Please standby we are about to begin. Hello and welcome to the Erie Indemnity Company Second 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'll open the call for question and answers. Now, I would like to introduce your host for today's conference call, Ms. Karen Kraus Phillips, Vice President and Manager of Corporate Communications and Investor Relations.

Thank you Patrick and good morning everyone. We appreciate all you joining us today. On today's call, management will discuss our second quarter 2008 results. Joining me are Terry Cavanaugh, President and CEO; our outgoing President and CEO, John Brinling; Executive Vice President and Chief Financial Officer, Phil Garcia; Jim Tanous, Executive Vice President, Secretary and General Counsel; Mike Sebastian, 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'll open the call for question. We issued our earnings release and additional supplement yesterday afternoon. If you need a copy of the press release or any of the exhibits you can find these in the investor relation section of 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 uncertainty. 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 the latest 10-Q filing with the SEC filed July 30, 2008, and in the related press release and 8-K. In this call, we will discuss some non-GAAP measures. You can find a 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 at 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 I am very pleased to introduce Erie's new President and CEO, Terry Cavanaugh, Terry? Terrence W. Cavanaugh: Thank you Karen. Good morning and thanks for joining us on today's call. I will give you a little perspective on my transition to Erie before turning the call over to Phil Garcia to give the details on our second quarter results. Before I start telling you about myself, my feelings about being a member of the Erie team, and my observation on our second quarter, I'd first like to extend my personal thanks to John Brinling. After what I have seen in the past two days, I understand why he has such a fine choice to service as Interim President and CEO. John is respected and appreciated by employees and agents alike. In a short time I've known him, it is clear he leaves the golden rule. To my benefit John is postponing his retirement a few more weeks to help with this transition; for that I am very grateful. Thanks John for what you are doing for me, and of course for all that you have done for our company. If you got a chance to read the press release announcing my appointment you know that I am an insurance guy. I spent 33 years, my entire carrier, in the business working for chub in a variety of capacities. I know this business, and I have a deep understanding and appreciation for ERIE's operating model. Having said that this is only my third day on the job. So at this point I guess most of you have a longer and deeper history with the company than I do. But I can tell you I couldn't be more proud to be at the helm of this great company. Before I even thought about being a CEO, I knew about the strength of the ERIE brand, very customer and Asian focused and the reputation of ERIE's people, to always want to do the right thing. And thinking about the CEO job, these were the things that came to mind. ERIE has a great history and a strong operating platform. I think the company is poised to take advantage of its skills and market conditions to continue to grow customers and strengthen the relationship with ERIE agents, our distribution system. Over the next several weeks, I will spend time with our employees and agents only about opportunities we need to advance and challenges we need to address. I am also looking forward to meeting many of you and hearing your perspectives about the ERIE. On our third quarter call, I expect to give you my thoughts on how we are going to keep ERIE moving forward and produce greater value for our shareholders. Now on to second quarter results. When I look at our second quarter results, it's obvious that investment market conditions have had an impact. Our investment revenue showed a significant decline compared to our second quarter 2007. This is an endemic issue within and outside our industry and I don't see it changing anytime soon. Despite soft market conditions, ERIE did grow total policies enforced by 2.5%. To put that number in perspective private passenger auto new business increased 4.8%, home owners' new business decreased 2.5% and commercial lines new business policies enforced increased 9.6%. The company also turned in a solid retention rate of 90.4%. This helped to offset reductions and written premium that results in a flat revenue growth in our management operations segment compared to a year earlier. In our underwriting operations, the combined ratio continued to be positive even though higher than our outstanding result ERIE saw in the second quarter last year. Our GAAP combined ratio for Erie Indemnity Company was 93.7. The result was affected by increased losses in the current accident year, particularly increases in home owner severity and three catastrophic workers compensation claims. I am going to turn it over now to Phil, to take us through the numbers. Phil? Philip A. Garcia, CPA, FLMI, ACS: Thanks Terry and good morning everybody. For the second quarter of 2008 our net income decreased by 41.4% to $41.3 million from $70.5 million at June 30, 2007. On a per diluted share basis, net income decreased to $0.71 in the second quarter of '08 compared to $1.11 last year. Our net operating income per share decreased by 19.6% to $0.87 in the second quarter of '08 compared to $1.09 last year. As Terry mentioned the earnings decreased in the second quarter was mainly a result of a reduction in investment revenues due to $12.4 million of impairment charges and $4.6 million of changes in fair value on our common stock in accordance with FAS 159. We also had a decrease of $8.9 million in equity in earnings of our limited partnerships. I'll talk about those issues in more detail when I review our investment operations results. First, let's look at the results of our management operations. Our management fee revenue was flat as our direct written premiums of the property casualty group remained level in the second quarter of '08 compared to the second quarter of '07. As you know our management fee rate was 25% for the second quarters of both '08 and '07. As you know we frequently evaluate our pricing and currently we estimate that our pricing actions that are improved and filed and considered for filing could reduce the direct return premiums of the property casualty group by about $31.5 million during 2008. Approximately $17.3 million of the total occurred in the first half of '08. Most significant rate reductions effective in '08 are in workers' compensation in Pennsylvania and a home owner's rate reduction in Maryland. Our segmented pricing in Auto and home where we offer lower prices... lower prices to better risks has accelerated decline in our average premium per policy. Given our accident year last experience from the market conditions we are seeing... we are projecting premium rate increases of about 0% to 1% overall for 2009. The trend towards increased policy growth continued in the second quarter 2008 as our policies enforce and new written premium continued to decline. Our year-over-year policies enforce grew 2.5% or about 98,000 policies to 3,945,000 policies at June 30, 2008, compared to year-over-year growth of 66,000 policies in the second quarter of '07. Our policy retention rate as Terry mentioned improved to 90.4% at the end of the second quarter '08 compared to 89.9 at the end of the second quarter last year. Premiums generated from new business increased 1% to $113.5 million from $112.4 million in the second quarter of '08 compared to '07. The new business year-over-year average premium per policy was $866 and $852 at June 30th of '08 and '07 respectively, an increase of 1.6%. The total cost to management operations increased by 2.8% during the second quarter of '08. Commissions to our independent agents as you know make up the majority of these costs. Our commissions in the second quarter of '08 reflect a decrease in the estimate for our agent bonuses of about $2.3 million, which was offset by an increase in normal and accelerated rate commissions of $1.8 million or 1.5% to $125.6 million in the second quarter of '08. On June 1, 2008, we implemented a new tiered payment structure to replace the $50 bonus we have been paying on new private passenger auto applications. The new structure pays up between $50 and $200 per policy based on the number of qualifying new private passenger auto policies and agency issues. The cost of this program is expected to be around $9 million on an annualized basis. The original estimate for the $50 private passenger bonus was about $6 million annualized for 2008. On July 1st, we also increased commissions on certain commercial lines new business premiums from 15% to 20%. The increased commercial commission resulted in point... about $0.5 million of additional commission expense in the second quarter on un-collected premium balances for new commercial policies at June 30, 2008. The full impact of this commission increase is expected to be approximately $1.5 million for the remainder of '08 and about $2 million on an annualized run rate basis. Accelerated commissions were also higher because of the new agencies appointed during the year. Cost to management operation excluding commissions, increased $5.8 million or 9.8% of the second quarter of '08. Our personal... personnel cost increased by 4.9% in the second quarter of '08 compared to '07 primarily as a result of $1 million charge for executive severance cost. Excluding the severance charge, personnel cost rose 2%. Sales and policy issuance cost increased 32.3% due to a $1.3 million increase in advertising expense. All other operating costs increased 14.6% driven by a $2.2 million increase in consulting fees, primarily related to our current technology program. Our estimate for growth in non-commission operating expenses for the year 2008 is 13%, due to our higher planned IT spend, which I'll describe more fully in a minute, increased executive severance cost, hire agency related expenses and advertising cost. The increases in technology expenses we are incurring are just significantly enhance the functionality of our processing and agency interface systems through selective replacement of key system components. This work will improve the ease of doing business with our agents by enhancing agent and employee productivity and access to information. In 2007, we started looking at options for replacing our policy administration system and that process continued during first half of this year. In the second half of 2008 we will be developing the design of the policy administration replacement system. As we disclosed in our first quarter release, we anticipate additional IT expense excluding our internal labor for this project in the second half of 2008 to approximate about $10 million. During the second quarter of 2008 we made some short term enhancements to our systems to improve the ease of doing business for our agents. Some of these enhancements include a 24 hour batch cycle, personalized downloads into agency management systems and continued upgrades to our existing agency interface, DS pro. Now I will provide you with some highlights of our underwriting operations. Our insurance underwriting operations continued to perform profitability in the second quarter of '08 generating a profit of $3.2 million compared to underwriting profit of $7.9 million in the second quarter of '07. The property and casualty groups adjusted statutory combined ratio at June 30 2008 was 87% compared to 77.7% at June 30, 2007. The GAAP combined ratio for the company was 93.7% in the second quarter of this year compared to 84.8% last year. Development of prior accident year loss reserves remained favorable improving the loss ratio of 3.9 points or $2 million in the second quarter of '08 compared to an improvement of 4.3 points in the second quarter of '07. The favorable development was concentrated in the auto bodily injury and uninsured... underinsured motorists, bodily injury coverage. Our catastrophe losses contributed 3 points and 2.2 points to the GAAP combined ratio in the second quarters of '08 and '07 respectively. Finally, I'll review highlights of our investment operations. The company's investment operations recorded income of $7.9 million during the second quarter of '08 compared to $37.8 million for the same period in '07. We had $12.4 million of impairment charges in the second quarter of '08, mostly on securities issued by entities in the financial service industry sector due to continued declines in the fair value of those investments. In addition, our net realized losses on investments during the quarter included $4.6 million of valuation adjustments on our common stocks as I previously spoke about; recognize the result of our adopting FAS-159. For the six months ended June 30 '08 and '07 impairment charges on the fixed maturities were $14 million and $1.6 million respectively and impairment charges on preferred stock were $10.4 million and $0.4 million. Earnings from our limited partnerships were $11 million for the quarter versus 20 million for the second quarter of '07. Our private equity and mezzanine debt limited partnerships generated earnings of $7.2 million and $8.1 million for the quarters ended June 30th '08 and '07. And our real estate limited partnerships generated earnings of $4.1 million and $12.1 million in those same periods. The reduced earnings by our real estate limited partnerships are a result of a slowdown in the residential real estate markets. Finally, as part of our capital management program during the second quarter of '08 we purchased more that 7037,000 shares of our outstanding class A common stock under our stock repurchase plan; it was authorized in February of '06. The shares were repurchased at a cost of $36.9 million or $49.97 per share. In April of 2008, our Board of Directors authorized an additional 100 million of repurchases under this plan through June 30, 2009 of which $94.2 million was outstanding on June 30, 2008. Terrence W. Cavanaugh: Thank you, Phil. Before we open the call for questions, I wanted to update you on our agent recruitment efforts. Our recruitment goal for 2008 is 140 new agents by yearend. Through the second quarter, we've appointed 84 new agencies bringing our total representation to 2016 agencies throughout our system. We are also making good progress on our plans to enter Minnesota and are on target to begin writing business there by September 1, 2009. We've done some staff recruiting during the last quarter that has already sparked considerable interest from our independent agents in that state. One last item before we take you questions. The company has some very positive news in July. The ERIE received the 2008 JD Power and Associates award for highest customer satisfaction with the auto insurance purchase experience. The award was a result of Erie's. top ranking in 2008. JD Power New Auto Insurance buyer study. This recognition by our newest policy holders affirms my thinking about the company; it is a testament to the extreme focused Erie employees and agents have on exceeding customer expectations. Thank you for your attention. I think we are ready to open the call for questions. Question And Answer

[Operator Instructions]. And we will go first to Meyer Shields with Stifel Nicolaus.

Thanks, good morning and welcome, I guess [ph], Terry. Terrence W. Cavanaugh: Thank you. Philip A. Garcia, CPA, FLMI, ACS: Good morning Meyer.

How are you Phil and how are you self [ph]? I guess a fundamental question; can you talk a little about the rate increases you are seeing in personnel and commercial lines for the insurance that you are targeting? Terrence W. Cavanaugh: Sure, Meyer. In the market we are in I might speak mostly about auto... the auto line. We see very rational pricing out there in the marketplace? I think you heard on some of the other calls of what we are seeing is modest increases in personal auto almost across the board, some minor decreases but mostly increases and we will see that in our jurisdictions, but we think it's very rational.

On the commercial side? Terrence W. Cavanaugh: Well on commercial our average premium continues to drop as you have seen and I think commercial is a little bit more competitive and you are seeing more price decreases in commercial than your in personal lines.

And with regard to the decreases you have taken before, we've clearly seen an up-tick in the retention in new business. But can you talk a little bit about how the changes match up with your expectations when you took decreases? Terrence W. Cavanaugh: You mean the changes in retention?

Yes. Terrence W. Cavanaugh: Well. When people open their renewals and they don't see large increases they tend not to shop and so what's happening in out there in micro environment price wise also affects our retention. And so, rationale... the pricing's been very rational and so people aren't shopping and so we actually... our retention is about where we projected it would be at this point.

Okay, that's great. Thanks, so much.

We will take our next question from Dan Schlemmer with Fox-Pitt Kelton.

Hi, good morning, welcome Terry. Terrence W. Cavanaugh: Thank you.

Question on just understanding the loss ratio and looking at it year-over-year the 55.6 went up to 63.8 and sort of reading through the tax I get about 2% on pricing year-over-year if I'm reading it right and about maybe 1 point from prior year development and another point from catastrophes. So, I guess I read into that about 4% loss ratio deterioration from loss trends, and am I my reading that accurately or I missing something there just in terms of the actual... way I am calculating that about 4 point of loss ratio trend, does that make sense? Terrence W. Cavanaugh: Yes, you've got a extra point of caps; from you are talking about the quarter right.

Yeah. Terrence W. Cavanaugh: Yes, because the year is a little different. But for the quarter we have an extra point of cap, and we had a little bit less in development this year than we did last year in the second quarter, right?

Yes. Terrence W. Cavanaugh: And then about a couple... 2.5 points of accident year deterioration, right?

Okay. Terrence W. Cavanaugh: From a combination of severity and frequency and price.

Yes, I guess maybe I was hoping can you break that... break it... break that out in terms of frequency in severity and probably the one thing that people are, I think, starting to see in the macro economy is gas prices and how that's affecting auto trends. But just over all where you are seeing the frequency and severity trends break out favorable or unfavorably most significantly? Terrence W. Cavanaugh: Yes, our frequency trends continued to be positive, our actuaries kind of news on this... on whether the gas prices are causing a change in frequency. They believe that when gas prices come back down, that we will see the return to the same frequency trend. And so that's not something necessarily that they are looking to price into the product going forward. So, we are seeing continued frequency... positive frequency trends and moderating severity trends. That deterioration in our accident year result is mostly result of our price actions, which you've seen... our price actions have trended down in 2008 and our estimates for 2009 are trending down... trending down from where they were, they are actually up about half a point, yes.

I am sorry; can you clarify that last point, trending down? Terrence W. Cavanaugh: Well you will see that we are taking price decreases in 2008 in the calendar year 2008 of about $31 million and our guidance in this Q is for 2009 of 0 to 1% increase.

Right, got you. Terrence W. Cavanaugh: That's down from what we disclosed in the first quarter, Dan.

Yes. Terrence W. Cavanaugh: Yes.

Can you further comment on the... your growth rate in policies enforce is pretty favorable. In particular if you look back at some of these charts that show sort of what's the growth rate's been over the last couple of years and pretty much everything's moving in the right direction on almost every one of your segment. So, the rate decreases seems... I am aware that there's lot of rate decreases in the market and you have to stay competitive but given how well you are doing with policy enforce, it's a little bit surprising that you're taking aggregate decreases? Can you sort of comment on what the rational there is or why it seems like there's a little bit of a disconnect between you take rate decreases at the same time as you are already seeing good test growth? Philip A. Garcia, CPA, FLMI, ACS: I just... as an observation I would make over the last 48 hours is that I've seen a significantly vibrant organization and I just... last night I spent four hours with an agency group that does a lot of business with us and I can assure you that the... the organization has been very focused over the last 12 months under John's direction and they are very, very excited about the capabilities of the ERIE both in terms of our field organization and the product capability that we are building in our corporate offices here. And so I think you are seeing sort of a dissection of two events occurring and that's why we are more confident in terms of the fact that we are going to be able take rate modestly in 2009 and you couple that then with the very focused ERIE organization in terms of field and home office and I think we are looking forward to a much more competitive playing field. Terrence W. Cavanaugh: We have seen in our auto business and you have seen quarter after quarter Dan that we have had positive trends in prior reserve estimates in particularly in automobile bodily injury and uninsured... under insured motors... un-insured and under insured motors. So, we factor that under indications and it allow us to moderate our price a little bit and we want to provide a competitive price for our agents out there too.

Great. Terrence W. Cavanaugh: We already... we are growing the units nicely.

Thanks. Last question just real quick. I think you went live with West Virginia workers comp about a month ago. I'm just curious early read on that is that P&L; is there a significant amount pick up there, what you are seeing in that market, just curious? Terrence W. Cavanaugh: Mike, why don't you answer that question? Michael S. Zavasky, CPCU, CIC, ARe: Dan, we are seeing the... about exactly what we expected. We went through a lot of trading with our agents, gave them a program, got them comfortable with how to operate in the workers comp market that they never operated in before. It's proven to have been a good strategic move. Business is coming in on at about the level we anticipated it being and I'm real pleased with the quality of the business that we are seeing as well.

Great, thank you. Terrence W. Cavanaugh: Thank you Dan.

[Operator Instructions]. And it appears we have no additional questions and I would be returning the call back over to the management team for any additional or closing remarks.

Thanks Patrick. Just a reminder to everyone that the call will be posted on our website erieinsurance.com after 12:30 Eastern Time today. And as always if you have any questions, please give me call at 814-870-4665. Thanks again and make it a great day.

This concludes today conference. We thank everyone for their participation. You may now disconnect your lines.