UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 of (I.R.S. Employer
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
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 the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 9,450,000 shares of Common
Stock outstanding on October 31, 1996.
1
<PAGE>
INDEX
ERIE FAMILY LIFE INSURANCE COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets--September 30, 1996 and December 31, 1995
Statements of Income--Three months ended September 30, 1996 and 1995,
nine months ended September 30, 1996 and 1995
Statements of Changes in Cash Flows--nine months ended
September 30, 1996 and 1995
Notes to Financial Statements--September 30, 1996
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
Part I. Financial Information
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
----------------- ---------------
(Unaudited)
<S> <C> <C>
Investments:
Fixed Maturities, at fair value
(amortized cost of $462,833,249
and $401,771,542, respectively) $459,652,931 $426,381,008
Equity Securities, at fair value
(cost of $127,396,033 and $125,763,874,
respectively) 131,624,985 126,324,721
Real Estate 1,731,595 1,796,395
Policy Loans 4,193,344 3,694,530
Mortgage Loans on Real Estate 8,208,769 7,062,742
Other Invested Assets 6,896,276 4,165,721
------------ ------------
Total Investments $612,307,900 $569,425,117
Cash, including short-term investments of
$12,955,478 and $35,230,606, respectively 13,021,989 34,847,347
Premiums Receivable 2,735,964 2,701,578
Reinsurance Recoverable 108,471 265,514
Other Receivables 240,076 254,674
Accrued Investment Income 10,265,364 9,044,136
Deferred Policy Acquisition Costs 56,037,435 50,762,292
Reserve Credit For Reinsurance Ceded 3,965,831 3,484,190
Prepaid Federal Income Tax 527,979 0
Other Assets 2,235,045 3,009,313
------------ ------------
Total Assets $701,446,054 $673,794,161
------------ ------------
</TABLE>
See notes to financial statements.
3
<PAGE>
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
-------------- --------------
(Unaudited)
<S> <C> <C>
Liabilities:
Policy Liabilities and Accruals:
Future Life Policy Benefits $ 52,491,729 $ 48,768,739
Policy and Contract Claims 771,907 897,026
Annuity Deposits 435,289,915 405,346,808
Universal Life Deposits 54,079,694 45,971,842
Supplementary Contracts Not
Including Life Contingencies 825,247 872,745
Other Policyholder Funds 2,941,967 5,238,897
Current Federal Income Tax 0 261,471
Deferred Federal Income Tax 11,693,790 16,979,255
Reinsurance Premium Due 115,933 360,478
Accounts Payable and Accrued Liabilities 5,108,050 2,728,133
Note Payable to Affiliate 15,000,000 15,000,000
Due to Affiliate 631,813 1,392,365
Dividends Payable 2,362,504 1,071,000
------------ ------------
Total Liabilities $581,312,549 $544,888,759
------------ ------------
Shareholders' Equity:
Common Stock, $.40 Par Value Per Share;
Authorized 15,000,000 Shares; 9,450,000
Shares Issued And Outstanding (Note D) $ 3,780,000 $ 3,465,000
Additional Paid-In Capital 630,000 945,000
Net Unrealized Appreciation (Depreciation) on
Investment Securities, net of
Deferred Taxes of $367,022 and
$8,809,609, respectively 681,612 16,360,704
Retained Earnings 115,041,893 108,134,698
------------ ------------
Net Shareholders' Equity $120,133,505 $128,905,402
------------ ------------
Total Liabilities and Shareholders'
Equity $701,446,054 $673,794,161
------------ ------------
</TABLE>
See notes to financial statements.
4
<PAGE>
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- ---------------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Policy:
Life Premiums, net of premiums ceded of
$1,047,438, $745,847, $2,601,268 and
$2,192,838, respectively $ 7,192,211 $ 6,620,756 $ 21,364,064 $ 19,183,841
Group 488,260 574,419 1,469,294 1,748,359
--------------- ---------------- --------------- ---------------
Total Policy Revenues $ 7,680,471 $ 7,195,175 $ 22,833,358 $ 20,932,200
Investment Income, net of expenses of
$355,056, $96,558, $1,057,275 and
$285,701, respectively 11,622,874 10,465,117 34,297,482 30,509,963
Realized gain on investment 898,400 4,690,581 1,671,027 6,006,298
Other Income 568,431 386,776 1,423,054 1,159,373
--------------- ---------------- --------------- ---------------
Total Revenues $ 20,770,176 $ 22,737,649 $ 60,224,921 $ 58,607,834
--------------- ---------------- --------------- ---------------
Benefits and Expenses:
Death Benefits, net of reinsurance
recoveries of $271,318, $411,521,
$1,657,797 and $905,961, respectively 1,618,047 1,711,884 6,676,726 5,909,477
Interest on annuity deposits 6,305,008 5,925,301 18,899,418 17,127,396
Interest on universal life deposits 821,821 661,424 2,318,720 1,902,364
Surrender and other benefits 215,326 235,312 796,802 806,959
Increase in liability for future life policy
Benefits, net of the increase in reserve
credit for reinsurance ceded of $183,754,
$200,038, $481,641 and $528,442,
respectively 1,277,405 979,292 3,241,349 2,846,884
Amortization of deferred policy
acquisition costs 684,486 481,446 2,072,515 1,212,483
Commissions 855,927 725,244 2,393,184 2,081,545
General expenses 1,234,779 1,491,922 4,147,494 4,563,721
Taxes, licenses and fees 1,536,977 513,977 2,241,710 2,756,789
--------------- ---------------- --------------- ---------------
Total Benefits and Expenses $ 14,549,776 $ 12,725,802 $ 42,787,918 $ 39,207,618
--------------- ---------------- --------------- ---------------
Income From Operations 6,220,400 10,011,847 17,437,003 19,400,216
Federal Income Tax
Current (280,026) 2,640,871 2,647,678 5,151,372
Deferred 1,958,423 434,921 3,157,122 1,069,081
--------------- ---------------- --------------- ---------------
Total Federal Income Tax 1,678,397 3,075,792 5,804,800 6,220,453
--------------- ---------------- --------------- ---------------
Net Income $ 4,542,003 $ 6,936,055 $ 11,632,203 $ 13,179,763
--------------- ---------------- --------------- ---------------
Net Income Per Share $ .48 $ 0.73 $ 1.23 $ 1.39
--------------- ---------------- --------------- ---------------
Dividends Declared Per Share $ .125 $ 0.113 $ .50 $ 0.34
--------------- ---------------- --------------- ---------------
</TABLE>
5
<PAGE>
Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,632,203 $ 13,179,763
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of bond and mortgage
premium and discount 214,728 97,508
Amortization of deferred policy acquisition
costs 2,072,515 1,212,483
Real Estate Depreciation 64,800 76,671
Deferred federal income taxes 3,157,122 1,069,081
Realized gains on investments (1,671,027) (6,006,298)
Decrease (Increase) in other assets 774,268 (47,779)
Decrease (Increase) in other receivables 14,598 (131,402)
Increase in premium receivable (34,386) (120,666)
Increase in reinsurance receivable
and reserve credits (324,598) (591,444)
Increase in accrued investment income (1,221,228) (1,354,435)
Increase in deferred policy acquisition
costs (7,347,658) (5,399,628)
Increase in future policy benefits and claims 3,597,871 3,261,685
Decrease in other policyholder funds (2,296,930) (3,213,927)
(Decrease) Increase in reinsurance premium due (244,545) 24,571
Increase (Decrease) in accounts payable and accrued
liabilities and due to affiliate 1,619,365 (872,460)
(Decrease) Increase in current Federal income taxes (789,450) 1,134,099
----------------- -----------------
Net cash provided by operating
activities $ 9,217,648 $ 2,317,822
----------------- -----------------
Cash flows from investing activities:
Fixed Maturity Securities:
Held-to-Maturity:
Maturities $ 0 $ 3,906,728
Available-for-Sale:
Maturities 12,215,710 1,548,146
Sales 14,257,447 40,382,164
Purchases (87,753,820) (89,247,603)
Equity Securities:
Sales 13,600,665 16,421,802
Purchases (13,660,263) (21,109,082)
Loans made to policyholders (981,689) (751,650)
Payments received on policy loans 482,875 376,861
Purchase of other invested assets (3,150,344) (1,425,662)
Sale of other invested assets 349,789 80,331
Purchase of mortgage loans (1,968,775) 0
Principal payments received on mortgage
loans 995,442 552,499
----------------- -----------------
Net cash used in investing activities $ (65,612,963) $ (49,265,466)
----------------- -----------------
</TABLE>
6
<PAGE>
Statements of Cash Flows--Continued (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------- ------------------
<S> <C> <C>
Cash flows from financing activities:
Increase in annuity and supplementary
contract deposits $ 29,895,609 $ 46,932,277
Increase in Universal Life Deposits 8,107,852 7,087,376
Dividends paid to stockholders (3,433,504) (3,087,000)
------------------ -----------------
Net cash provided by financing
activities $ 34,569,957 $ 50,932,653
------------------ -----------------
Net increase (decrease) in cash and cash
equivalents (21,825,358) 3,985,009
Cash and cash equivalents at beginning of year 34,847,347 6,559,213
------------------ -----------------
Cash and cash equivalents at end of quarter $ 13,021,989 $ 10,544,222
------------------ -----------------
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 485,635 $ 632
Income taxes 3,437,128 4,017,273
</TABLE>
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1995.
NOTE B -- RECLASSIFICATIONS
Certain amounts as previously reported have been reclassified to conform to the
current year's presentation.
NOTE C -- INVESTMENTS
The total invested assets of the Company consist of investments in fixed
maturities, preferred stock, common stock, real estate, mortgage and policy
loans and other invested assets. At September 30, 1996, 75.1% of total invested
assets were invested in fixed maturities. Preferred stocks represent 18.9% or
$115.6 million and common stocks represent 2.6% or $16.0 million of total
invested assets at September 30, 1996, while real estate and mortgage loans make
up only 1.6% of total invested assets. Mortgage loan and real estate investments
have the potential for higher returns but also carry more risk, including less
liquidity and greater uncertainty of rate of return. Consequently these
investments have been kept to a minimum.
The Company's fixed maturities at September 30, 1996 consist of investments in
bonds of $458 million and investments in redeemable preferred stock of $2
million. It is the Company's objective that the fixed maturity portfolio be of
very high quality and well diversified within each market sector. The portfolio
is conservatively managed with the goal of achieving reasonable returns while
limiting exposure to risk. At September 30, 1996 the carrying value of fixed
maturities was $459,652,931, or 75.1% of total invested assets. At September 30,
1996, the amortized cost, carrying/market value, gross unrealized gains and
gross unrealized losses for fixed maturities were as follows:
Fixed Maturities at 9-30-96
<TABLE>
<CAPTION>
Carrying/ Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses
<S> <C> <C> <C> <C>
U.S. Treasuries & Agency $ 6,124,827 $ 6,397,289 $ 272,462 $ 0
Mortgage-Backed Certificates 375,219 389,102 13,886 3
Industrial Miscellaneous 305,495,146 303,503,917 5,020,718 7,011,947
Public Utilities 100,230,682 98,436,370 1,500,809 3,295,121
States & Political Subdivisions 2,062,745 2,275,590 212,845 0
Special Revenue 48,544,630 48,650,663 1,260,864 1,154,831
------------------- ------------------- ----------------- -----------------
Total Fixed Maturities $ 462,833,249 $ 459,652,931 $ 8,281,584 $ 11,461,902
</TABLE>
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The bond investments included in the fixed maturity category consist of
high-quality, marketable securities, 96.9% or $445.5 million of which, are rated
at investment grade levels (Baa/BBB or better). Included in this investment-
grade category are $296 million of bonds characterized as of the "highest"
quality or "Class 1" securities as defined by the National Association of
Insurance Commissioners (NAIC). Below investment-grade bonds totaled $14.2
million at September 30, 1996 and are a very manageable 3.1% of total invested
assets. None of the bonds included in the below investment-grade category were
considered "low" quality at September 30, 1996. All of the securities classified
as below investment-grade are current and in good standing. Generally, the fixed
maturity securities in the Company's portfolio are rated by external rating
agencies. If not externally rated, they are rated by the Company on a basis
consistent with the basis used by the rating agencies.
If management determines that any declines in market value of these investments
are other than temporary, the securities will be written-down to the realizable
value of the investment and reflected in the income statement. If a bond is in
default of interest payments and it is determined that liquidation of the
security would be in the Company's best interest, the security will be sold to
return the proceeds to income producing assets.
At September 30, 1996, the Company's five largest investments in corporate debt
securities totaled $30,758,772, none of which individually exceeded $6.7
million. These investments had a market value of $29.9 million.
In compliance with "Accounting for Certain Investments in Debt and Equity
Securities (FAS 115)," the Company has classified all of its fixed maturity
portfolio as available-for-sale at September 30, 1996. 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.
Equity securities consist of common and preferred stocks which are carried on
the balance sheet at current market value. At September 30, 1996, common and
preferred stock held by the Company had a cost of $127,396,033 and a market
value of $131,624,985, representing an unrealized gain of $4,228,952. As with
the fixed maturity portfolio, the Company's preferred stock portfolio provides a
source of highly predictable current income that is very competitive with
high-grade bonds. These securities are well diversified within each market
sector and support the investment return provided to Policyholders. The
preferred stocks are of very high-quality and extremely marketable, 96.8% or
$111.9 million of which are of the "highest" or "high" quality, as defined by
the NAIC. The remaining $3.7 million of preferred stocks have a "medium" NAIC
rating. There are no preferred stocks in the Company's portfolio rated in the
"low," "lowest," or "in or near default" quality categories established by the
NAIC.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Equity Securities, 9-30-96
<TABLE>
<CAPTION>
Gross Gross
Market Unrealized Unrealized
Cost Value Gains Losses
<S> <C> <C> <C> <C>
Common Stock
Banks & Insurance $ 2,065,459 $ 3,862,939 $ 1,797,480 $ 0
Industrial & Miscellaneous 11,625,706 12,128,718 738,862 235,850
Preferred Stocks
Public Utilities 5,273,282 5,220,800 0 52,482
Banks & Insurance 77,230,715 77,993,300 1,934,060 1,171,475
Industrial & Miscellaneous 31,200,871 32,419,228 1,492,482 274,125
------------------- ------------------- --------------- ---------------
Total Equity Securities $ 127,396,033 $ 131,624,985 $ 5,962,884 $ 1,733,932
</TABLE>
Real estate investments are carried on the statements 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 September 30, 1996, the Company did not own any derivatives.
NOTE D - STOCK SPLIT
On May 1, 1996 a three-for-one common stock split in which two additional shares
were issued for each share held was approved by the Company's shareholders
effective for shareholders of record May 2, 1996. The par value of each share of
the common stock was changed to $.40 per share, the number of authorized shares
was increased to 15,000,000 shares and the number of shares issued and
outstanding was increased to 9,450,000. All per share data in the accompanying
financial statements have been restated to reflect this change.
NOTE E - DIVIDENDS DECLARED
On June 17, 1996 and September 17, 1996, the Board of Directors of the Company
approved the third and fourth quarter dividends totaling $.25 per share. The
third quarter dividend of $.125 per share was paid on October 1, 1996, to
shareholders of record as of September 20, 1996. The fourth quarter dividend of
$.125 per share will be paid on January 2, 1997 to shareholders of record as of
December 20, 1996.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction with the
financial statements and related notes found on pages 3 through 10, since they
contain important information that is helpful in evaluating the Company's
operating results and financial condition.
OVERVIEW
Erie Family Life Insurance Company (the Company) is incorporated in the
Commonwealth of Pennsylvania. The Company is primarily engaged in the business
of underwriting and selling nonparticipating individual and group life insurance
policies, including universal life, and annuity products. The Company markets
its products through independent Agents and is licensed in eleven states and the
District of Columbia in the Eastern U.S. and is subject to the supervision and
regulation of the states in which it does business. A large portion of the
Company's business is written in Pennsylvania.
Net income decreased to $4,542,003, or $.48 per share, in the third quarter of
1996 from $6,936,055 or $.73 per share, in the third quarter of 1995, a decrease
of 35%. The decrease in nonrecurring realized gains on investments from
$4,690,581 in the third quarter of 1995 to $898,400 in the third quarter of 1996
was the primary reason for the decrease in net income. Operating results
continued to be strong as total policy revenue grew by 6.7% to $7,680,471 in the
current period. Investment income net of expenses grew by 11% from $10,465,117
in the third quarter of 1995 to $11,622,874 in the third quarter of 1996.
REVENUES, BENEFITS, AND EXPENSES
Policy Revenues. Total policy revenues increased 6.7% to $7,680,471 in the third
quarter of 1996 from $7,195,175 in the third quarter of 1995. Included in these
totals are first year life policy revenues of $1,618,493 in the third quarter of
1996 and $1,445,842 in the third quarter of 1995, an increase of 12%. This
growth in first year policy revenues was bolstered by the Company's
participation in the Erie Insurance Group travel incentive program, "California
Dreamin'." This multi-line promotion offers successful ERIE Agents a trip to
Palm Springs, California in early 1997. A minimum level of life production is
required to qualify.
Group policy revenues decreased from $574,419 in the third quarter of 1995 to
$488,260 in the third quarter of 1996. The 1995 group policy revenue amount
included $130,000 in annuity loads on structured settlement premiums. This
annuity load was charged to pay the 2% annuity premium tax on non-qualified
annuities. Effective January 1, 1996, the Pennsylvania tax on non-qualified
annuities was repealed. In response to this tax change, the 2% load on
structured settlement premium has been discontinued by the Company.
Deposits. First year and single universal life and annuity deposits were
$7,423,011 in the third quarter of 1996 and $11,463,800 in the third quarter of
1995, representing a decrease of 35%. Included in these amounts are structured
settlement annuities sold to the Erie Insurance Group property/casualty
affiliate companies which totaled $2,581,252 in the third quarter of 1996 and
$6,396,124 in the third quarter of 1995.
Net Investment Income. Net investment income in the third quarter of 1996 was
$11,622,874 compared to $10,465,117 in the third quarter of 1995, an increase of
11%. Fueling the growth in investment income was the Company's cash flows
generated from annuity and universal life deposits and operating income.
Realized Gain on Investment. During the third quarter of 1996, the Company
generated realized gains on investments of $898,400. During the third quarter of
1995, the Company had realized gains on investments of $4,690,581. These amounts
consisted of gains from the sale of securities.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
Death Benefits. Net death benefits on life insurance policies decreased 5% in
the third quarter of 1996 to $1,618,047, compared to $1,711,884, for the same
period in 1995. Death benefit experience must be analyzed for long-term trends,
rather than over short periods where unusual fluctuations may influence the
results. This is particularly true for a company the size of Erie Family Life,
which is growing rapidly. The Company's mortality experience has been extremely
good over the past several years and the Company believes that its underwriting
philosophy and practices are sound.
Interest on Annuity and Universal Life Deposits. Interest on deposits held by
the Company for Policyholders rose 8% from $6,586,725 in the third quarter of
1995 to $7,126,829 in the third quarter of 1996. This increase was due to the
$68 million in deposits made by Policyholders during the 12-month period ending
September 30, 1996. At September 30, 1996, annuity deposits accruing interest
were $435 million and universal life deposits accruing interest were $54
million. During the third quarter of 1996, the interest rate credited on
universal life remained unchanged while the interest rate credited on annuity
deposits increased by .25%. The current interest rate credited on universal life
deposits is in the 6.25% to 7.00% range while the rate credited on annuity
deposits is in the 5.00% to 6.00% range.
Amortization of Deferred Policy Acquisition Costs (DPAC). The amortization of
deferred policy acquisition costs totaled $481,446 in the third quarter of 1995
and $684,486 in the third quarter of 1996.
Commissions. Commissions increased $130,683 to $855,927 in the third quarter of
1996. Most of this commission increase was due to an increase in renewal policy
revenues of 5.4% along with an increase in the average commission rate. The
average commission rate increased due to an increase in persistency for policies
in their second policy year. Second year renewal commission rates are higher
than third and subsequent year commission rates and increases in second year
persistency will result in an increase in the average commission rate. The
commission costs, which vary with and are primarily related to the production of
new business, have been deferred. These costs are being amortized over the
premium paying period of the related policies in proportion to the ratio of the
annual premium revenue to the total anticipated premium revenue.
General Expenses. General expenses amount to $1,234,779 in the third quarter of
1996 compared to $1,491,922 for the same period in 1995. The majority of the
decrease in general expenses was due to decreases in data processing expense.
This decrease was due to lower computer usage charges and less charges for
system maintenance and enhancement. 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 $1,023,000 to
$1,536,977 in the third quarter of 1996. This increase was caused by the state
life and health insurance guaranty assessments. The accrual for these
assessments totaled $1,200,000 in the third quarter of 1996 and $17,000 in the
third quarter of 1995. In 1995, $332,000 of the state life and health insurance
guaranty assessments were paid in the first quarter and $854,000 were paid in
the second quarter. The remaining decrease was caused by the repeal of the
Pennsylvania tax on non-qualified annuities beginning January 1, 1996. The
Pennsylvania non-qualified annuity tax increased the Company's premium taxes by
$193,000 in the third quarter of 1995.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
Federal Income Tax. Federal Income Tax in the third quarter amounted to
$1,678,397 compared to $3,075,792 for the same period in 1995. The Company's
effective federal income tax rates in 1996 and 1995 differ primarily due to the
recognition of, or limitations on, capital losses.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of an entity's ability to secure enough cash to meet its
contractual obligations and operating needs. Generally, insurance premiums and
deposits are collected prior to claims and benefit disbursements and these funds
are invested to provide necessary cash flows in future years. The Company's
major sources of cash from operations are life insurance premiums, annuity and
universal life deposits and investment income. The net positive cash flow is
used to fund Company commitments and to build the investment portfolio, thereby
increasing future investment returns. Net cash provided by operating activities
for the nine months ended September 30, 1996 was $9,217,648, compared to
$2,317,822 for the nine months ended September 30, 1995. The Company's liquidity
position remains strong as invested assets grew by $43 million during the first
nine months of 1996 to $612 million at September 30, 1996.
Premium from the sale of new policies combined with the premium on existing
policies accounted for approximately 37.0% of total revenue in the third quarter
of 1996 and 31.6% for the same period in 1995. Investment income, net of
expenses, generated 56.0% of total revenue in 1996 and 46.0% in 1995.
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 $10,762,252 in the
third quarter of 1996 and $14,697,756 in the third quarter of 1995.
The Company's current commitments for expenditures as of September 30, 1996, are
primarily for policy death benefits, policy surrenders and withdrawals, general
operating expenses, federal income taxes, and dividends to stockholders. These
commitments are met by cash flows from policy revenue, annuity and universal
life deposits and investment income. Management believes its cash flow from
operations, its liquid assets and marketable securities and its line of credit
with PNC Bank will enable the Company to meet any foreseeable cash requirements.
At September 30, 1996, the Company's line of credit with PNC Bank totaled $10
million, none of which was outstanding.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
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 pay out which
may be made in 1996 without prior Pennsylvania insurance commissioner approval
is $9,373,000.
The Company's 1995 year-end Risk Based Capital Analysis as reflected in its 1995
statutory annual statement shows total adjusted capital of $75,548,251 and
authorized control level risk based capital of $10,608,713. These results
demonstrate a strong capital position for the Company.
FINANCIAL CONDITION
RESERVE LIABILITIES
The Company's primary commitment is its obligation to meet the payment of future
benefits under the terms of its life insurance and annuity contracts. To meet
these future obligations, the Company establishes life insurance reserves based
upon the type of policy, the age of the insured, and the number of years the
policy has been in force. The Company also establishes annuity and universal
life reserves based on the amount of Policyholder deposits (less applicable
policy charges) plus interest earned on those deposits. On September 30, 1996,
there was no material difference between the carrying value and fair value of
the Company's investment-type policies. These life insurance and annuity
reserves are supported primarily by the Company's long-term, fixed-income
investments because the underlying policy reserves are generally also of a
long-term nature.
INVESTMENTS
The Company's investment strategies and portfolios are structured to match the
features of the life insurance and annuity products sold by the Company. The
Company's annuities and life insurance policies are long-term products,
therefore the Company's investment strategy takes a long-term perspective
emphasizing investment quality, diversification, and superior investment
returns. The Company's investments are prudently managed on a total return
approach that focuses on current income and capital appreciation.
The Company's invested assets are also exceptionally liquid in order to meet the
short and long-term commitments to our Policyholders. At September 30, 1996, the
Company's investment portfolio of cash and money market investments, investment
grade bonds, common stocks, and preferred stocks, all of which are extremely
marketable, totaled $604 million or 86% of total assets. These resources provide
the liquidity the Company requires to meet the unforeseen demands on its funds.
"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 "Note C to the Financial Statements," the "Revenue Benefits
and Expenses - Death Benefits," the "Liquidity and Capital Resources" and the
"Investments" 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, fluctuations of
securities markets, and technological difficulties and advancements.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
All other exhibits for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore, have been omitted.
The Company did not file any reports on Form 8-K during the three-month period
ending September 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Erie Family Life Insurance Company
(Registrant)
Date November 7, 1996 /s/ Stephen A. Milne
(Stephen A. Milne, President & CEO)
/s/ Thomas M. Sider
(Thomas M. Sider, Executive Vice President & CFO)
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1996 FORM 10-Q OF THE ERIE FAMILY LIFE INSURANCE COMPANY
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<CIK> 0000033416
<NAME> ERIE FAMILY LIFE INSURANCE COMPANY
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 459,652,931
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 131,624,985
<MORTGAGE> 8,208,769
<REAL-ESTATE> 1,731,595
<TOTAL-INVEST> 612,307,900
<CASH> 13,021,989
<RECOVER-REINSURE> 108,471
<DEFERRED-ACQUISITION> 56,037,435
<TOTAL-ASSETS> 701,446,054
<POLICY-LOSSES> 542,686,585
<UNEARNED-PREMIUMS> 174,997
<POLICY-OTHER> 771,907
<POLICY-HOLDER-FUNDS> 2,941,967
<NOTES-PAYABLE> 0
<COMMON> 4,410,000
0
0
<OTHER-SE> 115,723,505
<TOTAL-LIABILITY-AND-EQUITY> 701,446,054
22,833,358
<INVESTMENT-INCOME> 34,297,482
<INVESTMENT-GAINS> 1,671,027
<OTHER-INCOME> 1,423,054
<BENEFITS> 31,933,015
<UNDERWRITING-AMORTIZATION> 2,072,515
<UNDERWRITING-OTHER> 8,782,388
<INCOME-PRETAX> 17,437,003
<INCOME-TAX> 5,804,800
<INCOME-CONTINUING> 11,632,203
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,632,203
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
All per share data has been restated to reflect the common stock split approved
be the Company's stockholders on May 1, 1996.
</FN>
</TABLE>
