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 June 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 July 31, 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--June 30, 1995 and December 31, 1994
Statements of Income--Three months ended June 30, 1995 and 1994, six months
ended June 30, 1995 and 1994
Statements of Changes in Cash Flows--six months ended June 30, 1995 and 1994
Notes to Financial Statements--June 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
<PAGE>
Part I. Financial Information
BALANCE SHEETS
June 30, December 31,
ASSETS 1995 1994
(Unaudited)
Investments:
Fixed Maturities:
Held-to-Maturity, at amortized cost
(fair value of $156,247,643 and
$142,544,015, respectively) $159,754,545 $160,445,072
Available-for-Sale, at fair value
(amortized cost of
$195,649,928 and $180,281,163,
respectively) 208,737,659 175,851,865
Equity Securities, at fair value
(cost of $126,573,644 and
$116,380,818, respectively) 131,032,963 108,361,616
Real Estate 1,847,514 1,898,628
Policy Loans 3,472,172 3,181,311
Mortgage Loans on Real Estate 7,100,416 7,633,399
Other Invested Assets 3,631,805 2,257,143
Total Investments $515,577,074 $459,629,034
Cash, including short-term cash
investments of$19,806,374 and
$7,262,914, respectively 17,961,163 6,559,213
Premiums Receivable 2,301,513 2,300,721
Reinsurance Recoverable 32,676 312,249
Other Receivables 154,775 261,578
Accrued Investment Income 8,502,665 8,388,301
Deferred Policy Acquisition Costs 47,793,167 44,951,795
Reserve Credit For Reinsurance Ceded 3,714,027 3,385,623
Prepaid Federal Income Taxes 2,079,052 851,320
Other Assets 2,048,634 1,992,298
Total Assets $600,164,746 $528,632,132
See notes to financial statements.
3
<PAGE>
BALANCE SHEETS
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
(Unaudited)
Liabilities:
Policy Liabilities and Accruals:
Future Life Policy Benefits $ 46,246,171 $ 44,050,175
Policy and Contract Claims 945,235 797,485
Annuity Deposits 374,570,457 341,242,154
Universal Life Deposits 40,782,180 36,107,402
Supplementary Contracts Not
Including Life Contingencies 766,418 767,456
Other Policyholder Funds 4,063,639 6,352,476
Deferred Federal Income Tax 14,030,567 2,897,964
Reinsurance Premium Due 149,852 193,135
Accounts Payable and
Accrued Liabilities 3,268,494 4,131,617
Due to Affiliate 887,337 1,236,687
Total Liabilities $485,710,350 $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 $6,141,468 And
($4,356,975), respectively 11,405,582 (8,091,525)
Retained Earnings 98,638,814 94,537,106
Net Stockholders' Equity $114,454,396 $ 90,855,581
Total Liabilities and Stockholders'
Equity $600,164,746 $528,632,132
See notes to financial statements.
4
<PAGE>
STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues:
Policy:
Life Premiums, net of premiums
ceded of $706,725, $838,706,
$1,446,991 and $1,333,659,
respectively $ 6,688,263 $ 5,715,164 $12,563,085 $11,209,638
Group 578,396 445,912 1,173,940 890,245
Total Policy Revenues $ 7,266,659 $ 6,161,076 $13,737,025 $12,099,883
Investment Income, Net of Expenses
of $94,828, $89,444, $189,143
and $158,534, respectivel 10,141,044 8,619,825 20,044,846 16,956,401
Realized Gain on Investment 776,767 1,068,629 1,315,717 3,602,591
Other Income 399,200 471,849 772,597 752,872
Total Revenues $18,583,670 $16,321,379 $35,870,185 $33,411,747
Benefits and Expenses:
Death Benefits, net of reinsurance
recoveries of $17,232,
$339,337, $494,440 and
$639,507, respectively 2,364,483 1,053,689 4,197,593 2,151,248
Interest on Annuity Deposits 5,576,817 4,498,693 11,202,095 8,866,720
Interest on Universal Life Deposits 650,713 449,673 1,240,940 885,162
Surrender and Other Benefits 308,001 283,107 571,647 573,029
Increase in Liability for Future
Life Policy Benefits, net of
the increase in reserve credit
for reinsurance ceded of $182,422,
$241,186, $328,404 and $439,213,
respectively 868,578 718,830 1,867,592 1,371,609
Amortization of Deferred Policy
Acquisition Costs 27,799 506,857 731,037 826,223
Commissions 739,310 518,933 1,356,301 985,008
General Expenses 1,841,632 1,699,521 3,071,799 3,090,019
Taxes, Licenses and Fees 1,406,548 1,149,737 2,242,812 1,937,454
Total Benefits and Expenses $13,783,881 $10,879,040 $26,481,816 $20,686,472
Income From Operations 4,799,789 5,442,339 9,388,369 12,725,275
Federal Income Tax
Current 764,159 1,612,396 2,510,501 3,818,603
Deferred 877,681 333,028 634,160 685,144
Total Federal Income Tax 1,641,840 1,945,424 3,144,661 4,503,747
Net Income $ 3,157,949 $ 3,496,915 $ 6,243,708 $ 8,221,528
Net Income Per Share $ 1.00 $ 1.11 $ 1.98 $ 2.61
Dividends Declared Per Share $ .34 $ .30 $ .68 $ .60
</TABLE>
5
<PAGE>
Statements of Changes in Cash Flows (Unaudited)
Six Months Ended Six Months Ended
June 30, 1995 June 30, 1994
Cash flows from operating activities:
Net income $ 6,243,708 $ 8,221,528
Adjustments to reconcile net income
to net cash provided by operating
activities:
Net amortization of bond and mortgage
premium and discount 61,979 5,896
Amortization of deferred policy
acquisition costs 731,037 826,223
Real Estate Depreciation 51,114 51,900
Deferred federal income taxes 634,160 685,144
Realized gains on investments (1,315,717) (3,602,591)
Increase in other assets (56,336) (619,629)
Decrease in other receivables 106,803 130,912
Increase in premium receivable (792) (1,598)
Increase in reinsurance recoverable
and reserve credits (48,831) (450,350)
Increase in accrued investment income (114,364) (1,554,311)
Increase in deferred policy acquisition
costs (3,572,409) (3,908,485)
Increase in future policy benefits
and claims 2,343,746 1,919,749
Decrease in other policyholder funds (2,288,837) (82,330)
(Decrease) Increase in reinsurance
premium due (43,283) 14,242
(Decrease) Increase in accounts
payable and accrued liabilities
and due to affiliate (1,338,473) 302,656
Decrease in current Federal
income taxes (1,227,732) (217,918)
Net cash provided by operating
activities 165,773 1,721,038
Cash flows from investing activities:
Fixed Maturity Securities:
Held-to-Maturity:
Maturities $ 647,659 $ 6,017,769
Sales 0 0
Purchases 0 (40,754,128)
Available-for-Sale:
Maturities 853,029 2,351,244
Sales 31,280,894 23,257,708
Purchases (46,839,026) (36,074,888)
Equity Securities:
Sales 5,596,106 13,433,001
Purchases (15,156,682) (20,656,456)
Loans made to policyholders (555,760) (403,277)
Payments received on policy loans 264,899 222,266
Purchase of other invested assets (1,425,662) (884,349)
Sale of other invested assets 51,000 6,133,816
Purchase of mortgage loans 0 (2,000,000)
Principal payments received on mortgage
loans 533,677 4,316,566
Net cash used in investing activities (24,749,866) (45,040,728)
6
<PAGE>
Statements of Changes in Cash Flows--Continued (Unaudited)
Six Months Ended Six Months Ended
June 30, 1995 June 30, 1994
Cash flows from financing activities:
Increase in annuity and supplementary
contract deposits 33,327,265 27,752,906
Increase in Universal Life Deposits 4,674,778 3,795,188
Dividends paid to stockholders (2,016,000) (1,811,253)
Net cash provided by financing
activities $35,986,043 $29,736,841
Net increase (decrease) in cash and cash
equivalents 11,401,950 (13,582,849)
Cash and cash equivalents at
beginning of year 6,559,213 14,800,790
Cash and cash equivalents at
end of quarter $17,961,163 $ 1,217,941
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 0 $ 20,837
Income taxes 3,738,234 4,700,599
7
<PAGE>
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 six month period ended June 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 June 30, 1995, 71.5% of total invested
assets were invested in fixed maturities. Preferred stocks represent 23.8% or
$122.7 million and common stocks represent 1.6% or $8.4 million of total
invested assets at June 30, 1995, while real estate and mortgage loans make up
only 1.7% 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 June 30, 1995 consist of investments in bonds
of $366 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 June 30, 1995 the carrying value of fixed
maturities was $368,492,204, or 71.5% of total invested assets. At June 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 6-30-95
(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 $ 6,647 $ 524 $ 0 $ 6,647
Mortgage-Backed Certificates 483 508 26 1 483
Industrial & Miscellaneous 191,565 198,513 9,600 2,652 200,565
Public Utilities 105,459 106,416 2,505 1,548 107,624
Political Subdivision 3,008 3,296 288 0 3,228
Special Revenue 48,766 49,605 2,059 1,220 49,945
Total Fixed Maturities $355,404 $364,985 $ 15,002 $ 5,421 $368,492
</TABLE>
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The bond investments included in the fixed maturity category consist of
high-quality, marketable securities, 98.8% or $362 million of which, are rated
at investment grade levels (Baa/BBB or better). Included in this investment
grade category are $268 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 June 30, 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 June 30, 1995, the Company's five largest investments in corporate debt
securities totaled $26,400,269, none of which individually exceeded $6.2
million. These investments had a market value of $26.9 million.
In compliance with "Accounting for Certain Investments in Debt and Equity
Securities (FAS 115)," the Company has classified 56.6% of its fixed maturity
portfolio as available-for-sale at June 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 June 30, 1995, common and
preferred stock held by the Company had a cost of $126,573,644 and a market
value of $131,032,963, representing an unrealized gain of $4,459,319. 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, 95.3% or
$116.9 million of which are of the "highest" or "high" quality, as defined by
the NAIC. The remaining $5.7 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
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Equity Securities, 6-30-95
(thousands)
Gross Gross
Market Unrealized Unrealized
Cost Value Gains Losses
Common Stocks
Banks & Insurance $ 677 $ 790 $ 113 $ 0
Industrial & Miscellaneous 5,796 7,592 2,051 255
Preferred Stocks
Public Utilities 2,773 2,893 120 0
Banks & Insurance 74,282 76,719 3,427 990
Industrial & Miscellaneous 43,046 43,039 1,093 1,100
Total Equity Securities $126,574 $131,033 $ 6,804 $ 2,345
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 June 30, 1995, the Company did not own any
derivatives.
10
<PAGE>
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 $3,157,949, or $1.00 per share, in the second quarter of
1995 from $3,496,915 or $1.11 per share, in the second quarter of 1994, a
decrease of 9.7%. Operating results remained strong as total policy revenue grew
by 18% to $7,266,659 in the current period. Investment income net of expenses
grew by 18% from $8,619,825 in the second quarter of 1994 to $10,141,044 in the
second quarter of 1995.
REVENUES, BENEFITS, AND EXPENSES
Policy Revenues. Total policy revenues increased 18% to $7,266,659 in the second
quarter of 1995 from $6,161,076 in the second quarter of 1994. Renewal life
policy revenues rose 24% to $5,851,774 from $4,717,498 while first year life
policy revenues decreased 2% to $1,414,885 in the second quarter of 1995 from
$1,443,578 in the second quarter of 1994. New policy production remained strong,
but did not match the sales records set in the second 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
$17,729,768 in the second quarter of 1995 and $12,454,074 in the second quarter
of 1994, representing an increase of 42%. Included in these amounts are
structured settlement annuities sold to the Erie Insurance Group
property/casualty affiliate companies which totaled $6,399,251 in the second
quarter of 1995 and $1,440,419 in the second quarter of 1994.
Net Investment Income. Net investment income in the second quarter of 1995 was
$10,141,044 compared to $8,619,825 in the second quarter of 1994, an increase of
18%. 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 second quarter of 1995, the Company
generated realized gains of $776,767, compared to gains of $1,068,629 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 124% in
the second quarter of 1995 to $2,364,483, compared to $1,053,689, 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 26% from $4,948,366 in the second quarter of
1994 to $6,227,530 in the second quarter of 1995. This increase was due to the
$78 million in deposits made by Policyholders during the 12-month period ending
June 30, 1995. At June 30, 1995, annuity deposits accruing interest were $375
million and universal life deposits accruing interest were $41 million. During
the second quarter of 1995, the interest rate credited on universal life
remained unchanged while the interest rate credited on annuities was reduced by
25 basis points (.25 percent). 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.
Amortization of Deferred Policy Acquisition Costs (DPAC). The amortization of
deferred policy acquisition costs totaled $27,799 in the second quarter of 1995
and $506,857 in the second quarter of 1994. This decrease reflects the
refinement of certain estimates during 1995, primarily the actual-to-expected
expense ratio. During the second quarter of 1995 the actual-to-expected ratio of
deferred policy acquisition costs was adjusted to better reflect the additional
salaries and wages expense now being deferred. (See General Expenses).
Commissions. Commissions increased $220,377 to $739,310 in the second quarter of
1995. Most of this commission increase was due to an increase in total policy
revenues of 18% 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 $1,841,632 in the second quarter of
1995 compared to $1,699,521 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 the
Company's commitment of resources to several information systems projects during
1995. In the long-run these information system investments will enable the
Company to respond to the needs of agents and policyholders more quickly and
effectively, and allow the Company to control operating expenses. 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.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
Taxes, Licenses, and Fees. Taxes, licenses and fees increased $256,811 to
$1,406,548 in the second quarter of 1995. Increased non-qualified deposit volume
resulted in higher non-qualified annuity premium taxes, in the second quarter.
The Pennsylvania non-qualified annuity tax increased the Company's premium taxes
by $203,000 in the second quarter of 1995 and $137,000 in the second quarter of
1994.
Taxes, licenses, and fees also rose due to an increase in the assessments paid
to the state life insurance guaranty associations. These assessments totaled
$873,000 in the second quarter of 1995 and $701,000 in the second 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 $347,000 of
the 1995 assessments and $289,000 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 second
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 these
annuities. However, the Pennsylvania 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 $15,000 during the second 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 second quarter amounted to
$1,641,840 compared to $1,945,424 for the same period in 1994. The 12% 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 second quarter of 1995 was $165,773, compared to $1,721,038 in
the second quarter of 1994. The Company's liquidity position remains strong as
invested assets grew by $28 million during the second quarter of 1995 to $516
million at June 30, 1995.
13
<PAGE>
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 39.1% of total revenue in the second
quarter of 1995 and 37.7% for the same period in 1994. Investment income, net of
expenses, generated 54.6% of total revenue in 1995 and 52.8% in 1994. Also
during the second quarter, the Company had a realized gain on investments which
generated 4.2% of total revenue in 1995 and 6.5% 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 $22,171,683 in the
second quarter of 1995 and $16,925,260 in the second quarter of 1994.
The Company's current commitments for expenditures as of June 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 June 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 June 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 June 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 $517 million or 86.2% 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 June 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 July 31, 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
JUNE 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>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-END> JUN-30-1995 JUN-30-1994
<DEBT-HELD-FOR-SALE> 208,737,659 0
<DEBT-CARRYING-VALUE> 159,754,545 0
<DEBT-MARKET-VALUE> 156,247,643 0
<EQUITIES> 131,032,963 0
<MORTGAGE> 7,100,416 0
<REAL-ESTATE> 1,847,514 0
<TOTAL-INVEST> 515,577,074 0
<CASH> 17,961,163 0
<RECOVER-REINSURE> 32,676 0
<DEFERRED-ACQUISITION> 47,793,167 0
<TOTAL-ASSETS> 600,164,746 0
<POLICY-LOSSES> 462,365,226 0
<UNEARNED-PREMIUMS> 139,455 0
<POLICY-OTHER> 945,235 0
<POLICY-HOLDER-FUNDS> 4,063,639 0
<NOTES-PAYABLE> 0 0
<COMMON> 4,410,000 0
0 0
0 0
<OTHER-SE> 110,044,396 0
<TOTAL-LIABILITY-AND-EQUITY> 600,164,746 0
13,737,025 12,099,883
<INVESTMENT-INCOME> 20,044,846 16,956,401
<INVESTMENT-GAINS> 1,315,717 3,602,591
<OTHER-INCOME> 772,597 752,872
<BENEFITS> 19,079,867 13,847,768
<UNDERWRITING-AMORTIZATION> 731,037 826,223
<UNDERWRITING-OTHER> 6,670,912 6,012,481
<INCOME-PRETAX> 9,388,369 12,725,275
<INCOME-TAX> 3,144,661 4,503,747
<INCOME-CONTINUING> 6,243,708 8,221,528
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,243,708 8,221,528
<EPS-PRIMARY> 1.98 2.61
<EPS-DILUTED> 1.98 2.61
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
