A.M. Best Affirms Financial Strength Ratings for Erie Insurance

A.M. Best Affirms Financial Strength Ratings for Erie Insurance

Business Editors

OLDWICK, N.J.–(BUSINESS WIRE)–March 8, 2002

A.M. Best Co. has affirmed the financial strength ratings of the property/casualty and life affiliates of the Erie Insurance Group, Erie, Pennsylvania.

The ratings reflect the group’s superior capitalization, competitive position in the independent agency channel and favorable regional business profile. Despite substantial declines in surplus over the last two years, the group’s capital remains within the guidelines of the current rating level. While operating returns are below those of its peers, reported results are somewhat distorted by the profit component portion of the management fee paid by Erie Insurance Exchange to its attorney-in-fact, Erie Indemnity Company. When adjusted to account for this component as a dividend payment instead of an underwriting expense, the group’s five year average pre-tax operating return is 10%, versus the reported 3%.

Recent results reflect Erie’s above average investment leverage, declining underwriting experience and losses on the assumed reinsurance line. While the group’s long-term capital appreciation investment strategy has historically generated capital gains and surplus growth, the predominantly stock weighted investment portfolio has led to high investment leverage with corresponding exposure to equity market volatility. Recent underwriting experience has deteriorated due to the combination of price competition, increasing loss costs and weather related events. In addition, 2001 results include assumed reinsurance losses of approximately $150 million related to the events of September 11. Erie has subsequently tightened its guidelines on the assumed reinsurance line as well implemented terrorist exclusions where applicable.

Erie Family Life Insurance Company, as a member of the Erie Insurance Group, has faced similar challenges in terms of above average investment leverage in the equity sector. This strategy has been reevaluated and the allocation has been gradually reduced over the last twelve months. As a member of the Erie Insurance Group, Erie Life also enjoys benefits related to the group’s strengths in terms of financial strength, marketing, distribution and customer reach.

Although Erie Insurance Group has implemented rate increases across the majority of its lines of business in response to rising loss costs and market rate firming, A.M. Best anticipates the group’s results will continue to be pressured over the intermediate term. Unlike many of its peers, Erie’s automobile policies are for a one-year term. While the annual policy contributes to high policyholder retention levels, it likely will temper improvement in results given the timing involved in earning rate increases.

Finally, there is transitional uncertainty associated with Erie’s on-going search for a Chief Executive Officer subsequent to the retirement of former CEO, Stephen Milne, on January, 18, 2002.

The following financial strength ratings have been affirmed for the Erie Insurance property/casualty and life affiliates:

– Erie Insurance Company A++ (Superior)

– Erie Insurance Company of New York A++ (Superior)

– Erie Insurance Exchange A++ (Superior)

– Erie Insurance Property and Casualty Company A++ (Superior)

– Flagship City Insurance Company A++ (Superior)

– Erie Family Life Insurance Company A+ (Superior)

A.M. Best Co., established in 1899, is the world’s oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best’s Web site at www.ambest.com.

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