Erie Indemnity Co (ERIE) 2005 Q1 法說會逐字稿

Hello, and welcome to the Erie Indemnity Company First Quarter 2005 Earnings Conference. At the request of Erie Indemnity, this conference is begin recorded for instant replay purposes. At this time, all participants are in a listen-only mode. Following prepared remarks from management, we'll open the call for questions and answers.

Now, I would like to introduce your host for today's conference call, Karen Kraus Phillips, VP and Manager of Corporate Communications, IR.

Thank you, Mark, and good morning. We appreciate all of you joining us today.

On today's call, management will discuss our first quarter 2005 results. Joining me are Jeff Ludrof, President and CEO; EVP and CFO Phil Garcia; and Jan Van Gorder, Senior EVP and General Counsel.

Today's prepared remarks will be approximately 30 minutes. Following those remarks, we will open the call for questions. We would 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 forms 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 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 8-K filing with the SEC dated April 25, 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 at 12:30 p.m. Eastern time.

Your participation on this call will constitute consent to the recording, publication, webcast and 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. I'd now like to turn the call over to Erie's President and CEO, Jeff Ludrof. Jeff?

Thank you, Karen. Good morning, everyone, and thank you for joining us on today's call.

I've been characterizing 2004 as a year of transformation because that word best describes our achievements in underwriting profitability. I can carry that descriptor forward into 2005, as we work to build on the solid foundation of profitability we created during the past 18 months. That effort produced a combined ratio of 86.8 for the property and casualty group during the first quarter of 2005, and a GAAP combined ratio of 88.4 for the property and casualty subsidiaries of Erie Indemnity Company. Erie Indemnity's underwriting performance resulted in an increase of $6.2 million to the Company's net income.

Overall net income for the quarter increased by 16.5% to $57.8 million, up from $49.6 million from the same quarter a year ago. Net income per share was up by 18.5% to $0.83 per share, compared to $0.70 per share for the first quarter of 2004. Net income, excluding realized capital gains was $0.78 per share.

As I said, we now have a firm foundation to build upon. The Company's outstanding improvement in underwriting profitability brings with it an opportunity to build a stronger, competitive position in the marketplace. The better loss experience we see allows for more moderate rate changes. This helps our agents attract and retain the very best customers.

On that base, we began to put building blocks in place last year to position us for more profitable growth. The introduction of insurance scoring in 2004 was part of that framework.

During the first quarter of 2005, our use of insurance scoring progressed into a more refined, segmented pricing strategy, which we provided to agents in most states in late February for new business. April 1st, the model is operational in most states for renewal business. Thus far, our experience with the new pricing model is consistent with our retrospective study of 500,000 Erie policyholders, and we're confident that it effectively positions us from an underwriting and pricing perspective.

At the same time, we realize when something new is introduced into the equation, there are a lot of dynamics that need to settle before you can get a true picture of the effect. In other words, while we remain confident the model will produce the desired results, we'll have to give it time to take hold. And from what I see, this is typical for many insurers who introduced insurance scoring into their pricing strategies. In fact, we know that around the time when other insurance companies were introducing their segmented pricing models, their written premium growth was challenged in the short-term.

Our new tiered pricing model, along with many refinements we have planned for 2005, positions the Erie for continued underwriting success and the ability to grow in the competitive marketplace. However, we don't expect our new pricing model to be the silver bullet. We have many other marketing initiatives planned for 2005. While we don't anticipate a dramatic upturn in [pith] growth in 2005, we do believe it will start moving in a positive direction.

Our retention rates have begun to level off on a sequential basis. For the first quarter 2005, our overall policy retention rate was 88.3, as compared to 88.4 at December 31, 2004. Again, this is due to underwriting profitability efforts. Our agents have now gone through more than one renewal cycle to ensure their Erie book of business is a quality book of business. I expect our retention ratio to stabilize in the second quarter.

As with underwriting profitability, our approach toward quality growth is long-term and steady. That's how we'll maintain underwriting profitability. That's how we'll increase shareholder value. It's a strategy that works for us and has kept this company moving forward for 80 years. And I believe it will keep us prosperous for 80 years more to come.

In the discussion about segmented pricing, I indicated earlier that we'd be introducing other marketing initiatives to support our agents' selling efforts this year, most of which will be announced at Erie's Agent Advisory Council scheduled for the first part of June. Currently, our Spring annual dinner meeting contests are underway and they'll be concluding in the next few weeks.

The Company will also continue its agent appointment efforts in 2005. Through the first quarter of 2005, six new agents have been appointed. We expect to appoint 75 new agents by year-end 2005.

Another focus for the Company in 2005 is enhancing customers' ease of doing business with Erie. Technology remains a key part of that focus as we move into a new phase with Erie Connection, our new policy processing and agency interface system. The back office policy processing system is operational. But, we had our share of challenges with the agency interface. We're continuing to work closely with pilot agents and employees to ensure that Erie Connection is easy to use before it's fully deployed, that it enhances our agents' experience with Erie and their ability to provide above all in service to our mutual customers.

Just last week, we held our 80th annual shareholders meeting. Following the meeting, we issued a press release announcing the newly elected Board of Directors, the slate recommended by the Board's Nominating Committee. And I look forward to working with all of them. Our Board is a proactive and productive Board. I appreciate their sincere interest in the Company, their leadership, and counsel.

You may have also heard that, in March, I was diagnosed with a very curable form of cancer, Hodgkin's Lymphoma. I'm currently undergoing chemotherapy treatments, I'm feeling great, and my chances of a complete recovery are very good.

When I relayed this news to our employees and agents, I reminded them of the remarkable recovery of Pittsburgh Penguin great Mario Lemieux who, months after his Hodgkin's diagnosis, returned to the ice to lead the Penguins to an NHL scoring record. Well, while I have no aspirations of joining the NHL next season, you will see me competing in biathlons and triathlons. But more importantly, your company is being managed effectively. While I'm curtailing my travel schedule a bit, I'm more focused than ever on the success of the Erie.

And now, I'll turn it over to Phil to talk more about our financial results. Phil?

Thanks, Jeff, and good morning everyone.

As Jeff remarked, we continued to make significant progress during the first quarter of 2005, particularly related to underwriting profitability. For the quarter, property and casualty group recorded an 86.8 reported 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 adjusted combined ratio in the first quarter of 2005 was 81.4, which was affected by positive prior year reserve development and lower seasonal losses. And for our direct business only, the adjusted statutory combined ratio was 78.8. These results are evidence of a tremendous team effort that positions the Erie to move forward and to grow profitably.

For the first quarter of 2005, net income increased by 16.5% to $57.8 million, or $0.83 per share, compared to $49.6 million, or $0.70 per share for the first quarter of 2004. Net income, excluding the effects of net realized capital gains, and income taxes on those gains, rose 13.6% for the quarter to $54.2 million, or $0.78 per share, up from $47.7 million or $0.67 per share for the same quarter in 2004.

As you know, we segment the Company's operations into three main components; the management operations, the underwriting operations, and the investment operations. And I'll begin my discussion of the financial results with the management operations segment.

Income from management operations for the first quarter of 2005 increased to $57.5 million from $56.2 million for the first quarter in 2004. The increase in income from management operations was a result of a higher management fee rate and a 1.2% increase in the direct written premiums of the property and casualty group, as well as the change in the allowance for return management fees. Management fee revenue rose 3.9% for the quarter ended March 31, 2005, to $230.4 million, compared to the quarter ended March 31, 2004. The higher management fee rate in 2005 of 23.75% resulted in a $2.4 million more in management fee revenue for the quarter ended March 31, 2005, or an increase in net income per share, diluted, of $0.02 per share.

Direct written premiums of the property and casualty group grew 1.2% in the first quarter of 2005, to $971.8 million, from $960.7 million in the first quarter of 2004. Increases in average premium per policy, which included the impact of certain rate increases in various lines of business that were initially effective in 2004, contributed to the growth of direct premiums written.

For the first time in Erie's history, direct written premiums on a 12-month rolling basis crossed the $4 billion mark during the quarter. As expected, our emphasis on underwriting discipline continues to have an effect on policy production. The rate increases that were implemented in 2003 and 2004 helped to offset these reductions. Total new written premium declined by 13.3% to $83.8 million at March 31, 2005, from $96.7 million at the end of the first quarter of 2004. Personalized new written premium declined by 22.5% from $68.5 million at the end of the first quarter 2004, to $53.1 million at March 31, 2005.

We saw a reverse in the decline of new written premium in our commercial lines. New commercial written premium increased by 8.6% at the end of the first quarter of 2005, to $30.5 million, from $28.1 million at the end of the first quarter of 2004. We're pleased that our new commercial written premium grew during the quarter. In addition, our year-over-year policy retention ratio declined from 88.4 at December 31, 2004, to 88.3 at March 31, 2005. And it appears that our retention rate is bottoming.

As Jeff noted, we're focusing on initiatives to stimulate quality growth while maintaining the improvements we've made in underwriting profitability. The average premium per policy increased 6.4% to $1,066 for the 12 months ended March 31, 2005, from $1,002 for the 12 months ended March 31, 2004. The average premium per personal lines policy increased 6.4%, while commercial lines average premiums increased 6.2% for the 12 months ended March 31, 2005. The private passenger auto average premium per policy increased 4.3% to $1,192 for the 12 months ended March 31, 2005, from $1,143 for the 12 months ended March 31, 2004.

Considering our improved underwriting results and the change in general market conditions, we do not expect premium rate increased to continue at the level experienced in recent years. Management continuously evaluates pricing actions and estimates that those approved, filed and contemplated for filing through March 31, 2005 will result in a net decrease in direct written premium in 2005 of about $5 million. This moderation of pricing actions is expected to improve our ability to attract new policyholders and to retain our existing policyholders.

Jeff also referenced some of the new underwriting tools and the pricing models that are expected to favorably impact our ability to attract and retain good risks. Last August, the Company implemented insurance scoring for underwriting purposes for its private passenger auto and homeowners lines of business in all operating space except Maryland in response to changing competitive market conditions. The Company has also developed a price segmentation model that incorporates insurance scoring, among other risk characteristics, into a rating plan with multiple pricing tiers. This segmented pricing will enable the Company to offer competitive rates to more customers, providing greater flexibility and pricing policies with varying degrees of risk.

In March 2005, use of the tiered rating plan was implemented on all new business. Application of the rating plan to renewal business began in April of 2005. And as Jeff mentioned, we plan to introduce further refinements to our tiered pricing program in the coming months.

To support Erie agents' growth efforts, the Company is also considering additional marketing initiatives, including target marketing programs for preferred risk customers based upon our new rating tiers.

Management fee revenue was reduced by $0.4 million and $3.9 million in the first quarter of 2005 and 2004, respectively, due to an increase in the allowance on mid-term policy cancellations. The methodology used to estimate the mid-term policy cancellations was refined in the second quarter of 2004 based on a retrospective analysis of the adequacy of that allowance. The allowance adjustment for the first quarter of 2005 reflects a leveling off of cancellations, evidenced by our policy retention ratio of 88.3 and 88.4 at March 31, 2005 and December 31, 2004, respectively.

Service agreement revenue decreased to $4.8 million for the first quarter of 2005 from $5.6 million for the same period in 2004. Included in service agreement revenue are service charged the company collects from policyholders for providing multiple payment plans on policies written by the property and casualty group. Service charge income was $4.8 million and $4.9 million in the first quarters of 2005 and 2004, respectively.

Also included in service agreement revenue is service income received from the exchange as compensation for the management and administration of voluntary assumed reinsurance from non-affiliated reinsurers. As the exchange exited the assumed reinsurance business as of December 31, 2003, only a modest amount of reinsurance premium was recorded, generating $0.7 million in service agreement revenue in the first quarter of 2004, as remaining treaties expired.

In the first quarter of 2005, the remaining activity generated minimal service income for the Company. The service agreement between the Company and the exchange was terminated, effective March 31, 2005.

The cost of management operations increased 3.8% for the first quarter of 2005 to $177.7 million from $171.2 million during the first quarter of 2004, primarily due to an increase in commission costs. The costs of management operations, excluding commission costs, increased 6.7% for the three months ended March 31, 2005, to $51.5 million from $48.3 million recorded in the first quarter of 2004.

Personnel related costs are the second largest component in the cost of management operations. The Company's personnel expense totaled $31.8 million for the three months ended March 31, 2005, compared to $29.8 million for the same period in 2004, an increase of 6.9%. Growth in personnel costs moderated in the first quarter of 2005 due to lower allocated IT salary costs and other inter-company cost reimbursements. Total employee benefit costs increased 8.2% in the first quarter of 2005, compared to the first quarter of 2004. Retirement plan benefit costs increased 12.2% to $2.7 million in the first quarter of 2005, compared to $2.4 million in the first quarter of 2004.

We're continuing our expense management efforts to more appropriately match the growth in operating costs to be more inline with the Company's policy in force growth rates. We have already substantially moderated our hiring plan in 2005, hiring primarily for critical need positions only.

The Company's underwriting performance produced a GAAP combined ratio of 88.4 for the quarter, compared to a GAAP combined ratio of 102.9 a year earlier. This resulted in an underwriting gain of $6.2 million for the first quarter of 2005, from an underwriting loss of $1.5 million for the first quarter of 2004. This is a reflection of the efforts we have undertaken to improve the underwriting profitability of our property and casualty operations.

The property and casualty group's reported statutory combined ratio, calculated on a direct business only, was 85.6% and 99.5% for the first quarters of 2005 and 2004, respectively. Typically, the effects of seasonality and lower catastrophe experience positively affected our first quarter experience. These effects combined with efforts to improve underwriting profitability, resulted in the positive combined ratio results.

The adjusted statutory combined ratios for the property and casualty group for the first quarter of 2005 was 81.4, compared to 95 for the first quarter of 2004. Prior to the third quarter 2004, reserve estimates were reviewed quarterly, but seasonal fluctuations and loss reserves were previously recognized over the balance of the year. Since then, seasonal fluctuations in the property and casualty group's underwriting results were recognized in the quarterly results in which they occurred. The first quarter of the fiscal year typically has the lowest non-cat claim volume of the year. Lower claim volume, coupled with improved underwriting, resulted in seasonally low underwriting losses at March 31, 2005. Underwriting losses are seasonally higher in the second and fourth quarters and, as a consequence, the property and casualty group's combined ratio generally increases as the year progresses.

The property and casualty group also experienced positive development on losses of prior accident years, which reduced the statutory combined ratio by 7.9 points and 6.4 points in the first quarters of 2005 and 2004, respectively. During the first quarters of 2005 and 2004, the Company's share of catastrophe losses, as defined by the property and casualty group, amounted to $0.3 million and $0.4 million, respectively, and contributed 0.5 points and 0.8 points to the GAAP combed ratio, respectively. This represents a very low catastrophe experience for the quarter.

The investment operations of Erie Indemnity Company recorded income of $22.8 million during the first quarter of 2005, compared to $19.4 million for the same period in 2004, an increase of 17.9%. Investment income net of expenses was relatively flat during the quarter, decreasing by 1.5% to $14.5 million from $14.7 million a year earlier. This was primarily due to two factors; slightly lower yields on the investment portfolio, and cash flows deployed into the stock repurchase plan totally $14.6 million for the quarter.

The increase in net revenue from investment operations thus far in 2005 is due in part to equity in earnings of limited partnership investments of $2.1 million, compared to $0.4 million in the first quarter of 2004. In addition, sales of common equity securities in the first quarter of 2005 drove a $2.6 million increase in net realized capital gains on investment.

The Company also was affected by impairment charges of $1.5 million included in the net realized capital gains or losses on fixed maturity and equity investments in the first quarter of 2005. There were no impairment charges on those securities in the first quarter of 2004.

Equity and earnings of limited partnerships was $2.1 million and $0.4 million for the quarters ended March 31, 2005 and 2004, respectively. Private equity in mezzanine debt limited partnerships generated earnings of $1.1 million and $0.1 million for the three months ended March 31, 2005 and 2004, respectively.

Real estate limited partnership investments generated $1 million in earnings in the first quarter of 2005, compared to $0.3 million in the first quarter of 2004. There were impairment charges of $0.6 million and $0.1 million on limited partnerships in the first quarters of 2005 and 2004, respectively, related to private equity limited partnerships.

During the first quarter of 2005, the company repurchased 285,428 shares of its outstanding class A common stock, in conjunction with the stock repurchase plan that was authorized in December, 2003. And as I mentioned, the shares were purchased at a total cost of $14.6 million, or an average price per share of $51.21.

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

(OPERATOR INSTRUCTIONS.) Charles Gates, CS First Boston.

I had one question and one follow-up question. My first question, if you commented on frequency I missed it. Could you comment on what frequency looks like or occurred during the first quarter versus previous experience?

Yes, our frequency trends continue to be positive. I think that's being experienced throughout the industry. Our frequency trends in auto continue to be positive, and our frequency trends in homeowners continue to be very positive. So, we saw that our combined ratio for our homeowners line was 67.4, our statutory adjusted combined ratio for homeowners with 67.4. So, we're experiencing the same positive frequency trends that you're hearing on all of your calls, Charlie.

So, by positive meaning the declining frequency?

Yes, declining frequencies.

Okay. My follow-up question. I think one of you said that you had initiated pricing adjustments on the order of $5 million with regard to impact in premiums written. And maybe I misunderstood that. I guess the question is, given the election of other companies to reduce rates, how does this kind of an adjustment, which doesn't seem to be very large, position you in the market?

Well, what we always report on, Charlie, is our -- what we refer to as our rating action. We try and give you visibility every quarter around the rating actions that we have either filed -- have been filed and approved, or that are filed and awaiting action, or we're contemplating filing. Last quarter, we reported that we believed that the effect on premium in 2005 would be a positive $8 million. This quarter, we're reporting that that effect we believe to be a negative $5 million. So, from the last time we talked to this quarterly report, we have decreased what we believe our premium from rate increases will be in 2005 by $13 million.

So, that's approximately a 1.5% roughly, back of the envelope adjustment to the pricing of your personal auto book? Would that be a correct comment?

Well, we have a $4 billion book of property casualty business.

I thought that was personal auto. I'm sorry.

Well, that's all of our rating actions is $13 million. It's gone from $8 million positive from last quarter to a $5 million decrease this quarter. So, that's what I'm referring to in the $13 million.

Charlie, I would just add to your point about how does it position us in the market place. In my comments about our segmented pricing model, we've now provided our agents with a wider range of prices, which positions us more favorably in the marketplace, particularly to go after the most desirable business.

Meyer Shields, Legg Mason.

Hi. Good morning. Actually, this is Mike Phillips with Legg Mason filling in for Meyer. Two quick questions for you. One, on your reserve releases in the quarter, can you comment on what lines of business those related to?

Sure. First of all, you have to look -- one thing that we don't probably give you enough visibility on is that our property casualty group, we report on a statutory basis, Mike. And one thing we choose not to do, and we've never done in the accounting around our property casualty group, is record salvage and sub receivables. So, built into our property casualty group's result in a subsequent year, we always anticipate at least several points of positive development from the salvage and subs that we have not recorded at year end, which is going to flow into our next calendar year.

In that 7.9 points of positive re-estimation of reserves is three points of salvage and sub that we received that we did not record in the property casualty pool at the end of last year. So, we always have built in a couple of points of positive development if we get our reserves right in the prior fiscal year.

Now, why is it three points in the first quarter? Well, it's mostly salvage on our auto book, and it tends to come in earlier in the year rather than later. So, if you take that 7.9 points of positive re-estimation and you pull out three points, we have 4.9 points of positive re-estimation. Okay? So, that puts that in context. And it continues to come in in our auto line and in our commercial -- in some of our commercial [multi-apparel] lines. Positive development.

Great. Is the three points of sal-sub, is that kind of typical for our first quarter? Is that what you're--?

Yes. That's kind of typical for our first quarter.

Okay. Great. The second quick question is on your agency appointments. Should we read into only adding 6 in the first quarter, is the 75 is kind of aggressive? Was there seasonality in how you appoint to them or how does that work?

Well, keep in mind when you back off activity to generate agent employments, you can't flip the switch overnight and start it back up. So, there's a lot of activity that has taken place in the first quarter that I would anticipate us catching up. So, it wouldn't be typical to divide our 75 by 4 and see it nicely fall into those. We've encouraged our sales management team to focus on quality employments, and I would expect to see that number rise in the second quarter and jump significantly in the third quarter.

Okay, great. And one final question. On your segmentation pricing, can you show us any details of some of the different factors that you're using in the segmentation, or anything you can share about that?

Well, we're considering a number of attributes, starting with loss experience and whether or not an individual is loss free, whether they've had activity. Of course, we're using an insurance score and that's a model that we purchased externally and so that's factored in. We're also looking at several other interactions that we can further refine our pricing model with.

Elizabeth Malone, Advest.

Could you just go over -- I know you explained that your -- the investment income did drop off compared to a year ago or sequentially, and interest rates had something to do with it. Could you talk a little bit about -- you did a lot of restructuring on the investment portfolio in 2004. And are we to anticipate that that's going to generate generally lower investment income than you'd had in previous quarters?

Yes, Beth. First of all, one thing in investment income we did report a slight decline from March to March in investment income. If you look at December, the December quarter, you'll see that we had investment income of about $16 million, which is a pretty good decline sequentially from December to March.

But, when you look at our data, you're going to see that our March -- excuse me, our June and December quarters in the net investment income line are higher than our March and September quarters. And the reason for that is we have some preferred securities in indemnity, $40 or $50 million of preferred stocks that pay semi-annually. So, you have to really look at the quarterly pattern in estimating and modeling our investment income at indemnity. And you don't want to look at the sequential quarters because of this effect of this preferred stock portfolio.

But to your question, we really haven't restructured the portfolios of indemnity that much. We really restructured the portfolios of the Erie Insurance Exchange, in that we took our common stock allocation down substantially to between 50% and 60% of our statutory surplus at the exchange. It was up around 100. And then, of course, we had a turnover in managers of that common stock portfolio from internally managed to externally managed.

So, you know, a big change, like you said, a big change in the portfolio at the exchange, not at indemnity. Really, indemnity, we -- the only thing we've done is we have a small common stock portfolio that we have gone from internal managers to external managers.

Okay . Thank you. Another question on the technology and the tiering of the product. This has been a big theme among a lot of -- you know, it was led by some of the larger carriers, but now smaller companies are also starting to tier, their books of business, especially in the personal lines.

And I was wondering, do you think this is going to change the competitive environment that you're in? Is this going to make -- you know, does this improve your selection process or does it -- is it actually just a reaction to the competitive conditions in the marketplace that you have to provide this tiering?

Well, let me say, I believe it supplements our competitive position in the fundamentals that we offer. Our agents have always been front-line underwriters. And so, our agents continue to be front-line underwriters in eyeballing individuals and evaluating all attributes of them as a risk. And then we supplement that by using these tiering models, which have many of the different components that I mentioned a few minutes ago, interactions that come into play in terms of using a wider range of prices. And that enables us to be competitive at multiple price points based on the individual risk that's presented to us as a company.

So, is it a reaction? I think it's part of winning in the marketplace and competing for the very best business, and we're positioned to do that.

(OPERATOR INSTRUCTIONS.) Adam Klauber of Cochran Caronia.

Cost of management operations seemed like it was lower this quarter than it's been in the last several quarters -- I'm sorry, the growth of the cost of management operations. Is that a trend we can see going forward?

Well, there's two components, as you know, Adam. There's the commission component and then there's the other operating expenses. So let me address the commission component first.

As you know, the commission component is affected by a couple of things. The two biggest things are the change in commercial commissions that's now reflected in our numbers. And we have -- we quoted that number in the K -- or in the Q.

The other thing that's affecting it is our accruals for our agent bonus, which have gone up in the first quarter substantially, about a $5 million increase in that accrual in the first quarter; not because we believe that the total ultimate number will be bigger for this year, but last year the profitability improved so dramatically that accrual went up pretty dramatically last year quarter-over-quarter, sequential quarter-over-quarter.

So, last year in the first quarter we were accruing much less than we ultimately accrued -- we should have accrued by year-end. So, a big increase in the Founders Award in the commission line, kind of mitigated by the tempering of our commercial commission. So, commissions were up 2.7 percent.

In the operating expenses, they were up 6.7 percent. Again, I made some comments about we are looking at the single biggest cost of management operations, which is personnel costs. We are slowing our growth in hiring. During the first quarter, we also had some reimbursements, particularly IT reimbursements. Some of our people that we anticipated would be coming off our ecommerce project are continuing to work on that project. And so, some of those reimbursements also mitigated the costs going forward.

So, again, we talked about last quarter that we're trying to keep our cost of management of operations, other than commissions, in the mid-single digit growth, more in line with our policy growth, and that's what we're trying to do for the year.

Great. Also, could you talk about competition by major lines in Pennsylvania? Auto, home owners, and commercial?

As you know, Pennsylvania, our home state, continues to be a large portion of our business. We -- with the segmented pricing model, with the frontline underwriting, with the service that is offered, the JD Power & Associates tells us in February that we are the number one company in the nation for collision claims, as well as the number one company for independent agent represented companies for auto and home.

We've got a very strong competitive position. It's heating up out there. There's certainly others out there that are competing for the business as well. But, in auto and home, we are making more progress. There's more to be made. We have other initiatives that we will introduce in 2005 that will position us even more strongly to compete for new business, particularly in automobile.

Commercial continues to be very competitive, but our people, our risk management people, along with our agents and our adjusters, provide strong value in terms of evaluating the risk and responding to any claims associated with those. So, we have a strong position in commercial in the Pennsylvania marketplace.

And that does conclude today's question and answer session. I will now turn the conference back over to Mr. Jeff Ludrof for any closing or additional remarks.

As I noted earlier, last week I had the privilege of addressing Erie shareholders at our annual meeting. In addition to providing an update on the Company's financial condition, I had an opportunity to discuss the transformation of our Company that occurred in 2004, and the optimism we have because of our strengthened financial condition and sound positioning for profitable, consistent growth. I said then, and I'll repeat now, that transformation is not too strong of a word. Our employees and agents helped the company quickly and effectively return to underwriting strength. Now, we can focus on maintaining our underwriting profitability while enhancing our quality growth.

We've implemented new tools that will boost our competitiveness in the marketplace. Combining insurance scoring with tiered pricing and other factors will better match our price with the individual risk. As a result, Erie agents will have a wide arrange of pricing, and the Company will be better positioned to attract and retain the very best customers.

We're also concentrating on further improving the ease of doing business with our Company, both from the perspective of our policyholders and our agents. Our new customer service division and our continued focus on improving the front-end, the agency interface of Erie Connection will enhance the experience of everyone associated with our Company.

While we have transformed our underwriting profitability to outstanding results, we are equally focused on growing our business in line with our underwriting philosophy. Our improved loss experience has allowed us to moderate our pricing, and we have additional plans to stimulate the rate of new business growth.

I am optimistic that you will see our Company grow our new business. In particular, during the third and fourth quarters as our new initiatives take hold.

One day after the shareholders meeting, on April 20th last week, we celebrated the 80th anniversary of the founding of our Company. As I noted to employees, these anniversary's are a tribute to the people who dreamed and developed this great Company, fueled by a passionate and collective commitment to our mission.

Today, 80 years later, we're still creating strategies to win. We are engaged in an ongoing discipline to challenge our thinking and not simply accept the status quo; to retain the best of Erie, and to seek out ways to improve, sustain, and grow into the future. What we do today has a tremendous impact on the success of our Company tomorrow.

I thank you for your continued interest.

Thank you, all. That concludes today's call. Again, a recording of the call will be posted on our website, erieinsurance.com, after 12:30 p.m. Eastern time today. If you have any questions at all, please give me a call at 814-870-4665. Thank you again and have a great day.

And that does conclude today's conference call. Thank you very much for joining us.