UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 2-39458
ERIE FAMILY LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1186315
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Erie Insurance Place, Erie, Pennsylvania 16530
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (814) 870-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 9,450,000 shares of Common
Stock outstanding on July 31, 1998.
1
<PAGE>
INDEX
ERIE FAMILY LIFE INSURANCE COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Financial Position--June 30, 1998 and December 31, 1997
Statements of Operations--three months ended June 30, 1998 and 1997,
six months ended June 30, 1998 and 1997
Statements of Comprehensive Income--three months ended June 30, 1998 and
1997, six months ended June 30, 1998 and 1997
Statements of Cash Flows--six months ended June 30, 1998 and 1997
Notes to Financial Statements--June 30, 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
Part I. Financial Information
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
(Unaudited)
<S> <C> <C>
Investments:
Fixed Maturities available-for-sale, at fair
value (amortized cost of $589,193,624
and $535,792,641, respectively) $ 615,409,210 $ 558,177,487
Equity Securities, at fair value
(cost of $101,400,114 and $111,786,894,
respectively) 113,648,093 120,841,893
Real Estate 1,582,876 1,624,306
Policy Loans 5,557,098 5,099,671
Real Estate Mortgage Loans 9,981,163 10,049,733
Other Invested Assets 16,390,511 7,240,282
Total Investments $ 762,568,951 $ 703,033,372
Cash and cash equivalents 17,470,343 42,287,398
Premiums Receivable from Policyholders 3,394,569 3,471,385
Reinsurance Recoverable 86,404 350,837
Other Receivables 196,077 182,711
Accrued Interest and Dividends 10,563,384 10,273,259
Deferred Policy Acquisition Costs 67,379,747 64,567,085
Prepaid Federal Income Taxes 925,845 146,984
Reserve Credit For Reinsurance Ceded 5,485,953 5,041,530
Other Assets 4,796,764 3,179,302
Total Assets $ 872,868,037 $ 832,533,863
</TABLE>
See notes to financial statements.
3
<PAGE>
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
(Unaudited)
<S> <C> <C>
Liabilities:
Policy Liabilities and Accruals:
Future Life Policy Benefits $ 61,930,550 $ 59,413,782
Policy and Contract Claims 1,078,953 2,049,677
Annuity Deposits 506,319,118 489,444,701
Universal Life Deposits 75,157,432 68,890,312
Supplementary Contracts Not
including Life Contingencies 593,147 825,927
Other Policyholder Funds 3,665,428 6,595,330
Deferred Federal Income Tax 28,728,430 24,409,317
Reinsurance Premium Due 211,014 424,745
Accounts Payable and Accrued Liabilities 3,034,194 2,668,688
Note Payable to Affiliate 15,000,000 15,000,000
Due to Affiliate 1,557,479 1,156,431
Dividends Payable 2,835,000 1,275,752
Total Liabilities $ 700,110,745 $ 672,154,662
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
Accumulated Other Comprehensive Income,
net of Deferred Tax of $13,463,871
and $11,003,949, respectively 25,004,334 20,435,901
Retained Earnings 143,342,958 135,533,300
Net Shareholders' Equity $ 172,757,292 $ 160,379,201
Total Liabilities and Shareholders'
Equity $ 872,868,037 $ 832,533,863
</TABLE>
See notes to financial statements.
4
<PAGE>
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
<S> <C> <C> <C> <C>
1998 1997 1998 1997
Revenues:
Policy:
Life Premiums, net of premiums ceded of
$971,074, $1,010,431, $1,742,307 and
$1,721,638, respectively $ 9,251,146 $ 8,264,957 $ 17,614,278 $ 16,188,741
Group 582,074 549,381 1,200,120 1,093,623
Total Policy Revenue $ 9,833,220 $ 8,814,338 $ 18,814,398 $ 17,282,364
Investment Income, Net of Expenses of
$368,822, $353,852, $726,803 and
$691,074, respectively 12,995,512 12,211,491 25,785,740 24,612,774
Realized Gains on Investment 866,108 746,305 2,702,270 1,368,087
Other Income 225,625 185,125 389,533 325,424
Total Revenues $ 23,920,465 $ 21,957,259 $ 47,691,941 $ 43,588,649
Benefits and Expenses:
Death Benefits, net of reinsurance recoveries
of $53,384, $509,284, $568,735 and
$515,902, respectively 1,760,225 2,220,839 3,238,370 4,652,264
Interest on Annuity Deposits 7,319,108 6,870,451 14,813,290 13,718,676
Interest on Universal Life Deposits 1,151,303 941,881 2,237,366 1,844,231
Surrender and Other Benefits 299,884 325,978 565,681 612,746
Increase in Future Life Policy Benefits, net of
the increase in reserve credit for reinsurance
ceded of $192,838, $166,816, $444,423 and
$720,510, respectively 1,139,514 935,151 2,072,345 2,759,929
Amortization of Deferred Policy
Acquisition Costs 1,350,161 756,093 2,645,951 1,560,404
Commissions, net of reinsurance reimbursements
of $414,936, $166,816, $624,246 and $720,510,
respectively 273,310 640,487 570,151 878,957
General Expenses 1,665,434 1,983,824 3,115,807 3,406,414
Taxes, Licenses and Fees 343,987 285,218 (200,999) 571,673
Total Benefits and Expenses $ 15,302,926 $ 14,959,922 $ 29,057,962 $ 30,005,294
Income From Operations $ 8,617,539 $ 6,997,337 $ 18,633,979 $ 13,583,355
Federal Income Tax
Current 2,078,993 1,795,374 4,712,636 3,459,150
Deferred 974,200 588,700 1,859,188 1,109,878
Total Federal Income Tax 3,053,193 2,384,074 6,571,824 4,569,028
Net Income $ 5,564,346 $ 4,613,263 $ 12,062,155 $ 9,014,327
Net Income Per Share $ 0.59 $ 0.49 $ 1.28 $ 0.95
Dividends Declared Per Share $ 0.30 $ 0.27 $ 0.45 $ 0.405
</TABLE>
See notes to financial statements.
5
<PAGE>
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net Income $ 5,564,346 $ 4,613,263 $ 12,062,155 $ 9,014,327
Unrealized Gains (Losses) on Securities:
Unrealized Holding Gains Arising
During Period 4,423,513 16,887,650 9,730,630 1,895,016
Less: Reclassification Adjustment for Gains
Included in Net Income (866,108) (746,305) (2,702,270) (1,368,087)
Net Unrealized Holding Gains
Arising During Period $ 3,557,405 $ 16,141,345 $ 7,028,360 $ 526,929
Income Tax (Expense) Related to
Unrealized Gains (1,245,092) (5,647,510) (2,459,926) (182,464)
Other Comprehensive Income,
Net of Tax $ 2,312,313 $ 10,493,835 $ 4,568,434 $ 344,465
Comprehensive Income $ 7,876,659 $ 15,107,098 $ 16,630,589 $ 9,358,792
</TABLE>
See notes to financial statements.
6
<PAGE>
Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,062,155 $ 9,014,327
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of bond and mortgage
premium and discount 296,516 617,579
Amortization of deferred policy acquisition
costs 2,645,951 1,560,404
Real Estate Depreciation 41,430 43,200
Deferred federal income taxes 1,859,188 1,109,878
Realized gains on investments (2,702,270) (1,368,087)
(Increase) decrease in other assets (1,617,462) 2,521,206
Increase in other receivables (13,366) (774,031)
Decrease (increase) in premium receivable 76,816 (68,081)
Increase in reinsurance recoverable
and reserve credits (179,990) (471,810)
Increase in accrued investment income (290,125) (421,614)
Increase in deferred policy acquisition
costs (5,458,613) (5,162,396)
Increase in future policy benefits and claims 1,546,044 3,235,248
(Decrease) increase in other policyholder funds (2,929,902) 1,425,522
(Decrease) increase in reinsurance premium due (213,731) 29,915
Increase in accounts payable and accrued
liabilities and due to affiliate 766,556 38,170
Increase in prepaid federal income tax (778,861) (1,147,064)
Net cash provided by operating
activities $ 5,110,336 $ 10,182,366
Cash flows from investing activities:
Purchase of investments:
Fixed maturities $ (102,188,874) $ (36,738,163)
Equity securities (15,978,933) (27,607,708)
Mortgage loans 0 (1,086,241)
Sales/maturities of investments:
Fixed maturities 49,554,055 20,436,815
Equity securities 28,009,764 14,809,173
Principal payments received on mortgage loans 68,747 63,759
Loans made to policyholders (749,872) (734,309)
Payments received on policy loans 292,445 347,434
Purchase of other invested assets (9,579,849) (603,581)
Proceeds from other invested assets 429,621 284,763
Net cash used in investing activities $ (50,142,896) $ (30,828,058)
</TABLE>
7
<PAGE>
Statements of Cash Flows--Continued (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
<S> <C> <C>
Cash flows from financing activities:
Increase in annuity and supplementary
contract deposits $ 16,641,637 $ 20,659,289
Increase in Universal Life Deposits 6,267,120 6,201,681
Dividends paid to shareholders (2,693,252) (2,457,004)
Net cash provided by financing
activities $ 20,215,505 $ 24,403,966
Net increase (decrease) in cash and
short-term cash investments (24,817,055) 3,758,274
Cash and short-term cash investments at
beginning of year 42,287,398 6,284,102
Cash and short-term cash investments at
end of quarter $ 17,470,343 $ 10,042,376
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 483,750 $ 483,750
Income taxes 5,360,000 4,473,896
</TABLE>
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1997.
NOTE B -- INVESTMENTS
The total invested assets of the Company consist of investments in fixed
maturities, preferred stock, common stock, real estate, mortgage and policy
loans and other invested assets. At June 30, 1998, 80.7% of total invested
assets were invested in fixed maturities. Preferred stocks represent 9.4% or
$71.8 million and common stocks represent 5.5% or $41.9 million of total
invested assets at June 30, 1998. Real estate and mortgage loans make up only
1.5% 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.
The Company has classified all of its fixed maturity portfolio as available-for
sale at June 30, 1998. 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.
The Company's fixed maturities at June 30, 1998 consist of investments in bonds
of $612 million and investments in redeemable preferred stock of $3 million.
Consistent with the Company's investment objective, the fixed maturity portfolio
is of very high quality and well diversified within each market sector. The
portfolio is conservatively managed with the goal of achieving reasonable
returns while limiting exposure to risk. At June 30, 1998, the amortized cost,
gross unrealized gains, gross unrealized losses and carrying value for fixed
maturities were as follows:
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Fixed Maturities at 6-30-98
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasuries $ 4,382,143 $ 642,644 $ 0 $ 5,024,787
U.S. Government Agency 17,567,495 647,186 124,068 18,090,613
States & Political Subdivisions 2,057,557 188,124 0 2,245,681
Special Revenue 11,097,720 902,649 0 12,000,369
Public Utilities 78,563,333 3,460,530 710,168 81,313,695
U.S. Banks, Trusts & Insurance
Companies 118,606,250 7,089,127 850,721 124,844,656
U.S. Industrial & Miscellaneous 329,048,811 15,350,831 778,408 343,621,234
Foreign Governments-Agency 2,988,637 0 564,787 2,423,850
Foreign Banks, Trusts &
Insurance Companies 5,000,000 126,565 0 5,126,565
Foreign Industrial & Miscellaneous 19,881,678 836,082 0 20,717,760
Total Fixed Maturities $ 589,193,624 $ 29,243,738 $ 3,028,152 $ 615,409,210
</TABLE>
Included in the fixed maturity category are high-quality bonds with a carrying
value of $605,740,100 that are rated at investment grade levels (Baa/BBB or
better). Included in this investment-grade category are $357 million
characterized as the "highest" quality or "Class 1" securities as defined by the
National Association of Insurance Commissioners (NAIC). Generally, the fixed
maturity securities in the Company's portfolio are rated by external rating
agencies. If not externally rated, they are rated by the Company on a basis
consistent with the basis used by the rating agencies.
If management determines that any declines in market value of these investments
are other than temporary, the securities will be written-down to the realizable
value of the investment and the write down reflected in income. 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 June 30, 1998, the amortized cost of the Company's five largest investments
in corporate debt securities totaled $35.5 million, none of which individually
exceeded $8.1 million. These investments had a market value of $36.8 million.
Equity securities consist of common and preferred stocks which are carried on
the balance sheet at market value. As with the fixed maturity portfolio, the
Company's preferred stock portfolio provides a source of highly predictable
current income that is very competitive with high-grade bonds. These securities
are well diversified within each market sector. The preferred stocks are of very
high-quality (all of the $71.8 million of preferred stock are rated "highest" or
"high" quality as defined by the NAIC) and extremely marketable. There are no
preferred stocks in the Company's portfolio rated in the "low," "lowest," or "in
or near default" quality categories established by the NAIC.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Equity Securities at 6-30-98
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Common Stock
U.S. Industrial & Miscellaneous $ 37,543,241 $ 8,464,181 $ 4,136,284 $ 41,871,138
Total Common Stock 37,543,241 8,464,181 4,136,284 41,871,138
Preferred Stocks
Public Utilities 4,000,000 50,080 0 4,050,080
U.S. Banks, Trusts &
Insurance Companies 41,611,509 7,166,686 22,440 48,755,755
Foreign Banks, Trusts &
Insurance Companies 7,873,364 410,176 206,200 8,077,340
U.S. Industrial & Miscellaneous 6,472,000 301,780 0 6,773,780
Foreign Industrial &
Miscellaneous 3,900,000 220,000 0 4,120,000
Total Preferred Stock 63,856,873 8,148,722 228,640 71,776,955
Total Equity Securities $ 101,400,114 $ 16,612,903 $ 4,364,924 $ 113,648,093
</TABLE>
Real estate investments are carried on the statements of financial position at
cost, less allowances for depreciation and possible losses. Commercial mortgage
loans on real estate are carried at their unpaid balances, adjusted for
amortization of premium or discount, less allowances for possible loan losses.
Policy loans are carried at their unpaid balances.
The fair values of the Company's investments in real estate, mortgage loans,
policy loans, and other invested assets, approximate the values presented in the
financial statements.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction with the
financial statements and related notes found on pages 3 through 11, since they
contain important information that is helpful in evaluating the Company's
operating results and financial condition.
OVERVIEW
Erie Family Life Insurance Company (the Company) is incorporated in the
Commonwealth of Pennsylvania. The Company is engaged primarily in the business
of underwriting and selling nonparticipating 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
United States and the District of Columbia and is subject to the supervision and
regulation of the states in which it writes business. A large portion of the
Company's business is written in Pennsylvania.
Net income increased to $5,564,346, or $.59 per share, in the second quarter of
1998 from $4,613,262 or $.49 per share, in the second quarter of 1997, an
increase of 20.6%. The increase in nonrecurring realized gains on investments
from $746,305 in the second quarter of 1997 to $866,108 in the second quarter of
1998 and a decrease in death benefits from $2,220,839 in the second quarter of
1997 to $1,760,225 in the second quarter of 1998 were the primary reasons for
the increase in net income. Operating results continued to be strong as total
policy revenue grew by 11.6% to $9,833,220 in the current period. Investment
income net of expenses rose 6.4% from $12,211,491 in the second quarter of 1997
to $12,995,512 in the second quarter of 1998.
REVENUES, BENEFITS, AND EXPENSES
Policy Revenues. Total policy revenues increased 11.6% to $9,833,220 in the
second quarter of 1998 from $8,814,338 in the second quarter of 1997. Included
in these totals are first year life policy revenues of $1,711,421 in the second
quarter of 1998 and $1,647,211 in the second quarter of 1997, an increase of
3.8%.
Group policy revenues increased from $549,381 in the second quarter of 1997 to
$582,074 in the second quarter of 1998.
Deposits. First year and single universal life and annuity deposits decreased
12.2% to $10,111,686 in the second quarter of 1998 compared to $11,519,126 in
the second quarter of 1997. Included in these amounts are structured settlement
annuities sold to the Erie Insurance Group property/casualty affiliate companies
which totaled $3,693,903 in the second quarter of 1998 and $2,417,209 in the
second quarter of 1997.
Net Investment Income. Net investment income in the second quarter of 1998 was
$12,995,512 compared to $12,211,491 in the second quarter of 1997, an increase
of 6.4%. The majority of the increase in income generated by the investment
portfolio was due to increased levels of investment from cash flows generated by
the Company's operations and annuity and universal life deposits.
Realized Gain on Investment. During the second quarter of 1998 and 1997, the
Company generated realized gains of $866,108 and $746,305, respectively, from
the sale of equity and fixed maturity investments.
Death Benefits. Net death benefits on life insurance policies decreased 20.7% in
the second quarter of 1998 to $1,760,225, compared to $2,220,839, for the same
period in 1997. Mortality experience should be evaluated over the long term,
rather than over short periods where unusual fluctuations may influence the
results. This is particularly true for a company the size of Erie Family Life,
which is growing rapidly. The Company's mortality experience has been good over
the past several years and management believes that its underwriting philosophy
and practices are sound.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
Interest on Annuity and Universal Life Deposits. Interest on deposits held by
the Company for Policyholders grew 8.4% to $8,470,411 in the second quarter of
1998 from $7,812,332 in the second quarter of 1997. This increase was due to the
$68 million in deposits made by Policyholders during the 12-month period ending
June 30, 1998. At June 30, 1998, annuity deposits accruing interest were $506
million and universal life deposits accruing interest were $75 million. During
the second quarter of 1998, the interest rate credited on universal life and
annuity deposits remained unchanged. The current interest rate credited on
universal life deposits is in the 6.25% to 7.00% range while the rate credited
on annuity deposits is in the 5.00% to 6.25% range.
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 1998 second quarter increase in future life policy benefits was $1,139,514,
compared to $935,151 in the second quarter of 1997 an increase of 21.9%. The
second quarter 1998 increase in future life policy benefits is in line with the
$1.1 million average quarterly increase recorded in 1997.
Commission Expense. Direct commission costs include new and renewal commissions,
production bonuses and Company contest awards. These direct commission expenses
are reduced by commissions received from reinsurers and the expense is affected
by the amount of commission expenses capitalized as part of the deferred policy
acquisition costs (DAC). 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 bonus commissions and some second-year
commissions qualify for deferral, i.e., additions to the DAC. 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. During the second quarter of 1998 commission expense decreased
$367,177 to $273,310. Commission expense was affected by $414,936 in commission
reimbursements received under ceded reinsurance contracts during the second
quarter of 1998 compared to $166,816 received during the second quarter of 1997.
General Expenses. General expenses amounted to $1,665,434 in the second quarter
of 1998 compared to $1,983,824 for the same period in 1997.
General expenses include wages and salaries, Employee benefits, data processing
expenses, occupancy expenses and other office and general administrative
expenses of the Company. Certain general expenses of the Company are deferred as
policy acquisition costs. Medical inspection and exam fees related to new
business production, wages, salaries and Employee benefits of underwriting
personnel, and bonuses paid to branch sales Employees for the production of life
and annuity business, are all deferred. Deferred acquisition costs are amortized
over the premium paying period of the related policies in proportion to the
ratio of the annual premium revenue to the total anticipated premium revenue.
In accordance with AICPA Statement of Position (SOP) 98-1 "Accounting for the
Costs of Computer Software Development or Obtained for Internal Use", the
Company began capitalizing internal use software costs during the first quarter
of 1998. This change resulted in a decrease in general expenses of $326,000 for
the second quarter of 1998.
Certain operating expenses of the Company are paid by Erie Indemnity Company and
reimbursed monthly by the Company. Additionally, a portion of the common
overhead expenses of the Erie Insurance Group are allocated to Erie Family Life.
These expenses comprise the majority of Company general expenses. Erie Indemnity
Company is a 21.6 percent shareholder of Erie Family Life Insurance Company and
the Management Company for the Erie Insurance Exchange.
Taxes, Licenses, and Fees. Taxes, licenses and fees increased by $58,769 to
$343,987 in the second quarter of 1998 compared ot $285,218 in the second
quarter of 1997. For the six months ended June 30, 1998 taxes, licenses and fees
amounted to ($200,999) compared to $571,673 at June 30, 1997. The $772,672
decrease was caused by a $954,000 refund that is due the Company from the
Pennsylvania Life and Health Insurance Guaranty Association because of a
recalculation of annuity assessments paid in previous years.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company's ability to secure enough cash to meet
its contractual obligations and operating needs. Generally, insurance premiums
and deposits are collected prior to claims and benefit disbursements and these
funds are invested to provide necessary cash flows in future years. The
Company's major sources of cash from operations are life insurance premiums,
annuity and universal life deposits and investment income. The net positive cash
flow is used to fund Company commitments and to build the investment portfolio,
thereby increasing future investment returns. Net cash provided by operating
activities for the six months ended June 30, 1998 was $5,110,336, compared to
$10,182,366 for the six months ended June 30, 1997. The Company's liquidity
position remains strong as invested assets grew by $60 million during the first
six months of 1998 to $763 million at June 30, 1998.
Annuity and universal life deposits, which do not appear as revenue on the
financial statements, provide cash. These deposits do not involve a mortality or
morbidity risk and are accounted for using methods applicable to comparable
"interest-bearing obligations" of other types of financial institutions. This
method of accounting records deposits as a liability rather than as a revenue.
Annuity and universal life deposits were $15,579,401 in the second quarter of
1998 and $17,049,670 in the second quarter of 1997.
The Company's current commitments for expenditures as of June 30, 1998 are
primarily for policy death benefits, policy surrenders and withdrawals, general
operating expenses, federal income taxes, and dividends to shareholders. These
commitments are met by cash flows from policy revenue, annuity and universal
life deposits and investment income. Management believes its cash flow from
operations and its liquid assets and marketable securities will enable the
Company to meet any foreseeable cash requirements. As an added measure of
liquidity, the Company has in place a $10 million line of credit with a bank. At
June 30, 1998, there were no borrowings on this line of credit.
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 the greater of: (a) 10 percent
of its statutory surplus as regards policyholders as shown on its last annual
statement on file with the commissioner, or (b) the net income as reported for
the period covered by such annual statement, but shall not include pro rata
distributions of any class of the insurer's own securities. Accordingly, the
maximum dividend payout which may be made in 1998 without prior Pennsylvania
Commissioner approval is $12,924,000.
Dividends declared to shareholders totaled $2,835,000 in the second quarter of
1998.
The Company's 1997 year-end Risk Based Capital Analysis as reflected in its 1997
statutory annual statement shows total adjusted capital of $90,727,646 and
authorized control level risk based capital of $15,031,184. These results are
indicative of the strong capital position of the Company.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
FINANCIAL CONDITION
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 June 30, 1998, 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 are designed and portfolios are structured
to match the features of the life insurance and annuity products sold by the
Company. 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 are liquid in order to meet commitments to our
Policyholders. At June 30, 1998, the Company's investment portfolio of cash and
money market investments, investment grade bonds, common stocks, and preferred
stocks, all of which are readily marketable, totaled $746 million or 86% of
total assets. These resources provide the liquidity the Company requires to meet
the unforeseen demands on its funds.
ACCOUNTING PRONOUNCEMENTS
FAS 130
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 (FAS 130) "Reporting Comprehensive
Income". FAS 130 is effective for fiscal years beginning after December 31, 1997
and requires reporting of comprehensive income in a full set of general purpose
financial statements. The purpose of reporting comprehensive income is to report
a measure of all changes in equity of the Company that result from recognized
transactions and other economic events of the period. The two components of
comprehensive income for Erie Family Life are net income from operations and
unrealized gain or loss from investments, net of tax. Included in this report
are statements of comprehensive income for the three and six months ended
June 30, 1998 and 1997.
SOP 98-1
During the first quarter of 1998, the Company adopted AICPA Statement of
Position (SOP) 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". In accordance with SOP 98-1 the Company began
capitalizing internal use software costs. The adoption of this statement
resulted in an increase in net income of $212,000, or $.02 per share for the
second quarter of 1998 and $423,000 or .04 per share for the six months ended
June 30, 1998.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995: Statements contained herein expressing the beliefs of management such as
those contained in "Note B to the Financial Statements", the "Revenue Benefits
and Expenses - Death Benefits", the "Liquidity and Capital Resources" and the
"Investments" sections hereof, and the other statements which are not historical
facts contained in this report are forward looking statements that involve risks
and uncertainties. These risks and uncertainties include but are not limited to:
legislative, judicial, and regulatory changes, the impact of competitive
products and pricing, product development, geographic spread of risk,
catastrophic events, better (or worse) mortality rates, securities markets
fluctuations and technological difficulties and advancements.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
All other exhibits for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore, have been omitted.
The Company did not file any reports on Form 8-K during the three-month period
ending June 30, 1998.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Erie Family Life Insurance Company
(Registrant)
Date August 5, 1998
/s/ Stephen A. Milne
(Stephen A. Milne, President & CEO)
/s/ Philip A. Garcia
(Philip A. Garcia, Executive Vice President & CFO)
17
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ERIE
FAMILY LIFE INSURANCE COMPANY'S STATEMENT OF FINANCIAL POSITION AND STATEMENT OF
OPERATIONS DATED JUNE 30, 1998 AND ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 615,409,210
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 113,648,093
<MORTGAGE> 9,981,163
<REAL-ESTATE> 1,582,876
<TOTAL-INVEST> 762,568,951
<CASH> 17,470,343
<RECOVER-REINSURE> 86,404
<DEFERRED-ACQUISITION> 67,379,747
<TOTAL-ASSETS> 872,868,037
<POLICY-LOSSES> 644,000,247
<UNEARNED-PREMIUMS> 161,630
<POLICY-OTHER> 1,078,953
<POLICY-HOLDER-FUNDS> 3,665,428
<NOTES-PAYABLE> 0
0
0
<COMMON> 4,410,000
<OTHER-SE> 168,347,292
<TOTAL-LIABILITY-AND-EQUITY> 872,868,037
18,814,398
<INVESTMENT-INCOME> 25,785,740
<INVESTMENT-GAINS> 2,702,270
<OTHER-INCOME> 389,533
<BENEFITS> 22,927,052
<UNDERWRITING-AMORTIZATION> 2,645,951
<UNDERWRITING-OTHER> 3,484,959
<INCOME-PRETAX> 18,633,979
<INCOME-TAX> 6,571,824
<INCOME-CONTINUING> 12,062,155
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,062,155
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
