1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 April 30, 1998.
<PAGE>
INDEX
ERIE FAMILY LIFE INSURANCE COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Financial Position--March 31, 1998 and December 31, 1997
Statements of Operations--three months ended March 31, 1998 and 1997
Statements of Comprehensive Income--three months ended March 31, 1998
and 1997
Statements of Cash Flows--three months ended March 31, 1998 and 1997
Notes to Financial Statements--March 31, 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
Part I. Financial Information
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
-------------- ---------------
(Unaudited)
<S> <C> <C>
Investments:
Fixed Maturities available-for-sale, at fair
value (amortized cost of $563,862,789
and $535,792,641, respectively) $ 585,805,804 $ 558,177,487
Equity Securities, at fair value
(cost of $106,879,850 and $111,786,894,
respectively) 119,846,559 120,841,893
Real Estate 1,603,591 1,624,306
Policy Loans 5,261,975 5,099,671
Real Estate Mortgage Loans 10,014,951 10,049,733
Other Invested Assets 11,101,531 7,240,282
-------------- --------------
Total Investments $ 733,634,411 $ 703,033,372
Cash and cash equivalents 32,827,451 42,287,398
Premiums Receivable from Policyholders 3,174,793 3,471,385
Reinsurance Recoverable 475,504 350,837
Other Receivables 226,378 182,711
Accrued Interest and Dividends 11,901,193 10,273,259
Deferred Policy Acquisition Costs 65,873,928 64,567,085
Prepaid Federal Income Taxes 0 146,984
Reserve Credit For Reinsurance Ceded 5,293,115 5,041,530
Other Assets 4,220,672 3,179,302
-------------- --------------
Total Assets $ 857,627,445 $ 832,533,863
============== ==============
</TABLE>
See notes to financial statements.
3
<PAGE>
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
Liabilities:
Policy Liabilities and Accruals:
Future Life Policy Benefits $ 60,598,198 $ 59,413,782
Policy and Contract Claims 1,851,557 2,049,677
Annuity Deposits 501,827,915 489,444,701
Universal Life Deposits 72,149,710 68,890,312
Supplementary Contracts Not
including Life Contingencies 627,901 825,927
Other Policyholder Funds 4,531,251 6,595,330
Current Federal Income Tax 2,120,911 0
Deferred Federal Income Tax 26,509,139 24,409,317
Reinsurance Premium Due 236,258 424,745
Accounts Payable and Accrued Liabilities 2,114,049 2,668,688
Note Payable to Affiliate 15,000,000 15,000,000
Due to Affiliate 927,424 1,156,431
Dividends Payable 1,417,500 1,275,752
-------------- -------------
Total Liabilities $ 689,911,813 $ 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 $12,218,780
and $11,003,949, respectively 22,692,021 20,435,901
Retained Earnings 140,613,611 135,533,300
-------------- -------------
Net Shareholders' Equity $ 167,715,632 $ 160,379,201
-------------- -------------
Total Liabilities and Shareholders'
Equity $ 857,627,445 $ 832,533,863
============== =============
</TABLE>
See notes to financial statements.
4
<PAGE>
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------ ------------------
<S> <C> <C>
Revenues:
Policy:
Life Premiums, net of premiums ceded of
$771,233 and $711,207, respectively $ 8,363,132 $ 7,923,783
Group 618,046 544,242
-------------- -------------
Total Policy Revenue $ 8,981,178 $ 8,468,025
Investment Income, Net of Expenses of
$337,266 and $337,222, respectively 12,790,228 12,401,283
Realized Gains on Investment 1,836,161 621,782
Other Income 163,909 140,299
-------------- -------------
Total Revenues $ 23,771,476 $ 21,631,389
-------------- -------------
Benefits and Expenses:
Death Benefits, net of reinsurance recoveries
of $515,351 and $6,654, respectively 1,478,145 2,431,425
Interest on Annuity Deposits 7,494,182 6,848,225
Interest on Universal Life Deposits 1,086,063 902,349
Surrender and Other Benefits 265,797 286,768
Increase in Future Life Policy
Benefits, net of the increase in reserve
credit for reinsurance ceded of $175,028,
and $135,864 respectively 932,831 1,824,778
Amortization of Deferred Policy
Acquisition Costs 1,295,790 804,311
Commissions, net of reinsurance reimbursements
of $209,310 and $287,873, respectively 296,841 238,470
General Expenses 1,450,373 1,422,590
Taxes, Licenses and Fees (544,986) 286,455
-------------- -------------
Total Benefits and Expenses $ 13,755,036 $ 15,045,371
-------------- -------------
Income From Operations $ 10,016,440 $ 6,586,018
Federal Income Tax
Current 2,633,643 1,663,776
Deferred 884,988 521,178
-------------- -------------
Total Federal Income Tax 3,518,631 2,184,954
-------------- -------------
Net Income $ 6,497,809 $ 4,401,064
============== =============
Net Income Per Share $ 0.69 $ 0.47
============== =============
Dividends Declared Per Share $ 0.15 $ 0.135
============== =============
</TABLE>
See notes to financial statements.
5
<PAGE>
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------ ------------------
<S> <C> <C>
Net Income $ 6,497,809 $ 4,401,064
-------------- -------------
Unrealized Gains (Losses) on Securities:
Unrealized Holding Gains (Losses) Arising
During Period 5,307,116 (14,992,635)
Less: Reclassification Adjustment for Gains
Included in Net Income (1,836,161) (621,782)
-------------- -------------
Net Unrealized Holding Gains (Losses)
Arising During Period $ 3,470,955 $ (15,614,417)
Income Tax (Expense) Benefit Related to
Unrealized Gains (Losses) (1,214,834) 5,465,046
-------------- -------------
Other Comprehensive Income (Loss), Net of
Tax $ 2,256,121 $ (10,149,371)
-------------- -------------
Comprehensive Income (Loss) $ 8,753,930 $ (5,748,307)
============== =============
</TABLE>
See notes to financial statements.
6
<PAGE>
Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,497,809 $ 4,401,064
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of bond and mortgage
premium and discount 155,949 318,308
Amortization of deferred policy acquisition
costs 1,295,790 804,311
Real Estate Depreciation 20,715 21,600
Deferred federal income taxes 884,988 521,178
Realized gains on investments (1,836,161) (621,782)
(Increase) decrease in other assets (1,041,368) 2,528,345
(Increase) decrease in other receivables (43,666) 282,226
Decrease in premium receivable 296,592 117,089
(Increase) decrease in reinsurance recoverable
and reserve credits (376,252) 19,837
Increase in accrued investment income (1,627,934) (1,849,956)
Increase in deferred policy acquisition
costs (2,602,633) (2,870,221)
Increase in future policy benefits and claims 986,296 2,065,176
Decrease in other policyholder funds (2,064,079) (2,237,607)
Decrease in reinsurance premium due (188,487) (7,144)
Decrease in accounts payable and accrued
liabilities and due to affiliate (783,648) (1,621,958)
Increase in Federal income taxes currently payable 2,267,895 379,103
-------------- -------------
Net cash provided by operating
activities $ 1,841,806 $ 2,249,569
-------------- -------------
Cash flows from investing activities:
Purchase of investments:
Fixed maturities $ (41,709,780) $ (17,547,090)
Equity securities (6,215,468) (6,891,650)
Mortgage loans 0 (747,801)
Sales/maturities of investments:
Fixed maturities 13,952,283 7,680,529
Equity securities 12,491,060 6,336,822
Principal payments received on mortgage loans 34,870 32,413
Loans made to policyholders (294,345) (320,749)
Payments received on policy loans 132,041 175,916
Purchase of other invested assets (4,009,279) (125,026)
Proceeds from other invested assets 148,031 33,778
-------------- -------------
Net cash used in investing activities $ (25,470,587) $ (11,372,858)
-------------- -------------
</TABLE>
7
<PAGE>
Statements of Cash Flows--Continued (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------ ------------------
<S> <C> <C>
Cash flows from financing activities:
Increase in annuity and supplementary
contract deposits $ 12,185,188 $ 11,446,250
Increase in Universal Life Deposits 3,259,398 3,276,528
Dividends paid to shareholders (1,275,752) (1,181,252)
-------------- -------------
Net cash provided by financing
Activities $ 14,168,834 $ 13,541,526
-------------- -------------
Net increase (decrease) in cash and
short-term cash investments 9,459,947 (4,418,237)
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 $ 32,827,451 $ 10,702,339
============== =============
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 0 $ 0
Income taxes 300,000 1,223,896
</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 three month period ended March 31, 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 March 31, 1998, 79.8% of total invested
assets were invested in fixed maturities. Preferred stocks represent 11.7% or
$85.9 million and common stocks represent 4.6% or $34.0 million of total
invested assets at March 31, 1998. Real estate and mortgage loans make up only
1.6% of total invested assets. Mortgage loan and real estate investments have
the potential for higher returns but also carry more risk, including less
liquidity and greater uncertainty of rate of return. Consequently these
investments have been kept to a minimum.
The Company has classified all of its fixed maturity portfolio as available-for
sale at March 31, 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 March 31, 1998 consist of investments in
bonds. Consistent with the Company's investment objective, the fixed maturity
portfolio is comprised of bonds of very high quality and well diversified within
each market sector. The portfolio is conservatively managed with the goal of
achieving reasonable returns while limiting exposure to risk. At March 31, 1998
the carrying value of fixed maturities was $585,805,804, or 79.8% of total
invested assets. At March 31, 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 3-31-98
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasuries $ 4,266,482 $ 537,636 $ 0 $ 4,804,118
U.S. Government Agency 27,494,700 688,437 77,330 28,105,807
States & Political Subdivisions 2,057,946 188,708 0 2,246,654
Special Revenue 11,114,226 797,313 0 11,911,539
Public Utilities 76,559,242 2,797,611 578,869 78,777,984
U.S. Banks, Trusts & Insurance
Companies 104,466,324 5,739,319 289,558 109,916,085
U.S. Industrial & Miscellaneous 314,024,791 12,598,820 663,111 325,960,500
Foreign Governments-Agency 2,988,202 0 355,552 2,632,650
Foreign Banks, Trusts &
Insurance Companies 5,000,000 0 28,125 4,971,875
Foreign Industrial & Miscellaneous 15,890,876 587,716 0 16,478,592
------------------- ------------------- ------------------- ------------------
Total Fixed Maturities $ 563,862,789 $ 23,935,560 $ 1,992,545 $ 585,805,804
</TABLE>
Included in the fixed maturity category are high-quality bonds with a carrying
value of $581,113,654 that are rated at investment grade levels (Baa/BBB or
better). Included in this investment-grade category are $370 million
characterized as of the "highest" quality or "Class 1" securities as defined by
the National Association of Insurance Commissioners (NAIC). Generally, the fixed
maturity securities in the Company's portfolio are rated by external rating
agencies. If not externally rated, they are rated by the Company on a basis
consistent with the basis used by the rating agencies.
If management determines that any declines in market value of these investments
are other than temporary, the securities will be written-down to the realizable
value of the investment and 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 March 31, 1998, the amortized cost of the Company's five largest investments
in corporate debt securities totaled $34.5 million, none of which individually
exceeded $8.0 million. These investments had a market value of $36.0 million.
Equity securities consist of common and preferred stocks which are carried on
the balance sheet at market value. At March 31, 1998, common and preferred stock
held by the Company had a cost of $106,879,850 and a market value of
$119,846,559, representing an unrealized gain of $12,966,709. 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 and extremely marketable, 95.2% or
$81.7 million of which are of the "highest" or "high" quality, as defined by the
NAIC. The remaining $4.1 million of preferred stocks have a "medium" NAIC
rating. There are no preferred stocks in the Company's portfolio rated in the
"low," "lowest," or "in or near default" quality categories established by the
NAIC.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Equity Securities at 3-31-98
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Common Stock
U.S. Industrial & Miscellaneous $ 30,106,514 $ 6,580,728 $ 2,724,426 $ 33,962,816
------------------- ------------------- --------------- ------------------
Total Common Stock 30,106,514 6,580,729 2,724,426 33,962,816
Preferred Stocks
Public Utilities 4,000,000 20,000 0 4,020,000
U.S. Banks, Trusts &
Insurance Companies 48,667,465 8,038,935 143,645 56,562,755
Foreign Banks, Trusts &
Insurance Companies 7,765,000 393,880 175,000 7,983,880
U.S. Industrial & Miscellaneous 12,440,871 848,862 32,625 13,257,108
Foreign Industrial &
Miscellaneous 3,900,000 160,000 0 4,060,000
------------------- ------------------- --------------- ------------------
Total Preferred Stock 76,773,336 9,461,677 351,270 85,883,743
Total Equity Securities $ 106,879,850 $ 16,042,405 $ 3,075,696 $ 119,846,559
</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 $6,497,809, or $.69 per share, in the first quarter of
1998 from $4,401,064 or $.47 per share, in the first quarter of 1997, an
increase of 47.6%. The increase in nonrecurring realized gains on investments
from $621,782 in the first quarter of 1997 to $1,836,161 in the first quarter of
1998 and a decrease in death benefits from $2,431,425 in the first quarter of
1997 to $1,478,145 in the first 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 6% to $8,981,178 in the current period. Investment income net of
expenses rose 3.1% from $12,401,283 in the first quarter of 1997 to $12,790,228
in the first quarter of 1998.
REVENUES, BENEFITS, AND EXPENSES
Policy Revenues. Total policy revenues increased 6.1% to $8,981,178 in the first
quarter of 1998 from $8,468,025 in the first quarter of 1997. Included in these
totals are first year life policy revenues of $1,621,867 in the first quarter of
1998 and $1,887,123 in the first quarter of 1997, a decrease of 14.1%. First
year policy revenues in 1997 were bolstered by the Company's participation in an
Erie Insurance Group multi-line sales promotion.
Group policy revenues increased from $544,242 in the first quarter of 1997 to
$618,046 in the first quarter of 1998.
Deposits. First year and single universal life and annuity deposits remained
steady with $14,696,826 in the first quarter of 1998 compared to $14,599,707 in
the first quarter of 1997. Included in these amounts are structured settlement
annuities sold to the Erie Insurance Group property/casualty affiliate companies
which totaled $5,968,760 in the first quarter of 1998 and $5,363,165 in the
first quarter of 1997.
Net Investment Income. Net investment income in the first quarter of 1998 was
$12,790,228 compared to $12,401,283 in the first quarter of 1997, an increase of
3.1%. 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 first quarter of 1998 and 1997, the
Company generated realized gains of $1,836,161 and $621,782, respectively, from
the sale of equity and fixed maturity investments.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
Death Benefits. Net death benefits on life insurance policies decreased 39.2% in
the first quarter of 1998 to $1,478,145, compared to $2,431,425, 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.
Interest on Annuity and Universal Life Deposits. Interest on deposits held by
the Company for Policyholders grew 10.7% from $7,750,574 in the first quarter of
1997 to $8,580,245 in the first quarter of 1998. This increase was due to the
$69 million in deposits made by Policyholders during the 12-month period ending
March 31, 1998. At March 31, 1998, annuity deposits accruing interest were $502
million and universal life deposits accruing interest were $72 million. During
the first 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 first quarter increase in future life policy benefits was $932,831,
compared to $1,824,778 in the first quarter of 1997. In the first quarter of
1997, the increase in future life policy benefits was due to the large amount of
insurance placed in-force from a Company sales promotion. The first quarter 1998
increase in future life policy benefits is in line with the $1.1 million average
quarterly increase recorded in 1997.
Commission Expense. Commission Expense increased $58,371 to $296,841 in the
first quarter of 1998. That portion of commission costs, which vary with and are
primarily related to the production of new business, have been deferred. These
costs are being amortized over the premium paying period of the related policies
in proportion to the ratio of the annual premium revenue to the total
anticipated premium revenue.
General Expenses. General expenses amounted to $1,450,373 in the first quarter
of 1998 compared to $1,422,590 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.
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 decreased by $831,441 to
$(544,986) in the first quarter of 1998. The decrease in taxes, licenses, and
fees 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 three months ended March 31, 1998 was $1,841,806, compared to
$2,249,569 for the three months ended March 31, 1997. The Company's liquidity
position remains strong as invested assets grew by $31 million during the first
three months of 1998 to $734 million at March 31, 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 $19,492,758 in the first quarter of
1998 and $19,318,567 in the first quarter of 1997.
The Company's current commitments for expenditures as of March 31, 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
March 31, 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 to shareholders totaled $1,417,500 in the first 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
demonstrate a strong capital position for 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 March 31, 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 also exceptionally liquid in order to meet the
short and long-term commitments to our Policyholders. At March 31, 1998, the
Company's investment portfolio of cash and money market investments, investment
grade bonds, common stocks, and preferred stocks, all of which are extremely
marketable, totaled $738 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 months ended March 31, 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. A change in accounting estimate was
recognized to reflect the adoption of this statement, resulting in an increase
in net income of $211,000, or $.02 per share for the first quarter of 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 4. Submission of Matters to a Vote of Security Holders
On April 28, 1998, the Registrant held its Annual Meeting of Shareholders:
A. The following Directors were elected at the Annual Meeting of Shareholders
for a one-year term and until a successor is elected and qualified:
Peter B. Bartlett
Samuel P. Black, III
J. Ralph Borneman, Jr.
Patricia A. Goldman
Susan Hirt Hagen
F. William Hirt
Edmund J. Mehl
Stephen A. Milne
John M. Petersen
Seth E. Schofield
Jan R. Van Gorder, Esq.
Harry H. Weil, Esq.
B. The following other matter was voted upon at the meeting and the following
number of affirmative votes were cast with respect to such matter:
The proposal to ratify the selection of Brown, Schwab, Bergquist &
Company as independent public accountants to examine the financial
statements and perform the annual audit of the Company for the year
ending December 31, 1998 was ratified. This proposal received 9,027,351
affirmative votes, 1,559 negative votes with 10,741 abstentions.
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three-month period
ending March 31, 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 May 6, 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 MARCH 31, 1998 AND ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 585,805,804
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 119,846,559
<MORTGAGE> 10,014,951
<REAL-ESTATE> 1,603,591
<TOTAL-INVEST> 733,634,411
<CASH> 32,827,451
<RECOVER-REINSURE> 475,504
<DEFERRED-ACQUISITION> 65,873,928
<TOTAL-ASSETS> 857,627,445
<POLICY-LOSSES> 635,203,724
<UNEARNED-PREMIUMS> 241,007
<POLICY-OTHER> 1,851,557
<POLICY-HOLDER-FUNDS> 4,531,251
<NOTES-PAYABLE> 0
0
0
<COMMON> 4,410,000
<OTHER-SE> 163,305,632
<TOTAL-LIABILITY-AND-EQUITY> 857,627,445
8,981,178
<INVESTMENT-INCOME> 12,790,228
<INVESTMENT-GAINS> 1,836,161
<OTHER-INCOME> 163,909
<BENEFITS> 11,257,018
<UNDERWRITING-AMORTIZATION> 1,295,790
<UNDERWRITING-OTHER> 1,202,228
<INCOME-PRETAX> 10,016,440
<INCOME-TAX> 3,518,631
<INCOME-CONTINUING> 6,497,809
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,497,809
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.69
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
