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Erie Indemnity Company Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: November 1, 2012 04:34PM
Erie Indemnity Company (ERIE) filed Quarterly Report for the period ended 2012-09-30. Erie Indemnity Company has a market cap of $2.96 billion; its shares were traded at around $63.01 with a P/E ratio of 21.9 and P/S ratio of 0.6. The dividend yield of Erie Indemnity Company stocks is 3.5%. Erie Indemnity Company had an annual average earning growth of 16.3% over the past 10 years.
Highlight of Business Operations:The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods have been included. Operating results for the nine month period ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The accompanying consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission on February 27, 2012.
In October 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This guidance modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal insurance contracts. The amendments in this guidance specify that the costs are limited to incremental direct costs that result directly from successful contract transactions and would not have been incurred by the insurance entity had the contract transactions not occurred. These costs must be directly related to underwriting, policy issuance and processing, medical and inspection reports and sales force contract selling. The amendments also specify that advertising costs are only included as deferred acquisition costs if the direct-response advertising criteria are met. ASU 2010-26 was effective for interim and annual reporting periods beginning after December 15, 2011. We have elected to prospectively adopt this guidance. The change does not affect the Indemnity shareholder interest nor does it affect Indemnity earnings per share. Acquisition costs capitalized during the three and nine months ended September 30, 2012 totaled $195 million and $559 million, respectively. Acquisition costs that would have been capitalized during the three and nine months ended September 30, 2012 using the previous method of capitalization totaled $200 million and $574 million, respectively. Included in this note below is our updated accounting policy under the caption Deferred acquisition costs.
Life insurance DAC related to traditional life insurance products is amortized in proportion to premium revenues over the premium-paying period of related policies using assumptions about mortality, morbidity, lapse rates, expenses and future yield on related investments established when the policy was issued. Amortization is adjusted each period to reflect policy lapse or termination rates as compared to anticipated experience. DAC related to universal life products and deferred annuities is amortized over the estimated lives of the contracts in proportion to actual and expected future gross profits, investment, mortality, expense margins and surrender charges. Both historical and anticipated investment returns, including realized gains and losses, are considered in determining the amortization of DAC.
Our life insurance operations segment includes traditional and universal life insurance products and fixed annuities marketed to individuals using the same independent agency force utilized by our property and casualty insurance operations. We evaluate profitability of the life insurance segment principally based upon segment net income, including investments, which for segment purposes are reflected in the investment operations segment. At the same time, we recognize that investment-related income is integral to the evaluation of the life insurance segment because of the long duration of life products. For the third quarters of 2012 and 2011, investment activities on life insurance related assets generated revenues of $25 million and $29 million, respectively, resulting in EFL reporting income before income taxes of $12 million and $13 million, respectively, before intercompany eliminations. For the nine months ended September 30, 2012 and 2011, investment activities on life insurance related assets generated revenues of $77 million and $83 million, respectively, resulting in EFL reporting income before taxes of $34 million and $38 million, respectively, before intercompany eliminations.
Includes losses as a result of other-than-temporary impairments and accrual of discount and amortization of premium. These amounts are reported in the Consolidated Statements of Operations. There was $2 million in unrealized gains included in earnings for the nine months ended September 30, 2012 on Level 3 securities.
Stocks Discussed: ERIE,