AM Best Information Services

JUNE 20, 2011 12:00 AM (EDT)

A.M. Best Affirms Ratings of Erie Insurance Group and Erie Family Life Insurance Company

Kenneth Tappen
Senior Financial Analyst—P/C
(908) 439-2200, ext. 5248

Andrew Gold
Senior Financial Analyst—L/H
(908) 439-2200, ext. 5487

Rachelle Morrow
Senior Manager, Public Relations
(908) 439-2200, ext. 5378

Jim Peavy
Assistant Vice President, Public Relations
(908) 439-2200, ext. 5644


OLDWICK, N.J. - JUNE 20, 2011 12:00 AM (EDT)
A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of "aa-" of Erie Insurance Group (Erie) and its property/casualty members. The outlook for the ICR has been revised to positive from stable, and the outlook for the FSR remains stable.

Additionally, A.M. Best has affirmed the FSR of A (Excellent) and ICR of "a" of Erie's life affiliate, Erie Family Life Insurance Company (Erie Family Life). The outlook for these ratings is stable. Concurrently, A.M. Best has withdrawn the ICR of "a+" of Erie's management company, Erie Indemnity Company (Erie Indemnity) [NASDAQ: ERIE]. All companies are headquartered in Erie, PA. (See below for a detailed list of the companies.)

The withdrawal of the ICR for Erie Indemnity is based on the December 31, 2010 sale of its property/casualty insurance subsidiaries and the March 31, 2011 sale of its 21.6% ownership interest of Erie Family Life to Erie Insurance Exchange (Exchange). Consequently, Erie Indemnity is no longer an owner of any risk-bearing insurance companies.

The revised outlook for the ICR of Erie is based on its superior risk-adjusted capitalization, strong five-year operating earnings, which compares favorably to industry norms, and its well-established regional market presence.

Erie's superior capital position is reflective of management's conservative operating philosophy and moderate underwriting leverage measures. Erie's profitable underwriting results are derived from management's adherence to underwriting and pricing discipline, well established agency relationships and controlled operating expenses. Erie's capital position further benefits from its well diversified investment portfolio, prudent loss reserving practices and effective enterprise risk management process, which includes strong catastrophe risk management. Erie maintains a competitive advantage through its superior level of service and protection, combined with its advanced technology platform and agency partnering approach, which strengthens agency loyalty. Erie also has outstanding business persistency as reflected by its high renewal retention ratios across most lines of business.

Erie reported solid net earnings in 2010, which were positively impacted by improved financial markets resulting in increased net investment gain. Impairment charges in 2010 significantly decreased on bonds, preferred stock, common stock and limited partnerships compared to 2009. Erie produced slight underwriting earnings in 2010, with the reduction due to increased catastrophe losses. Despite this result, surplus grew 6.5% to $5.1 billion at year-end 2010 from $4.8 billion at year-end 2009. Additional financial flexibility is available to Erie through Erie Indemnity, which maintains a strong balance sheet and no long-term debt obligations.

Erie's recorded results are somewhat distorted by the profit component portion of the management fee paid to Erie Indemnity. The management agreement with the subscribers at the Exchange stipulates that the management company may retain a fee of up to 25% of all premiums written as compensation for managing the business and affairs of the Exchange. The management fee rate was set at the maximum of 25% for both 2011 and 2010. On average, the profit portion has added nearly four points to the group's expense ratio over the last five years.

Due to Erie's geographic concentration, operating results are subject to legislative changes as well as catastrophe losses. Based on premiums written, Pennsylvania, Maryland, Virginia and Ohio account for approximately 70% of the group's total business. While Erie has sustained a strong capital position, its financial condition remains susceptible to severe weather-related events and further declines in the value of certain securities held in its investment portfolio.

The affirmation of Erie Family Life's ratings acknowledges its integral position within Erie as evidenced by a substantial cash contribution to the company in 2009, consistent positive statutory operating results and favorable level of risk-adjusted capitalization based on Best's Capital Adequacy Ratio. Partially offsetting these positive rating factors are Erie Family Life's large exposure to interest-sensitive fixed annuities resulting in significant spread compression.

The FSR of A+ (Superior) and ICR of "aa-" have been affirmed for Erie Insurance Group and its following property/casualty members:

- Erie Insurance Exchange

- Erie Insurance Company

- Erie Insurance Company of New York

- Erie Insurance Property & Casualty Company

- Flagship City Insurance Company

The principal methodology used in determining these ratings is Best's Credit Rating Methodology - Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best's rating process and highlights the different rating criteria employed. Additional key criteria utilized include: "Rating Members of Insurance Groups"; "Risk Management and the Rating Process for Insurance Companies"; "Understanding BCAR for Property/Casualty Insurers"; "Natural Catastrophe Stress Test Methodology"; "Catastrophe Risk Management Incorporated Within the Rating Analysis"; and "Understanding BCAR for Life and Health Insurers." Methodologies can be found at

Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source.

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