FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(FEE REQUIRED)
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from to
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
100 Erie Insurance Place, Erie, Pennsylvania 16530
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (814) 870-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.10 par value
(Tile of class)
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 period 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 3,150,000 shares of Common
Stock outstanding on February 28, 1996.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to shareholders for the fiscal year
ended December 31, 1995 (the "Annual Report") are incorporated by reference into
Parts II and IV of this Form 10-K Report.
1
<PAGE>
INDEX
ITEM NUMBER AND CAPTION PAGE
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a
Vote of Security Holders 8
Item 5. Market for Registrant's Common Stock
and Related Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
Item 8. Financial Statements and Supplementary Data 9
Item 9. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosure 9
Item 10. Directors and Executive Officers
of the Registrant 10
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain
Beneficial Owners and Management 19
Item 13. Certain Relationships and Related
Transactions 21
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 22
2
<PAGE>
PART I
ITEM 1. BUSINESS
Erie Family Life Insurance Company (hereinafter referred to as "The
Company", the "Registrant" or "Erie Family Life") was incorporated in the
Commonwealth of Pennsylvania on May 23, 1967 and commenced business on
September 1, 1967. The Company is primarily engaged in the business of
underwriting and selling non-participating individual and group life
insurance policies, including universal life. Erie Family Life also sells
individual and group annuities.
Products
The Company's portfolio of life insurance includes the usual forms of
permanent life, endowment and term policies, including whole life, family
income, mortgage and decreasing term, group, and universal life
insurance. In terms of face value, new life business issued in 1995 had a
ratio of 4:1 of term insurance to whole life insurance coverage.
Life insurance premiums and annuity deposits have been the primary
sources of cash inflows for the Company.
Classes of Life Insurance
Percentage of Total Sales
For the year ended December 31,
<TABLE>
<CAPTION>
Class 1995 1994 1993 1992 1991
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ordinary Life (including Total
and Permanent Disability and
Additional Accidental Death) 91.8% 92.1% 92.3% 91.9% 92.1%
Group 8.2 7.9 7.7 8.1 7.9
------ ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
Certain elements of revenue and expense reflect the requirements of
Financial Accounting Standard (FAS) 97. FAS 97 prescribes a uniform
method by which life insurance companies record certain long-term
contracts, specifically annuities, universal life, and other interest
sensitive products. This method involves separating the premium income
into the "premium" portion (shown in the sales figures) which represents
insurance protection purchased, and the "deposit" portion, which
represents funds to be held at interest for future uses. Under this
standard, the "deposit" portion of the premium income is accounted for
using methods applicable to comparable "interest bearing obligations" of
other types of financial institutions.
3
<PAGE>
Structured settlement annuities sold to affiliate companies represented
$22,018,313 in annuity deposits in 1995, $11,431,965 in 1994 and
$7,516,908 in 1993. Also included in the annuity deposits are annuity
contracts purchased by the Erie Insurance Group Retirement Plan for
Employees. These annuity contracts purchased totaled $6,024,125 in 1995
and $8,880,714 in 1994.
Classes of Deposits
Total Deposits
For the year ended December 31,
<TABLE>
<CAPTION>
Class 1995 1994 1993 1992 1991
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Universal Life Deposit $ 8,490,667 $ 7,482,156 $ 6,130,390 $ 5,543,162 $ 4,560,411
Annuity Deposit 66,051,230 62,048,541 50,550,323 53,526,178 44,040,442
------------- ------------- --------------- -------------- --------------
$ 74,541,897 $ 69,530,697 $ 56,680,713 $ 59,069,340 $ 48,600,853
</TABLE>
The Registrant reinsures with other insurance companies the portion of
the insurance coverage above acceptable retentions. Beginning January 1,
1995, the retention limit on an acceptable risk was increased to $300,000
on each individual life written. Prior to January 1, 1995, the limit was
$225,000.
The Company reinsures under a number of different reinsurance agreements.
The primary purpose of this reinsurance is to enable the Company to write
a policy in an amount larger than the risk it is willing to assume for
itself. The secondary purposes are to receive commissions on the
reinsurance ceded and in some instances to participate in the profits of
the reinsured business by way of an "experience rating refund."
Marketing
The Company markets its products through independent agents throughout
Pennsylvania, Maryland, Virginia, West Virginia, Ohio, Indiana,
Tennessee, North Carolina and the District of Columbia. The policies sold
are evaluated by the Company's Underwriting Department which selects or
declines applicants for insurance. Premium on policies which are accepted
may be standard or rated, depending on the nature of the risk.
4
<PAGE>
Competition
The Company operates in a highly competitive field which consists of many
stock and mutual life insurance companies. A large number of established
insurance companies compete in states in which the Company transacts
business and many of these companies offer more diversified lines of
insurance coverage and have substantially greater financial resources
than does the Company. Competition is based primarily on price,
availability of insurance products and the financial strength of the
Company.
Insurance Regulation
The Company is subject to supervision and regulation by the insurance
departments of the states in which it does business. Although the extent
of the regulation varies from state to state, generally the supervisory
agencies are vested with broad administrative powers relating to the
granting and revocation of licenses to transact business, regulation of
trade practices, licensing of agents, approval of policy forms, deposits
of security for the benefits of policy owners and investments and
maintenance of specified reserves and capital, all designed primarily for
the protection of policy owners. In accordance with the rules of the
National Association of Insurance Commissioners, the Company is examined
periodically by one or more of the state supervisory agencies. The latest
such examination of the Company was conducted by the Pennsylvania and
Ohio Insurance Departments and covered the four years ended December 31,
1990.
The Commonwealth of Pennsylvania has adopted the minimum risk-based
capital requirements on domestic insurance companies that were developed
by the National Association of Insurance Commissioners (NAIC). The
formulas for determining the amount of risk-based capital specify various
weighing factors that are applied to financial balances or various levels
of activity based on the perceived degree of risk. These formulas
determine a ratio of the company's regulatory total adjusted capital to
its authorized control level risk-based capital, as defined by the NAIC.
Companies below specific trigger points or ratios are classified within
certain levels, each of which requires specified corrective action. The
levels and ratios are as follows.
Ratio of Total Adjusted Capital to
Authorized Control Level Risk-Based
Regulatory Event Capital (Less Than or Equal to)
Company action level 2 (or 2.5 with negative trends)
Regulatory action level 1.5
Authorized control level 1
Mandatory control level .7
Erie Family Life has regulatory total adjusted capital of $76 million and
$56 million at December 31, 1995, and 1994, respectively, and a ratio of
total adjusted capital to authorized control level risk-based capital of
7.1 and 5.8 at December 31, 1995, and 1994, respectively. These levels
far exceed the minimum risk-based capital requirements.
5
<PAGE>
Life Reserves
In accordance with generally accepted accounting principles (GAAP), the
Company is required to establish and maintain as liabilities, actuarial
reserves to meet its obligations on life insurance policies and
annuities. These reserves are amounts which, with additions from premiums
to be received on outstanding policies and with interest on such reserves
compounded annually at certain assumed rates, are calculated to be
sufficient to meet policy obligations at death or maturity in accordance
with the mortality tables employed when the policies are issued.
The interest factors used in the computation of material reserves are:
Basis of Assumption
<TABLE>
<CAPTION>
Years of Policy
Issue Type Interest Mortality Withdrawal
<S> <C> <C> <C> <C>
1967 - 1975 All Life 4% graded to 3 1/2% 1955-60 Basic Modified
Select Plus Ultimate Linton B
1976 - 1980 All Life 6% graded to 4% 1955-60 Basic Linton B
Select Plus Ultimate
1981 - 1988 Permanent 7 1/4% graded to 6% 85% of 1965-70 150% of
Life Select and Ultimate Linton A
1981 - 1988 Other 7 1/4% graded to 6% 85% or 90% of Pricing
Life 1965-70 Select and Assumptions
Ultimate
1988 - 1995 All Life 7% graded to 6% Multiple of 1965-70 Pricing
and Annual Select and Ultimate Assumptions
Renewable
Term
1987 - 1995 Universal 7 1/2% graded to 6% 85% or 90% of Pricing
Life 1965-70 Select and Assumptions
Ultimate
</TABLE>
Investments
In accordance with standard insurance practice, the Registrant invests
its funds principally in corporate bonds and preferred and common stocks.
In 1995, the Company's real estate held for investment purposes
constituted 0.3% of the Company's total assets while mortgage loans
accounted for 1.0% and Other Invested Assets accounted for 0.6%. The real
estate owned by the Company is leased to an affiliate, Erie Indemnity
Company (EIC), for rentals of $423,120 per year through December 31,
2000. In addition, the Company makes policy loans to its Policyholders,
and at December 31, 1995, such policy loans constituted 0.5% of the
Registrant's total assets. Annual increases in the number and dollar
amount of policy loans, generally, will vary with changes in short-term
rates of interest. When short-term rates are high, policy loans are also
expected to increase.
6
<PAGE>
Subject to certain laws that prescribe the nature, quality and percentage
of the various types of investments which may be made by insurance
companies, the Company manages its investments to meet diversification,
yield and liquidity objectives.
Employees
Services of seventy-nine full-time Employees are provided through an
affiliate, EIC. All employees are salaried and ten are officers. These
Employee expenses along with other operating expenses are paid by the EIC
and reimbursed on a monthly basis. None of the Employees are covered by
collective bargaining agreements and the Company believes its Employee
relations are satisfactory.
Other Data
The Company's Lapse Rate for 1995 was 7.9%.
Reinsurance Profitability - Not Applicable.
New Types of Insurance - Not Applicable.
Total Insurance In Force for the last five years Net of
Reinsurance was:
1995 - $8,370,940,000
1994 - $7,481,537,000
1993 - $6,428,223,000
1992 - $5,545,197,000
1991 - $4,678,254,000
7
<PAGE>
ITEM 2. PROPERTIES
The Registrant owns no real property and no tangible personal property used in
the operation of its business except office supplies and forms. The Registrant
does, however, own real property for investment purposes as outlined under ITEM
1 - INVESTMENTS. The executive and administrative offices of the Registrant are
located in the headquarters office of Erie Insurance Group in Erie,
Pennsylvania. The Registrant pays other members of the group an amount
determined by an arm's length agreement for office space and for the use of
facilities, equipment and services.
ITEM 3. LEGAL PROCEEDINGS
The Registrant is not involved in any material pending legal proceedings other
than ordinary routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote to shareholders during the fourth
quarter of 1995.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Currently there is no market on which the Registrant's stock is traded.
The Company had 1,145 recordholders of Common Stock at December 31, 1995.
Date Dividends Declared Date Dividends Paid Dividends per Share
March 1, 1994 April 1, 1994 $ .30
March 1, 1994 July 1, 1994 .30
July 21, 1994 October 1, 1994 .30
September 29, 1994 January 1, 1995 .30
March 2, 1995 April 1, 1995 .34
April 25, 1995 July 3, 1995 .34
June 22, 1995 October 2, 1995 .34
September 21, 1995 January 2, 1996 .34
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information contained in "Selected Financial Data" on Page 12 of the
Company's 1995 Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION
The information set forth on pages 13 through 18 of the Company's 1995 Annual
Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The 1995 Financial Statements and the Registrant's independent auditor's report
on pages 20 through 28 of the Company's 1995 Annual Report are incorporated
herein by reference, as is the unaudited information set forth in the Notes to
the Financial Statements under the caption "Unaudited Quarterly Summary of
Operations" on page 28.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
9
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Present Principal Position with Erie
Name and Age Family Life and Other Material Positions
as of 12/31/95 Held During the Last Five Years
<S> <C>
Samuel P. Black, Jr. 1 Director since 1967. Chairman of the Board, Samuel P. Black & Associates, Inc.--
93 insurance agency; Director--Erie Insurance Company, Flagship City Insurance Company,
Erie Insurance Property & Casualty Company and Erie Indemnity Company,
Attorney-in-Fact for Erie Insurance Exchange.
J. Ralph Borneman, Jr. Director since 1992. President and Chief Executive Officer of Body-Borneman
57 Associates Inc., insurance agency. President Body-Borneman, Ltd. and Body-Borneman,
Inc., insurance agencies. Director--Erie Insurance Company, Erie Indemnity Company,
Attorney-in-Fact for Erie Insurance Exchange, Erie Insurance Company of New York and
National Penn Bankshares.
John J. Brinling, Jr. Executive Vice President of the Company since December 1990. Division Officer 1984-
48 present.
Robert H. Dreyer Senior Vice President of the Company since 1990. Chief Actuary 1983-Present.
58
Philip A. Garcia Senior Vice President and Controller and Division Officer since October 1993. Vice
39 President and Manager of the Life Accounting Department of the Company prior to 1993.
Susan Hirt Hagen 1,* Director since 1980. Managing Partner, Hagen, Herr & Peppin, Group Relations
60 Consultants since 1990; Associate, Center for Practice of Conflict Management 1972-
1990; Director--Erie Insurance Company and Erie Indemnity Company,
Attorney-in-Fact for Erie Insurance Exchange, since 1980; Director, Erie
Insurance Property & Casualty Company and Erie Insurance Company of New York
since 1995.
Thomas B. Hagen* Director since 1980. Secretary of Commerce of the Commonwealth of Pennsylvania
60 since January 1995; Chairman, Hagen & Company, business consultants from 1994 to
January 1995, Special Consultant to the Chairman of the Board of the Erie
Indemnity Company, Attorney-in-Fact for the Erie Insurance Exchange from
September 1993 to January 1995; Chairman of the Board and Chief
Executive Officer of the Erie Indemnity Company, Attorney-in-Fact
for the Erie Insurance Exchange, Erie Family Life Insurance Company and Erie
Insurance Company from November 1990, and of Flagship City Insurance Company
and Erie Insurance Property & Casualty Company, since 1992 and 1993,
respectively, to September 1993; President of the Erie Indemnity
Company, Attorney-in-Fact for the Erie Insurance Exchange and Erie Insurance
Company and Executive Vice President of Erie Family Life Insurance Company
from 1982 to November 1990; Director, the Erie Indemnity Company,
Attorney-in-Fact for the Erie Insurance Exchange and Erie Insurance
Company, General Public Utilities Corporation 1988-1995. Erie Small
Business Investment Company 1985-1995.
<FN>
1 Member of Executive Committee
* F. William Hirt is the brother of Susan Hirt Hagen and the
brother-in-law of Thomas B. Hagen. Susan Hirt Hagen is the
wife of Thomas B. Hagen.
</FN>
</TABLE>
10
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Present Principal Position with Erie
Name and Age Family Life and Other Material Positions
as of 12/31/95 Held During the Last Five Years
<S> <C>
F. William Hirt 1C,* Chairman of the Board. Director since 1967. Chairman of the Board of the Erie
70 Insurance Company, Erie Indemnity Company, Attorney-in-Fact for Erie Insurance
Exchange, Erie Insurance Property & Casualty Company and Flagship City
Insurance Company since September 1993; Chairman of the Board of Erie
Insurance Company of New York since April 1994. Chairman of the Executive
Committee of the Company and the Erie Indemnity Company, Attorney-in-Fact
for Erie Insurance Exchange since November 1990; Interim President and
Chief Executive Officer of the Company, Erie Indemnity Company,
Attorney-in-Fact for Erie Insurance Exchange, Erie Insurance Company, Erie
Insurance Property & Casualty Company, Flagship City Insurance Company and
Erie Insurance Company of New York from January 1, 1996 to February 12,
1996; Chairman of the Board, Chief Executive Officer and Chairman of the
Executive Committee of the Company, Erie Indemnity Company, Attorney-in-
Fact for Erie Insurance Exchange and Erie Insurance Company for more than
five years prior thereto; Director--Erie Insurance Company,
Flagship City Insurance Company, Erie Indemnity Company, Attorney-in-Fact
for Erie Insurance Exchange, Erie Insurance Property & Casualty Company,
Erie Insurance Company of New York and Integra Financial Corporation.
Thomas H. Hubbard Director since 1967. Financial Consultant, Butcher & Singer--Division of Wheat
72 First Securities, Ashtabula, Ohio--September 1990-April 1991. Vice President,
Parker/ Hunter, Inc., Investments, Ashtabula, Ohio 1976-1990. Partner in Markko
Vineyard, Conneaut, Ohio since 1968. Director--Erie Insurance Company.
Stephen E. Jones, Esq. Director since 1967. Rear Admiral USNR (Ret.) of Counsel, Knox, McLaughlin,
89 Gornall & Sennett, P.C., Erie, PA. Director--Erie Insurance Company and Erie
Plastics, Corry, PA.
Dr. Irvin H. Kochel 2 Director since 1970. Retired Assistant Vice President Emeritus, The Pennsylvania
72 State University; Director--Erie Insurance Company and Erie Indemnity Company,
Attorney-in-Fact for Erie Insurance Exchange.
Edmund J. Mehl 1,2C Director since 1969. Retired Chairman and Chief Executive Officer, Dispatch
72 Printing, Inc.; Director--Erie Insurance Company, Erie Indemnity Company, Attorney-
in-Fact for Erie Insurance Exchange, Flagship City Insurance Company, Erie
Insurance Property & Casualty Company and Erie Insurance Company of New
York.
<FN>
1 Member of Executive Committee
2 Member of Audit Committee
C Committee Chairman
* F. William Hirt is the brother of Susan Hirt Hagen and the brother-in-law of
Thomas B. Hagen. Susan Hirt Hagen is the wife of Thomas B. Hagen.
</FN>
</TABLE>
11
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Present Principal Position with Erie
Name and Age Family Life and Other Material Positions
as of 12/31/95 Held During the Last Five Years
<S> <C>
Stephen A. Milne President, Chief Executive Officer and Director since February 12, 1996. President
47 and Chief Executive Officer of the Erie Insurance Company and Erie Indemnity
Company, Attorney-in-Fact for Erie Insurance Exchange since February 12,
1996. President and Chief Executive Officer of Flagship City Insurance
Company, Erie Insurance Property & Casualty Company and Erie Insurance
Company of New York since March 11, 1996; Executive Vice President of the
Erie Insurance Company, Erie Indemnity Company, Attorney-in-Fact for Erie
Insurance Exchange, Flagship City Insurance Company, Erie Insurance
Property & Casualty Company and Erie Insurance Company of New York
1994-February 1996. Owner, Bennett-Damascus Insurance Agency
March 1991-December 31, 1993; Senior Vice President-Agency Division Erie
Insurance Group 1988-1991. Director--Erie Insurance Company, Erie
Indemnity Company, Attorney-in-Fact for Erie Insurance Exchange and Erie
Insurance Company of New York, Flagship City Insurance Company and
Erie Insurance Property & Casualty Company.
John M. Petersen 1 Director since 1980. Retired; President and Chief Executive Officer of the Erie
67 Indemnity Company, Attorney-in-Fact for Erie Insurance Exchange, Erie Family Life
Insurance Company, Erie Insurance Company, Flagship City Insurance
Company and Erie Insurance Property & Casualty Company from 1993 to 1995 and
Erie Insurance Company of New York from 1994-1995; President, Treasurer
and Chief Financial Officer of the Erie Indemnity Company,
Attorney-in-Fact for the Erie Insurance Exchange, Erie Insurance
Company and Erie Family Life Insurance Company from November 1990, and of
Flagship City Insurance Company and Erie Insurance Property & Casualty
Company since 1992 and 1993, respectively, to September 1993;
President, Treasurer and Chief Financial officer of Erie Family Life
Insurance Company and Executive Vice President, Treasurer and Chief
Financial Officer of the Erie Indemnity Company, Attorney-in-Fact
for the Erie Insurance Exchange and Erie Insurance Company for more than
five years prior thereto; Director, the Erie Insurance Company, Flagship
City Insurance Company, Erie Indemnity Company, Attorney-in-Fact for Erie
Insurance Exchange, Erie Insurance Property & Casualty Company, Erie
Insurance Company of New York, and Spectrum Control, Inc.
Seth E. Schofield Director since 1991. Retired; Chairman of the Board and Chief Executive
56 Officer, USAir, Inc. from 1992 to January 1996; President and Chief Executive
Officer, USAir, Inc. from June 1991 to July 1992; President and Chief
Operating Officer, USAir, Inc. from June 1990 to June 1991; Executive Vice
President, USAir, Inc. from 1989 to June 1990; Chairman of the Board and a
Director, Greater Pittsburgh Chamber of Commerce; Director, USAir, Inc.,
the Erie Indemnity Company, Attorney-in-Fact for Erie Insurance
Exchange, Erie Insurance Company, PNC Bank, N.A., USX Corporation, Calgon
Carbon Corporation, and a member of the Desai Capital Management Advisory
Board.
<FN>
1 Member of Executive Committee
</FN>
</TABLE>
12
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Present Principal Position with Erie
Name and Age Family Life and Other Material Positions
as of 12/31/95 Held During the Last Five Years
<S> <C>
Thomas M. Sider Executive Vice President and Chief Financial Officer of the Company since
46 October 1993. Executive Vice President and Chief Financial Officer of the Erie
Insurance Company, Erie Indemnity Company, Attorney-in-Fact for Erie Insurance
Exchange, Flagship City Insurance Company, Erie Insurance Company of New York,
and Erie Insurance Property & Casualty Company. Treasurer of the E.I. Holding
Corp. and E.I. Service Corp. Director--Flagship City Insurance Company, Erie
Insurance Property & Casualty Company, E.I. Holding Corp., Erie Insurance
Company of New York and E.I. Service Corp.
Jan R. Van Gorder 1 Senior Executive Vice President, Secretary and General Counsel since 1990.
48 Director since September 1990. Senior Executive Vice President, Secretary and
General Counsel of the Erie Insurance Company, Erie Indemnity Company,
Attorney-in-Fact for Erie Insurance Exchange since 1990, and of Flagship
City Insurance Company and Erie Insurance Property & Casualty Company
since 1992 and 1993, respectively and of Erie Insurance Company of New York
since April 1994; Senior Vice President, Secretary and General
Counsel of the Company, Erie Insurance Company and Erie Indemnity Company,
Attorney-in-Fact for Erie Insurance Exchange for more than five years
prior thereto; Director--Erie Insurance Company, Flagship City
Insurance Company, Erie Insurance Property & Casualty Company, Erie
Insurance Company of New York and Erie Indemnity Company, Attorney-in-Fact
for Erie Insurance Exchange.
Harry H. Weil 2 Director since April 25, 1995. Senior Partner, Reed, Smith, Shaw & McClay,
62 Attorneys, since 1980, Partner 1969 to 1980, Associate 1964 to 1969; Director--Erie
Indemnity Company, Attorney-in-Fact for Erie Insurance Exchange, Erie
Insurance Company, Calgon Carbon Corporation and Pittsburgh Tube
Company.
Douglas F. Ziegler Senior Vice President, Treasurer and Chief Investment Officer of the Company
45 since October 1993. Senior Vice President, Treasurer and Chief Investment Officer of
the Erie Insurance Company, Erie Indemnity Company, Attorney-in-Fact for Erie
Insurance Exchange, Flagship City Insurance Company and Erie Insurance Property &
Casualty Company.
<FN>
1 Member of Executive Committee
2 Member of Audit Committee
</FN>
</TABLE>
13
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The Company is a member of an insurance holding company system pursuant to
Pennsylvania law under which insurance companies are required to have
nominating, audit and executive compensation committees composed solely of
directors who are not officers, employees or controlling shareholders of the
Company or any entity controlling the Company. Insurance companies can satisfy
this requirement if the insurance company is controlled by an insurer or a
publicly held corporation that has committees that comply with this requirement.
Erie Indemnity Company, holder of 21.6% of the Company's stock directly and
52.2% of the Company's stock as attorney-in-fact for Erie Insurance Exchange,
has committees which meet these requirements.
The following table sets forth the total compensation paid during each of the
three fiscal years ended December 31, 1995 to the Chief Executive Officer and
the four other most highly compensated executive officers during 1995 for
services rendered in all capacities (as required by the SEC) to the Company,
Erie Indemnity Company and its subsidiaries, and the Erie Insurance Exchange and
its subsidiary which collectively make up the Erie Insurance Group. The amount
of total compensation paid by Erie Indemnity Company listed below which is
allocated to the Company is as follows: John M. Petersen - 10%; Jan R. Van
Gorder - 5%; Thomas M. Sider - 10%; Stephen A. Milne - 0%; John J. Brinling, Jr.
- - 100%.
Annual Compensation
Name and Other Annual All Other
Principal Position Year Salary Bonus Compensation Compensation (1)
- --------------------------------------------------------------------------------
John M. Petersen 1995 $700,808 $242,923 $8,100 $23,956
President and Chief 1994 716,123 74,993 8,100 69,058
Executive Officer(2) 1993 427,379 94,643 5,383 10,828
Jan R. Van Gorder 1995 $296,095 $26,725 $1,029 $29,625
Executive Vice 1994 278,442 25,590 1,029 14,834
President, Secretary 1993 261,769 18,981 642 14,853
& General Counsel
Thomas M. Sider 1995 $231,901 $26,696 $941 $22,410
Executive Vice 1994 190,049 22,571 941 21,109
President & Chief 1993 168,243 17,604 66 20,836
Financial Officer
Stephen A. Milne 1995 $245,611 $26,623 $927 $39,993
Executive Vice 1994 189,512 34,943 965 4,433
President - Insurance
Operations(3)
John J. Brinling, 1995 $184,104 $20,853 $877 $28,837
Jr., Executive 1994 176,365 19,527 877 22,682
Vice President of 1993 164,530 19,712 642 22,006
EFL
(1) Amounts shown include matching contributions made by the Company pursuant
to the Company's Employee Savings Plans and premiums paid by the Company
on behalf of the named individuals on Split Dollar Life insurance
policies. For the year 1995, contributions made to the Employee Savings
Plans amounted to $18,173, $6,849, $6,143, $5,424 and $4,910, on behalf
of Messrs. Petersen, Van Gorder, Sider, Milne and Brinling,
14
<PAGE>
respectively. For the year 1994, contributions made to the Employee
Savings Plans amounted to $17,500, $6,190, $4,788, $4,433 and $4,478 on
behalf of Messrs. Petersen, Van Gorder, Sider, Milne and Brinling,
respectively. For the year 1993, contributions made to the Employee
Savings Plans amounted to $10,828, $5,917, $4,467 and $3,748 on behalf of
Messrs. Petersen, Van Gorder, Sider and Brinling, respectively. Premiums
paid during 1995 for Split Dollar Life insurance policies for Messrs.
Petersen, Van Gorder, Sider, Milne and Brinling, are as follows: $-0-,
$17,420, $16,267, $28,786 and $18,144. Premiums paid during 1994 for
Split Dollar Life insurance policies for Messrs. Petersen, Van Gorder,
Sider, Milne and Brinling, respectively, are as follows: $51,558, $8,644,
$16,321, $-0- and $18,204. Premiums paid during 1993 for Split Dollar
Life insurance policies for Messrs. Petersen, Van Gorder, Sider and
Brinling, respectively, are as follows: $-0-, $8,936, $16,369 and
$18,258. The Company is entitled to recover the premiums from any
proceeds paid on such Split Dollar Life insurance policies and has
retained a collateral interest in each policy to the extent of the
premiums paid with respect to such policies.
(2) Mr. Petersen retired as President and Chief Executive Officer of the
Company on December 31, 1995.
(3) Mr. Milne became an officer of the Company on January 11, 1994. Mr. Milne
had been previously employed by the Company; his last position with the
Company at that time was Senior Vice President -- Agency Division, a
position he held from 1988 to 1991. On February 12, 1996, Mr. Milne
became President, Chief Executive Officer and a director of the Company.
Stock Options and Stock Appreciation Rights
The Company does not have a stock option plan, nor has it ever
granted any stock option or stock appreciation right to any of the persons named
in the Summary Compensation Table.
Pension Plan
The following table sets forth the estimated annual benefits
payable upon retirement at age 65 under the Erie Insurance Group Retirement Plan
for Employees.
PENSION PLAN TABLE
Years of Service
Remuneration 15 20 25 30 35
- -------------------------------------------------------------------
$ 200,000 60,000 80,000 100,000 120,000 120,000
225,000 67,500 90,000 112,500 135,000 135,000
250,000 75,000 100,000 125,000 150,000 150,000
300,000 90,000 120,000 150,000 180,000 180,000
350,000 105,000 140,000 175,000 210,000 210,000
400,000 120,000 160,000 200,000 240,000 240,000
450,000 135,000 180,000 225,000 270,000 270,000
500,000 150,000 200,000 250,000 300,000 300,000
550,000 165,000 220,000 275,000 330,000 330,000
600,000 180,000 240,000 300,000 360,000 360,000
650,000 195,000 260,000 325,000 390,000 390,000
700,000 210,000 280,000 350,000 420,000 420,000
750,000 225,000 300,000 375,000 450,000 450,000
The compensation covered by such plan is the base salary
reported in the Summary Compensation Table.
Under the pension plan, credited years of service is capped at
30 years. Credited years of service for each of the individuals named in the
Summary Compensation Table is as follows: John M. Petersen - 31 years, Jan R.
Van Gorder - 15 years, Thomas M. Sider - 25 years, Stephen A. Milne - 18 years
and John J. Brinling, Jr. - 28 years.
15
<PAGE>
The benefits under such plan are computed on the basis of straight-life
annuity amounts and a life annuity with a ten-year certain benefit. The benefits
listed in the Pension Plan Table are not subject to deduction for Social
Security or other offset amounts. The information in the foregoing table does
not reflect certain limitations imposed by the Internal Revenue Code of 1986, as
amended (the "Code"). Beginning in 1994, the Code prohibits the inclusion of
earnings in excess of $150,000 per year (adjusted periodically for
cost-of-living increases) in the average earnings used to calculate benefits.
The Code also limits the maximum annual pension (currently $120,000, but
adjusted annually for cost-of-living increases) that can be paid to each
eligible employee. A Supplemental Employee Retirement Plan for senior management
is in effect which provides benefits in excess of the earnings limitations
imposed by the Internal Revenue Code of 1986 as amended.
Director Compensation
Effective January 1, 1995, the annual retainer for directors increased
to $15,000, plus $1,200 for each meeting attended and $800 for each committee
meeting attended (unless the committee meeting is held the same day as a Board
of Directors meeting, for which committee meeting $500 will be paid) plus an
additional $2,000 per year for each committee chairperson. In addition, all
directors are reimbursed for their expenses incurred in attending meetings.
Officers of the Company who serve as directors are not compensated separately
for attendance at meetings of the Board of Directors and its committees.
Agreements with Executive Officers
Upon the recommendation of the Executive Compensation Committee of the
Company's Board of Directors the Company has entered into employment agreements
with the following four of the Company's senior executive officers: John J.
Brinling, Jr., Executive Vice President of the Company in November, 1995;
Stephen A. Milne, President and CEO of the Company; Thomas M. Sider, Executive
Vice President and Chief Financial Officer of the Company, and Jan R. Van
Gorder, Executive Vice President, General Counsel and Secretary of the Company.
The employment agreements have the following principal terms:
(a) A three year term expiring in November , 1998 unless the agreement
is theretofore terminated in accordance with its terms with or without cause or
due to disability or death of the officer or notice of non-renewal is given by
the Company or the executive 30 days before any anniversary date;
(b) A minimum annual base salary at least equal to the executive's
annual base salary at the time the agreement was executed, subject to periodic
review to reflect the executive's performance and responsibilities, competitive
compensation levels and the impact of inflation;
(c) The eligibility of the executive under the Company's incentive
compensation programs and employee benefit plans;
(d) The establishment of the terms and conditions upon which the
executive's employment may be terminated by the Company and the compensation of
the executive in such circumstances. The agreements provide generally, among
other things, that if the employment of an executive is terminated without Cause
(as defined in the agreement) by the Company or by the executive for Good Reason
(as defined in the agreement) then the executive shall be entitled to receive an
amount equal to the sum of: (i) three times his highest annual base salary
during the preceding three years plus an amount equal to the total of the
executive's highest awards during the preceding three years under the Company's
bonus and other short-term incentive compensation plans and (ii) any award or
other compensation to which the executive is entitled under any of the Company's
incentive compensation programs and employee benefit plans as well as for the
continuing participation, for a period of three years following termination, in
all life, medical and dental insurance programs and other benefit plans to the
extent the executive and his dependents were eligible to participate in such
programs immediately prior to his termination;
(e) Provisions relating to confidentiality and non-disclosure
following an executive's termination; and
(f) An agreement by the executive not to compete with the Company for a
period of one year following his termination, unless his termination was without
Cause.
16
<PAGE>
Compensation Committee Interlocks and Insider Participation
The Executive Compensation Committee (the "Committee") of the Company
presently consists of Peter B. Bartlett, Chairman, J. Ralph Borneman, Jr., Seth
E. Schofield and Harry H. Weil. No member of the Committee is a former or
current officer or employee of the Company or any of its affiliates.
Furthermore, no executive officer of the Company serves as a member of a
compensation committee of another entity one of whose executive officers serves
on the Committee of the Company or as a director of the Company, nor does any
executive officer of the Company serve as a director of another entity, one of
whose executive officers serves on the Committee of the Company. Mr. Borneman is
the President and a principal shareholder of Body-Borneman Associates, Inc.,
Body-Borneman, Inc. and Body-Borneman, Ltd., all of which are independent
insurance agencies representing a number of insurers, including the Company and
its insurance affiliates.
Report of the Executive Compensation Committee of the Company
As noted previously, the Company is a member of an insurance holding
company system under Pennsylvania law which requires that the executive
compensation committee be composed of directors who are not officers, employees
or controlling shareholders, unless, as in the case of the Company, the insurer
is controlled by another insurer or a publicly held corporation which has
committees meeting this requirement. Erie Indemnity Company, which controls the
Company by virtue of its stock ownership, has a compensation committee that acts
on behalf of all members of the Erie Insurance Group (including the Company) and
which meets these "independent director" requirements.
The Committee is charged with the duty of recommending to the Board of
Directors the compensation of the five highest paid officers of the Erie
Insurance Group and such other officers as are determined by the Board of
Directors, recommending to the Board of Directors all forms of bonus
compensation including incentive programs that would be appropriate for the
Group and to undertake such other responsibilities as may be delegated to it.
The Board has authorized the Compensation Committee to consider the compensation
of the five highest paid officers, including the CEO. The Committee is composed
of four directors of the Erie Indemnity Company who are not officers or
employees of Erie Indemnity Company or any of its affiliates. The purpose of the
Committee is to determine the level and composition of compensation that is
sufficient to attract and retain top quality executives for the Erie Insurance
Group. It is the opinion of the Committee that the senior executives of the Erie
Insurance Group should receive compensation comparable to that paid by other
insurers of comparable size and financial performance.
The Committee reviewed the salary ranges and base salaries of the five
highest paid executives, including the CEO, in 1995. The Committee has position
descriptions for the five highest paid executives of the Group, including the
chief executive officer, which define the responsibilities and duties of each
position. The position descriptions also delineate the functional areas of
accountability and the qualifications and skills required to perform such
responsibilities and duties. The Committee then reviews the salary ranges for
the chief executive officer and the other four highest paid senior executives,
comparing the ranges to third party data compiled for similar positions with
other insurers. In reviewing the salary ranges for the five highest paid
executives, including the chief executive officer, the Committee references
Sibson's Management Compensation Survey published annually by Sibson & Company,
Inc., which summarizes compensation data for 100 insurance companies. The data
is reported by position and by company asset size, and by premium volume. The
Committee also uses compensation data obtained from Hay Management Consultants.
The information developed by Hay Management Consultants and Sibson & Company was
used for adjusting compensation levels for the three highest paid executive
positions. The unique aspects of each position, its duties and responsibilities,
the effect on the performance of the Company, the number of employees supervised
directly and other criteria are also considered in setting the base salaries.
The level of compensation for each executive reflects his or her
skills, experience and job performance. Normally, base salary will not be less
than the minimum for the salary range established for each position. Executives
with a broader range of skills, experience and consistently high performance
with the Group may receive compensation slightly above the mid-point for the
established salary range.
17
<PAGE>
A promotional salary increase may also be added to the executive's
compensation when the executive assumes new responsibilities or has increased
accountability for results. Significant changes in duties and responsibilities
may also result in a higher salary range.
Compensation for the chief executive officer consists primarily of
salary and bonus and minor perquisites which amount to less than 10% of the
chief executive officer's salary and bonus. No long-term incentive plans (which
provide incentives for performance occurring over longer periods of time) are
currently utilized in determining the compensation of the chief executive
officer. Stock options, stock appreciation rights and restricted stock are not
currently part of the executive compensation package for any executives of the
Group. The compensation of the chief executive officer is determined as
previously outlined.
Performance factors applicable to the Group, such as investment
portfolio returns, overall company profitability, as well as other factors are
considered indirectly in evaluating the chief executive officer's performance.
Such performance factors were considered in approving Mr. Petersen's 1995
compensation.
Compensation of the next four most highly compensated individuals is
determined by the Committee and is based upon the factors and processes
enumerated, i.e., a determination of a salary range based upon market data and
evaluation of the executive with respect to the executive's job description and
his or her position within the salary range.
Compensation of the next highest paid executives (other than the five
highest paid executives) is based upon the Group's established standard
compensation policies and is not determined by the Committee. As with the chief
executive officer and the next four most highly compensated executive officers,
no long-term incentive plans are maintained for these executives.
ERIE INDEMNITY COMPANY
EXECUTIVE COMPENSATION COMMITTEE
Peter B. Bartlett, Chairman
J. Ralph Borneman, Jr.
Seth E. Schofield
Harry H. Weil
18
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a)
Name & Address Amount & Nature
of Beneficial of Beneficial Percent of
Owner Ownership Class
Erie Indemnity Company 681,300(1) 21.6%(1)
100 Erie Insurance Place Direct
Erie, PA 16530
(b) Shares beneficially owned directly or indirectly by all Directors
and Officers:
Name & Address Amount & Nature
of Beneficial of Beneficial Percent of
Owner Ownership Class
Erie Insurance Exchange 1,644,300(1) 52.2%(1)
100 Erie Insurance Place Direct
Erie, PA
Samuel P. Black, Jr. 22,706 .72%
400 French St., Suite 100
Erie, PA 16507
J. Ralph Borneman 512 .02%
Box 552
17 East Philadelphia Ave.
Boyertown, PA 19512
Susan Hirt Hagen 100 --
5727 Grubb Rd.
Erie, PA 16506
Thomas B. Hagen 51,494 1.63%
5727 Grubb Rd.
Erie, PA 16506
F. William Hirt 55,678 1.77%
3270 Kingston Court S.
Erie, PA 16506
Thomas H. Hubbard 23,070 .73%
Box 245
Ashtabula, OH 44004-0245
Stephen E. Jones, Esq. 9,807 .31%
120 West 10th St.
Erie, PA
Dr. Irvin H. Kochel 2,083 .07%
4737 Reese Road
Erie, PA 16510
19
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (Cont.)
(b) Shares beneficially owned directly or indirectly by all Directors
and Officers:
Name & Address Amount & Nature
of Beneficial of Beneficial Percent of
Owner Ownership Class
Edmund J. Mehl 4,050 .13%
504 Frontier Dr.
Erie, PA 16505
John M. Petersen 29,739 .94%
124 Voyageur Dr.
Erie, PA 16505
Seth E. Schofield 600 .02%
2341 South Queen St.
Arlington, VA 22202
Jan R. Van Gorder 25 --
6796 Manchester Beach Road
Fairview, PA 16415
John J. Brinling, Jr. 210 .01%
1522 Sumner Drive
Erie, PA 16505
Robert H. Dreyer 300 .01%
465 Hawthorne Trace
Fairview, PA 16415
Philip Alan Garcia 425 .01%
786 Stockbridge Drive
Erie, PA 16505
Thomas M. Sider 140 --
11810 Old Lake Road
North East, PA 16428
Douglas F. Ziegler 90 --
378 Ridgeview Drive
Erie, PA 16505
All officers and directors
as a group (17 persons) 201,029(2) 6.38%(2)
20
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (Cont.)
(1) Erie Insurance Exchange (the "Exchange") is a reciprocal insurance
exchange controlled by its subscribers, each of whom has designated
Erie Indemnity Company as such subscriber's attorney-in-fact for
certain purposes, including Indemnity's holding of Common Stock of the
Company. 76% of the outstanding voting stock of Erie Indemnity Company
is owned beneficially by a trust established by H. O. Hirt, the father
of F. William Hirt and Susan H. Hagen and the father-in-law of Thomas
B. Hagen. Mr. Hirt and Mrs. Hagen are beneficiaries of the trust and
are co-trustees with Mellon Bank, N.A. An additional 12.7% of the Erie
Indemnity Company voting stock is beneficially owned by Samuel P.
Black, Jr.
(2) Includes direct and indirect beneficial ownership and shares owned by
and with spouses.
(c) There are no contractual arrangements known to the Registrant which may
result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors Black and Borneman are officers and principal shareholders of
insurance agencies which receive insurance commissions in the ordinary
course of business from Erie Family Life and its affiliates in accordance
with such companies standard commission schedules and agents' contracts.
The former President and CEO and previous Chief Investment Officer of the
Erie Insurance Group of Companies, John M. Petersen, who retired as an
employee of EIC on December 31, 1995, entered into a consulting arrangement
with EIC effective January 2, 1996. Under the terms of the arrangement, EIC
engaged Mr. Petersen as a consultant to furnish EIC and its pension trust,
Erie Insurance Exchange, and Erie Family Life Insurance Company, with
investment services with respect to their investments in common stocks.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following financial statements of the Registrant and the
report of independent certified public accountants are incorporated
herein by reference to pages 20 through 28 in the Registrant's annual
report to shareholders for the year ended December 31, 1995.
Independent Auditor Report
Statements of Financial Position - December 31, 1995 and 1994
Statements of Operations for the years ended December 31, 1995, 1994 and 1993
Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993
Statements of Shareholders' Equity for the years ended December 31, 1995,
1994 and 1993
Notes to Financial Statements
(2) The following financial statement schedules are included in this
report on FORM 10-K:
Page
Independent Auditors' Report on Schedules 24
Schedule I - Summary of Investments other than
investments in related parties 25
Schedule III - Supplementary Insurance Information 26
Schedule IV - Reinsurance 27
All other schedules 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.
(3) Exhibits:
Exhibit 13 - Annual Report to Shareholders
Exhibit 27 - Financial Data Schedule
All exhibits for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore,
have been omitted.
(b) No reports on Form 8-K have been filed or were required to be filed
during the last quarter of the period covered by this report.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) 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.
Date: March 1, 1996 ERIE FAMILY LIFE INSURANCE COMPANY
(Registrant)
Principal Officers
/s/ F. William Hirt
F. William Hirt, Chairman of the Board
/s/ Stephan A. Milne
Stephen A. Milne, President and C.E.O.
/s/ Thomas M. Sider
Thomas M. Sider, Executive Vice President & CFO
/s/ Philip A. Garcia
Philip A. Garcia, Senior Vice President & Controller
Board of Directors
/s/ Samuel P. Black, Jr. /s/ Irvin H. Kochel
Samuel P. Black, Jr. Dr. Irvin H. Kochel
/s/ J. Ralph Borneman /s/ Edmund J. Mehl
J. Ralph Borneman Edmund J. Mehl
/s/ Susan Hirt Hagen /s/ Stephen A. Milne
Susan Hirt Hagen Stephen A. Milne
/s/ Thomas B. Hagen /s/ John M. Petersen
Thomas B. Hagen John M. Petersen
/s/ F. William Hirt /s/ Seth E. Schofield
F. William Hirt Seth E. Schofield
/s/ Thomas H. Hubbard /s/ Jan R. Van Gorder
Thomas H. Hubbard Jan R. Van Gorder
/s/ Stephen E. Jones /s/ Harry H. Weil
Stephen E. Jones Harry H. Weil
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
Erie Family Life Insurance Company
We have audited the statements of financial position of Erie
Family Life Insurance Company (Company) as of December 31, 1995 and 1994 and the
related statements of operations, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995, as contained in the
1995 annual report, incorporated by reference in the annual report on Form 10-K
for the year ended December 31, 1995. In connection with our audits of the
financial statements, we also have audited the financial statement schedules, as
listed in the accompanying index. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Erie Family
Life Insurance Company as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
Also in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/ Brown Schwab Bergquist & Co.
Erie, Pennsylvania
February 16, 1996
24
<PAGE>
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
<TABLE>
<CAPTION>
December 31, 1995
Cost or Amount at which
Amortized Market Shown in the
Cost Value Balance Sheet
<S> <C> <C> <C>
Type of Investment
Fixed Maturities
Available-for-Sale
Bonds and Notes
U. S. Treasuries $ 6,568,499 $ 7,442,496 $ 7,442,496
Political Subdivisions 2,063,013 2,310,929 2,310,929
Special Revenue 50,683,120 52,853,098 52,853,098
Public Utilities 99,653,629 103,576,784 103,576,784
Industrial and Misc. 240,803,281 258,317,701 258,317,701
Redeemable Preferred Stocks
Banks, Trusts and
Insurance Companies 2,000,000 1,880,000 1,880,000
Total Fixed Maturities
Held-to-Maturity $ 401,771,542 $ 426,381,008 $ 426,381,008
Equity Securities
Common Stocks
Industrial and Misc. $ 3,500,006 $ 3,414,640 $ 3,414,640
Non-Redeemable Preferred Stocks
Public Utilities 5,273,282 5,299,712 5,299,712
Banks, Trusts and
Insurance Companies 83,749,715 84,656,625 80,382,125
Industrial and Misc. 33,240,871 32,953,744 37,228,244
Total Equity Securities $ 125,763,874 $ 126,324,721 $ 126,324,721
Real Estate
Investment Property $ 1,796,395 $ 1,796,395 $ 1,796,395
Policy Loans 3,694,530 3,694,530 3,694,530
Mortgage Loans 7,062,742 7,062,742 7,062,742
Other Invested Assets 4,165,721 4,165,721 4,165,721
Total Investments $ 544,254,804 $ 569,425,117 $ 569,425,117
</TABLE>
25
<PAGE>
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
At December 31,
Deferred Future
Policy Policy Other
Acquisition Benefits & Unearned Policy
Segment Costs Deposits Premium Claims
<S> <C> <C> <C> <C>
1995
Ordinary Life Insurance $ 43,893,056 93,756,432 104,951 823,618
Group Life Insurance 0 984,149 0 73,408
Annuities 6,869,236 405,346,808 0 0
Supplemental Contracts 0 872,745 0 0
Total $ 50,762,292 500,960,134 104,951 897,026
1994
Ordinary Life Insurance $ 38,740,281 79,503,597 98,700 723,638
Group Life Insurance 0 653,979 0 73,847
Annuities 6,211,514 341,242,154 0 0
Supplemental Contracts 0 767,457 0 0
Total $ 44,951,795 422,167,187 98,700 797,485
1993
Ordinary Life Insurance $ 33,419,935 67,423,466 80,070 1,070,429
Group Life Insurance 0 616,218 0 84,930
Annuities 5,062,903 281,489,139 0 0
Supplemental Contracts 0 882,586 0 0
Total $ 38,482,838 350,411,409 80,070 1,155,359
</TABLE>
<PAGE>
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
For the Years Ended December 31,
Amortization
Net Life & of Deferred Other
Policy Investment Annuity Acquisition Operating
Segment Revenues(a) Income Benefits Costs Expenses
<S> <C> <C> <C> <C> <C>
1995
Ordinary Life Insurance 25,764,413 11,329,270 10,083,138 1,813,419 8,814,413
Group Life Insurance 1,854,910 59,239 705,429 0 360,556
Annuities 454,674 29,509,614 22,664,856 544,708 2,281,533
Supplemental Contract 0 64,689 53,930 0 4,101
Total 28,073,997 40,962,812 33,507,353 2,358,127 11,460,603
1994
Ordinary Life Insurance 22,931,783 9,651,029 5,856,784 1,700,028 8,245,639
Group Life Insurance 1,717,589 46,571 799,772 0 330,111
Annuities 244,111 25,800,361 18,128,885 279,737 2,297,726
Supplemental Contract 0 68,288 36,737 0 2,813
Total 24,893,483 35,566,249 24,822,178 1,979,765 10,876,289
1993
Ordinary Life Insurance 20,440,636 8,517,118 6,019,207 1,634,843 6,912,809
Group Life Insurance 1,552,939 52,933 1,251,698 0 298,612
Annuities 163,247 22,283,079 16,284,434 457,921 1,726,956
Supplemental Contract 0 75,481 20,634 0 3,026
Total 22,156,822 30,928,611 23,575,973 2,092,764 8,941,403
<FN>
(a) Net of reinsurance
</FN>
</TABLE>
26
<PAGE>
SCHEDULE IV - REINSURANCE
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other From Other Net Assumed
Amount Companies Companies Amount to Net
<S> <C> <C> <C> <C> <C>
December 31, 1995
Life Insurance in force $ 9,568,795,000 1,197,855,000 N/A 8,370,940,000 -0-
Premiums for the year
Life Insurance 29,118,897 3,354,484 -0- 25,764,413 -0-
Other 2,309,584 0 -0- 2,309,584 -0-
Total Premiums $ 31,428,481 3,354,484 -0- 28,073,997 -0-
December 31, 1994
Life Insurance in force $ 8,468,890,000 987,353,000 N/A 7,481,537,000 -0-
Premiums for the year
Life Insurance 26,117,501 3,185,718 -0- 22,931,783 -0-
Other 1,961,700 0 -0- 1,961,700 -0-
Total Premiums $ 28,079,201 3,185,718 -0- 24,893,483 -0-
December 31, 1993
Life Insurance in force $ 7,265,509,000 837,286,000 N/A 6,428,223,000 -0-
Premiums for the year
Life Insurance 22,573,306 2,132,670 -0- 20,440,636 -0-
Other 1,716,186 0 -0- 1,716,186 -0-
Total Premiums $ 24,289,492 2,132,670 -0- 22,156,822 -0-
</TABLE>
27
<PAGE>
INCORPORATED BY REFERENCE, PAGE 12 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31
<S> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991
Policy Revenue $ 28,073,997 $ 24,893,483 $ 22,156,822 $ 19,415,368 $ 16,845,423
Investment & Other Income 50,275,954 41,875,339 42,630,274 39,107,928 22,436,810
Total Revenue $ 78,349,951 $ 66,768,822 $ 64,787,096 $ 58,523,296 $ 39,282,233
Benefits & Expenses 51,946,079 40,289,316 36,910,821 33,181,761 28,276,198
Operating Income Before Taxes 26,403,872 26,479,506 27,876,275 25,341,535 11,006,035
Federal Income Tax (Benefit):
Current 7,607,573 8,179,901 8,275,631 7,791,598 3,923,121
Deferred 914,707 1,469,927 1,496,402 1,655,339 (538,121)
Total Federal Income Tax 8,522,280 9,649,828 9,772,033 9,446,937 3,385,000
Cumulative effect on years prior
to 1993 on changing the method of
accounting for income taxes 0 0 (567,610) 0 0
Net Income $ 17,881,592 $ 16,829,678 $ 17,536,632 $ 15,894,598 $ 7,621,035
Earnings per share $ 5.68 $ 5.34 $ 5.57 $ 5.05 $ 2.42
Cash dividends declared per share$ 1.36 $ 1.20 $ 1.10 $ 1.00 $ 0.92
Total Assets $ 673,794,161 $ 528,632,132 $ 455,135,563 $ 376,485,292 $ 297,626,775
Shareholders Equity $ 128,905,402 $ 90,855,581 $ 89,744,886 $ 75,427,308 $ 63,388,207
Book Value per share $ 40.92 $ 28.84 $ 28.49 $ 23.95 $ 20.12
Average Number of
Shares Outstanding 3,150,000 3,150,000 3,150,000 3,150,000 3,150,000
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 13 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction with the
financial statements and related notes found on pages 21 - 28, since they
contain important information that is helpful in evaluating our operating
results and financial condition. (Note: A glossary of certain terms used in this
discussion can be found on page 19. The terms are italicized the first time they
appear in the text.)
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 non-participating individual and group life
insurance policies, including universal life and annuity products. The Company
markets its products through independent Agents and is licensed in 10 states and
the District of Columbia in the Eastern U.S. and is subject to supervision and
regulations of the states in which it does business. A large portion of the
Company's business is written in Pennsylvania.
Net Income increased to $17,881,592, or $5.68 per share, in 1995 from
$16,829,678, or $5.34 per share in 1994, a increase of 6.3 percent. Policy
revenues grew by 12.8 percent in 1995 and life insurance in force grew by almost
$1.1 billion during 1995, with total life insurance in force at December 31,
1995 growing to almost $9.6 billion. Investment income, net of expenses, grew by
15.2 percent to $40,962,812 in 1995 from $35,566,249 in 1994. Total assets
increased by 27.5 percent to $673,794,161.
REVENUES
Policy Revenues
Life premiums increased 12.4 percent to $25,764,413 in 1995 from $22,931,783 in
1994 and $20,440,636 in 1993. New life insurance coverage placed in force during
1995 was $1,877,983,000, compared to $1,884,722,000 in 1994 and $1,580,014,000
in 1993. This represents a decrease of 0.4 percent in 1995 and an increase of
19.3 percent in 1994. First year life insurance premiums were $5,624,117 in
1995, $5,563,765 in 1994 and $4,567,631 in 1993, an increase of 1.1 percent in
1995 and 21.8 percent in 1994. Renewal premium increased 16.0 percent in 1995 as
the overall company lapse ratio continued to decline. Group premiums rose 17.7
percent to $2,309,584 in 1995 from $1,961,700 as new competitive rates on group
products increased sales.
First-year and single universal life and annuity deposits were $57,606,715 in
1995, $53,965,315 in 1994 and $42,602,356 in 1993, representing an increase of
6.7 percent in 1995 and 26.7 percent in 1994. Total annuity and universal life
deposits were $74,541,897, $69,530,697, and $56,680,713 in 1995, 1994, and 1993,
<PAGE>
INCORPORATED BY REFERENCE, PAGE 13 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
respectively. Annuity deposits recorded in connection with annuity contracts
purchased by the Erie Insurance Group Retirement Plan for retired vested
employees receiving benefits were $6,024,125, $8,880,714, and $0 for the years
ended December 31, 1995, 1994, and 1993, respectively. Also included in annuity
deposits are annuities purchased by affiliated property/casualty companies for
use in connection with the structured settlement of insurance claims. Structured
settlement annuity deposits sold to Erie Insurance Group affiliate companies
totalled $22,018,313, $11,431,965, and $7,516,908 in 1995, 1994 and 1993,
respectively.
The Company's lapse ratio, as reported to the Pennsylvania Insurance Department,
fell to 7.9 percent in 1995, a positive trend which has continued for several
years. The lapse ratio was 8.4 percent in 1994 and 9.1 percent in 1993. The
lapse ratio is an important measure of the success of the Company's sales and
service efforts. Consequently, it is closely monitored as a barometer of future
life insurance product profitability and premium growth. The 6.0 percent
improvement in the lapse ratio in 1995 is reflective of management's policy
conservation efforts and the Company's sales practices. The decline in the
policy lapse ratio contributed to the growth in Company renewal life insurance
premiums in 1995.
Investment Income, Net of Expenses
Net investment income in 1995 was $40,962,812 compared to $35,566,249 in 1994
and $30,928,611 in 1993, an increase of 15.2 percent in 1995 and 15.0 percent in
1994. The ratio of net investment income to mean invested assets during 1995 was
7.78 percent compared to 8.33 percent in 1994 and 8.67 percent in 1993.
Investment yields declined in 1995 coinciding with the general decline in
interest rates during the year. 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 Investments
During 1995 and 1994, the Company generated realized gains of $7,483,798 and
$4,411,334 respectively, consisting entirely of gains from the sale of
securities. In 1993, the Company had realized gains on investments of
$10,433,318. This amount consisted of gains on the sale and maturity of
securities of $12,408,318 net of $1,200,000 in losses for a write-down of a
limited partnership interest and $775,000 in losses for a write-down of a
mortgage loan that became impaired during the period.
BENEFITS AND EXPENSES
Death Benefits
Net death benefits on life insurance policies increased 82.8 percent in 1995 to
$7,438,758, compared to $4,068,876 in 1994 and $4,639,349 in 1993. Although the
rise in death benefits in 1995 was dramatic, from 1992 through 1995 net death
benefits increased by about 56 percent which was in line with the increase in
the Company's life insurance in force of 52 percent, over the same period.
Mortality experience should be
<PAGE>
INCORPORATED BY REFERENCE, PAGE 14 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
analyzed for long-term trends, rather than 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. The Company believes that its
underwriting philosophy and practices are sound and positively contribute to the
mortality results experienced over the last several years.
During 1995, the Company introduced its new "Accelerated Benefits Option" which
allows terminally ill Policyholders to access life insurance benefits.
Policyholders who qualify may receive up to 50 percent of their policy death
benefit, not to exceed $250,000 per person, while they are still alive. This new
rider was made available on most new and existing life insurance policies at no
additional premium. Administrative fees and interest charges are applied only
when death benefits are advanced.
Interest on Annuity and Universal Life Deposits
Total interest credited on deposits rose 25.8 percent to $25,347,183 from
$20,145,355 in 1994. This increase in interest expense was due to new annuity
and universal life deposits of $74,541,897 made by Policyholders during 1995. At
December 31, 1995 annuity deposits accruing interest were $405 million and
universal life deposits accruing interest were $46 million. During 1995, the
interest rate credited on universal life deposits dropped from a 6.50 percent to
7.25 percent range on January 1, 1995 to a 6.25 percent to 7.00 percent range on
December 31, 1995. The rates credited on annuity deposits dropped from a 5.35
percent to 6.50 percent range at the beginning of 1995, to a 5.00 percent to
6.00 percent range at the end of 1995.
On January 1, 1996, a "10 Percent Preferred Withdrawal" feature was added to
Erie Family Life annuity policies. This feature allows Policyholders to withdraw
up to 10 percent of their value without incurring a surrender charge, once each
policy year.
Increase in Future Life Policy Benefits
The liability for future life policy benefits is computed considering various
factors such as anticipated mortality, future investment yields, withdrawals and
anticipated credit for reinsurance. The 1995 increase in future life policy
benefits equalled $4,619,996 compared to $2,611,084 in 1994 and $2,300,681 in
1993. The increase in 1995 is due to a reduction in estimated reinsurance
credits against the liability for future policy life benefits, an increase in
the provision for future life benefits on disabled lives, along with a general
increase in the provision due to the increased life insurance in force.
Beginning January 1, 1995, the retention limit on an acceptable risk was
increased to $300,000 on each individual life written. Prior to January 1, 1995,
the limit was $225,000.
Amortization of Deferred Policy Acquisition Costs
Generally, the costs incurred by the Company to acquire business, including
underwriting, commission and bonus costs, are deferred. These costs are
amortized and charged against earnings 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. The amortization of deferred acquisition
costs (DAC) rose 19.1 percent to $2,358,127 in 1995 from $1,979,765 in 1994. The
growth in amortization expense was affected by changes in premium revenue
patterns and policy persistency.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 14 AND 15 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
Commissions
In 1995, commission expenses increased 22.3 percent to $2,804,328. Most of this
commission increase was due to an increase in life insurance premiums of 12.4
percent 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 as well as changes in the mix of life and annuity
business sold. 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.
Commission costs, which vary with and are primarily related to the production of
new business, have been deferred and are capitalized as DAC. Most first year and
some second year commissions qualify for deferral. 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 (see Note 3 of the Notes to Financial Statements).
General Expenses
General expenses amounted to $5,802,088 compared to $5,775,026 in 1994 and
$5,120,063 in 1993. General expenses include wages and salaries, employee
benefits, data processing expenses, occupancy expenses and other office and
general administrative expenses of the Company. Certain general expenses of the
Company are deferred as policy acquisition costs. Medical inspection and exam
fees related to new business production, wages, salaries and employee benefits
of underwriting personnel, and bonuses paid to branch sales employees for the
production of life and annuity business, are all deferred. Deferred acquisition
costs are 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.
Certain operating expenses of the Company are paid by Erie Indemnity Company and
reimbursed monthly by the Company. Additionally, a portion of the common
overhead expenses of the Erie Insurance Group are allocated to Erie Family Life.
These expenses comprise the majority of Company general expenses. Erie Indemnity
Company is a 21.6 percent shareholder of Erie Family Life Insurance Company
stock and the management company for the Erie Insurance Exchange.
Taxes, Licenses and Fees
Taxes, licenses and fees increased $46,374 to $2,854,187 in 1995. The increase
was due to increased assessments made by the state life insurance guaranty
associations. These assessments totaled $1,251,000 in 1995, $1,072,000 in 1994
and $604,000 in 1993. The assessments are mandated by statute and are used by
the various state life insurance guaranty associations to guarantee the life,
annuity and health insurance policies of companies that have become insolvent.
About $340,000 of the 1995 assessments, $300,000 of the 1994 assessments and
$330,000 of the 1993 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. In 1991, the Pennsylvania legislature enacted
a new law that imposed a 2 percent premium tax on all non-qualified annuity
premiums. This tax increased the Company's premium taxes by $686,000 in 1995,
$522,000 in 1994 and $500,000 in 1993. On June 30, 1995, Pennsylvania Act
21-1995 was signed into law which repeals the tax on non-qualified annuities
beginning January 1, 1996.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 15 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
Federal Income Taxes
Federal income tax expense amounted to $8,522,280 in 1995 compared to $9,649,828
in 1994. Income from operations decreased 0.3 percent in 1995 when compared to
1994, while the federal income tax provision decreased by 11.7 percent for the
same period. Part of this difference was caused by the prior year federal income
tax provision being adjusted to actual. This adjustment caused the 1995
provision to decrease by $425,000 and the 1994 provision to increase by
$123,000.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of an entity's ability to secure enough cash to meet its
contractual obligation and operating needs. Generally, insurance premiums 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, 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 1995 was $8,297,378, compared to $12,805,742
in 1994, and $5,270,735 in 1993. The Company's liquidity position remains strong
as invested assets grew by 23.9 percent during 1995 to $569 million at December
31, 1995. The majority of invested assets are liquid marketable securities.
Premium from the sale of new policies combined with the premium on existing
policies accounted for approximately 35.8 percent of total revenue in 1995, 37.3
percent in 1994, and 34.2 percent in 1993. Investment income, net of expenses,
generated 52.3 percent of total revenue in 1995, 53.3 percent in 1994 and 47.7
percent in 1993. Also, the Company had a realized gain on investments which
generated 9.6 percent of total revenue in 1995, 6.6 percent in 1994 and 16.1
percent in 1993.
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 $74,541,897 in 1995,
$69,530,697 in 1994, and $56,680,713 in 1993.
The Company's current commitments for expenditures as of December 31, 1995, are
primarily for policy death benefits, policy surrenders and withdrawals, general
operating expense, federal income taxes, and dividends to shareholders. 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 December 31, 1995, the Company's line of credit with PNC Bank totaled $10
million, none of which was outstanding.
The amount of dividends Erie Family Life, a Pennsylvania-domiciled life insurer,
can pay to its shareholders without the prior approval of the Pennsylvania
Insurance Commissioner is limited by statute to not more than the greater of:
(a) 10 percent of its statutory surplus as regards policyholders as reported on
its last annual
<PAGE>
INCORPORATED BY REFERENCE, PAGE 15 AND 16 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
statement, or (b) the net income of the insurer as reported on its last annual
statement, not including any pro rata distributions of any class of the
insurer's own securities. Accordingly, the maximum dividend payout which may be
made in 1996 without prior Pennsylvania commissioner approval is $9,373,000.
The Commonwealth of Pennsylvania has adopted the statutory accounting practices
(SAP) minimum risk-based capital requirements for domestic insurance companies
that were developed by the National Association of Insurance Commissioners
(NAIC). The formulas for determining the amount of risk-based capital specify
various weighing factors that are applied to financial balances or various
levels of activity based on the perceived degree of risk. These formulas
determine a ratio of the Company's regulatory total adjusted capital to its
authorized control level risk-based capital, as defined by the NAIC. Companies
below specific trigger points or ratios are classified within certain levels,
each of which requires specified corrective action. The levels and ratios are as
follows:
Ratio of Total Adjusted Capital to
Authorized Control Level Risk-Based
Regulatory Event Capital (Less than or Equal to)
Company action level 2 (or 2.5 with negative trends)
Regulatory action level 1.5
Authorized control level 1
Mandatory control level .7
Erie Family Life has regulatory total adjusted capital of $76 million and $56
million at December 31, 1995, and 1994, respectively, and a ratio of total
adjusted capital to authorized control level risk-based capital of 7.1 and 5.8
at December 31, 1995, and 1994, respectively. These levels far exceed the
minimum risk-based capital requirements.
On December 29, 1995 a Note in the amount of $15 million, was issued by the
Company in accordance with Section 322.1 of the Pennsylvania Insurance Company
Law of 1921 as amended by the Act of December 18, 1992, P.L. 792 No. 178 (40
P.S. ss.445.1) to the Erie Indemnity Company (EIC) in exchange for a cash sum of
$15 million. Interest on this Note will be charged at an annual rate of 6.45
percent (%).
Notwithstanding any other provision in this Note, no payment of all or any
portion of the principal amount of this Note shall be demanded by EIC prior to
December 31, 2005, provided that the Company may pay upon ten (10) days' prior
written notice to EIC, the Interest on, or all or any portion of the principal
of, this Note at any time without premium of penalty, subject to the prior
consent of the Insurance Commissioner of the Commonwealth of Pennsylvania (the
"Commissioner") to such repayment in accordance with the provisions of Section
322.1 of the Insurance Company Law of 1921 (40 P.S. ss.445.1).
Commencing on December 31, 2005 the outstanding principal balance of this Note
(including all accrued Interest) shall be repayable on demand by EIC or under
such terms as EIC may elect, subject to the prior consent of the Commissioner to
such repayment in accordance with the provisions of law. Payment of principal
and/or interest is subordinated to payment of all other liabilities of the
Company.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 16 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
During 1994, Pennsylvania adopted the NAIC Model Actuarial Opinion and
Memorandum Regulation. As a result, the Company's actuarial opinion for 1995 and
1994 included the results of an asset adequacy analysis, based primarily on cash
flow testing. The testing consisted of 20-year projections of existing business
under each of ten different interest rate scenarios. The cash flows and
projected market value surplus results were positive under all ten scenarios.
RESERVE LIABILITIES
The Company's primary commitment is its obligation to meet the payment of future
policy 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 December 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. Erie
Family Life'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 also are liquid in order to meet the short-term
and long-term commitments to Policyholders. At December 31, 1995 Erie Family
Life's investment portfolio of cash and money market investments, investment
grade bonds, common stocks, and preferred stocks, all of which are extremely
marketable, totaled $580 million or 86.1 percent of total assets. These
resources provide the liquidity the Company requires to meet unforeseen demands
on its funds.
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 December 31, 1995, 74.9 percent of total
invested assets were invested in fixed maturities. Preferred stocks represent
21.6 percent or $123 million and common stocks represent 0.6 percent or $3
million of total invested assets at December 31, 1995, while real estate and
mortgage loans make up only 1.6 percent 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.
Invested assets at December 31, 1995 and 1994 consisted of the following:
<PAGE>
INCORPORATED BY REFERENCE, PAGE 16 AND 17 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
Invested Assets
Thousands
1995 1994
Fixed Maturities
Held-to-Maturity $ 0 $160,445
Available-for-Sale 426,381 175,852
Equity Securities
Preferred Stock 122,910 100,236
Common Stock 3,415 8,126
Real Estate 1,796 1,899
Mortgage Loans 7,063 7,633
Policy Loans 3,694 3,181
Other Invested Assets 4,166 2,257
Total Invested Assets $569,425 $459,629
Fixed Maturities
The Company's fixed maturities at December 31, 1995 consist of investments in
bonds of $424.5 million and investments in redeemable preferred stock of $1.9
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 December 31, 1995 the carrying value of fixed maturities was $426,381,008, or
74.9 percent of total invested assets. At December 31, 1995, the amortized cost,
carrying/market values, gross unrealized gains and gross unrealized losses for
fixed maturities were as follows:
Fixed Maturities at 12-31-95
<TABLE>
<CAPTION>
Amortized Carrying/ Unrealized Unrealized
Cost Market Values Gains Losses
<S> <C> <C> <C> <C>
U.S. Treasuries .......................... $ 6,568,499 $ 7,442,496 $ 874,234 $ 237
Political
subdivisions ........................... 2,063,013 2,310,929 247,916 0
Special revenue .......................... 50,683,120 52,853,098 2,861,312 691,334
Public utilities ......................... 101,653,629 105,456,784 4,289,346 486,191
Industrial and
miscellaneous .......................... 240,803,281 258,317,701 18,138,568 624,148
------------ ------------ ------------ ------------
Total fixed
maturities
available-for-
sale ................................... $401,771,542 $426,381,008 $ 26,411,376 $ 1,801,910
============ ============ ============ ============
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 17 AND 18 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
The bond investments included in the fixed maturity category consist of
high-quality, marketable securities, 98.2 percent or $416.9 million of which,
are rated at investment-grade levels (Baa/BBB or better). Included in this
investment-grade category are $282.1 million of bonds characterized as of the
"highest" quality or "Class 1" securities as defined by the NAIC. Below
investment-grade bonds totaled $7.6 million at December 31, 1995 and are a very
manageable 1.3 percent of total invested assets. Included in the below
investment-grade category are $7.6 million of "medium" quality bonds and none of
the bonds 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 statement of operations. 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. During 1993, the Company
recorded provisions for loss on other-than-temporary declines in the market
values of investment securities and losses on mortgage loans and limited
partnership of $1.5 million.
At December 31, 1995, the Company's five largest investments in corporate debt
securities totaled $28,885,008, none of which individually exceeded $6.3
million. These investments had a market value of $29.9 million.
During the fourth quarter of 1995, the Financial Accounting Standards Board
(FASB) released a special report on FAS 115, Accounting for Certain Investments
in Debt and Equity Securities. The special report was prepared as a guide in
helping companies understand and comply with the provisions of FAS 115. The
special report also included important transition provisions that gave reporting
enterprises a limited period to reassess and reclassify their securities
holdings into FAS 115's three reporting categories. This "fresh start" provision
allowed reporting enterprises to reclassify "held-to-maturity" securities to
either of the two other categories without restriction. Any security transferred
from held-to-maturity to the available-for-sale or trading classifications were
to be marked-to-market at the time of transfer. At December 15, 1995, the
Company reclassified $152,135,307 or 100 percent of its held-to-maturity fixed
maturity securities to available-for-sale pursuant to the transition provisions
of the FASB's Special Report. As a result, the Company recognized $1,455,550 of
unrealized gains, net of deferred income taxes, at December 15, 1995, as an
adjustment to shareholders' equity related to this reclassification. Management
believes that having all fixed maturities classified as available-for-sale
securities will allow the Company to meet its liquidity needs and provide
greater flexibility for its investment managers to restructure the Company's
investments in response to changes in market conditions or strategic direction.
Securities classified as available-for-sale are carried at market value with
unrealized gains and losses included in shareholders' equity. At December 31,
1995 and 1994, unrealized gains (losses) on fixed maturities available-for-sale
amounted to $15,996,153 and ($2,879,044), respectively, net of deferred taxes.
Prior to the adoption of FAS 115 in 1994, gains and losses on fixed maturities
were not recognized in the Company's financial statements until they were sold
or became impaired. Fixed maturities classified as held-to-maturity in 1994 are
carried at the lower of cost or market value. (See Note 3 of the Notes to
Financial Statements). At December 31, 1995, fixed maturities available-for-sale
had a cost of $401,771,542 and a market value of $426,381,008, representing an
unrealized gain of $24,609,466.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 18 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
Equity Securities
Equity securities consist of common and nonredeemable preferred stocks which are
carried on the statements of financial position at current market value. At
December 31, 1995, common and nonredeemable preferred stock held by the Company
had a cost of $125,763,874 and a market value of $126,324,721, representing an
unrealized gain of $560,847. As with the bond portfolio, the Company's
nonredeemable 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 nonredeemable preferred stocks are of very high
quality and extremely marketable, 97.2 percent or $119.5 million of which are of
the "highest" or "high" quality, as defined by the NAIC. The remaining $3.4
million of nonredeemable preferred stocks have a "medium" NAIC rating. There are
no nonredeemable preferred stocks in Erie Family Life's portfolio rated in the
"low," "lowest," or "in or near default" quality categories established by the
NAIC.
Equity Securities at 12-31-95
<TABLE>
<CAPTION>
Carrying/ Unrealized Unrealized
Actual Cost Market Values Gains Losses
<S> <C> <C> <C> <C>
Common stock:
Industrial and
miscellaneous ................................................. $ 3,500,006 $ 3,414,640 $ 0 $ 85,366
Preferred stock:
Public utilities ................................................ 5,273,282 5,299,712 26,430 0
Banks, trusts
and insurance
companies ..................................................... 83,749,715 84,656,625 3,036,760 2,129,850
Industrial and
miscellaneous ................................................. 33,240,871 32,953,744 1,615,500 1,902,627
------------ ------------ ------------ ------------
Total equity
securities ...................................................... $125,763,874 $126,324,721 $ 4,678,690 $ 4,117,843
============ ============ ============ ============
</TABLE>
Other Investments
Real estate investments are carried on the statement of financial position 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 December 31, 1995, the Company did not own any derivatives.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 18 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
MANAGEMENT CHANGES
At the Board of Directors meeting on February 12, 1996, the Board elected
Stephen A. Milne President and Chief Executive Officer of Erie Family Life
Insurance Company, Erie Indemnity Company and Erie Insurance Company. On March
11, 1996, Mr. Milne was elected President and Chief Executive Officer of
Flagship City Insurance Company, Erie Insurance Property & Casualty Company, and
Erie Insurance Company of New York. Mr. Milne has served as Executive Vice
President of Insurance Operations since 1993. Mr. Milne began his career with
the Erie Indemnity Company (EIC) in 1973 and has held several positions in the
claims and sales functions of the EIC. In 1984 he became a Vice President and in
1987 was named Senior Vice President of the EIC's Marketing Services Division.
Mr. Milne also was an ERIE Agent for three years.
The former President and CEO and previous Chief Investment Officer of the Erie
Insurance Group of Companies, John M. Petersen, who retired as an employee of
EIC on December 31, 1995, entered into a consulting arrangement with EIC
effective January 2, 1996. Under the terms of the arrangement, EIC engaged Mr.
Petersen as a consultant to furnish the company and its pension trust, the Erie
Insurance Exchange, and Erie Family Life Insurance Company, with investment
services with respect to their investments in common stocks.
MARKET FOR THE REGISTRANT'S
COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Currently there is no market on which the Registrant's stock is traded. The
Company had 1,145 shareholders of common stock on December 31, 1995.
Date Dividends Declared Dividends per Share Declared
March 1, 1994 .30
March 1, 1994 .30
July 21, 1994 .30
September 29, 1994 .30
March 2, 1995 .34
April 25, 1995 .34
June 22, 1995 .34
September 21, 1995 .34
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995: Statements contained herein expressing the beliefs of management such as
those contained in the "Benefits and Expenses" and the "Liquidity and Capital
Resources" sections hereof, and the other statements which are not historical
facts contained in this report are forward looking statements that involve risks
and uncertainties. These risks and uncertainties include but are not limited to:
legislative, judicial, and regulatory changes, the impact of competitive
products and pricing, product development, geographic spread of risk,
catastrophic events, better (or worse) morbidity rates, securities market
fluctuations and technological difficulties and advancements.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 19 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
GLOSSARY OF SELECTED INSURANCE TERMS
Annuity - Contract which provides for a series of fixed or variable periodic
payments from a stated or contingent date for a specified period, such as for a
number of years or for life.
Carrying Value - The amount reported for an asset or liability in the financial
statements in conformity with generally accepted accounting principles ("GAAP")
or statutory accounting practices ("SAP"), whichever is applicable in the
circumstances.
Deferred Policy Acquisition Costs (DAC) - The costs of acquiring new business,
principally commissions and certain costs of issuing policies, including
underwriting salaries and medical examinations, all of which vary with and are
primarily related to the production of new business. These costs are deferred
and amortized over the premium paying period on the related policies in
proportion to the ratio of the annual premium revenue to the total anticipated
premium revenue.
Future Policy Benefits - Liabilities established on a GAAP basis whose minimum
levels are determined by law and which are established to adequately provide for
benefits ultimately payable to policyholders.
Interest Rate Credited - Interest rate applied to funds accumulated under
annuity and universal life contracts, whether guaranteed or currently declared
by the insurer.
In Force - Total amount of insurance coverage or number of policies or annuity
contracts that are in effect.
Independent Agents - Independent contractors who represent one or more insurers
and are licensed to sell the insurers' products.
National Association of Insurance Commissioners (NAIC) - an association of the
top regulatory officials of all 50 states and the District of Columbia organized
to promote consistency of regulatory practices and statutory accounting
practices throughout the United States.
Premiums - Money paid by the policyholder to an insurance company for an
insurance policy or annuity.
Statutory Accounting Practices (SAP) - SAP provides for recording transactions
and preparing financial statements in accordance with the rules and procedures
prescribed or permitted by state statute or regulatory authorities. Such
practices generally reflect a liquidating, rather than a going concern basis, of
accounting. The principal difference between SAP and GAAP are as follows:
(a) under SAP, certain assets ("nonadmitted" assets) are eliminated from the
statements of financial position; (b) under SAP, policy acquisition costs are
expensed as incurred, while under GAAP, they are deferred and amortized over the
premium paying period of the related policies sold; (c) under SAP, no provision
is made for deferred income taxes and (d) under SAP, certain reserves are
recognized which are not recognized for GAAP.
Statutory Capital and Surplus - Statutory Capital is the amount received from
the sale of shares of stock in the Company. Statutory Surplus is the excess of
assets over liabilities and capital, as determined in accordance with statutory
accounting practices.
<PAGE>
Index to Graphs included in the Investment Section
of The Management's Discussion and Analysis
Graph #1 DISTRIBUTION OF INVESTED ASSETS
at December 31, 1995
Fixed Maturities - Available For Sale 74.9%
Nonredeemable Preferred Stocks 21.6%
Mortgage Loans 1.2%
Other Invested Assets 0.8%
Common Stocks 0.6%
Policy Loans 0.6%
Real Estate 0.3%
Graph #2 DIVERSIFICATION OF FIXED MATURITIES
at December 31, 1995 - Carrying/Market Value
Industrial & Miscellaneous 60.6%
Public Utilities 24.8%
Special Revenue 12.4%
U.S. Treasuries 1.7%
Political Subdivision 0.5%
Graph #3 QUALITY* OF BOND PORTFOLIO
at December 31, 1995 - Carrying/Market Value
A/A $178.6 Million 42.1%
BBB/Baa $107.2 Million 25.2%
AAA/Aaa $77.9 Million 18.4%
AA/Aa $53.2 Million 12.5%
BB/Ba $7.6 Million 1.8%
* As rated by Standard & Poor's or Moody's Investor's Service, Inc.
Graph #4 DIVERSIFICATION OF EQUITY SECURITIES
at December 31, 1995 - Carrying/Market Value
(2) Banks & Insurance 67.0%
(2) Industrial & Miscellaneous 26.1%
(2) Public Utilities 4.2%
(1) Industrial & Miscellaneous 2.7%
(1) Common Stock
(2) Preferred Stock
<PAGE>
INCORPORATED BY REFERENCE, PAGE 20 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Erie Family Life Insurance Company
Erie, Pennsylvania
We have audited the accompanying statements of financial
position of Erie Family Life Insurance Company as of December 31, 1995 and 1994,
and the related statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Erie Family
Life Insurance Company as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As described in Note 3 to the financial statements, the
Company changed its method of accounting for debt and equity securities in 1994.
In 1993, the Company changed its method of accounting for income taxes as
described in Note 5.
/s/ Brown Schwab Bergquist & Co.
Erie, Pennsylvania
February 16, 1996
<PAGE>
INCORPORATED BY REFERENCE, PAGE 22 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
As of December 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
------------ ------------
<S> <C> <C>
Investments
Fixed maturities:
Held-to-maturity, at amortized cost
(fair value of $142,544,015) $ $160,445,072
Available-for-sale, at fair value
(amortized cost of $401,771,542
and $180,281,163) 426,381,008 175,851,865
Equity securities, at fair value
(cost of $125,763,874 and
$116,380,818) 126,324,721 108,361,616
Real estate 1,796,395 1,898,628
Policy loans 3,694,530 3,181,311
Mortgage loans on real estate 7,062,742 7,633,399
Other invested assets 4,165,721 2,257,143
------------ ------------
Total investments $569,425,117 $459,629,034
Cash, including short-term
investments of $35,230,606
and $7,262,914, respectively 34,847,347 6,559,213
Premiums receivable 2,701,578 2,300,721
Reinsurance recoverable 265,514 312,249
Other receivables 254,674 261,578
Accrued investment income 9,044,136 8,388,301
Deferred policy acquisition costs 50,762,292 44,951,795
Reserve credit for reinsurance ceded 3,484,190 3,385,623
Prepaid federal income taxes 851,320
Other assets 3,009,313 1,992,298
------------ ------------
Total assets $673,794,161 $528,632,132
============ ============
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 22 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1994
------------ ------------
<S> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Future life policy benefits $ 48,768,739 $ 44,050,175
Policy and contract claims 897,026 797,485
Annuity deposits 405,346,808 341,242,154
Universal life deposits 45,971,842 36,107,402
Supplementary contracts not
including life contingencies 872,745 767,456
Other policyholder funds 5,238,897 6,352,476
Current federal income taxes
payable 261,471
Deferred federal income taxes 16,979,255 2,897,964
Reinsurance premium due 360,478 193,135
Accounts payable and accrued
liabilities 2,728,133 3,186,617
Note payable to affiliate 15,000,000
Due to affiliate 1,392,365 1,236,687
Dividends payable 1,071,000 945,000
------------ ------------
Total liabilities $544,888,759 $437,776,551
------------ ------------
SHAREHOLDERS' 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 $8,809,609 and
($4,356,975), respectively 16,360,704 ( 8,091,525)
Retained earnings 108,134,698 94,537,106
------------ ------------
Net shareholders' equity $128,905,402 $ 90,855,581
------------ ------------
Total liabilities and
shareholders' equity $673,794,161 $528,632,132
============ ============
</TABLE>
See Notes to Financial Statements.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 21 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Policy
Life premiums $25,764,413 $22,931,783 $20,440,636
Group 2,309,584 1,961,700 1,716,186
----------- ----------- -----------
Total policy
revenues $28,073,997 $24,893,483 $22,156,822
Investment income, net
of expenses 40,962,812 35,566,249 30,928,611
Realized gains on
investments 7,483,798 4,411,334 10,433,318
Other income 1,829,344 1,897,756 1,268,345
----------- ----------- -----------
Total revenues $78,349,951 $66,768,822 $64,787,096
----------- ----------- -----------
Benefits and expenses
Death benefits $ 7,438,758 $ 4,068,876 $ 4,639,349
Interest on annuity
deposits 22,718,786 18,163,588 16,302,627
Interest on universal
life deposits 2,628,397 1,981,767 1,529,950
Surrender and other
benefits 721,412 607,947 1,104,047
Increase in future life
policy benefits 4,619,996 2,611,084 2,300,681
Amortization of deferred
policy acquisition
costs 2,358,127 1,979,765 2,092,764
Commissions 2,804,328 2,293,450 1,794,610
General expenses 5,802,088 5,775,026 5,120,063
Taxes, licenses,
and fees 2,854,187 2,807,813 2,026,730
----------- ----------- -----------
Total benefits
and expenses $51,946,079 $40,289,316 $36,910,821
----------- ----------- -----------
Income from
operations $26,403,872 $26,479,506 $27,876,275
----------- ----------- -----------
</TABLE>
See Notes to Financial Statements.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 21 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS - CONTINUED
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Federal income taxes
Current $ 7,607,573 $ 8,179,901 $ 8,275,631
Deferred 914,707 1,469,927 1,496,402
----------- ----------- -----------
Total federal
income taxes $ 8,522,280 $ 9,649,828 $ 9,772,033
----------- ----------- -----------
Income before cumulative
effect of accounting
change $17,881,592 $16,829,678 $18,104,242
Cumulative effect on
years prior to 1993 on
changing the method
of accounting for
income taxes ( 567,610)
----------- ----------- -----------
Net income $17,881,592 $16,829,678 $17,536,632
=========== =========== ===========
Earnings per share:
Income before cumulative
effect of accounting
change $ 5.68 $ 5.34 $ 5.75
Cumulative effect of
accounting change ( .18)
----------- ----------- -----------
Net income per
share $ 5.68 $ 5.34 $ 5.57
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 24 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Net
Unrealized
Appreciation
(Depreciation) Net
Additional on Available- Share-
Common Paid-In for-Sale Retained holders'
Stock Capital Securities Earnings Equity
<S> <C> <C> <C> <C> <C>
Balance at
December 31,
1992 $3,465,000 $945,000 $ 3,601,503 $ 67,415,805 $ 75,427,308
Net income 17,536,632 17,536,632
Net change
during year 245,955 245,955
Dividends
declared,
$1.10 per
share ( 3,465,009) ( 3,465,009)
---------- -------- ----------- ------------ ------------
Balance at
December 31,
1993 $3,465,000 $945,000 $ 3,847,458 $ 81,487,428 $ 89,744,886
Net income 16,829,678 16,829,678
Net change
during year ( 21,437,365) ( 21,437,365)
FAS 115
cumulative
effect,
net of
deferred
taxes 9,498,382 9,498,382
Dividends
declared,
$1.20 per
share ( 3,780,000) ( 3,780,000)
---------- -------- ----------- ------------ ------------
Balance at
December 31,
1994 $3,465,000 $945,000 ($ 8,091,525) $ 94,537,106 $ 90,855,581
Net income 17,881,592 17,881,592
Net change
during year 24,452,229 24,452,229
Dividends
declared,
$1.36 per
share ( 4,284,000) ( 4,284,000)
---------- -------- ----------- ------------ ------------
Balance at
December 31,
1995 $3,465,000 $945,000 $16,360,704 $108,134,698 $128,905,402
========== ======== =========== ============ ============
</TABLE>
See Notes to Financial Statements.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 23 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,881,592 $16,829,678 $ 17,536,632
Cumulative effect of
accounting change 567,610
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Net amortization of
bond and mortgage
premium and discount 129,922 55,548 ( 110,504)
Amortization of deferred
policy acquisition
costs 2,358,127 1,979,765 2,092,764
Real estate depreciation 102,233 103,697 103,697
Deferred federal
income taxes 914,707 1,469,927 1,496,402
Realized gain on
investments ( 7,483,798) ( 4,411,334) ( 10,433,318)
Increase in premiums
receivable ( 400,857) ( 320,456) ( 58,835)
(Increase) decrease in
other receivables 6,904 57,007 ( 152,775)
(Increase) decrease in
accrued investment
income ( 655,835) ( 2,478,420) 191,202
Increase in deferred
policy acquisition costs ( 8,168,624) ( 8,448,722) ( 6,892,375)
(Increase) decrease in
other assets ( 1,017,015) ( 320,519) 16,554
Increase in reinsurance
recoverables and reserve
credits ( 51,832) ( 1,064,706) ( 693,648)
Increase in future life
policy benefits and
claims 4,818,105 3,373,539 2,695,932
Increase (decrease) in
other policyholder funds ( 1,113,579) 4,703,564 211,168
Increase (decrease) in
reinsurance premium due 167,343 62,937 ( 201,771)
Increase (decrease) in
federal income taxes
currently payable 1,112,791 112,759 ( 1,100,744)
Increase (decrease) in
accounts payables and
due to affiliate ( 302,806) 1,101,478 2,744
------------ ----------- ------------
Net cash provided by
operating activities $ 8,297,378 $12,805,742 $ 5,270,735
------------ ----------- ------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 23 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturity securities:
Held-to-maturity:
Maturities $ 7,948,330 $11,255,303 $ 88,310,672
Sales 45,579,973
Purchases ( 40,754,128) ( 151,500,059)
Available-for-sale:
Maturities 6,764,396 3,107,563
Sales 45,479,179 36,191,487
Purchases ( 119,758,853) ( 95,059,515)
Equity securities:
Sales 37,486,994 18,402,366 67,925,034
Purchases ( 40,995,932) ( 26,662,706) ( 99,291,194)
Purchase of mortgage loans ( 2,000,000) ( 3,981,471)
Principal payments received
on mortgage loans 572,056 5,991,967 2,041,570
Loans made to
policyholders ( 999,584) ( 821,201) ( 698,874)
Payments received on
policy loans 486,365 449,806 507,962
Purchase of other
invested assets ( 2,510,832) ( 1,644,339) ( 4,121,771)
Sale of other invested
assets 602,254 6,172,966 1,270,754
------------ ----------- ------------
Net cash used in
investing activities ($ 64,925,627) ($85,370,431) ($ 53,957,404)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in annuity
deposits and
supplementary contracts $ 64,209,943 $59,661,171 $ 53,511,342
Increase in universal
life deposits 9,864,440 8,363,194 6,832,482
Borrowed money 15,000,000 ( 1,290,000)
Dividends paid to
shareholders ( 4,158,000) ( 3,701,253) ( 3,386,256)
------------ ----------- ------------
Net cash provided by
financing activities $ 84,916,383 $64,323,112 $ 55,667,568
------------ ----------- ------------
Net increase (decrease) in
cash and short-term cash
investments $ 28,288,134 ($ 8,241,577) $ 6,980,899
Cash and short-term cash
investments at beginning
of year 6,559,213 14,800,790 7,819,891
------------ ----------- ------------
Cash and short-term cash
investments at end of year $ 34,847,347 $ 6,559,213 $ 14,800,790
============ =========== ============
</TABLE>
See Notes to Financial Statements.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 23 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the
year for:
Interest $ 632 $ 37,580 $ 46,293
Income taxes 6,494,782 8,067,142 9,376,375
</TABLE>
See Notes to Financial Statements.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
Note 1. Nature of Business
Erie Family Life Insurance Company (the Company) was
incorporated in the Commonwealth of Pennsylvania on May 23,
1967. The Company is 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 in
eleven states and is subject to supervision and regulations of
the states in which it does business. A majority of the
Company's business is written in Pennsylvania, Ohio, Maryland
and Virginia. The Company also sells a significant amount of
annuities to its affiliated companies of the Erie Insurance
Group. Approximately 31% of annuity deposits at December 31,
1995 relate to business with Erie Insurance Group affiliates.
See also Note 6.
Note 2. Basis of Presentation
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP).
Such basis of presentation includes the following:
(a) Policy reserves are computed according to the Company's
estimates of mortality, investment yields, lapses,
withdrawals, and other benefits and expenses.
(b) Commissions and other costs of acquiring new business
are recognized as deferred policy acquisition costs and
are amortized over either the premium paying period of
policies and contracts or in relation to the present
value of estimated gross profit on the policies, as
applicable.
(c) Income tax effects of temporary differences between tax
basis and financial statement basis of assets and
liabilities, relating primarily to policy reserves,
investments and acquisition costs, are provided.
(d) The effect of revaluing available-for-sale securities
to their respective fair values, net of deferred taxes,
is reflected as a separate component of shareholders'
equity.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 2. Basis of Presentation (Continued)
(e) The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Note 3. Significant Accounting Policies
(a) Investments
Investments are shown on the following bases:
Fixed maturities available-for-sale which consists of
bonds, notes, and redeemable preferred stock - at fair
value.
Equity securities which consists of common and
nonredeemable preferred stocks - at fair value.
Fixed maturities held-to-maturity which consists of
bonds, notes, and redeemable preferred stocks - at
cost, adjusted for amortization of premium or discount
and other-than-temporary market value declines.
Fair values are determined by quoted market prices for
those instruments that are actively traded in financial
markets. In cases where quoted market prices are not
available, the Company uses the services of various
brokerage companies to assist in pricing.
No securities are held for trading purposes.
Realized gains and losses on sales of investments are
recognized on a specific identification basis.
In May 1993, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and
Equity Securities" (FAS 115). The Company adopted the
provisions of the new standard for investments held as
of January 1, 1994. The cumulative effect, as of
January 1, 1994, of adopting FAS 115 increased
shareholders' equity by $9,498,382 (net of $5,114,513
in deferred income taxes) to reflect the net unrealized
gains on securities classified as available-for-sale
previously carried at amortized cost or lower of cost
or market value. Adoption of FAS 115 did not have any
effect on deferred policy acquisition costs.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 3. Significant Accounting Policies (Continued)
FAS 115 requires management to determine the
appropriate classification of securities at the date
of adoption, and thereafter at the date individual
investment securities are acquired. The appropriateness
of such classification is also reassessed at each
statements of financial position date.
Prior to the adoption of FAS 115, the Company stated
its fixed maturities at the lower of amortized cost or
fair value. Marketable equity securities were stated at
fair value. Under both the newly adopted accounting
standard and the Company's former accounting practices,
premiums and discounts on investments in debt
securities are amortized over their contractual lives.
Realized gains and losses, including losses from
declines in value of specific securities determined by
management to be other-than-temporary, are included in
income.
During 1995, the Financial Accounting Standards Board
(FASB) allowed a one-time reclassification of held-to-
maturity securities to available-for-sale securities.
At December 15, 1995, the Company reclassified
$152,135,307 or 100% of its held-to-maturity securities
to available-for-sale, pursuant to the transition
provisions of the FASB's special report on FAS 115. The
Company recognized $1,455,550 of unrealized gains net
of deferred income taxes at December 15, 1995 related
to this reclassification.
(b) Deferred Policy Acquisition Costs
The costs of acquiring new business, principally
commissions and certain costs of issuing policies,
including underwriting salaries and medical
examinations, all of which vary with and are primarily
related to the production of new business, have been
deferred. For traditional life insurance, these costs
are being amortized over the premium paying period of
the related policies in proportion to the total
anticipated premium revenue stream. Anticipated premium
revenue was estimated using the same assumptions which
were used for computing liabilities for future policy
benefits. The amount of costs to be deferred would be
reduced to the extent future policy premiums and
anticipated investment income would not exceed related
costs.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 3. Significant Accounting Policies (Continued)
Universal life and annuity deferred acquisition costs
are being amortized in relation to the present value of
estimated future gross profits on the contracts over a
20 year period.
Unamortized acquisition costs are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance at
beginning
of year $44,951,795 $38,482,838 $33,683,227
Additions 8,168,624 8,448,722 6,892,375
Amortization ( 2,358,127) ( 1,979,765) ( 2,092,764)
----------- ----------- -----------
Balance at end
of year $50,762,292 $44,951,795 $38,482,838
=========== =========== ===========
</TABLE>
(c) Policy Revenues and Deposits
Premiums on traditional life insurance contracts are
reported as earned revenue when due. For universal life
and annuity contracts, deposits are recorded in a
policyholder account which is classified as a
liability. Revenue is recognized as amounts are
assessed against the policyholder account for mortality
coverage and contract expenses. Premiums on life
insurance contracts and deposits on annuity and
universal life contracts are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Life insurance
premiums:
First year $ 5,624,117 $ 5,563,765 $ 4,567,631
Renewal 20,140,296 17,368,018 15,873,005
----------- ----------- -----------
$25,764,413 $22,931,783 $20,440,636
=========== =========== ===========
Annuity and universal
life deposits, net
of loading:
First year
and single $57,606,715 $53,965,315 $42,602,356
Renewal 16,935,182 15,565,382 14,078,357
----------- ----------- -----------
$74,541,897 $69,530,697 $56,680,713
=========== =========== ===========
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 AND 26 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 3. Significant Accounting Policies (Continued)
Included in the amount of 1995, 1994 and 1993 first
year and single deposits on annuity and universal life
deposits are $6,024,125, $8,880,714 and $0,
respectively, of deposits on annuity contracts
purchased by the Erie Insurance Group Retirement Plan
for Employees. Structured settlement annuities sold to
affiliate property and casualty insurance companies
totalled $22,018,313, $11,431,965 and $7,516,908, in
1995, 1994, and 1993, respectively.
(d) Policy Liabilities and Accruals
Liabilities for life insurance and income-paying
annuity future policy benefits have been computed
primarily by the net level premium method with
assumptions as to anticipated mortality, withdrawals,
and investment yields. Deferred annuity future policy
benefit liabilities have been established at
accumulated values without reduction for surrender
charges. Reserves for universal life and investment
contracts are based on the contract account balance, if
future benefit payments in excess of the account
balance are not guaranteed, or the present value of
future benefit payments when such payments are
guaranteed. Variations are inherent in such
calculations due to the estimates and assumptions
necessary in the calculations. Significant assumptions
pertinent to policy liabilities follow:
<TABLE>
<CAPTION>
Years
of Issue Policy Type Interest Mortality Withdrawal
<S> <C> <C> <C> <C>
1967-1975 All life 4% graded 1955-60 Basic Select Modified
to 3 1/2% Plus Ultimate Linton B
1976-1980 All life 6% graded 1955-60 Basic Select Linton B
to 4% Plus Ultimate
1981-1988 Permanent life 7 1/4% graded 85% of 1965-70 150% of
to 6% Select and Ultimate Linton A
1981-1988 Other life 7 1/4% graded 85% or 90% of 1965- Pricing
to 6% 70 assumptions
Select and Ultimate
1988-1995 All life and 7% graded Multiples of 1965- Pricing
annual renew- to 6% 70 assumptions
able term Select and Ultimate
1987-1995 Universal life 7 1/4% graded 85% or 90% of 1965- Pricing
to 6% 70 assumptions
Select and Ultimate
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 3. Significant Accounting Policies (Continued)
Annuities are subject to variable interest rates
determined at the discretion of the Company subject to
certain minimums. During 1995, annuity deposits earned
interest at rates ranging from 5.00 percent to 6.25
percent. Management believes the fair value of annuity
and universal life deposits approximates the amounts
recorded in the financial statements, since these
obligations are generally subject to fluctuating
interest rates.
(e) Liability for unpaid policy and contract claims
Activity in the liability for unpaid policy and
contract claims is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Balance at
January 1 $ 797,485 $1,155,359 $1,574,073
Less reinsurance
recoverables ( 112,203) ( 271,806) ( 340,513)
Less unpaid matured
endowments ( 12,567)
---------- ---------- ----------
Net balance at
January 1 $ 685,282 $ 883,553 $1,220,993
Total death claims
incurred 7,438,758 4,068,876 4,639,349
Total death claims
paid 7,378,981 4,267,147 4,976,789
---------- ---------- ----------
Net balance at
December 31 $ 745,059 $ 685,282 $ 883,553
Plus reinsurance
recoverables 135,597 112,203 271,806
Plus unpaid matured
endowment 16,370
---------- ---------- ----------
Balance at
December 31 $ 897,026 $ 797,485 $1,155,359
========== ========== ==========
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 3. Significant Accounting Policies (Continued)
(f) Mortgage Loans and Other Invested Assets
Mortgage loans are comprised primarily of commercial
real estate mortgage loans and are carried on the
statements of financial position at unpaid balances
adjusted for amortization of premium or discount, less
allowance for possible losses. Other invested assets
(primarily investments in real estate limited
partnerships) are recorded under the equity method of
accounting. The fair values of mortgage loans and other
invested assets approximate the amounts presented in
the financial statements. Fair values were determined
based on analyses of cash flows.
(g) Segment Information
All of the operations of the Company are considered
"life insurance" operations.
(h) Earnings per Share
Earnings per share amounts are based on the weighted
average number of common shares outstanding during each
of the respective years.
(i) Income Taxes
Income tax provisions are based on earnings reported
for financial statement purposes. Provisions for income
taxes include deferred taxes resulting from changes in
cumulative temporary differences between the tax bases
and financial statement bases of assets and
liabilities.
Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws and rates on the
date of enactment.
(j) Short-Term Investments
The Company considers all highly liquid investments
purchased with an original maturity of three months or
less to be short-term investments. Carrying amounts
approximate fair value because of the short maturity of
these investments.
(k) Reclassifications
Certain amounts as previously reported have been
reclassified to conform to the current year's
presentation.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 4. Investments
Fixed Maturities:
At December 31, 1995, the amortized cost, estimated fair values,
unrealized gains, and unrealized losses for investments in fixed
maturities available-for-sale were as follows:
<TABLE>
<CAPTION>
Amortized Estimated Unrealized Unrealized
Cost Fair Values Gains Losses
<S> <C> <C> <C> <C>
U. S. Treasuries ................................... $ 6,568,499 $ 7,442,496 $ 874,234 $ 237
Political
subdivisions ..................................... 2,063,013 2,310,929 247,916
Special revenue .................................... 50,683,120 52,853,098 2,861,312 691,334
Public utilities ................................... 101,653,629 105,456,784 4,289,346 486,191
Industrial and
miscellaneous .................................... 240,803,281 258,317,701 18,138,568 624,148
------------ ------------ ------------ ------------
Total fixed
maturities
available-for-
sale ............................................. $401,771,542 $426,381,008 $ 26,411,376 $ 1,801,910
============ ============ ============ ============
</TABLE>
At December 31, 1994, the amortized cost, estimated fair values,
unrealized gains, and unrealized losses for investments in fixed
maturities available-for-sale were as follows:
<TABLE>
<CAPTION>
Amortized Estimated Unrealized Unrealized
Cost Fair Values Gains Losses
<S> <C> <C> <C> <C>
U. S. Treasuries ....................................... $ 6,121,887 $ 5,868,300 $ 14,687 $ 268,274
Political
subdivisions ......................................... 1,868,344 2,036,950 168,606 0
Special revenue ........................................ 37,317,102 35,521,340 307,076 2,102,838
Public utilities ....................................... 28,833,112 27,844,600 194,982 1,183,494
Industrial and
miscellaneous ........................................ 106,140,718 104,580,675 2,662,726 4,222,769
------------ ------------ ------------ ------------
Total fixed
maturities
available-for-
sale ................................................. $180,281,163 $175,851,865 $ 3,348,077 $ 7,777,375
============ ============ ============ ============
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 4. Investments (Continued)
The following is a summary of fixed maturities available-for-
sale at December 31, 1995, by remaining term to maturity:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Values
<S> <C> <C>
Maturity during the year
ending December 31
1996 $ 2,402,098 $ 2,393,094
1997-2000 22,092,072 22,209,889
2001-2005 59,838,087 62,300,700
Subsequent to 2005 315,439,285 337,597,325
Redeemable preferred stock 2,000,000 1,880,000
------------ ------------
$401,771,542 $426,381,008
============ ============
</TABLE>
Bonds having a fair value of $2,014,000 at December 31, 1995
were on deposit with various regulatory authorities as required
by law. Bonds having a fair value of $10,000,000 are also
pledged as collateral on a $10,000,000 line of credit with a
Bank. There were no borrowings outstanding on the line as of
December 31, 1995.
At December 31, 1994, the amortized cost, estimated fair values,
unrealized gains, and unrealized losses for investments in fixed
maturities held-to-maturity were as follows:
<TABLE>
<CAPTION>
Amortized Estimated Unrealized Unrealized
Cost Fair Values Gains Losses
<S> <C> <C> <C> <C>
U. S. Government ................................. $ 541,184 $ 549,676 $ 13,413 $ 4,921
Political
subdivision .................................... 1,140,000 1,174,200 34,200 0
Special revenue .................................. 8,413,257 7,356,761 185,621 1,242,117
Public utility ................................... 62,216,452 54,951,765 34,191 7,298,878
Industrial and
miscellaneous .................................. 88,134,179 78,511,613 71,883 9,694,449
------------ ------------ ------------ ------------
Total fixed
maturities held-
to-maturity .................................... $160,445,072 $142,544,015 $ 339,308 $ 18,240,365
============ ============ ============ ============
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 4. Investments (Continued)
Equity Securities:
At December 31, 1995, cost, fair values, unrealized gains, and
unrealized losses for investments in equity securities were as
follows:
<TABLE>
<CAPTION>
Unrealized Unrealized
Actual Cost Fair Values Gains Losses
<S> <C> <C> <C> <C>
Common stock:
Industrial and
miscellaneous ......... $ 3,500,006 $ 3,414,640 $ 0 $ 85,366
Preferred stock:
Public utilities ........ 5,273,282 5,299,712 26,430 0
Banks, trusts
and insurance
companies ............. 83,749,715 84,656,625 3,036,760 2,129,850
Industrial and
miscellaneous ......... 33,240,871 32,953,744 1,615,500 1,902,627
------------ ------------ ------------ ------------
Total equity
securities .............. $125,763,874 $126,324,721 $ 4,678,690 $ 4,117,843
============ ============ ============ ============
</TABLE>
At December 31, 1994, cost, fair values, unrealized
gains, and unrealized losses for investments in equity
securities were as follows:
<TABLE>
<CAPTION>
Unrealized Unrealized
Actual Cost Fair Values Gains Losses
<S> <C> <C> <C> <C>
Common stock:
Banks, trusts
and insurance
companies $ 790,311 $ 1,080,715 $ 325,248 $ 34,844
Industrial and
miscellaneous 6,677,716 7,044,856 969,221 602,081
Preferred stock:
Public utilities 2,414,273 2,316,375 8,352 106,250
Banks, trusts
and insurance
companies 63,453,075 59,298,250 1,381,500 5,536,325
Industrial and
miscellaneous 43,045,443 38,621,420 185,000 4,609,023
------------ ------------ ---------- -----------
Total equity
securities $116,380,818 $108,361,616 $2,869,321 $10,888,523
============ ============ ========== ===========
</TABLE>
Net unrealized gains and losses on investments in fixed
maturities available-for-sale and equity securities are
credited to or charged directly against shareholders'
equity. At December 31, 1995, net unrealized gains on
these securities of $16,360,704 consisted of
$31,090,066 in unrealized gains less $5,919,753 in
unrealized losses and deferred taxes of $8,809,609.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 4. Investments (Continued)
At December 31, 1995, the Company did not have investments in
securities of any single issuer which exceeded 10% of net
shareholders' equity, except for federal home loan debentures,
which represents 15% of net shareholders' equity.
Investment gains (losses) during the year are composed as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
Realized gains
(losses):
Held-to-maturity ($ 266,413) ($ 167,535) $ 5,939,490
Available-for-sale 7,750,211 3,673,188 6,862,998
Mortgage loans ( 775,000)
Other invested
assets 905,681 ( 1,594,170)
---------- ---------- -----------
$7,483,798 $4,411,334 $10,433,318
========== ========== ===========
</TABLE>
Changes in unrealized gains (losses) include the following for
the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Equity securities $ 8,580,049 ($13,938,368) $810,651
Debt securities
available-for-
sale 26,799,457 ( 19,042,193)
Held to maturity
securities transferred
to available-for-sale
securities 2,239,307
Deferred federal
income taxes ( 13,166,584) 11,543,196 ( 564,696)
----------- ----------- --------
Net unrealized
capital gains
(losses) $24,452,229 ($21,437,365) $245,955
=========== =========== ========
</TABLE>
Investment income consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Dividends $10,033,662 $ 9,413,996 $ 8,226,162
Interest 31,160,233 26,085,767 22,467,010
Other 464,892 461,320 595,775
Less expenses ( 695,975) ( 394,834) ( 360,336)
----------- ----------- -----------
$40,962,812 $35,566,249 $30,928,611
=========== =========== ===========
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 5. Federal Income Taxes
Differences between total tax expense and the amount computed by
applying the federal income tax rate of 35% to income from
operations are set forth as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Federal income taxes
at statutory rates $9,241,355 $9,267,827 $9,756,696
Dividends received
deduction and
tax-exempt interest ( 437,130) ( 398,527) ( 609,550)
Effect on deferred
taxes of new tax law 126,136
Other ( 281,945) 780,528 498,751
---------- ---------- ----------
Income tax expense $8,522,280 $9,649,828 $9,772,033
========== ========== ==========
</TABLE>
Temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities that give rise
to deferred tax assets (liabilities) at December 31, 1995 and
1994, relate to the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred policy acquisition costs ($15,404,226) ($13,711,784)
Liability for future life and
annuity policy benefits 7,527,275 6,613,659
Investments ( 9,033,667) 4,276,711
Other ( 68,637) ( 76,550)
------------ -----------
($16,979,255) ($ 2,897,964)
=========== ===========
</TABLE>
In February, 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109 (FAS
109), "Accounting for Income Taxes." Effective January 1, 1993,
the Company adopted the FAS 109 standards. A deferred tax charge
of $567,610, or $.18 per share, is reported in the first quarter
1993 statement of operation and represents the cumulative effect
of this accounting change. The change also had the effect of
increasing the deferred tax liability by $229,000 relating to
net unrealized appreciation reflected in shareholders' equity.
Note 6. Related Party Transactions
The Erie Family Life Insurance Company is owned 21.6% by the
Erie Indemnity Company and 52.2% by the Erie Insurance
Exchange.
The Erie Indemnity Company (EIC) is the attorney-in-fact for
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 AND 28 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 6. Related Party Transactions (Continued)
the Erie Insurance Exchange (Exchange). Certain operating
expenses of the Company are paid by EIC and common expenses
are allocated. Such allocated expenses comprise the major
portion of Company general expenses.
The Company owns certain real estate which it leases to EIC for
rentals of $423,120 per year through December 31, 2000. The real
estate is recorded net of accumulated depreciation of $1,024,352
and $922,119 at December 31, 1995 and 1994, respectively.
The employees of the Company participate in the pension and
other employee benefit plans of EIC. The benefits are based on
years of service and salary. Pension costs are funded by EIC in
amounts sufficient to at least meet ERISA minimum funding
requirements. Pension and other benefit costs allocated to the
Company equalled $203,699, $164,792 and $106,166 in 1995, 1994
and 1993, respectively.
The Exchange and Erie Insurance Company (a wholly-owned
subsidiary of EIC) periodically purchase annuities from the
Company in connection with the structured settlement of claims.
Periodically the Erie Insurance Group Retirement Plan for
Employees purchases from the Company, individual annuities for
some terminated vested employees or beneficiaries receiving
benefits (excluding disabled and deferred vested participants).
These are non-participating annuity contracts under which the
Company has unconditionally contracted to provide specified
benefits to beneficiaries in return for a fixed premium from the
Plan. Annuity deposit balances outstanding relating to pension
annuities sold to the Erie Insurance Group Retirement Plan are
approximately $28,744,000 and $23,650,000 at December 31, 1995
and 1994, respectively. The reserves held for the sale of
structured settlement annuities to the Erie Insurance Exchange
and Erie Insurance Company equal $81,709,000 and $59,306,000 at
December 31, 1995 and 1994, respectively.
On December 29, 1995 a Note Payable in the amount of
$15,000,000, was issued by the Company in accordance with
Pennsylvania Insurance Company Law to the EIC in exchange for a
cash sum of $15,000,000. Interest on this Note will be charged
at an annual rate of 6.45% per annum. No payment of any portion
of the principal amount of this Note shall be demanded by EIC
prior to December 31, 2005. However, the Company may pay, upon
ten (10) days' prior written notice to EIC, the interest or any
portion of the principal of this Note without premium of
penalty, subject to the prior consent of the Insurance
Commissioner of the Commonwealth of Pennsylvania. Commencing on
December 31, 2005 the outstanding principal balance of this Note
(including all accrued interest) shall be repayable on demand by
EIC or under such terms as EIC may elect, subject to the prior
consent of the Commissioner to such repayment in accordance with
the provisions of law.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 7. Reinsurance
The Company cedes insurance to other insurers and reinsurers
under various contracts (typically under excess of loss
contracts) which cover individual risks. These reinsurance
arrangements minimize losses arising from large risks or from
hazards of an unusual nature. The Company accounts for
reinsurance activities in accordance with Statement of Financial
Accounting Standards No. 113 ("SFAS 113"), "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts." Pursuant to these standards, amounts recoverable or
credited under reinsurance contracts, are included in total
assets as reinsurance recoverable or credited for reinsurance
ceded. The cost of reinsurance related to long-duration
contracts is accounted for over the life of the reinsured
policies using assumptions consistent with those used to account
for the underlying policies.
A contingent liability exists with respect to reinsurance
receivables and the reserve credit for reinsurance ceded which
would become a liability in the event that such reinsurance
companies are unable to meet their obligations under the
existing reinsurance agreements. These agreements do not relieve
the Company of its primary obligation to its policyholders.
Policy revenues and benefits expense reflected in the statements
of operations have been reduced by the following amounts due to
reinsurance cessions:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Policy revenues $3,354,484 $3,185,718 $2,132,670
Death benefits 1,040,858 695,567 902,124
Future life policy
benefits 98,567 1,120,329 813,965
</TABLE>
The Company has an insignificant amount of reinsurance assumed
activity.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 8. Statutory Net Income and Shareholders' Equity, Dividend
Restrictions, and Accounting Practices
A reconciliation of net income as filed with regulatory
authorities to net income reported in the accompanying financial
statements for the years ended December 31, 1995, 1994 and 1993,
follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Statutory net income $ 9,373,483 $ 9,678,535 $ 6,335,124
Reconciling items:
Policy liabilities
and accruals 287,030 898,212 330,948
Deferred policy
acquisition costs,
net of amortization 5,810,497 6,468,957 4,799,611
Investment valuation
differences 3,436,669 1,494,951 8,537,233
Deferred taxes ( 914,707) ( 1,469,927) ( 2,064,012)
Other, net ( 111,380) ( 241,050) ( 402,272)
----------- ----------- -----------
GAAP net income $17,881,592 $16,829,678 $17,536,632
=========== =========== ===========
</TABLE>
A reconciliation of shareholders' equity as filed with
regulatory authorities to shareholders' equity reported in the
accompanying financial statements as of December 31, 1995 and
1994, follows:
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Statutory shareholders' equity $ 66,735,780 $46,695,870
Reconciling items
Asset valuation and interest
maintenance reserves 22,167,637 19,558,985
Investment valuation differences 23,400,679 ( 14,741,044)
Deferred policy acquisition costs 50,762,292 44,951,795
Surplus note ( 15,000,000)
Policy liabilities and accruals 377,644 ( 230,680)
Deferred taxes ( 16,979,255) ( 2,897,964)
Deferred and uncollected premiums ( 3,421,669) ( 3,171,594)
Other, net 862,294 690,213
------------ -----------
GAAP shareholders' equity $128,905,402 $90,855,581
============ ===========
</TABLE>
The amount of dividends Erie Family Life, a
Pennsylvania-domiciled life insurer, can pay to its shareholders
without the prior approval of the Pennsylvania Insurance
Commissioner is limited by statute to not more than the greater
of: (a) 10 percent of its statutory surplus as regards
policyholders as reported on its last annual statement, or (b)
the net income of the insurer as reported on its last annual
statement, not including any pro rata distributions of any class
of the insurer's own securities. Accordingly, the maximum
dividend payout which may be made in 1996 without prior
Pennsylvania commissioner approval is $9,373,000.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 8. Statutory Net Income and Stockholders' Equity, Dividend
Restrictions, and Accounting Practices (Continued)
The Company prepares its statutory financial statements in
accordance with accounting practices prescribed by the
Pennsylvania Insurance Department. Prescribed statutory
accounting practices include a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well
as state laws, regulations, and general administrative rules.
Note 9. Unaudited Quarterly Summary of Operations
The following summaries of operations for the four quarters of
1995 and 1994 are unaudited. In the opinion of the Company's
management, all adjustments - consisting only of normal
recurring accruals - necessary for a fair presentation of the
interim periods presented have been included.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
1995
Policy revenues $ 6,470,366 $ 7,266,659 $ 7,195,175 $ 7,141,797
Investment income 9,903,802 10,141,044 10,465,117 10,452,849
Realized gain
on investments 538,950 776,767 4,690,581 1,477,500
Other income 373,397 399,200 386,776 669,971
----------- ----------- ----------- -----------
Total revenues $17,286,515 $18,583,670 $22,737,649 $19,742,117
=========== =========== =========== ===========
Income from
operations $ 4,588,580 $ 4,799,789 $10,011,847 $ 7,003,656
Federal income
taxes 1,502,821 1,641,840 3,075,792 2,301,827
----------- ----------- ----------- -----------
Net income $ 3,085,759 $ 3,157,949 $ 6,936,055 $ 4,701,829
=========== =========== =========== ===========
Earnings
per share $ 0.98 $ 1.00 $ 2.20 $ 1.50
=========== =========== =========== ===========
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1995 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 9. Unaudited Quarterly Summary of Operations (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1994
Policy revenues $ 5,938,807 $ 6,161,076 $ 6,435,291 $ 6,358,309
Investment income 8,336,576 8,619,825 9,087,090 9,522,758
Realized gain (loss)
on investments 2,533,962 1,068,629 1,063,897 (255,154)
Other income 281,023 471,849 355,490 789,394
----------- ----------- ----------- -----------
Total revenues $17,090,368 $16,321,379 $16,941,768 $16,415,307
=========== =========== =========== ===========
Income from
operations $ 7,282,936 $ 5,442,339 $ 7,391,656 $ 6,362,575
Federal income
taxes 2,558,323 1,945,424 2,760,038 2,386,043
----------- ----------- ----------- -----------
Net income $ 4,724,613 $ 3,496,915 $ 4,631,618 $ 3,976,532
=========== =========== =========== ===========
Earnings
per share $ 1.50 $ 1.11 $ 1.47 $ 1.26
=========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1995 FORM 10-K OF THE ERIE FAMILY LIFE INSURANCE COMPANY
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<CIK> 0000033416
<NAME> ERIE FAMILY LIFE INSURANCE COMPANY
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 426,381,008
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 126,324,721
<MORTGAGE> 7,062,742
<REAL-ESTATE> 1,796,395
<TOTAL-INVEST> 569,425,117
<CASH> 34,847,347
<RECOVER-REINSURE> 265,514
<DEFERRED-ACQUISITION> 50,762,292
<TOTAL-ASSETS> 673,794,161
<POLICY-LOSSES> 500,960,134
<UNEARNED-PREMIUMS> 104,951
<POLICY-OTHER> 897,026
<POLICY-HOLDER-FUNDS> 5,238,897
<NOTES-PAYABLE> 0
<COMMON> 4,410,000
0
0
<OTHER-SE> 124,495,402
<TOTAL-LIABILITY-AND-EQUITY> 673,794,161
28,073,997
<INVESTMENT-INCOME> 40,962,812
<INVESTMENT-GAINS> 7,483,798
<OTHER-INCOME> 1,829,344
<BENEFITS> 38,127,349
<UNDERWRITING-AMORTIZATION> 2,358,127
<UNDERWRITING-OTHER> 11,460,603
<INCOME-PRETAX> 26,403,872
<INCOME-TAX> 8,522,280
<INCOME-CONTINUING> 17,881,592
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,881,592
<EPS-PRIMARY> 5.68
<EPS-DILUTED> 5.68
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
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<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
