Edgar Filing: ERIE INDEMNITY CO

ERIE INDEMNITY COMPANY 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PERSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

Commission file number 0-24000

ERIE INDEMNITY COMPANY

(Exact name of registrant as specified in its charter)


PENNSYLVANIA		25-0466020

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


100 Erie Insurance Place, Erie, Pennsylvania		16530

(Address of principal executive offices)		(Zip Code)

(814) 870-2785

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No o

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

The number of shares outstanding of the registrant’s Class A Common Stock as of the latest practicable date, with no par value and a stated value of $.0292 per share, was 51,801,612 at April 23, 2008.

The number of shares outstanding of the registrant’s Class B Common Stock as of the latest practicable date, with no par value and a stated value of $70 per share, was 2,551 at April 23, 2008.

The common stock is the only class of stock the registrant is presently authorized to issue.

INDEX

ERIE INDEMNITY COMPANY


PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Statements of Financial Position—March 31, 2008 and December 31, 2007	3
	Consolidated Statements of Operations—Three months ended March 31, 2008 and 2007	5
	Consolidated Statements of Comprehensive Income—Three months ended March 31, 2008 and 2007	6
	Consolidated Statements of Cash Flows—Three months ended March 31, 2008 and 2007	7
	Notes to Consolidated Financial Statements—March 31, 2008	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

Item 4.	Controls and Procedures	44

PART II.	OTHER INFORMATION	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 6.	Exhibits	46

	SIGNATURES	47
EX-31.1
EX-31.2
EX-32

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(dollars in thousands, except share data)


	March 31,		December 31,
	2008		2007
	(Unaudited)
Assets

Investments
Available-for-sale securities, at fair value:
Fixed maturities (amortized cost of $659,870 and $702,488, respectively)	$	659,470	$	703,406
Equity securities (cost of $112,322 and $204,005, respectively)		107,967		218,270
Trading securities, at fair value (cost of $107,125)		110,664		0
Limited partnerships (cost of $239,001 and $235,886, respectively)		290,508		292,503
Real estate mortgage loans		4,511		4,556

Total investments		1,173,120		1,218,735

Cash and cash equivalents		31,201		31,070
Accrued investment income		10,085		9,713
Premiums receivable from policyholders		241,098		243,612
Federal income taxes recoverable		0		1,451
Reinsurance recoverable from Erie Insurance Exchange on unpaid losses and loss adjustment expenses		825,345		833,554
Ceded unearned premiums to Erie Insurance Exchange		113,400		110,524
Note receivable from Erie Family Life Insurance		25,000		25,000
Other receivables due from Erie Insurance Exchange and affiliates		230,607		208,752
Reinsurance recoverable from non-affiliates		2,439		2,323
Deferred policy acquisition costs		15,919		16,129
Equity in Erie Family Life Insurance		58,977		59,046
Securities lending collateral		31,505		30,370
Pension plan asset		31,284		32,460
Other assets		60,976		55,884

Total assets	$	2,850,956	$	2,878,623

See accompanying notes to Consolidated Financial Statements.

ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Continued)
(dollars in thousands, except share data)


	March 31,			December 31,
	2008			2007
	(Unaudited)
Liabilities and shareholders’ equity

Liabilities
Unpaid losses and loss adjustment expenses	$	1,017,054		$	1,026,531
Unearned premiums		417,298			421,263
Commissions payable and accrued		126,799			122,473
Agent bonuses		17,939			94,458
Securities lending collateral		31,505			30,370
Bank line of credit		75,000			0
Accounts payable and accrued expenses		68,931			41,057
Deferred executive compensation		21,836			23,499
Federal income taxes payable		16,986			0
Deferred income taxes		8,611			14,598
Dividends payable		23,107			23,637
Employee benefit obligations		29,930			29,458

Total liabilities		1,854,996			1,827,344


Shareholders’ Equity
Capital stock:
Class A common, stated value $.0292 per share; authorized 74,996,930 shares; issued 68,277,600 shares; 52,134,286 and 53,338,937 shares outstanding, respectively		1,991			1,991
Class B common, convertible at a rate of 2,400 Class A shares for one Class B share, stated value $70 per share; and 2,551 shares authorized, issued and outstanding		179			179
Additional paid-in capital		7,830			7,830
Accumulated other comprehensive (loss) income		(2,453	)		10,048
Retained earnings, before cumulative effect adjustment		1,747,044			1,740,174
Cumulative effect adjustment from adoption of Statement of Financial Accounting Standards No. 159, net of tax		11,191			0

Retained earnings, after cumulative effect adjustment		1,758,235			1,740,174

Total contributed capital and retained earnings		1,765,782			1,760,222

Treasury stock, at cost, 16,143,314 and 14,938,663 shares, respectively		(769,822	)		(708,943	)

Total shareholders’ equity		995,960			1,051,279

Total liabilities and shareholders’ equity	$	2,850,956		$	2,878,623

See accompanying notes to Consolidated Financial Statements.

ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(dollars in thousands, except per share data)


	Three months ended March 31,
	2008			2007
Operating revenue
Management fee revenue, net	$	216,971		$	216,020
Premiums earned		51,926			51,974
Service agreement revenue		7,391			7,418

Total operating revenue		276,288			275,412

Operating expenses
Cost of management operations		181,119			179,886
Losses and loss adjustment expenses incurred		33,760			32,234
Policy acquisition and other underwriting expenses		11,999			11,995

Total operating expenses		226,878			224,115

Investment (loss) income — unaffiliated
Investment income, net of expenses		11,672			13,978
Net realized (losses) gains on investments		(24,579	)		1,890
Equity in earnings of limited partnerships		7,978			12,518

Total investment (loss) income — unaffiliated		(4,929	)		28,386

Income before income taxes and equity in (losses) earnings of Erie Family Life Insurance		44,481			79,683
Provision for income taxes		14,251			24,592
Equity in (losses) earnings of Erie Family Life Insurance, net of tax		(253	)		1,270

Net income	$	29,977		$	56,361


Net income per share
Class A common stock — basic	$	0.57		$	0.97
Class A common stock — diluted		0.51			0.88
Class B common stock — basic and diluted		84.57			149.01

Weighted average shares outstanding — basic
Class A common stock		52,827,878			57,691,289
Class B common stock		2,551			2,573
Weighted average shares outstanding — diluted
Class A common stock		58,965,265			63,906,458
Class B common stock		2,551			2,573

Dividends declared per share
Class A common stock	$	0.44		$	0.40
Class B common stock		66.00			60.00

See accompanying notes to Consolidated Financial Statements.

ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands)


	Three months ended March 31,
	2008			2007
Accumulated other comprehensive income
Balance, beginning of period	$	10,048		$	5,422
Adjustment to opening balance, net of tax*		(11,190	)		0

Adjusted balance, beginning of period		(1,142	)		5,422

Gross unrealized (losses) gains arising during period		(12,904	)		3,794
Less: reclassification adjustment for gross realized losses (gains) included in net income		10,888			(1,890	)

Change in comprehensive income, before tax		(2,016	)		1,904
Income tax benefit (expense) related to items of other comprehensive income		705			(666	)

Change in other comprehensive income, net of tax		(1,311	)		1,238

Balance, end of period	$	(2,453	)	$	6,660


Comprehensive income
Net income	$	29,977		$	56,361
Net change in Accumulated other comprehensive income		(1,311	)		1,238

Total comprehensive income	$	28,666		$	57,599


*		Unrealized gains related to common stocks were reclassified to retained earnings upon the adoption of the fair value option in accordance with SFAS No. 159. See Note 6 for further discussion.

See accompanying notes to Consolidated Financial Statements.

ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)


	Three months ended March 31,
	2008			2007
Cash flows from operating activities
Management fee received	$	193,955		$	223,952
Service agreement fee received		6,991			7,818
Premiums collected		50,359			50,165
Settlement of commutation received from Exchange		0			6,782
Net investment income received		12,634			13,577
Limited partnership distributions		29,616			15,776
Salaries and wages paid		(25,551	)		(27,831	)
Employee benefits paid		(5,858	)		(9,759	)
Commissions paid to agents		(96,444	)		(95,142	)
Agent bonuses paid		(94,399	)		(91,403	)
General operating expenses paid		(30,737	)		(26,827	)
Losses paid		(29,404	)		(29,023	)
Loss adjustment expenses paid		(5,560	)		(6,198	)
Other underwriting and acquisition costs paid		(16,880	)		(16,985	)
Income taxes (paid) recovered		(2,475	)		1,077

Net cash (used in) provided by operating activities		(13,753	)		15,979


Cash flows from investing activities
Purchase of investments:
Fixed maturities		(25,523	)		(62,421	)
Preferred stock		(12,972	)		(9,101	)
Common stock		(26,475	)		(14,280	)
Limited partnerships		(18,480	)		(24,131	)
Sales/maturities of investments:
Fixed maturity sales		50,207			31,504
Fixed maturity calls/maturities		13,656			25,992
Preferred stock		7,692			4,531
Common stock		12,795			18,736
Return on limited partnerships		1,238			2,849
Purchase of property and equipment		(3,605	)		(753	)
Net distributions of agent loans		(1,049	)		(231	)

Net cash used in investing activities		(2,516	)		(27,305	)


Cash flows from financing activities
Proceeds from bank line of credit		75,000			—
Purchase of treasury stock		(34,962	)		(15,072	)
Dividends paid to shareholders		(23,638	)		(23,265	)
Increase in collateral from securities lending		1,135			3,721
Redemption of securities lending collateral		(1,135	)		(3,721	)

Net cash provided by (used in) financing activities		16,400			(38,337	)


Net increase (decrease) in cash and cash equivalents		131			(49,663	)
Cash and cash equivalents at beginning of period		31,070			60,241

Cash and cash equivalents at end of period	$	31,201		$	10,578

See accompanying notes to Consolidated Financial Statements.

ERIE INDEMNITY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements, which include the accounts of Erie Indemnity Company and our wholly owned property/casualty insurance subsidiaries, Erie Insurance Company (EIC), Erie Insurance Company of New York (EINY) and Erie Insurance Property and Casualty Company (EIPC), have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles (GAAP) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, refer to the consolidated financial statements and footnotes included in our Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on February 27, 2008. Erie Insurance Exchange (Exchange), for whom we serve as attorney-in-fact, and its property/casualty subsidiary, Flagship City Insurance Company, our three insurance subsidiaries, EIC, EICNY and EIPC and Erie Family Life Insurance Company (EFL) operate collectively as the Erie Insurance Group (Group).

NOTE 2 — RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In 2007, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 gave us the irrevocable option to report selected financial assets and liabilities at fair value. SFAS 159 also established presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement bases for similar types of assets and liabilities. We adopted the fair value option for our common stock portfolio as of January 1, 2008 because it better reflects the way we manage our common stock portfolio under a total return approach. These assets were formerly accounted for as available-for-sale under SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” with changes in fair value recorded in other comprehensive income. Beginning January 1, 2008 all changes in fair value of our common stock are recognized in earnings as they occur. The adoption of SFAS 159 required the unrealized gains and losses on these securities at January 1, 2008 to be included in a cumulative effect adjustment to beginning retained earnings. The net impact of the cumulative effect adjustment for our common stock portfolio on January 1, 2008 increased retained earnings and reduced other comprehensive income by $11.2 million, net of tax. See also Note 6 herein.

In 2006, SFAS 157, “Fair Value Measurements,” was issued and provides guidance for using fair value to measure assets and liabilities as well as enhances disclosures about fair value measurements. The standard applies whenever other standards require, or permit, assets or liabilities to be measured at fair value. The standard did not expand the use of fair value in any new circumstances and thus, did not have an impact on our financial position, results of operations or cash flows. The statement established a fair value hierarchy that prioritizes the observable and unobservable inputs to valuation techniques used to measure fair value into three levels. Quantitative and qualitative disclosures will focus on the inputs used to measure fair value for these measurements and the effects of these measurements in the financial statements. We implemented this standard during the first quarter of 2008 and have provided the required disclosures concerning inputs used to measure fair value in Note 6 herein.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES

Available-for-sale securities

Fixed maturity and preferred stock securities are classified as available-for-sale and are reported at fair value. Unrealized holding gains and losses, net of related tax effects, on fixed maturities and preferred stock are charged or credited directly to shareholders’ equity as accumulated other comprehensive (loss) income.

Realized gains and losses on sales of fixed maturity and preferred stock securities are recognized in income based upon the specific identification method. Interest and dividend income are recognized as earned.

Fixed income and preferred stock securities are evaluated quarterly for other-than-temporary impairment loss. Some factors considered in evaluating whether or not a decline in fair value is other-than-temporary include:

	•		the extent and duration to which fair value is less than cost;

	•		historical operating performance and financial condition of the issuer;

	•		short and long-term prospects of the issuer and its industry based on analysts’ recommendations;

	•		specific events that occurred affecting the issuer, including a ratings downgrade; and

	•		our ability and intent to hold the investment for a period of time sufficient to allow for a recovery in value.

An investment that is deemed impaired is written down to its estimated fair value. Impairment charges are included in net realized (losses) gains in the Consolidated Statements of Operations.

Trading securities

Common stock securities were classified from available-for-sale at December 31, 2007 to trading in the first quarter of 2008 with our adoption of SFAS 159. Common stock securities are reported at fair value. As of January 1, 2008, unrealized gains and losses on these securities are included in net realized (losses) gains in the Consolidated Statements of Operations. Realized gains and losses on sales of common stock are recognized in income based upon the specific identification method. Dividend income is recognized as earned.

NOTE 4 — RECLASSIFICATIONS

Certain amounts previously reported in the 2007 financial statements have been reclassified to conform to the current period’s presentation. Such reclassifications only affected the statements of cash flows.

NOTE 5 — EARNINGS PER SHARE

Earnings per share are calculated under the two-class method, which allocates earnings to each class of stock based on its dividend rights. Class B shares are convertible into Class A shares at a conversion ratio of 2,400 to 1. Class A diluted earnings per share are calculated under the if-converted method which reflects the conversion of Class B shares and the effect of potentially dilutive outstanding employee stock-based awards under the long-term incentive plan and awards not yet vested related to the outside directors’ stock compensation plan.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5 — EARNINGS PER SHARE (Continued)

A reconciliation of the numerators and denominators used in the basic and diluted per-share computations is presented below for each class of common stock:


	Three Months Ended March 31,
	2008						2007
	Allocated		Weighted				Allocated		Weighted
(dollars in thousands,	net income		shares		Per-share		net income		shares		Per-share
except per share data)	(numerator)		(denominator)		amount		(numerator)		(denominator)		amount

Class A — Basic EPS:
Income available to Class A stockholders	$	29,761		52,827,878	$	0.57	$	55,978		57,691,289	$	0.97


Dilutive effect of stock awards		0		14,987		—		0		39,969		—


Assumed conversion of Class B shares		216		6,122,400		—		383		6,175,200		—


Class A — Diluted EPS:
Income available to Class A stockholders on Class A equivalent shares	$	29,977		58,965,265	$	0.51	$	56,361		63,906,458	$	0.88


Class B — Basic and diluted EPS:
Income available to Class B stockholders	$	216		2,551	$	84.57	$	383		2,573	$	149.01

Included in the restricted stock awards not yet vested are awards of 12,535 and 37,716 for the first quarter of 2008 and 2007, respectively, related to our pre-2004 long-term incentive plan for executive and senior management. Awards not yet vested related to the outside directors’ stock compensation plan were 2,452 and 2,253 for the first quarters of 2008 and 2007, respectively.

NOTE 6 — FAIR VALUE

Fair Value Measurement (SFAS 157)

SFAS 157 provides guidance for using fair value to measure assets and liabilities and enhances disclosures about fair value measurement (see Note 2). The standard describes three levels of inputs that may be used to measure fair value which are provided below.

Valuation techniques used to derive fair value of our available-for-sale and trading securities are based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources. Unobservable inputs reflect our own assumptions regarding exit market pricing for these securities. These techniques provide the inputs for the following fair value hierarchy:


Level 1		Unadjusted quoted prices for identical instruments in active markets. Such prices are obtained from third-party nationally recognized pricing services.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 6 — FAIR VALUE (Continued)


Level 2		Inputs other than quoted prices included in Level 1 that are observable for the asset. These would include observable broker or dealer quotes.

Level 3		Inputs are unobservable for the security. Fair values are determined using comparable securities or valuations received from various broker or dealer quotes.

We value our municipal securities, mortgage backed securities, asset-backed securities, collateralized-mortgage-obligation securities, foreign and domestic corporate bonds and redeemable preferred stock with Level 2 inputs provided by third party nationally recognized pricing services. A certain amount of these holdings may also be valued using Level 3 inputs. For Level 3 fixed maturities fair values are generally determined by outside brokers or dealers. Examples of Level 3 fixed maturities may include certain private redeemable preferred stock and bond securities, collateralized debt and loan obligations, and credit linked notes.

For our holdings in publicly traded common and nonredeemable preferred stocks Level 1 inputs from third party nationally recognized pricing services are used to determine fair value. Instances exist when current market quotes in active markets are unavailable for certain nonredeemable preferred stocks. In these instances, we receive estimated fair values from the pricing services that provide fair values for our fixed maturity holdings; these are included as Level 2 inputs. We also hold a small number of private nonredeemable preferred stock securities and due to the unobservable inputs regarding these securities valuations are obtained from various brokers or dealers and are classified as Level 3 inputs.

The following table represents the fair value measurements on a recurring basis for our invested assets by major category and level of input as required by SFAS 157:


	March 31, 2008
	Fair value measurements using:
(dollars in thousands)	Total		Level 1		Level 2		Level 3

Available-for-sale securities:
Fixed maturities	$	659,470	$	10,359	$	638,565	$	10,546
Preferred stock		107,967		64,623		36,477		6,867
Trading securities:
Common stock		110,664		110,643		0		21

Total	$	878,101	$	185,625	$	675,042	$	17,434

The following table provides a reconciliation of assets measured at fair value on a recurring basis for securities using Level 3 inputs:


	Fair value measurements using Level 3 instruments only
			Net Gains and Losses
	Beginning					Included						Transfer
	balance at					in other						in and		Ending
	December 31,		Included			comprehensive			Purchases			(out) of		balance at
(dollars in thousands)	2007		in earnings			income			and sales			Level 3		March 31, 2008

Available-for-sale securities:
Fixed maturities	$	10,941	$	0		$	(166	)	$	(229	)	$	0	$	10,546
Preferred stock		5,858		(452	)		(539	)		2,000			0		6,867
Trading securities:
Common stock		21		0			0			0			0		21

Total	$	16,820	$	(452	)	$	(705	)	$	1,771		$	0	$	17,434

Transfers in and out of Level 3 would be attributable to changes in the ability to observe significant inputs in determining fair value exit pricing. As noted in the table above, at March 31, 2008, no transfers were made in or out of Level 3 inputs during the quarter.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 6 — FAIR VALUE (Continued)

For the period ended March 31, 2008 realized losses included in earnings totaled $0.5 million and are reported in the Consolidated Statements of Income. There were no unrealized gains or losses included in earnings at March 31, 2008 on Level 3 securities.

We have no assets that were measured at fair value on a nonrecurring basis during the three months ended March 31, 2008.

Fair Value Option (SFAS 159)

Effective January 1, 2008, the Company adopted SFAS 159 for our common stock portfolio (See Note 2). The following table represents the December 31, 2007 carrying value of these assets, the transition adjustment booked to retained earnings and the carrying value as of January 1, 2008.


			Cumulative effect			January 1, 2008
	December 31, 2007		adjustment to			fair value
	(carrying value		January 1, 2008			(carrying value
(dollars in thousands)	prior to adoption)		retained earnings			after adoption)
Common stock	$	108,090	$	17,216		$	108,090

Deferred tax adjustment				(6,025	)

Carrying value, net of deferred tax adjustment			$	11,191

The decrease in fair value for the first quarter of 2008, of $13.7 million was reported in realized (losses) gains on investments in the Consolidated Statement of Operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7 — INVESTMENTS

Fixed maturities and equity securities

Fixed maturities consist of bonds, notes and redeemable preferred stock. Equity securities include nonredeemable preferred stock at March 31, 2008 and common and preferred stock at December 31, 2007. The following tables summarize the cost and fair value of our available-for-sale securities:


	March 31, 2008
			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
(dollars in thousands)	cost		gains		losses		fair value


Available-for-sale securities
Fixed maturities
U.S. treasuries and government agencies	$	3,803	$	405	$	0	$	4,208
Foreign government		1,997		52		0		2,049
Municipal securities		244,874		2,751		762		246,863
U.S. corporate debt		291,073		5,900		7,171		289,802
Foreign corporate debt		80,133		2,041		2,209		79,965
Mortgage-backed securities		9,700		563		157		10,106
Asset-backed securities		13,932		0		1,883		12,049


Total bonds		645,512		11,712		12,182		645,042
Redeemable preferred stock		14,358		317		247		14,428

Total fixed maturities	$	659,870	$	12,029	$	12,429	$	659,470

Equity securities
U.S. nonredeemable preferred stock	$	107,192	$	1,302	$	5,511	$	102,983
Foreign nonredeemable preferred stock		5,130		134		280		4,984

Total equity securities	$	112,322	$	1,436	$	5,791	$	107,967

Total available-for-sale securities	$	772,192	$	13,465	$	18,220	$	767,437

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7 — INVESTMENTS (Continued)


	December 31, 2007
			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
(dollars in thousands)	cost		gains		losses		fair value

Fixed maturities
U.S. treasuries and government agencies	$	4,406	$	272	$	0	$	4,678
Municipal securities		247,412		2,314		358		249,368
U.S. corporate debt		324,218		5,231		5,921		323,528
Foreign corporate debt		83,335		2,175		1,106		84,404
Mortgage-backed securities		11,565		602		38		12,129
Asset-backed securities		16,329		0		2,189		14,140

Total bonds		687,265		10,594		9,612		688,247
Redeemable preferred stock		15,223		614		678		15,159

Total fixed maturities	$	702,488	$	11,208	$	10,290	$	703,406

Equity securities
U.S. common stock	$	66,449	$	12,754	$	0	$	79,203
Foreign common stock		24,408		4,549		70		28,887
U.S. nonredeemable preferred stock		108,018		1,978		4,960		105,036
Foreign nonredeemable preferred stock		5,130		250		236		5,144

Total equity securities	$	204,005	$	19,531	$	5,266	$	218,270

When a decline in the value of an investment is considered to be other-than-temporary by management, the investment is written down to fair value. Investment impairments are evaluated on an individual security basis. Adjustments to the carrying value of marketable preferred equity securities and fixed maturities that are considered impaired are recorded as realized losses in the Consolidated Statements of Operations.

Trading securities

Trading securities consist of our common stock portfolio. With the adoption of SFAS 159 as of January 1, 2008, any unrealized gains or losses on these securities are recorded as realized gains and losses in our Statement of Operations. See also Note 6 for further discussion.

The following table summarizes the cost and fair value of our common stock at March 31, 2008:


	March 31, 2008
			Gross		Gross
	Amortized		unrealized		unrealized		Estimated
(dollars in thousands)	cost		gains		losses		fair value

Trading securities
U.S. common stock	$	77,654	$	8,492	$	5,326	$	80,820
Foreign common stock		29,471		2,714		2,341		29,844

Total trading securities	$	107,125	$	11,206	$	7,667	$	110,664

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7 — INVESTMENTS (Continued)

The components of net realized losses and gains on investments as reported in the Consolidated Statements of Operations are included below. Impairment charges for the three months ended March 31, 2008 include securities primarily in the banking and financial services industries.


	Three months ended March 31,
(dollars in thousands)	2008			2007
Available-for-sale securities:
Fixed maturities
Gross realized gains	$	1,294		$	316
Gross realized losses		(138	)		(109	)
Impairment charges		(5,950	)		(246	)

Net realized losses		(4,794	)		(39	)


Equity securities
Gross realized gains		414			3,333
Gross realized losses		(2,334	)		(997	)
Impairment charges		(6,004	)		(407	)

Net realized (losses) gains		(7,924	)		1,929


Trading securities:
Common stock
Gross realized gains		1,979			0
Gross realized losses		(1,777	)		0
Valuation adjustments		(13,691	)		0

Net realized losses		(13,489	)		0


Limited partnerships:
Gross realized gains		3,541			0
Gross realized losses		(1,913	)		0

Net realized gains		1,628			0


Net realized (losses) gains on investments	$	(24,579	)	$	1,890

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7 — INVESTMENTS (Continued)

Limited partnerships

For the three months ended March 31, 2008 our equity in earnings from these partnerships as reported in the Consolidated Statements of Operations totaled 17.9% of our pre-tax income. While we do not exert significant influence over any of these partnerships, because we account for them under the equity method of accounting, we are providing summarized financial information in the following tables as of March 31, 2008 and December 31, 2007. Amounts provided in the “recorded by partnerships” section of the table are presented using the latest available financial statements received from the partnerships.


	Recorded by Erie Indemnity Company
	as of and for the three months ended March 31, 2008
					Income (loss)
					recognized
					due to
					valuation			Net
					adjustments			income
Investment percentage in partnership	Number of		Asset		by the			(loss)
for Erie Insurance Group	partnerships		recorded		partnerships			recorded
			(dollars in thousands)
Private equity:
Less than 10%		27	$	81,962	$	(1,545	)	$	5,527
Greater than or equal to 10% but less than 50%		5		6,131		(1,035	)		1,131
Greater than or equal to 50%		1		4,285		0			0

Total private equity		33		92,378		(2,580	)		6,658
Mezzanine debt:
Less than 10%		13		33,532		642			359
Greater than or equal to 10% but less than 50%		3		12,182		383			(139	)
Greater than or equal to 50%		1		3,841		(132	)		174

Total mezzanine debt		17		49,555		893			394
Real estate:
Less than 10%		19		96,292		(1,585	)		3,627
Greater than or equal to 10% but less than 50%		9		31,107		52			421
Greater than or equal to 50%		7		21,176		(516	)		614

Total real estate		35		148,575		(2,049	)		4,662

Total limited partnerships		85	$	290,508	$	(3,736	)	$	11,714

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED

NOTE 7 — INVESTMENTS (Continued)


	Recorded by Partnerships
	as of and for the three months ended March 31, 2008
					Income (loss)
					recognized
					due to
					valuation
					adjustments
Investment percentage of partnership	Total		Total		by the
for Erie Insurance Group	assets		liabilities		partnerships			Net income
			(dollars in thousands)
Private equity:
Less than 10%	$	22,012,263	$	459,104	$	1,394,936		$	1,933,812
Greater than or equal to 10% but less than 50%		403,056		2,057		38,594			8,626
Greater than or equal to 50%		10,666		165		0			0

Total private equity		22,425,985		461,326		1,433,530			1,942,438
Mezzanine debt:
Less than 10%		4,990,285		1,513,451		(34,904	)		458,319
Greater than or equal to 10% but less than 50%		487,154		163,647		(27,908	)		88,791
Greater than or equal to 50%		25,851		8,859		89			5,545

Total mezzanine debt		5,503,290		1,685,957		(62,723	)		552,655
Real estate:
Less than 10%		17,992,981		7,816,780		94,386			985,888
Greater than or equal to 10% but less than 50%		1,105,586		395,436		(4,890	)		87,837
Greater than or equal to 50%		252,042		138,154		6,367			642

Total real estate		19,350,609		8,350,370		95,863			1,074,367

Total limited partnerships	$	47,279,884	$	10,497,653	$	1,466,670		$	3,569,460

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7 — INVESTMENTS (Continued)


	Recorded by Erie Indemnity Company
	as of and for the year ended December 31, 2007
					Income (loss)
					recognized
					due to valuation
Investment percentage in partnership	Number of		Asset		adjustments			Net income
for Erie Insurance Group	partnerships		recorded		by the partnerships			(loss) recorded

					(dollars in thousands)

Private equity:
Less than 10%		35	$	92,077	$	7,468		$	12,541
Greater than or equal to 10% but less than 50%		7		10,708		1,449			1,566
Greater than or equal to 50%		1		3,831		0			(76	)

Total private equity		43		106,616		8,917			14,031
Mezzanine debt:
Less than 10%		13		30,841		109			3,446
Greater than or equal to 10% but less than 50%		3		10,493		(1,396	)		3,243
Greater than or equal to 50%		1		3,533		207			926

Total mezzanine debt		17		44,867		(1,080	)		7,615
Real estate:
Less than 10%		19		88,426		8,841			14,246
Greater than or equal to 10% but less than 50%		9		29,707		3,357			1,293
Greater than or equal to 50%		7		22,887		2,387			83

Total real estate		35		141,020		14,585			15,622

Total limited partnerships		95	$	292,503	$	22,422		$	37,268

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7 — INVESTMENTS (Continued)


	Recorded by Partnerships
	as of and for the year ended December 31, 2007
					Income (loss)
					recognized
					due to valuation
Investment percentage of partnership	Total		Total		adjustments			Net income
for Erie Insurance Group	assets		liabilities		by the partnerships			(loss)

			(dollars in thousands)

Private equity:
Less than 10%	$	24,802,587	$	558,874	$	303,611		$	2,836,059
Greater than or equal to 10% but less than 50%		416,487		2,232		65,969			3,836
Greater than or equal to 50%		10,349		25		0			(229	)

Total private equity		25,229,423		561,131		369,580			2,839,666
Mezzanine debt:
Less than 10%		4,284,587		366,896		(95,681	)		470,929
Greater than or equal to 10% but less than 50%		434,269		159,209		(34,872	)		84,384
Greater than or equal to 50%		204,909		233		3,855			32,947

Total mezzanine debt		4,923,765		526,338		(126,698	)		588,260
Real estate:
Less than 10%		23,626,981		14,153,607		766,150			629,172
Greater than or equal to 10% but less than 50%		1,106,697		401,752		15,824			49,592
Greater than or equal to 50%		260,058		140,389		9,234			2,108

Total real estate		24,993,736		14,695,748		791,208			680,872

Total limited partnerships	$	55,146,924	$	15,783,217	$	1,034,090		$	4,108,798

During the first quarter of 2008, we sold 10 private equity limited partnerships in the secondary market. Proceeds from these sales totaled $18.0 million from which we recognized $1.6 million in realized gains. The proceeds received from the sales will help to fund the remaining commitments of existing limited partnerships.

See also Note 13 for investment commitments related to limited partnerships.

Securities lending program

To generate additional investment revenue we participate in a program whereby marketable securities from our investment portfolio are lent to independent brokers or dealers based on, among other things, their creditworthiness, in exchange for collateral initially equal to 102% of the value of the securities on loan and is thereafter maintained at a minimum of 100% of the fair value of the securities loaned. The fair value of the securities on loan to each borrower is monitored daily by the third-party custodian and the borrower is required to deliver additional collateral if the fair value of the collateral falls below 100% of the fair value of the securities on loan.

We had loaned securities included as part of our invested assets with a fair value of $30.4 million and $29.4 million at March 31, 2008 and December 31, 2007, respectively. We have incurred no losses on the securities lending program since the program’s inception.

Cash equivalents are principally comprised of investments in bank money market funds and approximate fair value.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7 — INVESTMENTS (Continued)

Bank line of credit

As of March 31, 2008 we have available a $75 million line of credit with a bank that expires on December 31, 2008. Borrowings on this line of credit were $75 million at March 31, 2008. Interest is charged on this line at the Federal Funds Rate (currently at 2.25%) plus 50 basis points. Bonds with a value of $100.5 million are held as collateral on the line at March 31, 2008. These securities have no restrictions and are reported as available-for-sale fixed maturities in the Consolidated Statements of Financial Position. The bank requires compliance with certain covenants which include minimum net worth and leverage ratios. We are in compliance with all of these covenants at March 31, 2008.

NOTE 8 — SUMMARIZED FINANCIAL STATEMENT INFORMATION OF EFL

EFL is an affiliated Pennsylvania-domiciled life insurance company operating in 10 states and the District of Columbia. We own 21.6% of EFL’s outstanding common shares and account for this investment using the equity method of accounting. The remaining 78.4% of EFL is owned by Erie Insurance Exchange.

The following represents unaudited condensed financial statement information for EFL on a GAAP basis:


	Three months ended March 31,
(dollars in thousands)	2008			2007
Revenues	$	26,658		$	40,575
Benefits and expenses		29,376			32,105
(Loss) income before income taxes		(2,718	)*		8,470
Net (loss) income		(1,645	)		6,315
Comprehensive (loss) income		(708	)		8,680


*		In the first quarter of 2008, EFL recognized impairment charges of $14.9 million on fixed maturities and equity securities, primarily in the banking and finance industries. No impairment charges were recognized in the first quarter 2007.


	As of
	March 31,			December 31,
(dollars in thousands)	2008			2007
Investments	$	1,493,030		$	1,511,319
Total assets		1,749,080			1,744,704
Liabilities		1,476,401			1,471,317
Accumulated other comprehensive loss		(528	)		(1,465	)
Total shareholders’ equity		272,679			273,387

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 9 — POSTRETIREMENT BENEFITS

The liabilities for the plans described in this note are presented in total for all employees of the Group. The gross liability for the pension plans is presented in the Consolidated Statements of Financial Position as employee benefit obligations. A portion of annual expenses related to the pension plans is allocated to related entities within the Group.

We offer a noncontributory defined benefit pension plan that covers substantially all employees. This is the largest benefit plan we offer. We also offer an unfunded supplemental retirement plan for certain members of the Erie Insurance Group retirement plan for employees (SERP) for executive and senior management. The components of net periodic benefit cost for our pension benefits are:


	Three months ended
	March 31,
(dollars in thousands)	2008			2007
Service cost	$	3,102		$	3,575
Interest cost		4,509			4,175
Expected return on plan assets		(6,042	)		(5,100	)
Amortization of prior service cost		108			100
Amortization of actuarial loss		2			350

Net periodic benefit cost	$	1,679		$	3,100

The decrease in the net periodic benefit cost of the pension plans is primarily due to change in discount rate to 6.62% for 2008 compared to 6.25% in 2007. Additionally, contributions made in the second quarter of 2007 have increased the asset market value and as a result, the expected returns on such assets have increased in 2008.

NOTE 10 — NOTE RECEIVABLE FROM ERIE FAMILY LIFE INSURANCE COMPANY

We are due $25 million from EFL in the form of a surplus note. The note may be repaid only out of unassigned surplus of EFL and repayment is subject to prior approval by the Pennsylvania Insurance Commissioner. The note bears an annual interest rate of 6.70% and is payable on demand on or after December 31, 2018. EFL accrued interest, payable semi-annually to us, of $0.4 million in each of the first quarters ended March 31, 2008 and 2007.

NOTE 11 — STATUTORY INFORMATION

Cash and securities with carrying value of $6.3 million were deposited by our property/casualty insurance subsidiaries with regulatory authorities under statutory requirements at March 31, 2008 and December 31, 2007.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 12 — SUPPLEMENTARY DATA ON CASH FLOWS

A reconciliation of net income to net cash provided by operating activities as presented in the Consolidated Statements of Cash Flows is as follows:


	Three months ended March 31,
(dollars in thousands)	2008			2007
Cash flows from operating activities
Net income	$	29,977		$	56,361
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,073			7,902
Deferred income tax (expense) benefit		(6,681	)		9,070
Realized loss (gain) on investments		24,579			(1,890	)
Equity in earnings of limited partnerships		(7,978	)		(12,518	)
Net amortization of bond premium		406			545
Undistributed losses (earnings) of Erie Family Life Insurance		272			(1,366	)
Decrease in deferred compensation		(1,663	)		(5,901	)
Limited partnership distributions		29,616			15,776
(Increase) decrease in receivables and reinsurance recoverable from the Exchange and affiliates		(13,046	)		42,772
Increase in prepaid expenses and other assets		(8,124	)		(17,553	)
Increase in accounts payable and accrued expenses		19,777			22,685
Decrease in accrued agent bonuses		(76,519	)		(69,910	)
Decrease in loss reserves		(9,477	)		(24,661	)
Decrease in unearned premiums		(3,965	)		(5,333	)

Net cash (used in) provided by operating activities	$	(13,753	)	$	15,979

NOTE 13 — COMMITMENTS AND CONTINGENCIES

We have contractual commitments to invest up to $129.0 million of additional funds in limited partnership investments at March 31, 2008. These commitments will be funded as required by the partnerships’ agreements through 2012. At March 31, 2008, the total commitment to fund limited partnerships that invest in private equity securities is $53.3 million, real estate activities is $47.8 million and mezzanine debt securities is $27.9 million. We expect to have sufficient cash flows not only from operations but also from cash inflows (distributions) from existing limited partnership investments, which have typically been strong in our experience, to meet these partnership commitments.

We are involved in litigation arising in the ordinary course of business. In our opinion, the effects, if any, of such litigation are not expected to be material to our consolidated financial condition, cash flows or operations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 14 — VARIABLE INTEREST ENTITY

Erie Insurance Exchange (Exchange) is a reciprocal insurance company, domiciled in Pennsylvania, for which we serve as attorney-in-fact. We hold a variable interest in the Exchange, however, we are not the primary beneficiary as defined under Financial Accounting Standards Interpretation 46, “Consolidation of Variable Interest Entities.” We have a significant interest in the financial condition of the Exchange because net management fee revenues are based on the direct written premiums of the Exchange and the other members of the Property and Casualty Group.

The selected financial data below is derived from the Exchange’s financial statements prepared in accordance with Statutory Accounting Principles (SAP) required by the National Association of Insurance Commissioners’ (NAIC) Accounting Practices and Procedures Manual, as modified to include prescribed practices of the Insurance Department of the Commonwealth of Pennsylvania. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation, have been included. The condensed financial data set forth below represents the Exchange’s share of underwriting results after accounting for intercompany pooling transactions.

Erie Insurance Exchange
Condensed statutory statements of operations


	Three months ended March 31,
(dollars in thousands)	2008		2007

Premiums earned	$	887,492	$	889,551
Losses, loss adjustment expenses and other underwriting expenses*		821,418		794,427

Net underwriting income		66,074		95,124
Total investment income**		30,229		136,646

Net income before federal income tax		96,303		231,770
Federal income tax expense		60,800		71,992

Net income	$	35,503	$	159,778


*		Includes management fees paid or accrued as payable to the Company.

**		In the first quarter of 2008, the Exchange recognized impairment charges of $104.9 million on fixed maturities and equity securities, primarily in the banking and finance industry sectors. Impairment charges in the first quarter 2007 were $6.0 million.

Erie Insurance Exchange
Condensed statutory statements of financial position


	As of
	March 31,		December 31,
(dollars in thousands)	2008		2007

Fixed maturities	$	4,255,507	$	4,353,977
Equity securities		2,878,432		3,016,607
Alternative investments		1,374,751		1,389,224
Other invested assets		302,559		168,189

Total invested assets		8,811,249		8,927,997
Other assets		1,142,810		1,033,852

Total assets	$	9,954,059	$	9,961,849

Loss and loss adjustment expense reserves	$	3,400,175	$	3,418,221
Unearned premium reserves		1,426,199		1,430,328
Accrued liabilities		406,574		345,776

Total liabilities		5,232,948		5,194,325
Total policyholders’ surplus		4,721,111		4,767,524

Total liabilities and policyholders’ surplus	$	9,954,059	$	9,961,849

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 14 — VARIABLE INTEREST ENTITY (Continued)

Erie Insurance Exchange
Condensed statutory statements of cash flows


	Three months ended
	March 31,
(dollars in thousands)	2008			2007

Cash flows from operating activities
Premiums collected net of reinsurance	$	869,975		$	881,697
Losses and loss adjustment expenses paid		(518,634	)		(498,225	)
Management fee and expenses paid		(318,634	)		(343,701	)
Net investment income received		142,339			100,354
Federal income taxes and other expenses paid		(7,063	)		(38,388	)

Net cash provided by operating activities		167,983			101,737


Net cash used in investing activities		(15,801	)		(73,835	)

Net cash provided by (used in) financing activities		1,010			(15,785	)

Net increase in cash and cash equivalents		153,192			12,117
Cash and cash equivalents-beginning of period		98,712			85,784

Cash and cash equivalents-end of period	$	251,904		$	97,901

NOTE 15 — SEGMENT INFORMATION

We operate our business as three reportable segments — management operations, insurance underwriting operations and investment operations. Accounting policies for segments are the same as those described in the summary of significant accounting policies Note 3 of our Annual Report on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on February 27, 2008. The management fee revenues received from the property/casualty insurance subsidiaries are not eliminated in the segment detail that follows as management bases its decisions on the segment presentation. Summarized financial information for our operating segments is presented as follows:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 15 — SEGMENT INFORMATION (Continued)


	Three months ended March 31,
(dollars in thousands)	2008			2007


Management operations
Operating revenue
Management fee revenue	$	229,599		$	228,645
Service agreement revenue		7,391			7,418

Total operating revenue		236,990			236,063
Cost of management operations		191,660			190,385

Income before income taxes	$	45,330		$	45,678

Net income from management operations	$	30,807		$	31,581


Insurance underwriting operations
Operating revenue
Premiums earned:
Personal lines	$	36,420		$	35,800
Commercial lines		15,433			16,220
Reinsurance — nonaffiliates		73			(46	)

Total premiums earned		51,926			51,974

Operating expenses
Losses and expenses:
Personal lines		32,192			30,831
Commercial lines		14,971			14,867
Reinsurance — nonaffiliates		683			657

Total losses and expenses		47,846			46,355

Income before income taxes	$	4,080		$	5,619

Net income from insurance underwriting operations	$	2,773		$	3,885


Investment operations
Investment income, net of expenses	$	11,672		$	13,978
Net realized (losses) gains on investments		(24,579	)		1,890
Equity in earnings of limited partnerships		7,978			12,518

Total investment (loss) income-unaffiliated	$	(4,929	)	$	28,386

Net (loss) income from investment operations	$	(3,350	)	$	19,625

Equity in (losses) earnings of EFL, net of tax	$	(253	)	$	1,270

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 15 — SEGMENT INFORMATION (Continued)

Reconciliation of reportable segment revenues and operating expenses to the Consolidated Statements of Operations is as follows:


	Three months ended March 31,
(dollars in thousands)	2008			2007

Segment revenues, excluding investment operations	$	288,916		$	288,037
Elimination of intersegment management fee revenues		(12,628	)		(12,625	)

Total operating revenues	$	276,288		$	275,412

Segment operating expenses	$	239,506		$	236,740
Elimination of intersegment management fee revenue		(12,628	)		(12,625	)

Total operating expenses	$	226,878		$	224,115

The intersegment revenues and expenses that are eliminated in the Consolidated Statements of Operations relate to our property/casualty insurance subsidiaries’ 5.5% share of the intersegment management fees paid to us.

The growth rate of policies in force, policy retention (the percentage of policyholders eligible for renewals who have renewed their policies measured on a twelve-month rolling basis) and average premium per policy trends directly impact our management operations and insurance underwriting operating segments. Below is a summary of each major line of business for the Property and Casualty Group.

Growth rates of policies in force for Property and Casualty Group insurance operations:


	Private		12-mth.					12-mth.			All Other		12-mth.			Total		12-mth.
	Passenger		growth					growth			Personal		growth			Personal		growth
Date	Auto		rate			Homeowners		rate			Lines		rate			Lines		rate
12/31/2006		1,633,882		(0.4	)%		1,377,965		1.8	%		301,497		5.2	%		3,313,344		1.0	%
03/31/2007		1,635,714		0.0			1,384,856		2.1			305,591		5.4			3,326,161		1.3
06/30/2007		1,644,561		0.4			1,398,034		2.3			311,761		5.9			3,354,356		1.7
09/30/2007		1,649,801		0.8			1,408,114		2.5			316,786		6.2			3,374,701		2.0
12/31/2007		1,651,234		1.1			1,413,712		2.6			321,431		6.6			3,386,377		2.2
03/31/2008		1,655,869		1.2			1,420,250		2.6			325,926		6.7			3,402,045		2.3


			12-mth.			CML*		12-mth.					12-mth.			All Other		12-mth.			Total		12-mth.
	CML*		growth			Multi-		growth			Workers		growth			CML*		growth			CML*		growth
Date	Auto		rate			Peril		rate			Comp.		rate			Lines		rate			Lines		rate
12/31/2006		119,801		0.9	%		218,542		2.4	%		53,923		(4.1	)%		92,687		2.7	%		484,953		1.3	%
03/31/2007		119,907		1.1			219,300		2.3			53,498		(3.2	)		92,857		2.8			485,562		1.5
06/30/2007		121,587		1.8			223,670		3.0			53,955		(1.7	)		94,612		3.3			493,824		2.2
09/30/2007		122,154		2.2			226,302		3.9			54,341		(0.1	)		96,167		3.8			498,964		3.0
12/31/2007		122,558		2.3			228,214		4.4			54,720		1.5			96,464		4.1			501,956		3.5
03/31/2008		122,882		2.5			229,577		4.7			54,927		2.7			96,511		3.9			503,897		3.8


*		CML = Commercial


Date	Total All Lines		12-mth. growth rate
12/31/2006		3,798,297		1.0	%
03/31/2007		3,811,723		1.3
06/30/2007		3,848,180		1.8
09/30/2007		3,873,665		2.1
12/31/2007		3,888,333		2.4
03/31/2008		3,905,942		2.5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 15 — SEGMENT INFORMATION (Continued)

Policy retention trends for Property and Casualty Group insurance operations:


	Private
	Passenger			CML*						CML*			Workers			All Other			Total
Date	Auto			Auto			Homeowners			Multi-Peril			Comp.			Lines			All Lines
12/31/2006		90.8	%		87.7	%		89.4	%		86.0	%		85.7	%		87.1	%		89.5	%
03/31/2007		91.0			88.0			89.7			86.1			86.2			87.2			89.7
06/30/2007		91.1			88.1			89.9			86.0			86.3			87.6			89.9
09/30/2007		91.3			88.2			90.1			86.1			86.8			87.5			90.0
12/31/2007		91.5			88.2			90.3			86.0			86.8			87.8			90.2
03/31/2008		91.6			88.4			90.5			86.5			87.6			87.9			90.4


*		CML = Commercial

Average premium per policy trends for Property and Casualty Group insurance operations:


	Private		12-mth.					12-mth.			All Other		12-mth.			Total		12-mth.
	Passenger		percent					percent			Personal		percent			Personal		percent
Date	Auto		change			Homeowners		change			Lines		change			Lines		change
12/31/2006	$	1,110		(5.5	)%	$	526		(3.1	)%	$	349		0.3	%	$	797		(5.2	)%
03/31/2007		1,100		(5.3	)		524		(2.8	)		349		0.0			791		(4.9	)
06/30/2007		1,094		(4.0	)		520		(2.8	)		351		0.9			786		(3.9	)
09/30/2007		1,093		(2.6	)		519		(2.1	)		352		1.1			783		(2.9	)
12/31/2007		1,092		(1.6	)		518		(1.5	)		353		1.1			782		(1.9	)
03/31/2008		1,091		(0.8	)		518		(1.1	)		354		1.4			781		(1.3	)


			12-mth.					12-mth.			All Other		12-mth.			Total		12-mth.			Total		12-mth.
	CML*		percent			Workers		percent			CML*		percent			CML*		percent			All		percent
Date	Auto		change			Comp.		change			Lines		change			Lines		change			Lines		change
12/31/2006	$	2,687		(3.4	)%	$	5,985		(3.7	)%	$	1,657		(2.8	)%	$	2,393		(4.3	)%	$	1,001		(4.8	)%
03/31/2007		2,664		(4.1	)		5,914		(5.7	)		1,641		(4.0	)		2,365		(5.4	)		991		(5.1	)
06/30/2007		2,627		(3.8	)		5,901		(3.9	)		1,616		(3.6	)		2,333		(4.5	)		984		(4.1	)
09/30/2007		2,600		(3.9	)		5,780		(4.4	)		1,592		(4.6	)		2,295		(5.0	)		978		(3.3	)
12/31/2007		2,577		(4.1	)		5,602		(6.4	)		1,581		(4.6	)		2,262		(5.5	)		973		(2.8	)
03/31/2008		2,568		(3.6	)		5,453		(7.8	)		1,576		(4.0	)		2,240		(5.3	)		969		(2.2	)


*		CML = Commercial

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the historical financial information and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on February 27, 2008. The following discussion of financial results focuses heavily on our three primary segments: management operations, insurance underwriting operations and investment operations consistent with the presentation in Item 1, Note 15 in the Notes to Consolidated Financial Statements. That presentation, which management uses internally to monitor and evaluate results, is an alternative presentation of our Consolidated Statements of Operations.

Certain statements contained herein are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are not in the present or past tense and can generally be identified by the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “likely,” “plan,” “project,” “seek,” “should,” “target,” “will,” and other expressions that indicate future trends and events. Forward-looking statements include, without limitation, statements and assumptions on which such statements are based that are related to our plans, strategies, objectives, expectations, intentions and adequacy of resources. Examples of such statements are discussions relating to management fee revenue, cost of management operations, underwriting, premium and investment income volumes, and agency appointments. Such statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Among the risks and uncertainties that could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements are the following: factors affecting the property/casualty and life insurance industries generally, including price competition, legislative and regulatory developments, government regulation of the insurance industry including approval of rate increases, the size, frequency and severity of claims, natural disasters, exposure to environmental claims, fluctuations in interest rates, inflation and general business conditions; the geographic concentration of our business as a result of being a regional company; the accuracy of our pricing and loss reserving methodologies; changes in driving habits; our ability to maintain our business operations including our information technology system; our dependence on the independent agency system; the quality and liquidity of our investment portfolio; our dependence on our relationship with Erie Insurance Exchange; and the other risks and uncertainties discussed or indicated in all documents filed by the Company with the Securities and Exchange Commission, including those described in Part I, “Item 1A. Risk Factors” of the 2007 Form 10-K, which information is incorporated by reference, updated by Part II, “Item 1A. Risk Factors” of this Form 10-Q. A forward-looking statement speaks only as of the date on which it is made and reflects the Company’s analysis only as of that date. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changes in assumptions, or otherwise.

NATURE OF ORGANIZATION

The following organizational chart depicts the organization of the various entities of the Erie Insurance Group:

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

We serve as the attorney-in-fact for the policyholders of Erie Insurance Exchange (Exchange), a reciprocal insurance exchange, and operate predominantly as a provider of certain management services to the Exchange. We also own subsidiaries that are property and casualty insurers. The Exchange and its property/casualty insurance subsidiary, Flagship City Insurance Company, and our three property/casualty insurance subsidiaries, Erie Insurance Company (EIC), Erie Insurance Company of New York (EINY) and Erie Insurance Property and Casualty Company (EIPC), (collectively, the Property and Casualty Group) underwrite personal and commercial lines property and casualty insurance exclusively through nearly 2,000 independent agencies comprising over 8,500 licensed independent agents. The entities within the Property and Casualty Group pool their underwriting results. The financial position and results of operations of the Exchange are not consolidated with ours. We, together with the Property and Casualty Group and Erie Family Life Insurance Company (EFL), operate collectively as the Erie Insurance Group.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 to the Consolidated Financial Statements for a discussion of recently adopted accounting pronouncements.

OVERVIEW

The financial information presented herein reflects our management operations from serving as attorney-in-fact for the Exchange, our insurance underwriting results from our wholly-owned subsidiaries (EIC, EINY and EIPC) and our investment operations. The bases of calculations used for segment data are described in more detail in Item 1, Note 15 in the Notes to Consolidated Financial Statements.

Segment Results


	Three months ended March 31,
(dollars in thousands, except per share data)	2008			2007		% Change
				(Unaudited)
Income from management operations	$	45,330		$	45,678		(0.8	)%
Underwriting income		4,080			5,619		(27.4	)
Net revenue from investment operations		(5,201	)		29,752	NM

Income before income taxes		44,209			81,049		(45.5	)
Provision for income taxes		14,232			24,688		(42.4	)

Net income	$	29,977		$	56,361		(46.8	)

Net income per share — diluted	$	0.51		$	0.88		(42.4	)%

NM = not meaningful

KEY POINTS

	•		Decrease in net income per share-diluted in the first quarter of 2008 was impacted by net realized losses on investments due to $13.7 million of changes in fair value on our common stock as a result of adopting SFAS 159 and $11.9 million of impairment charges.

	•		Gross margins from management operations decreased to 19.1% in the first quarter of 2008 from 19.4% in the first quarter of 2007.

	•		GAAP combined ratios of the insurance underwriting operations increased to 92.1% in the first quarter of 2008 from 89.2% in the first quarter of 2007.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The property/casualty insurance industry is in a strong financial position, however, it continues to be faced with the negative indications of a generally softening underwriting cycle and an unsteady economy. The industry is forecasting overall premium rate reductions and continued increases in the combined ratio in 2008. The cyclical nature of the insurance industry has a direct impact on our income from management operations as our management fee revenues are based on the direct written premiums of the Property and Casualty Group and the management fee rate we charge. Our management fee revenue reflected minimal growth of 0.4%, as direct written premiums of the Property and Casualty Group were flat in the first quarter of 2008 compared to the first quarter of 2007.

Cost of management operations increased 0.7% to $191.7 million in the first quarter of 2008 driven by an increase in personnel costs. Our estimate for growth in non-commission operating costs is about 9% for 2008 as we plan to invest significantly in information technology during the second half of the year.

The insurance underwriting operations continued to experience favorable development of prior accident year loss and loss adjustment expense reserves, the extent of which was not as great as the first quarter of 2007. We had a slight increase in catastrophe losses in the first quarter of 2008 compared to the first quarter of 2007.

Concerns persist surrounding the credit markets and more specifically the financial services industry. We continue to evaluate potential other-than-temporary impairments on our bond and preferred stock portfolios. The impairment charges we recognized in the first quarter of 2008 of $11.9 million were the result of writedowns in value due to continued declines in fair value and credit deterioration on certain of our bonds and preferred stock in the financial services industry sector. The majority of the impairments relate to securities that are performing in line with anticipated or contractual cash flows.

Effective January 1, 2008, we adopted SFAS 159 for our common stock portfolio. As a result of adopting this standard, all changes in the fair value of our common stock are now reflected in our Consolidated Statements of Operations. We recognized $13.7 million of unrealized losses on common stocks in the first quarter of 2008.

ANALYSIS OF BUSINESS SEGMENTS

Management Operations


	Three months ended March 31,
(dollars in thousands)	2008			2007			% Change
				(Unaudited)
Management fee revenue	$	229,599		$	228,645			0.4	%
Service agreement revenue		7,391			7,418			(0.4	)

Total revenue from management operations		236,990			236,063			0.4
Cost of management operations		191,660			190,385			0.7

Income from management operations	$	45,330		$	45,678			(0.8	)%

Gross margin		19.1	%		19.4	%

KEY POINTS

	•		The management fee rate was 25% in the first quarters of 2008 and 2007.

	•		Direct written premiums of the Property and Casualty Group were flat in the first quarter of 2008 compared to the first quarter of 2007.

	•		Year-over-year policies in force grew 2.5%, or 94,219 policies, to 3,905,942 at March 31, 2008 compared to year-over-year growth of 50,223 policies in the first quarter of 2007.

	•		Year-over-year average premium per policy was $969 and $991 at March 31, 2008 and 2007, respectively, a decrease of 2.2%.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

•

During the first quarter of 2008, premium rate changes resulted in a $9.0 million decrease in written premiums.

	•		Service agreement revenue continued to reflect the shift to the no-fee single payment plan as a result of a discount in pricing offered for paid-in-full policies.

	•		Commission costs decreased 0.8% and costs other than commissions increased 4.0% in the first quarter.

	•		Estimates for agent bonuses and other incentives decreased $2.9 million, offset by a $1.3 million increase in scheduled rate commissions compared to the first quarter of 2007.

	•		Personnel costs increased 9.0% to $37.0 million in the first quarter of 2008 compared to $33.9 million in the first quarter of 2007 primarily as a result of increases in the management incentive plan and executive severance costs.

Management fee revenue

The following table presents the direct written premium of the Property and Casualty Group, shown by major line of business, and the calculation of our management fee revenue.


	Three months ended March 31,
(dollars in thousands)	2008			2007			% Change
				(Unaudited)
Private passenger auto	$	436,999		$	434,705			0.5	%
Homeowners		151,137			148,371			1.9
Commercial multi-peril		114,975			115,054			(0.1	)
Workers compensation		84,857			91,905			(7.7	)
Commercial auto		82,870			83,166			(0.4	)
All other lines of business		47,558			44,977			5.7

Property and Casualty Group direct written premiums	$	918,396		$	918,178			0.0	%
Management fee rate		25.00	%		25.00	%

Management fee revenue, gross	$	229,599		$	229,545			0.0	%
Change in allowance for management fee returned on cancelled policies*		0			(900	)	NM

Management fee revenue, net of allowance	$	229,599		$	228,645			0.4	%

NM = not meaningful


*		Management fees are returned to the Exchange when policies are cancelled mid-term and unearned premiums are refunded. We record an estimated allowance for management fees returned on mid-term policy cancellations.

Management fee revenue is based upon the management fee rate, determined by our Board of Directors, and the direct written premiums of the Property and Casualty Group. The management fee rate was set at 25%, the maximum rate, for both 2008 and 2007. In the first quarter of 2008, there was no change in the allowance for management fees returned on cancelled policies as the rate of cancellations remained fairly consistent. The policy retention ratio improved slightly for all lines of business to 90.4% at March 31, 2008 from 90.2% at December 31, 2007. In the first quarter of 2007, although mid-term cancellations of policies for the Property and Casualty Group continued to trend downward, the seasonal effects on the unearned premium reserve resulted in an increase in the allowance for management fees returned on cancelled policies in 2007.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Direct written premiums of the Property and Casualty Group were $918.4 million in the first quarter of 2008 reflecting reductions in average premium offset by an increase in policies in force. Total year-over-year policies in force increased by 2.5% to 3,905,942 at March 31, 2008. Growth in policies in force is the result of continuing improvements in policyholder retention and increased new policies sold. The year-over-year average premium per policy declined 2.2% to $969 at March 31, 2008 from $991 at March 31, 2007. The impact of these rate decreases is seen primarily in the renewal premiums.

We continuously evaluate pricing and estimate that those pricing actions approved, filed and contemplated for filing could reduce the direct written premiums of the Property and Casualty Group by approximately $23.2 million during 2008, of which approximately $9.0 million occurred in the first quarter of 2008. The most significant rate reductions effective in 2008 are in workers compensation in Pennsylvania and homeowners in Maryland. Segmented pricing in auto and home, where we offer lower prices to better risks, has accelerated the decline in average premium per policy.

Premiums generated from new business increased 3.3% to $94.5 million from $91.5 million in the first quarter of 2008 as compared to 2007. Underlying the trend in new business premiums is an increase in new business policies in force of 4.8% to 463,478 at March 31, 2008 from 442,313 at March 31, 2007, while the year-over-year average premium per policy on new business increased 3.4% to $872 at March 31, 2008 from $843 at March 31, 2007.

Premiums generated from renewal business decreased 0.3% to $823.9 million from $826.7 million at March 31, 2008 and 2007, respectively. Renewal policies in force increased 2.2% to 3,442,464 from 3,369,410, while the year-over-year average premium per policy on renewal business decreased 2.8% to $982 from $1,011 for the same respective periods in 2008 and 2007.

Personal lines — Despite overall increases in the average premium per policy and policies in force, the Property and Casualty Group’s personal lines new business premiums written decreased 0.4% to $58.6 million in the first quarter of 2008. Homeowners new business premiums written decreased 6.8% primarily in the states of Pennsylvania, Maryland and Ohio. The year-over-year average premium per policy on personal lines new business increased 0.8% to $689 at March 31, 2008 from $684 at March 31, 2007. Personal lines new policies in force increased 3.1% to 377,529 at March 31, 2008 compared to March 31, 2007 and decreased 0.4% from December 2007.

Private passenger auto new premiums written increased 2.1% to $38.2 million during the first quarter of 2008 driven by a 6.0% increase in new business policies in force to 158,380. The private passenger auto new business year-over-year average premium per policy decreased 0.1% to $1,026 at March 31, 2008. An incentive program that was implemented in July 2006 to stimulate policy growth has contributed to the increase in new business policies in force. Under the program, eligible agents receive a $50 bonus on each new private passenger auto policy. This program is scheduled to run through June 30, 2008. Homeowners new business premium decreased to $15.9 million in the first quarter of 2008 from $17.0 million in the first quarter of 2007. Homeowners new policies in force decreased 0.8% to 167,052, while the year-over-year average premium per policy on homeowners new business decreased 0.4%.

Renewal premiums written on personal lines policies increased during the first quarter of 2008 to $556.4 million from $549.4 million, or 1.3%.The impact of rate reductions was offset by improving policy retention ratio trends. The year-over-year average premium per policy on personal lines renewal business decreased 1.5% to $792 at March 31, 2008 from $804 at March 31, 2007. The policy retention ratio for private passenger auto improved to 91.6% at March 31, 2008, from 91.5% at December 31, 2007 and 91.0% at March 31, 2007.

Commercial lines - The commercial lines new business premiums written increased 9.8% to $35.7 million in the first quarter of 2008 from $32.5 million in the first quarter of 2007. Commercial lines new policies in force increased 12.8% to 85,949 at March 31, 2008, while the average premium per policy on commercial lines increased 4.1%. Factors contributing to the increase in new commercial lines premiums written in 2008 include more proactive communications between us and our commercial agents, continued refinement and enhancements to our quote processing systems and our use of more refined pricing based on predictive modeling. The increase in the average premium per policy on commercial lines new business resulted from certain commercial multi-peril pricing actions that increased rates.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Renewal premiums for commercial lines decreased 3.5% to $267.5 million from $277.3 million in the first three months of 2008 compared to 2007. While renewal policies in force increased 2.1% to 417,948 at March 31, 2008, the year-over-year average premium per policy on commercial lines renewal business declined 5.9% due primarily to the workers compensation and commercial multi-peril line of business trends.

Future trends — premium revenue — We are continuing our efforts to grow premiums and improve our competitive position in the marketplace. Our new policy growth was influenced somewhat by the timing of our annual sales contests for our independent agents. These contests are intended to generate policy sales through various annual promotional incentives and recognition awards. These spring annual sales contests in 2008 did not begin until April, nearly one month later than their start date in 2007. Thus the spring contests had less of an impact on the number of policies placed in the first quarter of 2008 as compared to the first quarter of 2007. Also contributing to our current and future growth is the continued expansion of our agency force as new agents build up their books of business with the Property and Casualty Group. We appointed 46 new agencies in the first three months of 2008, for a total of 1,990 agencies at March 31, 2008. We expect to meet our goal of appointing 140 new agencies in 2008. In 2007, we appointed 214 new agencies. As previously announced, with West Virginia’s workers compensation system transitioning to an open-market system in July 2008, the Property and Casualty Group is preparing to begin writing workers compensation business in West Virginia in 2008 once that occurs.

Service agreement revenue

Service agreement revenue includes service charges we collect from policyholders for providing extended payment terms on policies written by the Property and Casualty Group. The service charges are fixed dollar amounts per billed installment. Gross service agreement revenue amounted to $7.0 million for the quarters ended March 31, 2008 and 2007. Effective March 1, 2008, we introduced late payment and policy reinstatement fees where permitted on policyholder accounts that are past due or lapsed in coverage due to non-payment of premiums. Service agreement revenue is expected to increase $4.5 million in 2008 as a result of these new fees. This estimate is based on current policyholder late payment patterns, which may be influenced by these fees, and therefore could reduce this estimate once fully implemented.

Cost of management operations


	Three months ended March 31,
(in thousands)	2008		2007		% Change

	(Unaudited)
Commissions	$	129,758	$	130,849		(0.8	)%

Personnel costs		36,975		33,913		9.0
Survey and underwriting costs		5,915		6,285		(5.9	)
Sales and policy issuance costs		5,594		5,233		6.9
All other operating costs		13,418		14,105		(4.9	)

Non-commission expense		61,902		59,536		4.0

Total cost of management operations	$	191,660	$	190,385		0.7	%

KEY POINTS

•

Included in the $1.1 million decrease in commissions are:

	•		a decrease in the estimate for agent bonuses of $2.6 million in the first quarter of 2008, offset by

	•		an increase in normal and accelerated rate commissions of $1.3 million, or 1.2% to $109.8 million, in the first quarter of 2008 driven by an increase in certain workers compensation commission rates and higher accelerated commissions due to more newly appointed agents, and

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

•

an increase in promotional incentives of $0.7 million for a contest that began in October 2007.

	•		Driving the 9.0% increase in personnel costs in the first quarter of 2008 compared to 2007 is an increase of $1.8 million in the estimate of management incentive plan expense coupled with a $1.1 million charge for executive severance costs. Excluding the severance charge, personnel costs rose 5.7%.

	•		All other operating costs decreased 4.9% driven by a $1.4 million decrease in professional fees.

Commissions — Commissions to independent agents, which are the largest component of the cost of management operations, include scheduled commissions earned by independent agents on premiums written, accelerated commissions and agent bonuses and are outlined in the following table:


	Three months ended March 31,
(in thousands)	2008		2007			% Change

	(Unaudited)
Scheduled rate commissions	$	108,824	$	107,963			0.8	%
Accelerated rate commissions		970		513			89.1
Agent bonuses		17,774		21,328			(16.7	)
Promotional incentives		761		93		NM
$50 private passenger auto bonus		1,429		1,452			(1.6	)
Change in commissions allowance for mid-term policy cancellations		0		(500	)	NM

Total commissions	$	129,758	$	130,849			(0.8	)%

NM = not meaningful

Scheduled and accelerated rate commissions —The direct written premiums of the Property and Casualty Group remained flat in the first quarter of 2008 compared to the first quarter of 2007. The increase in scheduled rate commissions is reflective of an increase in certain workers compensation commission rates which became effective August 1, 2007 in certain states, and added $0.6 million of commission expense in the first quarter of 2008.

Accelerated rate commissions are offered under specific circumstances to certain newly-recruited agents for their initial three years of operations. Accelerated rate commissions increased during the first quarter of 2008 as expected given the additional new agency appointments in recent years as part of our growth strategy. We appointed 65 new agencies in 2005, 139 in 2006 and 214 in 2007. In the first quarter of 2008 we appointed another 46 new agencies and expect to appoint a total of 140 for the year. As new agency appointments continue, accelerated commissions are expected to increase.

Agent bonuses — Agent bonuses are based predominantly on an individual agency’s property/casualty underwriting profitability over a three-year period. There is also a growth component to the bonus, paid only if the agency is profitable. The estimate for the bonus is modeled on a monthly basis using the two prior year’s actual underwriting data by agency combined with the current year-to-date actual data. The decrease in the estimate for agent bonuses in the first quarter of 2008 reflects a reduction in our estimate of the profitability component of the bonus. The agent bonus award is estimated at almost $70 million for 2008. Of this estimate, $67.5 million represents the profitability component and $2.5 million represents the growth component.

$50 personal auto bonus — In July 2006, an incentive program was implemented that is scheduled to run through June 30, 2008 that pays a $50 bonus to agents for each qualifying new private passenger auto policy issued. The cost of this program for the first three months of 2008 was $1.4 million. These incentive program costs are expected to approximate $2.8 million for 2008.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Other costs of management operations — The cost of management operations excluding commission costs increased 4.0% for the first quarter of 2008. Personnel costs, which are the second largest component in the cost of management operations, increased 9.0%, or $3.1 million in the first quarter of 2008. Expense for our management incentive plans increased $1.8 million primarily due to changes in market value on our estimated number of shares to be paid under the long-term incentive plan along with an increase in the estimates for performance improvements against targets as compared to the peer group of companies. The first quarter of 2008 also includes a $1.1 million charge for severance costs for an executive officer who resigned during the quarter. Salaries and wages increased $0.2 million as a result of a 5.7% increase in average pay rates offset by lower staffing levels. All other operating costs decreased 4.9% primarily due to a $1.4 million decrease in professional fees.

Future trends — cost of management operations — The competitive position of the Property and Casualty Group is based on many factors including price considerations, service levels, ease of doing business, product features and billing arrangements, among others. Pricing of Property and Casualty Group policies is directly affected by the cost structure of the Property and Casualty Group and the underlying costs of sales, underwriting and policy issuance activities performed by the Company for the Property and Casualty Group. Our estimate for growth in non-commission operating expenses for the year 2008 is 9%. While efforts will continue to manage controllable expenses, such as salaries and wages, much of the increase will be expended on information technology initiatives in 2008 as we begin the replacement of our policy administration systems in the second half of the year.

Insurance Underwriting Operations

Our insurance underwriting operations originate through direct business of our property/casualty insurance subsidiaries but net underwriting results are a product of the intercompany reinsurance pooling agreement between our subsidiaries and the Erie Insurance Exchange.


	Three months ended March 31,
(in thousands)	2008		2007		% Change

	(Unaudited)
Premiums earned	$	51,926	$	51,974		(0.1	)%

Losses and loss adjustment expenses incurred		33,760		32,234		4.7
Policy acquisition and other underwriting expenses		14,086		14,121		(0.2	)

Total losses and expenses		47,846		46,355		3.2

Underwriting income	$	4,080	$	5,619		(27.4	)%

KEY POINTS

	•		Earned premiums declined slightly in the first quarter of 2008 reflecting the trend of rate decreases.

	•		Development of prior accident year loss reserves continued to be favorable improving the loss ratio 5.3 points, or $2.7 million, in the first quarter 2008 compared to an improvement of 10.3 points for the first quarter of 2007. This development is reflective of improved severity trends.

	•		Catastrophe losses contributed 1.6 points and 0.5 points to the GAAP combined ratio in the first quarters of 2008 and 2007, respectively.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)


	Three months ended March 31,
Profitability Measures	2008			2007

Erie Indemnity Company GAAP loss and LAE ratio*		65.0	%		62.0	%
Erie Indemnity Company GAAP combined ratio*		92.1			89.2
P&C Group statutory combined ratio		93.0			89.6
P&C Group adjusted statutory combined ratio**		88.9			85.5
Direct business:
Personal lines adjusted statutory combined ratio		85.3			81.8
Commercial lines adjusted statutory combined ratio		91.7			88.7

Prior accident year reserve development — redundancy		(5.3	)		(10.3	)
Prior year salvage and subrogation recoveries collected		(3.3	)		(3.1	)

Total loss ratio points from prior accident years		(8.6	)%		(13.4	)%


*		The GAAP loss and LAE ratio and the combined ratio, expressed as a percentage, is the ratio of losses, loss adjustment, acquisition and other underwriting expenses incurred to earned premiums for our property/casualty insurance subsidiaries. Our GAAP combined ratios are different than the results of the Property and Casualty Group due to certain GAAP adjustments.

**		The adjusted statutory combined ratio removes the profit margin on the management fee we earn from the Property and Casualty Group.

Development of direct loss reserves

Our 5.5% share of the Property and Casualty Group’s favorable development of prior accident year losses, after removing the effects of salvage and subrogation recoveries, was $2.7 million and $5.4 million, and improved the loss ratio by 5.3 points and 10.3 points in the first quarters of 2008 and 2007, respectively. The favorable development in both 2008 and 2007 is primarily the result of sustained improved severity trends on automobile bodily injury and on uninsured/underinsured motorist (UM/UIM) bodily injury. Overall, loss costs for private passenger auto have remained relatively flat, with the exception of bodily injury costs, which have increased. The first quarter of 2007 reflects results from claims initiatives and changes in the way these claims were settled in Pennsylvania.

Catastrophe losses

Our share of catastrophe losses, as defined by the Property and Casualty Group, amounted to $0.8 million and $0.3 million in the first quarters of 2008 and 2007, respectively. Catastrophes in the first quarter of 2008 included wind, rain and hail storms in the states of Virginia, Tennessee and Pennsylvania. Catastrophe losses contributed 1.6 points and 0.5 points to the GAAP combined ratio in the first quarters of 2008 and 2007, respectively. Underwriting losses are seasonally higher in the second and fourth quarters and as a consequence, our combined ratio generally increases as the year progresses. In the first quarter of 2008, our share of the reduction to incurred but not reported reserves related to seasonality adjustments was $3.5 million, compared to $3.3 million in the first quarter of 2007.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Investment Operations


	Three months ended March 31,
(in thousands)	2008			2007		% Change

				(Unaudited)
Net investment income	$	11,672		$	13,978		(16.5	)%
Net realized (losses) gains on investments		(24,579	)		1,890	NM
Equity in earnings of limited partnerships		7,978			12,518		(36.3	)
Equity in (losses) earnings of EFL		(272	)		1,366	NM

Net (loss) revenue from investment operations	$	(5,201	)	$	29,752	NM

NM = not meaningful

KEY POINTS

	•		Net investment income decreased 16.5% for the quarter due to lower invested asset balances as a result of our continued share repurchase activity.

	•		Net realized losses on investments include $11.9 million of impairment charges in the first quarter of 2008, and $13.7 million of unrealized losses on common equity securities recognized as a result of adopting SFAS 159. Impairment charges were $0.7 million in the first quarter of 2007.

	•		Equity in earnings of limited partnerships decreased $4.5 million in the first quarter of 2008 as a result of a general slow-down in the real estate market.

Net realized gains and losses on investments included impairment charges of $11.9 million on fixed maturities and preferred stock in the first quarter of 2008. Included in these amounts were impairment charges on preferred stock of $6.0 million for the three months ended March 31, 2008. Impairment charges on fixed maturities totaled $5.9 million for the three months ended March 31, 2008. Impairment charges were taken on securities in the financial services industry sector due to continued declines in fair value and credit deterioration that occurred in the first quarter of 2008. We adopted SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159) as of January 1, 2008. We elected to report common stock at fair value, with changes in value reported in earnings. The adoption of SFAS 159 resulted in an increase to January 1, 2008 retained earnings of $11.2 million ($17.2 million pretax). In the first quarter of 2008, valuation losses on common stock that were reported in earnings were $13.7 million. See Note 6 to the Consolidated Financial Statements for additional information.

Private equity and mezzanine debt limited partnerships generated earnings of $5.4 million and $6.0 million for the quarters ended March 31, 2008 and 2007, respectively. Real estate limited partnerships generated earnings of $2.6 million and $6.5 million in the first quarters of 2008 and 2007, respectively. Although we have no direct exposure, the reduced valuation adjustments recorded by our real estate limited partnerships are the result of a general slow-down in the real estate market, primarily due to the subprime mortgage situation.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

FINANCIAL CONDITION

Investments

Our investment strategy takes a long-term perspective emphasizing investment quality, diversification and superior investment returns. Investments are managed on a total return approach that focuses on current income and capital appreciation. Our investment strategy also provides for liquidity to meet our short- and long-term commitments. At March 31, 2008, our investment portfolio of investment-grade bonds and preferred stock, common stock and cash and cash equivalents represents $862 million, or 30.2%, of total assets.

Our investments are subject to certain risks, including interest rate and price risk. Our exposure to interest rates is concentrated in our fixed maturities portfolio. The fixed maturities portfolio comprises 56.2% and 63.2% of invested assets at March 31, 2008 and December 31, 2007, respectively. We calculate the duration and convexity of the fixed maturities portfolio each month to measure the price sensitivity of the portfolio to interest rate changes. Duration measures the relative sensitivity of the fair value of an investment to changes in interest rates. Convexity measures the rate of change of duration with respect to changes in interest rates. These factors are analyzed monthly to ensure that both the duration and convexity remain in the targeted ranges established by management.

We continually review the fixed maturity and preferred stock portfolios to evaluate positions that might incur other-than-temporary declines in value. For all investment holdings, general economic conditions and/or conditions specifically affecting the underlying issuer or its industry, including downgrades by the major rating agencies, are considered in evaluating impairment in value. In addition to specific factors, other factors considered in our review of investment valuation are the length of time and amount the fair value is below cost.

For fixed maturity and preferred stock investments, we individually analyze all positions with emphasis on those that have, in management’s opinion, declined significantly below cost. We consider market conditions, industry characteristics and the fundamental operating results of the issuer to determine if the decline is due to changes in interest rates, changes relating to a decline in credit quality, or other issues affecting the investment. A charge is recorded in the Consolidated Statements of Operations for positions that have experienced other-than-temporary impairments due to credit quality or other factors, or for which it is not our intent or ability to hold the position until recovery has occurred. (See “Analysis of Investment Operations” section herein.)

If our policy for determining the recognition of impaired positions were different, our Consolidated Results of Operations could be significantly impacted. Management believes its investment valuation philosophy and accounting practices result in appropriate and timely measurement of value and recognition of impairment.

We adopted SFAS 157 “Fair Value Measurement” during the first quarter of 2008. This standard did not require us to make any changes to our valuation methods. Furthermore, our use of Level 3 or “Unobservable inputs” accounted for less than 2% of our available-for-sale and trading securities at March 31, 2008.

Fixed maturities

We continue to monitor the municipal bond market and the effect of recent downgrades by rating agencies specific to certain municipal bond insurers. Our municipal bond portfolio accounts for $246.9 million, or 37.4%, of the total fixed maturity portfolio. Insurance enhanced municipal bonds total 81.7% of the total municipal bond portfolio. This insurance guarantees the payment of principal and interest on a bond if the issuer defaults. Our municipal bond portfolio is highly rated and includes all investment grade holdings (BBB or higher). The overall credit quality rating of our municipal bond portfolio is AA. The overall credit quality rating of our municipal bond portfolio giving no effect to insurance is AA-.

Approximately 4.2%, or $27.7 million, of our fixed maturities portfolio is invested in structured products. Our structured product portfolio is highly rated with an average rating of A+ or higher. We continually monitor these investments for material declines in quality and value.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Trading securities

Effective January 1, 2008, we adopted SFAS 159 for our common stock portfolio. As a result of adopting this standard, all changes in value for our common stock previously recorded through other comprehensive income on our Consolidated Statements of Financial Position are now reflected in realized gains and losses in our Consolidated Statements of Operations. A one-time cumulative-effect adjustment of $11.2 million, net of tax, was recorded as an increase to retained earnings with an offsetting reduction to other comprehensive income on January 1, 2008.

Property/casualty loss reserves

Loss reserves are established to account for the estimated ultimate costs of loss and loss adjustment expenses for claims that have been reported but not yet settled and claims that have been incurred but not reported.

Among the factors that may potentially cause the greatest variation between current reserve estimates and the actual future paid amounts are: unforeseen changes in statutory or case law altering the amounts to be paid on existing claim obligations, new medical procedures and/or drugs whose cost is significantly different from that seen in the past, and claims patterns on current business that differ significantly from historical claims patterns.

Loss and loss adjustment expense reserves are presented in our Consolidated Statements of Financial Position on a gross basis for EIC, EINY, and EIPC. Our property/casualty insurance subsidiaries wrote about 16% of the direct property/casualty premiums of the Property and Casualty Group during the first three months of 2008. Under the terms of the Property and Casualty Group’s quota share and intercompany pooling arrangement, a significant portion of these reserve liabilities are recoverable. Recoverable amounts are reflected as an asset in our Consolidated Statements of Financial Position. The direct and assumed loss and loss adjustment expense reserves by major line of business and the related amount recoverable under the intercompany pooling arrangement are presented as follows:


	As of
	March 31,		December 31,
(in thousands)	2008		2007

Gross reserve liability:
Private passenger auto	$	307,445	$	321,320
Pre-1986 automobile catastrophic injury		194,482		192,764
Homeowners		29,251		28,506
Workers compensation		151,172		146,402
Workers compensation catastrophic injury		103,478		108,589
Commercial auto		75,392		79,848
Commercial multi-peril		77,818		75,169
All other lines of business		78,016		73,933

Gross reserves		1,017,054		1,026,531
Reinsurance recoverables		826,146		834,453

Net reserve liability	$	190,908	$	192,078

The reserves that have the greatest potential for variation are the catastrophic injury liability reserves. There are currently about 300 claimants requiring lifetime medical care, of which less than 150 involve catastrophic injuries. The reserve carried by the Property and Casualty Group for the catastrophic injury claimants, which is our best estimate of this liability at this time, was $542.2 million at March 31, 2008, which is net of $176.6 million of anticipated reinsurance recoverables. Our property/casualty subsidiaries’ share of the net catastrophic injury liability reserves is $29.8 million at March 31, 2008.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Off-balance sheet arrangements

There are no off-balance sheet obligations related to the variable interest we have in the Exchange. Any liabilities between the Exchange and us are recorded in our Consolidated Statements of Financial Position. We have no other material off-balance sheet obligations or guarantees, other than the limited partnership investment commitments discussed in Note 13 to the Consolidated Financial Statements herein.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of an entity’s ability to secure enough cash to meet its contractual obligations and operating needs. We have historically generated sufficient net positive cash flow from our operations to fund our commitments and build the investment portfolio. We also maintain liquidity in our investment portfolio in the form of readily marketable fixed maturities, equity securities and short-term investments.

Our primary sources of cash flows from operations are generated from our net management revenues and by collecting and investing in premiums from new and renewal business in advance of paying claims. Management fees from the Exchange represented 80% of our total revenues for the first quarter of 2008. Cash outflows are variable because settlement dates for claim payments vary and cannot be predicted with absolute certainty. While volatility in claims payments could be significant for the Property and Casualty Group, the effect on us of this volatility is mitigated by the intercompany reinsurance pooling arrangement. The cash flow requirements for claims have not historically been significant to our liquidity. Historically, about 50% of losses and loss adjustment expenses included in the reserve are paid out in the subsequent 12-month period and approximately 89% is paid out within a five year period. Such payments are reduced by recoveries under the intercompany reinsurance pooling agreement.

Net cash used in our operating activities was $13.8 million in the first quarter of 2008. In the first quarter of 2007, we generated net positive cash flows from operating activities of $16.0 million. Despite management fee revenues being consistent with the first quarter of 2007 levels, cash received from management fees in the first quarter 2008 were lower than in the first quarter 2007 due to cash settlement practices. Cash paid in the first three months of 2008 for agent bonuses was $94.4 million, of which $94.1 million was accrued at December 31, 2007.

We borrowed $75.0 million on our new line of credit in the first quarter of 2008 for certain intercompany cash settlement needs. Interest on this line is charged based on the Federal Funds Rate (currently 2.25%) plus 50 basis points. This amount is expected to be repaid by December 2008.

During the first quarter of 2008, we repurchased 1,204,651 shares of our outstanding Class A common stock in conjunction with the continuation of our stock repurchase plan that was authorized in February 2006. The shares were purchased at a total cost of $60.9 million of which $29.5 million occurred on March 31, 2008 which will be settled in cash in April. In April 2008 our Board of directors authorized an additional $100 million of repurchases under this plan through June 30, 2009. (See Part II of Item 2. Issuer Purchases of Equity Securities.)

CRITICAL ACCOUNTING ESTIMATES

We make estimates and assumptions that have a significant effect on the amounts and disclosures reported in the financial statements. The most significant estimates relate to valuation of investments, reserves for property/casualty insurance unpaid losses and loss adjustment expenses and retirement benefits. While management believes its estimates are appropriate, the ultimate amounts may differ from estimates provided. Our most critical accounting estimates are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2007. There have been no significant changes to the policies surrounding these estimates since that time.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

FACTORS THAT MAY AFFECT FUTURE RESULTS

Financial condition of the Exchange

We have a direct interest in the financial condition of the Exchange because management fee revenues are based on the direct written premiums of the Exchange and the other members of the Property and Casualty Group. Additionally, we participate in the underwriting results of the Exchange through the pooling arrangement in which our insurance subsidiaries have 5.5% participation. A concentration of credit risk exists related to the unsecured receivables due from the Exchange for certain fees, costs and reimbursements.

To the extent that the Exchange incurs underwriting losses or investment losses resulting from declines in the value of its marketable securities, the Exchange’s policyholders’ surplus would be adversely affected. If the surplus of the Exchange were to decline significantly from its current level, the Property and Casualty Group could find it more difficult to retain its existing business and attract new business. A decline in the business of the Property and Casualty Group would have an adverse effect on the amount of the management fees we receive and the underwriting results of the Property and Casualty Group. In addition, a significant decline in the surplus of the Exchange from its current level would make it more likely that the management fee rate would be reduced. At March 31, 2008, the Exchange had $4.7 billion in statutory surplus and a premium to surplus ratio of less than 1 to 1. We believe the Exchange’s capital levels are very strong.

Additional information, including condensed statutory financial statements of the Exchange, is presented in Note 14 to the Consolidated Financial Statements herein.

Insurance premium rate actions

The changes in premium rates of the Property and Casualty Group directly affect direct written premium levels and underwriting profitability of the Property and Casualty Group, the Exchange and us, and also have a direct bearing on management fees. Rate reductions have been implemented and continue to be sought in 2008 by the Property and Casualty Group. Pricing actions contemplated or taken by the Property and Casualty Group are subject to various regulatory requirements of the states in which these insurers operate. The pricing actions already implemented, or to be implemented through 2008, will also have an effect on the market competitiveness of the Property and Casualty Group’s insurance products. Such pricing actions, and those of competitors, could affect the ability of our agents to sell and/or renew business. Management estimates that pricing actions approved, filed and awaiting approval or contemplated through 2008, will reduce premiums for the Property and Casualty Group by $14.2 million through the remainder of the year for a total of $23.2 million in 2008. Given our experience and the potential turn in the market, we continue to project rate increases of about 2% to 3% overall that will affect our 2009 pricing.

The Property and Casualty Group continues refining its pricing segmentation model for the private passenger auto and homeowners lines of business. The refined rating plans include significantly more pricing segments than the former plans, providing us greater flexibility in pricing for policyholders with varying degrees of risk. Refining pricing segmentation should enable us to provide more competitive rates to policyholders with varying risk characteristics, as risks can be more accurately priced over time. The continued introduction of new pricing variables could impact retention of existing policyholders and could affect the Property and Casualty Group’s ability to attract new policyholders. These outcomes will then impact the Property and Casualty Group’s premium dollars and ultimately our management fee revenue.

Policy growth

Premium levels attributable to growth in policies in force of the Property and Casualty Group directly affect the profitability of our management operations. The continued focus on underwriting discipline and maturing of our pricing segmentation model has contributed to growth in new policies in force and improved retention ratios. The continued growth of the policy base of the Property and Casualty Group is dependent upon its ability to retain existing and attract new policyholders. A lack of new policy growth or the inability to retain existing customers could have an adverse effect on the growth of premium levels for the Property and Casualty Group and, consequently, lower management fees for us.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Catastrophe losses

The Property and Casualty Group conducts business in 11 states and the District of Columbia, primarily in the mid-Atlantic, mid-western and southeastern portions of the United States. A substantial portion of the business is private passenger and commercial automobile, homeowners and other commercial lines of business in Ohio, Maryland, Virginia and particularly, Pennsylvania. As a result, a single catastrophe occurrence or destructive weather pattern could have a material adverse affect on the results of operations and surplus position of the members of the Property and Casualty Group. Common catastrophic events include severe winter storms, hurricanes, earthquakes, tornadoes, wind and hail storms. In its homeowners line of insurance, the Property and Casualty Group is particularly exposed to an Atlantic hurricane, which might strike the states of North Carolina, Maryland, Virginia and Pennsylvania. The Property and Casualty Group maintains catastrophe occurrence reinsurance coverage to mitigate the future potential catastrophe loss exposure.

Incurred but not reported (IBNR) losses

The Property and Casualty Group is exposed to new claims on previously closed files and to larger than historical settlements on pending and unreported claims. We are exposed to increased losses by virtue of our 5.5% participation in the intercompany reinsurance pooling agreement with the Exchange. We exercise professional diligence to establish reserves at the end of each period that are fully reflective of the ultimate value of all claims incurred. However, these reserves are, by their nature, only estimates and cannot be established with absolute certainty.

The reserve that has the greatest potential for variation is the catastrophic injury liability reserve. The workers compensation product and the automobile no-fault law in Pennsylvania from 1975 until 1985 provided for unlimited medical benefits. The estimation of ultimate liabilities for these claims is subject to significant judgment due to variations in claimant health and mortality over time. Actual experience, different than that assumed, could have a significant impact on the reserve estimates.

Market volatility

With the adoption of SFAS 159 as of January 1, 2008, all changes to unrealized gains and losses on the common stock portfolio are recognized in investment income as net realized gains or losses in the Consolidated Statements of Operations. The fair value of the common stock portfolio is subject to fluctuation from period to period resulting from changes in prices. Depending upon market conditions, this could cause considerable fluctuation in reported total investment income in 2008 and beyond. See Note 6 to the Consolidated Financial Statements for a discussion of the adoption of SFAS 159.

Information technology development

During 2008, we are carrying out a broad program of initiatives to enhance the functionality of our legacy processing and agency interface systems aimed at improving the ease of doing business, enhancing agent and employee productivity and access to information. We are also continuing in 2008 a program to evaluate policy administration system replacement alternatives which we initiated in 2007. In the second half of 2008 we anticipate information technology expense of about $10 million related to the start of major upgrades to our information technology systems. As this development progresses, amounts could be materially different than our initial estimates.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is primarily related to fluctuations in prices and interest rates. Quantitative and qualitative disclosures about market risk resulting from changes in prices and interest rates are included in Item 7A. in our 2007 Annual Report on Form 10-K. There have been no material changes in such risks or our periodic reviews of asset and liability positions during the three months ended March 31, 2008. The information contained in the investments section of Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

Our objective is to earn competitive returns by investing in a diversified portfolio of securities. We are exposed to credit risk through our portfolios of fixed maturity securities, nonredeemable preferred stock, mortgage loans and to a lesser extent short-term investments. This risk is defined as the potential loss in fair value resulting from adverse changes in the borrower’s ability to repay the debt. We manage this risk by performing up front underwriting analysis and ongoing reviews of credit quality by position and for the fixed maturity portfolio in total. We do not hedge credit risk inherent in our fixed maturity investments.

Our investment portfolio is diversified with 96.5% of the fixed income portfolio rated investment grade (BBB or higher). Approximately 4.2% of our fixed income portfolio is invested in structured products which include mortgage-backed securities, collateralized debt/loan obligations, asset-backed and credit-linked notes. Our structured product portfolio has an average rating of A+ or higher. We believe we have no direct exposure to the subprime residential mortgage market through investments in structured products.

We have significant receivables from the Exchange, which are subject to credit risk. Our results are directly related to the financial strength of the Exchange. Credit risks related to the receivables from the Exchange are evaluated periodically by management. Similar to our investment portfolio, the Exchange maintains 77.2% of its bond portfolio rated investment grade. Approximately 10.0% of the Exchange’s bond portfolio is invested in structured products with an average rating of AA or higher.

ITEM 4. CONTROLS AND PROCEDURES

We carried out an evaluation, with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. Our management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, any change in our internal control over financial reporting and determined that there has been no change in our internal control over financial reporting during the quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2007.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities


							Approximate
							Dollar Value
					Total Number of		of Shares that
	Total Number		Average		Shares Purchased		May Yet Be
	of Shares		Price Paid		as Part of Publicly		Purchased
Period	Purchased		Per Share		Announced Plan		Under the Plan
January 1 — 31, 2008		432,970	$	50.66		432,970
February 1 — 29, 2008		220,613		50.29		220,613
March 1 — 31, 2008		551,068		50.54		551,068

Total		1,204,651				1,204,651	$	131,100,000

Included in the $131.1 million above is a continuation of the stock repurchase program for an additional $100 million approved by our Board of Directors in April 2008, authorizing repurchases through June 30, 2009.

PART II. OTHER INFORMATION (Continued)

ITEM 6. EXHIBITS


Exhibit
Number		Description of Exhibit

10.1*		Severance Agreement dated February 28, 2008, by and between Erie Indemnity Company and Thomas B. Morgan

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*		Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 8-K/A that was filed with the Commission on March 3, 2008.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Erie Indemnity Company
	(Registrant)
Date: April 30, 2008	/s/ John J. Brinling, Jr.
	John J. Brinling, Jr., President & CEO

	/s/ Philip A. Garcia
	Philip A. Garcia, Executive Vice President & CFO