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, 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 May 7, 1997.
1
<PAGE>
INDEX
ERIE FAMILY LIFE INSURANCE COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Financial Position--March 31, 1997 and December 31, 1996
Statements of Operations--Three months ended March 31, 1997 and 1996
Statements of Cash Flows--three months ended March 31, 1997 and 1996
Notes to Financial Statements--March 31, 1997
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 1997 1996
------------ -------------
(Unaudited)
<S> <C> <C>
Investments:
Fixed Maturities, at fair value
(amortized cost of $517,460,314
and $509,627,188, respectively) $ 507,964,694 $ 515,529,699
Equity Securities, at fair value
(cost of $114,354,692 and $111,463,042,
respectively) 119,227,509 116,552,145
Real Estate 1,688,729 1,710,329
Policy Loans 4,526,490 4,381,657
Mortgage Loans on Real Estate 9,671,235 8,955,760
Other Invested Assets 6,878,474 6,787,226
--------------------- ---------------------
Total Investments $ 649,957,131 $ 653,916,816
Cash, including short-term investments of
$10,495,839 and $7,789,063, respectively 10,702,339 6,284,102
Premiums Receivable 2,857,216 2,974,305
Reinsurance Recoverable 56,882 212,583
Other Receivables 284,990 567,216
Accrued Investment Income 11,642,051 9,792,095
Deferred Policy Acquisition Costs 60,092,338 58,026,428
Reserve Credit For Reinsurance Ceded 4,335,771 4,199,907
Other Assets 2,148,863 4,677,208
--------------------- ---------------------
Total Assets $ 742,077,581 $ 740,650,660
--------------------- ---------------------
</TABLE>
See notes to financial statements.
3
<PAGE>
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------ -------------
(Unaudited)
<S> <C> <C>
Liabilities:
Policy Liabilities and Accruals:
Future Life Policy Benefits $ 55,994,502 $ 54,033,860
Policy and Contract Claims 1,807,639 1,703,105
Annuity Deposits 462,019,558 450,570,003
Universal Life Deposits 60,133,118 56,856,590
Supplementary Contracts Not
Including Life Contingencies 835,953 839,258
Other Policyholder Funds 3,525,664 5,763,271
Current Federal Income Tax 1,065,456 686,353
Deferred Federal Income Tax 10,670,624 15,614,492
Reinsurance Premium Due 196,054 203,198
Accounts Payable and Accrued Liabilities 3,184,961 4,519,782
Note Payable to Affiliate 15,000,000 15,000,000
Due to Affiliate 761,870 1,049,007
Dividends Payable 1,275,752 1,181,252
--------------------- ---------------------
Total Liabilities $ 616,471,151 $ 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 (Depreciation) on
Investment Securities, net of
Deferred Tax (Benefit) Expense of ($1,617,981)
and $3,847,065 respectively (3,004,822) 7,144,549
Retained Earnings 124,201,252 121,075,940
--------------------- ----------------------
Net Shareholders' Equity $ 125,606,430 $ 132,630,489
--------------------- ---------------------
Total Liabilities and Shareholders'
Equity $ 742,077,581 $ 740,650,660
--------------------- ---------------------
</TABLE>
See notes to financial statements.
<PAGE>
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
-------------------- --------------------
<S> <C> <C>
Revenues:
Policy:
Life Premiums, net of premiums ceded of
$711,207 and $697,905, respectively $ 7,923,783 $ 6,660,979
Group 544,242 506,523
---------------- ---------------
Total Policy Revenues $ 8,468,025 $ 7,167,502
Investment Income, Net of Expenses of
$337,222 and $350,266, respectively 12,401,283 11,273,287
Realized Gain on Investment 621,782 10,322
Other Income 140,299 136,492
---------------- ---------------
Total Revenues $ 21,631,389 $ 18,587,603
---------------- ---------------
Benefits and Expenses:
Death Benefits, net of reinsurance recoveries
of $6,654and $344,663, respectively 2,431,425 2,964,877
Interest on Annuity Deposits 6,848,225 6,414,959
Interest on Universal Life Deposits 902,349 741,120
Surrender and Other Benefits 286,768 282,425
Increase in Liability for Future Life Policy Benefits,
net of the increase in reserve credit for reinsurance
ceded of $135,864 and $127,456, respectively 1,824,778 889,986
Amortization of Deferred Policy
Acquisition Costs 804,311 624,807
Commissions 238,470 483,579
General Expenses 1,422,590 1,607,656
Taxes, Licenses and Fees 286,455 353,497
---------------- ---------------
Total Benefits and Expenses $ 15,045,371 $ 14,362,906
---------------- ---------------
Income From Operations 6,586,018 4,224,697
Federal Income Tax
Current 1,663,776 1,012,431
Deferred 521,178 533,460
---------------- ---------------
Total Federal Income Tax 2,184,954 1,545,891
---------------- ---------------
Net Income $ 4,401,064 $ 2,678,806
---------------- ---------------
Net Income Per Share $ 0.47 $ 0.28
---------------- ---------------
Dividends Declared Per Share $ 0.135 $ 0.125
---------------- ---------------
</TABLE>
5
<PAGE>
Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
-------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,401,064 $ 2,678,806
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of bond and mortgage
premium and discount 318,308 70,710
Amortization of deferred policy acquisition
costs 804,311 624,807
Real Estate Depreciation 21,600 21,600
Deferred federal income taxes 521,178 533,460
Realized gains on investments (621,782) (10,322)
Decrease in other assets 2,528,345 594,908
Decrease in other receivables 282,226 34,814
Decrease in premium receivable 117,089 277,120
(Increase) decrease in reinsurance recoverable
and reserve credits 19,837 (279,964)
Increase in accrued investment income (1,849,956) (1,123,561)
Increase in deferred policy acquisition
costs (2,870,221) (2,312,675)
Increase in future policy benefits and claims 2,065,176 1,709,351
Decrease in other policyholder funds (2,237,607) (1,385,610)
Decrease in reinsurance premium due (7,144) (186,402)
Decrease in accounts payable and accrued
liabilities and due to affiliate (1,621,958) (1,014,961)
Increase in Federal income taxes currently payable 379,103 249,440
------------------ -----------------
Net cash provided by operating
activities 2,249,569 481,521
------------------ -----------------
Cash flows from investing activities:
Fixed Maturity Securities:
Available-for-Sale:
Maturities $ 7,680,529 $ 7,829,826
Sales 0 6,955,210
Purchases (17,547,090) (60,639,862)
Equity Securities:
Sales 6,336,822 4,609,846
Purchases (6,891,650) (9,549,400)
Loans made to policyholders (320,749) (299,911)
Payments received on policy loans 175,916 177,741
Purchase of other invested assets (125,026) (2,172,889)
Sale of other invested assets 33,778 54,096
Principal payments received on mortgage
loans 32,413 949,830
Purchase of mortgage loans (747,801) 0
------------------ -----------------
Net cash used in investing activities (11,372,858) (52,085,513)
------------------ -----------------
</TABLE>
6
<PAGE>
Statements of Cash Flows--Continued (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
-------------------- ------------------
<S> <C> <C>
Cash flows from financing activities:
Increase in annuity and supplementary
contract deposits 11,446,250 14,904,985
Increase in Universal Life Deposits 3,276,528 2,702,067
Dividends paid to shareholders (1,181,252) (1,071,000)
------------------ -----------------
Net cash provided by financing
activities $ 13,541,526 $ 16,536,052
------------------ -----------------
Net increase (decrease) in cash and
short-term cash investments 4,418,237 (35,067,940)
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 $ 10,702,339 $ (220,593)
------------------ -----------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 0 $ 0
Income taxes 1,223,896 762,992
</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, 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 March 31, 1997, 78.2% of total invested
assets were invested in fixed maturities. Preferred stocks represent 16.9% or
$109.7 million and common stocks represent 1.5% or $9.5 million of total
invested assets at March 31, 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 March 31, 1997 consist of investments in bonds
of $517 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, 1997 the carrying value of
fixed maturities was $507,964,694, or 78.2% of total invested assets. At March
31, 1997, the amortized cost, carrying/ market value, gross unrealized gains and
gross unrealized losses for fixed maturities were as follows:
Fixed Maturities at 3-31-97
<TABLE>
<CAPTION>
Carrying/ Gross Gross
Amortized Market Unrealized Unrealized
Cost Value Gains Losses
<S> <C> <C> <C> <C>
U.S. Treasuries & Agency $ 45,666,716 $ 44,965,298 $ 489,215 $ 1,190,633
Foreign Governments 2,986,500 2,889,210 0 97,290
States & Political Subdivisions 4,671,998 4,933,116 261,117 0
Special Revenue 4,375,000 4,532,699 157,699 0
Public Utilities 90,940,280 88,661,114 1,371,839 3,651,004
U.S. Industrial & Miscellaneous 361,757,752 354,661,297 3,549,613 10,646,068
Foreign Industrial & Miscellaneous 7,062,068 7,321,960 259,892 0
------------------- ------------------- ------------------- ----------------
Total Fixed Maturities $ 517,460,314 $ 507,964,694 $ 6,089,375 $ 15,584,995
</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 $312
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 March 31, 1997, the Company's five largest investments in corporate debt
securities totaled $32,610,429, none of which individually exceeded $7.9
million. These investments had a market value of $32.0 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, 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 March 31, 1997, common and
preferred stock held by the Company had a cost of $114,354,692 and a market
value of $119,227,509, representing an unrealized gain of $4,872,817. 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, 96.5% or
$105.8 million of which are of the "highest" or "high" quality, as defined by
the NAIC. The remaining $3.8 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, 3-31-97
<TABLE>
<CAPTION>
Gross Gross
Market Unrealized Unrealized
Cost Value Gains Losses
<S> <C> <C> <C> <C>
Common Stock
Industrial & Miscellaneous $ 9,451,656 $ 9,499,195 $ 511,486 $ 463,948
Preferred Stocks
Public Utilities 4,000,000 3,920,000 0 80,000
U.S. Banks, Trusts &
Insurance 77,562,165 81,031,585 4,109,020 639,600
Foreign Banks, Trusts &
Insurance 3,000,000 3,240,000 240,000 0
Industrial & Miscellaneous 16,440,871 17,696,729 1,255,858 0
Foreign Industrial &
Miscellaneous 3,900,000 3,840,000 0 60,000
------------------- ------------------- --------------- ---------------
Total Equity Securities $ 114,354,692 $ 119,227,509 $ 6,116,364 $ 1,243,548
</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, 1997, the Company did not own any derivatives.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction with the
financial statements and related notes found on pages 3 through 10, since they
contain important information that is helpful in evaluating the Company's
operating results and financial condition.
OVERVIEW
Erie Family Life Insurance Company (the Company) is incorporated in the
Commonwealth of Pennsylvania. The Company is primarily engaged in the business
of underwriting and selling nonparticipating individual and group life insurance
policies, including universal life, and annuity products. The Company markets
its products through independent Agents and is licensed in eleven states 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 $4,401,064, or $.47 per share, in the first quarter of
1997 from $2,678,806 or $.28 per share, in the first quarter of 1996, an
increase of 64%. Increases in non-recurring realized capital gains, policy
revenues and investment income were the primary reasons for the increase in net
income. Non-recurring realized capital gains increased $611,460 to $621,782 in
the first quarter of 1997. Operating results remained strong as total policy
revenue grew by 18% to $8,468,025 in the current period. Investment income net
of expenses grew by 10% from $11,273,287 in the first quarter of 1996 to
$12,401,283 in the first quarter of 1997.
REVENUES, BENEFITS, AND EXPENSES
Policy Revenues. Total policy revenues increased 18.1% to $8,468,025 in the
first quarter of 1997 from $7,167,502 in the first quarter of 1996. Included in
these totals are first year life policy revenues of $1,887,123 in the first
quarter of 1997 and $1,530,731 in the first quarter of 1996, an increase of
23.3%. Some of the growth in first year policy revenues was due to premium
received in December 1996, but not placed until 1997, for the Erie Insurance
Group agent travel incentive program, "California Dreamin".
Group policy revenues increased from $506,523 in the first quarter of 1996 to
$544,242 in the first quarter of 1997.
Deposits. First year and single universal life and annuity deposits were
$14,599,707 in the first quarter of 1997 and $16,196,925 in the first quarter of
1996, representing a decrease of 9.9%. Included in these amounts are structured
settlement annuities sold to the Erie Insurance Group property/casualty
affiliate companies which totaled $5,363,165 in the first quarter of 1997 and
$4,856,312 in the first quarter of 1996.
Net Investment Income. Net investment income in the first quarter of 1997 was
$12,401,283 compared to $11,273,287 in the first quarter of 1996, an increase of
10%. 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 1997, the Company
generated realized gains on investments of $621,782. During the first quarter of
1996, the Company had realized gains on investments of $10,322. 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 18% in
the first quarter of 1997 to $2,431,425, compared to $2,964,877, 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 8% from $7,156,079 in the first quarter of
1996 to $7,750,574 in the first quarter of 1997. This increase was due to the
$66 million in deposits made by Policyholders during the 12-month period ending
March 31, 1997. At March 31, 1997, annuity deposits accruing interest were $463
million and universal life deposits accruing interest were $60 million. During
the first quarter of 1997, the interest rate credited on universal life
increased while the interest rate credited on annuity deposits dropped. The
current interest rate credited on universal life deposits is in the 6.25% to
7.25% range while the rate credited on annuity deposits is in the 5.00% to 6.25%
range.
Commissions. Commissions decreased $245,109 to $238,470 in the first quarter of
1997. Most of this commission decrease was due to the commission expense related
to the Erie Insurance Group travel incentive program, "California Dreamin'", in
1996. 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.
Commission reimbursements from ceded reinsurance contracts have been deducted
from the gross commission expense. These reimbursements represent the first- and
second-year commissions paid on policies that were reinsured under a number of
different reinsurance agreements. These reimbursements totaled $208,261 in the
first quarter of 1997 and $202,818 in the first quarter of 1996.
General Expenses. General expenses amount to $1,422,590 in the first quarter of
1997 compared to $1,607,656 for the same period in 1996. The majority of the
decrease in general expenses was due to a reduction in data processing expense.
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 $67,042 to
$286,455 in the first quarter of 1997. This 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 second quarter amounted to
$2,184,954 compared to $1,545,891 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 first quarter of 1997 was $2,249,568, compared to $481,521 for the first
quarter of 1996.
Premium from the sale of new policies combined with the premium on existing
policies accounted for approximately 39.1% of total revenue in the first quarter
of 1997 and 38.6% for the same period in 1996. Investment income, net of
expenses, generated 57.3% of total revenue in 1997 and 60.6% 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 $19,318,567 in the
first quarter of 1997 and $20,995,699 in the first quarter of 1996.
The Company's current commitments for expenditures as of March 31, 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 March 31, 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 March 31, 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 March 31, 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 $629 million or 85% 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 4. Submission of Matter to a Vote of Security Holders
On April 29, 1997, the Registrant held its Annual Meeting of Shareholders:
A. The following Directors were elected at the Annual Meeting of Shareholders
for a one-year term and until a successor is elected and qualified:
Peter B. Bartlett
Samuel P. Black, III
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.
B. The following other matters were voted upon at the meeting and the
following number of affirmative votes were cast with respect to such
matters:
(1) The ratification of the firm of Brown, Schwab, Bergquist & Company as
independent public accountants to examine the financial statements
and perform the annual audit of the Company for the year ending
December 31, 1997 was ratified. This ratification received 8,854,112
affirmative votes, 2,034 negative votes with no abstentions.
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, 1997.
15
<PAGE>
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 7, 1997 /s/ Stephen A. Milne
(Stephen A. Milne, President & CEO)
/s/ Thomas M. Sider
(Thomas M. Sider, Executive Vice President & CFO)
16
<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 MARCH 31, 1997, AND 1996 AND ARE QUALIFIED IN THEIR
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<DEBT-HELD-FOR-SALE> 507,964,694 0
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 119,227,509 0
<MORTGAGE> 9,671,235 0
<REAL-ESTATE> 1,688,729 0
<TOTAL-INVEST> 649,957,131 0
<CASH> 10,702,339 0
<RECOVER-REINSURE> 56,882 0
<DEFERRED-ACQUISITION> 60,092,338 0
<TOTAL-ASSETS> 742,077,581 0
<POLICY-LOSSES> 578,983,131 0
<UNEARNED-PREMIUMS> 230,592 0
<POLICY-OTHER> 1,807,639 0
<POLICY-HOLDER-FUNDS> 3,525,664 0
<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 4,410,000 0
<OTHER-SE> 121,196,430 0
<TOTAL-LIABILITY-AND-EQUITY> 742,077,581 0
8,468,025 7,167,502
<INVESTMENT-INCOME> 12,401,283 11,273,287
<INVESTMENT-GAINS> 621,782 10,322
<OTHER-INCOME> 140,299 136,492<F1>
<BENEFITS> 12,293,545 11,293,367
<UNDERWRITING-AMORTIZATION> 804,311 624,807
<UNDERWRITING-OTHER> 1,947,515 2,444,732<F1>
<INCOME-PRETAX> 6,586,018 4,224,697
<INCOME-TAX> 2,184,954 1,545,891
<INCOME-CONTINUING> 4,401,064 2,678,806
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,401,064 2,678,806
<EPS-PRIMARY> 0.47 0.28
<EPS-DILUTED> 0.47 0.28
<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 THREE MONTHS ENDED MARCH 31, 1996 REPRESENTS
AMOUNTS THAT HAVE BEEN RECLASSIFIED TO CONFORM TO THE CURRENT YEAR'S
PRESENTATION.
</FN>
</TABLE>
