Erie Indemnity Reports Strong Fourth Quarter Net Operating Income

Key points for the fourth quarter 2007:

-- Net income was $32.6 million for the fourth quarter of 2007, down from $45.5 million for the same period in 2006. Net income per share-diluted decreased to $0.55 per share, compared to $0.71 per share in the comparable quarter in 2006. Net income in the fourth quarter of 2007 was affected by net realized losses on investments, which included $16.8 million for impairments of securities.

-- Net operating income per share (excluding net realized gains or losses on investments and related taxes) was $0.69 in each of the fourth quarters of 2007 and 2006.

-- Gross margins from management operations increased to 15.5 percent in the fourth quarter of 2007 from 14.2 percent in the fourth quarter of 2006.

-- The GAAP combined ratio of the insurance underwriting operations was 90.5 percent in the fourth quarter of 2007 compared to 100.0 percent in the same period of 2006.

-- Net revenue from investment operations decreased to $12.4 million from $30.7 million for the fourth quarters of 2007 and 2006, respectively, driven by realized losses on investments.

-- The fourth quarter 2007 provision for income taxes was increased by adjustments to the tax basis of certain limited partnership investments.

"We capped the year with strong 4th quarter performance in our underlying business operations," said John J. Brinling, Jr., president and chief executive officer. "Our refined pricing model, improved retention and the expansion of our agency force helped us continue to grow our total policies in force, with new policies up more than 6 percent over 2006 and new written premium up 9 percent. We continued to retain greater numbers of our current customers ending the year with a strong retention ratio of 90.2 percent. We believe our Company is positioned for another positive year in 2008."

Details of fourth quarter 2007 results - Segment Basis:

Management operations

Management fee revenue grew 1.1 percent, while the direct written premiums of the Property and Casualty Group decreased 0.5 percent in the fourth quarter of 2007 compared to the fourth quarter of 2006. The management fee rate was 25 percent for 2007 and 24.75 percent in 2006. The higher management fee rate in 2007 increased management fee revenue by $2.1 million, or $0.02 per share- diluted for the quarter ended December 31, 2007.

New business premiums written in the fourth quarter of 2007 increased by 6.6 percent to $91.3 million. In the fourth quarter of 2007, personal lines new business premiums written increased 3.5 percent, while commercial lines new business premiums written increased 12.6 percent, when compared to the same period in 2006. The Company's year-over-year policy retention continued to improve to 90.2 at December 31, 2007, compared to 89.5 at December 31, 2006. Rate actions implemented by the Property and Casualty Group resulted in a $13.7 million decrease in direct written premiums during the fourth quarter of 2007.

The total cost of management operations decreased 0.6 percent to $189.2 million in the fourth quarter of 2007, from $190.3 million for the same period in 2006. Commission costs, the largest component of the cost of management operations, increased 1.7 percent to $132.8 million from $130.6 million in the fourth quarter 2006. Normal and accelerated commissions increased $0.3 million, or 0.3 percent, impacted by more agencies receiving accelerated commissions, as expected in conjunction with the recent expansion of the Company's agency force. Agent bonuses increased $0.9 million, or 3.5 percent to $26.3 million in the fourth quarter of 2007 due to a new promotional incentive that began in October 2007.

Fourth quarter cost of management operations, excluding commissions, decreased 5.6 percent to $56.4 million in 2007 from $59.8 million in 2006. Personnel costs decreased by 9.1 percent, or $3.2 million, in the fourth quarter of 2007 primarily due to a $2.5 million adjustment to information technology costs allocated to affiliates. Exclusive of this adjustment, personnel costs decreased $0.7 million as a result of a decrease in the management incentive plan expenses that were offset by higher average pay rates of Company employees.

All other operating costs increased 6.6 percent, or $0.8 million, to $13.8 million for the fourth quarter of 2007 compared to the fourth quarter of 2006. These costs were reduced by $1.8 million due to the information technology cost allocation adjustment mentioned above. Exclusive of this adjustment, all other operating costs increased $2.6 million driven primarily by $1.5 million in additional professional fees related to various corporate initiatives and $1.2 million in additional software purchases, software maintenance and license agreements.

Insurance underwriting operations

The insurance underwriting operations generated gains of $4.9 million in the fourth quarter of 2007. The Property and Casualty Group's adjusted statutory combined ratio was 89.9 and 99.8 in the fourth quarter of 2007 and 2006, respectively.

-- Earned premiums declined $1.2 million for the fourth quarter of 2007 reflecting the trend of premium rate decreases.

-- The fourth quarter 2007 result reflects lower catastrophe levels. Catastrophe losses incurred were $0.5 million, or 0.9 points, in the fourth quarter of 2007 and $2.6 million, or 4.9 points in the fourth quarter of 2006.

-- Adverse development of prior accident year loss reserves, excluding salvage and subrogation recoveries, contributed $0.6 million, or 1.2 points, to the loss ratio in the fourth quarter 2007.

The adverse development in the fourth quarter of 2007 resulted from a change in mortality assumptions used to estimate the pre-1986 automobile catastrophic injury liability reserves. The fourth quarter of 2006 also experienced adverse development resulting primarily from reserve strengthening to the pre-1986 automobile catastrophic injury liability reserves as a result of a change in the medical inflation rate assumption.

Investment operations

Net revenue from investment operations decreased to $12.4 million in the fourth quarter of 2007 compared to $30.7 million in the same period of 2006.

Net investment income, which includes primarily interest and dividends on the Company's fixed maturity and equity security portfolios, decreased 11.5 percent to $12.5 million in the fourth quarter of 2007. The use of funds during the year to repurchase shares of the Company's Class A common stock has reduced the capital available for investment operations. The Company repurchased 320,958 shares of the Company's Class A non-voting common stock at a cost of $16.9 million during the fourth quarter of 2007.

Equity in earnings of limited partnerships totaled $12.8 million in the fourth quarter of 2007. Included in the fourth quarter of 2007 were realized gains recognized in the equity in earnings of limited partnerships of $11.3 million and market value adjustments of $1.5 million. The fourth quarter of 2006 equity in earnings of limited partnerships of $12.7 million included realized gains of $9.7 million with market value adjustments of $3.0 million.

Net realized losses on investments totaled $12.7 million in the fourth quarter of 2007 compared to gains of $2.1 million in the fourth quarter of 2006. Included in net realized losses/gains on investments are impairment charges of $16.8 million and $1.4 million in the fourth quarters of 2007 and 2006, respectively. Contributing to the fourth quarter 2007 impairments were common stock impairments totaling $7.0 million and preferred stock impairments totaling $6.3 million.

Equity in losses of Erie Family Life Insurance Company (EFL) was $0.2 million compared to earnings of $1.8 million in the fourth quarters of 2007 and 2006, respectively. EFL had net realized losses on investments in the fourth quarter of 2007 due to $7.2 million of impairment charges related to their bond portfolio.

The Company adopted Financial Accounting Standard (FAS) 159, "The Fair Value Option for Financial Assets and Financial Liabilities" effective January 1, 2008 for its common stock portfolio. As a result of adopting this standard, all changes in unrealized gains and losses will be reflected in the Company's Statement of Operations. A one-time cumulative-effect adjustment of approximately $11.2 million, net of tax, will be recorded as an increase to retained earnings with an offsetting reduction to other comprehensive income on January 1, 2008.

Income Taxes

The fourth quarter 2007 provision for income taxes was increased by $1.3 million for adjustments made to the tax basis and sale of certain limited partnership investments that impacted the Company's deferred tax liability. The low effective income tax rate of 26.8 percent in the fourth quarter 2006 was influenced by the effect of favorable IRS audit adjustments and a downward adjustment to the effective income tax rate recorded through the first three quarters of 2006.

Key points for the full-year 2007:

-- Net income was $212.9 million for the year ended December 31, 2007, a 4.4 percent increase from $204.0 million for the year ended December 31, 2006. Net income per share-diluted increased to $3.43 per share from $3.13 per share in 2006. Net income was impacted by improved underwriting operations and limited partnership earnings.

-- Net operating income per share (excluding net realized gains or losses on investments and related taxes) increased 11.9 percent to $3.48 in 2007, compared to $3.12 in 2006.

-- Management fee revenue increased 0.4 percent to $947.0 million, from $942.8 million for the same period one year ago. Gross margins from management operations decreased to 18.1 percent for the year ended December 31, 2007 from 19.2 percent in 2006.

-- GAAP combined ratios of the insurance underwriting operations improved to 88.1 percent for 2007 from 93.7 percent for 2006.

-- Catastrophe losses contributed 1.7 points and 4.0 points in 2007 and 2006, respectively.

-- Positive prior accident year loss reserve development favorably impacted the combined ratio in 2007.

-- Net revenue from investment operations was positively impacted by a 42.9 percent increase in earnings from limited partnership investments in 2007.

-- The Company repurchased 4.5 million shares of its common stock in 2007 at a cost of $236.7 million. -- Erie Indemnity Company