Erie Ranked in FORTUNE ‘500;’ Best Lowers Ratings

April 3, 2003

Pennsylvania-based Erie Insurance Group announced that it has been ranked as No. 454 on the 2003 FORTUNE ‘500’ list of the largest American companies based on total revenue. It was No. 610 on the FORTUNE ‘1,000’ list last year. The bulletin indicated Erie was one of 36 newcomers to the list and is one of only 27 companies headquartered in Pennsylvania.

The news evidently didn’t impress A.M. Best Co., which announced that it has downgraded the financial strength rating to A+ (Superior) from A++ (Superior) of Erie’s P/C oiperations, along with the group’s life affiliate, Erie Family Life Insurance Company, which it lowered to A (Excellent) from A+ (Superior). All the companies have “stable” outlooks.

Commenting on the 500 ranking, Erie Insurance Group president and CEO Jeffrey A. Ludrof stated: “We’re honored to be among such prestigious company. I’m reminded of something our founder, H.O. Hirt, always said, “If you give your policyholders the service they have a right to expect, you will grow and you will prosper. This recognition reflects our continued focus on quality growth. It’s just one facet of our longstanding business philosophy, in which underwriting is our focus, growth is consistent and steady, and service is uncompromised.”

In a classic example of the glass being half empty, or half full, depending on one’s point of view, Ludrof stressed that Best had given Eire its second-highest rating A+ (Superior), although he did mention that this was a downgrade from the A++ rating Erie got last year. Erie is nonetheless “in the top 8 percent of domestic property/casualty insurers and groups of insurers rated,” said the bulletin.

Best’s announcement said its downgrade of Erie’s ratings “reflects the deterioration in surplus, high common stock investment leverage, deteriorating operating performance trends and adverse reserve development patterns.” Erie, which has had historically good returns on capital investments, is apparently another victim in the decline in investment values, coupled with increased reserve requirements.

Best indicated that the “recent equity market volatility had a considerable impact on overall surplus levels with an approximate 50% decline for the three-year period ending December 2002. Consequently, common stocks as a percentage of surplus is nearly 100%, exposing capital to additional equity market volatility.”

It also said, “Over the last three years, Erie’s underwriting experience deteriorated due to the combination of severity trends and price competition. Further, reserve development patterns have been unfavorable, requiring reserve strengthening of approximately $184 million related primarily to the private passenger automobile and workers’ compensation lines.”

Best noted the company’s efforts to improve conditions by strengthening its underwriting guidelines and implementing rate increases, but it still sees pressure on earnings in the near term, as these measures will take time to show results.

Best concluded, however, that “Despite the rating change, Erie continues to maintain a strong level of risk-adjusted capitalization as well as a highly competitive position in the independent agency channel. Also, the group’s financial flexibility is favorably impacted by the financial position of its publicly traded management company, Erie Indemnity Company, which as of year-end 2002 had nearly $1 billion in shareholders’ equity and no long-term debt obligations. The group’s market presence is reflective of its reputation for excellent customer service and strong independent agency relationships. This combination has enabled it to consistently record overall renewal retention ratios over 90% across most lines of business. Accordingly, the group’s favorable capital position, its well-defined plans for improved underwriting profitability and the high degree of financial flexibility at Erie Indemnity Company allows A.M. Best to view the outlook for the ratings as stable.”

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