. Now I'd like to turn the call over to Erie's President and CEO, Jeff Ludrof. Jeff.
Jeff Ludrof - President and CEO
Good morning, everyone, and thank you for joining us on today's call. As Karen mentioned, the earnings release was issued yesterday afternoon. It indicates that Erie Indemnity Company had a solid fourth quarter with net income of $61.3 million, an increase of 42.2 percent over the fourth quarter of 2003. That equates to 87 cents per share diluted.
Overall for the year, net income was up 13.4 percent to $226.4 million with net income per share diluted increasing to $3.21 per share -- a new Company record.
Phil will get into the details and review the numbers for the comparable timeframes in 2003. But before Phil reviews the financials, I'd like to talk about our continued focus on underwriting profitability during the fourth quarter and all of 2004 and how that favorably impacted our overall results. I will also share some thoughts on key initiatives for 2005.
During the first few weeks of 2005, I had an opportunity to address our agents and employees and share my views of the past year. During those discussions and here today, I can use a single word to describe the year 2004 for the Erie. Transformation.
Considering what our agents and employees helped us accomplished while maintaining their dedication to the fundamentals of our business, transformation truly does tell the story of the Erie in 2004. We have transformed Erie into a healthier company. Our efforts have generated a turnaround in the underwriting profitability, which now enables us to focus more fully on enhancing quality growth.
Reported statutory combined ratio for the property and casualty group was 95.6 for 2004. That's down from 109.5 at year end 2003. A nearly 14 point reduction. When adjusted for the profit paid to the indemnity company which provides a more accurate comparison to our peers the adjusted statutory combined ratio was 90.1. That's a significant improvement from 103.3 adjusted statutory combined ratio reported a year earlier.
Certainly we benefited from a relatively mild year for catastrophe losses since the series of hurricanes that impacted the United States affected national insurers far more than our regional operations. No matter how it you look at it, that's a significant improvement. And it represents our potential for success when our agents and employees work toward a common goal.
Further evidence of our financial health can be found in the progress we have made in growing the surplus of the exchange. Which is also important to the health of the Erie Indemnity Company. Following declines in 2002 and early 2003, the exchanges policyholders surplus has increased to $2.8 billion as of December 31, 2004. Even with these significant strides, we will maintain underwriting discipline.
While this has always been Erie's prescribed approach this year, with the ensuing soft market, maintaining underwriting discipline is imperative. It's a reflection of our overall approach to business. Thoughtful, deliberate, and long-term. This approach leverages Erie's cultural advantages and sustained our business model solidly based in the relationships we have with our agents, employees and our policyholders.
Premium rates are stabilizing throughout the industry and with our loss experience improving the same holds true for our Company. Our pricing is moderating and that will help us enhance our competitive position.
We have also implemented a number of additional initiatives to stimulate future growth. That is in line with our underwriting philosophies. As a tool to complement existing underwriting capabilities, in 2004 we introduced insurance scoring as we said we would do. Earlier this month, we introduced a segmented pricing plan for private passenger auto and homeowners insurance to our agents, combining insurance scoring with other factors to more specifically match our price with individual risks.
Our agents now have more pricing options to compete for the customers with the best loss characteristics and to retain the very best customers. We also have a plan using segmented pricing that will help our agents in their efforts to bring qualified customers back to the Erie. To enhance agent sales efforts, we are linking segmented pricing with a new online lead generation program, providing agents with qualified leads and the marketing materials to attract those leads. We will also accelerate agency recruitment and appointments. In 2004, we added 33 new agencies; and in 2005, we expect to add another 75.
Our deliberate focus on underwriting discipline also had an impact on policy growth and retention as we anticipated. At year end 2004, policies in force for the property casualty group totaled nearly 3.8 million. A .7 percent increase year-over-year with year end 2003. Personal lines policies were up by 8/10ths of 1 percent year-over-year at December 31, 2004 with commercial lines policies increasing by 7/10ths of 1 percent year-over-year.
Our year-end policy retention rate of 88.4 is still favorable by industry standards but down from our retention rate of 90.2 at the end of 2003.
As I have indicated, we have put into place several plans to enhance growth for 2005. Segmented pricing, coupled with new qualified leads and our stepped-up agent recruitment efforts are only part of the plan. These plans will become more apparent during the second and third quarters of 2005; and while we look to enhance growth, our senior management team is exploring options to be sure our growth and the cost of management operations is more in line with policy unit growth.
Our objective remains to take a balanced long-term approach to underwriting profitability and quality growth, while maintaining expense control in our management operations. We believe this will translate into an enhanced retention and profitable growth in 2005.
Technology also remains a key focus for our Company as we continue the development of Erie Connection -- our new policy processing system. This system is operational for back end processing. We are working closely with agents and employees involved in the initial release of Erie Connection to improve the front end of the system. The actual agency interface, to ensure its effective implementation. With the improvement in our underwriting profitability, our Company is well positioned to capitalize on the progress we made in 2004.
We were pleased that, in December, the Board of Directors decided to approve an increase in shareholder dividends as part of our ongoing capital management plan. For each Class A share, the quarterly dividend was raised from 21 1/2 cents to 32 1/2 cents. The quarterly dividend for Class B shares was raised from $32.25 to $48.75. The new dividend represented a 51 percent increase in the payout per share at about a 2 1/2 percent yield on the Class A shares at the time of the decision.
Also in December, the Board of Directors set the management fee rate at 23.75 percent, beginning January 1, 2005. As you know, our corporate structure is such that the Board has a fiduciary responsibility to balance the interest of the policyholders of Erie Insurance Exchange with those of the Company shareholders. This is most evident when the Board sets the management fee.
Year after year, we received accolades from organizations like J.D. Power and Associates for the service we provide our policyholders. We are flattered by that attention and grateful for that positive knowledge from our customers. But we won't rest on these laurels.
In 2004 we created a new division to attend, specifically, to our customer service function. The new customer service division brings together a cohesive team working together for the benefit of the Company, agents, and policyholders. Our goal? To make it even easier for area policyholders and agents to do business with us.
This year, we are celebrating the 80th anniversary of our Company's founding. Generations of agents and employees have worked hard over the past 80 years to fulfill the founding philosophy of providing policyholders with a near-perfect protection and service as is humanly possible, always doing so at the lowest possible cost.
Erie's service culture continues to distinguish us in the marketplace. Erie agents and employees are committed to doing what it takes to serve the needs of our policyholders and that leads us to not just meeting but exceeding their expectations. As you can see, our plans in 2005 set the stage for future growth but not by jeopardizing underwriting profitability.
We continue to maintain our disciplined, focused approach for long-term profitability which we believe will continue to result in our Company's long-term success. With the onset of more refined segmented pricing, coupled with the marketing tools and branding strategies to support our agent sales efforts, Erie is well positioned to begin building on our solid profitable foundation moving forward in 2005 and beyond.
Phil, I'll turn it over to you to talk about our financial results.
Phil Garcia - EVP and CFO
Thanks, Jeff, and good morning everyone. As Jeff said at the start of this call Erie Indemnity Company performed well in the fourth quarter 2004. Net income increased 42.2 percent to $61.3 million compared to $43.1 million for the same period in 2003. Net income per diluted share increased to 87 cents per share in the fourth quarter of 2004 compared to 61 cents per share in the comparable quarter for 2003.
Net income, excluding the effects of net realized capital gains or losses on investments and the related federal income tax on those gains, rose 33.9 percent for the fourth quarter of 2004 to $53.7 million or 76 cents per diluted share up from $40.1 million or 56 cents per diluted share for the same period one year ago. As you may recall we had several non-recurring adjustments in the fourth quarter of 2003 that resulted in a decrease in net income of about 12 cents per diluted share.
One of the adjustments was a charge of 5 cents per diluted share to record deferred taxes on the Company's share of the undistributed earnings of Erie Family Life.
In the fourth quarter of 2004 the Company recorded an adjustment to decrease the provision for income taxes by $4.5 million or 6 cents per diluted share to reflect current tax recoveries. As a result of these adjustments to the respective fourth quarter results, the effective fourth quarter tax rates were 27.6 percent in 2004 and 37.9 percent in 2003.
As Jeff noted, our full year results were solid in 2004. Net income was up 13.4 percent to $226.4 million from $199.7 million at the end of 2003. Net income per diluted share increased to $3.21 per share at December 31st, 2004, from $2.81 at year end 2003.
Net income excluding the effects of net realized capital gains or losses on investments, and the related federal income taxes grew 11.1 percent to $214.4 million or $3.04 per diluted share.
Now I would like to elaborate on the Company's fourth quarter results. Management fee revenue increased 6.8 percent to $220.7 million for the quarter ended December 31st, 2004, from $206.7 million for the same period one year ago. The direct written premiums of the property and casually group upon which the management fee revenue is calculated grew 5.9 percent to $912.9 million in the fourth quarter 2004 from $862.3 million in the fourth quarter of 2003.
As Jeff explained, the Company's Board of Directors set the management rate at 23 3/4 percent beginning January 1st, 2005. The Company continues to focus on improving underwriting profitability. We continue to experience a reduction in the twelve-month growth rate of policies in force. That is due to a decline in new policies written and a lower retention rate.
The twelve-month moving average growth in policies in force was up -- was .7 percent at December 31st, 2004, compared to 6.7 percent at December 31st, 2003.
We have talked about this effect before. As we work to improve underwriting profitability, we expected this to occur with retention and new policies written. In the fourth quarter of 2004, new premium written declined 13.2 percent to $85.3 million from $98.3 million in the fourth quarter of 2003. In the fourth quarter of 2004, personal lines new premium written declined 16.9 percent while commercial lines new premiums written declined 4.2 percent compared to the same period in 2003.
Twelve-month moving average policy retention rate declined to 88.4 percent at year end from 88.7 percent at September 30th, 2004 and 90.2 percent at December 31st, 2003.
Service agreement revenue was down 96.7 percent to $54,000 on $.9 million in nonaffiliated assumed reinsurance premiums in the fourth quarter compared to $1.7 million on $27.6 million in nonaffiliated assumed reinsurance premiums recorded in the fourth quarter of 2003. This decline was an expected result of our decision to exit the reinsurance business.
Service charge revenue rose 2.5 percent to $5.6 million in the fourth quarter of 2004 vs. $5.5 million for the same period in 2003.
The cost of management operations increased by 9.1 percent to $172.4 million in the fourth quarter of 2004 from $158 million for the same period in 2003.
Commission costs, the largest single expense, increased by 7.6 percent to $121.9 million in the fourth quarter of 2004 from $113.3 million in the fourth quarter of 2003.
Fourth quarter cost of management operations excluding commissions increased 12.9 percent to $50.4 million in 2004 from $44.7 million in 2003. Personnel costs totaled $29.1 million in the fourth quarter 2004 vs. $25.9 million in the same period in 2003, an increase of 12.6 percent.
Salaries and wages rose 12.8 percent to $21.8 million in the quarter. Retirement benefit costs increased to $2.8 million in the fourth quarter of 2004 from $1.8 million in the fourth quarter of 2003, due to a lower discount rate assumption used to calculate the pension costs.
The growth in the cost of management operations other than commissions was affected by additional professional and consulting fees in connection with the Company's Sarbanes-Oxley 404 certification in 2004. In the fourth quarter 2004 the Company incurred about $.5 million in professional and consulting fees related to this effort.
The Company's insurance underwriting operations recorded losses of $.9 million and $8 million in the fourth quarters of 2004 and 2003, respectively. The reported statutory combined ratio for the Property and Casualty Group for the fourth quarter was 100.7, compared to 102.1 for the fourth quarter of 2003. The Property and Casualty Group experienced a private passenger auto adjusted statutory combined ratio in the fourth quarter of 2004 of 103.9, which was typically the highest last quarter for the private passenger auto line due to weather conditions. The Property and Casualty Group also strengthened reserves for private passenger auto during the fourth quarter 2004 in consideration of prior accident year claims.
The Property and Casualty Group also took this action for workers compensation reserves in the fourth quarter 2004. Strengthening of workers compensation reserves totaled almost $28 million or the equivalent of 32 combined ratio points for this line of business during the quarter. $20 million of that amount represented development of prior year claims. The Company's reported GAAP combined ratio was 101.7 for the quarter vs. 115.8 for the same quarter in 2003.
The Company's share of catastrophe losses totaled $.5 million and $.8 million for the three months periods ended December 31st, 2004 and 2003, respectively.
Charges under the excess of loss reinsurance agreement with the exchange were $1.7 million in the fourth quarter 2004 vs. $.7 million in charges recorded during the fourth quarter 2003.
Net revenue from investment operations for the fourth quarter of 2004 reflects income of $31.6 million compared to $21.8 million in income for the same period in 2003.
The performance of investment operations continues to benefit from improvements in the fixed income and equity markets. Net investment income increased by 4.3 percent to $15.9 million in the quarter ended December 31st, 2004, from $15.3 million for the same period in 2003.
Net realized gains on investment of $11.7 million were recorded during the fourth quarter of 2004 compared to $4.6 million for the fourth quarter of 2003. Equity and earnings of limited partnerships generated gains of $2.9 million compared to losses of $.6 million for the fourth quarter of 2003.
The Company's earnings from its 21.6 percent equity ownership of EFL totaled $1.1 million in the fourth quarter of 2004, compared to $2.4 million in the fourth quarter of 2003.
During the fourth quarter of 2004, the Company repurchased 188,000 shares of its Class A common stock at an average price of $50.36 per share as part of its $250 million stock repurchase authorization.
Now I'd like to discuss the Company's year end 2004 results on a segment basis beginning with management operations. Management fee revenue for 2004 was up 7.6 percent from a year earlier to $945.1 million.
In 2004 direct written premium on which the management fee is based was up 8.9 percent over 2003 to 4 billion. Personal lines premium rose 9.4 percent while commercial lines saw a 7.6 percent increase. An increase in average premium per policy contributed to the increase in direct written premiums. The Company has experienced a reduction in the twelve-month growth rate of policies in force due to the decline in new policies written in all of 2004. Again this was an expected result of our focus on underwriting profitability.
Total new premium written declined 20.5 percent to $399 million in 2004 from $501.9 million in 2003. Personal lines new premium written declined 15.5 or excuse me -- 15.7 percent to $281 million in 2004 while commercial lines new premium written declined 30.2 percent to $117.5 million in 2004.
The average premium per policy increased 8.1 percent to $1060 in 2004 from $981 in 2003. With personal auto, the average premium per policy increased 6.1 percent to $1190 in 2004 from $1122 in 2003. The commercial lines, the average premium per policy increased 6.9 percent to $2487 in 2004 from $2326 in 2003.
Premium increases anticipated due to pricing actions filed and approved are waiting approval through December 31st, 2004, that amount to approximately $8 million in additional premium for the Property and Casualty Group in 2005.
The anticipated 2005 rating increases are lower as a result of improved loss experience in the rate decreases taken in conjunction with the rollout of our tiered pricing plan. Regulatory restrictions in certain states surrounding the implementation of tiered pricing have the effect of delaying price increases for certain policyholders.
The cost of management operations increased by 11.1 percent during 2004. Commission costs to independent agencies which make up over half the Company's cost to management operations rose 11.9 percent to $531.2 million in 2004 from $474.7 million in 2003.
A significant portion of this increase is related to our agent bonus program. Agent bonuses, which are based on the agency's underwriting profitability results and now include a component for growth, totaled $46.2 million in 2004, a $22.1 million increase over the cost for the agent bonus program in 2003.
Cost of management operations, excluding commissions, increased 8.8 percent in 2004 to $193.1 million from $177.5 million in 2003. This was due primarily to increases in personnel costs. Personnel costs increased 12.1 percent in 2004 compared to 2003 as a result of increased employee staffing levels and increased employee benefit costs.
Salaries and wages rose 12.2 percent while employee benefit costs rose 12.9 percent. Health plan costs increased 6.8 percent in 2004.
Retirement and savings plans cost rose 47.9 percent to $9.9 million in 2004 from $6.7 million in 2003 as a result of a lower assumed discount rate assumption for retirement plan obligations. In our underwriting operations segment, the Company's 5.5 percent share of the Property and Casualty Group's underwriting losses totaled $4.4 million in 2004 compared to $24.9 million in 2003. This resulted in a GAAP combined ratio of 102.1 for 2004, compared to 113 in 2003. A reported statutory combined ratio for the Property and Casualty Group was 95.6 for 2004, compared to 109.5 per 2003. As Jeff said earlier, adjusted for the profit portion of the management fee paid to the Erie Indemnity Company, the adjusted statutory combined ratio falls to 90.1.
The improvement in 2004 underwriting results on direct business reflects the impact of underwriting profitability initiatives implemented in 2003 to offset increased claims severity and controlled exposure growth. In addition, the Property and Casualty Group experienced positive development on losses of prior accident years of $71.6 million in 2004, compared to adverse development on losses of prior accident years of 4.2 million in 2003.
Catastrophe losses of the Property and Casualty Group were $73.3 million and $182.7 million in 2004 and 2003, respectively. The Company's share of catastrophe losses totaled 4 million and 10 million for the years ended December 31st, 2004 and 2003, respectively.
Charges under the excess of loss reinsurance agreement with the exchange for the year totaled $7.7 million in 2004, compared to recoveries of 6.5 million per 2003. As Jeff pointed out the policy on surplus of the exchange has shown steady growth in the past two years rising from 2.1 billion in 2002 to 2.8 billion in 2004, further strengthening our financial position.
Investment operations for the year ended December 31st, 2004, saw net revenue from investment operations increasing 26.4 percent to $93.7 million compared to 74.2 million for the same period in 2003. Net realized gains on investments were $18.5 million for the year ended December 31st, 2004, compared to $10.4 million at December 31st, 2003. There were no impairment charges in net realized gains on investments in 2004.
Net investment income totaled $61 million for the year ended December 31st, 2004, and $58.3 million for 2003, up 4.6 percent from 2003. Included in net investment income are primarily interest and dividends on the Company's fixed maturity and equity security portfolios.
For the year ended December 31st, 2004, equity in gains and limited partnerships amounted to $8.7 million compared to losses of $2 million in 2003. Impairment charges on limited partnerships totaled $1.2 million in 2004, compared to impairment charges of $5 million in 2003.
Equity and earnings of Erie Family Life was $5.6 million in 2004, compared to 7.4 million for the same period 2003. As part of the Company's capital management plan 1.1 million shares of Erie Indemnity Company Class A common stock were repurchased during 2004 at an average cost of $47.20 per share. The move is part of a $250 million share repurchase program reauthorized by the Board in 2003 with about $196 million of unused authorization outstanding.
Now I'd like to turn the call back to Karen.
Karen Kraus Phillips - VP, Mgr of Corporate Communications, IR
Thanks. That concludes our prepared remarks. Steve, if you could now open the call for questions from our phone audience.
Operator
(OPERATOR INSTRUCTIONS) Adam Klauber. Cochran, Caronia.
Adam Klauber - Analyst
Could you talk about competition within the auto insurance market? Has the level of competition been increasing in the last three to six months, No. 1? No. 2, where are you pricing within the competition of the major players? Are you at the low-end, mid end, higher end? And No. 3, temp (ph) growth as expected continues to trend down. Could you just give us a general idea of how long that downward trend is going to continue? And when do you think we will see more stabilization of that temp trend?
Jeff Ludrof - President and CEO
Adam, this is Jeff. Good morning and thank you for joining us. The competition and the competitiveness of auto continues to be intent. In the last three to six months I believe it is continued at a similar pace that it did earlier in the year. I would describe Erie's competitive position in auto to be improving. Improving of course, as you know, related directly to the improved underwriting profitability. We mentioned the opportunity that we now have to have lower rate indications. So indicated as an example we anticipate premium in 2005 to be $8 million.
Now that is across all lines. The improvement that we have experienced in auto on an annual basis has really positioned us to be in a much stronger position to have lower rates and more competitive rates.
The third area that you questioned about is growth. And I am just going to ask you to rephrase or restate your question if you would please to make sure that I answer properly?
Adam Klauber - Analyst
Tip growth and again it's not a surprise. Tip growth as expected has been trending down in all lines and for the first time tip growth and auto, actually, was negative for the quarter. Wondering just generally when do you expect that tip growth to trend to stabilize or should we expect that trend to continue to go down for some time?
Jeff Ludrof - President and CEO
I expect the stabilization to be taking place very shortly. With the introduction of our segmented tier pricing, our agents now have more pricing options for risk. With us, I believe we are approaching the bottom.
Adam Klauber - Analyst
Okay. One other area. Expense growth in the management segment. In the fourth quarter, were accruals higher or some of the salaries or benefits area or is that 12 percent more of a normalized run rate?
Jeff Ludrof - President and CEO
No it's not. We mentioned that we had some Sarbanes-Oxley costs at the end of the quarter.
Adam Klauber - Analyst
Right. If you exclude the Sarbanes obviously.
Jeff Ludrof - President and CEO
Right. We also -- that is not a run rate that we -- that you should expect. We mentioned in the call that we are going to take some steps to control our expenses in 2005. And a big part of that plan is going to be controlling the growth and personnel expense. The number of people we hire in 2005. So we need to moderate our cost of management operations. Personnel is a big component of that. More in line with our unit growth. And we are going to do that in 2005.
Operator
Meyer Shields with Legg Mason.
Meyer Shields - Analyst
First of all the $8 million from rate increases? Am I correct in comparing that to the projection of 77 million at the third quarter conference call?
Jeff Ludrof - President and CEO
Correct.
Meyer Shields - Analyst
Does that reflect decreases in lines besides auto?
Jeff Ludrof - President and CEO
Mostly it reflects decreases in the auto line. Basically, we are saying that 8 million is basically a wash for 2005. There is not going to be any average premium movement from rate is what we're saying with that number. But that declined from 72 at the end of the third quarter (inaudible) is mostly in the auto line.
Meyer Shields - Analyst
If I can go back to Adam's question on expenses and management operations. What was it that drove the cost so high -- or the rate of increase I should say, so high in '04?
Jeff Ludrof - President and CEO
We made some investments in people and in contractors in 2004. We were busy with all our underwriting profitability and issues. We were busy with putting together our segmented tiered pricing plan; and we were busy with Sarbanes-Oxley. So we realized that that 12 plus growth rate in personnel costs and cost of management operations needs to moderate in 2005. Like I said earlier, we are going to moderate it.
Meyer Shields - Analyst
Turning to the commission cuts in commercial lines. Is that all commercial lines or any specific lines of business?
Jeff Ludrof - President and CEO
I'm sorry I missed (MULTIPLE SPEAKERS)
Phil Garcia - EVP and CFO
Let me answer it. The question is in regard to commercial commissions and whether or not it is in all commercial lines. The answer is no. It is in specific commercial lines of business.
Meyer Shields - Analyst
Are you disclosing which lines?
Phil Garcia - EVP and CFO
It relates to our habitational lines, primarily.
Operator
Charles Gates, Credit Suisse First Boston.
Charles Gates - Analyst
I believe you reduced rates by 7 percent September 1 in Pennsylvania. Could you review other recent pricing actions and be specific?
Phil Garcia - EVP and CFO
Our segmented tier pricing model for Pennsylvania is effective April 1. (MULTIPLE SPEAKERS)
Jeff Ludrof - President and CEO
March 1 for new business and April 1 for renewal, I believe.
Charles Gates - Analyst
So I was just wrong on the September 1st?
Jeff Ludrof - President and CEO
Yes.
Charles Gates - Analyst
So you didn't reduce rates in Pennsylvania last year?
Phil Garcia - EVP and CFO
Well what year are you referring to?
Charles Gates - Analyst
I was referring to September 1, 2004, Phil.
Phil Garcia - EVP and CFO
In January 2004 we had our last rate change in Pennsylvania. This rate change -- we had filed for a rate change back in the fall of 2004 for an effective date of January 1, 2005. That is typically our auto effective date for Pennsylvania.
Charles Gates - Analyst
What kind of an adjustment are you making in Pennsylvania now? Or did you make on January 1st '05?
Phil Garcia - EVP and CFO
Well what happened is, we did not go with a January 1 effective date. In conjunction with our segmented tier pricing, that effective date was delayed so that we would not have two changes -- a January 1 date and an April 1 date. We combined the two with an April 1 date.
Charles Gates - Analyst
What kind of an adjustment did you put in? Or are you putting in on April 1st?
Phil Garcia - EVP and CFO
The tiered pricing plan is generally designed to be revenue neutral. So the plan across auto and home is designed to give 45 percent of our customers a price break. 45 percent of our customers will see a price increase, so it'll go into a higher tier and about 10 percent of the customers will stay the same.
Charles Gates - Analyst
Have you reduced rates in Pennsylvania in the last year?
Phil Garcia - EVP and CFO
In effect, we will be reducing rates for the better tiered business fairly substantially in Pennsylvania. For our better tiered business in our new plan.
Charles Gates - Analyst
Can you give a guesstimate of what that might be, sir?
Phil Garcia - EVP and CFO
Off the top of my head I do know the number.
Charles Gates - Analyst
But you didn't reduce rates in Pennsylvania during '04? That was my first question. Have you reduced rates in other states recently?
Phil Garcia - EVP and CFO
Again we rolled out this price tiering plan for auto and home in almost all the states we do business. There are a couple of exceptions. Again, it is designed to be premium revenue neutral to our policy holders. Some people will see a decrease, some people will see an increase.
Jeff Ludrof - President and CEO
What's difficult about this is with segmented tier pricing we have all these different price points. Back to Pennsylvania for a second. On Pennsylvania Automobile our base rate, essentially, is going up 9/10 of 1 percent in 2005. Pennsylvania also does not allow us to take the rates up, using an insurance scoring program. We will see the decreases for that business that qualifies.
Charles Gates - Analyst
The reason in part for my question is, seemingly, other leading auto insurance companies are moving to reduced rates; and I thought you highlighted your initial comments in fact that we would be becoming more competitive and so, seemingly, I'm having trouble just reconciling the two.
Jeff Ludrof - President and CEO
Sure. One thing to consider is while others may have experienced some reductions, in some cases, they are reducing from a higher absolute number.
Charles Gates - Analyst
That's a good point.
Jeff Ludrof - President and CEO
There's a lot of competition out there in the marketplace and that is not to suggest that Erie is the lowest rate in every single situation. That is clearly not the case.
Charles Gates - Analyst
So your spread vs. Geico is now reduced from what it was a year ago?
Jeff Ludrof - President and CEO
Absolutely.
Charles Gates - Analyst
And Progressive whatever?
Jeff Ludrof - President and CEO
Yes.
Charles Gates - Analyst
The only other questions I have is I know other companies adopted this tier pricing before you. To what extent basically does it effect structure to the extent that you are now adopting I guess companies like Allstate for example is now on something I guess called Strategic Risk Management 4.
Phil Garcia - EVP and CFO
They are on their fourth version?
Charles Gates - Analyst
Yes sir.
(MULTIPLE SPEAKERS)
Phil Garcia - EVP and CFO
I would answer that question this way by saying that we did not build our pricing model in-house. We leveraged a pricing model by an outside vendor that had experience with many different companies using that model. So in some ways it was to our advantage to be able to leverage that. It is also important to remember that with all of these models there are a number of different ways to use them. We have plans for additional enhancements to the model just as we do with every other aspect of our pricing schemes. Also important to recognize that at the end of the day, the detail really comes down to competitive position. And in addition to having competitive prices, we have competitive products. We have a strong value proposition in service, provided by our agents and employees. So we are confident in our improving overall competitive position and I do expect us to continue to enhance our model.
Charles Gates - Analyst
This is my last question. Do you have a Wal-Mart problem though? And the Wal-Mart problem is that as other mass merchandisers or wholesale clubs come down in price basically the reason for driving to the Wal-Mart.
Jeff Ludrof - President and CEO
So your point is that --
Charles Gates - Analyst
(MULTIPLE SPEAKERS) narrower spread.
(MULTIPLE SPEAKERS)
Charles Gates - Analyst
-- or there is a narrower spread so there is less reason to drive 12 miles to go to the Wal-Marts, yes.
Phil Garcia - EVP and CFO
We think there's important qualitative difference in claims operations and that when customers have claims they come to appreciate the fact that we have a superior quality in our claims operations. That we are recognized for it nationally and that that makes a difference in this business.
Jeff Ludrof - President and CEO
I would also point out the benefit of operating through our local accessible professional independent agents. Many of them are located in numbers that exceed the number of Wal-Marts in their communities. So I believe that having our agents present and available is a big factor and it is a trust factor when making a purchase of insurance.
I respect your question actually.
Operator
(OPERATOR INSTRUCTIONS) Beth Malone, Advest.
Elizabeth Malone - Analyst
A quick question on the fee calculation. You have had 24 percent within the fourth quarter, was the calculation for the management fee. And I think you stated it was going to be 23 3/4 starting February 1 2005. Is that right?
Phil Garcia - EVP and CFO
That's right.
Elizabeth Malone - Analyst
Could you just go over again the strategy or the logic behind why you reduced the fee at this time?
Jeff Ludrof - President and CEO
Again the fee was 23 1/2 for half of 2004 and it was 24 for the second half of 2004. So on average the fee was 23 3/4 percent for all of 2004. On average. Because we have some seasonality in the way our premium comes in. So, but on average it is 23 3/4. So in effect it is still 23 3/4 percent for 2005. Again, what the Board looks at, we go into our December board meeting and we show them the financial condition of the exchange vis a vis the financial condition of Erie Indemnity Company. We go in there with our plans and forecast for 2005 and the Board considers all that information, the relative condition of the Erie Insurance exchange and the goals at Erie Indemnity Company for return on equity and earnings growth. They consider all that and then they set the fee and they set it at 23 3/4 percent.
Elizabeth Malone - Analyst
All right. That's helpful. Also could you just talk about with all the changes you have made to your tiering, to your positioning in the marketplace. What has been -- have there been changes in your distribution as well? How have the agents responded to these changes in general?
Jeff Ludrof - President and CEO
This is Jeff. I think it is fair to say any time you go through change, it takes time. Our new pricing model as an example is two weeks old. Our agents just had the opportunity to have it turned on in their agencies. They're -- understandably so at this point -- reacting to each individual scenario. The way a segmented tier pricing model works is based on a distribution of a normal bell curve. It takes a volume of business in order to recognize the concepts in the theories behind that type of normal distribution. So I would say to you it's early. We are working together to make sure that we both understand the marketplace condition as well as how the model will respond.
Elizabeth Malone - Analyst
Would you say that -- it is early but you must have had a reason to go to this tiering for competitive purposes. I guess you would anticipate that the agents have been driving that demand because that is what your competitors are doing?
Jeff Ludrof - President and CEO
There's no question in the past year both our agents and our Company joined forces to agree that we wanted to go together to a segmented tier pricing model. In years past we discussed that and I would not say that there was complete agreement, that that was the direction we should go. Erie, as you know, did not go to segmented tier pricing as quickly as other companies did. We have articulated reasons in the past which include having the benefit of having our agents as front-line underwriters out there vs. our competitors. That is not to suggest that our agents are not still front-line underwriters in using this new tool. But we are in a much stronger position to have the benefit of both this tool and the agents' judgment and that is a powerful combination.
Elizabeth Malone - Analyst
One last question on expansion into new markets now that you have got the tiering technology in place. Do you anticipate that you will be entering new markets now?
Jeff Ludrof - President and CEO
We intend to expand in our existing markets as I mentioned, adding 75 new agencies in 2005. I want us to continue to focus our attention to leverage these new tools across markets that we are very familiar with. There are opportunities for us to regain policy holders some of which were lost in the past year or so and opportunities for us to expand market share. We want to focus our -- narrow our focus to those existing markets now.
Operator
Due to time constraints, we are going to take our final question from Will Kidd, Central Securities.
Will Kidd - Analyst
Two questions. One is the strategy and goals and homeowners. And the second one is the strategy and goals in workers comp. Just some comments on those.
Phil Garcia - EVP and CFO
In homeowners? We have had a terrific year in homeowners from very poor results we had in 2003 and 2002. We made just a remarkable turnaround in the homeowners book. Record profits this year for the group. Part of that was a low cat year. We were blessed by storms blowing past Erie's territories. The rest of the country can't say that particularly down South. So we had a terrific year in homeowners. Our indications are coming down. We have got our prices where we make where we want them to be in homeowners; and our price indications are coming down. So we are very pleased with the homeowners line now.
The workers comp line, as you see, we had 140 statutory combined ratio in workers comp. Part of that was from the development of some prior claims that go back quite a ways. They continue to develop and we continue to suffer through the development of those losses; and when you take that effect out of the numbers, it is still an unacceptable number. It is north of a 100 statutory combined ratio. So we continue to work hard on all aspects of getting our severity, improving our severity in workers comp and putting specialty units, workers comp specialty units in the field. So it continues to challenge us. But we are working hard at it and just like we did with homeowners we are going to turn workers comp around.
Jeff Ludrof - President and CEO
Let me add -- this is Jeff. Let me add to that by saying our strategy in some ways is very similar. For these two lines, as they relate respectively to our strategy for personal lines as it relates to homeowners and its participation and workers comp to our commercial lines. In both cases, in personal lines having homeowners gives us an opportunity to more carefully underwrite all elements of risk exposures. Both across the auto, the home, and in many cases the personal catastrophe liability and life insurance lines. This allows us more information to evaluate when we are considering each of the individual lines.
The same holds true in our commercial area. By evaluating the workers comp exposure in conjunction with the commercial auto, the general liability, the catastrophe liability exposures, we are in a much stronger position to, again, evaluate all the exposures and carefully consider underwriting actions that we would take. So it is part of our strategy to have multiple lines within each of our customers.
Operator
I would like to turn things over to Mr. Jeff Ludrof for any additional closing comments.
Jeff Ludrof - President and CEO
Thank you all for taking the time to be with us today. I would just like to close by reiterating a few points. For the past 2 years we have been focused on improving the underwriting profitability of the Property and Casualty Group. Thanks to the superb execution of our agents and employees our plan to do so have been successful, yielding an adjusted statutory combined ratio of 90.1 for the Property and Casualty Group in 2004.
Now we can focus more fully on enhancing quality growth in 2005, without sacrificing underwriting profitability. We just rolled out Erie's segmented pricing model. This combined with marketing and brand building strategies will begin to generate more unit growth. Additionally we have stepped up our recruiting efforts and plan to add 75 new agencies in 2005. At the same time, we will focus attention on the cost of management operations and commit to grow expenses more in line with unit growth in 2005. Erie's low-cost operating model has been and will continue to be a strategic advantage for the Company. There is no doubt that 2004 was a year of transformation and achievement for us. We are pleased with the Company's results and the rate of return we've delivered to our shareholders. Thank you again for your participation today.
Karen Kraus Phillips - VP, Mgr of Corporate Communications, IR
Jeff, thank you. And that concludes the call. We appreciate all of you been with us. As a reminder, a recording of the call will be posted on our website, erieinsurance.com, after 12:30 PM Eastern time today. If you have any questions at all, please give me a call at 814-870-4665. Thanks again and have a great day.
Operator
Thank you once again. That does conclude today's teleconference. We do appreciate your participation and you may disconnect at this time.