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, 1997
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, 1997.
1
<PAGE>
INDEX
ERIE FAMILY LIFE INSURANCE COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Financial Position--September 30, 1997 and
December 31, 1996
Statements of Operations--Three months ended September 30, 1997 and
1996, nine months ended September 30, 1997 and 1996
Statements of Cash Flows--nine months ended September 30, 1997 and 1996
Notes to Financial Statements--September 30, 1997
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 1997 1996
------------ -------------
(Unaudited)
<S> <C> <C>
Investments:
Fixed Maturities, at fair value
(amortized cost of $535,670,934
and $509,627,188, respectively) $ 550,980,864 $ 515,529,699
Equity Securities, at fair value
(cost of $112,762,312 and $111,463,042,
respectively) 124,640,218 116,552,145
Real Estate 1,645,529 1,710,329
Policy Loans 4,916,919 4,381,657
Mortgage Loans on Real Estate 10,043,975 8,955,760
Other Invested Assets 7,072,307 6,787,226
--------------------- ---------------------
Total Investments $ 699,299,812 $ 653,916,816
Cash, including short-term investments of
$28,166,277 and $7,789,063, respectively 26,672,611 6,284,102
Premiums Receivable 3,064,627 2,974,305
Reinsurance Recoverable 227,365 212,583
Other Receivables 290,263 567,216
Accrued Investment Income 11,742,957 9,792,095
Deferred Policy Acquisition Costs 63,176,281 58,026,428
Reserve Credit For Reinsurance Ceded 4,668,635 4,199,907
Other Assets 2,413,039 4,677,208
--------------------- ---------------------
Total Assets $ 811,555,590 $ 740,650,660
===================== =====================
</TABLE>
See notes to financial statements.
3
<PAGE>
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------ --------------
(Unaudited)
<S> <C> <C>
Liabilities:
Policy Liabilities and Accruals:
Future Life Policy Benefits $ 58,605,674 $ 54,033,860
Policy and Contract Claims 1,990,727 1,703,105
Annuity Deposits 478,110,998 450,570,003
Universal Life Deposits 66,140,483 56,856,590
Supplementary Contracts Not
including Life Contingencies 819,762 839,258
Other Policyholder Funds 7,744,231 5,763,271
Current Federal Income Tax 618,979 686,353
Deferred Federal Income Tax 22,773,250 15,614,492
Reinsurance Premium Due 273,219 203,198
Accounts Payable and Accrued Liabilities 3,500,216 4,519,782
Note Payable to Affiliate 15,000,000 15,000,000
Due to Affiliate 839,750 1,049,007
Dividends Payable 2,551,504 1,181,252
--------------------- ---------------------
Total Liabilities $ 658,968,793 $ 608,020,171
--------------------- ---------------------
Shareholders' Equity:
Common Stock, $.40 Par Value Per Share;
Authorized 15,000,000 Shares; 9,450,000
Shares Issued And Outstanding $ 3,780,000 $ 3,780,000
Additional Paid-In Capital 630,000 630,000
Net Unrealized Appreciation on Investment
Securities, net of Deferred Tax of $9,510,773
and $3,847,065, respectively 17,662,865 7,144,549
Retained Earnings 130,513,932 121,075,940
--------------------- ---------------------
Net Shareholders' Equity $ 152,586,797 $ 132,630,489
--------------------- ---------------------
Total Liabilities and Shareholders'
Equity $ 811,555,590 $ 740,650,660
===================== =====================
</TABLE>
See notes to financial statements.
4
<PAGE>
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Policy:
Life Premiums, net of premiums ceded of
$887,210, $1,047,438, $2,608,848 and
$2,601,268, respectively $ 8,097,260 $ 7,192,211 $ 24,285,999 $ 21,364,064
Group 564,167 488,260 1,657,792 1,469,294
--------------- ---------------- --------------- ---------------
Total Policy Revenues $ 8,661,427 $ 7,680,471 $ 25,943,791 $ 22,833,358
Investment Income, Net of Expenses of
$328,986, $355,056, $976,860 and
$1,057,275, respectively 12,418,846 11,622,874 37,031,620 34,297,482
Realized Gain on Investment 2,507,707 898,400 3,875,794 1,671,027
Other Income 189,902 126,256 515,326 477,282
--------------- ---------------- --------------- ---------------
Total Revenues $ 23,777,882 $ 20,328,001 $ 67,366,531 $ 59,279,149
--------------- ---------------- --------------- ---------------
Benefits and Expenses:
Death Benefits, net of reinsurance recoveries
of $244,888, $271,318, $760,790 and
$1,657,797 respectively 2,346,461 1,618,047 6,998,725 6,676,726
Interest on Annuity Deposits 6,851,856 6,305,008 20,570,532 18,899,418
Interest on Universal Life Deposits 1,029,153 821,821 2,873,383 2,318,720
Surrender and Other Benefits 269,319 215,326 882,066 796,802
Increase in Liability for Future Life Policy
Benefits, net of the increase in reserve
credit for reinsurance ceded of $166,048,
$183,754 $468,728 and $481,641 respectively 1,343,157 1,277,405 4,103,086 3,241,349
Amortization of Deferred Policy
Acquisition Costs 693,000 684,486 2,253,404 2,072,515
Commissions, net of reinsurance reimbursements
of $331,582, $442,173, $927,307
and $945,771 respectively 327,071 413,753 1,206,028 1,447,412
General Expenses 1,602,345 1,234,778 5,008,760 4,147,494
Taxes, Licenses and Fees 257,666 1,536,977 829,338 2,241,710
--------------- ---------------- --------------- ---------------
Total Benefits and Expenses $ 14,720,028 $ 14,107,601 $ 44,725,322 $ 41,842,146
--------------- ---------------- --------------- ---------------
Income From Operations 9,057,854 6,220,400 22,641,209 17,437,003
Federal Income Tax
Current 3,146,011 (280,026) 6,605,161 2,647,678
Deferred 385,172 1,958,423 1,495,050 3,157,122
--------------- ---------------- --------------- ----------------
Total Federal Income Tax 3,531,183 1,678,397 8,100,211 5,804,800
--------------- ---------------- --------------- ----------------
Net Income $ 5,526,671 $ 4,542,003 $ 14,540,998 $ 11,632,203
=============== ================ =============== ================
Net Income Per Share $ 0.58 $ .48 $ 1.54 $ 1.23
=============== ================ =============== ================
Dividends Declared Per Share $ 0.135 $ .125 $ 0.54 $ .50
=============== ================ =============== ================
</TABLE>
5
<PAGE>
Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
-------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,540,996 $ 11,632,203
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of bond and mortgage 926,033 214,728
premium and discount
Amortization of deferred policy acquisition 2,253,404 2,072,515
costs
Real Estate Depreciation 64,800 64,800
Deferred federal income taxes 1,495,050 3,157,122
Realized gains on investments (3,875,794) (1,671,027)
Decrease in other assets 2,264,169 774,268
Increase in other receivables 276,953 14,598
Increase in premium receivable (90,322) (34,386)
Increase in reinsurance recoverable
and reserve credits (483,510) (324,598)
Increase in accrued investment income (1,950,862) (1,221,228)
Increase in deferred policy acquisition
costs (7,403,257) (7,347,658)
Increase in future policy benefits and claims 4,859,436 3,597,871
Increase (decrease) in other policyholder funds 1,980,960 (2,296,930)
Increase (decrease) in reinsurance premium due 70,021 (244,545)
Increase (decrease) in accounts payable and accrued
liabilities and due to affiliate (1,228,824) 1,619,365
Decrease in Federal income taxes currently payable (67,374) (789,450)
Net cash provided by operating ----------------- -----------------
activities 13,631,879 9,217,648
----------------- -----------------
Cash flows from investing activities:
Fixed Maturity Securities:
Maturities $ 18,504,108 $ 12,215,710
Sales 17,755,850 14,257,447
Purchases (64,669,917) (87,753,820)
Equity Securities:
Sales 38,613,027 13,600,665
Purchases (34,596,577) (13,660,263)
Loans made to policyholders (1,053,304) (981,689)
Payments received on policy loans 518,041 482,875
Purchase of other invested assets (774,745) (3,150,344)
Sale of other invested assets 475,464 349,789
Purchase of mortgage loans (1,183,667) (1,968,775)
Principal payments received on mortgage
loans 95,714 995,442
------------------ -----------------
Net cash used in investing activities (26,316,006) (65,612,963)
------------------ -----------------
</TABLE>
6
<PAGE>
Statements of Cash Flows--Continued (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
-------------------- -------------------
<S> <C> <C>
Cash flows from financing activities:
Increase in annuity and supplementary
contract deposits $ 27,521,499 $ 29,895,609
Increase in Universal Life Deposits 9,283,893 8,107,852
Dividends paid to shareholders (3,732,756) (3,433,504)
------------------ -----------------
Net cash provided by financing
activities $ 33,072,636 $ 34,569,957
------------------ -----------------
Net increase (decrease) in cash and
short-term cash investments 20,388,509 (21,825,358)
Cash and short-term cash investments at
beginning of year 6,284,102 34,847,347
------------------ -----------------
Cash and short-term cash investments at
end of quarter $ 26,672,611 $ 13,021,989
================== =================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 483,750 $ 485,635
Income taxes 6,473,896 3,437,128
</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, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. 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, 1996.
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, 1997, 78.8% of total invested
assets were invested in fixed maturities. Preferred stocks represent 13.3% or
$92.9 million and common stocks represent 4.5% or $31.7 million of total
invested assets at September 30, 1997, while real estate and mortgage loans make
up only 1.7% of total invested assets. Mortgage loan and real estate investments
have the potential for higher returns but also carry more risk, including less
liquidity and greater uncertainty of rate of return. Consequently these
investments have been kept to a minimum.
The Company's fixed maturities at September 30, 1997 consist of investments in
bonds of $535 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, 1997 the
carrying value of fixed maturities was $550,980,864, or 78.8% of total invested
assets. At September 30, 1997, the amortized cost, carrying/market value, gross
unrealized gains and gross unrealized losses for fixed maturities were as
follows:
Fixed Maturities at 9-30-97
<TABLE>
<CAPTION>
Carrying/ Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses
<S> <C> <C> <C> <C>
U.S. Treasuries & Agency $ 12,966,919 $ 13,598,661 $ 641,054 $ 9,312
Foreign Governments 2,987,352 2,921,250 0 66,102
States & Political Subdivisions 2,760,825 3,001,244 240,419 0
Special Revenue 14,915,439 15,578,422 906,733 243,750
Public Utilities 81,088,837 82,652,198 2,193,335 629,974
U.S. Industrial & Miscellaneous 409,057,555 420,751,069 13,200,799 1,507,285
Foreign Industrial & Miscellaneous 11,894,007 12,478,020 596,359 12,346
------------------- ------------------- ------------------- ----------------
Total Fixed Maturities $ 535,670,934 $ 550,980,864 $ 17,778,699 $ 2,468,769
</TABLE>
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The bond investments included in the fixed maturity category consist of
high-quality, marketable securities, all of which, are rated at investment grade
levels (Baa/BBB or better). Included in this investment-grade category are $350
million of bonds characterized as of the "highest" quality or "Class 1"
securities as defined by the National Association of Insurance Commissioners
(NAIC). 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, 1997, the Company's five largest investments in corporate debt
securities totaled $32,569,653, none of which individually exceeded $8.0
million. These investments had a market value of $33.6 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, 1997. 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, 1997, common and
preferred stock held by the Company had a cost of $112,762,312 and a market
value of $124,640,218, representing an unrealized gain of $11,877,906. 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, 94.7% or
$87.9 million of which are of the "highest" or "high" quality, as defined by the
NAIC. The remaining $5.0 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, 9-30-97
<TABLE>
<CAPTION>
Gross Gross
Market Unrealized Unrealized
Cost Value Gains Losses
<S> <C> <C> <C> <C>
Common Stock
Banks, Trusts & Insurance
Companies $ 730,500 $ 884,375 $ 153,875 $ 0
Industrial & Miscellaneous 27,567,876 30,845,425 5,705,017 2,427,468
------------------- ------------------- --------------- ---------------
Total Common Stock 28,298,376 31,729,800 5,858,892 2,427,468
Preferred Stocks
Public Utilities 4,000,000 4,030,080 30,080 0
U.S. Banks, Trusts &
Insurance Companies 56,358,065 62,061,370 5,921,785 218,480
Foreign Banks, Trusts &
Insurance Companies 7,765,000 7,931,400 322,600 156,200
U.S. Industrial & Miscellaneous 12,440,871 14,847,568 2,406,697 0
Foreign Industrial &
Miscellaneous 3,900,000 4,040,000 140,000 0
------------------- ------------------- --------------- ---------------
Total Preferred Stock 84,463,936 92,910,418 8,821,162 374,680
Total Equity Securities $ 112,762,312 $ 124,640,218 $ 14,680,054 $ 2,802,148
</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 values presented in the
financial statements.
At September 30, 1997, the Company did not own any derivatives.
NOTE E - DIVIDEND DECLARED
On September 15,1997, the Board of Directors of the Company approved the fourth
quarter dividend of $ .135 per share. The dividend will be paid on January 2,
1998 to shareholders of record as of December 17, 1997.
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 increased to $5,526,671, or $.58 per share, in the third quarter of
1997 from $4,542,003 or $.48 per share, in the third quarter of 1996, an
increase of 21.7%. The increase in nonrecurring realized gains on investments
from $898,400 in the third quarter of 1996 to $2,507,707 in the third quarter of
1997 was the primary reason for the increase in net income. Operating results
continued to be strong as total policy revenue grew by 12.8% to $8,661,427 in
the current period. Investment income net of expenses rose 6.8% from $11,622,874
in the third quarter of 1996 to $12,418,846 in the third quarter of 1997.
REVENUES, BENEFITS, AND EXPENSES
Policy Revenues. Total policy revenues increased 12.8% to $8,661,427 in the
third quarter of 1997 from $7,680,471 in the third quarter of 1996. Included in
these totals are first year life policy revenues of $1,712,541 in the third
quarter of 1997 and $1,618,493 in the third quarter of 1996, an increase of
5.8%.
Group policy revenues increased from $488,260 in the third quarter of 1996 to
$564,167 in the third quarter of 1997.
Deposits. First year and single universal life and annuity deposits were
$10,480,444 in the third quarter of 1997 and $7,423,011 in the third quarter of
1996, an increase of 41%. Included in these amounts are structured settlement
annuities sold to the Erie Insurance Group property/casualty affiliate companies
which totaled $4,030,897 in the third quarter of 1997 and $2,581,252 in the
third quarter of 1996.
Net Investment Income. Net investment income in the third quarter of 1997 was
$12,418,846 compared to $11,622,874 in the third quarter of 1996, an increase of
6.8%. 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 third quarter of 1997, the Company
generated realized gains on investments of $2,507,707. During the third quarter
of 1996, the Company had realized gains on investments of $898,400. 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 45% in
the third quarter of 1997 to $2,346,461, compared to $1,618,047, for the same
period in 1996. 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 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 11% from $7,126,829 in the third quarter of
1996 to $7,881,009 in the third quarter of 1997. This increase was due to the
$70 million in deposits made by Policyholders during the 12-month period ending
September 30, 1997. At September 30, 1997, annuity deposits accruing interest
were $478 million and universal life deposits accruing interest were $66
million. During the third quarter of 1997, the interest rate credited on
universal life and annuity deposits remained unchanged. The current interest
rate credited on universal life deposits is in the 5.25% to 6.00% 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 $684,486 in the third quarter of 1996
and $693,000 in the third quarter of 1997.
Commissions. Commissions decreased $86,682 to $327,071 in the third quarter of
1997. The decrease in commission expense reflects lower accruals for travel
incentive programs in the third quarter of 1997 versus the third quarter of
1996. Excluding the effect of travel incentive costs, commissions increased
$33,318 or 8.1%. 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 $1,602,345 in the third quarter of
1997 compared to $1,234,778 for the same period in 1996. The majority of the
increase in general expenses was due to increases in employee salaries and
benefits. Employee salary and benefits 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 by $1,279,311 to
$257,666 in the third quarter of 1997. The decrease in taxes, licenses, and fees
reflects lower accruals for state life and health guaranty assessments in the
third quarter of 1997 versus the third quarter of 1996. No accruals were needed
during the third quarter of 1997. The remaining decrease was caused by the
recognition of premium tax credits now available for annuity guaranty
assessments paid in prior years.
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
$3,531,183 compared to $1,678,397 for the same period in 1996. The Company's
effective federal income tax rates in 1997 and 1996 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, 1997 was $13,631,879, compared to
$9,217,648 for the nine months ended September 30, 1996. The Company's liquidity
position remains strong as invested assets grew by $45 million during the first
nine months of 1997 to $699 million at September 30, 1997.
Premium from the sale of new policies combined with the premium on existing
policies accounted for approximately 36.4% of total revenue in the third quarter
of 1997 and 37.8% for the same period in 1996. Investment income, net of
expenses, generated 52.2% of total revenue in 1997 and 57.2% in 1996.
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 $14,396,286 in the
third quarter of 1997 and $10,762,252 in the third quarter of 1996.
The Company's current commitments for expenditures as of September 30, 1997, 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 September 30, 1997, 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 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 1997 without prior Pennsylvania Commissioner approval is
$10,516,000.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
The Company's 1996 year-end Risk Based Capital Analysis as reflected in its 1996
statutory annual statement shows total adjusted capital of $83,833,559 and
authorized control level risk based capital of $11,835,459. 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, 1997,
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, 1997, 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 $702 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>
OTHER MATTERS
New Chief Financial Officer Appointed
Philip A. Garcia, CPA, FLMI, ACS, was named executive vice president and chief
financial officer on October 1, 1997. Mr. Garcia has been with the Company for
the past 17 years and had been senior vice president and controller since
September 1993.
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, 1997.
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 5, 1997
/s/ Jan R. Van Gorder
(Jan R. Van Gorder, Executive Vice President,
Secretary and General Counsel)
/s/ Philip A. Garcia
(Philip A. Garcia, Executive Vice President & CFO)
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ERIE
FAMILY LIFE INSURANCE COMPANY'S STATEMENTS OF FINANCIAL POSITION AND STATEMENTS
OF OPERATION DATED SEPTEMBER 30,1997, AND 1996 AND ARE QUALIFIED IN THEIR
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<DEBT-HELD-FOR-SALE> 550,980,864 0
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 124,640,218 0
<MORTGAGE> 10,043,975 0
<REAL-ESTATE> 1,645,529 0
<TOTAL-INVEST> 699,299,812 0
<CASH> 26,672,611 0
<RECOVER-REINSURE> 227,365 0
<DEFERRED-ACQUISITION> 63,176,281 0
<TOTAL-ASSETS> 811,555,590 0
<POLICY-LOSSES> 603,676,917 0
<UNEARNED-PREMIUMS> 190,163 0
<POLICY-OTHER> 1,990,727 0
<POLICY-HOLDER-FUNDS> 7,744,231 0
<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 4,410,000 0
<OTHER-SE> 148,176,797 0
<TOTAL-LIABILITY-AND-EQUITY> 811,555,590 0
25,943,791 22,833,358
<INVESTMENT-INCOME> 37,031,620 34,297,482
<INVESTMENT-GAINS> 3,875,794 1,671,027
<OTHER-INCOME> 515,326 477,282<F1>
<BENEFITS> 35,427,792 31,933,015
<UNDERWRITING-AMORTIZATION> 2,253,404 2,072,515
<UNDERWRITING-OTHER> 7,044,126 7,836,616<F1>
<INCOME-PRETAX> 22,641,209 17,437,003
<INCOME-TAX> 8,100,211 5,804,800
<INCOME-CONTINUING> 14,540,998 11,632,203
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 14,540,998 11,632,203
<EPS-PRIMARY> 1.54 1.23
<EPS-DILUTED> 1.54 1.23
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
<FN>
<F1>THE INFORMATION REPORTED FOR THE NINE MONTHS ENDED SEPTEMBER 30,1996
REPRESENTS AMOUNTS THAT HAVE BEEN RECLASSIFIED TO CONFORM TO THE CURRENT YEAR'S
PRESENTATION.
</FN>
</TABLE>
