A.M. Best Downgrades Ratings of Erie Insurance Group and Erie Family Life

Business Wire, April 2, 2003

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--April 2, 2003

A.M. Best Co. has downgraded the financial strength rating to A (Superior) from A (Superior) of the property/casualty affiliates of Erie Insurance Group (Erie).

Along with this action, the group's life affiliate, Erie Family Life Insurance Company, has been downgraded to A (Excellent) from A (Superior). Both companies are located in Erie, PA. The rating outlook is stable for both companies.

The downgrading of the rating of the property/casualty affiliates reflects the deterioration in surplus, high common stock investment leverage, deteriorating operating performance trends and adverse reserve development patterns. Historically, Erie's long-term capital appreciation investment strategy had generated favorable capital gains and surplus growth. However, recent equity market volatility had a considerable impact on overall surplus levels with an approximate 50% decline for the three-year period ending December 2002. Consequently, common stocks as a percentage of surplus is nearly 100%, exposing capital to additional equity market volatility.

Over the last three years, Erie's underwriting experience deteriorated due to the combination of severity trends and price competition. Further, reserve development patterns have been unfavorable, requiring reserve strengthening of approximately $184 million related primarily to the private passenger automobile and workers' compensation lines. Erie has taken corrective actions by implementing rate increases and making revisions to underwriting guidelines. A.M. Best anticipates results will continue to be pressured over the intermediate term due to ongoing rate adequacy needs along with exposure growth. Moreover, Erie's automobile product provides an annual policy term. As such, it will likely temper any improvement in results given the timing involved in earning rate increases.

The downgrading of the rating of Erie Family Life reflects the impact of the rating change of the property/casualty group, net realized capital losses, exposure to below investment grade long-term bonds relative to capital and surplus and continued modest risk-adjusted capitalization. Despite its consistently positive operating results, its surplus level declined due to capital losses, continuing stockholder dividends and growth related surplus strain.

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

The financial strength rating has been downgraded to A (Superior) for Erie Insurance Group and its following property/casualty affiliates:

-- Erie Insurance Exchange

-- Erie Insurance Company

-- Erie Insurance Company of New York

-- Erie Insurance Property & Casualty Co

-- Flagship City Insurance Company

The financial strength rating has been downgraded to A (Excellent) for Erie Family Life Insurance Company.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.