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 March 31, 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 April 30, 1995
The common stock is the only class of stock the Registrant is presently
authorized to issue.
1
<PAGE>
INDEX
ERIE FAMILY LIFE INSURANCE COMPANY
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited)
Balance sheets--March 31, 1995 and December 31, 1994
Statements of income--Three months ended March 31, 1995 and 1994
Statements of changes in cash flows--three months ended March 31, 1995
and 1994
Notes to financial statements--March 31, 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 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
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Part I. Financial Information
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1995 1994
------------- -------------
(Unaudited)
<S> <C> <C>
Investments:
Fixed Maturities:
Held-to-Maturity, at amortized cost
(fair value of $147,146,307 and
$142,544,015, respectively) ........................................... $ 160,127,274 $ 160,445,072
Available-for-Sale, at fair value
in 1994 (amortized cost of
$194,897,935 and $180,281,163,
respectively) ......................................................... 196,218,084 175,851,865
Equity Securities, at fair value
(cost of $119,997,202 and $116,380,818,
respectively) ........................................................ 115,359,816 108,361,616
Real Estate ............................................................ 1,873,071 1,898,628
Policy Loans ........................................................... 3,260,085 3,181,311
Mortgage Loans on Real Estate .......................................... 7,492,817 7,633,399
Other Invested Assets .................................................. 3,666,655 2,257,143
Total Investments ................................................. $ 487,997,802 $ 459,629,034
Cash, including short-term cash investments of
$5,588,019 and $7,262,914, respectively .............................. 4,895,422 6,559,213
Premiums Receivable ..................................................... 2,131,157 2,300,721
Reinsurance Recoverable ................................................. 554,017 312,249
Other Receivables ....................................................... 237,151 261,578
Accrued Investment Income ............................................... 8,155,043 8,388,301
Deferred Policy Acquisition Costs ....................................... 46,010,962 44,951,795
Reserve Credit For Reinsurance Ceded .................................... 3,531,605 3,385,623
Prepaid Federal Income Taxes ............................................ 0 851,320
Other Assets ............................................................ 1,990,077 1,992,298
------------- -------------
Total Assets .......................... $ 555,503,236 $ 528,632,132
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
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BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
------------ ------------
(Unaudited)
<S> <C> <C>
Liabilities:
Policy Liabilities and Accruals:
Future Life Policy Benefits ................... $ 45,195,171 $ 44,050,175
Policy and Contract Claims 1,278,262 797,485
Annuity Deposits ............................... 356,058,504 341,242,154
Universal Life Deposits ........................ 38,321,662 36,107,402
Supplementary Contracts Not
Including Life Contingencies ................. 773,113 767,456
Other Policyholder Funds ......................... 4,714,244 6,352,476
Current Federal Income Tax ....................... 850,829 0
Deferred Federal Income Tax ...................... 5,850,385 2,897,964
Reinsurance Premium Due .......................... 130,307 193,135
Accounts Payable and Accrued Liabilities 2,918,569 4,131,617
Due to Affiliate ................................. 606,529 1,236,687
------------ ------------
Total Liabilities ............................. $456,697,575 $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 Depreciation on
Investment Securities, net of
Deferred Taxes Benefit of $1,161,033
And $4,356,975, respectively ................... (2,156,204) (8,091,525)
Retained Earnings ................................ 96,551,865 94,537,106
------------ ------------
Net Stockholders' Equity ...................... $ 98,805,661 $ 90,855,581
------------ ------------
Total Liabilities and Stockholders'
Equity ....................................... $555,503,236 $528,632,132
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
4
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STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1994
<S> <C> <C>
Revenues:
Policy:
Life Premiums, net of premiums ceded of
$740,266 and $494,953, respectively ........... $ 5,874,822 $ 5,494,474
Group ........................................... 595,544 444,333
------------ ------------
Total Policy Revenues ............................. 6,470,366 5,938,807
Investment Income, Net of Expenses
of $94,315 and $69,090, respectively ............ 9,903,802 8,336,576
Realized Gain on Investment ....................... 538,950 2,533,962
Other Income ...................................... 373,397 281,023
------------ ------------
Total Revenues ................................ 17,286,515 17,090,368
------------ ------------
Benefits and Expenses:
Death Benefits, net of reinsurance recoveries
of $477,208 and $300,170, respectively ........ 1,833,110 1,097,559
Interest on Annuity Deposits .................... 5,625,278 4,368,027
Interest on Universal Life Deposits ............. 590,227 435,489
Surrender and Other Benefits .................... 263,646 289,922
Increase in Liability for Future Life Policy
Benefits, net of the increase in
reserve credit for reinsurance ceded of $145,982
and $198,027, respectively .................... 999,014 652,779
Amortization of Deferred Policy
Acquisition Costs ............................. 703,238 319,366
Commissions ..................................... 616,991 466,075
General Expenses ................................ 1,230,167 1,390,498
Taxes, Licenses and Fees ........................ 836,264 787,717
------------ ------------
Total Benefits and Expenses ................... 12,697,935 9,807,432
------------ ------------
Income From Operations ............................ 4,588,580 7,282,936
Federal Income Tax
Current ......................................... 1,746,342 2,206,207
Deferred ........................................ (243,521) 352,116
------------ ------------
Total Federal Income Tax ...................... 1,502,821 2,558,323
------------ ------------
Net Income ........................................ $ 3,085,759 $ 4,724,613
------------ ------------
------------ ------------
Net Income Per Share .............................. $ 0.98 $ 1.50
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
5
<PAGE>
Statements of Changes in Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1994
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................................... $ 3,085,759 $ 4,724,613
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of bond and mortgage
premium and discount ......................................... 30,437 156
Amortization of deferred policy acquisition
costs ........................................................ 703,238 319,366
Real Estate Depreciation ....................................... 25,557 25,950
Deferred federal income taxes .................................. (243,521) 352,116
Realized gains on investments .................................. (538,950) (2,533,962)
Decrease in other assets ....................................... 2,221 44,567
Decrease in other receivables .................................. 24,427 42,145
Decrease in premium receivable ................................. 169,564 111,464
Increase in reinsurance receivable
and reserve credits .......................................... (387,750) (255,543)
Decrease (Increase) in accrued investment income................. 233,258 (720,494)
Increase in deferred policy acquisition
costs ........................................................ (1,762,405) (1,768,681)
Increase in future policy benefits and claims ................... 1,625,773 709,922
(Decrease) Increase in other policyholder funds ................. (1,638,232) 166,252
(Decrease) Increase in reinsurance premium due .................. (62,828) 23,540
Decrease in accounts payable and accrued
liabilities and due to affiliate ............................. (1,969,206) (547,562)
Increase in current Federal income taxes ........................ 1,702,149 2,159,189
------------ ------------
Net cash provided by operating
activities ............................................... 999,491 2,853,038
------------ ------------
Cash flows from investing activities:
Fixed Maturity Securities:
Held-to-Maturity:
Maturities ................................................... $ 270,802 $ 3,232,540
Sales ........................................................ 0 0
Purchases .................................................... 0 (40,754,128)
Available-for-Sale:
Maturities ................................................... 809,239 2,275,874
Sales ........................................................ 5,948,381 10,753,363
Purchases .................................................... (21,180,965) (9,892,902)
Equity Securities:
Sales ........................................................ 835,353 8,693,692
Purchases .................................................... (4,090,000) (15,392,803)
Loans made to policyholders .................................... (235,943) (188,677)
Payments received on policy loans .............................. 157,169 81,842
Purchase of other invested assets .............................. (1,409,512) (57,681)
Sale of other invested assets .................................. 0 5,942,219
Principal payments received on mortgage
loans ........................................................ 140,927 1,695,452
------------ ------------
Net cash used in investing activities ...................... (18,754,549) (33,611,209)
------------ ------------
</TABLE>
6
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Statements of Changes in Cash Flows--Continued (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1994
<S> <C> <C>
Cash flows from financing activities:
Increase in annuity and supplementary
contract deposits ............................................ 14,822,007 12,684,936
Increase in Universal Life Deposits ............................ 2,214,260 1,763,815
Dividends paid to stockholders ................................. (945,000) (866,253)
Borrowed Money ................................................. 0 4,004,065
------------ ------------
Net cash provided by financing
activities ............................................... 16,091,267 17,586,563
------------ ------------
Net increase (decrease) in cash and cash
equivalents ...................................................... (1,663,791) (13,171,608)
Cash and cash equivalents at beginning of year ..................... 6,559,213 14,800,790
------------ ------------
Cash and cash equivalents at end of quarter ........................ $ 4,895,422 $ 1,629,182
------------ ------------
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ....................................................... $ 0 $ 0
Income taxes ................................................... 44,193 47,018
</TABLE>
7
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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 three month period ended March 31, 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 March 31, 1995, 73.0% of total invested
assets were invested in fixed maturities. Preferred stocks represent 22.0% or
$107.5 million and common stocks represent 1.6% or $7.8 million of total
invested assets at March 31, 1995, while real estate and mortgage loans make up
only 1.9% 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 March 31, 1995 consist of investments in bonds
of $354 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 March 31, 1995 the carrying value of fixed
maturities was $356,345,358, or 73.0% of total invested assets. At March 31,
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 3-31-95
(thousands)
<TABLE>
<CAPTION>
Gross Gross
Amortized Market Unralized Unrealized Carrying
Cost Values Gains Losses Value
<S> <C> <C> <C> <C> <C>
U.S. Treasury & Agency ........................ $ 44,965 $ 43,217 $ 359 $ 2,107 $ 44,216
Mortgage-Backed Certificates .................. 6,923 6,700 131 354 6,937
Industrial & Miscellaneous .................... 190,514 185,240 4,392 9,666 191,852
Public Utilities .............................. 100,545 95,488 605 5,662 100,745
Political Subdivision ......................... 3,008 3,236 228 0 3,162
Special Revenue ............................... 9,070 9,483 468 55 9,433
Total Fixed Maturities ........................ $355,025 $343,364 $ 6,183 $ 17,844 $356,345
</TABLE>
8
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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, 98.8% or $350 million of which, are rated
at investment grade levels (Baa/BBB or better). Included in this
investment-grade category are $256 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 $4.4
million at March 31, 1995 and are a very manageable 0.9% 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 March 31, 1995, the Company's five largest investments in corporate debt
securities totaled $20,687,423, none of which individually exceeded $4.3
million. These investments had a market value of $20.1 million.
In compliance with "Accounting for Certain Investments in Debt and Equity
Securities (FAS 115)," the Company has classified 55% of its fixed maturity
portfolio as available-for-sale at March 31, 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 March 31, 1995, common and
preferred stock held by the Company had a cost of $119,997,202 and a market
value of $115,359,816, representing an unrealized loss of $4,637,386. 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, 95.5% or
$102.7 million of which are of the "highest" or "high" quality, as defined by
the NAIC. The remaining $4.8 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, 3-31-95
(thousands)
<TABLE>
<CAPTION>
Gross Gross
Market Unrealized Unrealized
Cost Value Gains Losses
<S> <C> <C> <C> <C>
Common Stocks
Banks & Insurance ............................. $ 756 $ 1,044 $ 288 $ 0
Industrial & Miscellaneous .................... 6,303 6,779 1,158 682
Preferred Stocks
Public Utilities .............................. 2,350 2,355 90 85
Banks & Insurance ............................. 94,938 90,203 2,132 6,867
Industrial & Miscellaneous .................... 15,650 14,979 112 783
Total Equity Securities ......................... $119,997 $115,360 $ 3,780 $ 8,417
</TABLE>
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.
In October 1994, the Financial Accounting Standards Board issued Statement No.
119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments (FAS 119)." FAS 119 requires increased disclosures about
derivative products, which are defined to include futures, forward, swap, or
option contracts, or other financial instruments with similar characteristics.
FAS 119 also requires that fair value information of derivative financial
instruments be presented without combining, aggregating, or netting the fair
value of derivative and nonderivative financial instruments. This statement is
effective for financial statements issued by the Company for fiscal years ending
after December 15, 1994. At March 31, 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 decreased to $3,085,759, or $.98 per share, in the first quarter of
1995 from $4,724,613 or $1.50 per share, in the first quarter of 1994, a
decrease of 35%. The decrease in non-recurring realized gains on investment from
$2,533,962 in the first quarter of 1994 to $538,950 in the first quarter of 1995
was the primary reason for the decrease in net income. Operating results
remained strong as total policy revenue grew by 9% to $6,470,366 in the current
period. Investment income net of expenses grew by 19% from $8,336,576 in the
first quarter of 1994 to $9,903,802 in the first quarter of 1995.
REVENUES, BENEFITS, AND EXPENSES
Policy Revenues. Total policy revenues increased 9% to $6,470,366 in the first
quarter of 1995 from $5,938,807 in the first quarter of 1994. Included in these
totals are first year life policy revenues of $1,247,825 in the first quarter of
1995 and $1,291,393 in the first quarter of 1994, a decrease of 3%. New policy
production remained strong, but did not match the sales records set in the first
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
$12,364,721 in the first quarter of 1995 and $10,568,818 in the first quarter of
1994, representing an increase of 17%. Included in these amounts are structured
settlement annuities sold to the Erie Insurance Group property/casualty
affiliate companies which totaled $6,779,479 in the first quarter of 1995 and
$1,187,720 in the first quarter of 1994.
Net Investment Income. Net investment income in the first quarter of 1995 was
$9,903,802 compared to $8,336,576 in the first quarter of 1994, an increase of
19%. 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 first quarter of 1995, the Company
generated realized gains of $538,950, compared to gains of $2,533,962 generated
during the same period in 1994. These gains consisted of gains on the sale and
maturity of securities.
11
<PAGE>
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 67% in
the first quarter of 1995 to $1,833,110, compared to $1,097,559, for the same
period in 1994. Death benefit experience must 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 extremely
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 29% from $4,803,516 in the first quarter of
1994 to $6,215,505 in the first quarter of 1995. This increase was due to the
$73 million in deposits made by Policyholders during the 12-month period ending
March 31, 1995. At March 31, 1995, annuity deposits accruing interest were $356
million and universal life deposits accruing interest were $38 million. During
the first 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 6.50% range.
Commissions. Commissions increased $150,916 to $616,991 in the first quarter of
1995. Most of this commission increase was due to an increase in total policy
revenues of 9.0% 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 $1,230,167 in the first quarter of
1995 compared to $1,390,498 for the same period in 1994. The decrease in
operating expense was due primarily to a decrease in employee salaries and
wages. This decrease was caused by a change in the salary and wage expense being
deferred. The deferred policy acquisition costs now include the bonus paid to
the 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 in proportion to the ratio of the annual premium revenue to the
total anticipated premium revenue.
Taxes, Licenses, and Fees. Taxes, licenses and fees increased $48,547 to
$836,264 in the first quarter of 1995. This increase was due to the increased
taxes due on non-qualified annuity deposits. The Pennsylvania non-qualified
annuity tax increased the Company's premium taxes by $186,000 in the first
quarter of 1995 and $113,000 in the first quarter of 1994.
Also included in the taxes, licenses and fees are assessments paid to the state
life insurance guaranty associations. These assessments totaled $340,000 in the
first quarter of 1995 and $342,000 in the first quarter of 1994. The assessments
are mandated by the state life insurance guaranty associations and are used by
them to guarantee the life, annuity and health insurance policies of companies
that have become insolvent. About $180 of the 1995 assessments and $6,600 of the
1994 assessments can be recovered as credits on the Company's state premium tax
returns. These credits have generally remained available, but are not guaranteed
by the states. During the first quarter of 1994, the Company recognized a
disallowance of a premium tax credit for annuity assessments paid to the
Pennsylvania Life and Health Insurance Guaranty Association (Guaranty
Association). When the Pennsylvania Department of Revenue originally considered
the ramifications of the tax on nonqualified annuities, it determined that
insurers would be permitted an offset against their premium tax liabilities for
Guaranty Association assessments on
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATION (Continued)
these annuities. However, the Department of Revenue abruptly changed its
position and made it clear that it would deny insurers Guaranty Association
premium tax offsets against the 2% premium tax liability on individual
nonqualified annuities. This forced the Company to increase its premium tax
liability by $77,000 during the first quarter of 1994. The Company believes that
the Department's original interpretation permitting the offset is correct and
has paid its 1993 and 1994 annual premium tax under protest.
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 first quarter amounted to
$1,502,821 compared to $2,558,323 for the same period in 1994. The 37% decrease
in income from operations was the reason for this decrease.
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 quarter of 1995 was $999,491, compared to $2,853,038 in
the first quarter of 1994. The Company's liquidity position remains strong as
invested assets grew by $28 million during the first quarter of 1995 to $488
million at March 31, 1995.
Premium from the sale of new policies combined with the premium on existing
policies accounted for approximately 37.4% of total revenue in the first quarter
of 1995 and 34.7% for the same period in 1994. Investment income, net of
expenses, generated 57.3% of total revenue in 1995 and 48.8% in 1994. Also
during the first quarter, the Company had a realized gain on investments which
generated 3.1% of total revenue in 1995 and 14.8% 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 $17,795,401 in the
first quarter of 1995 and $14,456,542 in the first quarter of 1994.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATION (Continued)
The Company's current commitments for expenditures as of March 31, 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 March 31, 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 March 31, 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.
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 March 31, 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 $476.6 million or 85.8% of total assets. These resources
provide the liquidity the Company requires to meet the unforeseen demands on its
funds.
14
<PAGE>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On April 25, 1995, the Registrant held its Annual Meeting of Stockholders.
The following Directors were elected at the Annual Meeting of Stockholders for a
one-year term and until a successor is elected and qualified:
Samual P. Black, Jr.
J. Ralph Borneman, Jr.
Susan Hirt Hagen
Thomas B. Hagen
F. William Hirt
Thomas H. Hubbard
Stephen E. Jones, Esq.
Dr. Irvin H. Kochel
Edmund J. Mehl
John M. Petersen
Seth E. Schofield
Jan R. Van Gorder, Esq.
Harry H. Weil, Esq.
Item 5. Other Information
On April 20, 1995, John M. Petersen, President and CEO of the Company, formally
announced his decision to retire from this position at the end of 1995. The
Board of Directors has formed a succession committee to conduct a search for a
replacement who shares the Company's corporate philosophy and values. Mr.
Petersen will remain in this position until his successor has an opportunity to
assume this role and an orderly transfer of responsibilities can be made.
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 March 31, 1995.
15
<PAGE>
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 May 4, 1995 /s/ John M. Petersen
(John M. Petersen, President & CEO)
/s/ Thomas M. Sider
(Thomas M. Sider, Executive Vice President & CFO)
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 31, 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>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-END> MAR-31-1995 MAR-31-1994
<DEBT-HELD-FOR-SALE> 196,218,084 0
<DEBT-CARRYING-VALUE> 160,127,274 0
<DEBT-MARKET-VALUE> 147,146,307 0
<EQUITIES> 115,359,816 0
<MORTGAGE> 7,492,817 0
<REAL-ESTATE> 1,873,071 0
<TOTAL-INVEST> 487,997,802 0
<CASH> 4,895,422 0
<RECOVER-REINSURE> 554,017 0
<DEFERRED-ACQUISITION> 46,010,962 0
<TOTAL-ASSETS> 555,503,236 0
<POLICY-LOSSES> 440,348,450 0
<UNEARNED-PREMIUMS> 185,064 0
<POLICY-OTHER> 1,278,262 0
<POLICY-HOLDER-FUNDS> 4,714,244 0
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<TOTAL-LIABILITY-AND-EQUITY> 555,503,236 0
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<INVESTMENT-INCOME> 9,903,802 8,336,576
<INVESTMENT-GAINS> 538,950 2,533,962
<OTHER-INCOME> 373,397 281,023
<BENEFITS> 9,311,275 6,843,776
<UNDERWRITING-AMORTIZATION> 703,238 319,366
<UNDERWRITING-OTHER> 2,683,422 2,644,290
<INCOME-PRETAX> 4,588,580 7,282,936
<INCOME-TAX> 1,502,821 2,558,323
<INCOME-CONTINUING> 3,085,759 4,724,613
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<NET-INCOME> 3,085,759 4,724,613
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