FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from to
Commission File Number 2-39458
ERIE FAMILY LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1186315
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 Erie Insurance Place, Erie, Pennsylvania 16530
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (814) 870-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.40 par value
(Tile of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 9,450,000 shares of Common
Stock outstanding on February 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Annual Report to shareholders for the fiscal year
ended December 31, 1996 (the "Annual Report") are incorporated by reference into
Parts II and IV of this Form 10-K Report.
1
<PAGE>
INDEX
ITEM NUMBER AND CAPTION PAGE
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a
Vote of Security Holders 8
Item 5. Market for Registrant's Common Stock
and Related Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
Item 8. Financial Statements and Supplementary Data 9
Item 9. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosure 9
Item 10. Directors and Executive Officers
of the Registrant 10
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain
Beneficial Owners and Management 19
Item 13. Certain Relationships and Related
Transactions 21
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 22
2
<PAGE>
PART I
ITEM 1. BUSINESS
Erie Family Life Insurance Company (hereinafter referred to as "The
Company", the "Registrant" or "Erie Family Life") was incorporated in the
Commonwealth of Pennsylvania on May 23, 1967 and commenced business on
September 1, 1967. The Company is primarily engaged in the business of
underwriting and selling non-participating individual and group life
insurance policies, including universal life. Erie Family Life also sells
individual and group annuities. Erie Family Life is owned 21.6 % by Erie
Indemnity Company and 52.2% by Erie Insurance Exchange. The remaining
stock is held by the public, predominantly agents and employees of the
Erie Insurance Group.
Erie Indemnity Company is a Pennsylvania business corporation formed in
1925 to be the attorney-in-fact for Erie Insurance Exchange, a
Pennsylvania-domiciled reciprocal insurance exchange. The Erie Indemnity
Company's principal business activity consists of management of the
Exchange. The Erie Indemnity Company also is engaged in the
property/casualty insurance business through its wholly owned
subsidiaries, Erie Insurance Company (Erie Insurance Co.), Erie Insurance
Company of New York (Erie NY) and Erie Insurance Property & Casualty
Company (Erie P&C) and through its management of Flagship City Insurance
Company (Flagship), a subsidiary of the Erie Insurance Exchange. Together
with the Erie Insurance Exchange, the Erie Indemnity Company and its
subsidiaries and affiliates, including Erie Family Life, operate
collectively under the name "Erie Insurance Group."
Products
The Company's portfolio of life insurance includes the usual forms of
permanent life, endowment and term policies, including whole life, family
income, mortgage and decreasing term, group, and universal life
insurance. In terms of face value, new life business issued in 1996 had a
ratio of 4:1 of term insurance to whole life insurance coverage.
Life insurance premiums and annuity deposits have been the primary
sources of cash inflows for the Company.
Classes of Life Insurance
Percentage of Total Sales
For the year ended December 31,
<TABLE>
<CAPTION>
Class 1996 1995 1994 1993 1992
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ordinary Life (including Total
and Permanent Disability and
Additional Accidental Death) 93.3% 91.8% 92.1% 92.3% 91.9%
Group 6.7 8.2 7.9 7.7 8.1
------- ----- ------ ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
Certain elements of revenue and expense reflect the requirements of
Financial Accounting Standard (FAS) 97. FAS 97 prescribes a uniform
method by which life insurance companies record certain long-term
3
<PAGE>
contracts, specifically annuities, universal life, and other interest
sensitive products. This method involves separating the premium income
into the "premium" portion (shown in the sales figures) which represents
insurance protection purchased, and the "deposit" portion, which
represents funds to be held at interest for future uses. Under this
standard, the "deposit" portion of the premium income is accounted for
using methods applicable to comparable "interest bearing obligations" of
other types of financial institutions.
Structured settlement annuities sold to affiliate companies represented
$13,504,953 in annuity deposits in 1996, $22,018,313 in 1995 and
$11,431,965 in 1994. Also included in the annuity deposits are annuity
contracts purchased by the Erie Insurance Group Retirement Plan for
Employees. These annuity contracts purchased totaled $4,894,042 in 1996,
$6,024,125 in 1995 and $8,880,714 in 1994.
Classes of Deposits
Total Deposits
For the year ended December 31,
<TABLE>
<CAPTION>
Class 1996 1995 1994 1993 1992
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Universal Life Deposit $ 9,465,576 $ 8,490,667 $ 7,482,156 $ 6,130,390 $ 5,543,162
Annuity Deposit 58,250,822 66,051,230 62,048,541 50,550,323 53,526,178
------------- ------------- --------------- -------------- --------------
$ 67,716,398 $ 74,541,897 $ 69,530,697 $ 56,680,713 $ 59,069,340
</TABLE>
The Registrant reinsures with other insurance companies the portion of
the insurance coverage above acceptable retentions. Beginning January 1,
1995, the retention limit on an acceptable risk was increased to $300,000
on each individual life written. Prior to January 1, 1995, the limit was
$225,000.
The Company reinsures under a number of different reinsurance agreements.
The primary purpose of this reinsurance is to enable the Company to write
a policy in an amount larger than the risk it is willing to assume for
itself. The secondary purposes are to receive commissions on the
reinsurance ceded and in some instances to participate in the profits of
the reinsured business by way of an "experience rating refund."
Marketing
The Company markets its products through independent agents throughout
Pennsylvania, Maryland, Virginia, West Virginia, Ohio, Indiana,
Tennessee, North Carolina and the District of Columbia. The policies sold
are evaluated by the Company's Underwriting Department which selects or
declines applicants for insurance. Premium on policies which are accepted
may be standard or rated, depending on the nature of the risk.
4
<PAGE>
Competition
The Company operates in a highly competitive industry which consists of
numerous stock and mutual life insurance companies. A large number of
established insurance companies compete in states in which the Company
transacts business and many of these companies offer more diversified
lines of insurance coverage and have substantially greater financial
resources than does the Company. Competition is based primarily on price,
product features, availability of insurance products and the financial
strength of the Company.
Insurance Regulation
The Company is subject to supervision and regulation by the insurance
departments of the states in which it does business. Although the extent
of the regulation varies from state to state, generally the supervisory
agencies are vested with broad administrative powers relating to the
granting and revocation of licenses to transact business, regulation of
trade practices, licensing of agents, approval of policy forms, deposits
of security for the benefits of policy owners and investments and
maintenance of specified reserves and capital, all designed primarily for
the protection of policy owners. In accordance with the rules of the
National Association of Insurance Commissioners, the Company is examined
periodically by one or more of the state supervisory agencies. The latest
such examination of the Company was conducted by the Pennsylvania and
Ohio Insurance Departments and covered the four years ended December 31,
1995.
The Commonwealth of Pennsylvania has adopted the minimum risk-based
capital requirements on domestic insurance companies that were developed
by the National Association of Insurance Commissioners (NAIC). The
formulas for determining the amount of risk-based capital specify various
weighing factors that are applied to financial balances or various levels
of activity based on the perceived degree of risk. These formulas
determine a ratio of the company's regulatory total adjusted capital to
its authorized control level risk-based capital, as defined by the NAIC.
Companies below specific trigger points or ratios are classified within
certain levels, each of which requires specified corrective action. The
NAIC levels and ratios are as follows:
Ratio of Total Adjusted Capital to
NAIC Required Authorized Control Level Risk-Based
Regulatory Event Capital (Less Than or Equal to)
Company action level 2 (or 2.5 with negative trends)
Regulatory action level 1.5
Authorized control level 1
Mandatory control level .7
Erie Family Life has regulatory total adjusted capital of $84 million and
$76 million at December 31, 1996, and 1995, respectively, and a ratio of
total adjusted capital to authorized control level risk-based capital of
7.1 at both December 31, 1996 and 1995. The Company's ratios
significantly exceed the minimum NAIC risk-based capital requirements.
5
<PAGE>
Life Reserves
In accordance with generally accepted accounting principles (GAAP), the
Company is required to establish and maintain as liabilities, actuarial
reserves to meet its obligations on life insurance policies and
annuities. These reserves are amounts which, with additions from premiums
to be received on outstanding policies and with interest on such reserves
compounded annually at certain assumed rates, are calculated to be
sufficient to meet policy obligations at death or maturity in accordance
with the mortality tables employed when the policies are issued.
The interest factors used in the computation of material reserves are:
Basis of Assumption
<TABLE>
<CAPTION>
Years of Policy
Issue Type Interest Mortality Withdrawal
<S> <C> <C> <C> <C>
1967 - 1975 All Life 4% graded to 3 1/2% 1955-60 Basic Modified
Select Plus Ultimate Linton B
1976 - 1980 All Life 6% graded to 4% 1955-60 Basic Linton B
Select Plus Ultimate
1981 - 1988 Permanent 7 1/4% graded to 6% 85% of 1965-70 150% of
Life Select and Ultimate Linton A
1981 - 1988 Other 7 1/4% graded to 6% 85% or 90% of Pricing
Life 1965-70 Select and Assumptions
Ultimate
1988 - 1996 All Life 7% graded to 6% Multiple of 1965-70 Pricing
and Annual Select and Ultimate Assumptions
Renewable
Term
1987 - 1996 Universal 7 1/2% graded to 6% 85% or 90% of Pricing
Life 1965-70 Select and Assumptions
Ultimate
</TABLE>
Investments
In accordance with standard insurance practice, the Registrant invests
its funds principally in corporate bonds and preferred and common stocks.
In 1996, the Company's real estate held for investment purposes
constituted 0.2% of the Company's total assets while mortgage loans
accounted for 1.2% and other invested assets accounted for 0.9%. The real
estate owned by the Company is leased to an affiliate, Erie Indemnity
Company (Indemnity), for rentals of $423,120 per year through December
31, 2000. In addition, the Company makes policy loans to its
Policyholders, and at December 31, 1996, such policy loans constituted
0.6% of the Registrant's total assets. Annual increases in the number and
dollar amount of policy loans, generally, will vary with changes in
short-term rates of interest. When short-term rates are high, policy
loans are also expected to increase.
6
<PAGE>
Subject to certain laws that prescribe the nature, quality and percentage
of the various types of investments which may be made by insurance
companies, the Company manages its investments to meet diversification,
yield and liquidity objectives.
Employees
Services of seventy-nine full-time Employees are provided through an
affiliate, Erie Indemnity Company. All employees are salaried and ten are
officers. These Employee expenses along with other operating expenses are
paid by the Erie Indemnity Company and reimbursed on a monthly basis.
None of the Employees are covered by collective bargaining agreements and
the Company believes its Employee relations are good.
Other Data
The Company's Lapse Rate for 1996 was 8.2%.
Reinsurance Profitability - Not Applicable.
New Types of Insurance - Not Applicable.
Total Insurance In Force for the last five years Net of
Reinsurance was:
1996 - $9,646,962,000
1995 - $8,370,940,000
1994 - $7,481,537,000
1993 - $6,428,223,000
1992 - $5,545,197,000
7
<PAGE>
ITEM 2. PROPERTIES
The Registrant owns no real property and no tangible personal property used in
the operation of its business except office supplies and forms. The Registrant
does, however, own real property for investment purposes as outlined under ITEM
1 - INVESTMENTS. The executive and administrative offices of the Registrant are
located in the headquarters office of Erie Insurance Group in Erie,
Pennsylvania. The Registrant pays other members of the group an amount
determined by an arm's length agreement for office space and for the use of
facilities, equipment and services.
ITEM 3. LEGAL PROCEEDINGS
The Registrant is not involved in any material pending legal proceedings other
than ordinary routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote to shareholders during the fourth
quarter of 1996.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Currently there is no market on which the Registrant's stock is traded.
The Company had 1,146 recordholders of Common Stock at December 31, 1996.
Date Dividends Declared Date Dividends Paid Dividends per Share*
March 2, 1995 April 1, 1995 .113
April 25, 1995 July 3, 1995 .113
June 22, 1995 October 2, 1995 .113
September 21, 1995 January 2, 1996 .113
February 29, 1996 April 1, 1996 .125
May 1, 1996 July 1, 1996 .125
June 17, 1996 October 1, 1996 .125
September 17, 1996 January 2, 1997 .125
*Adjusted to reflect a three-for-one stock split which was effective May 2,
1996.
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information contained in "Selected Financial Data" on Page 10 of the
Company's 1996 Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION
The information set forth on pages 11 through 18 of the Company's 1996 Annual
Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The 1996 Financial Statements and the Registrant's independent auditor's report
on pages 20 through 28 of the Company's 1996 Annual Report are incorporated
herein by reference, as is the unaudited information set forth in the Notes to
the Financial Statements under the caption "Unaudited Quarterly Summary of
Operations" on page 28.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
9
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Present Principal Position with Erie
Name and Age Family Life and Other Material Positions
as of 12/31/96 Held During the Last Five Years
<S> <C>
Peter B. Bartlett 3 Partner, Brown Brothers Harriman & Co. Since 1974; Director, the Company,
62 Kennametal, Inc., Finmar Reinsurance Corporation until March 1995 and The
Swedish American Chamber of Commerce, Inc.
Samuel P. Black, Jr. 1 Director since 1967. Chairman of the Board, Samuel P. Black & Associates, Inc.--
94 insurance agency; Director--Erie Insurance Company, Flagship City Insurance
Company, Erie Insurance Property & Casualty Company and Erie Indemnity
Company, Attorney-in-Fact for Erie Insurance Exchange.
J. Ralph Borneman, Jr. Director since 1992. President and Chief Executive Officer of Body-Borneman
58 Associates Inc., insurance agency. President Body-Borneman, Ltd. and Body-
Borneman, Inc., insurance agencies. Director--Erie Insurance Company, Erie
Indemnity Company, Attorney-in-Fact for Erie Insurance Exchange, Erie
Insurance Company of New York and National Penn Bankshares.
John J. Brinling, Jr. Executive Vice President of the Company since December 1990. Division Officer
49 1984-present.
Robert H. Dreyer Senior Vice President of the Company since 1990. Chief Actuary 1983-Present.
59
Philip A. Garcia Senior Vice President and Controller and Division Officer since October 1993. Vice
40 President and Manager of the Life Accounting Department of the Company prior to
1993.
Patricia A. Goldman 2 Retired; Senior Vice President for Communications, USAir, Inc. from 1988 to
54 1994; Director, the Company and Crown Central Petroleum Corporation.
Susan Hirt Hagen 1,* Director since 1980. Managing Partner, Hagen, Herr & Peppin, Group Relations
61 Consultants since 1990; Associate, Center for Practice of Conflict Management
1972-1990; Director--Erie Insurance Company and Erie Indemnity Company,
Attorney-in-Fact for Erie Insurance Exchange, since 1980; Director, Erie
Insurance Property & Casualty Company, Erie Insurance Company of New York,
and Flagship City Insurance Company since 1995.
<FN>
1 Member of Executive Committee
2 Member of Audit Committee
3 Member of Investment Committee
* F. William Hirt is the brother of Susan Hirt Hagen and the brother-in-law of
Thomas B. Hagen. Susan Hirt Hagen is the wife of Thomas B. Hagen.
</FN>
</TABLE>
10
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Present Principal Position with Erie
Name and Age Family Life and Other Material Positions
as of 12/31/96 Held During the Last Five Years
<S> <C>
Thomas B. Hagen* Director since 1980. Former Secretary of Community and Economic Developement of the
61 Commonwealth of Pennsylvania January 1995 to March 1997; Chairman, Hagen & Company,
business consultants from 1994 to January 1995, Special Consultant to the Chairman of
the Board of the Erie Indemnity Company, Attorney-in-Fact for the Erie
Insurance Exchange from September 1993 to January 1995; Chairman of the Board
and Chief Executive Officer of the Erie Indemnity Company,
Attorney-in-Fact for the Erie Insurance Exchange, Erie Family Life
Insurance Company and Erie Insurance Company from November 1990, and of
Flagship City Insurance Company and Erie Insurance Property & Casualty
Company, since 1992 and 1993, respectively, to September 1993;
President of the Erie Indemnity Company, Attorney-in-Fact for the Erie
Insurance Exchange and Erie Insurance Company and Executive Vice President
of Erie Family Life Insurance Company from 1982 to November 1990; Director,
the Erie Indemnity Company, Attorney-in-Fact for the Erie
Insurance Exchange and Erie Insurance Company, General Public Utilities
Corporation 1988-1995. Erie Small Business Investment Company 1985-1995.
F. William Hirt 1C,* Chairman of the Board. Director since 1967. Chairman of the Board of the Erie
71 Insurance Company, Erie Indemnity Company, Attorney-in-Fact for Erie
Insurance Exchange, Erie Insurance Property & Casualty Company and
Flagship City Insurance Company since September 1993; Chairman of the Board
of Erie Insurance Company of New York since April 1994. Chairman of the
Executive Committee of the Company and the Erie Indemnity Company,
Attorney-in-Fact for Erie Insurance Exchange since November 1990; Interim
President and Chief Executive Officer of the Company, Erie Indemnity
Company, Attorney-in-Fact for Erie Insurance Exchange, Erie Insurance
Company, Erie Insurance Property & Casualty Company, Flagship City
Insurance Company and Erie Insurance Company of New York from January 1,
1996 to February 12, 1996; Chairman of the Board, Chief Executive Officer and
Chairman of the Executive Committee of the Company, Erie Indemnity Company,
Attorney-in-Fact for Erie Insurance Exchange and Erie Insurance Company
for more than five years prior thereto; Director--Erie Insurance
Company, Flagship City Insurance Company, Erie Indemnity Company,
Attorney-in-Fact for Erie Insurance Exchange, Erie Insurance Property &
Casualty Company, Erie Insurance Company of New York and Integra
Financial Corporation.
Dr. Irvin H. Kochel 2 Director since 1970. Retired Assistant Vice President Emeritus, The
73 Pennsylvania State University; Director--Erie Insurance Company and Erie
Indemnity Company, Attorney-in-Fact for Erie Insurance Exchange.
<FN>
1 Member of Executive Committee
2 Member of Audit Committee
C Committee Chairman
* F. William Hirt is the brother of Susan Hirt Hagen and the brother-in-law of
Thomas B. Hagen. Susan Hirt Hagen is the wife of Thomas B. Hagen.
</FN>
</TABLE>
11
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Present Principal Position with Erie
Name and Age Family Life and Other Material Positions
as of 12/31/96 Held During the Last Five Years
<S> <C>
Edmund J. Mehl 1,2C Director since 1969. Retired Chairman and Chief Executive Officer, Dispatch
73 Printing, Inc.; Director--Erie Insurance Company, Erie Indemnity Company,
Attorney-in-Fact for Erie Insurance Exchange, Flagship City Insurance
Company, Erie Insurance Property & Casualty Company and Erie Insurance
Company of New York.
Stephen A. Milne 1,3 President, Chief Executive Officer and Director since February 12, 1996.
48 President and Chief Executive Officer of the Erie Insurance Company and Erie
Indemnity Company, Attorney-in-Fact for Erie Insurance Exchange since
February 12, 1996. President and Chief Executive Officer of Flagship City
Insurance Company, Erie Insurance Property & Casualty Company and Erie
Insurance Company of New York since March 11, 1996; Executive Vice
President of the Erie Insurance Company, Erie Indemnity Company,
Attorney-in- Fact for Erie Insurance Exchange, Flagship City Insurance
Company, Erie Insurance Property & Casualty Company and Erie Insurance
Company of New York 1994-February 1996. Owner, Bennett-Damascus
Insurance Agency March 1991-December 31, 1993; Senior Vice President-Agency
Division Erie Insurance Group 1988-1991. Director--Erie Insurance
Company, Erie Indemnity Company, Attorney-in-Fact for Erie Insurance
Exchange and Erie Insurance Company of New York, Flagship City Insurance
Company and Erie Insurance Property & Casualty Company.
John M. Petersen 1,3 Director since 1980. Retired; President and Chief Executive Officer of the Erie
68 Indemnity Company, Attorney-in-Fact for Erie Insurance Exchange, Erie Family
Life Insurance Company, Erie Insurance Company, Flagship City Insurance
Company and Erie Insurance Property & Casualty Company from 1993 to 1995 and
Erie Insurance Company of New York from 1994-1995; President, Treasurer
and Chief Financial Officer of the Erie Indemnity Company,
Attorney-in-Fact for the Erie Insurance Exchange, Erie Insurance
Company and Erie Family Life Insurance Company from November 1990, and of
Flagship City Insurance Company and Erie Insurance Property & Casualty
Company since 1992 and 1993, respectively, to September 1993;
President, Treasurer and Chief Financial officer of Erie Family Life
Insurance Company and Executive Vice President, Treasurer and Chief
Financial Officer of the Erie Indemnity Company, Attorney- in-Fact
for the Erie Insurance Exchange and Erie Insurance Company for more than
five years prior thereto; Director, the Erie Insurance Company, Flagship
City Insurance Company, Erie Indemnity Company, Attorney-in-Fact for Erie
Insurance Exchange, Erie Insurance Property & Casualty Company, Erie
Insurance Company of New York, and Spectrum Control, Inc.
<FN>
1 Member of Executive Committee
2 Member of Audit Committee
3 Member of Investment Committee
C Committee Chairman
</FN>
</TABLE>
12
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Present Principal Position with Erie
Name and Age Family Life and Other Material Positions
as of 12/31/96 Held During the Last Five Years
<S> <C>
Seth E. Schofield Director since 1991. Retired; Chairman of the Board and Chief Executive
57 Officer, USAir, Inc. from 1992 to January 1996; President and Chief Executive
Officer, USAir, Inc. from June 1991 to July 1992; President and Chief
Operating Officer, USAir, Inc. from June 1990 to June 1991; Executive Vice
President, USAir, Inc. from 1989 to June 1990; Chairman of the Board and a
Director, Greater Pittsburgh Chamber of Commerce; Director, USAir, Inc.,
the Erie Indemnity Company, Attorney-in-Fact for Erie Insurance
Exchange, Erie Insurance Company, PNC Bank, N.A., USX Corporation, Calgon
Carbon Corporation, and a member of the Desai Capital Management Advisory
Board.
Thomas M. Sider Executive Vice President and Chief Financial Officer of the Company since
47 October 1993. Executive Vice President and Chief Financial Officer of the Erie
Insurance Company, Erie Indemnity Company, Attorney-in-Fact for Erie
Insurance Exchange, Flagship City Insurance Company, Erie Insurance Company
of New York, and Erie Insurance Property & Casualty Company. Treasurer of
the E.I. Holding Corp. and E.I. Service Corp. Director--Flagship City Insurance
Company, Erie Insurance Property & Casualty Company, E.I. Holding Corp.,
Erie Insurance Company of New York and E.I. Service Corp.
Jan R. Van Gorder 1 Senior Executive Vice President, Secretary and General Counsel since 1990.
49 Director since September 1990. Senior Executive Vice President, Secretary and
General Counsel of the Erie Insurance Company, Erie Indemnity Company,
Attorney-in-Fact for Erie Insurance Exchange since 1990, and of Flagship
City Insurance Company and Erie Insurance Property & Casualty Company
since 1992 and 1993, respectively and of Erie Insurance Company of New York
since April 1994; Senior Vice President, Secretary and General
Counsel of the Company, Erie Insurance Company and Erie Indemnity Company,
Attorney-in- Fact for Erie Insurance Exchange for more than five years
prior thereto; Director--Erie Insurance Company, Flagship City
Insurance Company, Erie Insurance Property & Casualty Company, Erie
Insurance Company of New York and Erie Indemnity Company, Attorney-in-Fact
for Erie Insurance Exchange.
Harry H. Weil 2,3C Director since April 25, 1995. Senior Partner, Reed, Smith, Shaw & McClay,
63 Attorneys, since 1980, Partner 1969 to 1980, Associate 1964 to 1969; Director--
Erie Indemnity Company, Attorney-in-Fact for Erie Insurance
Exchange, Erie Insurance Company, Calgon Carbon Corporation and
Pittsburgh Tube Company.
Douglas F. Ziegler Senior Vice President, Treasurer and Chief Investment Officer of the Company
46 since October 1993. Senior Vice President, Treasurer and Chief Investment
Officer of the Erie Insurance Company, Erie Indemnity Company, Attorney-in-
Fact for Erie Insurance Exchange, Flagship City Insurance Company and Erie
Insurance Property & Casualty Company.
<FN>
1 Member of Executive Committee
2 Member of Audit Committee
3 Member of Investment Committee
C Committee Chairman
</FN>
</TABLE>
13
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The Company is a member of an insurance holding company system
pursuant to Pennsylvania law under which insurance companies are required to
have nominating, audit and executive compensation committees composed solely of
directors who are not officers, employees or controlling shareholders of the
Company or any entity controlling the Company. Insurance companies can satisfy
this requirement if the insurance company is controlled by an insurer or a
publicly held corporation that has committees that comply with this requirement.
Erie Indemnity Company, holder of 21.6% of the Company's stock directly and
52.2% of the Company's stock as attorney-in-fact for Erie Insurance Exchange,
has committees which meet these requirements.
The following table sets forth the compensation paid by the
Company during each of the three fiscal years ended December 31, 1994, 1995, and
1996, to the chief executive officer of the Company and the four other most
highly compensated executive officers of the Company during 1996 for services
rendered in all capacities to the Company, EFL, Erie Insurance Exchange (the
"Exchange") and their subsidiaries and affiliates.
Annual Compensation
Name and Other Annual All Other
Principal Position Year Salary Bonus Compensation Compensation (1)
- - --------------------------------------------------------------------------------
F. William Hirt 1996 $ 0 $ 11,220 $ 0 $ 0
Chief Executive
Officer(2)
01/01/96-02/11/96
Stephen A. Milne 1996 $467,305 $ 39,351 $ 1,014 $ 26,020
Chief Executive 1995 245,611 26,623 927 39,993
Officer (3) 1994 189,512 34,943 965 4,433
02/12/96-12/31/96
Jan R. Van Gorder 1996 $312,555 $ 25,433 $ 1,014 $ 26,431
Executive Vice 1995 296,095 26,725 1,029 29,625
President, Secretary 1994 278,442 25,590 1,029 14,834
& General Counsel
Thomas M. Sider 1996 $267,295 $ 26,844 $ 1,014 $ 24,231
Executive Vice 1995 231,901 26,696 941 22,410
President & Chief 1994 190,049 22,571 941 21,109
Financial Officer
John J. Brinling, 1996 $202,126 $ 34,652 $ 946 $ 24,098
Jr., Executive 1995 184,104 20,853 877 28,837
Vice President of 1994 176,365 19,527 877 22,682
EFL
Alvin L. Irwin 1996 $175,868 $ 19,436 $ 6,060 $ 633,680
Senior Vice 1995 171,273 17,978 6,325 3,192
President (4) 1994 167,072 16,360 3,665 3,010
14
<PAGE>
(1) Amounts shown include matching contributions made by the Company pursuant
to the Company's Employee Savings Plan and premiums paid by the Company
on behalf oft the named individuals on the Split Dollar Plan insurance
policies. For the year 1996, contributions made to the Employee Savings
Plans amounted to $-0-, $11,729, $8,869, $8,024, $6,026 and $4,278 on
behalf of Messrs. Hirt, Milne, VanGorder, Sider, Brinling, and Irwin,
respectively. For the year 1995, contributions to the Employee Savings
Plan amounted to $-0-, $5,424, $6, 849, $6,143, $4,910, and $3,192 on
behalf of Messrs. Hirt, Milne, VanGorder, Sider, Brinling, and Irwin. For
the year 1994, contributions made to the Employee Savings Plan amounted
to $-0-. $4,433, $6,190, $4,788. $4,478 and $3,010 on behalf of Messrs.
Hirt, Milne, VanGorder, Sider, Brinling, and Irwin, respectively.
Premiums paid during 1996 for Split Dollar Life insurance policies for
Messrs. Hirt, Milne, VanGorder, Sider, Brinling, and Irwin, respectively,
are as follows: $-0-, $14,291, $17,742, $16,207, $18,072, and $-0-.
Premiums paid during 1995 for Split Dollar Life insurance policies for
Messrs. Hirt, Milne, VanGorder, Sider, Brinling, and Irwin, respectively,
are as follows: $-0-, $28,786, $17,420, $16,267, $18,144, and $-0-.
Premiums paid during 1994 for Split Dollar Life insurance policies for
Messrs. Hirt, Milne, VanGorder, Sider, Brinling, and Irwin are as
follows: $-0-, $-0-, $8,644, $16,321, $18,204, and $-0-. The Company is
entitled to recover the premiums from any proceeds paid on such Split
Dollar Life insurance policies and has retained a collateral interest in
each policy to the extent of the premiums paid with respect to such
policies. The total benefit accruing to Mr. Irwin under the Supplemental
Employee Retirement Plan of the Company amounted to $629,402 and is
reported on the table in 1996.
(2) Mr. Hirt served as Chief Executive Officer of the Company for the period
January 1, 1996 thru February 11, 1996.
(3) Mr. Milne became President and Chief Executive Officer of the Company and
a Company Director on February 12, 1996.
(4) Mr. Irwin retired effective December 31, 1996 after 30 years of service.
Stock Options and Stock Appreciation Rights
The Company does not have a stock option plan, nor has it ever
granted any stock option or stock appreciation right to any of the persons named
in the Summary Compensation Table.
15
<PAGE>
Pension Plan
The following table sets forth the estimated annual benefits
payable upon retirement at age 65 under the Erie Insurance Group Retirement Plan
for Employees.
PENSION PLAN TABLE
Years of Service
Remuneration 15 20 25 30 35
- - -------------------------------------------------------------------
$ 200,000 60,000 80,000 100,000 120,000 120,000
225,000 67,500 90,000 112,500 135,000 135,000
250,000 75,000 100,000 125,000 150,000 150,000
300,000 90,000 120,000 150,000 180,000 180,000
350,000 105,000 140,000 175,000 210,000 210,000
400,000 120,000 160,000 200,000 240,000 240,000
450,000 135,000 180,000 225,000 270,000 270,000
500,000 150,000 200,000 250,000 300,000 300,000
550,000 165,000 220,000 275,000 330,000 330,000
600,000 180,000 240,000 300,000 360,000 360,000
650,000 195,000 260,000 325,000 390,000 390,000
700,000 210,000 280,000 350,000 420,000 420,000
750,000 225,000 300,000 375,000 450,000 450,000
The compensation covered by such plan is the base salary
reported in the Summary Compensation Table.
16
<PAGE>
Under the pension plan, credited years of service is capped at
30 years. Credited years of service for each of the individuals named in the
Summary Compensation Table is as follows: F. William Hirt - 30 years,
Stephen A. Milne - 19 years, Jan R. Van Gorder - 16 years, Thomas M. Sider - 26
years, John J. Brinling, Jr. - 29 years and Alvin Irwin - 30 years.
The benefits under such plan are computed on the basis of
straight-life annuity amounts and a life annuity with a ten-year certain
benefit. The benefits listed in the Pension Plan Table are not subject to
deduction for Social Security or other offset amounts. The information in the
foregoing table does not reflect certain limitations imposed by the Internal
Revenue Code of 1986, as amended (the "Code"). Beginning in 1994, the Code
prohibits the inclusion of earnings in excess of $150,000 per year (adjusted
periodically for cost-of-living increases) in the average earnings used to
calculate benefits. The Code also limits the maximum annual pension (currently
$120,000, but adjusted annually for cost-of-living increases) that can be paid
to each eligible employee. A Supplemental Employee Retirement Plan for senior
management is in effect which provides benefits in excess of the earnings
limitations imposed by the Internal Revenue Code of 1986 as amended.
Director Compensation
Effective January 1, 1995, the annual retainer for directors of
all members of the Group, including the registrant, increased to $15,000, plus
$1,200 for each meeting attended and $800 for each committee meeting attended
(unless the committee meeting is held the same day as a Board of Directors
meeting, for which committee meeting $500 will be paid) plus an additional
$2,000 per year for each committee chairperson. In addition, all directors are
reimbursed for their expenses incurred in attending meetings. Officers of the
Company who serve as directors are not compensated separately for attendance at
meetings of the Board of Directors and its committees. Director Petersen also is
compensated pursuant to a consulting arrangement as disclosed in Item 13.
Agreements with Executive Officers
Upon the recommendation of the Executive Compensation Committee
of the Company's Board of Directors the Company has entered into employment
agreements with the following four of the Company's senior executive officers:
John J. Brinling, Jr., Executive Vice President of the Company in November,
1995; Stephen A. Milne, President and CEO of the Company; Thomas M. Sider,
Executive Vice President and Chief Financial Officer of the Company, and Jan R.
Van Gorder, Executive Vice President, General Counsel and Secretary of the
Company. The employment agreements have the following principal terms:
(a) A three year term expiring in November , 1998 unless the
agreement is theretofore terminated in accordance with its terms with or without
cause or due to disability or death of the officer or notice of non-renewal is
given by the Company or the executive 30 days before any anniversary date;
(b) A minimum annual base salary at least equal to the
executive's annual base salary at the time the agreement was executed, subject
to periodic review to reflect the executive's performance and responsibilities,
competitive compensation levels and the impact of inflation;
(c) The eligibility of the executive under the Company's
incentive compensation programs and employee benefit plans;
(d) The establishment of the terms and conditions upon which the
executive's employment may be terminated by the Company and the compensation of
the executive in such circumstances. The agreements provide generally, among
other things, that if the employment of an executive is terminated without Cause
(as defined in the agreement) by the Company or by the executive for Good Reason
(as defined in the agreement) then the executive shall be entitled to receive an
amount equal to the sum of: (i) three times his highest annual base salary
during the preceding three years plus an amount equal to the total of the
executive's highest awards during the preceding three years under the Company's
bonus and other short-term incentive compensation plans and (ii) any award or
other compensation to which the executive is entitled under any of the Company's
incentive compensation programs and employee benefit plans as well as for the
continuing participation, for a period of three years following termination, in
all life, medical and dental insurance programs and other benefit plans to
17
<PAGE>
the extent the executive and his dependents were eligible to participate in such
programs immediately prior to his termination;
(e) Provisions relating to confidentiality and non-disclosure
following an executive's termination; and
(f) An agreement by the executive not to compete with the Company for
a period of one year following his termination, unless his termination was
without Cause.
Compensation Committee Interlocks and Insider Participation
The Executive Compensation Committee (the "Committee") of the Company
presently consists of Peter B. Bartlett, Chairman, J. Ralph Borneman, Jr., Seth
E. Schofield and Harry H. Weil. No member of the Committee is a former or
current officer or employee of the Company or any of its affiliates.
Furthermore, no executive officer of the Company serves as a member of a
compensation committee of another entity one of whose executive officers serves
on the Committee of the Company or as a director of the Company, nor does any
executive officer of the Company serve as a director of another entity, one of
whose executive officers serves on the Committee of the Company. Mr. Borneman is
the President and a principal shareholder of Body- Borneman Associates, Inc.,
Body-Borneman, Inc. and Body-Borneman, Ltd., all of which are independent
insurance agencies representing a number of insurers, including the Company and
its insurance affiliates.
Report of the Executive Compensation Committee of the Company
The Committee is charged with the duty of recommending to the Board of
Directors the compensation of the three highest paid officers of the Company and
such other officers as are determined by the Board of Directors, recommending to
the Board of Directors all forms of bonus compensation including incentive
programs that would be appropriate for the Company and to undertake such other
responsibilities as may be delegated to it by the Board of Directors. The Board
has authorized the Compensation Committee to consider the compensation of the
four highest paid officers, including the CEO. The Committee is composed of four
directors who are not officers or employees of the Company, the Exchange or EFL
or any of their affiliates or subsidiaries. The purpose of the Committee is to
determine the level and composition of compensation that is sufficient to
attract and retain top quality executives for the Company.
Compensation Philosophy: The objectives of the executive compensation
practices are to (1) attract, reward and retain key executive talent and (2) to
motivate executive officers to perform to the best of their abilities and to
achieve short-term and long-term corporate objectives that will contribute to
the overall goal of enhancing stockholder and policyholder value. To that end,
compensation comparisons will be made to benchmark positions at other insurers
in terms of compensation levels and composition of the total compensation mix.
Under federal tax laws, the Company is not allowed a federal income
tax deduction for compensation paid to certain executive officers to the extent
that compensation exceeds $1 million per officer in any fiscal year. No officer
of the Company has received compensation in excess of $1 million in any fiscal
year to date. The Compensation Committee may consider adopting policies with
respect to this limitation on deductibility when appropriate.
The Committee reviewed the salary ranges and base salaries of the four
highest paid executives including the chief executive officer in 1996. The
Committee has position descriptions for the four highest paid executives of the
Company, including the chief executive officer, which define the
responsibilities and duties of each position. The position descriptions also
delineate the functional areas of accountability and the qualifications and
skills required to perform such responsibilities and duties. The Committee then
reviews the salary ranges for the chief executive officer and the other three
highest paid senior executives, comparing the ranges to third party data
compiled for similar positions with other property and casualty insurers. In
reviewing the salary ranges for the four highest paid executives, including the
chief executive officer, the Committee references Sibson's Management
Compensation Survey published annually by Sibson & Company, Inc., which
18
<PAGE>
summarizes compensation data for more than 100 insurance companies. The data is
reported by position and by company asset size and by premium volume. The unique
aspects of each position, its duties and responsibilities, the effect on the
performance of the Company, the number of employees supervised directly and
other criteria are also considered in setting the base salaries. The Committee
also secured the services of Towers Perrin, a nationally recognized consulting
firm with specific expertise in the insurance industry, to do a detailed
analysis of competitive compensation levels and make recommendations. In
addition, Towers Perrin made specific recommendations to the Committee regarding
the compensation for Mr. Milne as he assumed the responsibilities of chief
executive officer.
The level of compensation for each executive reflects his or her
skills, experience and job performance. Normally, base salary will not be less
than the minimum for the salary range established for each position. Executives
with a broader range of skills, experience and consistently high performance
with the Company may receive compensation above the midpoint for the established
salary range.
A promotional salary increase may also be added to the executive's
compensation when the executive assumes new responsibilities or has increased
accountability for results. Significant changes in duties and responsibilities
may also result in a higher salary range.
Compensation for the chief executive officer consists primarily of
salary and bonus and minor perquisites which amount to less than 10% of the
chief executive officer's salary and bonus. No long-term incentive plans (which
provide incentives for performance occurring over longer periods of time) are
currently utilized in determining the compensation of the chief executive
officer, although external data indicates its prevalence among competitor
companies. Stock options, stock appreciation rights and restricted stock are not
currently part of the executive compensation package for any executives of the
Company.
Performance factors applicable to the Company, such as property and
casualty insurance loss ratios, investment portfolio returns, overall company
profitability, as well as other factors are considered indirectly in evaluating
the chief executive officer's performance.
Compensation of the next three most highly compensated individuals is
determined by the Committee and is based upon the factors and processes
enumerated, i.e., a determination of a salary range based upon market data and
evaluation of the executive with respect to the executive's job description and
his or her position within the salary range.
Compensation of the next highest paid executives (other than the four
highest paid executives) is based upon the Company's established standard
compensation policies and is not determined by the Committee. As with the chief
executive officer and the next three most highly compensated executive officers,
no long-term incentive plans are maintained for this executive.
ERIE INDEMNITY COMPANY
EXECUTIVE COMPENSATION COMMITTEE
Peter B. Bartlett, Chairman
J. Ralph Borneman, Jr.
Seth E. Schofield
Harry H. Weil
19
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of 2/28/97
(a)
Name & Address Shares
of Beneficial Beneficially Percent of
Owner Owned Class
Erie Indemnity Company 2,043,900(1) 21.6%(1)
100 Erie Insurance Place Direct
Erie, PA 16530
Erie Insurance Exchange 4,932,900(1) 52.2%(1)
100 Erie Insurance Place Direct
Erie, PA
(b) Shares beneficially owned directly or indirectly by all Directors and
Officers:
Name & Address Shares
of Beneficial Beneficially Percent of
Owner Owned Class
Peter B. Bartlett 0 NA
65 Egbert Street
Bay Head, NJ 08742
Samuel P. Black, Jr. 68,118 .72%
400 French St., Suite 100
Erie, PA 16507
J. Ralph Borneman 1,536 .02%
Box 552
17 East Philadelphia Ave.
Boyertown, PA 19512
Patricia A. Goldman 0 NA
3026 1/2 Q Street, NW
Washington, DC 20007
Susan Hirt Hagen 300 --
5727 Grubb Rd.
Erie, PA 16506
Thomas B. Hagen 154,482 1.63%
5727 Grubb Rd.
Erie, PA 16506
F. William Hirt 167,034 1.77%
3270 Kingston Court S.
Erie, PA 16506
20
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (Cont.)
(b) Shares beneficially owned directly or indirectly by all Directors and
Officers:
Name & Address Shares
of Beneficial Beneficially Percent of
Owner Owned Class
Dr. Irvin H. Kochel 6,249 .07%
4737 Reese Road
Erie, PA 16510
Edmund J. Mehl 12,150 .13%
504 Frontier Dr.
Erie, PA 16505
Stephen A. Milne 0 NA
100 Culbertson Drive
Lake City, PA 16423
John M. Petersen 89,141 .94%
124 Voyageur Dr.
Erie, PA 16505
Seth E. Schofield 0 NA
9500 South Ocean Drive #1601
Jensen Beach, FL 34957
Jan R. Van Gorder 75 --
6796 Manchester Beach Road
Fairview, PA 16415
Harry H. Weil 0 NA
7 Foxwood Drive
Pittsburgh, PA 15238
John J. Brinling, Jr. 1,260 .01%
1522 Sumner Drive
Erie, PA 16505
Robert H. Dreyer 600 .01%
465 Hawthorne Trace
Fairview, PA 16415
Philip Alan Garcia 1,275 .01%
786 Stockbridge Drive
Erie, PA 16505
Thomas M. Sider 285 --
11810 Old Lake Road
North East, PA 16428
Douglas F. Ziegler 270 --
378 Ridgeview Drive
Erie, PA 16505
Officers and directors
as a group (19 persons) 502,775(2) 5.32%(2)
21
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (Cont.)
(1) Erie Insurance Exchange (the "Exchange") is a reciprocal insurance
exchange controlled by its subscribers, each of whom has designated
Erie Indemnity Company as such subscriber's attorney-in-fact for
certain purposes, including Indemnity's holding of Common Stock of the
Company. 76.2% of the outstanding voting stock of Erie Indemnity
Company is owned beneficially by a trust established by H. O. Hirt,
the father of F. William Hirt and Susan H. Hagen and the father-in-law
of Thomas B. Hagen. Mr. Hirt and Mrs. Hagen are beneficiaries of the
trust and are co-trustees with Mellon Bank, N.A. An additional 12.7%
of the Erie Indemnity Company voting stock is beneficially owned by
Samuel P. Black, Jr.
(2) Includes direct and indirect beneficial ownership and shares owned by
and with spouses.
(c) There are no contractual arrangements known to the Registrant which may
result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors Black and Borneman are officers and principal shareholders of
insurance agencies which receive insurance commissions in the ordinary
course of business from Erie Family Life and its affiliates in accordance
with such companies standard commission schedules and agents' contracts.
The retired President and CEO and previous Chief Investment Officer of the
Erie Insurance Group of Companies, and current director, John M. Petersen,
entered into a consulting arrangement with Erie Indemnity Company effective
January 2, 1996. Under the terms of the arrangement, Erie Indemnity Company
engaged Mr. Petersen as a consultant to furnish Erie Indemnity Company and
its pension trust, Erie Insurance Exchange, and Erie Family Life Insurance
Company, with investment services with respect to their investments in
common stocks. The amount paid Mr. Petersen pursuant to this arrangement in
1996 was $2,078,758.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following financial statements of the Registrant and the
report of independent certified public accountants are incorporated
herein by reference to pages 20 through 28 in the Registrant's annual
report to shareholders for the year ended December 31, 1996.
Independent Auditor Report
Statements of Financial Position - December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996,
1995 and 1994 Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 Statements of Shareholders'
Equity for the years ended December 31, 1996, 1995 and 1994 Notes
to Financial Statements
(2) The following financial statement schedules are included in this
report on FORM 10-K:
Page
Independent Auditors' Report on Schedules 25
Schedule I - Summary of Investments other than
investments in related parties 26
Schedule V - Supplementary Insurance Information 27
Schedule VI - Reinsurance 28
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore, have been omitted.
(3) Exhibits:
Exhibit 13 - Annual Report to Shareholders
Exhibit 27 - Financial Data Schedule
All exhibits for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore,
have been omitted.
(b) No reports on Form 8-K have been filed or were required to be filed
during the last quarter of the period covered by this report.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: March 11, 1997 ERIE FAMILY LIFE INSURANCE COMPANY
(Registrant)
Principal Officers
/s/ F. William Hirt
F. William Hirt, Chairman of the Board
/s/ Stephan A. Milne
Stephen A. Milne, President and C.E.O.
/s/ Thomas M. Sider
Thomas M. Sider, Executive Vice President & CFO
/s/ Philip A. Garcia
Philip A. Garcia, Senior Vice President & Controller
Board of Directors
/s/ Peter B. Bartlett /s/ Irvin H. Kochel
Peter B. Bartlett Dr. Irvin H. Kochel
/s/ Samuel P. Black, Jr. /s/ Edmund J. Mehl
Samuel P. Black, Jr. Edmund J. Mehl
/s/ J. Ralph Borneman /s/ Stephen A. Milne
J. Ralph Borneman Stephen A. Milne
/s/ Patricia A. Goldman /s/ John M. Petersen
Patricia A. Goldman John M. Petersen
/s/ Susan Hirt Hagen /s/ Seth E. Schofield
Susan Hirt Hagen Seth E. Schofield
/s/ Thomas B. Hagen /s/ Jan R. Van Gorder
Thomas B. Hagen Jan R. Van Gorder
/s/ Harry H. Weil
F. William Hirt Harry H. Weil
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders
Erie Family Life Insurance Company
We have audited the statements of financial position of Erie Family Life
Insurance Company (Company) as of December 31, 1996 and 1995 and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996, as contained in the 1996
annual report, incorporated by reference in the annual report on Form 10-K for
the year ended December 31, 1996. In connection with our audits of the financial
statements, we also have audited the financial statement schedules, as listed in
the accompanying index. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Erie Family Life Insurance
Company as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ Brown Schwab Bergquist & Co.
Erie, Pennsylvania
February 18, 1997
25
<PAGE>
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
<TABLE>
<CAPTION>
December 31, 1996
Cost or Amount at which
Amortized Market Shown in the
Cost Value Balance Sheet
<S> <C> <C> <C>
Type of Investment
Fixed Maturities
Available-for-Sale
Bonds and Notes
U. S. Treasuries $ 6,476,927 $ 6,943,977 $ 6,943,977
Foreign Governments 2,986,046 2,970,000 2,970,000
Political Subdivisions 4,676,466 5,003,331 5,003,331
Special Revenue 24,697,215 25,021,613 25,021,613
Public Utilities 90,987,333 91,538,151 91,538,151
Industrial and Misc. 370,740,927 374,435,097 374,435,097
Foreign Industrial and Misc. 7,062,274 7,547,530 7,547,530
Redeemable Preferred Stocks
Banks, Trusts and
Insurance Companies 2,000,000 2,070,000 2,070,000
Total Fixed Maturities
Available-for-Sale $ 509,627,188 $ 515,529,699 $ 515,529,699
Equity Securities
Common Stocks
Industrial and Misc. $ 5,500,006 $ 5,985,570 $ 5,985,570
Non-Redeemable Preferred Stocks
Public Utilities 4,000,000 3,940,000 3,940,000
U. S. Banks, Trusts and
Insurance Companies 78,622,165 81,682,550 81,682,550
Foreign Banks, Trusts and
Insurance Companies 3,000,000 3,180,000 3,180,000
Industrial and Misc. 16,440,871 17,804,025 17,804,025
Foreign Industrial and Misc. 3,900,000 3,960,000 3,960,000
Total Equity Securities $ 111,463,042 $ 116,552,145 $ 116,552,145
Real Estate
Investment Property $ 1,710,329 $ 1,710,329 $ 1,710,329
Policy Loans 4,381,657 4,381,657 4,381,657
Mortgage Loans 8,955,760 8,955,760 8,955,760
Other Invested Assets 6,787,226 6,787,226 6,787,226
Total Investments $ 642,925,202 $ 653,916,816 $ 653,916,816
</TABLE>
26
<PAGE>
SCHEDULE V - SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
At December 31,
Deferred Future
Policy Policy Other
Acquisition Benefits & Unearned Policy
Segment Costs Deposits Premium Claims
<S> <C> <C> <C> <C>
1996
Ordinary Life Insurance $ 50,586,096 109,754,695 119,145 1,612,105
Group Life Insurance 0 1,135,755 0 91,000
Annuities 7,440,332 450,570,003 0 0
Supplemental Contracts 0 839,258 0 0
Total $ 58,026,428 562,299,711 119,145 1,703,105
1995
Ordinary Life Insurance $ 43,893,056 93,756,432 104,951 823,618
Group Life Insurance 0 984,149 0 73,408
Annuities 6,869,236 405,346,808 0 0
Supplemental Contracts 0 872,745 0 0
Total $ 50,762,292 500,960,134 104,951 897,026
1994
Ordinary Life Insurance $ 38,740,281 79,503,597 98,700 723,638
Group Life Insurance 0 653,979 0 73,847
Annuities 6,211,514 341,242,154 0 0
Supplemental Contracts 0 767,457 0 0
Total $ 44,951,795 422,167,187 98,700 797,485
</TABLE>
<PAGE>
SCHEDULE V - SUPPLEMENTARY INSURANCE INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
For the Years Ended December 31,
Amortization
Net Life & of Deferred Other
Policy Investment Annuity Acquisition Operating
Segment Revenues(a) Income Benefits Costs Expenses
<S> <C> <C> <C> <C> <C>
1996
Ordinary Life Insurance $29,038,797 13,165,970 17,434,872 2,456,879 7,078,531
Group Life Insurance 2,073,494 75,877 1,040,741 0 483,232
Annuities 3,871 32,641,980 25,061,905 684,471 1,785,210
Supplemental Contracts 0 65,142 47,430 0 4,280
Total $31,116,162 45,948,969 43,584,948 3,141,350 9,351,253
1995
Ordinary Life Insurance $25,764,413 11,329,270 14,372,964 1,813,419 7,541,883
Group Life Insurance 1,854,910 59,239 1,035,599 0 360,556
Annuities 454,674 29,509,614 22,664,856 544,708 2,281,533
Supplemental Contracts 0 64,689 53,930 0 4,101
Total $28,073,997 40,962,812 38,127,349 2,358,127 10,188,073
1994
Ordinary Life Insurance $22,931,783 9,651,029 8,430,107 1,700,028 6,882,372
Group Life Insurance 1,717,589 46,571 837,533 0 330,111
Annuities 244,111 25,800,361 18,128,885 279,737 2,297,726
Supplemental Contracts 0 68,288 36,737 0 2,813
Total $24,893,483 35,566,249 27,433,262 1,979,765 9,513,022
<FN>
(a) Net of reinsurance ceded
</FN>
</TABLE>
27
<PAGE>
SCHEDULE VI - REINSURANCE
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other From Other Net Assumed
Amount Companies Companies Amount to Net
<S> <C> <C> <C> <C> <C>
December 31, 1996
Life Insurance in force $ 10,766,917,000 1,151,610,000 31,655,000 9,646,962,000 0.33%
Premiums for the year
Life Insurance 32,673,673 3,634,876 0 29,038,797 -0-
Group 1,994,659 0 82,706 2,077,365 3.98%
Total Premiums $ 34,668,332 3,634,876 82,706 31,116,162 0.27%
December 31, 1995
Life Insurance in force $ 9,537,687,000 1,197,855,000 31,108,000 8,370,940,000 0.37%
Premiums for the year
Life Insurance 29,118,897 3,354,484 0 25,764,413 -0-
Group 2,205,144 0 104,440 2,309,584 4.52%
Total Premiums $ 31,324,041 3,354,484 104,440 28,073,997 0.37%
December 31, 1994
Life Insurance in force $ 8,438,925,000 987,353,000 29,965,000 7,481,537,000 0.40%
Premiums for the year
Life Insurance 26,117,501 3,185,718 0 22,931,783 -0-
Group 1,867,982 0 93,718 1,961,700 4.78%
Total Premiums $ 27,985,483 3,185,718 93,718 24,893,483 0.38%
</TABLE>
28
<PAGE>
INCORPORATED BY REFERENCE, PAGE 10 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Policy Revenue $ 31,116,162 $ 28,073,997 $ 24,893,483 $ 22,156,822 $ 19,415,368
Investment & Other Income 46,617,179 41,519,626 36,100,738 31,363,811 28,538,090
Realized Gains on Investments 4,986,897 7,483,798 4,411,334 10,433,318 9,647,470
Total Revenue $ 82,720,238 $ 77,077,421 $ 65,405,555 $ 63,953,951 $ 57,600,928
Benefits & Expenses 56,077,551 50,673,549 38,926,049 36,077,676 32,259,393
Operating Income Before Taxes 26,642,687 26,403,872 26,479,506 27,876,275 25,341,535
Federal Income Tax
Current 5,378,656 7,607,573 8,179,901 8,275,631 7,791,598
Deferred 3,597,781 914,707 1,469,927 1,496,402 1,655,339
Total Federal Income Tax 8,976,437 8,522,280 9,649,828 9,772,033 9,446,937
Cumulative effect on years prior to
1993 on changing the method of
accounting for income taxes 0 0 0 (567,610) 0
Net Income $ 17,666,250 $ 17,881,592 $ 16,829,678 $ 17,536,632 $ 15,894,598
Earnings per share $ 1.87 $ 1.89 $ 1.78 $ 1.86 $ 1.68
Cash dividends declared per share$ 0.50 $ 0.453 $ 0.40 $ 0.367 $ 0.333
Total Assets $ 740,650,660 $ 673,794,161 $ 528,632,132 $ 455,135,563 $ 376,485,292
Stockholders Equity $ 132,630,489 $ 128,905,402 $ 90,855,581 $ 89,744,886 $ 75,427,308
Book Value per share $ 14.03 $ 13.64 $ 9.61 $ 9.50 $ 7.98
Average Number of
Shares Outstanding 9,450,000 9,450,000 9,450,000 9,450,000 9,450,000
<FN>
All per share data has been adjusted to reflect the three-for-one common stock split effective May 2, 1996.
</FN>
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 11 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction with the
financial statements and related notes found on pages 21 - 28, since they
contain important information that is helpful in evaluating the Company's
operating results and financial condition. (Note: A glossary of certain terms
used in this discussion can be found on page 19. The terms are italicized the
first time they appear in the text.)
OVERVIEW
Erie Family Life Insurance Company (the Company) is incorporated in the
Commonwealth of Pennsylvania. The Company is engaged primarily in the business
of underwriting and selling non-participating individual and group life
insurance policies, including universal life and annuities. The Company markets
its products through independent agents and operates in eight states in the
Eastern U.S. and the District of Columbia and is subject to supervision and
regulations of the states in which it does business. A large portion of the
Company's business is written in Pennsylvania.
Net income decreased to $17,666,250, or $1.87 per share, in 1996 from
$17,881,592, or $1.89 per share in 1995, a decrease of 1.2 percent. The decrease
in non-recurring realized gains on investment from $7,483,798 in 1995 to
$4,986,897 in 1996 was one of the primary reasons for the decrease in net
income. Operating results remained strong as policy revenues grew by 10.8
percent in 1996 and life insurance in force grew by more than $1.2 billion
during 1996. Total life insurance in force at December 31, 1996 grew to almost
$10.8 billion. Investment income, net of expenses, grew by 12.2 percent to
$45,948,969 in 1996 from $40,962,812 in 1995. Total assets of the Company
increased by 9.9 percent to $740,650,660.
REVENUES
Policy Revenues
Life premiums increased 12.7 percent to $29,038,797 in 1996 from $25,764,413 in
1995 and $22,931,783 in 1994. New life insurance coverage placed in force during
1996 was $2,129,639,000, compared to $1,877,983,000 in 1995 and $1,884,722,000
in 1994. This represents an increase of 13.4 percent in 1996 and a decrease of
0.4 percent in 1995 compared to 1994. First-year life insurance premiums were
$6,505,484 in 1996, $5,624,117 in 1995 and $5,563,765 in 1994, an increase of
15.7 percent in 1996 and 1.1 percent in 1995. Renewal premium increased 11.9
percent in 1996 to $22,533,313. Group policy revenues decreased 10.1 percent to
$2,077,365 in 1996 from $2,309,584 in 1995. The 1995 group policy revenue amount
included $449,000 in annuity loads on structured settlement deposits. 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.
<PAGE>
INCORPORATED BY REFERENCE, PAGES 11 AND 12 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
First-year and single universal life and annuity deposits were $50,651,063 in
1996, $57,606,715 in 1995 and $53,965,315 in 1994, representing a decrease of
12.1 percent in 1996 and an increase of 6.7 percent in 1995 over 1994. Total
annuity and universal life deposits were $67,716,398, $74,541,897, and
$69,530,697 in 1996, 1995, and 1994, respectively. Annuity deposits recorded
in connection with annuity contracts purchased by the Erie Insurance Group
Retirement Plan for retired vested Employees receiving benefits were $4,894,042,
$6,024,125, and $8,880,714 for the years ended December 31, 1996, 1995, and
1994, respectively. Also included in annuity deposits are annuities
purchased by affiliated property/casualty companies for use in connection with
the structured settlement of insurance claims. Structured settlement annuity
deposits sold to Erie Insurance Group affiliate companies totaled
$13,504,953, $22,018,313, and $11,431,965 in 1996, 1995 and 1994,
respectively. Generally, lower interest rates and a flattened yield curve in
1996 and 1995 made fixed annuities and structured settlement annuities less
attractive compared to other savings alternatives.
The Company's lapse ratio, as reported to the Pennsylvania Insurance Department,
increased to 8.2 percent in 1996. The lapse ratio was 7.9 percent in 1995 and
8.4 percent in 1994. The lapse ratio is an important measure of the success of
the Company's sales and service efforts. Consequently, it is monitored closely
as a barometer of future life insurance product profitability and premium
growth.
Investment Income, Net of Expenses
Net investment income in 1996 was $45,948,969 compared to $40,962,812 in 1995
and $35,566,249 in 1994, an increase of 12.2 percent in 1996 and 15.2 percent in
1995. The ratio of net investment income to mean invested assets declined during
1996 to 7.4 percent, compared to 7.8 percent in 1995 and 8.3 percent in 1994.
This decline in portfolio yield was the result of generally lower interest rates
and a flattened yield curve in 1996 and 1995. The decrease in overall portfolio
yield was offset by a 9.3 percent increase in invested assets of the Company in
1996 versus 1995, due to the cash flows generated by the Company's operations
and annuity and universal life deposits.
Realized Gain on Investments
During 1996, 1995 and 1994, the Company generated realized gains of $4,986,897,
$7,483,798 and 4,411,334, respectively, which resulted from the sale of equity
and fixed income securities.
BENEFITS AND EXPENSES
Death Benefits
Net death benefits on life insurance policies increased 30.2 percent in 1996 to
$9,688,242, compared to $7,438,758 in 1995 and $4,068,876 in 1994. Although the
increase in death benefits in 1996 was greater than the growth in in-force
policies in 1996, from 1991 through 1996 net death benefits increased by about
120 percent, consistent with the 106 percent growth in the Company's life
insurance in force, over the same period. Mortality experience should be
analyzed over the long term, rather than short periods where unusual
fluctuations may influence the results. This is particularly true for a company
the size of Erie Family Life, which is growing rapidly. The Company believes
that its underwriting philosophy and practices are sound.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 12 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
Interest on Annuity and Universal Life Deposits
Total interest credited on deposits rose 11.6 percent to $28,299,828 from
$25,347,183 in 1995. This increase in interest expense was due to new annuity
and universal life deposits of $67,716,398 made by Policyholders during 1996. At
December 31, 1996 annuity deposits accruing interest were $451 million, an
increase of 11.2 percent from December 31, 1995, and universal life deposits
accruing interest were $57 million, an increase of 23.7 percent from December
31, 1995. During 1996, the interest rate credited on universal life deposits
remained in the 6.25 percent to 7.00 percent range. The rates credited on
annuity deposits remained in the 5.00 percent to 6.75 percent range.
On January 1, 1996, a "10 Percent Preferred Withdrawal" endorsement was added to
all Erie Family Life annuity policies. This policy endorsement allows annuity
Policyholders to withdraw up to 10 percent of their annuity account value
without incurring a surrender charge, once each policy year, subject to certain
restrictions.
Increase in Future Life Policy Benefits
The liability for future life policy benefits is computed considering various
factors such as anticipated mortality, future investment yields, withdrawals and
anticipated credit for reinsurance. The 1996 increase in future life policy
benefits was $4,549,404, compared to $4,619,996 in 1995 and $2,611,084 in 1994.
The decrease in 1996 is due to an increase in estimated reinsurance credits
applied against the liability for future policy life benefits in 1995, along
with a general increase in the provision due to the increased life insurance in
force. Beginning January 1, 1995, the retention limit on an acceptable insurance
risk was increased to $300,000 on each individual life written. Prior to January
1, 1995, the risk retention limit was $225,000.
Amortization of Deferred Policy Acquisition Costs
Generally, the costs incurred by the Company to acquire business, including
underwriting, commission and bonus costs, are deferred. These costs are
amortized and charged against earnings over the premium paying period of the
related policies in proportion to the ratio of the annual premium revenue to the
total anticipated premium revenue. The amortization of deferred acquisition
costs (DAC) rose 33.2 percent to $3,141,350 in 1996 from $2,358,127 in 1995. The
growth in amortization expense was affected by changes in premium revenue
patterns and by a decrease in policy persistency.
Commissions
In 1996, commission expenses increased 20.2 percent to $1,841,861. Most of this
commission increase was due to an increase in life insurance premiums of 10.8
percent along with an increase in the average commission rate. The average
commission rate increased due to an increase in persistency for policies in
their second policy year as well as changes in the mix of life and annuity
business sold. Second-year renewal commission rates are higher than third and
subsequent year commission rates and increases in second-year persistency will
result in an increase in the average commission rate.
Commission reimbursements from ceded reinsurance contracts have been deducted
from the gross commission expense. These reimbursements represent the first- and
second- year commissions paid on
<PAGE>
INCORPORATED BY REFERENCE, PAGES 12 AND 13 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
policies that were reinsured under a number of different reinsurance agreements.
These reimbursements totaled $1,367,873 in 1996, $1,272,530 in 1995 and
$1,363,267 in 1994.
Commission costs, which vary with and are related primarily to the production of
new business, have been deferred and are capitalized as DAC. Most first-year and
some second-year commissions qualify for deferral. These costs are being
amortized over the premium paying period of the related policies in proportion
to the ratio of the annual premium revenue to the total anticipated premium
revenue (see Note 2 of the Notes to Financial Statements).
General Expenses
General expenses amounted to $5,839,795 compared to $5,802,088 in 1995 and
$5,775,026 in 1994. 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, including 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. 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 the Company's 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 $1,184,590 to $1,669,597 in 1996. The
decrease was due to decreased assessments made by the state life insurance
guaranty associations and repeal of the tax on non-qualified annuities. These
assessments totaled $707,000 in 1996, $1,251,000 in 1995 and $1,072,000 in 1994.
The assessments are mandated by statute and are used by the various state life
insurance guaranty associations to guarantee the life, annuity and health
insurance policies of companies that have become insolvent. About $2,000 of the
1996 assessments, $340,000 of the 1995 assessments and $300,000 of the 1994
assessments can be recovered as credits on the Company's state premium tax
returns. These credits generally have remained available but are not guaranteed
by the states.
In 1991, the Pennsylvania legislature enacted a new law that imposed a 2 percent
premium tax on all non-qualified annuity premiums. This tax increased the
Company's premium taxes by $686,000 in 1995 and $522,000 in 1994. On June 30,
1995, Pennsylvania Act 21-1995 was signed into law which repealed the tax on
non-qualified annuities effective January 1, 1996.
<PAGE>
INCORPORATED BY REFERENCE, PAGES 13 AND 14 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company's ability to secure enough cash to meet
its contractual obligation and operating needs. Generally, insurance premiums
are collected prior to claims and benefit disbursements and these funds are
invested to provide necessary cash flows in future years. The Company's major
sources of cash from operations are life insurance premiums and investment
income. The net positive cash flow is used to fund Company commitments and to
build the investment portfolio, thereby increasing future investment returns.
Net cash provided by operating activities in 1996 was $14,480,503 compared to
$8,297,378 in 1995, and $12,805,742 in 1994. The Company's liquidity position
remains strong as invested assets grew by 14.8 percent during 1996 to $654
million at December 31, 1996. The majority of invested assets are liquid
marketable securities.
Premium from the sale of new policies, combined with the premium on existing
policies, accounted for approximately 37.6 percent of total revenue in 1996,
36.4 percent in 1995, and 38.1 percent in 1994. Investment income, net of
expenses, generated 55.5 percent of total revenue in 1996, 53.1 percent in 1995
and 54.4 percent in 1994. Also, the Company had realized gains on the sale of
investments which generated 6.0 percent of total revenue in 1996, 9.7 percent in
1995 and 6.7 percent in 1994.
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 revenue. Annuity and universal life deposits were $67,716,398 in 1996,
$74,541,897 in 1995, and $69,530,697 in 1994.
The Company's commitments for expenditures as of December 31, 1996 are primarily
for policy death benefits, policy surrenders and withdrawals, general operating
expense, federal income taxes, dividends to shareholders and the new policy
administration system, described below. 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 a bank will enable the
Company to meet any foreseeable cash requirements. At December 31, 1996, the
Company's line of credit with PNC Bank totaled $10 million, none of which was
outstanding.
During 1996, the Company made a decision to replace its life and annuity policy
administration systems with a new state-of-the art system called the Cyberlife
policy administration system from Cybertek Corporation of Dallas, Texas. In
addition to the cost of the software, expenditures for computer hardware,
technical and user training, project administration, and consulting will be
incurred in connection with this project. The financial commitments for this
system were made by Erie Indemnity Company, which will charge the Company for
the cost of the system over its estimated useful life. The total capital costs
of this project are expected to be about $2 million.
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.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 14 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
Accordingly, the maximum dividend payout which may be made in 1997 without prior
Pennsylvania commissioner approval is $10,516,000.
Risk-Based Capital
The Commonwealth of Pennsylvania has adopted the statutory accounting practices
(SAP) minimum risk- based capital requirements for domestic insurance companies
that were developed by the National Association of Insurance Commissioners
(NAIC). The formulas for determining the amount of risk-based capital specify
various weighing factors that are applied to financial balances or various
levels of activity based on the perceived degree of risk. These formulas
determine a ratio of the Company's regulatory total adjusted capital to its
authorized control level risk-based capital, as defined by the NAIC. Companies
below specific trigger points or ratios are classified within certain levels,
each of which requires specified corrective action. The levels and ratios are as
follows:
Ratio of Total Adjusted Capital to
NAIC Authorized Control Level Risk-Based
Regulatory Event Capital (Less than or Equal to)
Company action level 2.0 (or 2.5 with negative trends)
Regulatory action level 1.5
Authorized control level 1.0
Mandatory control level 0.7
Erie Family Life had regulatory total adjusted capital of $84 million and $76
million at December 31, 1996, and 1995, respectively, and a ratio of total
adjusted capital to authorized control level risk-based capital of 7.1 at both
December 31, 1996, and 1995, respectively. These levels exceed, by a substantial
margin, the minimum risk-based capital requirements.
During 1994, Pennsylvania adopted the NAIC Model Actuarial Opinion and
Memorandum Regulation. As a result, the Company's actuarial opinion for 1996 and
1995 included the results of an asset adequacy analysis, based primarily on cash
flow testing. The testing consisted of 20-year projections of existing business
under each of ten different interest rate scenarios. The cash flows and
projected market value surplus results were positive under all ten scenarios.
Surplus Note
On December 29, 1995, a surplus note in the amount of $15 million was issued by
the Company in accordance with Section 322.1 of the Pennsylvania Insurance
Company Law of 1921 as amended by the Act of December 18, 1992, P.L. 792 No. 178
(40 P.S. ss.445.1) to the Erie Indemnity Company (Indemnity) in exchange for
cash of $15 million. Interest on this note will be charged at an annual rate of
6.45 percent.
<PAGE>
INCORPORATED BY REFERENCE, PAGES 14 AND 15 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
Notwithstanding any other provision in this note, no payment of all or any
portion of the principal amount of this note shall be demanded by Indemnity
prior to December 31, 2005, provided that the Company may pay upon ten (10)
days' prior written notice to Indemnity, the interest on, or all or any portion
of the principal of, this note at any time without premium of penalty, subject
to the prior consent of the Insurance Commissioner of the Commonwealth of
Pennsylvania (the "Commissioner") to such repayment in accordance with the
provisions of Section 322.1 of the Insurance Company Law of 1921. Commencing on
December 31, 2005, the outstanding principal balance of this note (including all
accrued interest) shall be repayable on demand by Indemnity or under such terms
as Indemnity may elect, subject to the prior consent of the Commissioner to such
repayment in accordance with the provisions of law. Payment of principal and/or
interest is subordinated to payment of all other liabilities of the Company.
RESERVE LIABILITIES
The Company's primary commitment is its obligation to meet the payment of future
policy benefits under the terms of its life insurance and annuity contracts. To
meet these future obligations, the Company establishes life insurance reserves
based upon the type of policy, the age of the insured, and the number of years
the policy has been in force. The Company also establishes annuity and universal
life reserves based on the amount of Policyholder deposits (less applicable
policy charges) plus interest earned on those deposits. On December 31, 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 as the underlying policy reserves are generally also of a long-term
nature.
INVESTMENTS
The Company's investment strategies and portfolios are structured to match the
features of the life insurance and annuity products sold by the Company. Erie
Family Life's annuities and life insurance policies are long-term products;
therefore, the Company's investment strategy takes a long-term perspective
emphasizing investment quality, diversification, and superior investment
returns. The Company's investments are managed prudently on a total return
approach that focuses on current income and capital appreciation.
The Company's invested assets also are liquid in order to meet the short-term
and long-term commitments to Policyholders. At December 31, 1996 Erie Family
Life's investment portfolio of cash and money market investments,
investment-grade bonds, common stocks, and preferred stocks, all of which are
extremely marketable, totaled $636 million or 85.9 percent of total assets.
These resources provide the liquidity the Company requires to meet unforeseen
demands on its funds.
The total invested assets of the Company consist of investments in fixed
maturities, preferred stock, common stock, real estate, mortgage and policy
loans and other invested assets. At December 31, 1996, 78.8 percent of total
invested assets were invested in fixed maturities. Preferred stocks represent
16.9 percent or $111 million and common stocks represent 0.9 percent or $6
million of total invested assets at December 31, 1996, while real estate and
mortgage loans make up only 1.6 percent of total invested assets. Mortgage loan
and real estate investments have the potential for higher returns but also carry
more risk, including less liquidity and greater uncertainty of rate of return.
Consequently, these investments have been kept to a minimum. Invested assets at
December 31, 1996 and 1995 consisted of the following:
<PAGE>
INCORPORATED BY REFERENCE, PAGE 15 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
Invested Assets
In Thousands
1996 1995
Fixed Maturities
Available-for-Sale $515,530 $ 426,381
Equity Securities
Preferred Stock 110,566 122,910
Common Stock 5,986 3,415
Real Estate 1,710 1,796
Mortgage Loans 8,956 7,063
Policy Loans 4,382 3,694
Other Invested Assets 6,787 4,166
Total Invested Assets $653,917 $569,425
Fixed Maturities
The Company's fixed maturities at December 31, 1996 consist of investments in
bonds of $513.4 million and investments in redeemable preferred stock of $2.1
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 managed conservatively with the goal of achieving reasonable returns while
limiting exposure to risk.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 16 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
At December 31, 1996 the carrying value of fixed maturities was $515,529,699, or
78.8 percent of total invested assets. At December 31, 1996, the amortized cost,
carrying/market values, gross unrealized gains and gross unrealized losses for
fixed maturities were as follows:
Fixed Maturities at 12-31-96
<TABLE>
<CAPTION>
Amortized Carrying/ Unrealized Unrealized
Cost Market Values Gains Losses
<S> <C> <C> <C> <C>
U.S. Treasuries $ 6,476,927 $ 6,943,977 $ 467,050 $ 0
Foreign governments 2,986,046 2,970,000 0 16,046
Political
subdivisions 4,676,466 5,003,331 326,865 0
Special revenue 24,697,215 25,021,613 827,261 502,863
Public utilities 92,987,333 93,608,151 2,154,870 1,534,052
U.S. industrial and
miscellaneous 370,740,927 374,435,097 8,244,393 4,550,223
Foreign industrial
and miscellaneous 7,062,274 7,547,530 485,256 0
--------------- --------------- ------------- ------------
Total fixed
maturities
available-for-
sale $ 509,627,188 $ 515,529,699 $ 12,505,695 $ 6,603,184
=============== =============== ============= =============
</TABLE>
The bond investments included in the fixed maturity category consist of
high-quality, marketable securities, 99.6 percent or $511.6 million of which are
rated at investment-grade levels (Baa/BBB or better). Included in this
investment-grade category are $319.2 million of bonds characterized as of the
"highest" quality or "Class 1" securities as defined by the NAIC. Below
investment-grade bonds totaled $1.9 million at December 31, 1996 and are a very
manageable 0.3 percent of total invested assets. Included in the below
investment-grade category are $1.9 million of "medium" quality bonds and none of
the bonds are considered "low" quality. All of the securities classified as
below-investment-grade are current and in good standing. Generally, the fixed
maturity securities in the Company's portfolio are rated by external rating
agencies. If not externally rated, they are rated by the Company on a basis
consistent with the basis used by the rating agencies.
If management determines that any declines in market value of these investments
are other than temporary, the securities will be written down to the realizable
value of the investment and reflected in the statement of operations. If a bond
is in default of interest payments and it is determined that liquidation of the
security would be in the Company's best interest, the security will be sold to
return the proceeds to income-producing assets.
At December 31, 1996, the Company's five largest investments in corporate debt
securities totaled $31,000,655, none of which individually exceeded $6.7
million. These investments had a market value of $30.7 million.
<PAGE>
INCORPORATED BY REFERENCE, PAGES 16 AND 17 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
During the fourth quarter of 1995, the Financial Accounting Standards Board
(FASB) released a special report on FAS 115, Accounting for Certain Investments
in Debt and Equity Securities. The special report was prepared as a guide in
helping companies understand and comply with the provisions of FAS 115. The
special report also included important transition provisions that gave reporting
enterprises a limited period to reassess and reclassify their securities
holdings into FAS 115's three reporting categories. This "fresh start" provision
allowed reporting enterprises to reclassify "held-to-maturity" securities to
either of the two other categories without restriction. Any security transferred
from held-to-maturity to the available-for-sale or trading classifications were
to be marked-to-market at the time of transfer. At December 15, 1995, the
Company reclassified $152,135,307 or 100 percent of its held-to-maturity fixed
maturity securities to available-for-sale pursuant to the transition provisions
of the FASB's Special Report. As a result, the Company recognized $1,455,550 of
unrealized gains, net of deferred income taxes, at December 15, 1995, as an
adjustment to shareholders' equity related to this reclassification. Management
believes that having all fixed maturities classified as available-for-sale
securities will allow the Company to meet its liquidity needs and provide
greater flexibility for its investment managers to restructure the Company's
investments in response to changes in market conditions or strategic direction.
Securities classified as available-for-sale are carried at market value with
unrealized gains and losses included in shareholders' equity. At December 31,
1996 and 1995, unrealized gains on fixed maturities available-for-sale amounted
to $3,836,632 and $15,966,153, respectively, net of deferred taxes. Prior to the
adoption of FAS 115 in 1994, gains and losses on fixed maturities were not
recognized in the Company's financial statements until they were sold or became
impaired. At December 31, 1996, fixed maturities available-for-sale had a cost
of $509,627,188 and a market value of $515,529,699, representing an unrealized
gain of $5,902,511.
Equity Securities
Equity securities consist of common and nonredeemable preferred stocks which are
carried on the statements of financial position at current market value. At
December 31, 1996, common and nonredeemable preferred stock held by the Company
had a cost of $111,463,042 and a market value of $116,552,145, representing an
unrealized gain of $5,089,103. As with the bond portfolio, the Company's
nonredeemable preferred stock portfolio provides a source of highly predictable
current income that is very competitive with high-grade bonds. These securities
are well diversified within each market sector and support the investment return
provided to Policyholders. The nonredeemable preferred stocks are of very high
quality and extremely marketable, 96.3 percent or $106.5 million of which are of
the "highest" or "high" quality, as defined by the NAIC. The remaining $4.1
million of nonredeemable preferred stocks have a "medium" NAIC rating. There are
no nonredeemable preferred stocks in Erie Family Life's portfolio rated in the
"low," "lowest," or "in or near default" quality categories established by the
NAIC.
<PAGE>
INCORPORATED BY REFERENCE, PAGES 17 AND 18 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
Equity Securities at 12-31-96
<TABLE>
<CAPTION>
Carrying/ Unrealized Unrealized
Actual Cost Market Values Gains Losses
<S> <C> <C> <C> <C>
Common stock:
Industrial and
miscellaneous $ 5,500,006 $ 5,985,570 $ 490,855 $ 5,291
Preferred stock:
Public utilities 4,000,000 3,940,000 0 60,000
U.S. banks, trusts
and insurance
companies 78,622,165 81,682,550 3,685,885 625,500
Foreign banks,
trusts and insurance
companies 3,000,000 3,180,000 180,000 0
U.S. industrial and
miscellaneous 16,440,871 17,804,025 1,363,154 0
Foreign industrial
and miscellaneous 3,900,000 3,960,000 60,000 0
-------------- ------------ ------------ -----------
Total equity
securities $ 111,463,042 $116,552,145 $ 5,779,894 $ 690,791
============== ============= ============ ===========
</TABLE>
Other Investments
Real estate investments are carried on the statement of financial position at
cost, less allowances for depreciation and possible losses. Commercial mortgage
loans on real estate are carried at their unpaid balances, adjusted for
amortization of premium or discount, less allowances for possible loan losses.
Policy loans are carried at their unpaid balances.
The fair values of the Company's investments in real estate, mortgage loans,
policy loans, and other invested assets, approximate the book values presented
in the financial statements.
At December 31, 1996, the Company did not own any derivatives.
MANAGEMENT CHANGES
At the Board of Directors meeting on February 12, 1996, the Board elected
Stephen A. Milne President and Chief Executive Officer of Erie Family Life
Insurance Company, Erie Indemnity Company and Erie Insurance Company. On March
11, 1996, Mr. Milne was elected President and Chief Executive Officer of
Flagship City Insurance Company, Erie Insurance Property & Casualty Company, and
Erie Insurance Company of New York. Mr. Milne previously served as Executive
Vice President of Insurance Operations since 1993. Mr. Milne began his career
with the Erie Indemnity Company (Indemnity) in 1973 and has held several
positions in the claims and sales functions of Indemnity. In 1984 he became a
Vice President and in 1987 was named Senior Vice President of the Indemnity's
Marketing Services Division. Mr. Milne also was an ERIE Agent for three years.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 18 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
The former President and CEO and previous Chief Investment Officer of the Erie
Insurance Group of Companies, John M. Petersen, who retired as an employee of
Indemnity on December 31, 1995, entered into a consulting arrangement with
Indemnity effective January 2, 1996. Under the terms of the arrangement,
Indemnity engaged Mr. Petersen as a consultant to furnish the company and its
pension trust, the Erie Insurance Exchange, and Erie Family Life Insurance
Company, with investment services with respect to their investments in common
stocks.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
During 1996 federal banking reform legislation was proposed in Congress but was
hampered by issues surrounding the integration of banking and other financial
services, specifically banks affiliation with insurers and the sale of insurance
products by banks. In 1997 Congress most likely will advance financial service
and banking reform measures, including the issue of bank insurance powers. In
addition, during 1996 the U. S. Supreme Court ruled in the Barnett Bank case
that national banks can use subsidiary offices in small towns to sell insurance
anywhere in the country. The Barnett Bank decision held that state insurance
laws "that prevent or significantly interfere" with bank insurance activities
are preempted by federal banking laws. Regulatory and legislative reforms
affecting bank insurance powers and public policy will continue in 1997. The
Company could be affected adversely by regulatory and/or legislative reforms
which allow banks to sell life insurance products in the Company's markets.
In 1996 life insurance marketing reform legislation was enacted in Pennsylvania
with implementation required in 1997. The legislation regulates life insurance
policy illustrations, adds standard proof of delivery regulations for life
policy illustrations and life policies, and regulates replacements of policies
with another policy issued by the same insurer. The new disclosures and
documentation required by the legislation will increase the Company's costs
to market and deliver its life insurance products.
MARKET FOR THE REGISTRANT'S
COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Currently there is no market on which the Registrant's stock is traded. The
Company had 1,146 shareholders of common stock on December 31, 1996.
The Company affected a three-for-one (3 for 1) split of its common stock on
May 2, 1996.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 18 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
Date Dividends Declared Dividends per Share Declared *
March 2, 1995 .113
April 25, 1995 .113
June 22, 1995 .113
September 21, 1995 .113
February 29, 1996 .125
May 1, 1996 .125
June 17, 1996 .125
September 17, 1996 .125
*Adjusted to reflect three-for-one stock split effective May 2, 1996.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995: Statements contained herein expressing the beliefs of management such as
those contained in the "Benefits and Expenses", "Liquidity and Capital
Resources", and the "Factors Which May Affect Future Results" sections hereof,
and the other statements which are not historical facts contained in this
report, are forward looking statements that involve risks and uncertainties.
These risks and uncertainties include but are not limited to: legislative,
judicial, and regulatory changes, the impact of competitive products and
pricing, product development, geographic spread of risk, catastrophic events,
better (or worse) morbidity rates, securities market fluctuations and
technological difficulties and advancements.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 19 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
GLOSSARY OF SELECTED INSURANCE TERMS
Annuity - Contract which provides for a series of fixed or variable periodic
payments from a stated or contingent date for a specified period, such as for a
number of years or for life.
Carrying Value - The amount reported for an asset or liability in the financial
statements in conformity with generally accepted accounting principles ("GAAP")
or statutory accounting practices ("SAP"), whichever is applicable in the
circumstances.
Deferred Policy Acquisition Costs (DAC) - The costs of acquiring new business,
principally commissions and certain costs of issuing policies, including
underwriting, salaries and medical examinations, all of which vary with and are
related primarily to the production of new business. These costs are deferred
and amortized over the premium paying period on the related policies in
proportion to the ratio of the annual premium revenue to the total anticipated
premium revenue.
Future Policy Benefits - Liabilities established on a GAAP basis whose minimum
levels are determined by law and which are established to adequately provide for
benefits ultimately payable to policyholders.
Interest Rate Credited - Interest rate applied to funds accumulated under
annuity and universal life contracts, whether guaranteed or currently declared
by the insurer.
In Force - Total amount of insurance coverage or number of policies or annuity
contracts that are in effect.
Independent Agents - Independent contractors who represent one or more insurers
and are licensed to sell the insurers' products.
National Association of Insurance Commissioners (NAIC) - An association of the
top regulatory officials of all 50 states and the District of Columbia organized
to promote consistency of regulatory practices and statutory accounting
practices throughout the United States.
Premiums - Money paid by the policyholder to an insurance company for an
insurance policy or annuity.
Statutory Accounting Practices (SAP) - SAP provides for recording transactions
and preparing financial statements in accordance with the rules and procedures
prescribed or permitted by state statute or regulatory authorities. Such
practices generally reflect a liquidating rather than a going concern basis of
accounting. The principal difference between SAP and GAAP are as follows:
(a) under SAP, certain assets ("nonadmitted" assets) are eliminated from the
statements of financial position; (b) under SAP, policy acquisition costs are
expensed as incurred, while under GAAP, they are deferred and amortized over the
premium paying period of the related policies sold; (c) under SAP, no provision
is made for deferred income taxes and (d) under SAP, certain reserves are
recognized which are not recognized for GAAP.
Statutory Capital and Surplus - Statutory Capital is the amount received from
the sale of shares of stock in the Company. Statutory Surplus is the excess of
assets over liabilities and capital, as determined in accordance with statutory
accounting practices.
<PAGE>
Index to Graphs included in the Investment Section
of The Management's Discussion and Analysis
Graph #1 DISTRIBUTION OF INVESTED ASSETS
at December 31, 1996
Fixed Maturities - Available for Sale 78.8%
Nonredeemable Preferred Stocks 16.9%
Mortgage Loans 1.4%
Other Invested Assets 1.0%
Common Stocks 0.9%
Policy Loans 0.7%
Real Estate 0.3%
Graph #2 DIVERSIFICATION OF FIXED MATURITIES
at December 31, 1996 - Carrying/Market Value
U.S. Industrial & Miscellaneous 72.6%
Public Utilities 18.2%
Special Revenue 4.8%
Foreign Industrial & Miscellaneous 1.5%
U.S. Treasuries 1.3%
Political Subdivision 1.0%
Foreign Governments 0.6%
Graph #3 QUALITY* OF BOND PORTFOLIO
at December 31, 1996 - Carrying/Market Value
A/A $217.1 Million 42.3%
BBB/Baa $155.6 Million 30.3%
AAA/Aaa $72.4 Million 14.1%
AA/Aa $66.4 Million 12.9%
BB/Ba $1.9 Million 0.4%
* As rated by Standard & Poor's or Moody's Investor's Service, Inc.
Graph #4 DIVERSIFICATION OF EQUITY SECURITIES
at December 31, 1996 - Carrying/Market Value
(2) U.S. Banks & Insurance 70.1%
(2) U.S. Industrial & Miscellaneous 15.3%
(1) Industrial & Miscellaneous 5.1%
(2) Public Utilities 3.4%
(2) Foreign Industrial & Miscellaneous 3.4%
(2) Foreign Banks & Insurance 2.7%
(1) Common Stock
(2) Preferred Stock
<PAGE>
INCORPORATED BY REFERENCE, PAGE 20 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Erie Family Life Insurance Company
Erie, Pennsylvania
We have audited the accompanying statements of financial position of Erie Family
Life Insurance Company as of December 31, 1996 and 1995, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Erie Family Life Insurance
Company as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.
Erie, Pennsylvania
February 18, 1997
<PAGE>
INCORPORATED BY REFERENCE, PAGE 22 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
As of December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Investments
Fixed maturities, at fair value
(amortized cost of $509,627,188
and $401,771,542) $515,529,699 $426,381,008
Equity securities, at fair value
(cost of $111,463,042 and
$125,763,874, respectively) 116,552,145 126,324,721
Real estate 1,710,329 1,796,395
Policy loans 4,381,657 3,694,530
Mortgage loans on real estate 8,955,760 7,062,742
Other invested assets 6,787,226 4,165,721
------------ ------------
Total investments $653,916,816 $569,425,117
Cash, including short-term cash
investments of $7,789,063
and $35,230,606, respectively 6,284,102 34,847,347
Premiums receivable 2,974,305 2,701,578
Reinsurance recoverable 212,583 265,514
Other receivables 567,216 254,674
Accrued investment income 9,792,095 9,044,136
Deferred policy acquisition costs 58,026,428 50,762,292
Reserve credit for reinsurance ceded 4,199,907 3,484,190
Other assets 4,677,208 3,009,313
Total assets $740,650,660 $673,794,161
============ ============
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 22 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Future life policy benefits $ 54,033,860 $ 48,768,739
Policy and contract claims 1,703,105 897,026
Annuity deposits 450,570,003 405,346,808
Universal life deposits 56,856,590 45,971,842
Supplementary contracts not
including life contingencies 839,258 872,745
Other policyholder funds 5,763,271 5,238,897
Current federal income taxes
payable 686,353 261,471
Deferred federal income taxes 15,614,492 16,979,255
Reinsurance premium due 203,198 360,478
Accounts payable and accrued
liabilities 4,519,782 2,728,133
Note payable to affiliate 15,000,000 15,000,000
Due to affiliate 1,049,007 1,392,365
Dividends payable 1,181,252 1,071,000
------------ ------------
Total liabilities $608,020,171 $544,888,759
------------ ------------
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 taxes of
$3,847,065 and $8,809,609,
respectively 7,144,549 16,360,704
Retained earnings 121,075,940 108,134,698
------------ ------------
Net shareholders' equity $132,630,489 $128,905,402
------------ ------------
Total liabilities and
shareholders' equity $740,650,660 $673,794,161
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 21 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Policy
Life premiums $29,038,797 $25,764,413 $22,931,783
Group 2,077,365 2,309,584 1,961,700
----------- ----------- -----------
Total policy
revenues $31,116,162 $28,073,997 $24,893,483
Investment income, net
of expenses 45,948,969 40,962,812 35,566,249
Realized gains on
investments 4,986,897 7,483,798 4,411,334
Other income 668,210 556,814 534,489
----------- ----------- -----------
Total revenues $82,720,238 $77,077,421 $65,405,555
----------- ----------- -----------
Benefits and expenses
Death benefits $ 9,688,242 $ 7,438,758 $ 4,068,876
Interest on annuity
deposits 25,108,877 22,718,786 18,163,588
Interest on universal
life deposits 3,190,951 2,628,397 1,981,767
Surrender and other
benefits 1,047,474 721,412 607,947
Increase in future life
policy benefit 4,549,404 4,619,996 2,611,084
Amortization of deferred
policy acquisition
costs 3,141,350 2,358,127 1,979,765
Commissions 1,841,861 1,531,798 930,183
General expenses 5,839,795 5,802,088 5,775,026
Taxes, licenses,
and fees 1,669,597 2,854,187 2,807,813
----------- ----------- -----------
Total benefits
and expenses $56,077,551 $50,673,549 $38,926,049
----------- ----------- -----------
Income from
operations $26,642,687 $26,403,872 $26,479,506
----------- ----------- -----------
Federal income taxes
Current $ 5,378,656 $ 7,607,573 $ 8,179,901
Deferred 3,597,781 914,707 1,469,927
----------- ----------- -----------
Total federal
income taxes $ 8,976,437 $ 8,522,280 $ 9,649,828
----------- ----------- -----------
Net income $17,666,250 $17,881,592 $16,829,678
=========== =========== ===========
Net income per
share $ 1.87 $ 1.89 $ 1.78
=========== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 24 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net
Unrealized
Appreciation
(Depreciation) Net
Additional on Available- Share-
Common Paid-In for-Sale Retained holders'
Stock Capital Securities Earnings Equity
<S> <C> <C> <C> <C> <C>
Balance at
January 1,
1994 $3,780,000 $630,000 $ 3,847,458 $ 81,487,428 $ 89,744,886
Net income 16,829,678 16,829,678
Net change
during year ( 21,437,365) ( 21,437,365)
FAS 115
cumulative
effect,
net of
deferred
taxes 9,498,382 9,498,382
Dividends
declared,
$.40 per
share ( 3,780,000) ( 3,780,000)
---------- -------- ----------- ------------ ------------
Balance at
December 31,
1994 $3,780,000 $630,000 ($ 8,091,525) $ 94,537,106 $ 90,855,581
Net income 17,881,592 17,881,592
Net change
during year 24,452,229 24,452,229
Dividends
declared,
$.453 per
share ( 4,284,000) ( 4,284,000)
---------- -------- ----------- ------------ ------------
Balance at
December 31,
1995 $3,780,000 $630,000 $16,360,704 $108,134,698 $128,905,402
Net income 17,666,250 17,666,250
Net change
during year ( 9,216,155) ( 9,216,155)
Dividends
declared,
$.50 per
share ( 4,725,008) ( 4,725,008)
---------- -------- ----------- ------------ ------------
Balance at
December 31,
1996 $3,780,000 $630,000 $ 7,144,549 $121,075,940 $132,630,489
========== ======== =========== ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 23 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,666,250 $ 17,881,592 $16,829,678
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Net amortization of
bond and mortgage
premium and discount 733,881 129,922 55,548
Amortization of deferred
policy acquisition
costs 3,141,350 2,358,127 1,979,765
Real estate depreciation 86,066 102,233 103,697
Deferred federal
income taxes 3,597,781 914,707 1,469,927
Realized gains on
investments ( 4,986,897) ( 7,483,798) ( 4,411,334)
Increase in premiums
receivable ( 272,727) ( 400,857) ( 320,456)
(Increase) decrease in
other receivables ( 312,542) 6,904 57,007
Increase in accrued
investment income ( 747,959) ( 655,835) ( 2,478,420)
Deferred policy
acquisition costs ( 10,405,486) ( 8,168,624) ( 8,448,722)
Increase in other assets ( 1,667,895) ( 1,017,015) ( 320,519)
Increase in reinsurance
receivables and reserve
credits ( 662,786) ( 51,832) ( 1,064,706)
Increase in future life
policy benefits and
claims 6,071,200 4,818,105 3,373,539
Increase (decrease) in
other policyholder funds 524,374 ( 1,113,579) 4,703,564
(Decrease) increase in
reinsurance premium due ( 157,280) 167,343 62,937
Increase in federal
income taxes currently
payable 424,882 1,112,791 112,759
Increase (decrease) in
accounts payable and
due to affiliate 1,448,291 ( 302,806) 1,101,478
------------ ------------ -----------
Net cash provided by
operating activities $ 14,480,503 $ 8,297,378 $12,805,742
------------ ------------ -----------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 23 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturity securities:
Held-to-maturity:
Maturities $ $ 7,948,330 $11,255,303
Purchases ( 40,754,128)
Available-for-sale:
Maturities 24,052,115 6,764,396 3,107,563
Sales proceeds 17,218,796 45,479,179 36,191,487
Purchases ( 149,403,614) ( 119,758,853) ( 95,059,515)
Equity securities:
Sales proceeds 37,128,238 37,486,994 18,402,366
Purchases ( 18,394,580) ( 40,995,932) ( 26,662,706)
Purchase of mortgage loans ( 2,752,196) ( 2,000,000)
Principal payments received
on mortgage loans 1,026,426 572,056 5,991,967
Loans made to policyholders ( 1,317,369) ( 999,584) ( 821,201)
Payments received on
policy loans 630,242 486,365 449,806
Purchase of other invested
assets ( 3,170,391) ( 2,510,832) ( 1,644,339)
Sales of other invested
assets 478,885 602,254 6,172,966
------------ ------------ -----------
Net cash used in
investing activities ($ 94,503,448) ($ 64,925,627) ($85,370,431)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in annuity
deposits and
supplementary contracts $ 45,189,708 $ 64,209,943 $59,661,171
Increase in universal
life deposits 10,884,748 9,864,440 8,363,194
Borrowed money 15,000,000
Dividends paid to
shareholders ( 4,614,756) ( 4,158,000) ( 3,701,253)
------------ ------------ -----------
Net cash provided by
financing activities $ 51,459,700 $ 84,916,383 $64,323,112
------------ ------------ -----------
Net increase (decrease) in
cash and short-term cash
investments ($ 28,563,245) $ 28,288,134 ($ 8,241,577)
Cash and short-term cash
investments at beginning
of year 34,847,347 6,559,213 14,800,790
------------ ------------ -----------
Cash and short-term cash
investments at end of year $ 6,284,102 $ 34,847,347 $ 6,559,213
============ ============ ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 23 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the
year for:
Interest $ 971,154 $ 632 $ 37,580
Income taxes 4,953,774 6,494,782 8,067,142
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
Note 1. Nature of Business
Erie Family Life Insurance Company (the Company) was
incorporated in the Commonwealth of Pennsylvania on May 23,
1967. The Company is engaged in the business of underwriting and
selling nonparticipating individual and group life insurance
policies, including universal life, and annuity products. The
Company markets its products through independent agents in eight
states and the District of Columbia and is subject to
supervision and regulations of the states in which it does
business. A majority of the Company's business is written in
Pennsylvania, Ohio, Maryland and Virginia. The Company also
sells a significant amount of annuities to its affiliated
companies of the Erie Insurance Group. Approximately 32% of
annuity reserves at December 31, 1996 relate to business with
Erie Insurance Group affiliates. See also Note 7.
Note 2. Basis of Presentation and Significant Accounting Policies
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP).
(a) Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
(b) Investments
Investments are shown on the following bases:
Fixed maturities available-for-sale which consists
of bonds, notes, and redeemable preferred stocks -
at fair value.
Equity securities which consists of common and
nonredeemable preferred stocks - at fair value.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 2. Basis of Presentation and Significant Accounting Policies
(Continued)
Fair values are determined by quoted market prices for
those instruments that are actively traded in financial
markets. In cases where quoted market prices are not
available, the Company uses the services of various
brokerage companies to assist in pricing. The effect of
revaluing available-for-sale securities to their
respective fair values, net of deferred taxes, is
reflected as a separate component of shareholders'
equity.
No securities are held for trading purposes.
Realized gains and losses on sales of investments are
recognized on a specific identification basis.
In May 1993, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and
Equity Securities" (FAS 115). The Company adopted the
provisions of the new standard for investments held as
of January 1, 1994. The cumulative effect, as of
January 1, 1994, of adopting FAS 115 increased
shareholders' equity by $9,498,382 (net of $5,114,513
in deferred income taxes) to reflect the net unrealized
gains on securities classified as available-for-sale
previously carried at amortized cost or lower of cost
or market value. Adoption of FAS 115 did not have any
effect on deferred policy acquisition costs.
FAS 115 requires management to determine the
appropriate classification of securities at the date of
adoption, and thereafter at the date individual
investment securities are acquired. The appropriateness
of such classification is also reassessed at each
balance sheet date.
During 1995, the Financial Accounting Standards Board
(FASB) allowed a one-time reclassification of
held-to-maturity securities to available-for-sale
securities. At December 15, 1995, the Company
reclassified $152,135,307 or 100% of its
held-to-maturity securities to available-for-sale,
pursuant to the transition provisions of the FASB's
special report on FAS 115. The Company recognized
$1,455,550 of unrealized gains net of deferred income
taxes at December 15, 1995 relating to this
reclassification.
Premiums and discounts on investments in debt
securities are amortized over their contractual lives.
Realized gains and losses, including losses from
declines in value of specific securities determined by
management to be other-than-temporary, are included in
income.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 2. Basis of Presentation and Significant Accounting Policies
(Continued)
(c) Deferred Policy Acquisition Costs
The costs of acquiring new business, principally
commissions and certain costs of issuing policies,
including underwriting salaries and medical
examinations, all of which vary with and are primarily
related to the production of new business, have been
deferred. For traditional life insurance, these costs
are being amortized over the premium paying period of
the related policies in proportion to the total
anticipated premium revenue stream. Anticipated premium
revenue was estimated using the same assumptions which
were used for computing liabilities for future policy
benefits. The amount of costs to be deferred would be
reduced to the extent future policy premiums and
anticipated investment income would not exceed related
costs.
Universal life and annuity deferred acquisition costs
are being amortized in relation to the present value of
estimated future gross profits on the contracts over a
20 year period.
Policy acquisition costs are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at
beginning
of year $50,762,292 $44,951,795 $38,482,838
Additions 10,405,486 8,168,624 8,448,722
Amortization ( 3,141,350) ( 2,358,127) ( 1,979,765)
----------- ----------- -----------
Balance at end
of year $58,026,428 $50,762,292 $44,951,795
=========== =========== ===========
</TABLE>
(d) Policy Revenues and Deposits
Premiums on traditional life insurance contracts are
reported as earned revenue when due. For universal life
and annuity contracts, deposits are recorded in a
policyholder account which is classified as a
liability. Revenue is recognized as amounts are
assessed against the policyholder account for mortality
coverage and contract expenses.
Annuity deposits in 1996, 1995 and 1994 included
$4,894,042, $6,024,125 and $8,880,714, respectively, of
deposits on annuity contracts purchased by the Erie
Insurance Group Retirement Plan for Employees.
Structured settlement annuities sold to affiliate
property and casualty companies of the Erie Insurance
Group totalled $13,504,953, $22,018,313 and
$11,431,965, in 1996, 1995, and 1994, respectively.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 2. Basis of Presentation and Significant Accounting Policies
(Continued)
(e) Policy Liabilities and Accruals
Liabilities for life insurance and income-paying
annuity future policy benefits have been computed
primarily by the net level premium method with
assumptions as to anticipated mortality, withdrawals,
lapses, and investment yields. Deferred annuity future
policy benefit liabilities have been established at
accumulated values without reduction for surrender
charges. Reserves for universal life and investment
contracts are based on the contract account balance, if
future benefit payments in excess of the account
balance are not guaranteed, or the present value of
future benefit payments when such payments are
guaranteed. Variations are inherent in such
calculations due to the estimates and assumptions
necessary in the calculations. Significant assumptions
pertinent to policy liabilities follow:
<TABLE>
<CAPTION>
Years
of Issue Policy Type Interest Mortality Withdrawal
<S> <C> <C> <C> <C>
1967-1975 All life 4% graded 1955-60 Basic Select Modified
to 3 1/2% Plus Ultimate Linton B
1976-1980 All life 6% graded 1955-60 Basic Select Linton B
to 4% Plus Ultimate
1981-1988 Permanent life 7 1/4% graded 85% of 1965-70 150% of
to 6% Select and Ultimate Linton A
1981-1988 Other life 7 1/4% graded 85% or 90% of 1965- Pricing
to 6% 70 assumptions
Select and Ultimate
1988-1996 All life and 7% graded Multiples of 1965- Pricing
annual renew- to 6% 70 assumptions
able term Select and Ultimate
1987-1996 Universal life 7 1/4% graded 85% or 90% of 1965- Pricing
to 6% 70 assumptions
Select and Ultimate
</TABLE>
Annuities are subject to varying interest rates
determined at the discretion of the Company subject to
certain minimums. During 1996, annuity deposits earned
interest at rates ranging from 5.00% to 6.75%.
Management believes the fair value of annuity and
universal life deposits approximates the amounts
recorded in the financial statements, since these
obligations are generally subject to fluctuating
interest rates.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 2. Basis of Presentation and Significant Accounting Policies
(Continued)
(f) Mortgage Loans and Other Invested Assets
Mortgage loans are comprised primarily of commercial
real estate mortgage loans and are carried on the
statements of financial position at unpaid balances
adjusted for amortization of premium or discount, less
allowance for possible losses. Other invested assets
(primarily investments in real estate limited
partnerships) are recorded under the equity method of
accounting. The fair values of mortgage loans and other
invested assets approximate the amounts presented in
the financial statements. Fair values were determined
based on analyses of historic and forecasted cash
flows.
(g) Segment Information
All of the operations of the Company are considered
"life insurance" operations.
(h) Earnings per Share
Earnings per share amounts are based on the weighted
average number of common shares outstanding during each
of the respective years.
(i) Income Taxes
Income tax provisions are based on earnings reported
for financial statement purposes. Provisions for income
taxes include deferred taxes resulting from changes in
cumulative temporary differences between the tax bases
and financial statement bases of assets and
liabilities.
Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws and rates on the
date of enactment.
(j) Short-Term Investments
The Company considers all highly liquid investments
purchased with an original maturity of three months or
less to be short-term investments. Carrying amounts
approximate fair value because of the short maturity of
these investments.
(k) Reclassifications
Certain amounts as previously reported have been
reclassified to conform to the current year's
presentation.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 3. Investments
Fixed Maturities:
At December 31, 1996, the amortized cost, estimated fair values,
unrealized gains, and unrealized losses for investments in fixed
maturities (all of which are available-for-sale) are as follows:
<TABLE>
<CAPTION>
Amortized Estimated Unrealized Unrealized
Cost Fair Values Gains Losses
<S> <C> <C> <C> <C>
U. S. Treasuries $ 6,476,927 $ 6,943,977 $ 467,050 $
Foreign govern-
ments 2,986,046 2,970,000 16,046
Political
subdivisions 4,676,466 5,003,331 326,865
Special revenue 24,697,215 25,021,613 827,261 502,863
Public utilities 92,987,333 93,608,151 2,154,870 1,534,052
U. S. industrial
and miscellaneous 370,740,927 374,435,097 8,244,393 4,550,223
Foreign industrial
and miscellaneous 7,062,274 7,547,530 485,256
------------ ------------ ----------- -----------
Total fixed
maturities
available-for-
sale $509,627,188 $515,529,699 $12,505,695 $ 6,603,184
============ ============ =========== ===========
</TABLE>
At December 31, 1995, the amortized cost, estimated fair values,
unrealized gains, and unrealized losses for investments in fixed
maturities available-for-sale were as follows:
<TABLE>
<CAPTION>
Amortized Estimated Unrealized Unrealized
Cost Fair Values Gains Losses
<S> <C> <C> <C> <C>
U. S. Treasuries $ 6,568,499 $ 7,442,496 $ 874,234 $ 237
Political
subdivisions 2,063,013 2,310,929 247,916
Special revenue 50,683,120 52,853,098 2,861,312 691,334
Public utilities 101,653,629 105,456,784 4,289,346 486,191
U. S. industrial
and miscellaneous 233,734,928 250,337,701 17,226,921 624,148
Foreign industrial
and miscellaneous 7,068,353 7,980,000 911,647
------------ ------------ ----------- -----------
Total fixed
maturities
available-for-
sale $401,771,542 $426,381,008 $26,411,376 $ 1,801,910
============ ============ =========== ===========
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 3. Investments (Continued)
The following is a summary of fixed maturities
available-for-sale at December 31, 1996, by remaining term to
contractual maturity:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Values
<S> <C> <C>
Maturity during the year
ending December 31
1997 $ 249,806 $ 252,813
1998-2001 60,650,272 59,549,556
2002-2006 105,473,662 105,235,615
Subsequent to 2006 341,253,448 348,421,715
Redeemable preferred stock 2,000,000 2,070,000
------------ ------------
$509,627,188 $515,529,699
============ ============
</TABLE>
Bonds having a fair value of $1,903,500 at December 31, 1996
were on deposit with various regulatory authorities as required
by law. Bonds having a fair value of $16,175,000 are also
pledged as collateral on a $10,000,000 line of credit with a
bank. There were no borrowings outstanding on the line as of
December 31, 1996.
Equity Securities:
At December 31, 1996, cost, estimated fair values, unrealized
gains, and unrealized losses for investments in equity
securities were as follows:
<TABLE>
<CAPTION>
Estimated Unrealized Unrealized
Cost Fair Values Gains Losses
<S> <C> <C> <C> <C>
Common stock:
Industrial and
miscellaneous $ 5,500,006 $ 5,985,570 $ 490,855 $ 5,291
Preferred stock:
Public utilities 4,000,000 3,940,000 60,000
U. S. banks,
trusts and
insurance companies 78,622,165 81,682,550 3,685,885 625,500
Foreign banks, trusts
and insurance
companies 3,000,000 3,180,000 180,000
U. S. industrial
and miscellaneous 16,440,871 17,804,025 1,363,154
Foreign industrial
and miscellaneous 3,900,000 3,960,000 60,000
------------ ------------ ---------- --------
Total equity
securities $111,463,042 $116,552,145 $5,779,894 $690,791
============ ============ ========== ========
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 3. Investments (Continued)
At December 31, 1995, cost, estimated fair values, unrealized
gains, and unrealized losses for investments in equity
securities were as follows:
<TABLE>
<CAPTION>
Estimated Unrealized Unrealized
Cost Fair Values Gains Losses
<S> <C> <C> <C> <C>
Common stock:
Industrial and
miscellaneous $ 3,500,006 $ 3,414,640 $ $ 85,366
Preferred stock:
Public utilities 5,273,282 5,299,712 26,430
U. S. banks, trusts
and insurance
companies 80,749,715 81,431,625 2,811,760 2,129,850
Foreign banks, trusts
and insurance
companies 3,000,000 3,225,000 225,000
U. S. industrial
and miscellaneous 29,340,871 29,013,744 1,575,500 1,902,627
Foreign industrial
and miscellaneous 3,900,000 3,940,000 40,000
------------ ------------ ---------- ----------
Total equity
securities $125,763,874 $126,324,721 $4,678,690 $4,117,843
============ ============ ========== ==========
</TABLE>
Net unrealized gains and losses on investments in fixed
maturities available-for-sale and equity securities are credited
to or charged directly against shareholders' equity. At December
31, 1996, net unrealized gains on these securities of $7,144,549
consisted of $18,285,589 in unrealized gains less $7,293,975 in
unrealized losses and deferred taxes of $3,847,065.
At December 31, 1996, the Company did not have investments in
securities of any single issuer which equalled or exceeded 10%
of net shareholders' equity, except for federal home loan
debentures, which equal approximately 10% of net shareholders'
equity.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 3. Investments (Continued)
Realized gains and losses for fixed maturity or equity
securities were as follows for the years ended December 31,:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Realized gains:
Fixed maturities 778,043 3,339,981 2,950,262
Preferred stock 652,786 3,655,231 1,465,492
Common stock 4,258,198 2,978,421 1,097,548
---------- ---------- ----------
5,689,027 9,973,633 5,513,302
========== ========== ==========
Realized losses:
Fixed maturities 325,843 1,711,293 1,016,607
Preferred stock 85,976 508,085 85,341
Common stock 290,311 270,457 20
---------- ---------- ----------
702,130 2,489,835 1,101,968
========== ========== ==========
</TABLE>
Changes in unrealized gains (losses) include the following for
the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Equity securities $ 4,528,256 $ 8,580,049 ($13,938,368)
Debt securities
available-for-sale ( 18,706,955) 26,799,457 ( 19,042,193)
Transferred to
available-for-sale
securities 2,239,307
Deferred federal
income taxes 4,962,544 ( 13,166,584) 11,543,196
----------- ----------- -----------
Net unrealized
capital gains
(losses) for the
year ($ 9,216,155) $24,452,229 ($21,437,365)
=========== =========== ===========
</TABLE>
Investment income consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Dividends $10,168,153 $10,033,662 $ 9,413,996
Interest 36,755,946 31,160,233 26,085,767
Other 423,120 464,892 461,320
Less expenses ( 1,398,250) ( 695,975) ( 394,834)
----------- ----------- -----------
$45,948,969 $40,962,812 $35,566,249
=========== =========== ===========
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 4. Liability for Unpaid Policy and Contract Claims
Activity in the liability for unpaid policy and contract claims
is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1 $ 897,026 $ 797,485 $1,155,359
Less reinsurance
recoverables ( 135,597) ( 112,203) ( 271,806)
Less unpaid matured
endowments ( 16,370)
----------
Net balance at January 1 $ 745,059 $ 685,282 $ 883,553
Total death claims
incurred 9,688,242 7,438,758 4,068,876
Total death claims paid 8,863,167 7,378,981 4,267,147
---------- ---------- ----------
Net balance at
December 31 $1,570,134 $ 745,059 $ 685,282
Plus reinsurance
recoverables 132,971 135,597 112,203
Plus unpaid matured
endowment 16,370
Balance at December 31 $1,703,105 $ 897,026 $ 797,485
========== ========== ==========
</TABLE>
Note 5. Life Premiums and Annual Annuity and Universal Life Deposits
Premiums on life insurance contracts and deposits on annuity and
universal life contracts are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Life insurance premiums:
First year $ 6,505,484 $ 5,624,117 $ 5,563,765
Renewal 22,533,313 20,140,296 17,368,018
----------- ----------- -----------
$29,038,797 $25,764,413 $22,931,783
=========== =========== ===========
Annuity and universal
life deposits, net
of loading:
First year
and single $50,651,063 $57,606,715 $53,965,315
Renewal 17,065,335 16,935,182 15,565,382
----------- ----------- -----------
$67,716,398 $74,541,897 $69,530,697
=========== =========== ===========
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 6. Federal Income Taxes
Differences between tax expense and the amount computed by
applying the federal income tax rate of 35% to income from
operations are set forth as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -------
<S> <C> <C> <C>
Federal income taxes
at statutory rates $9,324,940 $9,241,355 $9,267,827
Dividends received
deduction and
tax-exempt interest ( 772,484) ( 437,130) ( 398,527)
Other 423,981 ( 281,945) 780,528
---------- ---------- ----------
Income tax expense $8,976,437 $8,522,280 $9,649,828
========== ========== ==========
</TABLE>
Temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities that give rise
to deferred tax assets (liabilities) at December 31, 1996 and
1995, relate to the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred policy acquisition costs ($17,613,507) ($15,404,226)
Liability for future life and
annuity policy benefits 6,739,570 7,527,275
Unrealized gains ( 3,847,065) ( 8,809,609)
Other ( 893,490) ( 292,695)
----------- -----------
($15,614,492) ($16,979,255)
=========== ===========
</TABLE>
Note 7. Related Party Transactions
The Erie Family Life Insurance Company is owned 21.6% by the
Erie Indemnity Company and 52.2% by the Erie Insurance Exchange.
The Erie Indemnity Company (EIC) is the attorney-in-fact for the
Erie Insurance Exchange (Exchange). Certain operating expenses
of the Company are paid by EIC and common expenses are
allocated. Such allocated expenses comprise the major portion of
Company general expenses.
The Company owns certain real estate which it leases to EIC for
rentals of $423,120 per year through December 31, 2000. The real
estate is recorded net of accumulated depreciation of $1,110,419
and $1,024,352 at December 31, 1996 and 1995, respectively.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 7. Related Party Transactions (Continued)
The Erie Insurance Group affiliated property/casualty insurance
companies periodically purchase annuities from the Company in
connection with the structured settlement of claims. Also, the
Erie Insurance Group Retirement Plan for Employees purchases
from the Company, individual annuities for some terminated
vested employees or beneficiaries receiving benefits (excluding
disabled and deferred vested participants). These are
non-participating annuity contracts under which the Company has
unconditionally contracted to provide specified benefits to
beneficiaries in return for a fixed premium from the Plan.
Annuity deposit balances outstanding relating to pension
annuities sold to the Erie Insurance Group Retirement Plan are
$32,812,000 and $28,744,000 at December 31, 1996 and 1995,
respectively. The reserves held for structured settlement
annuities sold to the affiliated property/casualty insurance
companies equal $94,096,000 and $81,709,000 at December 31, 1996
and 1995, respectively.
On December 29, 1995 a Note Payable in the amount of
$15,000,000, was issued by the Company in accordance with
Pennsylvania Insurance Company Law to the EIC in exchange for a
cash sum of $15,000,000. Interest on this Note is charged at an
annual rate of 6.45% per annum. No payment of any portion of the
principal amount of this Note shall be demanded by EIC prior to
December 31, 2005. However, the Company may pay, upon ten days
prior written notice to EIC, the interest or any portion of the
principal of this Note without premium of penalty, subject to
the prior consent of the Insurance Commissioner of the
Commonwealth of Pennsylvania. Commencing on December 31, 2005
the outstanding principal balance of this Note (including all
accrued interest) shall be repayable on demand by EIC or under
such terms as EIC may elect, subject to the prior consent of the
Commissioner.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 8. Reinsurance
The Company cedes insurance to other insurers and reinsurers
under various contracts (typically under excess of loss
contracts) which cover individual risks. These reinsurance
arrangements minimize losses arising from large risks or from
hazards of an unusual nature. The Company accounts for
reinsurance activities in accordance with Statement of Financial
Accounting Standards No. 113 ("SFAS 113"), "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts." Pursuant to these standards, amounts recoverable or
credited under reinsurance contracts, are included in total
assets as reinsurance recoverable or credited for reinsurance
ceded. The cost of reinsurance related to long-duration
contracts is accounted for over the life of the reinsured
policies using assumptions consistent with those used to account
for the underlying policies.
A contingent liability exists with respect to reinsurance
receivables and the reserve credit for reinsurance ceded which
would become a liability in the event such reinsurance companies
are unable to meet their obligations under the existing
reinsurance agreements. These agreements do not relieve the
Company of its primary obligation to its policyholders.
Policy revenues, benefits and expenses reflected in the
statements of operations have been reduced by the following
amounts due to reinsurance cessions:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Policy revenues $3,634,876 $3,354,484 $3,185,718
Death benefits 1,846,353 1,040,858 695,567
Future life policy
benefits 715,717 98,567 1,120,329
Commissions 1,367,873 1,272,530 1,363,267
</TABLE>
The Company has an insignificant amount of reinsurance assumed activity.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 AND 28 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 9. Statutory Net Income and Shareholders' Equity, Dividend
Restrictions, and Accounting Practices
A reconciliation of net income as filed with regulatory
authorities to net income reported in the accompanying
financial statements for the years ended December 31, 1996,
1995 and 1994, follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Statutory net income $12,636,652 $ 9,373,483 $ 9,678,535
Reconciling items:
Policy liabilities
and accruals 1,326,891 287,030 898,212
Deferred policy
acquisition costs,
net of amortization 7,264,136 5,810,497 6,468,957
Investment valuation
differences 836,719 3,436,669 1,494,951
Deferred taxes ( 3,597,781) ( 914,707) ( 1,469,927)
Other, net ( 800,367) ( 111,380) ( 241,050)
----------- ----------- -----------
GAAP net income $17,666,250 $17,881,592 $16,829,678
=========== =========== ===========
</TABLE>
A reconciliation of shareholders' equity as filed with
regulatory authorities to shareholders' equity reported in the
accompanying financial statements as of December 31, 1996 and
1995, follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Statutory shareholders' equity $ 73,410,532 $ 66,735,780
Reconciling items:
Asset valuation and interest
maintenance reserves 23,909,912 22,167,637
Investment valuation differences 9,236,050 23,400,679
Deferred policy acquisition costs 58,026,428 50,762,292
Surplus note ( 15,000,000) ( 15,000,000)
Policy liabilities and accruals 2,073,738 377,644
Deferred taxes ( 15,614,492) ( 16,979,255)
Deferred and uncollected
prem ( 3,952,730) ( 3,421,669)
Other, net 541,051 862,294
------------ ------------
GAAP shareholders' equity $132,630,489 $128,905,402
============ ============
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 9. Statutory Net Income and Shareholders' Equity, Dividend
Restrictions, and Accounting Practices (Continued)
As a Pennsylvania domiciled insurance company, the Company may
pay dividends within the preceding twelve months of not more
than the greater of (i) 10% of its statutory surplus as shown
on its last annual statement or (ii) the statutory net gain
from operations after dividends to policyholders and federal
income taxes and before realized gains or losses for the
period covered by such statement. Accordingly, the maximum
dividend payout which may be made in 1997 without prior
Pennsylvania Commissioner approval is $10,516,000.
The Company prepares its statutory financial statements in
accordance with accounting practices prescribed by the
Pennsylvania Insurance Department. Prescribed statutory
accounting practices include a variety of publications of the
National Association of Insurance Commissioners (NAIC), as
well as state laws, regulations, and general administrative
rules.
Note 10. Stock Split
On May 1, 1996 a three-for-one common stock split in which two
additional shares were issued for each share held was approved
by the Company's shareholders effective for shareholders of
record May 2, 1996. The par value of each share of the common
stock was changed to $.40 per share. The number of authorized
shares was increased to 15,000,000 shares and the number of
shares issued and outstanding was increased to 9,450,000. All
per share data in the accompanying financial statements has
been restated to reflect this change.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
Note 11. Unaudited Quarterly Summary of Operations
The following summaries of operations for the four quarters of
1996 and 1995 are unaudited. In the opinion of the Company's
management, all adjustments - consisting only of normal
recurring accruals - necessary for a fair presentation of the
interim periods presented have been included.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
1996
Policy revenues $ 7,167,502 $ 7,985,385 $ 7,680,471 $ 8,282,804
Investment income 11,273,287 11,401,321 11,622,874 11,651,487
Realized gain
on investments 10,322 762,305 898,400 3,315,870
Other income 136,492 214,533 126,258 190,927
----------- ----------- ----------- -----------
Total revenues $18,587,603 $20,363,544 $20,328,003 $23,441,088
=========== =========== =========== ===========
Income from
operations $ 4,224,697 $ 6,991,906 $ 6,220,400 $ 9,205,684
Federal income taxes 1,545,891 2,580,512 1,678,397 3,171,637
----------- ----------- ----------- -----------
Net income $ 2,678,806 $ 4,411,394 $ 4,542,003 $ 6,034,047
=========== =========== =========== ===========
Earnings
per share $ 0.28 $ 0.47 $ 0.48 $ 0.64
=========== =========== =========== ===========
1995
Policy revenues $ 6,470,366 $ 7,266,659 $ 7,195,175 $ 7,141,797
Investment income 9,903,802 10,141,044 10,465,117 10,452,849
Realized gain
on investments 538,950 776,767 4,690,581 1,477,500
Other income 119,612 136,453 146,774 153,975
----------- ----------- ----------- -----------
Total revenues $17,032,730 $18,320,923 $22,497,647 $19,226,121
=========== =========== =========== ===========
Income from
operations $ 4,588,580 $ 4,799,789 $10,011,847 $ 7,003,656
Federal income taxes 1,502,821 1,641,840 3,075,792 2,301,827
----------- ----------- ----------- -----------
Net income $ 3,085,759 $ 3,157,949 $ 6,936,055 $ 4,701,829
=========== =========== =========== ===========
Earnings
per share $ 0.33 $ 0.33 $ 0.73 $ 0.50
=========== =========== =========== ===========
</TABLE>
<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 DECEMBER 31, 1996, 1995 AND 1994 AND ARE QUALIFIED IN THEIR
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<PERIOD-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<DEBT-HELD-FOR-SALE> 515,529,699 426,381,008 0
<DEBT-CARRYING-VALUE> 0 0 0
<DEBT-MARKET-VALUE> 0 0 0
<EQUITIES> 116,552,145 126,324,721 0
<MORTGAGE> 8,955,760 7,062,742 0
<REAL-ESTATE> 1,710,329 1,796,395 0
<TOTAL-INVEST> 653,916,816 569,425,117 0
<CASH> 6,284,102 34,847,347 0
<RECOVER-REINSURE> 212,583 265,514 0
<DEFERRED-ACQUISITION> 58,026,428 50,762,292 0
<TOTAL-ASSETS> 740,650,660 673,794,161 0
<POLICY-LOSSES> 562,299,711 500,960,134 0
<UNEARNED-PREMIUMS> 119,145 104,951 0
<POLICY-OTHER> 1,703,105 897,026 0
<POLICY-HOLDER-FUNDS> 5,763,271 5,238,897 0
<NOTES-PAYABLE> 0 0 0
0 0 0
0 0 0
<COMMON> 4,410,000 4,410,000 0
<OTHER-SE> 128,220,489 124,495,402 0
<TOTAL-LIABILITY-AND-EQUITY> 740,650,660 673,794,161 0
31,116,162 28,073,997 24,893,483
<INVESTMENT-INCOME> 45,948,969 40,962,812 35,566,249
<INVESTMENT-GAINS> 4,986,897 7,483,798 4,411,334
<OTHER-INCOME> 668,210 556,814 534,489<F1>
<BENEFITS> 43,584,948 38,127,349 27,433,262
<UNDERWRITING-AMORTIZATION> 3,141,350 2,358,127 1,979,765
<UNDERWRITING-OTHER> 9,351,253 10,188,073 9,513,022<F1>
<INCOME-PRETAX> 26,642,687 26,403,872 26,479,506
<INCOME-TAX> 8,976,437 8,522,280 9,649,828
<INCOME-CONTINUING> 17,666,250 17,881,592 16,829,678
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 17,666,250 17,881,592 16,829,678
<EPS-PRIMARY> 1.87 1.89 1.78<F2>
<EPS-DILUTED> 1.87 1.89 1.78<F2>
<RESERVE-OPEN> 0 0 0
<PROVISION-CURRENT> 0 0 0
<PROVISION-PRIOR> 0 0 0
<PAYMENTS-CURRENT> 0 0 0
<PAYMENTS-PRIOR> 0 0 0
<RESERVE-CLOSE> 0 0 0
<CUMULATIVE-DEFICIENCY> 0 0 0
<FN>
<F1>THE INFORMATION REPORTED FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 REPRESENTS
AMOUNTS THAT HAVE BEEN RECLASSIFIED TO CONFORM TO THE CURRENT YEAR'S
PRESENTATION.
<F2>ALL PER SHARE DATA HAS BEEN RESTATED TO REFLECT THE COMMON STOCK SPLIT APPROVED
BY THE COMPANY'S SHAREHOLDERS ON MAY 1, 1996
</FN>
</TABLE>
