Hello and welcome to the Erie Indemnity Company First Quarter 2008 Earnings Conference. At the request of Erie Indemnity, this conference is being recorded for instant replay purposes. At this time, all participants are in a listen-only mode. Following prepared remarks from Management, we will open the call for questions and answers. Now, I would like to turn the introduction -- now I'd like to introduce your host for today's conference call, Karen Kraus Phillips, Vice President and Manager of Corporate Communications and Investor Relations. Please go ahead.

Thank you, Mara, and good morning everyone. We appreciate all of you joining us today. On today's call, Management will discuss our first quarter 2008 results. Joining me are John Brinling, President and CEO; Executive Vice President and Chief Financial Officer, Phil Garcia; Jim Tanous, Executive Vice President, Secretary and General Counsel; Mike Zavasky, Executive Vice President, Insurance Operations;, and George Lucore, Executive Vice President, Field Operations. Today's prepared remarks will be approximately 30 minutes. Following those remarks, we will open the call for your questions. We issued our earnings release and additional supplements yesterday afternoon. If you need a copy of the press release or any of the exhibits, you can find these in the Investor Relations section on our website at erieinsurance.com. We also filed Form 10-Q with the SEC. On today's call, the Management of Erie Indemnity Company will share important information about current and future initiatives being undertaken at the company. As a result, certain forward-looking statements may be incorporated into their comments. These forward-looking statements reflect the company's current views about future events and are based on assumptions subject to known and unknown risks and uncertainties. These risks and uncertainties may cause results to differ materially from those anticipated as described in those statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict. For information on important factors that may cause such differences, please see the Safe Harbor statements in our latest 10-Q filing with the SEC dated April 30, 2008, and in the related press release and 8-K. In this call, we will discuss some non-GAAP measures. You can find the reconciliation of those measures to GAAP measures in the press release and in the supplement posted on our investor website at erieinsurance.com This call is being recorded, and the recording is the property of Erie Indemnity Company. It is not intended for reproduction or rebroadcast by any other party without the prior written consent of Erie Indemnity Company. A replay will be available on our website today after 12:30 PM Eastern time. Your participation on this call will constitute consent to the recording, publication, webcast, broadcast and use of your name, voice and comments by Erie Indemnity. If you do not agree with these terms, please disconnect at this time. And now Erie's President and CEO, John Brinling. John?

Hello, and thanks for joining us this morning. Today Phil and I will talk briefly about our first quarter 2008 results, and then we'll get to your questions. Before I start into our discussion of the first quarter, I want to thank those of you who attended our Annual Shareholders' Meeting held here at our home office on April 22. For your information, we posted Phil and my remarks with slides on the Investment section of our public website, erieinsurance.com. We also issued a press release following the meeting announcing the election of our 11 Board of Directors for 2008, and the reappointment of our executive management team. At its meeting following the Shareholders' Meeting, our Board approved an additional $100 million share repurchase program that will go into effect as soon as the remaining funds are expended in the current program. Phil will be talking about that during his review of our investment operation results. Now for our first quarter discussion; looking at our consolidated statement of operations, it's obvious that net income per share was affected by the performance of our investment operations. That's not surprising given the volatility we have seen in the financial markets. Phil will review in greater detail what's happening there. But in general, we recorded some impairment charges on bonds and preferred stocks. In addition, the market value change on our common stocks for the quarter was also reflected in our realized losses on investments. These effects combined resulted in net realized losses in investments of $25.6 billion [ph] pre-tax during the quarter. Our operating earnings per share, however, remained strong. While we're beginning to see a turnaround in personalized pricing, property casualty insurance industry is still being affected by soft market conditions, which has put pressure on direct written premiums of the…

Thanks, John, and good morning everyone. For the first quarter 2008, net income decreased by 46.8% to $30 million from $56.4 million at March 31, 2007. On a per diluted share basis, net income decreased to $0.51 in the first quarter of 2008 compared to $0.88 last year. Our net operating income per share decreased by 9.7% to $0.78 in the first quarter of 2007 [ph] compared to $0.86 per share last year. As John mentioned, the earnings decrease in the first quarter was driven by our net realized losses on investments due to changes in fair value in our common stock since we adopted FAS-159. We also recorded some impairment charges in our bonds and preferred stock, and I'll talk about those issues in more detail when I review our investment operations results. First to the management operation; our management fee revenue was basically flat in the first quarter. We were able to offset the decrease in direct written premium from rate decreases by our property casualty group by increasing our policies in-force, and improving our policy retention rate. Our management fee rate, as you know, was 25% for the first quarters of both '08 and '07. We regularly evaluate our pricing and currently estimate that pricing actions are proved, filed, and considered for filing could reduce the direct written premium for the property casualty group by about $23.2 million during 2008. This is a slightly larger decrease than the $8.8 decrease we projected at year-end. The additional rate decreases are driven by mandated rate rollbacks in Maryland homeowners, and Workers' Comp Bureau loss cost changes in Pennsylvania's workers' comp business. Segmented pricing in both auto and home where we offer lower prices to better risks has also accelerated the decline in average premium per policy. However, as we…

[Operator Instructions]. We take our first question from Michael Phillips with Stifel Nicolaus.

Thanks, good morning everybody.

Good morning Michael

Good morning Michael

Couple of questions; first probably a couple part question on the new policy administration system and impact on non-commission expenses, a couple parts around that. One just what are the benefits of the new system; help me understand what that's going to bring you, and then kind of the second part of that is how you think about the increasing expenses there in light of what that might to do the margins here in 2008.

Michael, this is John Brinling, and thanks for your question. There's a number of things that we would like to progress to, and principal among them is a real-time system. The system that we have right now is a batch system, meaning that the processing is really done overnight in a batch. So that causes some problems in terms of doing multiple changes that are done in sequence, they need to be done overnight, and so it spreads it out over a couple of day, where more modern technology would give us real time, so we could do those sequentially in no time at all. There's also other benefits that we'd realize, particularly in terms of interface with our agents being able to download to their systems and so forth. So there's a number of functional things that we would benefit from, and quite frankly, some improved processes that would allow us to operate much more efficiently with less man, person power here at the home office. So we could gain some financial advantages by reducing personnel here in the processing area and be able to service our policyholders and agents more efficiently.

This is Phil, Michael. Particularly in commercial lines where we have a lot more employees involved in processing policies, so part of that is going to be replacing our commercial system, which is pretty antiquated and involves a lot of human interaction to get a policy processed. So, we'll have a lot greater productivity in the commercial side of the house. We gave you the guidance that we gave you because obviously, this is going to affect our margins. Without that $10 million investment, non-commission operating expenses would have grown in the 5% to 6% range. So we wanted to give you that guidance so you could factor it in going forward. But obviously, it's going to affect our margins. We've got to manage the installation of the system so that we get the productivity gains we want to have.

And Michael, I wanted to add one more thing. I didn't want to signal any layoffs or anything like that. We've been able to handle these kinds of improvements through attrition and retraining of our people. So we've been able to do this kind of improvement in the past without having to resort to that.

Okay, yes. Great, thanks. I appreciate that. That's helpful. Second question is to your commission expenses, and you mentioned before some slight increase to comp expenses, workers' comp expenses or at least commission expenses back in late '07 I think. Anything you're thinking of in terms of '08 for other lines or other segments with changes just in scheduled rate commissions?

Well, we're always looking at ways to incent production, profitable production. But we don't have anything that we're ready to announce at this point, Michael.

Okay. You did mention agent bonuses down a bit this quarter. I know they're based on a three-year profitability. I assume 2008 means 2008 minus two years; is that correct first of all?

Yes. They're on a three-year rolling and we're this year looking at the three best years in our history I believe. So, our projections are that our loss experience will deteriorate some, which will bring the most recent year down. There's also a change in the way we handle our life bonuses, and those were paid through the Indemnity Company in the past and reimbursed by the Life Company, and we've changed that. So that's affecting the change as well.

That's fine. I just wanted to confirm based on probably a slight deterioration of margin in 2008, which I think is everybody's expectation, but that's kind of what I was thinking there and that's what you're confirming there.

Correct. '05 will drop off, we'll have '08 added.

Sorry. Okay.

So we're predicting, as John said, some slight deterioration in our underwriting results, and so the bonus comes down a little bit.

Okay, perfect. And then the last question; you mentioned in your comments and in the Q you talked about expected rate reductions to continue to be solid in 2008. And so you gave some reasons for that in your comments. Can you talk about kind of just the magnitude of how that's going to continue in '08 versus what we saw in 2007 as far as rate reductions, given also I guess in light of what John's earlier comments the kind of the market is starting to turn a bit?

Right. Well, the changes that we announced were pretty modest. At yearend, we said that we thought our rate changes for '08 would be a minus $8 million, which is really nothing on a $4 billion premium base. We've extended that to $23 million. So, a $15 million delta there. It's due to some rate decreases that were mandated in Maryland Home that we had to take, and some minor work comp changes we had to take in Pennsylvania because of the Bureau. It was the loss comp adjustment for the Work Comp Bureau in Pennsylvania. So it's still only $23 million out of $4 billion. So, it's a modest decline. And you saw in our forward-looking comments around 2009 that we're thinking about a 2% to 3% increase, average rate increase in 2009.

Okay. Perfect, thanks a lot. I'll pop back off, and I might hop back on in a second. Thank you.

We'll move next to Dan Schlemmer with Fox-Pitt Kelton.

Hi, good morning. Congratulations on a nice quarter. Following up sort of on the last question in the rates, can you give us a little more breakdown of… by line, and if there's any upward pricing or if it's all downward, just spread across all lines, et cetera? In particular, if you can maybe give us a little background on whether your rate actions are mostly you think mirroring the market or if it's a response to market or what, how it fits in across the general market conditions, that would be great. Thank you.

Well, Phil just outlined the immediate more long-term, because as you know, the rate actions we take now really don't kick in until '09 and beyond. We're looking overall at a rather modest increase in the neighborhood of 3% looking into '09 and '10. That's pretty much just keeping up with inflation. So, I would say that we're somewhat reflecting the market. We're certainly not leading it in terms of rate increases, but we do see… particularly after three years of significant rate decrease, we see that leveling off.

Can you talk about which areas are seeing the most change, or I mean just sort of break it down a little bit, what proportion of that is auto and home versus comp, et cetera on the rate action?

I don't have that detail at my fingertips, but it's pretty well spread out. We are trying to take it, particularly where the competition will allow us to, both in terms of lines and territories. So, we're not doing it en masse, but we're doing it specifically by line and by territory. And honestly, we're working on it right now Dan. In fact, I can tell you we're working on it right now.

Sort of on a separate note, but related your policy retention numbers have somewhat favorable trend. Just curious what you attribute the underlying causes, whether it's rate or agent incentives or the overall market, etc., just any background you can give on your view of the changes in those policy retention and the underlying causes.

Well, I'd like to think that principal among it is our service. We focus on giving above all in service to our policyholders have gotten a lot of positive comments in a recent Newsweek and on JD Power. So I'd like first of all to think that our policyholders are satisfied with the claim and non-claim service that they're receiving. But I think second of all, Dan, there's less shopping going on. Customers are not being shocked by rate increases, so they're not spending as much time shopping the market for price, and with the anticipation of switching. So I think it's a combination of our rate reductions and the fact that they're satisfied with our service, and just overall in the marketplace softening and less shopping going on.

Yes. Great, thank you. Last question, talking about the change in the accounting you adopted for the equities, it looks like I think 10% of your investments are in equities ballpark. But is that… seems to me looking forward, am I right in thinking through that that you're going to see an increase in the variability of your earnings stream, even though you don't have any change in the actual underlying fundamentals. Is that accurate or am I thinking through that correctly?

Right. You're going to see more volatility in the net income number. Obviously, we also report our operating income number where we back that out, and I know you guys follow that more than our income number.

Yes.

But they have a net income number that's going to bounce around because now our $100 million common stock portfolio every quarter is going to be mark-to-market through realized capital gains and losses. So you're thinking about it exactly right Dan.

Okay, great. Thank you.

Thank you, Dan. [Operator Instructions]. We move now to Ron Bobman with Capital Returns.

Hi, thanks a lot. Congrats on the nice results.

Thank you Ron.

Thanks, Ron. Hi.

Good morning, Ron.

Hi. I had a couple of questions and I missed something that Phil said in the prepared remarks. But it may have been explained in the Q&A earlier. So you were talking about drivers of, I think, premium growth going forward, and I missed part of your sentence where you talked about workers' comp. And I'm sorry, I didn't know whether that was sort of whatever was going on with workers' comp was a plus or a minus. Was that just the Pennsylvania sort of loss cost fact in there?

Yes. What I was referring to when I referred to workers' comp was the price increases we took in Pennsylvania Workers' Comp in conjunction with the Bureau lost cost reductions.

Okay.

And it's factored into the $3 million 2008 premium reductions that we are forecasting.

Got you. So I guess the increasing to 23, that delta is partly attributable to that.

Yes.

Okay, and my next question, I think John mentioned the new business, discussing again sort of the premiums and the drivers being retention improving, rates going down a bit, and then a pickup in new… or at least new business being up 4 some odd percent. And I was wondering if, what the mix of new business look like? Is it largely sort of the same distribution of business, auto, home, and commercial in their relatives that the in-force book has been, or is there any sort of marginal shift towards one category segment account side?

Ron, there hasn't been any significant shift in our mix. So it's spread over our personal lines, auto and home protector and commercial.

We also show you Ron, this is Phil, in the press release and the Q, you can see how our policies in-force are growing. So that really is the basic mix. And you can see that auto is growing a little bit more slowly than the other lines. I think our 12-month year-over-year auto growth is about 1.2, which is a little slower. Obviously; we were growing 2.5. So the auto growth has been a little slower. And that's something we want to turn around.

Got you. And then I think John you mentioned there were two incentive programs agent-focused, I assume it was this past quarter, the $50 bonus, and then there was… maybe these were new ones, that trip.

Well, one of them we've had since the summer of 2006 and that's a $50 per application for auto that's new to us, and that's been ongoing now going on close to two years. The second was a travel incentive that we announced in October of '07. We're taking the successful agents to St. Kitts in March I believe it is of '09 and the incentive ends the end of September this year.

Got you. And then is it… I was curious. What I'm trying to understand is whether the incentives are product-focused. You mentioned the $50 was in new auto. Is the trip product-focused or is the contest, the winning agent like you said --?

You're right, Dan. The $50 is auto focused, but the incentive trip has a point system for nearly all of our products… not all of our products, but nearly all of our products. And it's spread over personal lines, commercial lines, and life so that an agent can focus into one area and make the trip or do a mix of business and through combination of points make the trip.

Does the CFO who is figuratively cutting the check for that trip get to go as well?

We would normally not take the CFO.

Are you putting in a plug for me going to St. Kitt's? I would appreciate that Ron.

My last serious question, and it is sore subject, but I want to ask nonetheless because you mentioned the system spend. And in the past, system expenditures in some form have been a little bit of a black hole for the company. And so I'm wondering if managing this process, if there are sort of differences in management of the process or of the people that ensure sort of a better spend of this money.

Well, we're infinitely familiar with the results of our prior attempts, and certainly don't want to repeat history. It was an expensive learning experience, but we would like to think that we've learned some lessons from it. We are spending much more resource in the evaluation process. In fact, we're still in that evaluation process trying to make a very deliberate decision, and put in place the appropriate governance, so that this can be a more successful attempt.

Okay, thanks. And best of luck there.

Thank you.

Thank you, Ron.

There are no more questions in the queue at this time. I'd like to turn the conference over to you Mr. Brinling for any additional or closing remarks.

Well, I'd like to thank you for your questions and for joining us on the call today. Next week begins our month long series of spring annual dinner meetings, starting with Charlotte and Raleigh, North Carolina. I anticipate that the meetings will be my last annual dinner meetings with the company and that the new CEO will be attending the meetings in the fall. For those of you listening that aren't familiar with these events, each year we conduct nine contest and dinner meetings in the spring and nine in the fall, hitting each one of our branches. It creates a great opportunity for executive and senior leadership of Erie to meet and to celebrate with the agents and the employees throughout the company. And though, it obviously involves a lot of travel, I'm truly looking forward to this year's events. That concludes our call today. Again, I want to thank you for your continued interest in Erie Indemnity Company and for joining us to hear about our first quarter results. Have a great day.

Just a reminder that the recording of the call will be posed on our website, erieinsurance.com after 12:30 PM Eastern Time today. If you have any questions at all, as always please give me a call at 814-870-4665. Thanks again and make it a great day.

And that does conclude today's conference. Once again, we thank you for your participation