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 March 31, 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 May 3, 1996.
1
<PAGE>
INDEX
ERIE FAMILY LIFE INSURANCE COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Financial Position--March 31, 1996 and December 31, 1995
Statements of operations--Three months ended March 31, 1996 and 1995
Statements of changes in cash flows--three months ended March 31, 1996
and 1995
Notes to financial statements--March 31, 1996
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
Part I. Financial Information
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1996 1995
------------- -------------
(Unaudited)
<S> <C> <C>
Investments:
Fixed Maturities, at fair value
(amortized cost of $447,500,913
and $401,771,542, respectively) $ 452,043,041 $ 426,381,008
Equity Securities, at fair value
(cost of $130,666,274 and $125,763,874,
respectively) 133,821,387 126,324,721
Real Estate 1,774,795 1,796,395
Policy Loans 3,816,700 3,694,530
Mortgage Loans on Real Estate 6,285,132 7,062,742
Other Invested Assets 6,214,515 4,165,721
------------- -------------
Total Investments $ 603,955,570 $ 569,425,117
Cash, including short-term investments of
$1,479,820 and $35,230,606, respectively (220,593) 34,847,347
Premiums Receivable 2,424,458 2,701,578
Reinsurance Recoverable 418,022 265,514
Other Receivables 219,860 254,674
Accrued Investment Income 10,167,697 9,044,136
Deferred Policy Acquisition Costs 52,450,160 50,762,292
Reserve Credit For Reinsurance Ceded 3,611,646 3,484,190
Other Assets 2,414,405 3,009,313
------------- -------------
Total Assets $ 675,441,225 $ 673,794,161
------------- -------------
</TABLE>
See notes to financial statements.
3
<PAGE>
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------- -------------
(Unaudited)
<S> <C> <C>
Liabilities:
Policy Liabilities and Accruals:
Future Life Policy Benefits $ 49,786,181 $ 48,768,739
Policy and Contract Claims 1,588,935 897,026
Annuity Deposits 420,256,212 405,346,808
Universal Life Deposits 48,673,909 45,971,842
Supplementary Contracts Not
Including Life Contingencies 868,326 872,745
Other Policyholder Funds 3,853,287 5,238,897
Current Federal Income Tax 510,911 261,471
Deferred Federal Income Tax 11,397,141 16,979,255
Reinsurance Premium Due 174,076 360,478
Accounts Payable and Accrued Liabilities 2,334,536 2,728,133
Note Payable to Affiliate 15,000,000 15,000,000
Due to Affiliate 771,001 1,392,365
Dividends Payable 1,181,252 1,071,000
------------- -------------
Total Liabilities $ 556,395,767 $ 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 on
Investment Securities, net of
Deferred Taxes of $2,694,035
And $8,809,609, respectively 5,003,206 16,360,704
Retained Earnings 109,632,252 108,134,698
------------- -------------
Net Shareholders' Equity $ 119,045,458 $ 128,905,402
------------- -------------
Total Liabilities and Shareholders'
Equity $ 675,441,225 $ 673,794,161
------------- -------------
</TABLE>
See notes to financial statements.
4
<PAGE>
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1995
------------------ ------------------
<S> <C> <C>
Revenues:
Policy:
Life Premiums, net of premiums ceded of
$697,905 and $740,266, respectively $ 6,660,979 $ 5,874,822
Group 506,523 595,544
------------------ ------------------
Total Policy Revenues 7,167,502 6,470,366
Investment Income, Net of Expenses
of $350,266 and $94,315, respectively 11,273,287 9,903,802
Realized Gain on Investment 10,322 538,950
Other Income 339,310 373,397
------------------ ------------------
Total Revenues 18,790,421 17,286,515
------------------ ------------------
Benefits and Expenses:
Death Benefits, net of reinsurance recoveries
of $344,663 and $477,208, respectively 2,964,877 1,833,110
Interest on Annuity Deposits 6,414,959 5,625,278
Interest on Universal Life Deposits 741,120 590,227
Surrender and Other Benefits 282,425 263,646
Increase in Liability for Future Life Policy Benefits,
net of the increase in reserve credit for reinsurance
ceded of $127,456 and $145,982, respectively 889,986 999,014
Amortization of Deferred Policy
Acquisition Costs 624,807 703,238
Commissions 686,397 616,991
General Expenses 1,607,656 1,230,167
Taxes, Licenses and Fees 353,497 836,264
------------------ ------------------
Total Benefits and Expenses 14,565,724 12,697,935
------------------ ------------------
Income From Operations 4,224,697 4,588,580
Federal Income Tax
Current 1,012,431 1,746,342
Deferred 533,460 (243,521)
------------------ ------------------
Total Federal Income Tax 1,545,891 1,502,821
------------------ ------------------
Net Income $ 2,678,806 $ 3,085,759
================== ==================
Net Income Per Share (Before Stock Split) $ 0.85 $ 0.98
================== ==================
Dividends Declared Per Share (Before Stock Split) $ 0.375 $ 0.34
================== ==================
Net Income Per Share (After Stock Split) $ 0.28 $ 0.33
================== ==================
Dividends Declared Per Share (After Stock Split) $ 0.125 $ 0.113
================== ==================
</TABLE>
See notes to financial statements.
5
<PAGE>
Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1995
------------------ -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,678,806 $ 3,085,759
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of bond and mortgage
premium and discount 70,710 30,437
Amortization of deferred policy acquisition
costs 624,807 703,238
Real Estate Depreciation 21,600 25,557
Deferred federal income taxes 533,460 (243,521)
Realized gains on investments (10,322) (538,950)
Decrease in other assets 594,908 2,221
Decrease in other receivables 34,814 24,427
Decrease in premium receivable 277,120 169,564
Increase in reinsurance recoverables
and reserve credits (279,964) (387,750)
Decrease (Increase) in accrued investment income (1,123,561) 233,258
Increase in deferred policy acquisition
costs (2,312,675) (1,762,405)
Increase in future policy benefits and claims 1,709,351 1,625,773
Decrease in other policyholder funds (1,385,610) (1,638,232)
Decrease in reinsurance premium due (186,402) (62,828)
Decrease in accounts payable and accrued
liabilities and due to affiliate (1,014,961) (1,969,206)
Increase in Federal income taxes currently payable 249,440 1,702,149
------------------ -----------------
Net cash provided by operating
activities 481,521 999,491
------------------ -----------------
Cash flows from investing activities:
Fixed Maturity Securities:
Held-to-Maturity:
Maturities $ 0 $ 270,802
Sales 0 0
Purchases 0 0
Available-for-Sale:
Maturities 7,829,826 809,239
Sales 6,955,210 5,948,381
Purchases (60,639,862) (21,180,965)
Equity Securities:
Sales 4,609,846 835,353
Purchases (9,549,400) (4,090,000)
Loans made to policyholders (299,911) (235,943)
Payments received on policy loans 177,741 157,169
Purchase of other invested assets (2,172,889) (1,409,512)
Sale of other invested assets 54,096 0
Principal payments received on mortgage
loans 949,830 140,927
------------------ -----------------
Net cash used in investing activities (52,085,513) (18,754,549)
------------------ -----------------
</TABLE>
6
<PAGE>
Statements of Cash Flows--Continued (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1995
------------------ -----------------
<S> <C> <C>
Cash flows from financing activities:
Increase in annuity and supplementary
contract deposits 14,904,985 14,822,007
Increase in Universal Life Deposits 2,702,067 2,214,260
Dividends paid to shareholders (1,071,000) (945,000)
------------------ -----------------
Net cash provided by financing
activities 16,536,052 16,091,267
------------------ -----------------
Net increase (decrease) in cash and
short-term cash investments (35,067,940) (1,663,791)
Cash and short-term cash investments at
beginning of year 34,847,347 6,559,213
------------------ -----------------
Cash and short-term cash investments at
end of quarter $ (220,593) $ 4,895,422
------------------ -----------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 0 $ 0
Income taxes 762,992 44,193
</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 three month period ended March 31, 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 March 31, 1996, 74.8% of total invested
assets were invested in fixed maturities. Preferred stocks represent 20.0% or
$120.6 million and common stocks represent 2.2% or $13.2 million of total
invested assets at March 31, 1996, while real estate and mortgage loans make up
only 1.3% of total invested assets. Mortgage loan and real estate investments
have the potential for higher returns but also carry more risk, including less
liquidity and greater uncertainty of rate of return. Consequently these
investments have been kept to a minimum.
The Company's fixed maturities at March 31, 1996 consist of investments in bonds
of $450 million and investments in redeemable preferred stock of $2 million. It
is the Company's objective that the fixed maturity portfolio be of very high
quality and well diversified within each market sector. The portfolio is
conservatively managed with the goal of achieving reasonable returns while
limiting exposure to risk. At March 31, 1996 the carrying value of fixed
maturities was $452,043,041, or 74.8% of total invested assets. At March 31,
1996, the amortized cost, carrying/market value, gross unrealized gains and
gross unrealized losses for fixed maturities were as follows:
Fixed Maturities at 3-31-96
<TABLE>
<CAPTION>
Carrying/ Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses
<S> <C> <C> <C> <C>
U.S. Treasuries & Agency $ 6,123,923 $ 6,518,399 $ 394,476 $ 0
Mortgage-Backed Certificates 414,948 434,993 20,254 209
Industrial Miscellaneous 289,743,989 293,516,610 8,576,678 4,804,057
Public Utilities 100,506,403 100,295,012 2,008,186 2,219,577
States & Political Subdivisions 2,062,927 2,321,928 259,001 0
Special Revenue 48,648,723 48,956,099 1,440,346 1,132,970
------------------- ------------------- ----------------- ----------------
Total Fixed Maturities $ 447,500,913 $ 452,043,041 $ 12,698,941 $ 8,156,813
</TABLE>
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The bond investments included in the fixed maturity category consist of
high-quality, marketable securities, 99.2% or $446.4 million of which, are rated
at investment grade levels (Baa/BBB or better). Included in this investment-
grade category are $275 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 $3.7
million at March 31, 1996 and are a very manageable 0.6% of total invested
assets. None of the bonds included in the below investment-grade category are
considered "low" quality. All of the securities classified as below
investment-grade are current and in good standing. Generally, the fixed maturity
securities in the Company's portfolio are rated by external rating agencies. If
not externally rated, they are rated by the Company on a basis consistent with
the basis used by the rating agencies.
If management determines that any declines in market value of these investments
are other than temporary, the securities will be written-down to the realizable
value of the investment and reflected in the income statement. If a bond is in
default of interest payments and it is determined that liquidation of the
security would be in the Company's best interest, the security will be sold to
return the proceeds to income producing assets.
At March 31, 1996, the Company's five largest investments in corporate debt
securities totaled $30,818,106, none of which individually exceeded $6.7
million. These investments had a market value of $30.3 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 March 31, 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 March 31, 1996, common and
preferred stock held by the Company had a cost of $130,666,274 and a market
value of $133,821,387, representing an unrealized gain of $3,155,113. 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, 96.9% or
$116.9 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, 3-31-96
<TABLE>
<CAPTION>
Gross Gross
Market Unrealized Unrealized
Cost Value Gains Losses
<S> <C> <C> <C> <C>
Common Stock
Banks & Insurance $ 1,212,800 $ 1,306,250 $ 93,450 $ 0
Industrial & Miscellaneous 11,836,606 11,865,982 254,550 225,174
Preferred Stocks
Public Utilities 5,273,282 5,279,712 6,430 0
Banks & Insurance 83,142,715 84,595,090 2,098,975 646,600
Industrial & Miscellaneous 29,200,871 30,774,353 1,707,982 134,500
------------------- ------------------- --------------- ---------------
Total Equity Securities $ 130,666,274 $ 133,821,387 $ 4,161,387 $ 1,006,274
</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 March 31, 1996, the Company did not own any derivatives.
NOTE D - STOCK SPLIT
On May 1st a common stock split in the form of two shares for each share
outstanding 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.
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 $2,678,806, or $.28 per share, in the first quarter of
1996 from $3,085,759 or $.33 per share, in the first quarter of 1995, a decrease
of 13%. Reduced non-recurring realized capital gains and an increase in death
denefits were the primary reasons for the decrease in net income. Operating
results remained strong as total policy revenue grew by 11% to $7,167,502 in the
current period. Investment income net of expenses grew by 14% from $9,903,802 in
the first quarter of 1995 to $11,273,287 in the first quarter of 1996.
REVENUES, BENEFITS, AND EXPENSES
Policy Revenues. Total policy revenues increased 10.8% to $7,167,502 in the
first quarter of 1996 from $6,470,366 in the first quarter of 1995. Included in
these totals are first year life policy revenues of $1,530,731 in the first
quarter of 1996 and $1,247,825 in the first quarter of 1995, an increase of 23%.
This growth in first year policy revenues was bolstered by the Company's
participation in the Erie Insurance Group agent travel incentive program,
"California Dreamin'." This multi-line promotion offers successful ERIE Agents a
trip to Desert Springs, California in early 1997. A minimum level of life
production is required to qualify.
Group policy revenues decreased from $595,544 in the first quarter of 1995 to
$506,523 in the first quarter of 1996. The 1995 group policy revenue amount
included $135,590 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
$16,196,925 in the first quarter of 1996 and $12,364,721 in the first quarter of
1995, representing an increase of 31%. Included in these amounts are structured
settlement annuities sold to the Erie Insurance Group property/casualty
affiliate companies which totaled $4,856,312 in the first quarter of 1996 and
$6,779,479 in the first quarter of 1995.
Net Investment Income. Net investment income in the first quarter of 1996 was
$11,273,287 compared to $9,903,802 in the first quarter of 1995, an increase of
13.8%. Fueling the growth in investment income was the Company's cash flows
generated from annuity and universal life deposits and operating income.
Realized Gain on Investment. During the first quarter of 1996, the Company
generated realized gains on investments of $10,322. During the first quarter of
1995, the Company had realized gains on investments of $538,950. 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 increased 62% in
the first quarter of 1996 to $2,964,877, compared to $1,833,110, 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 15% from $6,215,505 in the first quarter of
1995 to $7,156,079 in the first quarter of 1996. This increase was due to the
$78 million in deposits made by Policyholders during the 12-month period ending
March 31, 1996. At March 31, 1996, annuity deposits accruing interest were $420
million and universal life deposits accruing interest were $49 million. During
the first quarter of 1996, the interest rate credited on universal life remained
unchanged while the interest rate credited on annuity deposits dropped. 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 5.75%
range.
Commissions. Commissions increased $69,406 to $686,397 in the first quarter of
1996. Most of this commission increase was due to an increase in renewal policy
revenues of 7.9% 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 $1,607,656 in the first quarter of
1996 compared to $1,230,167 for the same period in 1995. The majority of the
increase in general expenses was due to increases in employee salaries and
benefits. Employee salary and benefit expenses rose due to Employee merit pay
increases and Employee benefit cost increases. 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 decreased $482,767 to
$353,497 in the first quarter of 1996. Contributing to this decrease was 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 $186,000 in the first quarter of 1995.
Also included in the taxes, licenses and fees are assessments paid to the state
life insurance guaranty associations. These assessments totaled $6,000 in the
first quarter of 1996 and $340,000 in the first 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 first quarter amounted to
$1,545,891 compared to $1,502,821 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
in the first quarter of 1996 was $481,521, compared to $999,491 in the first
quarter of 1995. The Company's liquidity position remains strong as invested
assets grew by $35 million during the first quarter of 1996 to $604 million at
March 31, 1996.
Premium from the sale of new policies combined with the premium on existing
policies accounted for approximately 38.1% of total revenue in the first quarter
of 1996 and 37.4% for the same period in 1995. Investment income, net of
expenses, generated 60.0% of total revenue in 1996 and 57.3% 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 $20,995,699 in the
first quarter of 1996 and $17,795,401 in the first quarter of 1995.
The Company's current commitments for expenditures as of March 31, 1996, are
primarily for policy death benefits, policy surrenders and withdrawals, general
operating expenses, 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 March 31, 1995, 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 payout which
may be made in 1996 without prior Pennsylvania 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 March 31, 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 March 31, 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 $587 million or 87% 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 expressed under the "Death Benefits" and the "Liquidity and Capital
Resources" sections of the Management's Discussion and Analysis relating to
Management's belief that it's underwriting philosophy and practices are sound
and that it's liquid assets, marketable securities and it's line of credit with
PNC Bank are sufficient to meet forseeable cash requirements are forward looking
statement that involve risks and uncertainties. These risks and uncertainties
include but are not limited to: legislative, judicial, and regulatory changes,
the solvency of PNC Bank in supporting the line of credit, the impact of
competitive products and pricing, product development, spread of risk,
catastrophic events, better (or worse) morbidity rates, securities market
fluctuations, inflation and technological difficulties and advancements.
14
<PAGE>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On May 1, 1996, the Registrant held its Annual Meeting of Stockholders, at which
time three items were voted upon and passed by the stockholders as follows:
A. APPROVAL OF AMENDMENT TO ARTICLES OF AGREEMENT FOR THE PURPOSE OF INCREASING
THE AUTHORIZED CAPITAL STOCK FROM 5,000,000 SHARES, PAR VALUE $1.10 TO
15,000,000 SHARES, PAR VALUE $.40.
The Board of Directors of the Company submitted a proposal to the stockholders
to amend the Articles of Agreement (the Company's Charter) for the purpose of
increasing the authorized capital stock of the Company from 5,000,000 shares,
par value of $1.10 per share to 15,000,000 shares, par value of $.40 per share.
The purpose for increasing the capital stock of the Company is to provide the
necessary shares to permit a capital stock split. Increasing the authorized
capital stock to 15,000,000 shares will also provide capital stock for future
corporate requirements as the Board of Directors may deem advisable.
The Articles of Agreement of the Company state that 500,000 shares (10%) of the
5,000,000 shares of authorized capital stock are not subject to preemptive
rights. In order to maintain the same proportion of shares not subject to
stockholder preemptive rights, the Articles of Agreement are proposed to be
amended to increase the number of such shares from 500,000 to 1,500,000, which
is 10% of the 15,000,000 shares to be authorized.
In order to maintain the required paid-up capital to meet legal requirements in
its operating states, without reducing surplus, the par value of the capital
stock will be reduced from $1.10 per share to $.40 per share if the proposed
capital stock split discussed in the following section is approved. The effect
of this reduction in par value will be to increase the paid-up capital from
$3,465,000 to $3,780,000. The paid-in capital in excess of par will be adjusted
from $945,000 to $630,000.
Accordingly, the following resolutions shall be presented to the stockholders
for their approval at the Annual Meeting:
RESOLVED, That as proposed and submitted to this meeting by resolution of
the Board of Directors, paragraph 5th of the Articles of Agreement be and
the same is hereby amended to read as follows:
5th: The amount of the authorized capital stock of the Company is
$6,000,000 divided into 15,000,000 shares, par value of Forty Cents ($.40)
each, and the shares thus authorized and unissued may be issued from time
to time for such consideration not less than par as the Board of Directors
may direct; and that as to 1,500,000 of said shares representing $600,000
of capital, no stockholder shall have the right to subscribe therefore in
proportion to his interest in the Company; and
RESOLVED, That the proper officers of the Company on behalf of the Company
are hereby authorized and directed to do and perform all acts and to
execute, under seal or otherwise, and to deliver and file all instruments,
articles and documents necessary or proper to render the foregoing fully
effective.
Proxies representing 2,834,501 shares were voted in favor of this proposal,
4,845 shares were voted against the proposal and 2,595 shares abstained.
The amended articles became effective on May 2, 1996.
B. APPROVAL OF THREE-FOR-ONE CAPITAL STOCK SPLIT
The Board of Directors of the Company submitted a proposal to the stockholders
to approve a capital stock split in which each share of capital stock shall be
changed and reclassified into three (3) shares.
15
<PAGE>
The purpose of the capital stock split is to enhance the marketability of the
Company's shares by bringing the price of each share within the reach of more
investors. Frequently, this results in a wider distribution of shares which
makes the shares more readily marketable. Also, this may create greater interest
of the public in the Company's products and business.
Each stockholder is entitled to receive a stock certificate representing two (2)
additional shares for each share held of record on May 2, 1996, the effective
day of the split.
It was not necessary for stockholders to surrender their existing stock
certificates for exchange. On and after the effective date each such certificate
for shares presently outstanding, although stated to represent shares of $3.20
par value or $1.10 par value (as the case may be), automatically represents the
same number of shares of $.40 par value. Those persons who were record holders
of shares at the close of business on May 2, 1996 will be mailed, on May 15,
1996, certificates representing two (2) additional shares, $.40 par value, for
each share held by them on May 2, 1996.
The increased number of shares resulting from the proposed capital stock split
will not cause any change in the proportionate ownership interest in the Company
of any stockholder or in his proportionate voting rights as explained above. The
Company's capital paid up will be increased from $3,465,000 to $3,780,000.
Accordingly, the following resolutions were presented to the stockholders for
their approval at the Annual Meeting:
RESOLVED, That upon filing with the Secretary of State of the Commonwealth
of Pennsylvania of the amendment to the Articles of Agreement increasing
the capital stock, the par value of each share of the capital stock of the
Company shall be changed to $.40 per share, and that each of the present
shares of capital stock of the Company issued and outstanding at the close
of business on the effective date of such amendment shall forthwith be
changed and reclassified into three(3) shares of capital stock, par value
$.40 per share; and
RESOLVED, That the proper officers of the Company on behalf of the Company
are hereby authorized and directed to do and perform all acts and to
execute, under seal or otherwise, and to deliver and file all instruments,
articles and documents necessary or proper to render the foregoing fully
effective.
Proxies representing 2,837,545 shares voted for the proposed stock split, 2,745
shares voted against the stock split and 1,631 shares abstained.
C. The following Directors were elected at the Annual Meeting of Stockholders
for a one-year term and until a successor is elected and qualified:
Peter B. Bartlett
Samual P. Black, Jr.
J. Ralph Borneman, Jr.
Patricia A. Goldman
Susan Hirt Hagen
Thomas B. Hagen
F. William Hirt
Dr. Irvin H. Kochel
Edmund J. Mehl
Stephen A. Milne
John M. Petersen
Seth E. Schofield
Jan R. Van Gorder, Esq.
Harry H. Weil, Esq.
16
<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 March 31, 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 May 3, 1996 /s/ Stephen A. Milne
(Stephen A. Milne, President & CEO)
/s/ Thomas M. Sider
(Thomas M. Sider, Executive Vice President & CFO)
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARCH 31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 452,043,041
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 133,821,387
<MORTGAGE> 6,285,132
<REAL-ESTATE> 1,774,795
<TOTAL-INVEST> 603,955,570
<CASH> (220,593)
<RECOVER-REINSURE> 418,022
<DEFERRED-ACQUISITION> 52,450,160
<TOTAL-ASSETS> 675,441,225
<POLICY-LOSSES> 519,584,628
<UNEARNED-PREMIUMS> 191,728
<POLICY-OTHER> 1,588,935
<POLICY-HOLDER-FUNDS> 3,853,287
<NOTES-PAYABLE> 0
<COMMON> 4,410,000
0
0
<OTHER-SE> 114,635,458
<TOTAL-LIABILITY-AND-EQUITY> 675,441,225
7,167,502
<INVESTMENT-INCOME> 11,273,287
<INVESTMENT-GAINS> 10,322
<OTHER-INCOME> 339,310
<BENEFITS> 11,293,367
<UNDERWRITING-AMORTIZATION> 624,807
<UNDERWRITING-OTHER> 2,647,550
<INCOME-PRETAX> 4,224,697
<INCOME-TAX> 1,545,891
<INCOME-CONTINUING> 2,678,806
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,678,806
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
<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>
