Best Affirms Erie Group’s ‘A+’ Ratings

March 8, 2004

A.M. Best Co. announced that it has affirmed the financial strength rating of “A+” (Superior) for the property/casualty affiliates of Pennsylvania’s Erie Insurance Group, managed by Erie Indemnity Company. Best said it had also affirmed the financial strength rating of “A” (Excellent) of Erie Family Life Insurance Company. It assigned a “stable” outlook for all of the companies.

“The affirmation of the property/casualty affiliates reflects Erie’s strong risk-adjusted capitalization and modest premium leverage,” said Best. “The group’s capital position is favorably impacted by the financial position of its publicly traded management company, Erie Indemnity Company, which as of year-end 2003, had over $1 billion in shareholders’ equity and no long-term debt obligations.

“Erie maintains a strong market presence reflective of its reputation for excellent customer service, strong independent agency relationships and extensive local market knowledge. This combination enables the group to record overall renewal retention ratios of more than 90 percent across most lines of business.”

Best also noted that “although Erie maintains a long-term investment strategy that historically generated favorable capital appreciation, its predominantly stock weighted portfolio has led to above average investment leverage. To lessen its exposure, Erie considerably reduced its common stock portfolio in the fourth quarter of 2003.”

Best was less upbeat on Erie’s underwriting experience, which it said had “deteriorated over the last several years due to inadequate rates, increasing loss cost trends and weather-related events.” The rating agency indicated, however, that even though “the underwriting experience remained unfavorable, performance in 2003 improved due to the implementation of rate increases and refined risk segmentation as part of a comprehensive plan to address underwriting profitability.”

Best said it “anticipates that Erie’s results will continue to lag its peer group over the near term as a result of additional rate needs, as well as the length of time required to flow through earnings due to the utilization of annual policy terms. However, Erie’s strong risk-adjusted capitalization and financial flexibility at the management company remain significant offsetting factors.”

It also indicated that the “rating affirmation of Erie Family Life Insurance Company is based on its strategic position within Erie, financial support of the parent and its improved investment portfolio. Partially offsetting these factors are a significant growth in interest-sensitive annuity business in recent years and geographic concentration risk with respect to premium production.”

The “A+ “(Superior) financial strength rating was affirmed for the following Erie group P/C affiliates:
— Erie Insurance Exchange
— Erie Insurance Company
— Erie Insurance Company of New York
— Erie Insurance Property & Casualty Company
— Flagship City Insurance Company

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