FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 1995
Commission file number 2-39458
ERIE FAMILY LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1186315
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Erie Insurance Place, Erie, Pennsylvania 16530
(Address of principal executive offices) (Zip Code)
(814) 870-2000
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 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 periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of the issurer's classes
of common stock, as of the latest practical date.
Common Stock, $1.10 Par Value -- 3,150,000 shares as of October 31, 1995
The common stock is the only class of stock the Registrant is presently
authorized to issue.
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INDEX
ERIE FAMILY LIFE INSURANCE COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets--September 30, 1995 and December 31, 1994
Statements of Income--Three months ended September 30, 1995 and 1994, nine
months ended September 30, 1995 and 1994
Statements of Changes in Cash Flows--nine months ended September 30, 1995
and 1994
Notes to Financial Statements--September 30, 1995
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
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Part I. Financial Information
BALANCE SHEETS
September 30, December 31,
ASSETS 1995 1994
(Unaudited)
Investments:
Fixed Maturities:
Held-to-Maturity, at amortized cost
(fair value of $154,214,817 and
$142,544,015, respectively) $156,426,443 $160,445,072
Available-for-Sale, at fair value
(amortized cost of $229,391,365
and $180,281,163, respectively) 242,522,114 175,851,865
Equity Securities, at fair value
(cost of $125,294,834 and
$116,380,818, respectively) 129,114,572 108,361,616
Real Estate 1,821,957 1,898,628
Policy Loans 3,556,100 3,181,311
Mortgage Loans on Real Estate 7,081,946 7,633,399
Other Invested Assets 3,602,474 2,257,143
Total Investments $544,125,606 $459,629,034
Cash including short-term cash
investments of $11,735,136
and $7,262,914, respectively 10,544,222 6,559,213
Premiums Receivable 2,421,387 2,300,721
Reinsurance Receivable 375,251 312,249
Other Receivables 392,980 261,578
Accrued Investment Income 9,742,736 8,388,301
Deferred Policy Acquisition Costs 49,138,940 44,951,795
Reserve Credit For Reinsurance Ceded 3,914,065 3,385,623
Prepaid Federal Income Taxes 0 851,320
Other Assets 2,040,077 1,992,298
Total Assets $622,695,264 $528,632,132
See notes to financial statements.
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BALANCE SHEETS
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
(Unaudited)
Liabilities:
Policy Liabilities and Accruals:
Future Life Policy Benefits $ 47,425,501 $ 44,050,175
Policy and Contract Claims 683,844 797,485
Annuity Deposits 388,101,145 341,242,154
Universal Life Deposits 43,194,778 36,107,402
Supplementary Contracts Not
Including Life Contingencies 840,742 767,456
Other Policyholder Funds 3,138,549 6,352,476
Current Federal Income Tax 282,779 0
Deferred Federal Income Tax 14,256,690 2,897,964
Reinsurance Premium Due 217,706 193,135
Accounts Payable and
Accrued Liabilities 3,960,767 4,131,617
Due to Affiliate 661,077 1,236,687
Total Liabilities $502,763,578 $437,776,551
Stockholders' Equity:
Common Stock, $1.10 Par Value Per Share;
Authorized 5,000,000 Shares;
3,150,000 Shares Issued
And Outstanding $ 3,465,000 $ 3,465,000
Additional Paid-In Capital 945,000 945,000
Net Unrealized Appreciation
(Depreciation) on Investment
Securities, net of Deferred
Taxes of $5,932,670 And
($4,356,975), respectively 11,017,817 (8,091,525)
Retained Earnings 104,503,869 94,537,106
Net Stockholders' Equity $119,931,686 $ 90,855,581
Total Liabilities and Stockholders'
Equity $622,695,264 $528,632,132
See notes to financial statements.
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STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues:
Policy:
Life Premiums, net of premiums
ceded of $745,847, $731,943,
$2,192,838 and $2,065,602,
respectively $ 6,620,756 $ 5,967,818 $19,183,841 $17,177,456
Group 574,419 467,473 1,748,359 1,357,718
Total Policy Revenues $ 7,195,175 $ 6,435,291 $20,932,200 $18,535,174
Investment Income, Net of Expenses
of $96,558, $75,960, $285,701
and $234,494 respectively 10,465,117 9,087,090 30,509,963 26,043,491
Realized Gain on Investment 4,690,581 1,063,897 6,006,298 4,666,488
Other Income 386,776 355,490 1,159,373 1,108,362
Total Revenues $22,737,649 $16,941,768 $58,607,834 $50,353,515
Benefits and Expenses:
Death Benefits, net of reinsurance
recoveries of $411,521,
$52,271, $905,961 and
$691,778 respectively 1,711,884 523,192 5,909,477 2,674,440
Interest on Annuity Deposits 5,925,301 4,813,993 17,127,396 13,680,713
Interest on Universal Life Deposits 661,424 518,393 1,902,364 1,403,555
Surrender and Other Benefits 235,312 259,299 806,959 832,328
Increase in Liability for Future
Life Policy Benefits, net of
the increase in reserve credit
for reinsurance ceded of
$200,038, $250,917, $528,442
and $690,130 respectively 979,292 599,087 2,846,884 1,970,696
Amortization of Deferred Policy
Acquisition Costs 481,446 531,002 1,212,483 1,357,225
Commissions 725,244 504,664 2,081,545 1,489,672
General Expenses 1,491,922 1,414,016 4,563,721 4,504,035
Taxes, Licenses and Fees 513,977 386,466 2,756,789 2,323,920
Total Benefits and Expenses $12,725,802 $ 9,550,112 $39,207,618 $30,236,584
Income From Operations 10,011,847 7,391,656 19,400,216 20,116,931
Federal Income Tax
Current 2,640,871 2,577,026 5,151,372 6,395,629
Deferred 434,921 183,012 1,069,081 868,156
Total Federal Income Tax 3,075,792 2,760,038 6,220,453 7,263,785
Net Income $ 6,936,055 $ 4,631,618 $13,179,763 $12,853,146
Net Income Per Share $ 2.20 $ 1.47 $ 4.18 $ 4.08
Dividends Declared Per Share $ .34 $ .30 $ 1.02 $ .90
</TABLE>
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Statements of Changes in Cash Flows (Unaudited)
Nine Months Ended Nine Months Ended
September 30, 1995 September 30, 1994
Cash flows from operating activities:
Net income $ 13,179,763 $ 12,853,146
Adjustments to reconcile net income
to net cash provided by operating
activities:
Net amortization of bond and mortgage
premium and discount 97,508 34,736
Amortization of deferred policy
acquisition costs 1,212,483 1,357,225
Real Estate Depreciation 76,671 77,850
Deferred federal income taxes 1,069,081 868,156
Realized gains on investments (6,006,298) (4,666,488)
Increase in other assets (47,779) (494,967)
(Increase) decrease in
other receivables (131,402) 64,089
Increase in premium receivable (120,666) (126,604)
Increase in reinsurance receivable
and reserve credits (591,444) (553,201)
Increase in accrued investment income (1,354,435) (1,498,975)
Increase in deferred policy
acquisition costs (5,399,628) (5,747,461)
Increase in future policy
benefits and claims 3,261,685 2,523,315
(Decrease) increase in other
policyholder funds (3,213,927) 889,582
Increase in reinsurance premium due 24,571 143,170
Decrease in accounts payable
and accrued liabilities and
due to affiliate (872,460) (121,007)
Increase in current Federal
income taxes 1,134,099 982,069
Net cash provided by operating
activities $ 2,317,822 $ 6,584,635
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Statements of Changes in Cash Flows--Continued (Unaudited)
Nine Months Ended Nine Months Ended
September 30, 1995 September 30, 1994
Cash flows from investing activities:
Fixed Maturity Securities:
Held-to-Maturity:
Maturities $ 3,906,728 $ 6,206,223
Sales 0 0
Purchases 0 (40,754,128)
Available-for-Sale:
Maturities 1,548,146 3,030,154
Sales 40,382,164 32,312,174
Purchases (89,247,603) (69,138,472)
Equity Securities:
Sales 16,421,802 14,229,631
Purchases (21,109,082) (20,656,456)
Loans made to policyholders (751,650) (641,015)
Payments received on policy loans 376,861 337,062
Purchase of other invested assets (1,425,662) (905,599)
Sale of other invested assets 80,331 6,133,816
Purchase of mortgage loans 0 (2,000,000)
Principal payments received
on mortgage loans 552,499 4,515,036
Net cash used in investing activities $(49,265,466) $(67,331,574)
Cash flows from financing activities:
Increase in annuity and supplementary
contract deposits $ 46,932,277 $ 40,571,982
Increase in Universal Life Deposits 7,087,376 6,114,963
Borrowed Money 0 3,413,271
Dividends paid to stockholders (3,087,000) (2,756,253)
Net cash provided by financing
activities $ 50,932,653 $ 47,343,963
Net increase (decrease) in cash and cash
equivalents 3,985,009 (13,402,976)
Cash and cash equivalents at
beginning of year 6,559,213 14,800,790
Cash and cash equivalents at
end of quarter $ 10,544,222 $ 1,397,814
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 632 $ 25,998
Income taxes 4,017,273 5,954,181
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles 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 nine month period ended September 30, 1995 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1995. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1994
NOTE B -- RECLASSIFICATIONS
Certain amounts as previously reported have been reclassified to conform to the
current year's presentation.
NOTE C -- INVESTMENTS
The total invested assets of the Company consist of investments in fixed
maturities, preferred stock, common stock, real estate, mortgage and policy
loans and other invested assets. At September 30, 1995, 73.3% of total invested
assets were invested in fixed maturities. Preferred stocks represent 22.5% or
$122.6 million and common stocks represent 1.2% or $6.5 million of total
invested assets at September 30, 1995, while real estate and mortgage loans make
up only 1.6% of total invested assets. Mortgage loan and real estate investments
have the potential for higher returns but also carry more risk, including less
liquidity and greater uncertainty of rate of return. Consequently these
investments have been kept to a minimum.
The Company's fixed maturities at September 30, 1995 consist of investments in
bonds of $397 million and investments in redeemable preferred stock of $2
million. It is the Company's objective that the fixed maturity portfolio be of
very high quality and well diversified within each market sector. The portfolio
is conservatively managed with the goal of achieving reasonable returns while
limiting exposure to risk. At September 30, 1995 the carrying value of fixed
maturities was $398,948,557, or 73.3% of total invested assets. At September 30,
1995, the amortized cost, estimated market value, gross unrealized gains, gross
unrealized losses, and carrying value for fixed maturities were as follows:
Fixed Maturities at 9-30-95
(thousands)
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unrealized Unrealized Carrying
Cost Values Gains Losses Value
<S> <C> <C> <C> <C> <C>
U.S. Treasury & Agency $ 6,123 $ 6,663 $ 540 $ 0 $ 6,663
Mortgage-Backed Certificates 464 491 28 1 464
Industrial & Miscellaneous 220,656 228,306 9,747 2,097 229,525
Public Utilities 104,825 106,273 2,607 1,159 107,040
Political Subdivision 3,008 3,319 311 0 3,248
Special Revenue 50,742 51,685 2,023 1,080 52,009
Total Fixed Maturities $385,818 $396,737 $ 15,256 $ 4,337 $398,949
</TABLE>
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The bond investments included in the fixed maturity category consist of
high-quality, marketable securities, 98.9% or $392 million of which, are rated
at investment grade levels (Baa/BBB or better). Included in this
investment-grade category are $271 million of bonds characterized as of the
"highest" quality or "Class 1" securities as defined by the National Association
of Insurance Commissioners (NAIC). Below investment- grade bonds totaled $4.5
million at September 30, 1995 and are a very manageable 0.8% of total invested
assets. None of the bonds included in the below investment-grade category are
considered "low" quality. All of the securities classified as below
investment-grade are current and in good standing. Generally, the fixed maturity
securities in the Company's portfolio are rated by external rating agencies. If
not externally rated, they are rated by the Company on a basis consistent with
the basis used by the rating agencies.
If management determines that any declines in market value of these investments
are other than temporary, the securities will be written-down to the realizable
value of the investment and reflected in the income statement. If a bond is in
default of interest payments and it is determined that liquidation of the
security would be in the Company's best interest, the security will be sold to
return the proceeds to income producing assets.
At September 30, 1995, the Company's five largest investments in corporate debt
securities totaled $26,879,219, none of which individually exceeded $6.2
million. These investments had a market value of $27.8 million.
In compliance with "Accounting for Certain Investments in Debt and Equity
Securities (FAS 115)," the Company has classified 60.8% of its fixed maturity
portfolio as available-for-sale at September 30, 1995. Management believes this
level of available-for-sale securities is sufficient for the Company to meet its
liquidity needs and provides the flexibility necessary to respond to changes in
the securities markets. Securities classified as available-for-sale are carried
at market value with unrealized gains and losses included in stockholders'
equity. Fixed maturities classified as held-to-maturity are carried at the lower
of cost or market value. The held-to-maturity category includes only fixed
maturities which management has both the positive intent and ability to hold
until maturity.
Equity securities consist of common and preferred stocks which are carried on
the balance sheet at current market value. At September 30, 1995, common and
preferred stock held by the Company had a cost of $125,294,834 and a market
value of $129,114,572, representing an unrealized gain of $3,819,738. As with
the held-to-maturity portfolio, the Company's preferred stock portfolio provides
a source of highly predictable current income that is very competitive with
high-grade bonds. These securities are well diversified within each market
sector and support the investment return provided to Policyholders. The
preferred stocks are of very high-quality and extremely marketable, 95.0% or
$116.5 million of which are of the "highest" or "high" quality, as defined by
the NAIC. The remaining $6.1 million of preferred stocks have a "medium" NAIC
rating. There are no preferred stocks in the Company's portfolio rated in the
"low," "lowest," or "in or near default" quality categories established by the
NAIC.
9
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NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Equity Securities, 9-30-95
(thousands)
Gross Gross
Market Unrealized Unrealized
Cost Value Gains Losses
Common Stocks
Banks & Insurance $ 181 $ 333 $ 152 $ 0
Industrial & Miscellaneous 4,691 6,151 1,673 213
Preferred Stocks
Public Utilities 1,273 1,286 13 0
Banks & Insurance 76,905 78,098 2,135 942
Industrial & Miscellaneous 42,245 43,247 1,928 926
Total Equity Securities $125,295 $129,115 $ 5,901 $ 2,081
Real estate investments are carried on the balance sheet at cost, less
allowances for depreciation and possible losses. Commercial mortgage loans on
real estate are carried at their unpaid balances, adjusted for amortization of
premium or discount, less allowances for possible loan losses. Policy loans are
carried at their unpaid balances.
The fair values of the Company's investments in real estate, mortgage loans,
policy loans, and other invested assets, approximate the book values presented
in the financial statements.
At September 30, 1995, the Company did not own any derivatives.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction with the
financial statements and related notes found on pages 3 through 10, since they
contain important information that is helpful in evaluating the Company's
operating results and financial condition.
OVERVIEW
Erie Family Life Insurance Company (the Company) is incorporated in the
Commonwealth of Pennsylvania. The Company is primarily engaged in the business
of underwriting and selling nonparticipating individual and group life insurance
policies, including universal life, and annuity products. The Company markets
its products through independent Agents and is licensed in eleven states in the
Eastern U.S. and is subject to the supervision and regulation of the states in
which it does business. A large portion of the Company's business is written in
Pennsylvania.
Net income increased to $6,936,055, or $2.20 per share, in the third quarter of
1995 from $4,631,618 or $1.47 per share, in the third quarter of 1994, an
increase of 50%. The increase in non-recurring realized gains on investment from
$1,063,897 in the third quarter of 1994 to $4,690,581 in the third quarter of
1995 was the primary reason for the increase in net income. Operating results
remained strong as total policy revenue grew by 12% to $7,195,175 in the current
period. Investment income net of expenses grew by 15% from $9,087,090 in the
third quarter of 1994 to $10,465,117 in the third quarter of 1995.
REVENUES, BENEFITS, AND EXPENSES
Policy Revenues. Total policy revenues increased 12% to $7,195,175 in the third
quarter of 1995 from $6,435,291 in the third quarter of 1994. Renewal life
policy revenues rose 15% to $5,749,333 from $4,989,125 while first year life
policy revenues remained stable at $1,445,842 in the third quarter of 1995
compared to $1,446,166 in the third quarter of 1994. New policy production
remained strong, but did not match the sales records set in the third quarter of
1994 which were bolstered by the Company's participation in the Erie Insurance
Group travel incentive program, "TravelQuest '95."
Deposits. First year and single universal life and annuity deposits were
$11,463,800 in the third quarter of 1995 and $12,730,601 in the third quarter of
1994, representing a decrease of 10.0%. Included in these amounts are structured
settlement annuities sold to the Erie Insurance Group property/casualty
affiliate companies which totaled $6,396,124 in the third quarter of 1995 and
$1,872,336 in the third quarter of 1994. Also included in these amounts are
annuity contracts purchased by the Erie Insurance Group Retirement Plan for
employees which totaled $27,037 in the third quarter of 1995 and $4,353,723 in
the third quarter of 1994.
Net Investment Income. Net investment income in the third quarter of 1995 was
$10,465,117 compared to $9,087,090 in the third quarter of 1994, an increase of
15%. Fueling the growth in investment income was the Company's cash flows
generated from annuity and universal life deposits and operating income.
Realized Gain on Investment. During the third quarter of 1995, the Company
generated realized gains of $4,690,581, compared to gains of $1,063,897
generated during the same period in 1994. These gains consisted of gains on the
sale and maturity of securities.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
Death Benefits. Net death benefits on life insurance policies increased 227% in
the third quarter of 1995 to $1,711,884, compared to $523,192, for the same
period in 1994. Death benefit experience should be analyzed for long-term
trends, rather than over short periods where unusual fluctuations may influence
the results. This is particularly true for a company the size of Erie Family
Life, which is growing rapidly. The Company's mortality experience has been good
over the past several years and the Company believes that its underwriting
philosophy and practices are sound.
Interest on Annuity and Universal Life Deposits. Interest on deposits held by
the Company for Policyholders rose 24% from $5,332,386 in the third quarter of
1994 to $6,586,725 in the third quarter of 1995. This increase was due to the
$77 million in deposits made by Policyholders during the 12-month period ending
September 30, 1995. At September 30, 1995, annuity deposits accruing interest
were $388 million and universal life deposits accruing interest were $43
million. During the third quarter of 1995, the interest rate credited on
universal life and annuity deposits remained unchanged. The current interest
rate credited on universal life deposits is in the 6.50% to 7.25% range while
the rate credited on annuity deposits is in the 5.35% to 6.25% range.
Commissions. Commissions increased $220,580 to $725,244 in the third quarter of
1995. Most of this commission increase was due to an increase in total policy
revenues of 12% along with an increase in the average commission rate. The
average commission rate increased due to an increase in persistency for policies
in their second policy year. Second year renewal commission rates are higher
than third and subsequent year commission rates and increases in second year
persistency will result in an increase in the average commission rate. The
commission costs, which vary with and are primarily related to the production of
new business, have been deferred. These costs are being amortized over the
premium paying period of the related policies in proportion to the ratio of the
annual premium revenue to the total anticipated premium revenue.
General Expenses. General expenses amount to $1,491,922 in the third quarter of
1995 compared to $1,414,016 for the same period in 1994. The increase in
operating expense was due primarily to an increase in data processing expense.
Offsetting this increase in operating expense was a decrease in employee
salaries and wages. The increase in data processing expense was due to
increased networking charges from the Company's Data Sharing system. The Data
Sharing system electronically links the Agents with the Company. This technology
provides entry of applications at the agency level, expedites underwriting, and
enhances the Company's ability to communicate with the agency force. The
decrease in employee salaries and wages was caused by a change in the salary
and wage expense being deferred. The deferred policy acquisition costs now
include the bonuses paid to branch sales employees, which is directly
related to the production of new business. These costs will be amortized
over the premium paying period of the related policies sold, in proportion to
the ratio of the annual premium revenue to the total anticipated premium
revenue from these policies.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
Taxes, Licenses, and Fees. Taxes, licenses and fees increased $127,511 to
$513,977 in the third quarter of 1995. Increased non-qualified deposit volume
resulted in higher non-qualified annuity premium taxes, in the third quarter.
The Pennsylvania non-qualified annuity tax increased the Company's premium taxes
by $193,000 in the third quarter of 1995 and $103,000 in the third quarter of
1994. On June 30, 1995 Pennsylvania Act 21-1995 was signed into law. This law
repeals the tax on non-qualified annuities beginning January 1, 1996.
Certain operating expenses of the Company are paid by an affiliate, Erie
Indemnity Company and reimbursed monthly by the Company. Erie Indemnity Company
is a Pennsylvania business corporation and serves as the attorney in fact for
the Erie Insurance Exchange, a Pennsylvania reciprocal property and casualty
insurer, and also manages property and casualty insurance subsidiaries and
affiliates which collectively operate as the Erie Insurance Group. Additionally,
a portion of the common overhead expenses of the Erie Insurance Group are
allocated to the Company. These expenses comprise the majority of Company
general expenses.
Federal Income Tax. Federal Income Tax in the third quarter amounted to
$3,075,792 compared to $2,760,038 for the same period in 1994. Income from
operations increased by 35% for the third quarter of 1995 when compared to the
third quarter of 1994, while the Federal Income Tax provision increased by only
11% for the same period. This difference was caused by the prior year Federal
Income Tax provision being adjusted to actual. This adjustment caused the third
quarter 1995 Federal Income Tax provision to decrease by $425,000 and the third
quarter 1994 Federal Income Tax provision to increase by $123,000. Without these
adjustments, the federal income tax provision would have increased by 33% for
the third quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company's ability to secure enough cash to meet
its contractual obligations and operating needs. Generally, insurance premiums
and deposits are collected prior to claims and benefit disbursements and these
funds are invested to provide necessary cash flows in future years. The
Company's major sources of cash from operations are life insurance premiums,
annuity and universal life deposits and investment income. The net positive cash
flow is used to fund Company commitments and to build the investment portfolio,
thereby increasing future investment returns. Net cash provided by operating
activities in the first nine months of 1995 was $2,317,822, compared to
$6,584,635 in the first nine months of 1994. The Company's liquidity position
remains strong as invested assets grew by $29 million during the third quarter
of 1995 to $544 million at September 30, 1995.
13
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
Premium from the sale of new policies combined with the premium on existing
policies accounted for approximately 31.6% of total revenue in the third quarter
of 1995 and 38.0% for the same period in 1994. Investment income, net of
expenses, generated 46.0% of total revenue in 1995 and 53.6% in 1994. Also
during the third quarter, the Company had a realized gain on investments which
generated 20.6% of total revenue in 1995 and 6.3% in 1994.
Annuity and universal life deposits, which do not appear as revenue on the
financial statements, also generate cash. These deposits do not involve a
mortality or morbidity risk and are accounted for using methods applicable to
comparable "interest-bearing obligations" of other types of financial
institutions. This method of accounting records deposits as a liability rather
than as a revenue. Annuity and universal life deposits were $14,697,756 in the
third quarter of 1995 and $15,941,642 in the third quarter of 1994.
The Company's current commitments for expenditures as of September 30, 1995, are
primarily for policy death benefits, policy surrenders and withdrawals, general
operating expenses, federal income taxes, and dividends to stockholders. These
commitments are met by cash flows from policy revenue, annuity and universal
life deposits and investment income. Management believes its cash flow from
operations, its liquid assets and marketable securities and its line of credit
with PNC Bank will enable the Company to meet any foreseeable cash requirements.
At September 30, 1995, the Company's line of credit with PNC Bank totaled $10
million, none of which was outstanding.
As a Pennsylvania domiciled insurance company, the Company may pay dividends to
stockholders within the preceding 12 months of not more than the greater of 10%
of its statutory surplus as regards policyholders as shown on its last annual
statement, or the statutory net gain from operations after dividends to
policyholders and Federal income taxes and before realized gains or losses for
the period covered by such statement. Accordingly, the maximum dividend payout
which may be made in 1995 without prior Pennsylvania Insurance Commissioner
approval is $8,679,000.
The Company's 1994 year-end Risk Based Capital Analysis as reflected in its 1994
statutory annual statement shows total adjusted capital of $56,336,358 and
authorized control level risk based capital of $9,722,708.
These results demonstrate a strong capital position for the Company.
FINANCIAL CONDITION
RESERVE LIABILITIES
The Company's primary commitment is its obligation to meet the payment of future
benefits under the terms of its life insurance and annuity contracts. To meet
these future obligations, the Company establishes life insurance reserves based
upon the type of policy, the age of the insured, and the number of years the
policy has been in force. The Company also establishes annuity and universal
life reserves based on the amount of Policyholder deposits (less applicable
policy charges) plus interest earned on those deposits. On September 30, 1995,
there was no material difference between the carrying value and fair value of
the Company's investment-type policies. These life insurance and annuity
reserves are supported primarily by the Company's long-term, fixed-income
investments because the underlying policy reserves are generally also of a
long-term nature.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
INVESTMENTS
The Company's investment strategies and portfolios are structured to match the
features of the life insurance and annuity products sold by the Company. The
Company's annuities and life insurance policies are long-term products,
therefore the Company's investment strategy takes a long-term perspective
emphasizing investment quality, diversification, and superior investment
returns. The Company's investments are prudently managed on a total return
approach that focuses on current income and capital appreciation.
The Company's invested assets are also exceptionally liquid in order to meet the
short and long-term commitments to our Policyholders. At September 30, 1995, the
Company's investment portfolio of cash and money market investments, investment
grade bonds, common stocks, and preferred stocks, all of which are extremely
marketable, totaled $539 million or 86.5% of total assets. These resources
provide the liquidity the Company requires to meet the unforeseen demands on its
funds.
15
<PAGE>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
All other exhibits for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore, have been omitted.
The Company did not file any reports on Form 8-K during the three-month period
ending September 30, 1995.
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 Family Life Insurance Company
(Registrant)
Date October 27, 1995 /s/ John M. Petersen
(John M. Petersen, President & CEO)
/s/ Thomas M. Sider
(Thomas M. Sider, Executive Vice President & CFO)
16
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1995 FORM 10-Q OF THE ERIE FAMILY LIFE INSURANCE COMPANY
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0000033416
<NAME> ERIE FAMILY LIFE INSURANCE COMPANY
<S> <C> <C>
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<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
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