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, 1997
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 Company 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)
Company'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 Company (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 Company 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 Company'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 Company's classes of
common stock, as of the latest practicable date: 9,450,000 shares of Common
Stock outstanding on February 28, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Annual Report to shareholders for the fiscal year
ended December 31, 1997 (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 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a
Vote of Security Holders 7
Item 5. Market for Company's Common Stock
and Related Stockholder Matters 7
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 7
Item 8. Financial Statements and Supplementary Data 7
Item 9. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosure 7
Item 10. Directors and Executive Officers
of the Company 8
Item 11. Executive Compensation 13
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 "Company" 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 Erie
Indemnity Company.
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 1997 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 1997 1996 1995 1994 1993
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ordinary Life (including Total
and Permanent Disability and
Additional Accidental Death) 93.3% 93.3% 91.8% 92.1% 92.3%
Group 6.7 6.7 8.2 7.9 7.7
------ ------ ------ ------ ------
100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
3
<PAGE>
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
contracts, specifically annuities, universal life, and other interest
sensitive products. This method involves separating the premium income
into the "premium" portion (shown in revenue) 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 received 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
$17,780,582 in annuity deposits in 1997, $13,504,953 in 1996 and
$22,018,313 in 1995. Also included in the annuity deposits are annuity
contracts purchased by the Erie Insurance Group Retirement Plan for
Employees. These annuity contracts purchased totaled $1,992,060 in 1997,
$4,894,042 in 1996 and $6,024,125 in 1995.
Classes of Deposits
Total Deposits
For the year ended December 31,
<TABLE>
<CAPTION>
Class 1997 1996 1995 1994 1993
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Universal Life Deposit $ 10,733,738 $ 9,465,576 $ 8,490,667 $ 7,482,156 $ 6,130,390
Annuity Deposit 58,306,640 58,250,822 66,051,230 62,048,541 50,550,323
------------- ------------- ------------ ------------ ------------
$ 69,040,378 $ 67,716,398 $ 74,541,897 $ 69,530,697 $ 56,680,713
</TABLE>
The Company 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 policy 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.
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.
4
<PAGE>
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
Insurance Department and covered the five 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 $91 million and
a ratio of total adjusted capital to authorized control level risk-based
capital of 6:1 at December 31, 1997. The Company's ratios significantly
exceed the minimum NAIC risk-based capital requirements.
Life Reserves
The Company establishes and maintains 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.
Reserves 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. Interest rate assumptions for non-interest
sensitive life insurance range from 3.5% to 4% on policies issued in 1980
and prior years and 6% to 7.25% on policies issued in 1981 and subsequent
years. Mortality and withdrawal assumptions are based on tables typically
used in the industry.
5
<PAGE>
Annuities are subject to varying interest rates determined at the
discretion of the Company subject to certain minimums. During 1997,
annuity deposits earned interest at rates ranging from 5.00% to 6.25%.
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.
Employees
Services of eighty-one full-time Employees are provided through 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 1997 was 9.0%.
Reinsurance Profitability - Not Applicable.
New Types of Insurance - Not Applicable.
Total Insurance In Force for the last five years Net of
Reinsurance was:
1997 - $ 10,754,141,000
1996 - $ 9,646,962,000
1995 - $ 8,370,940,000
1994 - $ 7,481,537,000
1993 - $ 6,428,223,000
ITEM 2. PROPERTIES
The Company owns no real property and no tangible personal property used in the
operation of its business except office supplies and forms. The Company does,
however, own real property for investment purposes as described under ITEM 1
INVESTMENTS. The executive and administrative offices of the Company are located
in the headquarters office of Erie Insurance Group in Erie, Pennsylvania. The
Company 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 Company is not involved in any material pending legal proceedings other than
ordinary routine litigation incidental to its business.
6
<PAGE>
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 1997.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Currently there is no market on which the Company's stock is traded. The
Company had 1,145 recordholders of Common Stock at December 31, 1997.
Date Dividends Declared Date Dividends Paid Dividends per Share*
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
March 5, 1997 April 1,1997 .135
April 29, 1997 July 1, 1997 .135
June 17, 1997 October 1, 1997 .135
September 15, 1997 January 2, 1998 .135
*Adjusted to reflect a three-for-one stock split which was effective May 2,
1996.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in "Selected Financial Data" on Page 14 of the
Company's 1997 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 15 through 22 of the Company's 1997 Annual
Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The 1997 Financial Statements and the Company's independent auditor's report on
pages 24 through 32 of the Company's 1997 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 32.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
7
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
Present Principal Position with Erie
Name and Age Family Life and Other Material Positions
as of 04/01/98 Held During the Last Five Years
<S> <C>
Peter B. Bartlett 3C,4,5 Director since 1996. Partner, Brown Brothers Harriman & Co. since
64 1974; Director--Erie Insurance Company and Erie Indemnity Company,
Attorney-in-Fact for Erie Insurance Exchange and Kennametal, Inc.
Samuel P. Black, III 2 Director since 1997. President, Treasurer and Secretary, Samuel P.
56 Black & Associates, Inc.--insurance agency; President & Treasurer, Curti-Sergi
Company, life and employee benefits 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. 3,4 Director since 1992. President and Chief Executive Officer of Body-
59 Borneman 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 Bancshares.
John J. Brinling, Jr. Executive Vice President of the Company since December 1990. Division
51 Officer 1984-present.
Robert H. Dreyer Senior Vice President of the Company since 1990. Chief Actuary 1983-
60 Present.
Philip A. Garcia Executive Vice President and Chief Financial Officer of the Company,
41 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 since
October 1997. Senior Vice President and Controller and Division Officer
1993 - October 1997. Vice President and Manager of the Life Accounting
Department of the Company prior to 1993. Director - Flagship City
Insurance Company, Erie Insurance Property & Casualty Company and Erie
Insurance Company of New York.
<FN>
2 Member of Audit Committee
3 Member of Executive Compensation Committee
4 Member of Nominating Committee
5 Member of Investment Committee
C Committee Chairman
</FN>
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Present Principal Position with Erie
Name and Age Family Life and Other Material Positions
as of 04/01/98 Held During the Last Five Years
<S> <C>
Patricia A. Goldman 2,4 Director since 1996. Retired; Senior Vice President for Communications,
56 USAir, Inc. from 1988 to 1994; Director, Erie Insurance Company, Erie Indemnity
Company, Attorney-in-Fact for Erie Insurance Exchange and Crown Central Petroleum
Corporation.
Susan Hirt Hagen 1,* Director since 1980. Managing Partner, Hagen, Herr & Peppin, Group
62 Relations 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.
Thomas B. Hagen * Director since 1980. Chairman, Custom Engineering Co., Chairman,
62 Team Pennsylvania Foundation since 1997; Secretary of Commerce and Secretary of
Community and Economic Development of the Commonwealth of Pennsylvania 1995
to 1997; Special Consultant to the Chairman of the Board of the Erie
Indemnity Company, Attorney-in-Fact for the Erie Insurance Exchange from
1993 to 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 1990, and of Flagship City Insurance Company and Erie
Insurance Property & Casualty Company, from 1992 and 1993, respectively, to
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 1990; Director, the Erie
Indemnity Company, Attorney-in-Fact for the Erie Insurance Exchange and
Erie Insurance Company and GPU, Inc.
<FN>
1 Member of Executive Committee
2 Member of Audit Committee
4 Member of Nominating 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>
9
<PAGE>
<TABLE>
<CAPTION>
Present Principal Position with Erie
Name and Age Family Life and Other Material Positions
as of 04/01/98 Held During the Last Five Years
<S> <C>
F. William Hirt 1C,* Chairman of the Board. Director since 1967. Chairman of the Board of
72 the Erie 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
74 Pennsylvania State University; Director--Erie Insurance Company and Erie Indemnity
Company, Attorney-in-Fact for Erie Insurance Exchange.
Edmund J. Mehl 1,2C,4 Director since 1969. Retired Chairman and Chief Executive Officer,
74 Dispatch 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.
<FN>
1 Member of Executive Committee
2 Member of Audit Committee
4 Member of Nominating 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>
10
<PAGE>
<TABLE>
<CAPTION>
Present Principal Position with Erie
Name and Age Family Life and Other Material Positions
as of 04/01/98 Held During the Last Five Years
<S> <C>
Stephen A. Milne 1,5 President, Chief Executive Officer and Director since February 12, 1996.
49 President and Chief Executive Officer 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 since 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.
Timothy G. NeCastro Senior Vice President and Controller of the Company, Erie Insurance
37 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 since November
1997.
John M. Petersen 1,5 Director since 1980. Retired; President and Chief Executive Officer of the
69 Erie 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.
<FN>
1 Member of Executive Committee
5 Member of Investment Committee
</FN>
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Present Principal Position with Erie
Name and Age Family Life and Other Material Positions
as of 04/01/98 Held During the Last Five Years
<S> <C>
Seth E. Schofield 3,4C Director since 1991. Retired; Chairman of the Board and Chief Executive
58 Officer, USAir, Inc. from 1992 to January 1996; President and Chief Executive
Officer, USAir, Inc. from 1991 to 1992; President and Chief Operating
Officer, USAir, Inc. from 1990 to 1991; Executive Vice President, USAir,
Inc. from 1989 to 1990; Chairman of the Board and a Director, Greater
Pittsburgh Chamber of Commerce; Director, the Erie Indemnity Company,
Attorney-in-Fact for Erie Insurance Exchange, Erie Insurance Company, PNC
Bank, N.A., USX Corporation, Calgon Carbon Corporation, and Desai Capital
Management.
Jan R. Van Gorder 1 Senior Executive Vice President, Secretary and General Counsel since
50 1990. 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 2,3,5C Director since 1995. Senior Partner, Reed, Smith, Shaw & McClay,
64 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 and Calgon Carbon Corporation
Douglas F. Ziegler Senior Vice President, Treasurer and Chief Investment Officer of the
47 Company 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 and Erie Insurance
Company of New York. Director - Erie Insurance Company of New York.
<FN>
1 Member of Executive Committee
2 Member of Audit Committee
3 Member of Executive Compensation Committee
4 Member of Nominating Committee
5 Member of Investment Committee
C Committee Chairman
</FN>
</TABLE>
12
<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, 1997, 1996, and 1995, to the chief
executive officer of the Company and the four other most highly compensated
executive officers of the Company during 1997 for services rendered in all
capacities to the Company, Erie Indemnity Company, Erie Insurance Exchange (the
"Exchange") and their subsidiaries and affiliates.
Annual Compensation
Name and Other Annual All Other(2)
Principal Position Year Salary Bonus(1) Compensation Compensation
Stephen A. Milne 1997 $539,462 $174,697 $ 1,014 $ 66,219
Chief Executive 1996 467,305 39,351 1,014 26,020
Officer 1995 245,611 26,623 927 39,993
Jan R. Van Gorder 1997 $321,032 $103,469 $ 2,268 $ 26,263
Executive Vice 1996 312,555 25,433 1,014 26,431
President, Secretary 1995 296,095 26,725 1,029 29,625
& General Counsel
John J. Brinling, 1997 $214,395 $ 68,733 $ 2,268 $ 27,209
Jr., Executive 1996 202,126 34,652 946 24,098
Vice President of 1995 184,104 20,853 877 28,837
EFL
Philip A. Garcia 1997 $160,703 $ 58,744 $ 383 $ 4,470
Executive Vice 1996 142,255 9,039 332 3,966
President & Chief 1995 132,617 7,905 201 3,114
Financial Officer(3)
Dennis M. Geib 1997 $166,533 $ 52,127 $ 1,943 $ 4,094
Senior Vice 1996 158,261 10,157 1,900 4,072
President 1995 148,365 8,868 1,841 3,300
(1) The amounts indicated in the bonus column above represent amounts earned
by the named executives during 1997 under the Company's annual incentive
plan. The purpose of the annual incentive plan is to promote the best
interests of the Erie Insurance Group while enhancing shareholder value
of the Company by basing a portion of selected employees' compensation on
the performance of such employee and the Company. Performance measures
are established by the Executive Compensation Committee based on the
attainment of individual performance goals and Company financial goals
compared to a selected peer group.
13
<PAGE>
(2) Amounts shown include matching contributions made by the Company pursuant
to the Company's Employee Savings Plan, premiums paid by the Company on
behalf of the named individuals on the Split Dollar Plan insurance
policies and miscellaneous expense reimbursements. For the year 1997,
contributions made to the Employee Savings Plans amounted to $12,194,
$8,676, $6,432, $4,470, and $4,094 on behalf of Messrs. Milne, Van
Gorder, Brinling, Garcia and Geib, respectively. For the year 1996,
contributions to the Employee Savings Plan amounted to $11,729, $8,689,
$6,026, $3,966, and $4,072 on behalf of Messrs. Milne, Van Gorder,
Brinling, Garcia and Geib. For the year 1995, contributions made to the
Employee Savings Plan amounted to $5,424, $6,849, $4,910, $3,114, and
$3,300 on behalf of Messrs. Milne, Van Gorder, Brinling, Garcia and Geib,
respectively. Premiums paid during 1997 for Split Dollar Life insurance
policies for Messrs. Milne, Van Gorder, Brinling, Garcia and Geib,
respectively, are as follows: $51,531, $17,587, $17,700, $-0- and $-0-.
Premiums paid during 1996 for Split Dollar Life insurance policies for
Messrs. Milne, Van Gorder, Brinling, Garcia and Geib, respectively, are
as follows: $14,291, $17,742, $18,072, $-0- and $-0-. Premiums paid
during 1995 for Split Dollar Life insurance policies for Messrs. Milne,
Van Gorder, Brinling, Garcia and Geib are as follows: $28,786, $17,420,
$18,144, $-0- 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. For the year 1997,
miscellaneous expense reimbursements amounted to $2,494, $-0-, $3,077,
$-0- and $-0- for Messrs. Milne, Van Gorder, Brinling, Garcia and Geib.
For the year 1996, no miscellaneous expenses were incurred for Messrs.
Milne, Van Gorder, Brinling, Garcia and Geib. For the year 1995,
miscellaneous expense reimbursements amounted to $5,783, $5,356, $5,783,
$-0- and $-0- for Messrs. Milne, Van Gorder, Brinling, Garcia and Geib,
respectively.
(3) Mr. Garcia became Executive Vice President and Chief Financial Officer
on October 2, 1997.
Agreements with Executive Officers
Upon the recommendation of the Executive Compensation Committee of the Company's
Board of Directors the Company entered into employment agreements in December,
1997 with the following four senior executive officers of the Company: John J.
Brinling, Jr., Executive Vice President of the Company; Stephen A. Milne,
President and Chief Executive Officer; Philip A. Garcia, Executive Vice
President and Chief Financial Officer of the Company, and Jan R. Van Gorder,
Senior Executive Vice President, Secretary and General Counsel of the Company.
The employment agreements have the following principal terms:
(a) For Mr. Milne a four year term expiring in December, 2001 and for the
other executives a two year term expiring in December, 1999, unless the
agreement is theretofore terminated in accordance with its terms, with
or without cause, or due to the 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; (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 the extent the executive and his dependents were eligible
to participate in such programs immediately prior to his
termination; and (iii) accrued benefits under the Company's
Supplemental Executive Retirement Plan become immediately vested and
nonforfeitable.
14
<PAGE>
(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.
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.
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
- --------------------------------------------------------------------------------------------------------------------------
Name Number of Shares, Performance Estimated Future Payouts
Shares, Units or or Other Period Under Non-Stock
Other Rights (#) Until Maturation Price-Based Plans
or Payout
- --------------------------------------------------------------------------------------------------------------------------
Phantom Share Units Threshold Target Maximum(1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Milne, S. 45,839 1997-1999 -0- $188,812
Van Gorder, J. 27,279 1997-1999 -0- $112,361
Brinling, J. 18,218 1997-1999 -0- $ 75,038 NONE
Garcia, P. 12,719 1997-1999 -0- $ 52,390
Geib, D. 14,120 1997-1999 -0- $ 58,160
</TABLE>
The Company has established a Long-Term Incentive Plan that is designed to
enhance the growth and profitability of the Company by providing the incentive
of long term rewards to key employees who are capable of having a significant
impact on the performance of the Company; to attract and retain employees of
outstanding competence and ability; and to further align the interest of such
employees with those of shareholders of the Company. Each of the named
executives has been granted awards of phantom share units under the Company's
Long-Term Incentive Plan based upon a target award calculated as a percentage of
the executives' base salary. The total value of any phantom share units will be
determined at the end of the performance period based upon the growth in the
Company's retained earnings. Each executive will then be entitled to receive
shares of restricted Class A Common Stock of the Company equal to the dollar
value of the phantom share units at the end of the performance period. The
vesting period for the restricted Class A common shares issued to each executive
is three years after the end of the performance period. If an executive ceases
to be an employee prior to the end of the performance period, the executive
forfeits all phantom share units awarded. If an executive ceases to be an
employee prior to the end of the vesting period, the executive forfeits all
unvested restricted shares previously granted.
(1) There is no maximum payout limitation for a specific performance
period. However, the maximum value of phantom share units that may be
earned by any named executive in any year shall not exceed $500,000.
15
<PAGE>
Pension Plan
The following table sets forth the estimated total annual benefits payable upon
retirement at age 65 under the Erie Insurance Group Retirement Plan for
Employees and the Supplemental Employee Retirement Plan.
PENSION PLAN TABLE
Years of Service
Remuneration 15 20 25 30 35
- --------------------------------------------------------------------------
$ 200,000 60,000 80,000 100,000 120,000 120,000
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.
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: Stephen A. Milne - 21 years, Jan R. Van Gorder
- - 17 years, John J. Brinling, Jr. - 30 years, Philip A. Garcia - 17 years and
Dennis Geib - 17 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 $130,000, but adjusted periodically 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) similar to these provided to all other full
time employees as if the IRS limitations were not in effect. These benefits are
incorporated into the Pension Plan Table.
Director Compensation
The annual retainer for directors of all members of the Group, including the
Company, is $25,000, plus $1,500 for each meeting attended and $1,500 for each
committee meeting attended 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. The total amount allocated to the Company for
directors fees in 1997 was $111,068. Director Petersen also is compensated
pursuant to a consulting arrangement as disclosed in Item 13.
16
<PAGE>
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 or any of its
affiliates. 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.
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 are
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, under certain circumstances, 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 1997. 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 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 make recommendations regarding executive
compensation.
17
<PAGE>
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.
Compensation for the Chief Executive Officer consists primarily of salary,
annual incentive and long-term incentive payments, and minor perquisites which
amount to less than 10% of the Chief Executive Officer's salary and bonus. The
Board approved adoption of an annual incentive plan and long-term incentive plan
for senior executives of the Company as recommended by the Executive
Compensation Committee at its meeting of March 11, 1997. The purpose of the
annual incentive plan is to promote the best interests of the Company and to
promote the attainment of significant business objectives for the Company by
basing a portion of the executives' compensation on the attainment of both
premium growth and underwriting profitability goals. The annual incentive plan
will be paid in cash only.
Annual Incentive Plan target award levels, expressed as a percent of base
salary, are established annually by the Executive Compensation Committee and
approved by the Board of Directors. Payments under the Annual Incentive Plan are
based on a combination of individual executive performance and company
performance.
The Long-Term Incentive Program, which was approved by shareholders April 29,
1997, is designed to maximize returns to stockholders by linking executive
compensation to the overall profitability of the Company. Target award amounts,
expressed as a percentage of base salary, are determined by comparisons to peer
companies and approved by the Executive Compensation Committee and the Board of
Directors.
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 in evaluating the Chief
Executive Officer's performance. Such performance factors were considered in
approving Mr. Milne's 1997 compensation.
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.
Erie Indemnity Company Executive Compensation Committee:
Peter B. Bartlett, Chairman
J. Ralph Borneman, Jr.
Seth E. Schofield
Harry H. Weil
18
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of 2/28/98
(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 --
65 Egbert Street
Bay Head, NJ 08742
Samuel P. Black, III 132,397 1.40%
1091 Dutch Road
Fairview, PA 16415
J. Ralph Borneman 1,536 .02%
160 N. Funk Road
Boyertown, PA 19512
Patricia A. Goldman 100 --
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
Erie, PA 16506
Dr. Irvin H. Kochel 6,249 .07%
4637 Reese Road
Erie, PA 16510
19
<PAGE>
(b) Shares beneficially owned directly or indirectly by all Directors and
Officers:
Name & Address Shares
of Beneficial Beneficially Percent of
Owner Owned Class
Edmund J. Mehl 12,150 .13%
504 Frontier Dr.
Erie, PA 16505
Stephen A. Milne 200 --
100 Culbertson Drive
Lake City, PA 16423
John M. Petersen 89,141 .94%
124 Voyageur Dr.
Erie, PA 16505
Seth E. Schofield 0 --
8600 South Ocean Drive #1106
Jensen Beach, FL 34957
Jan R. Van Gorder 75 --
6796 Manchester Beach Road
Fairview, PA 16415
Harry H. Weil 100 --
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
Timothy G. NeCastro 0 --
124 West 37th Street
Erie, PA 16508
Douglas F. Ziegler 270 --
378 Ridgeview Drive
Erie, PA 16505
Officers and directors
as a group (19 persons) 567,169(2) 6.00%(2)
20
<PAGE>
(1) 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 13.4% of the Erie
Indemnity Company voting stock is beneficially owned by Samuel P.
Black, III.
(2) Includes direct and indirect beneficial ownership and shares owned by
and with spouses.
(c) There are no contractual arrangements known to the Company 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.
Such payments to the agencies for commissions written on insurance policies
from the property and casualty affiliated insurers and Erie Family Life
Insurance Company amounted to $2,540,612 and $626,760 for the Body-Borneman
Agency and the Black and Associates Agency respectively. Of these amounts,
the Company paid commissions of $108,845 to the Body-Borneman Agency and
$58,668 to the Black and Associates Agency in 1997.
Director Mehl is the retired Chairman and Chief Executive Officer of
Dispatch Printing, Inc., a company owned by his family members. Payments
for printing services from the company, and its affiliates, to Dispatch
Printing, Inc. amounted to $65,507 in 1997.
Director and 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 the Company on December 31, 1995, entered into a
consulting arrangement with the Company effective January 2, 1996. Under
the terms of the arrangement, the Company engaged Mr. Petersen as a
consultant to furnish the Company, the Erie Insurance Exchange, and Erie
Indemnity Company and its pension trust, with investment services with
respect to their investments in common stocks. As compensation for services
rendered by Mr. Petersen, a fee of .15 of 1 percent, on an annualized
basis, of the total fair market value of the common stock under management,
is paid to Mr. Petersen. The Company also pays for all necessary and
reasonable expenses related to Mr. Petersen's consulting services performed
under this arrangement. The compensation paid to Mr. Petersen, under this
arrangement in 1997, was $2,836,883 of which $30,393 was allocated to the
Company.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following financial statements of the Company and the report
of independent certified public accountants are incorporated herein by
reference to pages 24 through 32 in the Company's annual report to
shareholders for the year ended December 31, 1997.
Independent Auditor Report
Statements of Financial Position - December 31, 1997 and 1996
Statements of Operations for the years ended December 31, 1997,
1996 and 1995
Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995
Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995
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.
22
<PAGE>
(3) Exhibits:
Exhibit
Number Description of Exhibit
10.1 1997 Annual Incentive Plan of Erie Indemnity Company
10.2 Erie Indemnity Company Long-Term Incentive Plan
10.3 Employment Agreement dated December 16, 1997 by and between
Erie Indemnity Company and Stephen A. Milne
10.4 Employment Agreement dated December 16, 1997 by and between
Erie Indemnity Company and Jan R. Van Gorder
10.5 Employment Agreement dated December 16, 1997 by and between
Erie Indemnity Company and Philip A. Garcia
10.6 Employment Agreement dated December 16, 1997 by and between
Erie Indemnity Company and John J. Brinling, Jr.
13 1997 Annual Report to Security Holders. Reference is made to
the Annual Report furnished to the Commission, herewith.
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 Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: March 11, 1998 ERIE FAMILY LIFE INSURANCE COMPANY
(Registrant)
Principal Officers
/s/ Stephan A. Milne
Stephen A. Milne, President and C.E.O.
/s/ Jan R. Van Gorder
Jan R. Van Gorder, Executive Vice President, Secretary & General Counsel
/s/ Philip A. Garcia
Philip A. Garcia, Executive Vice President & CFO
/s/ Timothy G. NeCastro
Timothy G. NeCastro, 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, III /s/ Edmund J. Mehl
Samuel P. Black, III 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/ F. William Hirt /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, 1997 and 1996 and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997, as contained in the 1997
annual report, incorporated by reference in the annual report on Form 10-K for
the year ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1997
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 17, 1998
25
<PAGE>
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
<TABLE>
<CAPTION>
December 31, 1997
Cost or Amount at which
Amortized Market Shown in the
Type of Investment Cost Value Balance Sheet
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed Maturities Available-for-sale
U. S. Treasuries $ 4,267,607 $ 4,810,992 $ 4,810,992
U. S. Government Agency 27,519,035 27,945,095 27,945,095
States & Political Subdivisions 2,058,330 2,213,302 2,213,302
Special Revenue 14,209,832 15,315,426 15,315,426
Public Utilities 80,490,970 82,745,511 82,745,511
U. S. Banks, Trusts, and Insurance Companies 99,820,214 105,584,765 105,584,765
U. S. Industrial and Miscellaneous 285,565,364 297,590,104 297,590,104
Foreign Governments - Agency 2,987,776 2,347,500 2,347,500
Foreign Banks, Trusts, and Insurance Companies 5,000,000 5,099,000 5,099,000
Foreign Industrial and Miscellaneous 13,873,515 14,525,792 14,525,792
- -----------------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities available-for-sale $ 535,792,643 $ 558,177,487 $ 558,177,487
- -----------------------------------------------------------------------------------------------------------------------------------
Equity Securities
Common Stock
U. S. Banks, Trusts and Insurance Companies $ 730,500 $ 939,375 $ 939,375
U. S. Industrial and Miscellaneous 27,648,458 27,400,370 27,400,370
Non-Redeemable Preferred Stocks:
Public Utilities 4,000,000 4,050,080 4,050,080
U. S. Banks, Trusts and Insurance Companies 55,302,065 62,183,928 62,183,928
U. S. Industrial and Miscellaneous 12,440,871 14,240,640 14,240,640
Foreign Banks, Trusts, and Insurance Companies 7,765,000 7,967,500 7,967,500
Foreign Industrial and Miscellaneous 3,900,000 4,060,000 4,060,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total Equity Securities $ 111,786,894 $ 120,841,893 $ 120,841,893
- -----------------------------------------------------------------------------------------------------------------------------------
Real Estate
Investment Property $ 1,624,306 $ 1,624,306 $ 1,624,306
Policy Loans 5,099,671 5,099,671 5,099,671
Mortgage Loans 10,049,733 10,049,733 10,049,733
Other Invested Assets 7,240,282 7,240,282 7,240,282
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investments $ 671,593,529 $ 703,033,372 $ 703,033,372
- -----------------------------------------------------------------------------------------------------------------------------------
</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>
1997
Ordinary Life Insurance $ 55,958,508 127,064,469 131,926 1,839,677
Group Life Insurance 0 1,189,498 0 210,000
Annuities 8,608,577 489,444,701 0 0
Supplemental Contracts 0 876,054 0 0
- ---------------------------------------------------------------------------------------------------------------------
Total $ 64,567,085 618,574,722 131,926 2,049,677
- ---------------------------------------------------------------------------------------------------------------------
1996
Ordinary Life Insurance $ 50,586,096 107,704,284 119,145 1,612,105
Group Life Insurance 0 1,135,755 0 91,000
Annuities 7,440,332 450,570,003 0 0
Supplemental Contracts 0 889,669 0 0
- ---------------------------------------------------------------------------------------------------------------------
Total $ 58,026,428 560,299,711 119,145 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
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<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>
1997
Ordinary Life Insurance $ 32,826,827 14,659,150 18,511,338 3,607,634 7,911,668
Group Life Insurance 2,363,002 82,350 1,367,179 0 590,861
Annuities 3,643 35,110,681 27,614,299 87,332 1,088,065
Supplemental Contracts 0 62,111 51,604 0 4,163
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 35,193,472 49,914,292 47,544,420 3,694,966 9,594,757
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Net of reinsurance ceded
</FN>
</TABLE>
<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, 1997
Life Insurance in force $ 11,888,559,000 1,167,467,000 33,049,000 10,754,141,000 0.31%
Premiums for the year
Life Insurance 36,587,421 3,760,594 0 32,826,827 -0-
Group 2,257,474 0 109,171 2,366,645 4.61%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Premiums $ 38,844,895 3,760,594 109,171 35,193,472 0.31%
- -----------------------------------------------------------------------------------------------------------------------------------
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%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
10.1 1997 Annual Incentive Plan of Erie Indemnity Company 30
10.2 Erie Indemnity Company Long-Term Incentive Plan 35
10.3 Employment Agreement dated December 16, 1997 by and
between Erie Indemnity Company and Stephen A. Milne 45
10.4 Employment Agreement dated December 16, 1997 by and
between Erie Indemnity Company and Jan R. Van Gorder 62
10.5 Employment Agreement dated December 16, 1997 by and
between Erie Indemnity Company and Philip A. Garcia 79
10.6 Employment Agreement dated December 16, 1997 by and
between Erie Indemnity Company and John J. Brinling, Jr. 96
13 1997 Annual Report to Security Holders. Reference is made
to the Annual Report furnished to the Commission, herewith. 113
27 Financial Data Schedule 148
29
<PAGE>
Exhibit 10.1
1997 ANNUAL INCENTIVE PLAN
OF
ERIE INDEMNITY COMPANY
1. PURPOSE. The purpose of the Annual Incentive Plan (the "Plan") of Erie
Indemnity Company (the "Company") is to promote the best interests of the Erie
Insurance Exchange while enhancing shareholder value of the Company and to
promote the attainment of significant business objectives by the Company, its
subsidiaries and affiliates by basing a portion of selected employees'
compensation on the performance of such employee and the Company (as defined
below).
2. DEFINITIONS.
a. "Award Agreement" means the agreement entered into between the
Company and a Participant, setting forth the terms and conditions applicable to
an award granted to the Participant under this Plan.
b. "Base Salary" shall mean the annual base salary for a Participant at
the end of the calendar year 1997.
c. "Combined Ratio" means the sum of the loss ratio (including loss
adjustment expenses), expense ratio and policyholder dividend ratio, as
determined in accordance with statutory accounting principles and reported to
A.M. Best Company for the combined property casualty operations of the Erie
Insurance Exchange and affiliated property casualty companies (collectively
"Erie"). For Erie the Combined Ratio shall be adjusted downward to reflect the
excess of management fees over actual expenses for the management operations.
d. "Company" means Erie Indemnity Company and any corporation,
partnership or other organization of which the Company owns or controls,
directly or indirectly, not less than 50% of the total combined voting power of
all classes of stock or other equity interests. For purposes of this Plan, the
term "Company" shall include any successors thereto.
e. "Committee" means the Executive Compensation Committee of the Board
of Directors of the Company, or its functional successor, unless some other
Board committee has been designated by the Board of Directors to administer the
Plan.
f. "Participant" means any individual who has met the eligibility
requirements set forth in Section 5 hereof and to whom a grant has been made and
is outstanding under the Plan.
g. "Peer Group" means a group of companies selected by the Committee on
an industry and line of business basis.
30
<PAGE>
h. "Performance Measures" means the criteria upon which awards for 1997
will be based and, unless otherwise determined by the Committee shall be: (i) a
combination of the difference between Erie's Combined Ratio for 1997 and the
averaged Combined Ratio of the Peer Group for 1997 and the difference between
the Erie's growth in net written premiums as compared to growth in net written
premiums of the Peer Group ("Financial Performance Measure"); and (ii) the
Participant's individual performance assessment under the Company's existing
performance assessment system ("Individual Performance Measure"). The Financial
Performance Measure and the Individual Performance Measure are collectively
referred to as (the "Performance Measures").
i. "Target Award" means 25% of a Participant's Base Salary for 1997.
3. ADMINISTRATION. The Plan shall be administered by the Committee.
The Committee's determinations under the Plan need not be uniform and
may be made by it selectively among persons who receive, or are eligible to
receive, awards under the Plan, whether or not such persons are similarly
situated. Whenever the Plan refers to a determination being made by the
Committee, it shall be deemed to mean a determination by the Committee in its
sole discretion.
Subject to the provisions of the Plan, the Committee shall be
authorized to interpret the Plan, to make, amend and rescind such rules as it
deems necessary for the proper administration of the Plan, to make all other
determinations necessary or advisable for the administration of the Plan and to
correct any defect or supply any omission or reconcile any inconsistency in the
Plan in the manner and to the extent the Committee deems desirable to carry the
Plan into effect. Any action taken or determination made by the Committee shall
be conclusive on all parties.
4. WEIGHTING OF PERFORMANCE MEASURES. The Target Award shall be weighted in a
manner so that 75% of the Target Award shall be based upon the Financial
Performance Measure and 25% of the Target Award shall be based upon the
Individual Performance Measure. Satisfaction of either of the Performance
Measures shall entitle a Participant to payment with respect to that portion of
the award notwithstanding the fact that the other Performance Measure is not
satisfied.
5. ELIGIBLE PERSONS. Any key employee of the Company who the Committee
determines, in its sole discretion, has a significant effect on the operations
of the Company shall be eligible to participate in the Plan. Any Participant in
this Plan shall be deemed ineligible to participate in the Erie Insurance Group
Employee Profit Sharing Bonus Plan. No employee shall have a right (a) to be
selected under the Plan, or (b) having once been selected, to (i) be selected
again or (ii) continue as an employee.
31
<PAGE>
6. MAXIMUM AMOUNT AVAILABLE FOR AWARDS. The aggregate maximum pay-out with
respect to awards for 1997 under the Plan shall be 15% of the increase in the
Company's after tax earnings (as defined by the Committee) in 1997 compared to
1996. In the event that the total awards earned under the Plan exceed this
limitation, each Participant's award shall be reduced on a pro rata basis until
the total pay-out of awards under the Plan does not exceed the Plan maximum
established in the preceding sentence.
7. DETERMINATION OF AWARDS. The Committee shall determine the actual award to
each Participant for the year, based upon the following formula:
Participant Award = (.75 of Target Award x Financial Performance Percentage
Earned) + (.25 of Target Award x Individual Performance Percentage Earned).
The Financial Performance Percentage Earned and Individual Performance
Percentage Earned shall be determined in accordance with Appendix I and Appendix
II, respectively. For the Financial Performance Percentage Earned, the amount
shall be mathematically interpolated between cells in the matrix based upon
Erie's actual differences in Combined Ratio and Growth in New Written Premiums.
The Individual Performance Percentage Earned shall be based on the performance
assessment conducted during calendar year 1997.
The total award payable to any Participant may range from zero (0) to
one hundred and sixty (160) percent of the Participant's Target Award, depending
upon whether, or the extent to which, the Performance Measures have been
achieved. Notwithstanding anything in this Plan to the contrary, a Participant
shall not be entitled to, and no amount shall be payable to, such Participant in
the event that the Participant's Performance Points (as reflected in Appendix
II) are below 94. All such determinations regarding the achievement of
Performance Measures and the determination of actual awards will be made by the
Committee.
8. DISTRIBUTION OF AWARDS. Awards under the Plan shall be paid in cash as soon
as practicable after 1997 audited financial statements for Erie have been
prepared and Peer Group data is available.
9. TERMINATION OF EMPLOYMENT. A Participant must be actively employed by the
Company on the date his or her award is determined by the Committee ("the
Payment Date") in order to be entitled to payment of any award. In the event
active employment of a Participant shall be terminated before the Payment Date
for any reason other than discharge for "Cause" (as defined in such employee's
employment agreement with the Company or, if no such agreement exists, as
defined by the Committee) or voluntary resignation, such Participant may receive
such portion of his or her award as may be determined by the Committee. A
Participant discharged for Cause shall not be entitled to receive any award for
the year. A Participant who voluntarily resigns prior to the Payment Date shall
not be entitled to receive any award unless otherwise determined by the
Committee.
32
<PAGE>
10. MISCELLANEOUS.
a. NONASSIGNABILITY. No award will be assignable or transferable
without the written consent of the Committee in its sole discretion, except by
will or by the laws of descent and distribution.
b. WITHHOLDING TAXES. Whenever payments under the Plan are to be made,
the Company will withhold therefrom an amount sufficient to satisfy any
applicable governmental withholding tax requirements related thereto.
c. AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors of the
Company may at any time amend, suspend or discontinue the Plan, in whole or in
part. The Committee may at any time alter or amend any or all Award Agreements
under the Plan to the extent permitted by law.
d. OTHER PAYMENTS OR AWARDS. Nothing contained in the Plan will be
deemed in any way to limit or restrict the Company from making any award or
payment to any person under any other plan, arrangement or understanding,
whether now existing or hereafter in effect.
e. PAYMENTS TO OTHER PERSONS. If payments are legally required to be
made to any person other than the person to whom any amount is available under
the Plan, payments will be made accordingly. Any such payment will be a complete
discharge of the liability of the Company under this Plan.
f. LIMITS OF LIABILITY.
1. Any liability of the Company to any Participant with
respect to an award shall be based solely upon contractual obligations created
by the Plan and the Award Agreement.
2. Neither the Company, nor any member of its Board of
Directors or of the Committee, nor any other person participating in any
determination of any question under the Plan, or in the interpretation,
administration or application of the Plan, shall have any liability to any party
for any action taken or not taken in good faith under the Plan.
g. RIGHTS OF EMPLOYEES.
1. Status as an employee eligible to receive an award under
the Plan shall not be construed as a commitment that any award will be made
under this Plan to such employee or to other such employees generally.
33
<PAGE>
2. Nothing contained in this Plan or in any Award Agreement
(or in any other documents related to this Plan or to any award or Award
Agreement) shall confer upon any employee or Participant any right to continue
in the employ or other service of the Company or constitute any contract or
limit in any way the right of the Company to change such person's compensation
or other benefits or to terminate the employment or other service of such person
with or without cause.
h. SECTION HEADINGS. The section headings contained herein are for the
purposes of convenience only, and in the event of any conflict, the text of the
Plan, rather than the section headings, will control.
i. INVALIDITY. If any term or provision contained herein will to any
extent be invalid or unenforceable, such term or provision will be reformed so
that it is valid, and such invalidity or unenforceability will not affect any
other provision or part hereof.
j. APPLICABLE LAW. The Plan, the Award Agreements and all actions taken
hereunder or thereunder shall be governed by, and construed in accordance with,
the laws of the Commonwealth of Pennsylvania without regard to the conflict of
law principles thereof.
k. EFFECTIVE DATE. The Plan shall be effective as of January 1, 1997.
/s/ Peter B. Bartlett
-----------------------------------------
Peter B. Bartlett, Chairman
Executive Compensation Committee
34
Exhibit 10.2
ERIE INDEMNITY COMPANY
LONG-TERM INCENTIVE PLAN
1. GENERAL
1.1 Purpose.
The purposes of the Long-Term Incentive Plan (the "Plan") are: (a) to
enhance the growth and profitability of Erie Indemnity Company, a
Pennsylvania business corporation ("Erie"), and its subsidiaries and
affiliates by providing the incentive of long-term rewards to key
employees who are capable of having a significant impact on the
performance of Erie and its subsidiaries and affiliates; (b) to attract
and retain employees of outstanding competence and ability; (c) to
further align the interests of such employees with those of
shareholders of Erie.
1.2 Definitions.
For the purpose of the Plan, the following terms shall have the
meanings indicated:
(a) "Board of Directors" or "Board" shall mean the Board of
Directors of Erie.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended, including any successor law thereto.
(c) "Company" shall mean Erie and any corporation, partnership, or
other organization of which Erie, directly or indirectly, owns
or controls not less than 50% of the total combined voting
power of all classes of stock or other equity interests. For
purposes of this Plan, the terms "Erie" and "Company" shall
include any successor thereto.
(d) "Common Stock" shall mean the Class A (non-voting) Common
Stock of Erie and a "share of Common Stock" shall mean one
share of Common Stock.
(e) "Disability" shall mean total and permanent disability within
the meaning of Section 22(e)(3) of the Code.
(f) "Fair Market Value" of shares of Common Stock on any given
date(s) shall be: (a) the daily average of the high and low
sales prices on the NASDAQ National Market System of such
shares on the date(s) in question, or, if the shares of Common
Stock shall not have been traded on any such date(s), the
closing price on the NASDAQ National Market System on the
first day prior thereto on which the shares of Common Stock
were so traded; or (b) if the shares of Common Stock are not
traded on the NASDAQ National Market System, such other amount
as may be determined by the Plan Administrator by any fair and
reasonable means.
35
<PAGE>
(g) "Participant" shall mean any key employee who has met the
eligibility requirements set forth in Section 1.4 hereof and
to whom a grant has been made and is outstanding under the
Plan.
(h) "Performance Period" shall mean, in relation to Phantom Share
Units, any period, for which performance objectives have been
established pursuant to Article 2.
(i) "Phantom Share Unit" shall mean a right, granted to a
Participant pursuant to Article 2.
(j) "Plan Administrator" shall mean: (i) the Executive
Compensation Committee of the Board of Directors (the
"Committee"), or its functional successor, unless some other
Board committee has been designated by the Board of Directors
to administer the Plan or any portion of the Plan; or (ii) in
the event that the Committee is not comprised of two or more
"Non-Employee Directors" within the meaning of Rule
16b-3(a)(3) promulgated under Section 16 of the Securities
Exchange Act of 1934, then the Plan Administrator shall, with
respect to officers and directors subject to Section 16, be
the Board.
(k) "Restricted Share" shall mean a share of Common Stock, granted
to a Participant pursuant to Article 3, subject to the
restrictions set forth in Section 3.1 hereof.
(l) "Retirement" shall mean the cessation of employment with the
Company after reaching age 55 and having completed at least 5
years of service.
(m) "Vesting Period" shall mean in relation to Restricted Shares
receivable in payment for Phantom Share Units, the period of
time during which such shares are subject to restrictions on
transferability and may be forfeited if the Participant's
employment is terminated.
1.3 Administration.
36
<PAGE>
The Plan shall be administered by the Plan Administrator and the Plan
Administrator shall act in accordance with the procedures established
under Erie's Articles of Incorporation, By-laws and under any
resolution of the Board. Subject to the provisions of the Plan, the
Plan Administrator shall have sole and complete authority to: (i)
subject to Section 1.4 hereof, select Participants after receiving the
recommendations of the management of the Company; (ii) determine the
number of Phantom Share Units or Restricted Shares subject to each
grant; (iii) determine the time or times when grants are to be made or
are to be effective; (iv) determine the terms and conditions, including
the performance objectives, subject to which grants may be made; (v)
extend the term of any grant; (vi) prescribe the form or forms of the
instruments evidencing any grants made hereunder, provided that such
forms are consistent with the Plan; (vii) adopt, amend, and rescind
such rules and regulations as, in its opinion, may be advisable for the
administration of the Plan; (viii) construe and interpret the Plan and
all rules, regulations, and instruments utilized thereunder; and (ix)
make all determinations deemed advisable or necessary for the
administration of the Plan. All determinations by the Plan
Administrator shall be final and binding.
1.4 Eligibility and Participation.
Participation in the Plan shall be limited to officers (who may also be
members of the Board of Directors) and other salaried key employees of
the Company as identified by the Plan Administrator to participate in
the Plan.
2. PROVISIONS APPLICABLE TO PHANTOM SHARE UNITS
2.1 Performance Periods.
The Plan Administrator shall establish Performance Periods applicable
to Phantom Share Units. Each such Performance Period shall commence
with the beginning of a fiscal year in which performance objectives are
established and have a duration of not less than three consecutive
fiscal years.
2.2 Performance Objectives.
The Plan Administrator shall establish one or more performance
objectives for each Performance Period , provided that such performance
objectives shall be established prior to the grant of any Phantom Share
Units with respect to such period. Performance objectives shall be
based on one or more of the following measures: (i) retained earnings
per share plus dividend, (ii) earnings or earnings per share, (iii)
assets or return on assets, (iv) shareholder's equity or return on
shareholder's equity, (v) revenues, (vi) costs, (vii) gross profit
margin, (viii) investment earnings, (ix) loss ratio, (x) combined
ratio, or (xi) any other measure determined by the Plan Administrator
to be in the best interests of the Company. The Plan Administrator may,
in its discretion, establish performance objectives for the Company as
a whole or for only the business unit of the Company in which a given
Participant is involved, or a combination thereof.
2.3 Grants of Phantom Share Units.
37
<PAGE>
The Plan Administrator may select employees to become Participants
(subject to the provisions of Section 1.4 hereof) and grant Phantom
Share Units to such Participants at any time prior to or during the
first fiscal year of a Performance Period. Before making grants, the
Plan Administrator shall receive the recommendations of the Chief
Executive Officer of the Company, which will take into account such
factors as level of responsibility, current and past performance, and
performance potential. Each grant to a Participant shall be evidenced
by a written instrument stating the number of Phantom Share Units
granted, the target value of each Phantom Share Unit, the Performance
Period, the performance objective or objectives, the Vesting Periods
and restrictions applicable to Restricted Shares receivable in payment
for Phantom Share Units and any other terms, conditions and rights with
respect to such grant.
2.4 Adjustment With Respect to Phantom Share Units.
Any other provision of the Plan to the contrary notwithstanding, the
Plan Administrator may at any time adjust performance objectives (up or
down), adjust the way performance objectives are measured, or shorten
any Performance Period, if it is determined that conditions, including,
but not limited to, changes in the economy, changes in competitive
conditions, changes in laws or governmental regulations, changes in
generally accepted accounting principles, changes in the Company's
accounting policies, acquisitions or dispositions, stock redemptions,
reductions or increases in the management fee rate payable to Erie by
Erie Insurance Exchange, reductions to shareholders' equity due to
reductions or increases in net unrealized gain on available-for-sale
securities or the occurrence of other events impacting the performance
objectives, so warrant; provided, however, that the Plan Administrator
may not make any such adjustment that would increase the economic
benefit to any "covered employee" as defined in Section 162(m) of the
Code.
2.5. Maximum Annual Award.
The maximum value of Phantom Share Units that may be earned by any
Participant in any year shall not exceed $500,000.
2.6 Payment for Phantom Share Units.
38
<PAGE>
Within 90 days after the end of any Performance Period, the Plan
Administrator shall determine the total dollar value of Phantom Share
Units held by each Participant for such Performance Period. Payment for
Phantom Share Units shall be in the form of Restricted Shares and shall
be subject to the terms and conditions of Section 3 hereof. Such Common
Stock shall be purchased in the open market, provided however, that if
the Common Stock of the Company is not readily available in the
marketplace, or purchase of the Common Stock for Restricted Shares
would artificially affect the price of the Common Stock, in the sole
discretion of the Plan Administrator, Restricted Shares shall be
payable in deferred stock units equal in value to the number of shares
of Common Stock that would have been paid to the Participant had the
Common Stock been available in the marketplace. The number of
Restricted Shares (or stock unit equivalents) granted shall be equal to
the actual total value of the Phantom Share Units at the end of the
Performance Period divided by the monthly average price of the Fair
Market Value of the Common Stock for the month following the end of the
Performance Period, rounded up to the nearest whole share.
2.7 Termination of Employment.
(a) Prior to the end of a Performance Period:
(i) Death, Disability or Normal Retirement: If a
Participant ceases to be an employee of the Company
prior to the end of a Performance Period by reason
of death, Disability or Normal Retirement (as defined
in the Company's qualified Retirement Plan for
Employees), the Performance Period for outstanding
Phantom Share Units shall be deemed to end as of the
end of the fiscal year in which such event occurred.
The total dollar value of Phantom Share Units held by
such Participant shall be based upon performance
during the reduced Performance Period and will be
paid in the form of shares of Common Stock in the
manner provided for by Section 2.6. Any shares of
Common Stock payable pursuant to this Section 2.7,
shall be free of any restrictions or risk of
forfeiture under the Plan and shall be registered in
the name of the Participant or the Participant's
beneficiary or estate, as the case may be, as soon as
practicable after the end of the applicable
Performance Period.
(ii) Other Terminations: If a Participant ceases to be an
employee prior to the end of a Performance Period for
any reason other than death, Disability or Normal
Retirement, the Participant shall immediately forfeit
all Phantom Share Units previously granted under the
Plan. The Plan Administrator may, however, in its
sole discretion, permit a Participant to retain all
or a portion of his Phantom Share Units if it finds
that the circumstances in the particular case so
warrant.
(b) After the end of a Performance Period, but prior to the end
of a Vesting Period:
(i) Death or Disability: If a Participant ceases to be an
employee of the Company by reason of death or
Disability, the Vesting Period shall be deemed to
have ended and shares of Common Stock held by the
Company with respect to Restricted Shares earned
by such Participant shall be paid as soon as
practicable in the manner set forth in 3.4 hereof
39
<PAGE>
(ii) Retirement: The Retirement of a Participant shall not
constitute a termination of employment for purposes
of this Section 2(b), and such Participant shall not
forfeit any Common Stock held by the Company with
respect to Restricted Shares earned by such
Participant.
(iii) Other Terminations: If a Participant ceases to be an
employee prior to the end of a Vesting Period for any
reason other than death, Disability or Retirement,
the Participant shall immediately forfeit all
unvested Restricted Shares previously granted with
respect to such Vesting Period in accordance with the
provisions of Section 3.2(c) hereof, unless the Plan
Administrator, in its sole discretion, finds that the
circumstances in the particular case so warrant and
allows a Participant whose employment has so
terminated to retain any or all of the Restricted
Shares granted to such Participant.
3. PROVISIONS APPLICABLE TO RESTRICTED SHARES
3.1 Vesting Periods.
At the time a Phantom Share Unit award is made, the Plan Administrator
shall establish a Vesting Period applicable to Restricted Stock which
shall not be more than three years. The Plan Administrator may provide
for the lapse of all or a portion of such Vesting Period in
installments and may accelerate or waive such Vesting Period, in whole
or in part, based on such factors as the Plan Administrator may
determine.
3.2 Rights and Restrictions Governing Restricted Shares.
40
<PAGE>
At the time of payment in Restricted Shares, subject to the receipt by
the Company of any applicable consideration for such Restricted Shares,
one or more certificates representing the appropriate number of shares
of Common Stock granted to a Participant shall be registered either in
his name or for his benefit either individually or collectively with
others, but shall be held by the Company for the account of the
Participant. The Participant shall have all rights of a holder as to
such shares of Common Stock, including the right to receive dividends,
subject to the following restrictions: (a) the Participant shall not be
entitled to delivery of certificates representing such shares of Common
Stock and any other such securities until the expiration of the
applicable Vesting Period; (b) none of the Restricted Shares may be
sold, transferred, assigned, pledged, or otherwise encumbered or
disposed of during the applicable Vesting Period; and (c) all of the
Restricted Shares shall be forfeited and all rights of the Participant
to such Restricted Shares shall terminate without further obligation on
the part of the Company unless the Participant remains in the
continuous employment of the Company for the entire Vesting Period or
portion thereof in relation to which such Restricted Shares were
granted, except as otherwise allowed by Section 2.7 hereof. At the time
of payment in Restricted Shares, if the Common Stock of the Company is
not readily available in the marketplace, or purchase of the Common
stock would artificially affect the price of the Common Stock, in the
sole discretion of the Plan Administrator, then in that event, the
Company shall have the option to pay to the Participant in cash the
Fair Market Value of the Restricted Shares on such payment date.
3.3 Adjustment with Respect to Restricted Shares.
Any other provisions of the Plan to the contrary notwithstanding, the
Plan Administrator may at any time shorten any Vesting Period, if it
determines that conditions, including but not limited to, changes in
the economy, changes in competitive conditions, changes in laws or
governmental regulations, changes in generally accepted accounting
principles, changes in the Company's accounting policies, acquisitions
or dispositions, or the occurrence of other unusual, unforeseen, or
extraordinary events, so warrant.
3.4 Payment of Restricted Shares.
In the event that a Participant is still employed by the Company at the
end of the Vesting Period or portion thereof, all applicable
restrictions shall lapse as to Restricted Shares granted in relation to
such Vesting Period, and one or more stock certificates for the
appropriate number of shares of Common Stock, free of restrictions,
shall be delivered to the Participant or such shares shall be credited
to a brokerage account if the Participant so directs.
3.5 Deferral of Payment.
The Plan Administrator may, in its sole discretion, offer a Participant
the right, by execution of a written agreement, to defer the receipt of
all or any portion of the payment, if any, for Restricted Shares. If
such an election to defer is made, the Common Stock receivable in
payment for Restricted Shares shall be deferred as stock units equal in
number to the number of shares of Common Stock that would have been
paid to the Participant. Such stock units shall represent only a
contractual right and shall not give the Participant any interest,
right, or title to any Common Stock during the deferral period. The
cash receivable in payment for fractional shares receivable for
Restricted Shares shall be deferred as cash units. Deferred cash units
may be credited annually with an appreciation factor specified in the
deferred compensation agreement, which will include dividend
equivalents. At the end of the deferral period, deferred stock units
and cash units shall be paid in Common Stock, except that any payment
attributable to fractional shares shall be paid in cash. All
other terms and conditions of deferred payments shall be as
contained in a written deferred compensation agreement.
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4. MISCELLANEOUS
4.1 Designation of Beneficiary.
A Participant may designate, in a writing delivered to the Company
before his death, a person or persons to receive, in the event of his
death, any rights to which he would be entitled under the Plan. A
Participant may also designate an alternate beneficiary to receive
payments if the primary beneficiary does not survive the Participant. A
Participant may designate more than one person as his beneficiary or
alternate beneficiary, in which case such persons would receive
payments as joint tenants with a right of survivorship. A beneficiary
designation may be changed or revoked by a Participant at any time by
filing a written statement of such change or revocation with the
Company. If a Participant fails to designate a beneficiary, then his
estate shall be deemed to be his beneficiary.
4.2 Employment Rights.
Neither the Plan nor any action taken hereunder shall be construed as
giving any employee of the Company the right to become a Participant,
and a grant under the Plan shall not be construed as giving any
Participant any right to be retained in the employ of the Company.
4.3 Nontransferability.
A Participant's rights under the Plan, including the right to any
amounts or shares payable, may not be assigned, pledged, or otherwise
transferred except, in the event of a Participant's death, to his
designated beneficiary or, in the absence of such a designation, by
will or the laws of descent and distribution.
4.4 Withholding.
The Company shall have the right, before any payment is made or a
certificate for any shares is delivered or any shares are credited to
any brokerage account, to deduct or withhold from any payment under the
Plan any Federal, state, local or other taxes, including transfer
taxes, required by law to be withheld or to require the Participant or
his beneficiary or estate, as the case may be, to pay any amount, or
the balance of any amount, required to be withheld.
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If and to the extent withholding of any Federal, state or local tax is
required in connection with the lapse of restrictions with respect to
Restricted Shares earned pursuant to Phantom Share Units, the
Participant may elect to pay such amount in cash or: (i) have the
Company hold back from the shares to be delivered, stock having a value
calculated to satisfy such withholding obligations; (ii) deliver
previously-owned shares of Common Stock held by the Participant having
a value equal to the tax withholding obligation provided that the
previously owned shares have been held for at least six months; or
(iii) utilize a combination of the foregoing procedures.
4.5 Relationship to Other Benefits.
No payment under the Plan shall be taken into account in determining
any benefits under any retirement, group insurance, or other employee
benefit plan of the Company. The Plan shall not preclude the
shareholders of Erie , the Board of Directors or any committee thereof,
or the Company from authorizing or approving other employee benefit
plans or forms or incentive compensation, nor shall it limit or prevent
the continued operation of other incentive compensation plans or other
employee benefit plans of the Company or the participation in any such
plans by Participants in the Plan.
4.6 No Trust or Fund Created.
Neither the Plan nor any grant made hereunder shall create or be
construed to create a trust or separate fund of any kind or a fiduciary
relationship between the Company and a Participant or any other person.
To the extent that any person acquires a right to receive payments from
the Company pursuant to a grant under the Plan, such right shall be no
greater than the right of any unsecured general creditor of the
Company.
4.7 Expenses.
The expenses of administering the Plan shall be borne by the Company.
4.8 Indemnification.
Service on the Committee shall constitute service as a member of the
Board of Directors so that members of the Committee shall be entitled
to indemnification and reimbursement as directors of the Company
pursuant to its Articles of Incorporation, By-Laws, or resolutions of
its Board of Directors or shareholders.
4.9 Tax Litigation.
The Company shall have the right to contest, at its expense, any tax
ruling or decision, administrative or judicial, on any issue that is
related to the Plan and that the Company believes to be important to
Participants in the Plan and to conduct any such contest or any
litigation arising therefrom to a final decision.
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4.10 Antidulution.
Phantom Share Units and Restricted Shares shall be subject to
appropriate adjustment by the Plan Administrator as to the number and
price of shares of Common Stock or other considerations subject to such
grants in the event of changes in the outstanding shares by reason of
stock dividends, stock splits, recapitalizations, reorganizations,
mergers, consolidations, combinations, exchanges, or other relevant
changes in capitalization occurring after the date of grant.
5. AMENDMENT AND TERMINATION
The Board of Directors may modify, amend, or terminate the Plan at any
time except that, no modification, amendment, or termination of the
Plan shall adversely affect the rights of a Participant under a grant
previously made to him without the consent of such Participant.
6. INTERPRETATION
6.1 Governmental and Other Regulations.
The Plan and any grant hereunder shall be subject to all applicable
Federal and state laws, rules, and regulations and to such approvals by
any regulatory or governmental agency that may, in the opinion of the
counsel for the Company, be required.
6.2 Governing Law.
The Plan shall be construed and its provisions enforced and
administered in accordance with the laws of the Commonwealth of
Pennsylvania applicable to contracts entered into and performed
entirely in such State.
7. EFFECTIVE DATE AND SHAREHOLDER APPROVAL
The Plan shall be effective as of January 1, 1997.
44
Exhibit 10.3
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") made effective as of the 16th
day of December, 1997 (the "Effective Date") by and between ERIE INDEMNITY
COMPANY, a Pennsylvania corporation with its principal place of business at
Erie, Pennsylvania (the "Company"), and STEPHEN A. MILNE (the "Executive");
WITNESSETH:
WHEREAS, the Company has determined that it is in the best
interests of the Company and its shareholders to secure the continued employment
of the Executive on the terms and subject to the conditions set forth in this
Agreement; and
WHEREAS, the Executive desires and is willing to accept
employment with the Company on the terms and subject to the conditions set forth
herein;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Term. The Company hereby agrees to continue the employment
of the Executive and the Executive hereby agrees to continue to serve the
Company pursuant to the terms and conditions of this Agreement as President and
CEO of the Company, or in such other position with the Company of at least
commensurate responsibility and authority in all material respects, for a term
of four years commencing on the Effective Date hereof and expiring on December
15, 2001, unless earlier terminated pursuant to Section 5 hereof.
Notwithstanding the foregoing, the Executive shall serve in said office(s) at
the pleasure of the Company's Board of Directors (the "Board of Directors") and
the Executive may be removed from said office(s) at any time with or without
Cause, as hereinafter defined, pursuant to Sections 5(b) or 5(d) hereof;
provided that any such removal shall be without prejudice to any contract rights
the Executive may have hereunder. Subject to Section 8(a)(6) and Section 8(b)
hereof, this Agreement shall expire by its terms on December 15, 2001.
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2. Duties and Responsibilities. The Executive's duties
hereunder shall be those which shall be prescribed by the Company's Bylaws, as
amended from time to time, and by the Board of Directors or any committee
thereof from time to time and shall include such executive authority, duties,
powers and responsibilities as customarily attend the office as President and
CEO of a company comparable to the Company. The Executive shall discharge such
duties consistent with sound business practices and in accordance with law and
the Company's general employment policies, in each case, as in effect from time
to time, in all material respects and the Executive shall use best efforts to
promote the best interests of the Company. During the term of this Agreement,
the Executive's position (including the Executive's status and reporting
requirements), authority, duties, powers and responsibilities shall at all times
be at least commensurate in all material respects with the most significant of
those held, exercised or assigned to the Executive as of the Effective Date. The
Executive shall devote the Executive's knowledge, skill and all of the
Executive's professional time, attention and energies (reasonable absences for
vacations and illness excepted), to the business of the Company in order to
perform such assigned duties faithfully, competently and diligently. It is
understood and agreed between the parties that the Executive may (i) engage in
charitable and community activities, including serving on boards of directors or
trustees of and holding other leadership positions in non-profit organizations
unless the objectives and requirements of such positions are determined by the
Board of Directors to be inconsistent with the performance of the Executive's
duties hereunder, and, (ii) manage personal investments, so long as such
activities do not interfere or conflict with the Executive's performance of
responsibilities and obligations hereunder. It is expressly agreed that any such
activities engaged in by the Executive as of the Effective Date shall not
thereafter be deemed to interfere with the Executive's obligations and
responsibilities hereunder. The Executive agrees that the approval of the Board
of Directors or a committee thereof shall be required before the Executive first
accepts a position as director of any for-profit corporation after the date
hereof.
3. Compensation. During the term of this Agreement,
the Executive shall receive, for all services rendered to the Company
hereunder, the following (hereinafter referred to collectively as
"Compensation"):
(a) Salary. The Executive shall be paid an annual
base salary at an annual rate at least equal to the annual
rate being paid or payable to the Executive by the Company in
the month in which the Effective Date occurs, with such
increases thereafter as shall be determined from time to time
to be fair and reasonable by the Board of Directors or by the
Executive Compensation Committee of the Board of Directors
(the "Committee") in its discretion after taking into account,
among other things, the authority, duties, powers and
responsibilities of the Executive's position, the Executive's
performance, the Company's performance, the compensation of
persons in comparable positions at the Company and at other
comparable companies, and the effect of inflation. The
Executive's annual base salary shall not be reduced after any
such increase. The Executive's annual base salary shall be
payable in equal installments in accordance with the Company's
general salary payment policies, but no less frequently than
bi-weekly.
(b) Incentive Compensation. The Executive shall be
eligible for awards under the Company's incentive compensation
plans, if any, applicable to senior executive officers of the
Company or to key employees of the Company or its
subsidiaries, including, but not limited to, management
incentive plans and stock option plans, in accordance with and
subject to the terms thereof (including any provisions
providing for changes in the level of or termination of
benefits thereunder), on a basis commensurate with the
Executive's position and authorities, duties, powers and
responsibilities.
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(c) Employee Benefit Plans. The Executive and the
Executive's "dependents," as that term may be defined under
the applicable employee benefit plan(s) of the Company, shall
be included, to the extent eligible thereunder and subject to
the terms of the plans (including any provisions for changing
the level of or termination of benefits thereunder), in all
plans, programs and policies which provide benefits for
Company employees and their dependents on a basis commensurate
with the Executive's position and authorities, duties, powers
and responsibilities including, without limitation, health
care insurance, health and welfare plans, pension and
retirement plans, group life insurance plans, split dollar
life insurance plans, short and long-term disability plans,
survivors' benefits, executive supplemental benefits, holidays
and other similar or comparable benefits made available to the
Company's employees and senior executive officers
(hereinafter, such plans, programs and policies shall be
collectively referred to as the "Erie Benefit Plans"). Such
plans, programs and policies shall include, but are not
limited to, the Erie Insurance Group Retirement Plan for
Employees, the Erie Insurance Group Employee Savings Plan, the
Erie Insurance Group Deferred Compensation Plan, the Erie
Insurance Group Split Dollar Life Insurance Plan, the Erie
Insurance Group Supplemental Executive Retirement Plan, and
the Erie Insurance Group Health Protection, Prescription Drug,
Dental Assistance and Vision Care Plans.
(d) Perquisites. The Executive shall be entitled to
all perquisites which the Company from time to time makes
available to senior executive officers of the Company. Such
perquisites shall include, but are not limited to, parking,
club dues, tax preparation assistance, and an annual physical
examination.
(e) Expenses and Working Facilities. The Executive is
hereby authorized to incur, and shall be reimbursed by the
Company for, any and all reasonable and necessary business
related expenses, including, but not limited to, expenses for
business travel, entertainment, gifts and similar matters,
which expenses are incurred by the Executive on behalf of the
Company or any of its subsidiaries, upon presentation of
itemized accounts of such expenses in accordance with Company
policies. The Executive shall be furnished during the term of
this Agreement with offices and other working facilities in
the Company's principal executive offices located in Erie,
Pennsylvania (or other location of the principal executive
offices within the Erie metropolitan area) and secretarial and
other assistance suitable to the Executive's position and
adequate for the performance of duties hereunder.
(f) Performance Appraisal. The Executive's
performance may be evaluated by the Board of Directors or the
Committee from time to time. The Executive shall be entitled
to such additional remuneration, including but not limited to
annual bonuses based on performance, as the Board of Directors
or the Committee may, in its discretion, determine from time
to time.
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4. Absences. The Executive shall be entitled to vacations in
accordance with the Company's vacation policy in effect from time to time (but
in no event shall the Executive be entitled to fewer vacation days than under
the Company's vacation policy as in effect on the Effective Date) and to
absences because of illness or other incapacity, and shall also be entitled to
such other absences, whether for holiday, personal time, conventions, or for any
other purpose, as are granted to the Company's other senior executive officers
or as are approved by the Board of Directors or the Committee, which approval
shall not be unreasonably withheld.
5. Termination. The Executive's employment hereunder may be
terminated only as follows:
(a) Expiration of Term of Office. Upon the expiration
of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof, the
Board of Directors may (i) determine that the Executive should
not continue in such office(s) or (ii) that the Executive
should not be elected or appointed to an office with duties,
authorities, powers and responsibilities that are at least
commensurate with those of said office(s), in either case, for
reasons other than for Cause (if the reasons for such
noncontinuance, nonreelection or nonreappointment constitute
Cause, then Section 5(d) hereof will apply).
(b) By the Company Without Cause. The Company may at
any time terminate the Executive's employment hereunder
without Cause only by the affirmative vote of a majority of
the entire Board of Directors, and upon no less than thirty
(30) days' prior written notice to the Executive.
(c) By the Executive Without Good Reason. The
Executive may at any time terminate employment hereunder for
any reason upon no less than thirty (30) days' written notice
to the Company. Section 5(e) shall apply to any termination of
employment by the Executive for Good Reason.
(d) By the Company For Cause. The Company may
terminate the Executive's employment hereunder for Cause. In
such event, the Company shall give to the Executive prompt
written notice (in addition to any notice which may be
required by Section 5(d)(1) hereof) specifying in reasonable
detail the basis for such termination. For purposes of this
Agreement, "Cause" shall mean any of the following conduct by
the Executive:
(1) The deliberate and intentional
breach of any material provision of
this Agreement, which breach
Executive shall have failed to cure
within thirty (30) days after
Executive's receipt of written
notice from the Company specifying
the specific nature of the
Executive's breach;
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(2) The deliberate and intentional
engaging by Executive in gross
misconduct that is materially and
demonstrably inimical to the best
interests, monetary or otherwise, of
the Company; or
(3) Conviction of a felony or conviction
of any crime involving moral
turpitude, fraud or deceit.
For purposes of this definition, no act, or failure to act, on the Executive's
part shall be considered "deliberate and intentional" unless done, or omitted to
be done, by the Executive not in good faith and without reasonable belief that
such action or omission was in the best interest of the Company.
(e) By the Executive for Good Reason. The Executive
may terminate employment hereunder for Good Reason upon
providing thirty (30) days written notice to the Company after
the Executive reasonably becomes aware of the circumstances
giving rise to such Good Reason. For purposes of this
Agreement, "Good Reason" means the following conduct of the
Company, unless the Executive shall have consented thereto in
writing:
(1) Material breach of any material
provision of this Agreement by the
Company, which breach shall not have
been cured by the Company within
thirty (30) days after Company's
receipt from the Executive or the
Executive's agent of written notice
specifying in reasonable detail the
nature of the Company's breach;
(2) The assignment to the Executive of
any duties inconsistent in any
material respect with the
Executive's position (including any
reduction of the Executive's status
and reporting requirements),
authority, duties, powers or
responsibilities with the Company as
contemplated by Section 2 of this
Agreement, or any other action by
the Company, including the removal
of the Executive from or any failure
to reelect or reappoint the
Executive to the office(s) specified
in Section 2 or a commensurate
office(s) (other than for Cause),
which results in a diminution of the
Executive's authority, duties,
position, responsibilities or
status, excluding for this purpose
any isolated, insubstantial and
inadvertent action respecting the
Executive not taken in bad faith and
which is remedied by the Company
within thirty (30) days after
receipt of written notice from the
Executive to the Company;
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(3) The Company's relocation of the
Executive out of the Company's
principal executive offices or the
relocation of the Company's
principal executive offices to a
location outside the Erie,
Pennsylvania metropolitan area,
except for required short-term
travel on the Company's behalf to
the extent necessary for the
Executive to carry out his normal
duties in the ordinary course of
business;
(4) The failure of the Company to obtain
the assumption in writing of its
obligations to perform this
Agreement by any successor as
provided in Section 14 hereof not
less than five days prior to a
merger, consolidation or sale as
contemplated in Section 14; or
(5) A reduction in the overall level of
compensation of the Executive. For
purposes of this subsection 5, the
following shall not constitute a
reduction in the overall level of
compensation of the Executive: (i)
changes in the cash/stock mix of
compensation payable to the
Executive; (ii) a reduction in the
overall level of compensation of the
Executive resulting from the failure
to achieve corporate, business unit
and/or individual performance goals
established for purposes of
incentive compensation for any year
or other period; provided that the
aggregate short-term incentive
opportunity, when combined with the
Executive's base salary, provides,
in the aggregate, an opportunity for
the Executive to realize at least
the same overall level of
compensation as was paid in the
immediately prior year or period at
target performance levels; and
provided, further, that such target
performance levels are reasonable at
all times during the measurement
period, taking into account the fact
that one of the purposes of such
compensation is to incent the
Executive; (iii) reductions in
compensation resulting from changes
to any Erie Benefit Plan (provided
that such changes are generally
applicable to all participants in
such Erie Benefit Plan); and (iv)
any combination of the foregoing.
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(f) Disability. In the event that the Executive shall
be unable to perform the Executive's duties hereunder on a
full time basis for a period of one hundred-eighty (180)
consecutive calendar days by reason of incapacity due to
illness, accident or other physical or mental disability, then
the Company may, at its discretion, terminate the Executive's
employment hereunder if the Executive, within ten (10) days
after receipt of written notice of termination (which notice
may be given before or after the end of the entire 180 day
period), shall not have returned to the performance of all of
his duties hereunder on a full-time basis.
(g) Death. The Executive's employment under this
Agreement shall terminate upon the Executive's death.
(h) Mutual Written Agreement. This Agreement
and the Executive's employment hereunder may be terminated
at any time by the mutual written agreement of the Executive
and the Company.
6. Compensation in the Event of Termination. In the event that the
Executive's employment hereunder terminates prior to the expiration of this
Agreement for any reason provided in Section 5 hereof, the Company shall pay the
Executive, compensation and provide the Executive and the Executive's eligible
dependents with benefits as follows:
(a) Executive's Nonreelection to Office; Termination
By Company Without Cause; Termination By Executive for Good
Reason. In the event that the Executive's employment hereunder
is terminated: (i) because the Executive does not continue in
office pursuant to Section 5(a) hereof; or (ii) by the Company
without Cause pursuant to Section 5(b) hereof; or (iii) by the
Executive for Good Reason pursuant to Section 5(e) hereof,
then in any such event the Company shall pay or provide, as
applicable, the following compensation and benefits to the
Executive:
(1) Three (3) times the following: (A)
the highest annual base salary paid
or payable to the Executive in the
then current year or any one (1) of
the three (3) calendar years
preceding Executive's termination of
employment hereunder; plus (B) an
amount equal to the sum of the
Executive's highest award(s) under
the Company's Annual Incentive Plans
for any one (1) of the three (3)
calendar years preceding the date of
the termination of Executive's
employment hereunder (such total is
referred to herein as "Covered
Compensation"). Such payment to the
Executive by the Company shall be
paid in a lump sum unless the
Executive elects, and so notifies
the Company in writing prior to the
termination of the Executive's
employment hereunder, to receive
such payment in three (3) equal
annual installments. The lump sum or
first payment, as the case may be,
shall be paid within sixty (60) days
after the date of the termination of
the Executive's employment
hereunder;
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(2) Any awards or other compensation to
which the Executive is entitled
under any of the Company's
compensation plans or Erie Benefit
Plans to the extent not covered in
subsection (1) hereof;
(3) Any award to which the Executive
would be entitled under the
Company's Long-Term Incentive Plan
as in effect on December 16, 1997,
calculated under the provision of
that Plan as if the Executive ceases
to be an Employee of the Company by
reason of death, disability or
normal retirement;
(4) Continuing coverage for all purposes
(including eligibility, coverage,
vesting and benefit accruals, as
applicable), for a period of three
(3) years after the date of the
termination of Executive's
employment hereunder, to the extent
not prohibited by law, for the
Executive and the Executive's
eligible dependents under all of the
Erie Benefit Plans in effect and
applicable to Executive and the
Executive's eligible dependents as
of the date of termination. In the
event that the Executive and/or the
Executive's eligible dependents,
because of the Executive's
terminated status, cannot be covered
or fully covered under any or all of
the Erie Benefit Plans, the Company
shall continue to provide the
Executive and/or the Executive's
eligible dependents with the same
level of such coverage in effect
prior to termination, payable from
the general assets of the Company if
necessary. Notwithstanding the
foregoing, the Executive may elect
(by giving written notice to the
Company prior to the termination of
employment hereunder), on a benefit
by benefit basis, to receive in lieu
of continuing coverage, cash in an
amount equal to the present value
(using a 6.5% discount rate over
three years) of the projected cost
to the Company of providing such
benefit for such three year period.
The aggregate amount of cash to
which the Executive is entitled
pursuant to the preceding sentence
shall be payable by the Company to
the Executive within sixty (60) days
after the date of the termination of
Executive's employment hereunder;
and
(5) For a period of three (3) years
after the date of the termination of
Executive's employment hereunder,
such perquisites as are made
available to the Executive as of the
date of the termination of
Executive's employment hereunder.
The Executive's subsequent death, disability or attainment of age 65 or any
other age shall in no way affect or limit the Company's obligations under this
Section 6(a).
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(b) Termination By the Company for Cause. In the
event that the Company shall terminate the Executive's
employment hereunder for Cause pursuant to Section 5(d), this
Agreement shall forthwith terminate and the obligations of the
parties hereto shall be as set forth in Section 8 hereof.
(c) Termination by the Executive Without Good Reason.
In the event that the Executive shall terminate employment
hereunder other than for Good Reason pursuant to Section 5(c),
this Agreement shall forthwith terminate and the obligations
of the parties hereto shall be as set forth in Section 8
hereof.
(d) Disability. In the event that the Company elects
to terminate the Executive's employment hereunder pursuant to
Section 5(f), the Executive shall continue to receive from the
date of such termination through the expiration date of this
Agreement, sixty percent (60%) of the then current annual base
salary to which the Executive was entitled pursuant to Section
3(a) hereof immediately preceding such termination, in
accordance with the payroll practices of the Company for
senior executive officers, reduced, however, by the amount of
any proceeds from Social Security and disability insurance
policies provided by and at the expense of the Company.
(e) Death. In the event of the death of the Executive
during the term of this Agreement, the then current annual
base salary to which the Executive was entitled pursuant to
Section 3(a) hereof immediately preceding the Executive's
death shall be paid, in twelve (12) equal monthly installments
following the date of death, to the last beneficiary
designated by the Executive under the Company's group life
insurance policy maintained by the Company or such other
written designation expressly provided to the Company for the
purposes hereof or, failing either such designation, to the
Executive's estate.
(f) Mutual Written Consent. In the event that the
Executive and the Company shall terminate the Executive's
employment by mutual written agreement, the Company shall pay
such compensation and provide such benefits, if any, as the
parties may mutually agree upon in writing.
The Executive shall not be required to mitigate the amount of any payment
provided for in this Section 6 by seeking employment or otherwise, nor shall any
amounts received from employment or otherwise by the Executive offset in any
manner the obligations of the Company hereunder except as specifically provided
in Section 6(d) hereof.
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7. Certain Additional Payments by the Company. Notwithstanding
anything in this Agreement to the contrary, in the event it is determined that
any payment or distribution by the Company to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (a "Payment"), is subject to the excise
tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), or any successor provision, on excess parachute payments, as that
term is used and defined in Sections 4999 and 280G of the Code, then the
Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount equal to the then current rate of tax under said Section
4999 multiplied by the total of the amounts so paid or payable, including the
Gross-Up Payment, which are deemed to be a part of an excess parachute payment.
8. Effect of Expiration of Agreement or Termination of
Executive's Employment. Upon the expiration of this Agreement by its terms or
the termination of the Executive's employment hereunder, neither the Company nor
the Executive shall have any remaining duties or obligations hereunder except
that:
(a) The Company shall:
(1) Pay the Executive's accrued salary
and any other accrued benefits under
Sections 3(a), (b), and (c) hereof;
(2) Reimburse the Executive for expenses
already incurred in accordance with
Section 3(e) hereof;
(3) Pay or otherwise provide for any
benefits, payments or continuation
or conversion rights in accordance
with the provisions of any Erie
Benefit Plan of which the Executive
or any of the Executive's dependents
is or was a participant or as
otherwise required by law;
(4) Pay the Executive and the
Executive's beneficiaries any
compensation and/or provide the
Executive or the Executive's
eligible dependents any benefits, as
the case may be, due pursuant to
Section 6 or Section 7 hereof; and
(5) Unless the employment of the
Executive is terminated by the
Company for Cause, pay the Executive
or the Executive's beneficiaries the
full amount or amounts accrued under
the Supplemental Executive
Retirement Plan of the Company (the
"SERP") as in effect on the
Effective Date (or as such benefits
may be enhanced by subsequent
amendments or supplements to such
SERP), as though, solely for
purposes of determining any
otherwise applicable actuarial
reduction
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factors, the event of the
termination of Executive's
employment hereunder or expiration
of this Agreement occurred on the
Executive's Normal Retirement Date
as defined in such SERP. Accrued
benefits under the SERP shall be
fully vested and nonforfeitable upon
such termination (including
termination on account of the
Executive's death) or expiration.
Any reductions in SERP benefits that
would otherwise apply pursuant to
Section 10.1 of the Company's
Retirement Plan for Employees (or
pursuant to any successor provision
of such plan or any successor plan)
relating to Section 415(b) of the
Code shall not be applicable for
purposes hereof. No further approval
by the Board of Directors or the
Committee with respect to payments
under the SERP in accordance with
the preceding sentences shall be
required. Unreduced payments may
begin at age 55, but in no event
would payments be made under this
Section 8(a)(5) before the Executive
reaches age fifty-five (55). The
Company shall purchase for the
Executive, naming the Executive
and/or the Executive's designee the
owner, a paid up annuity, from an
insurer reasonably acceptable to the
Executive but in any event having an
A.M. Best rating of A+ or better (or
other comparable rating), that will
pay to the Executive an amount equal
to the benefit to which the
Executive would otherwise be
entitled under the SERP and payable
at the times such SERP benefit would
be payable in accordance with the
provisions hereof. Upon the purchase
and delivery to the Executive of
such an annuity, the Executive shall
release the Company from any further
obligation under the SERP. The
Company further agrees to pay the
Executive immediately upon
termination, a cash payment (the
"Tax Gross-up") equal to the sum of
the following: (i) all taxes
(federal, state, local, and payroll
taxes) incurred and due and owing by
the Executive, arising from the cost
of the annuity purchased by the
Company to meet the requirements of
this Section 8(a)(5), and (ii) any
such taxes incurred and due and
owing with respect to the amount
paid in (i).
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(6) Continue to remain bound by the
terms of Section 12 hereof.
(b) The Executive shall remain bound by the terms of
Sections 9 and 13 hereof for a period of thirty six (36)
months after the expiration of the Agreement by its terms;
provided, that the Executive shall not be bound by the terms
of Section 9(b) after the termination of employment (other
than a termination of the Executive by the Company for Cause)
if such termination occurs after the expiration of this
Agreement by its terms.
9. Covenants as to Confidential Information and Competitive
Conduct. The Executive hereby acknowledges and agrees as follows: (i) this
Section 9 is necessary for the protection of the legitimate business interests
of the Company, (ii) the restrictions contained in this Section 9 with regard to
geographical scope, length of term and types of restricted activities are
reasonable; (iii) the Executive has received adequate and valuable new
consideration for entering into this Agreement, and (iv) the Executive's
expertise and capabilities are such that this obligation hereunder and the
enforcement hereof by injunction or otherwise will not adversely affect the
Executive's ability to earn a livelihood.
(a) Confidentiality of Information and Nondisclosure.
The Executive acknowledges and agrees that the Executive's
employment by the Company under this Agreement necessarily
involves knowledge of and access to confidential and
proprietary information pertaining to the business of the
Company and its subsidiaries. Accordingly, the Executive
agrees that at all times during the term of this Agreement and
at any time thereafter, the Executive will not, directly or
indirectly, without the express written approval of the
Company, unless directed by applicable legal authority
(including any court of competent jurisdiction, governmental
agency having supervisory authority over the business of the
Company or the subsidiaries, or any legislative or
administrative body having supervisory authority over the
business of the Company or its subsidiaries) having
jurisdiction over the Executive, disclose to or use, or
knowingly permit to be so disclosed or used, for the benefit
of himself, any person, corporation or other entity other than
the Company, (i) any information concerning any financial
matters, customer relationships, competitive status, supplier
matters, internal organizational matters, current or future
plans, or other business affairs of or relating to the Company
or its subsidiaries, (ii) any management, operational, trade,
technical or other secrets or any other proprietary
information or other data of the Company or its subsidiaries,
or (iii) any other information related to the Company or its
subsidiaries or which the Executive should reasonably believe
will be damaging to the Company or its subsidiaries which has
not been published and is not generally known outside of the
Company. The Executive acknowledges that all of the foregoing
constitutes confidential and proprietary information, which is
the exclusive property of the Company.
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(b) Restrictive Covenant. During the term of, and for
a period of one (1) year (the "Restrictive Period") after the
termination of the Executive's employment hereunder for any
reason (other than a termination of the Executive hereunder
pursuant to Section 5(a), 5(b) or 5(e), hereof), the Executive
shall not render, directly, or indirectly, services to any
person, firm, corporation, association or other entity which
conducts the same or similar business as the Company or its
subsidiaries at the date of the Executive's termination of
employment hereunder within the states in which the Company or
any of its subsidiaries is then licensed and doing business at
the date of the Executive's termination of employment
hereunder without the prior written consent of the Board of
Directors, which may be withheld in its discretion. In the
event the Executive violates any of the provisions contained
in this Section 9(b) hereof, the Restrictive Period shall be
increased by the period of time from the commencement by the
Executive of any violation until such violation has been cured
to the satisfaction of the Company. The Executive further
agrees that at no time during the Restrictive Period will the
Executive attempt to directly or indirectly solicit or hire
employees of Company or its subsidiaries or induce any of them
to terminate their employment with the Company or any of the
subsidiaries. Notwithstanding the foregoing, the performance
by the Executive of rights and duties under an agency
agreement with the Company shall not constitute a breach of
this Section 9(b).
(c) Company Remedies. The Executive acknowledges and
agrees that any breach of this Section 9 will result in
immediate and irreparable harm to the Company, and that the
Company cannot be reasonably or adequately compensated by
damages in an action at law. In the event of a breach by the
Executive of the provisions of this Section 9, the Company
shall be entitled, to the extent permitted by law, immediately
to cease to pay or provide the Executive or the Executive's
dependents any compensation or benefit being, or to be, paid
or provided to the Executive pursuant to Section 3, Section 6
or Section 8 of this Agreement, and also to obtain immediate
injunctive relief restraining the Executive from conduct in
breach of the covenants contained in this Section 9. Nothing
herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for such breach,
including the recovery of damages from the Executive.
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10. Resolution of Differences Over Breaches of Agreement.
Except as otherwise provided herein, in the event of any controversy, dispute or
claim arising out of, or relating to, this Agreement, or the breach thereof, or
arising out of any other matter relating to the Executive's employment with the
Company, the parties may seek recourse only for temporary or preliminary
injunctive relief to the courts having jurisdiction thereof and if any relief
other than injunctive relief is sought, the Company and the Executive agree that
such underlying controversy, dispute or claim shall be settled by arbitration
conducted in Erie, Pennsylvania in accordance with this Section 10 and the
Commercial Arbitration Rules of the American Arbitration Association ("AAA").
The matter shall be heard and decided, and awards rendered by a panel of three
(3) arbitrators (the "Arbitration Panel"). The Company and the Executive shall
each select one arbitrator from the AAA National Panel of Commercial Arbitrators
(the "Commercial Panel") and AAA shall select a third arbitrator from the
Commercial Panel. The award rendered by the Arbitration Panel shall be final and
binding as between the parties hereto and their heirs, executors,
administrators, successors and assigns, and judgment on the award may be entered
by any court having jurisdiction thereof. Except as provided in Section 11
hereof, each party shall bear sole responsibility for all expenses and costs
incurred by such party in connection with the resolution of any controversy,
dispute or claim in accordance with this Section 10.
11. Payment of Executive's Legal Fees. If the Executive is
required to bring any action to enforce rights or to collect moneys due under
this Agreement, the Company shall pay to the Executive the fees and expenses
incurred by the Executive in bringing and pursuing such action if the Executive
is successful, in whole or in part, on the merits or otherwise (including by way
of a settlement involving a payment of money by the Company to the Executive),
in such action. The Company shall pay such fees and expenses in advance of the
final disposition of such action upon receipt of an undertaking from the
Executive to repay to the Company such advances if the Executive is not
ultimately successful, in whole or in part, on the merits or otherwise, in such
action.
12. Severance Pay upon Termination of Employment after
Expiration of the Agreement. Notwithstanding the expiration of this Agreement by
its terms and notwithstanding the terms of any corporate severance policy then
in effect and applicable to the Executive, if the employment of the Executive is
terminated without Cause by the Company, by the Executive for Good Reason or
upon the expiration of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof (for reasons other than
for Cause), in any case, within thirty-six (36) months after the expiration of
this Agreement by its terms, then (i) the Company shall pay to the Executive
severance compensation in an amount equal to two (2) times the Executive's
Covered Compensation as determined on the date of such termination, and (ii) the
Executive and the Executive's eligible dependents shall be entitled to
continuing coverage under the Company's then-existing group health plans
(including medical, dental, prescription drug and vision plans, if any) for a
period of two (2) years after the date of the termination of the Executive's
employment, to the extent not prohibited by law and subject to the terms of such
plans including provisions as to deductibles and copayments and changes in
levels of coverage that are generally applicable to employees. The payment to
the Executive by the Company pursuant to subsection (i) of the preceding
sentence shall be paid in a lump sum unless the Executive elects, and so
notifies the Company in writing prior to the Executive's termination of
employment, to receive such payment in two (2) equal annual installments. The
lump sum or first payment, as the case may be, shall be paid within thirty (30)
days after the date of termination of the Executive's employment.
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13. Release. The Executive hereby acknowledges and agrees that
neither the Company nor any of its representatives or agents will be obligated
to pay any compensation or benefit which the Executive has a right to be paid or
provided to the Executive or the Executive's dependents pursuant to Section 6,
Section 8 or Section 12 of this Agreement, unless the Executive, if requested by
the Company in its sole discretion, executes a release in a form reasonably
acceptable to the Company, which releases any and all claims the Executive has
or may have against the Company or its subsidiaries, agents, officers,
directors, successors or assigns.
14. Waiver. The waiver by a party hereto of any breach by the
other party hereto of any provision of this Agreement shall not operate or be
construed as a waiver of any other or subsequent breach by a party hereto.
15. Assignment. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the Company, and the Company
shall be obligated to require any successor to expressly acknowledge and assume
its obligations hereunder. This Agreement shall inure to the extent provided
hereunder to the benefit of and be enforceable by the Executive or the
Executive's legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. The Executive may not delegate any of the
Executive's duties, responsibilities, obligations or positions hereunder to any
person and any such purported delegation shall be void and of no force and
effect.
16. Notices. Any notices required or permitted to be given
under this Agreement shall be sufficient if in writing, and if personally
delivered or when sent by first class certified or registered mail, postage
prepaid, return receipt requested--in the case of the Executive, to his
residence address as set forth below, and in the case of the Company, to the
address of its principal place of business as set forth below, to the attention
of the Chairman of the Board, or in case the Executive is the Chairman of the
Board, to the Chairman of the Compensation Committee of the Board -- or to such
other person or at such other address with respect to each party as such party
shall notify the other in writing.
17. Construction of Agreement.
(a) Governing Law. This Agreement shall be
governed by and construed under the laws of the Commonwealth
of Pennsylvania.
(b) Severability. In the event that any one or more
of the provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, the validity, legality or
enforceability of the remaining provisions shall not in any
way be affected or impaired thereby.
(c) Headings. The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience of
reference only and shall not constitute a part of this
Agreement.
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18. Entire Agreement. This Agreement contains the entire
agreement of the parties concerning the Executive's employment and all promises,
representations, understandings, arrangements and prior agreements on such
subject are merged herein and superseded hereby, including the Employment
Agreement effective November 20, 1995 which is expressly superseded hereby. The
provisions of this Agreement may not be amended, modified, repealed, waived,
extended or discharged except by an agreement in writing signed by the party
against whom enforcement of any amendment, modification, repeal, waiver,
extension or discharge is sought. No person acting other than pursuant to a
resolution of the Board of Directors or the Committee shall have authority on
behalf of the Company to agree to amend, modify, repeal, waive, extend or
discharge any provision of this Agreement or anything in reference thereto or to
exercise any of the Company's rights to terminate or to fail to extend this
Agreement.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
officers thereunto duly authorized, and the Executive has hereunto set his hand
all as of the day and year first above written.
ATTEST: ERIE INDEMNITY COMPANY
/s/ J. R. Van Gorder /s/ F. William Hirt
____________________________ By:__________________________________
J. R. Van Gorder F. William Hirt
Secretary Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ Stephen A. Milne
____________________________ _____________________________________(SEAL)
Stephen A. Milne
100 Culbertson Drive
Lake City, PA 16423
61
Exhibit 10.4
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") made effective as of the 16th
day of December, 1997 (the "Effective Date") by and between ERIE INDEMNITY
COMPANY, a Pennsylvania corporation with its principal place of business at
Erie, Pennsylvania (the "Company"), and JAN R. VAN GORDER (the "Executive");
WITNESSETH:
WHEREAS, the Company has determined that it is in the best
interests of the Company and its shareholders to secure the continued employment
of the Executive on the terms and subject to the conditions set forth in this
Agreement; and
WHEREAS, the Executive desires and is willing to accept
employment with the Company on the terms and subject to the conditions set forth
herein;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Term. The Company hereby agrees to continue the employment
of the Executive and the Executive hereby agrees to continue to serve the
Company pursuant to the terms and conditions of this Agreement as Senior
Executive Vice President of the Company, or in such other position with the
Company of at least commensurate responsibility and authority in all material
respects, for a term of two years commencing on the Effective Date hereof and
expiring on December 15, 1999, unless earlier terminated pursuant to Section 5
hereof. Notwithstanding the foregoing, the Executive shall serve in said
office(s) at the pleasure of the Company's Board of Directors (the "Board of
Directors") and the Executive may be removed from said office(s) at any time
with or without Cause, as hereinafter defined, pursuant to Sections 5(b) or 5(d)
hereof; provided that any such removal shall be without prejudice to any
contract rights the Executive may have hereunder. Subject to Section 8(a)(6) and
Section 8(b) hereof, this Agreement shall expire by its terms on December 15,
1999.
2. Duties and Responsibilities. The Executive's duties
hereunder shall be those which shall be prescribed by the Company's Bylaws, as
amended from time to time, and by the Board of Directors or any committee
thereof from time to time and shall include such executive authority, duties,
powers and responsibilities as customarily attend the office as Senior Executive
Vice President of a company comparable to the Company. The Executive shall
discharge such duties consistent with sound business practices and in accordance
with law and the Company's general employment policies, in each case, as in
effect from time to time, in all material respects and the Executive shall use
best efforts to promote the best interests of the Company. During the term of
this Agreement, the Executive's position (including the Executive's status and
reporting requirements), authority, duties, powers and responsibilities shall at
all times be at least commensurate in all material respects with the most
significant of those held, exercised or assigned
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to the Executive as of the Effective Date. The Executive shall devote the
Executive's knowledge, skill and all of the Executive's professional time,
attention and energies (reasonable absences for vacations and illness excepted),
to the business of the Company in order to perform such assigned duties
faithfully, competently and diligently. It is understood and agreed between the
parties that the Executive may (i) engage in charitable and community
activities, including serving on boards of directors or trustees of and holding
other leadership positions in non-profit organizations unless the objectives and
requirements of such positions are determined by the Board of Directors to be
inconsistent with the performance of the Executive's duties hereunder, and, (ii)
manage personal investments, so long as such activities do not interfere or
conflict with the Executive's performance of responsibilities and obligations
hereunder. It is expressly agreed that any such activities engaged in by the
Executive as of the Effective Date shall not thereafter be deemed to interfere
with the Executive's obligations and responsibilities hereunder. The Executive
agrees that the approval of the Board of Directors or a committee thereof shall
be required before the Executive first accepts a position as director of any
for-profit corporation after the date hereof.
3. Compensation. During the term of this Agreement
the Executive shall receive, for all services rendered to the Company
hereunder, the following (hereinafter referred to collectively as
"Compensation"):
(a) Salary. The Executive shall be paid an annual
base salary at an annual rate at least equal to the annual
rate being paid or payable to the Executive by the Company in
the month in which the Effective Date occurs, with such
increases thereafter as shall be determined from time to time
to be fair and reasonable by the Board of Directors or by the
Executive Compensation Committee of the Board of Directors
(the "Committee") in its discretion after taking into account,
among other things, the authority, duties, powers and
responsibilities of the Executive's position, the Executive's
performance, the Company's performance, the compensation of
persons in comparable positions at the Company and at other
comparable companies, and the effect of inflation. The
Executive's annual base salary shall not be reduced after any
such increase. The Executive's annual base salary shall be
payable in equal installments in accordance with the Company's
general salary payment policies, but no less frequently than
bi-weekly.
(b) Incentive Compensation. The Executive shall be
eligible for awards under the Company's incentive compensation
plans, if any, applicable to senior executive officers of the
Company or to key employees of the Company or its
subsidiaries, including, but not limited to, management
incentive plans and stock option plans, in accordance with and
subject to the terms thereof (including any provisions
providing for changes in the level of or termination of
benefits thereunder), on a basis commensurate with the
Executive's position and authorities, duties, powers and
responsibilities.
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(c) Employee Benefit Plans. The Executive and the
Executive's "dependents," as that term may be defined under
the applicable employee benefit plan(s) of the Company, shall
be included, to the extent eligible thereunder and subject to
the terms of the plans (including any provisions for changing
the level of or termination of benefits thereunder), in all
plans, programs and policies which provide benefits for
Company employees and their dependents on a basis commensurate
with the Executive's position and authorities, duties, powers
and responsibilities including, without limitation, health
care insurance, health and welfare plans, pension and
retirement plans, group life insurance plans, split dollar
life insurance plans, short and long-term disability plans,
survivors' benefits, executive supplemental benefits, holidays
and other similar or comparable benefits made available to the
Company's employees and senior executive officers
(hereinafter, such plans, programs and policies shall be
collectively referred to as the "Erie Benefit Plans"). Such
plans, programs and policies shall include, but are not
limited to, the Erie Insurance Group Retirement Plan for
Employees, the Erie Insurance Group Employee Savings Plan, the
Erie Insurance Group Deferred Compensation Plan, the Erie
Insurance Group Split Dollar Life Insurance Plan, the Erie
Insurance Group Supplemental Executive Retirement Plan, and
the Erie Insurance Group Health Protection, Prescription Drug,
Dental Assistance and Vision Care Plans.
(d) Perquisites. The Executive shall be entitled to
all perquisites which the Company from time to time makes
available to senior executive officers of the Company. Such
perquisites shall include, but are not limited to, parking,
club dues, tax preparation assistance, and an annual physical
examination.
(e) Expenses and Working Facilities. The Executive is
hereby authorized to incur, and shall be reimbursed by the
Company for, any and all reasonable and necessary business
related expenses, including, but not limited to, expenses for
business travel, entertainment, gifts and similar matters,
which expenses are incurred by the Executive on behalf of the
Company or any of its subsidiaries, upon presentation of
itemized accounts of such expenses in accordance with Company
policies. The Executive shall be furnished during the term of
this Agreement with offices and other working facilities in
the Company's principal executive offices located in Erie,
Pennsylvania (or other location of the principal executive
offices within the Erie metropolitan area) and secretarial and
other assistance suitable to the Executive's position and
adequate for the performance of duties hereunder.
(f) Performance Appraisal. The Executive's
performance may be evaluated by the Board of Directors or the
Committee from time to time. The Executive shall be entitled
to such additional remuneration, including but not limited to
annual bonuses based on performance, as the Board of Directors
or the Committee may, in its discretion, determine from time
to time.
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4. Absences. The Executive shall be entitled to vacations in
accordance with the Company's vacation policy in effect from time to time (but
in no event shall the Executive be entitled to fewer vacation days than under
the Company's vacation policy as in effect on the Effective Date) and to
absences because of illness or other incapacity, and shall also be entitled to
such other absences, whether for holiday, personal time, conventions, or for any
other purpose, as are granted to the Company's other senior executive officers
or as are approved by the Board of Directors or the Committee, which approval
shall not be unreasonably withheld.
5. Termination. The Executive's employment hereunder may be
terminated only as follows:
(a) Expiration of Term of Office. Upon the expiration
of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof, the
Board of Directors may (i) determine that the Executive should
not continue in such office(s) or (ii) that the Executive
should not be elected or appointed to an office with duties,
authorities, powers and responsibilities that are at least
commensurate with those of said office(s), in either case, for
reasons other than for Cause (if the reasons for such
noncontinuance, nonreelection or nonreappointment constitute
Cause, then Section 5(d) hereof will apply).
(b) By the Company Without Cause. The Company may at
any time terminate the Executive's employment hereunder
without Cause only by the affirmative vote of a majority of
the entire Board of Directors, and upon no less than thirty
(30) days' prior written notice to the Executive.
(c) By the Executive Without Good Reason. The
Executive may at any time terminate employment hereunder for
any reason upon no less than thirty (30) days' written notice
to the Company. Section 5(e) shall apply to any termination of
employment by the Executive for Good Reason.
(d) By the Company For Cause. The Company may
terminate the Executive's employment hereunder for Cause. In
such event, the Company shall give to the Executive prompt
written notice (in addition to any notice which may be
required by Section 5(d)(1) hereof) specifying in reasonable
detail the basis for such termination. For purposes of this
Agreement, "Cause" shall mean any of the following conduct by
the Executive:
(1) The deliberate and intentional
breach of any material provision of
this Agreement, which breach
Executive shall have failed to cure
within thirty (30) days after
Executive's receipt of written
notice from the Company specifying
the specific nature of the
Executive's breach;
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(2) The deliberate and intentional
engaging by Executive in gross
misconduct that is materially and
demonstrably inimical to the best
interests, monetary or otherwise, of
the Company; or
(3) Conviction of a felony or conviction
of any crime involving moral
turpitude, fraud or deceit.
For purposes of this definition, no act, or failure to act, on the Executive's
part shall be considered "deliberate and intentional" unless done, or omitted to
be done, by the Executive not in good faith and without reasonable belief that
such action or omission was in the best interest of the Company.
(e) By the Executive for Good Reason. The Executive
may terminate employment hereunder for Good Reason upon
providing thirty (30) days written notice to the Company after
the Executive reasonably becomes aware of the circumstances
giving rise to such Good Reason. For purposes of this
Agreement, "Good Reason" means the following conduct of the
Company, unless the Executive shall have consented thereto in
writing:
(1) Material breach of any material
provision of this Agreement by the
Company, which breach shall not have
been cured by the Company within
thirty (30) days after Company's
receipt from the Executive or the
Executive's agent of written notice
specifying in reasonable detail the
nature of the Company's breach;
(2) The assignment to the Executive of
any duties inconsistent in any
material respect with the
Executive's position (including any
reduction of the Executive's status
and reporting requirements),
authority, duties, powers or
responsibilities with the Company as
contemplated by Section 2 of this
Agreement, or any other action by
the Company, including the removal
of the Executive from or any failure
to reelect or reappoint the
Executive to the office(s) specified
in Section 2 or a commensurate
office(s) (other than for Cause),
which results in a diminution of the
Executive's authority, duties,
position, responsibilities or
status, excluding for this purpose
any isolated, insubstantial and
inadvertent action respecting the
Executive not taken in bad faith and
which is remedied by the Company
within thirty (30) days after
receipt of written notice from the
Executive to the Company;
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(3) The Company's relocation of the
Executive out of the Company's
principal executive offices or the
relocation of the Company's
principal executive offices to a
location outside the Erie,
Pennsylvania metropolitan area,
except for required short-term
travel on the Company's behalf to
the extent necessary for the
Executive to carry out his normal
duties in the ordinary course of
business;
(4) The failure of the Company to obtain
the assumption in writing of its
obligations to perform this
Agreement by any successor as
provided in Section 14 hereof not
less than five days prior to a
merger, consolidation or sale as
contemplated in Section 14; or
(5) A reduction in the overall level of
compensation of the Executive. For
purposes of this subsection 5, the
following shall not constitute a
reduction in the overall level of
compensation of the Executive: (i)
changes in the cash/stock mix of
compensation payable to the
Executive; (ii) a reduction in the
overall level of compensation of the
Executive resulting from the failure
to achieve corporate, business unit
and/or individual performance goals
established for purposes of
incentive compensation for any year
or other period; provided that the
aggregate short-term incentive
opportunity, when combined with the
Executive's base salary, provides,
in the aggregate, an opportunity for
the Executive to realize at least
the same overall level of
compensation as was paid in the
immediately prior year or period at
target performance levels; and
provided, further, that such target
performance levels are reasonable at
all times during the measurement
period, taking into account the fact
that one of the purposes of such
compensation is to incent the
Executive; (iii) reductions in
compensation resulting from changes
to any Erie Benefit Plan (provided
that such changes are generally
applicable to all participants in
such Erie Benefit Plan); and (iv)
any combination of the foregoing.
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(f) Disability. In the event that the Executive shall
be unable to perform the Executive's duties hereunder on a
full time basis for a period of one hundred-eighty (180)
consecutive calendar days by reason of incapacity due to
illness, accident or other physical or mental disability, then
the Company may, at its discretion, terminate the Executive's
employment hereunder if the Executive, within ten (10) days
after receipt of written notice of termination (which notice
may be given before or after the end of the entire 180 day
period), shall not have returned to the performance of all of
his duties hereunder on a full-time basis.
(g) Death. The Executive's employment under this
Agreement shall terminate upon the Executive's death.
(h) Mutual Written Agreement. This Agreement
and the Executive's employment hereunder may be terminated
at any time by the mutual written agreement of the Executive
and the Company.
6. Compensation in the Event of Termination. In the event that the
Executive's employment hereunder terminates prior to the expiration of this
Agreement for any reason provided in Section 5 hereof, the Company shall pay the
Executive, compensation and provide the Executive and the Executive's eligible
dependents with benefits as follows:
(a) Executive's Nonreelection to Office; Termination
By Company Without Cause; Termination By Executive for Good
Reason. In the event that the Executive's employment hereunder
is terminated: (i) because the Executive does not continue in
office pursuant to Section 5(a) hereof; or (ii) by the Company
without Cause pursuant to Section 5(b) hereof; or (iii) by the
Executive for Good Reason pursuant to Section 5(e) hereof,
then in any such event the Company shall pay or provide, as
applicable, the following compensation and benefits to the
Executive:
(1) Three (3) times the following: (A)
the highest annual base salary paid
or payable to the Executive in the
then current year or any one (1) of
the three (3) calendar years
preceding Executive's termination of
employment hereunder; plus (B) an
amount equal to the sum of the
Executive's highest award(s) under
the Company's Annual Incentive Plans
for any one (1) of the three (3)
calendar years preceding the date of
the termination of Executive's
employment hereunder (such total is
referred to herein as "Covered
Compensation"). Such payment to the
Executive by the Company shall be
paid in a lump sum unless the
Executive elects, and so notifies
the Company in writing prior to the
termination of the Executive's
employment hereunder, to receive
such payment in three (3) equal
annual installments. The lump sum or
first payment, as the case may be,
shall be paid within sixty (60) days
after the date of the termination of
the Executive's employment
hereunder;
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(2) Any awards or other compensation to
which the Executive is entitled
under any of the Company's
compensation plans or Erie Benefit
Plans to the extent not covered in
subsection (1) hereof;
(3) Any award to which the Executive
would be entitled under the
Company's Long-Term Incentive Plan
as in effect on December 16, 1997,
calculated under the provision of
that Plan as if the Executive ceases
to be an Employee of the Company by
reason of death, disability or
normal retirement;
(4) Continuing coverage for all purposes
(including eligibility, coverage,
vesting and benefit accruals, as
applicable), for a period of three
(3) years after the date of the
termination of Executive's
employment hereunder, to the extent
not prohibited by law, for the
Executive and the Executive's
eligible dependents under all of the
Erie Benefit Plans in effect and
applicable to Executive and the
Executive's eligible dependents as
of the date of termination. In the
event that the Executive and/or the
Executive's eligible dependents,
because of the Executive's
terminated status, cannot be covered
or fully covered under any or all of
the Erie Benefit Plans, the Company
shall continue to provide the
Executive and/or the Executive's
eligible dependents with the same
level of such coverage in effect
prior to termination, payable from
the general assets of the Company if
necessary. Notwithstanding the
foregoing, the Executive may elect
(by giving written notice to the
Company prior to the termination of
employment hereunder), on a benefit
by benefit basis, to receive in lieu
of continuing coverage, cash in an
amount equal to the present value
(using a 6.5% discount rate over
three years) of the projected cost
to the Company of providing such
benefit for such three year period.
The aggregate amount of cash to
which the Executive is entitled
pursuant to the preceding sentence
shall be payable by the Company to
the Executive within sixty (60) days
after the date of the termination of
Executive's employment hereunder;
and
(5) For a period of three (3) years
after the date of the termination of
Executive's employment hereunder,
such perquisites as are made
available to the Executive as of the
date of the termination of
Executive's employment hereunder.
The Executive's subsequent death, disability or attainment of age 65 or any
other age shall in no way affect or limit the Company's obligations under this
Section 6(a).
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(b) Termination By the Company for Cause. In the
event that the Company shall terminate the Executive's
employment hereunder for Cause pursuant to Section 5(d), this
Agreement shall forthwith terminate and the obligations of the
parties hereto shall be as set forth in Section 8 hereof.
(c) Termination by the Executive Without Good Reason.
In the event that the Executive shall terminate employment
hereunder other than for Good Reason pursuant to Section 5(c),
this Agreement shall forthwith terminate and the obligations
of the parties hereto shall be as set forth in Section 8
hereof.
(d) Disability. In the event that the Company elects
to terminate the Executive's employment hereunder pursuant to
Section 5(f), the Executive shall continue to receive from the
date of such termination through the expiration date of this
Agreement, sixty percent (60%) of the then current annual base
salary to which the Executive was entitled pursuant to Section
3(a) hereof immediately preceding such termination, in
accordance with the payroll practices of the Company for
senior executive officers, reduced, however, by the amount of
any proceeds from Social Security and disability insurance
policies provided by and at the expense of the Company.
(e) Death. In the event of the death of the Executive
during the term of this Agreement, the then current annual
base salary to which the Executive was entitled pursuant to
Section 3(a) hereof immediately preceding the Executive's
death shall be paid, in twelve (12) equal monthly installments
following the date of death, to the last beneficiary
designated by the Executive under the Company's group life
insurance policy maintained by the Company or such other
written designation expressly provided to the Company for the
purposes hereof or, failing either such designation, to the
Executive's estate.
(f) Mutual Written Consent. In the event that the
Executive and the Company shall terminate the Executive's
employment by mutual written agreement, the Company shall pay
such compensation and provide such benefits, if any, as the
parties may mutually agree upon in writing.
The Executive shall not be required to mitigate the amount of any payment
provided for in this Section 6 by seeking employment or otherwise, nor shall any
amounts received from employment or otherwise by the Executive offset in any
manner the obligations of the Company hereunder except as specifically provided
in Section 6(d) hereof.
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7. Certain Additional Payments by the Company. Notwithstanding
anything in this Agreement to the contrary, in the event it is determined that
any payment or distribution by the Company to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (a "Payment"), is subject to the excise
tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), or any successor provision, on excess parachute payments, as that
term is used and defined in Sections 4999 and 280G of the Code, then the
Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount equal to the then current rate of tax under said Section
4999 multiplied by the total of the amounts so paid or payable, including the
Gross-Up Payment, which are deemed to be a part of an excess parachute payment.
8. Effect of Expiration of Agreement or Termination of
Executive's Employment. Upon the expiration of this Agreement by its terms or
the termination of the Executive's employment hereunder, neither the Company nor
the Executive shall have any remaining duties or obligations hereunder except
that:
(a) The Company shall:
(1) Pay the Executive's accrued salary
and any other accrued benefits under
Sections 3(a), (b), and (c) hereof;
(2) Reimburse the Executive for expenses
already incurred in accordance with
Section 3(e) hereof;
(3) Pay or otherwise provide for any
benefits, payments or continuation
or conversion rights in accordance
with the provisions of any Erie
Benefit Plan of which the Executive
or any of the Executive's dependents
is or was a participant or as
otherwise required by law;
(4) Pay the Executive and the
Executive's beneficiaries any
compensation and/or provide the
Executive or the Executive's
eligible dependents any benefits, as
the case may be, due pursuant to
Section 6 or Section 7 hereof; and
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(5) Unless the employment of the
Executive is terminated by the
Company for Cause, pay the Executive
or the Executive's beneficiaries the
full amount or amounts accrued under
the Supplemental Executive
Retirement Plan of the Company (the
"SERP") as in effect on the
Effective Date (or as such benefits
may be enhanced by subsequent
amendments or supplements to such
SERP), as though, solely for
purposes of determining any
otherwise applicable actuarial
reduction factors, the event of the
termination of Executive's
employment hereunder or expiration
of this Agreement occurred on the
Executive's Normal Retirement Date
as defined in such SERP. Accrued
benefits under the SERP shall be
fully vested and nonforfeitable upon
such termination (including
termination on account of the
Executive's death) or expiration.
Any reductions in SERP benefits that
would otherwise apply pursuant to
Section 10.1 of the Company's
Retirement Plan for Employees (or
pursuant to any successor provision
of such plan or any successor plan)
relating to Section 415(b) of the
Code shall not be applicable for
purposes hereof. No further approval
by the Board of Directors or the
Committee with respect to payments
under the SERP in accordance with
the preceding sentences shall be
required. Unreduced payments may
begin at age 55, but in no event
would payments be made under this
Section 8(a)(5) before the Executive
reaches age fifty-five (55). The
Company shall purchase for the
Executive, naming the Executive
and/or the Executive's designee the
owner, a paid up annuity, from an
insurer reasonably acceptable to the
Executive but in any event having an
A.M. Best rating of A+ or better (or
other comparable rating), that will
pay to the Executive an amount equal
to the benefit to which the
Executive would otherwise be
entitled under the SERP and payable
at the times such SERP benefit would
be payable in accordance with the
provisions hereof. Upon the purchase
and delivery to the Executive of
such an annuity, the Executive shall
release the Company from any further
obligation under the SERP. The
Company further agrees to pay the
Executive immediately upon
termination, a cash payment (the
"Tax Gross-up") equal to the sum of
the following: (i) all taxes
(federal, state, local, and payroll
taxes) incurred and due and owing by
the Executive, arising from the cost
of the annuity purchased by the
Company to meet the requirements of
this Section 8(a)(5), and (ii) any
such taxes incurred and due and
owing with respect to the amount
paid in (i).
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(6) Continue to remain bound by the
terms of Section 12 hereof.
(b) The Executive shall remain bound by the terms of
Sections 9 and 13 hereof for a period of thirty six (36)
months after the expiration of the Agreement by its terms;
provided, that the Executive shall not be bound by the terms
of Section 9(b) after the termination of employment (other
than a termination of the Executive by the Company for Cause)
if such termination occurs after the expiration of this
Agreement by its terms.
9. Covenants as to Confidential Information and Competitive
Conduct. The Executive hereby acknowledges and agrees as follows: (i) this
Section 9 is necessary for the protection of the legitimate business interests
of the Company, (ii) the restrictions contained in this Section 9 with regard to
geographical scope, length of term and types of restricted activities are
reasonable; (iii) the Executive has received adequate and valuable new
consideration for entering into this Agreement, and (iv) the Executive's
expertise and capabilities are such that this obligation hereunder and the
enforcement hereof by injunction or otherwise will not adversely affect the
Executive's ability to earn a livelihood.
(a) Confidentiality of Information and Nondisclosure.
The Executive acknowledges and agrees that the Executive's
employment by the Company under this Agreement necessarily
involves knowledge of and access to confidential and
proprietary information pertaining to the business of the
Company and its subsidiaries. Accordingly, the Executive
agrees that at all times during the term of this Agreement and
at any time thereafter, the Executive will not, directly or
indirectly, without the express written approval of the
Company, unless directed by applicable legal authority
(including any court of competent jurisdiction, governmental
agency having supervisory authority over the business of the
Company or the subsidiaries, or any legislative or
administrative body having supervisory authority over the
business of the Company or its subsidiaries) having
jurisdiction over the Executive, disclose to or use, or
knowingly permit to be so disclosed or used, for the benefit
of himself, any person, corporation or other entity other than
the Company, (i) any information concerning any financial
matters, customer relationships, competitive status, supplier
matters, internal organizational matters, current or future
plans, or other business affairs of or relating to the Company
or its subsidiaries, (ii) any management, operational, trade,
technical or other secrets or any other proprietary
information or other data of the Company or its subsidiaries,
or (iii) any other information related to the Company or its
subsidiaries or which the Executive should reasonably believe
will be damaging to the Company or its subsidiaries which has
not been published and is not generally known outside of the
Company. The Executive acknowledges that all of the foregoing
constitutes confidential and proprietary information, which is
the exclusive property of the Company.
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(b) Restrictive Covenant. During the term of, and for
a period of one (1) year (the "Restrictive Period") after the
termination of the Executive's employment hereunder for any
reason (other than a termination of the Executive hereunder
pursuant to Section 5(a), 5(b) or 5(e), hereof), the Executive
shall not render, directly, or indirectly, services to any
person, firm, corporation, association or other entity which
conducts the same or similar business as the Company or its
subsidiaries at the date of the Executive's termination of
employment hereunder within the states in which the Company or
any of its subsidiaries is then licensed and doing business at
the date of the Executive's termination of employment
hereunder without the prior written consent of the Board of
Directors, which may be withheld in its discretion. In the
event the Executive violates any of the provisions contained
in this Section 9(b) hereof, the Restrictive Period shall be
increased by the period of time from the commencement by the
Executive of any violation until such violation has been cured
to the satisfaction of the Company. The Executive further
agrees that at no time during the Restrictive Period will the
Executive attempt to directly or indirectly solicit or hire
employees of Company or its subsidiaries or induce any of them
to terminate their employment with the Company or any of the
subsidiaries. Notwithstanding the foregoing, the performance
by the Executive of rights and duties under an agency
agreement with the Company shall not constitute a breach of
this Section 9(b).
(c) Company Remedies. The Executive acknowledges and
agrees that any breach of this Section 9 will result in
immediate and irreparable harm to the Company, and that the
Company cannot be reasonably or adequately compensated by
damages in an action at law. In the event of a breach by the
Executive of the provisions of this Section 9, the Company
shall be entitled, to the extent permitted by law, immediately
to cease to pay or provide the Executive or the Executive's
dependents any compensation or benefit being, or to be, paid
or provided to the Executive pursuant to Section 3, Section 6
or Section 8 of this Agreement, and also to obtain immediate
injunctive relief restraining the Executive from conduct in
breach of the covenants contained in this Section 9. Nothing
herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for such breach,
including the recovery of damages from the Executive.
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10. Resolution of Differences Over Breaches of Agreement.
Except as otherwise provided herein, in the event of any controversy, dispute or
claim arising out of, or relating to, this Agreement, or the breach thereof, or
arising out of any other matter relating to the Executive's employment with the
Company, the parties may seek recourse only for temporary or preliminary
injunctive relief to the courts having jurisdiction thereof and if any relief
other than injunctive relief is sought, the Company and the Executive agree that
such underlying controversy, dispute or claim shall be settled by arbitration
conducted in Erie, Pennsylvania in accordance with this Section 10 and the
Commercial Arbitration Rules of the American Arbitration Association ("AAA").
The matter shall be heard and decided, and awards rendered by a panel of three
(3) arbitrators (the "Arbitration Panel"). The Company and the Executive shall
each select one arbitrator from the AAA National Panel of Commercial Arbitrators
(the "Commercial Panel") and AAA shall select a third arbitrator from the
Commercial Panel. The award rendered by the Arbitration Panel shall be final and
binding as between the parties hereto and their heirs, executors,
administrators, successors and assigns, and judgment on the award may be entered
by any court having jurisdiction thereof. Except as provided in Section 11
hereof, each party shall bear sole responsibility for all expenses and costs
incurred by such party in connection with the resolution of any controversy,
dispute or claim in accordance with this Section 10.
11. Payment of Executive's Legal Fees. If the Executive is
required to bring any action to enforce rights or to collect moneys due under
this Agreement, the Company shall pay to the Executive the fees and expenses
incurred by the Executive in bringing and pursuing such action if the Executive
is successful, in whole or in part, on the merits or otherwise (including by way
of a settlement involving a payment of money by the Company to the Executive),
in such action. The Company shall pay such fees and expenses in advance of the
final disposition of such action upon receipt of an undertaking from the
Executive to repay to the Company such advances if the Executive is not
ultimately successful, in whole or in part, on the merits or otherwise, in such
action.
12. Severance Pay upon Termination of Employment after
Expiration of the Agreement. Notwithstanding the expiration of this Agreement by
its terms and notwithstanding the terms of any corporate severance policy then
in effect and applicable to the Executive, if the employment of the Executive is
terminated without Cause by the Company, by the Executive for Good Reason or
upon the expiration of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof (for reasons other than
for Cause), in any case, within thirty-six (36) months after the expiration of
this Agreement by its terms, then (i) the Company shall pay to the Executive
severance compensation in an amount equal to two (2) times the Executive's
Covered Compensation as determined on the date of such termination, and (ii) the
Executive and the Executive's eligible dependents shall be entitled to
continuing coverage under the Company's then-existing group health plans
(including medical, dental, prescription drug and vision plans, if any) for a
period of two (2) years after the date of the termination of the Executive's
employment, to the extent not prohibited by law and subject to the terms of such
plans including provisions as to deductibles and copayments and changes in
levels of coverage that are generally applicable to employees. The payment to
the Executive by the Company pursuant to subsection (i) of the preceding
sentence shall be paid in a lump sum unless the Executive elects, and so
notifies the Company in writing prior to the Executive's termination of
employment, to receive such payment in two (2) equal annual installments. The
lump sum or first payment, as the case may be, shall be paid within thirty (30)
days after the date of termination of the Executive's employment.
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13. Release. The Executive hereby acknowledges and agrees that
neither the Company nor any of its representatives or agents will be obligated
to pay any compensation or benefit which the Executive has a right to be paid or
provided to the Executive or the Executive's dependents pursuant to Section 6,
Section 8 or Section 12 of this Agreement, unless the Executive, if requested by
the Company in its sole discretion, executes a release in a form reasonably
acceptable to the Company, which releases any and all claims the Executive has
or may have against the Company or its subsidiaries, agents, officers,
directors, successors or assigns.
14. Waiver. The waiver by a party hereto of any breach by the
other party hereto of any provision of this Agreement shall not operate or be
construed as a waiver of any other or subsequent breach by a party hereto.
15. Assignment. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the Company, and the Company
shall be obligated to require any successor to expressly acknowledge and assume
its obligations hereunder. This Agreement shall inure to the extent provided
hereunder to the benefit of and be enforceable by the Executive or the
Executive's legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. The Executive may not delegate any of the
Executive's duties, responsibilities, obligations or positions hereunder to any
person and any such purported delegation shall be void and of no force and
effect.
16. Notices. Any notices required or permitted to be given
under this Agreement shall be sufficient if in writing, and if personally
delivered or when sent by first class certified or registered mail, postage
prepaid, return receipt requested--in the case of the Executive, to his
residence address as set forth below, and in the case of the Company, to the
address of its principal place of business as set forth below, to the attention
of the Chairman of the Board, or in case the Executive is the Chairman of the
Board, to the Chairman of the Compensation Committee of the Board -- or to such
other person or at such other address with respect to each party as such party
shall notify the other in writing.
17. Construction of Agreement.
(a) Governing Law. This Agreement shall be
governed by and construed under the laws of the Commonwealth
of Pennsylvania.
(b) Severability. In the event that any one or more
of the provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, the validity, legality or
enforceability of the remaining provisions shall not in any
way be affected or impaired thereby.
(c) Headings. The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience of
reference only and shall not constitute a part of this
Agreement.
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18. Entire Agreement. This Agreement contains the entire
agreement of the parties concerning the Executive's employment and all promises,
representations, understandings, arrangements and prior agreements on such
subject are merged herein and superseded hereby, including the Employment
Agreement effective November 20, 1995 which is expressly superseded hereby. The
provisions of this Agreement may not be amended, modified, repealed, waived,
extended or discharged except by an agreement in writing signed by the party
against whom enforcement of any amendment, modification, repeal, waiver,
extension or discharge is sought. No person acting other than pursuant to a
resolution of the Board of Directors or the Committee shall have authority on
behalf of the Company to agree to amend, modify, repeal, waive, extend or
discharge any provision of this Agreement or anything in reference thereto or to
exercise any of the Company's rights to terminate or to fail to extend this
Agreement.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
officers thereunto duly authorized, and the Executive has hereunto set his hand
all as of the day and year first above written.
ATTEST: ERIE INDEMNITY COMPANY
/s/ Mark T. Torok /s/ F. William Hirt
____________________________ By:__________________________________
Mark T. Torok F. William Hirt
Assistant Secretary Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ Jan R. Van Gorder
____________________________ _____________________________________(SEAL)
Jan R. Van Gorder
6796 Manchester Beach Rd.
Fairview, PA 16415
78
Exhibit 10.5
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") made effective as of the 16th
day of December, 1997 (the "Effective Date") by and between ERIE INDEMNITY
COMPANY, a Pennsylvania corporation with its principal place of business at
Erie, Pennsylvania (the "Company"), and PHILIP A. GARCIA (the "Executive");
WITNESSETH:
WHEREAS, the Company has determined that it is in the best
interests of the Company and its shareholders to secure the continued employment
of the Executive on the terms and subject to the conditions set forth in this
Agreement; and
WHEREAS, the Executive desires and is willing to accept
employment with the Company on the terms and subject to the conditions set forth
herein;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Term. The Company hereby agrees to continue the employment
of the Executive and the Executive hereby agrees to continue to serve the
Company pursuant to the terms and conditions of this Agreement as Executive Vice
President of the Company, or in such other position with the Company of at least
commensurate responsibility and authority in all material respects, for a term
of two years commencing on the Effective Date hereof and expiring on December
15, 1999, unless earlier terminated pursuant to Section 5 hereof.
Notwithstanding the foregoing, the Executive shall serve in said office(s) at
the pleasure of the Company's Board of Directors (the "Board of Directors") and
the Executive may be removed from said office(s) at any time with or without
Cause, as hereinafter defined, pursuant to Sections 5(b) or 5(d) hereof;
provided that any such removal shall be without prejudice to any contract rights
the Executive may have hereunder. Subject to Section 8(a)(6) and Section 8(b)
hereof, this Agreement shall expire by its terms on December 15, 1999.
2. Duties and Responsibilities. The Executive's duties
hereunder shall be those which shall be prescribed by the Company's Bylaws, as
amended from time to time, and by the Board of Directors or any committee
thereof from time to time and shall include such executive authority, duties,
powers and responsibilities as customarily attend the office as Executive Vice
President of a company comparable to the Company. The Executive shall discharge
such duties consistent with sound business practices and in accordance with law
and the Company's general employment policies, in each case, as in effect from
time to time, in all material respects and the Executive shall use best efforts
to promote the best interests of the Company. During the term of this Agreement,
the Executive's position (including the Executive's status and reporting
requirements), authority, duties, powers and responsibilities shall at all times
be at least commensurate in all material respects with the most significant of
those held, exercised or assigned
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to the Executive as of the Effective Date. The Executive shall devote the
Executive's knowledge, skill and all of the Executive's professional time,
attention and energies (reasonable absences for vacations and illness excepted),
to the business of the Company in order to perform such assigned duties
faithfully, competently and diligently. It is understood and agreed between the
parties that the Executive may (i) engage in charitable and community
activities, including serving on boards of directors or trustees of and holding
other leadership positions in non-profit organizations unless the objectives and
requirements of such positions are determined by the Board of Directors to be
inconsistent with the performance of the Executive's duties hereunder, and, (ii)
manage personal investments, so long as such activities do not interfere or
conflict with the Executive's performance of responsibilities and obligations
hereunder. It is expressly agreed that any such activities engaged in by the
Executive as of the Effective Date shall not thereafter be deemed to interfere
with the Executive's obligations and responsibilities hereunder. The Executive
agrees that the approval of the Board of Directors or a committee thereof shall
be required before the Executive first accepts a position as director of any
for-profit corporation after the date hereof.
3. Compensation. During the term of this Agreement,
the Executive shall receive, for all services rendered to the Company
hereunder, the following (hereinafter referred to collectively as
"Compensation"):
(a) Salary. The Executive shall be paid an annual
base salary at an annual rate at least equal to the annual
rate being paid or payable to the Executive by the Company in
the month in which the Effective Date occurs, with such
increases thereafter as shall be determined from time to time
to be fair and reasonable by the Board of Directors or by the
Executive Compensation Committee of the Board of Directors
(the "Committee") in its discretion after taking into account,
among other things, the authority, duties, powers and
responsibilities of the Executive's position, the Executive's
performance, the Company's performance, the compensation of
persons in comparable positions at the Company and at other
comparable companies, and the effect of inflation. The
Executive's annual base salary shall not be reduced after any
such increase. The Executive's annual base salary shall be
payable in equal installments in accordance with the Company's
general salary payment policies, but no less frequently than
bi-weekly.
(b) Incentive Compensation. The Executive shall be
eligible for awards under the Company's incentive compensation
plans, if any, applicable to senior executive officers of the
Company or to key employees of the Company or its
subsidiaries, including, but not limited to, management
incentive plans and stock option plans, in accordance with and
subject to the terms thereof (including any provisions
providing for changes in the level of or termination of
benefits thereunder), on a basis commensurate with the
Executive's position and authorities, duties, powers and
responsibilities.
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(c) Employee Benefit Plans. The Executive and the
Executive's "dependents," as that term may be defined under
the applicable employee benefit plan(s) of the Company, shall
be included, to the extent eligible thereunder and subject to
the terms of the plans (including any provisions for changing
the level of or termination of benefits thereunder), in all
plans, programs and policies which provide benefits for
Company employees and their dependents on a basis commensurate
with the Executive's position and authorities, duties, powers
and responsibilities including, without limitation, health
care insurance, health and welfare plans, pension and
retirement plans, group life insurance plans, split dollar
life insurance plans, short and long-term disability plans,
survivors' benefits, executive supplemental benefits, holidays
and other similar or comparable benefits made available to the
Company's employees and senior executive officers
(hereinafter, such plans, programs and policies shall be
collectively referred to as the "Erie Benefit Plans"). Such
plans, programs and policies shall include, but are not
limited to, the Erie Insurance Group Retirement Plan for
Employees, the Erie Insurance Group Employee Savings Plan, the
Erie Insurance Group Deferred Compensation Plan, the Erie
Insurance Group Split Dollar Life Insurance Plan, the Erie
Insurance Group Supplemental Executive Retirement Plan, and
the Erie Insurance Group Health Protection, Prescription Drug,
Dental Assistance and Vision Care Plans.
(d) Perquisites. The Executive shall be entitled to
all perquisites which the Company from time to time makes
available to senior executive officers of the Company. Such
perquisites shall include, but are not limited to, parking,
club dues, tax preparation assistance, and an annual physical
examination.
(e) Expenses and Working Facilities. The Executive is
hereby authorized to incur, and shall be reimbursed by the
Company for, any and all reasonable and necessary business
related expenses, including, but not limited to, expenses for
business travel, entertainment, gifts and similar matters,
which expenses are incurred by the Executive on behalf of the
Company or any of its subsidiaries, upon presentation of
itemized accounts of such expenses in accordance with Company
policies. The Executive shall be furnished during the term of
this Agreement with offices and other working facilities in
the Company's principal executive offices located in Erie,
Pennsylvania (or other location of the principal executive
offices within the Erie metropolitan area) and secretarial and
other assistance suitable to the Executive's position and
adequate for the performance of duties hereunder.
(f) Performance Appraisal. The Executive's
performance may be evaluated by the Board of Directors or the
Committee from time to time. The Executive shall be entitled
to such additional remuneration, including but not limited to
annual bonuses based on performance, as the Board of Directors
or the Committee may, in its discretion, determine from time
to time.
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4. Absences. The Executive shall be entitled to vacations in
accordance with the Company's vacation policy in effect from time to time (but
in no event shall the Executive be entitled to fewer vacation days than under
the Company's vacation policy as in effect on the Effective Date) and to
absences because of illness or other incapacity, and shall also be entitled to
such other absences, whether for holiday, personal time, conventions, or for any
other purpose, as are granted to the Company's other senior executive officers
or as are approved by the Board of Directors or the Committee, which approval
shall not be unreasonably withheld.
5. Termination. The Executive's employment hereunder may be
terminated only as follows:
(a) Expiration of Term of Office. Upon the expiration
of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof, the
Board of Directors may (i) determine that the Executive should
not continue in such office(s) or (ii) that the Executive
should not be elected or appointed to an office with duties,
authorities, powers and responsibilities that are at least
commensurate with those of said office(s), in either case, for
reasons other than for Cause (if the reasons for such
noncontinuance, nonreelection or nonreappointment constitute
Cause, then Section 5(d) hereof will apply).
(b) By the Company Without Cause. The Company may at
any time terminate the Executive's employment hereunder
without Cause only by the affirmative vote of a majority of
the entire Board of Directors, and upon no less than thirty
(30) days' prior written notice to the Executive.
(c) By the Executive Without Good Reason. The
Executive may at any time terminate employment hereunder for
any reason upon no less than thirty (30) days' written notice
to the Company. Section 5(e) shall apply to any termination of
employment by the Executive for Good Reason.
(d) By the Company For Cause. The Company may
terminate the Executive's employment hereunder for Cause. In
such event, the Company shall give to the Executive prompt
written notice (in addition to any notice which may be
required by Section 5(d)(1) hereof) specifying in reasonable
detail the basis for such termination. For purposes of this
Agreement, "Cause" shall mean any of the following conduct by
the Executive:
(1) The deliberate and intentional
breach of any material provision of
this Agreement, which breach
Executive shall have failed to cure
within thirty (30) days after
Executive's receipt of written
notice from the Company specifying
the specific nature of the
Executive's breach;
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(2) The deliberate and intentional
engaging by Executive in gross
misconduct that is materially and
demonstrably inimical to the best
interests, monetary or otherwise, of
the Company; or
(3) Conviction of a felony or conviction
of any crime involving moral
turpitude, fraud or deceit.
For purposes of this definition, no act, or failure to act, on the Executive's
part shall be considered "deliberate and intentional" unless done, or omitted to
be done, by the Executive not in good faith and without reasonable belief that
such action or omission was in the best interest of the Company.
(e) By the Executive for Good Reason. The Executive
may terminate employment hereunder for Good Reason upon
providing thirty (30) days written notice to the Company after
the Executive reasonably becomes aware of the circumstances
giving rise to such Good Reason. For purposes of this
Agreement, "Good Reason" means the following conduct of the
Company, unless the Executive shall have consented thereto in
writing:
(1) Material breach of any material
provision of this Agreement by the
Company, which breach shall not have
been cured by the Company within
thirty (30) days after Company's
receipt from the Executive or the
Executive's agent of written notice
specifying in reasonable detail the
nature of the Company's breach;
(2) The assignment to the Executive of
any duties inconsistent in any
material respect with the
Executive's position (including any
reduction of the Executive's status
and reporting requirements),
authority, duties, powers or
responsibilities with the Company as
contemplated by Section 2 of this
Agreement, or any other action by
the Company, including the removal
of the Executive from or any failure
to reelect or reappoint the
Executive to the office(s) specified
in Section 2 or a commensurate
office(s) (other than for Cause),
which results in a diminution of the
Executive's authority, duties,
position, responsibilities or
status, excluding for this purpose
any isolated, insubstantial and
inadvertent action respecting the
Executive not taken in bad faith and
which is remedied by the Company
within thirty (30) days after
receipt of written notice from the
Executive to the Company;
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(3) The Company's relocation of the
Executive out of the Company's
principal executive offices or the
relocation of the Company's
principal executive offices to a
location outside the Erie,
Pennsylvania metropolitan area,
except for required short-term
travel on the Company's behalf to
the extent necessary for the
Executive to carry out his normal
duties in the ordinary course of
business;
(4) The failure of the Company to obtain
the assumption in writing of its
obligations to perform this
Agreement by any successor as
provided in Section 14 hereof not
less than five days prior to a
merger, consolidation or sale as
contemplated in Section 14; or
(5) A reduction in the overall level of
compensation of the Executive. For
purposes of this subsection 5, the
following shall not constitute a
reduction in the overall level of
compensation of the Executive: (i)
changes in the cash/stock mix of
compensation payable to the
Executive; (ii) a reduction in the
overall level of compensation of the
Executive resulting from the failure
to achieve corporate, business unit
and/or individual performance goals
established for purposes of
incentive compensation for any year
or other period; provided that the
aggregate short-term incentive
opportunity, when combined with the
Executive's base salary, provides,
in the aggregate, an opportunity for
the Executive to realize at least
the same overall level of
compensation as was paid in the
immediately prior year or period at
target performance levels; and
provided, further, that such target
performance levels are reasonable at
all times during the measurement
period, taking into account the fact
that one of the purposes of such
compensation is to incent the
Executive; (iii) reductions in
compensation resulting from changes
to any Erie Benefit Plan (provided
that such changes are generally
applicable to all participants in
such Erie Benefit Plan); and (iv)
any combination of the foregoing.
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(f) Disability. In the event that the Executive shall
be unable to perform the Executive's duties hereunder on a
full time basis for a period of one hundred-eighty (180)
consecutive calendar days by reason of incapacity due to
illness, accident or other physical or mental disability, then
the Company may, at its discretion, terminate the Executive's
employment hereunder if the Executive, within ten (10) days
after receipt of written notice of termination (which notice
may be given before or after the end of the entire 180 day
period), shall not have returned to the performance of all of
his duties hereunder on a full-time basis.
(g) Death. The Executive's employment under this
Agreement shall terminate upon the Executive's death.
(h) Mutual Written Agreement. This Agreement
and the Executive's employment hereunder may be terminated
at any time by the mutual written agreement of the Executive
and the Company.
6. Compensation in the Event of Termination. In the event that the
Executive's employment hereunder terminates prior to the expiration of this
Agreement for any reason provided in Section 5 hereof, the Company shall pay the
Executive, compensation and provide the Executive and the Executive's eligible
dependents with benefits as follows:
(a) Executive's Nonreelection to Office; Termination
By Company Without Cause; Termination By Executive for Good
Reason. In the event that the Executive's employment hereunder
is terminated: (i) because the Executive does not continue in
office pursuant to Section 5(a) hereof; or (ii) by the Company
without Cause pursuant to Section 5(b) hereof; or (iii) by the
Executive for Good Reason pursuant to Section 5(e) hereof,
then in any such event the Company shall pay or provide, as
applicable, the following compensation and benefits to the
Executive:
(1) Three (3) times the following: (A)
the highest annual base salary paid
or payable to the Executive in the
then current year or any one (1) of
the three (3) calendar years
preceding Executive's termination of
employment hereunder; plus (B) an
amount equal to the sum of the
Executive's highest award(s) under
the Company's Annual Incentive Plans
for any one (1) of the three (3)
calendar years preceding the date of
the termination of Executive's
employment hereunder (such total is
referred to herein as "Covered
Compensation"). Such payment to the
Executive by the Company shall be
paid in a lump sum unless the
Executive elects, and so notifies
the Company in writing prior to the
termination of the Executive's
employment hereunder, to receive
such payment in three (3) equal
annual installments. The lump sum or
first payment, as the case may be,
shall be paid within sixty (60) days
after the date of the termination of
the Executive's employment
hereunder;
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(2) Any awards or other compensation to
which the Executive is entitled
under any of the Company's
compensation plans or Erie Benefit
Plans to the extent not covered in
subsection (1) hereof;
(3) Any award to which the Executive
would be entitled under the
Company's Long-Term Incentive Plan
as in effect on December 16, 1997,
calculated under the provision of
that Plan as if the Executive ceases
to be an Employee of the Company by
reason of death, disability or
normal retirement;
(4) Continuing coverage for all purposes
(including eligibility, coverage,
vesting and benefit accruals, as
applicable), for a period of three
(3) years after the date of the
termination of Executive's
employment hereunder, to the extent
not prohibited by law, for the
Executive and the Executive's
eligible dependents under all of the
Erie Benefit Plans in effect and
applicable to Executive and the
Executive's eligible dependents as
of the date of termination. In the
event that the Executive and/or the
Executive's eligible dependents,
because of the Executive's
terminated status, cannot be covered
or fully covered under any or all of
the Erie Benefit Plans, the Company
shall continue to provide the
Executive and/or the Executive's
eligible dependents with the same
level of such coverage in effect
prior to termination, payable from
the general assets of the Company if
necessary. Notwithstanding the
foregoing, the Executive may elect
(by giving written notice to the
Company prior to the termination of
employment hereunder), on a benefit
by benefit basis, to receive in lieu
of continuing coverage, cash in an
amount equal to the present value
(using a 6.5% discount rate over
three years) of the projected cost
to the Company of providing such
benefit for such three year period.
The aggregate amount of cash to
which the Executive is entitled
pursuant to the preceding sentence
shall be payable by the Company to
the Executive within sixty (60) days
after the date of the termination of
Executive's employment hereunder;
and
(5) For a period of three (3) years
after the date of the termination of
Executive's employment hereunder,
such perquisites as are made
available to the Executive as of the
date of the termination of
Executive's employment hereunder.
The Executive's subsequent death, disability or attainment of age 65 or any
other age shall in no way affect or limit the Company's obligations under this
Section 6(a).
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(b) Termination By the Company for Cause. In the
event that the Company shall terminate the Executive's
employment hereunder for Cause pursuant to Section 5(d), this
Agreement shall forthwith terminate and the obligations of the
parties hereto shall be as set forth in Section 8 hereof.
(c) Termination by the Executive Without Good Reason.
In the event that the Executive shall terminate employment
hereunder other than for Good Reason pursuant to Section 5(c),
this Agreement shall forthwith terminate and the obligations
of the parties hereto shall be as set forth in Section 8
hereof.
(d) Disability. In the event that the Company elects
to terminate the Executive's employment hereunder pursuant to
Section 5(f), the Executive shall continue to receive from the
date of such termination through the expiration date of this
Agreement, sixty percent (60%) of the then current annual base
salary to which the Executive was entitled pursuant to Section
3(a) hereof immediately preceding such termination, in
accordance with the payroll practices of the Company for
senior executive officers, reduced, however, by the amount of
any proceeds from Social Security and disability insurance
policies provided by and at the expense of the Company.
(e) Death. In the event of the death of the Executive
during the term of this Agreement, the then current annual
base salary to which the Executive was entitled pursuant to
Section 3(a) hereof immediately preceding the Executive's
death shall be paid, in twelve (12) equal monthly installments
following the date of death, to the last beneficiary
designated by the Executive under the Company's group life
insurance policy maintained by the Company or such other
written designation expressly provided to the Company for the
purposes hereof or, failing either such designation, to the
Executive's estate.
(f) Mutual Written Consent. In the event that the
Executive and the Company shall terminate the Executive's
employment by mutual written agreement, the Company shall pay
such compensation and provide such benefits, if any, as the
parties may mutually agree upon in writing.
The Executive shall not be required to mitigate the amount of any payment
provided for in this Section 6 by seeking employment or otherwise, nor shall any
amounts received from employment or otherwise by the Executive offset in any
manner the obligations of the Company hereunder except as specifically provided
in Section 6(d) hereof.
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7. Certain Additional Payments by the Company. Notwithstanding
anything in this Agreement to the contrary, in the event it is determined that
any payment or distribution by the Company to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (a "Payment"), is subject to the excise
tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), or any successor provision, on excess parachute payments, as that
term is used and defined in Sections 4999 and 280G of the Code, then the
Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount equal to the then current rate of tax under said Section
4999 multiplied by the total of the amounts so paid or payable, including the
Gross-Up Payment, which are deemed to be a part of an excess parachute payment.
8. Effect of Expiration of Agreement or Termination of
Executive's Employment. Upon the expiration of this Agreement by its terms or
the termination of the Executive's employment hereunder, neither the Company nor
the Executive shall have any remaining duties or obligations hereunder except
that:
(a) The Company shall:
(1) Pay the Executive's accrued salary
and any other accrued benefits under
Sections 3(a), (b), and (c) hereof;
(2) Reimburse the Executive for expenses
already incurred in accordance with
Section 3(e) hereof;
(3) Pay or otherwise provide for any
benefits, payments or continuation
or conversion rights in accordance
with the provisions of any Erie
Benefit Plan of which the Executive
or any of the Executive's dependents
is or was a participant or as
otherwise required by law;
(4) Pay the Executive and the
Executive's beneficiaries any
compensation and/or provide the
Executive or the Executive's
eligible dependents any benefits, as
the case may be, due pursuant to
Section 6 or Section 7 hereof; and
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(5) Unless the employment of the
Executive is terminated by the
Company for Cause, pay the Executive
or the Executive's beneficiaries the
full amount or amounts accrued under
the Supplemental Executive
Retirement Plan of the Company (the
"SERP") as in effect on the
Effective Date (or as such benefits
may be enhanced by subsequent
amendments or supplements to such
SERP), as though, solely for
purposes of determining any
otherwise applicable actuarial
reduction factors, the event of the
termination of Executive's
employment hereunder or expiration
of this Agreement occurred on the
Executive's Normal Retirement Date
as defined in such SERP. Accrued
benefits under the SERP shall be
fully vested and nonforfeitable upon
such termination (including
termination on account of the
Executive's death) or expiration.
Any reductions in SERP benefits that
would otherwise apply pursuant to
Section 10.1 of the Company's
Retirement Plan for Employees (or
pursuant to any successor provision
of such plan or any successor plan)
relating to Section 415(b) of the
Code shall not be applicable for
purposes hereof. No further approval
by the Board of Directors or the
Committee with respect to payments
under the SERP in accordance with
the preceding sentences shall be
required. Unreduced payments may
begin at age 55, but in no event
would payments be made under this
Section 8(a)(5) before the Executive
reaches age fifty-five (55). The
Company shall purchase for the
Executive, naming the Executive
and/or the Executive's designee the
owner, a paid up annuity, from an
insurer reasonably acceptable to the
Executive but in any event having an
A.M. Best rating of A+ or better (or
other comparable rating), that will
pay to the Executive an amount equal
to the benefit to which the
Executive would otherwise be
entitled under the SERP and payable
at the times such SERP benefit would
be payable in accordance with the
provisions hereof. Upon the purchase
and delivery to the Executive of
such an annuity, the Executive shall
release the Company from any further
obligation under the SERP. The
Company further agrees to pay the
Executive immediately upon
termination, a cash payment (the
"Tax Gross-up") equal to the sum of
the following: (i) all taxes
(federal, state, local, and payroll
taxes) incurred and due and owing by
the Executive, arising from the cost
of the annuity purchased by the
Company to meet the requirements of
this Section 8(a)(5), and (ii) any
such taxes incurred and due and
owing with respect to the amount
paid in (i).
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(6) Continue to remain bound by the
terms of Section 12 hereof.
(b) The Executive shall remain bound by the terms of
Sections 9 and 13 hereof for a period of thirty six (36)
months after the expiration of the Agreement by its terms;
provided, that the Executive shall not be bound by the terms
of Section 9(b) after the termination of employment (other
than a termination of the Executive by the Company for Cause)
if such termination occurs after the expiration of this
Agreement by its terms.
9. Covenants as to Confidential Information and Competitive
Conduct. The Executive hereby acknowledges and agrees as follows: (i) this
Section 9 is necessary for the protection of the legitimate business interests
of the Company, (ii) the restrictions contained in this Section 9 with regard to
geographical scope, length of term and types of restricted activities are
reasonable; (iii) the Executive has received adequate and valuable new
consideration for entering into this Agreement, and (iv) the Executive's
expertise and capabilities are such that this obligation hereunder and the
enforcement hereof by injunction or otherwise will not adversely affect the
Executive's ability to earn a livelihood.
(a) Confidentiality of Information and Nondisclosure.
The Executive acknowledges and agrees that the Executive's
employment by the Company under this Agreement necessarily
involves knowledge of and access to confidential and
proprietary information pertaining to the business of the
Company and its subsidiaries. Accordingly, the Executive
agrees that at all times during the term of this Agreement and
at any time thereafter, the Executive will not, directly or
indirectly, without the express written approval of the
Company, unless directed by applicable legal authority
(including any court of competent jurisdiction, governmental
agency having supervisory authority over the business of the
Company or the subsidiaries, or any legislative or
administrative body having supervisory authority over the
business of the Company or its subsidiaries) having
jurisdiction over the Executive, disclose to or use, or
knowingly permit to be so disclosed or used, for the benefit
of himself, any person, corporation or other entity other than
the Company, (i) any information concerning any financial
matters, customer relationships, competitive status, supplier
matters, internal organizational matters, current or future
plans, or other business affairs of or relating to the Company
or its subsidiaries, (ii) any management, operational, trade,
technical or other secrets or any other proprietary
information or other data of the Company or its subsidiaries,
or (iii) any other information related to the Company or its
subsidiaries or which the Executive should reasonably believe
will be damaging to the Company or its subsidiaries which has
not been published and is not generally known outside of the
Company. The Executive acknowledges that all of the foregoing
constitutes confidential and proprietary information, which is
the exclusive property of the Company.
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(b) Restrictive Covenant. During the term of, and for
a period of one (1) year (the "Restrictive Period") after the
termination of the Executive's employment hereunder for any
reason (other than a termination of the Executive hereunder
pursuant to Section 5(a), 5(b) or 5(e), hereof), the Executive
shall not render, directly, or indirectly, services to any
person, firm, corporation, association or other entity which
conducts the same or similar business as the Company or its
subsidiaries at the date of the Executive's termination of
employment hereunder within the states in which the Company or
any of its subsidiaries is then licensed and doing business at
the date of the Executive's termination of employment
hereunder without the prior written consent of the Board of
Directors, which may be withheld in its discretion. In the
event the Executive violates any of the provisions contained
in this Section 9(b) hereof, the Restrictive Period shall be
increased by the period of time from the commencement by the
Executive of any violation until such violation has been cured
to the satisfaction of the Company. The Executive further
agrees that at no time during the Restrictive Period will the
Executive attempt to directly or indirectly solicit or hire
employees of Company or its subsidiaries or induce any of them
to terminate their employment with the Company or any of the
subsidiaries. Notwithstanding the foregoing, the performance
by the Executive of rights and duties under an agency
agreement with the Company shall not constitute a breach of
this Section 9(b).
(c) Company Remedies. The Executive acknowledges and
agrees that any breach of this Section 9 will result in
immediate and irreparable harm to the Company, and that the
Company cannot be reasonably or adequately compensated by
damages in an action at law. In the event of a breach by the
Executive of the provisions of this Section 9, the Company
shall be entitled, to the extent permitted by law, immediately
to cease to pay or provide the Executive or the Executive's
dependents any compensation or benefit being, or to be, paid
or provided to the Executive pursuant to Section 3, Section 6
or Section 8 of this Agreement, and also to obtain immediate
injunctive relief restraining the Executive from conduct in
breach of the covenants contained in this Section 9. Nothing
herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for such breach,
including the recovery of damages from the Executive.
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10. Resolution of Differences Over Breaches of Agreement.
Except as otherwise provided herein, in the event of any controversy, dispute or
claim arising out of, or relating to, this Agreement, or the breach thereof, or
arising out of any other matter relating to the Executive's employment with the
Company, the parties may seek recourse only for temporary or preliminary
injunctive relief to the courts having jurisdiction thereof and if any relief
other than injunctive relief is sought, the Company and the Executive agree that
such underlying controversy, dispute or claim shall be settled by arbitration
conducted in Erie, Pennsylvania in accordance with this Section 10 and the
Commercial Arbitration Rules of the American Arbitration Association ("AAA").
The matter shall be heard and decided, and awards rendered by a panel of three
(3) arbitrators (the "Arbitration Panel"). The Company and the Executive shall
each select one arbitrator from the AAA National Panel of Commercial Arbitrators
(the "Commercial Panel") and AAA shall select a third arbitrator from the
Commercial Panel. The award rendered by the Arbitration Panel shall be final and
binding as between the parties hereto and their heirs, executors,
administrators, successors and assigns, and judgment on the award may be entered
by any court having jurisdiction thereof. Except as provided in Section 11
hereof, each party shall bear sole responsibility for all expenses and costs
incurred by such party in connection with the resolution of any controversy,
dispute or claim in accordance with this Section 10.
11. Payment of Executive's Legal Fees. If the Executive is
required to bring any action to enforce rights or to collect moneys due under
this Agreement, the Company shall pay to the Executive the fees and expenses
incurred by the Executive in bringing and pursuing such action if the Executive
is successful, in whole or in part, on the merits or otherwise (including by way
of a settlement involving a payment of money by the Company to the Executive),
in such action. The Company shall pay such fees and expenses in advance of the
final disposition of such action upon receipt of an undertaking from the
Executive to repay to the Company such advances if the Executive is not
ultimately successful, in whole or in part, on the merits or otherwise, in such
action.
12. Severance Pay upon Termination of Employment after
Expiration of the Agreement. Notwithstanding the expiration of this Agreement by
its terms and notwithstanding the terms of any corporate severance policy then
in effect and applicable to the Executive, if the employment of the Executive is
terminated without Cause by the Company, by the Executive for Good Reason or
upon the expiration of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof (for reasons other than
for Cause), in any case, within thirty-six (36) months after the expiration of
this Agreement by its terms, then (i) the Company shall pay to the Executive
severance compensation in an amount equal to two (2) times the Executive's
Covered Compensation as determined on the date of such termination, and (ii) the
Executive and the Executive's eligible dependents shall be entitled to
continuing coverage under the Company's then-existing group health plans
(including medical, dental, prescription drug and vision plans, if any) for a
period of two (2) years after the date of the termination of the Executive's
employment, to the extent not prohibited by law and subject to the terms of such
plans including provisions as to deductibles and copayments and changes in
levels of coverage that are generally applicable to employees. The payment to
the Executive by the Company pursuant to subsection (i) of the preceding
sentence shall be paid in a lump sum unless the Executive elects, and so
notifies the Company in writing prior to the Executive's termination of
employment, to receive such payment in two (2) equal annual installments. The
lump sum or first payment, as the case may be, shall be paid within thirty (30)
days after the date of termination of the Executive's employment.
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13. Release. The Executive hereby acknowledges and agrees that
neither the Company nor any of its representatives or agents will be obligated
to pay any compensation or benefit which the Executive has a right to be paid or
provided to the Executive or the Executive's dependents pursuant to Section 6,
Section 8 or Section 12 of this Agreement, unless the Executive, if requested by
the Company in its sole discretion, executes a release in a form reasonably
acceptable to the Company, which releases any and all claims the Executive has
or may have against the Company or its subsidiaries, agents, officers,
directors, successors or assigns.
14. Waiver. The waiver by a party hereto of any breach by the
other party hereto of any provision of this Agreement shall not operate or be
construed as a waiver of any other or subsequent breach by a party hereto.
15. Assignment. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the Company, and the Company
shall be obligated to require any successor to expressly acknowledge and assume
its obligations hereunder. This Agreement shall inure to the extent provided
hereunder to the benefit of and be enforceable by the Executive or the
Executive's legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. The Executive may not delegate any of the
Executive's duties, responsibilities, obligations or positions hereunder to any
person and any such purported delegation shall be void and of no force and
effect.
16. Notices. Any notices required or permitted to be given
under this Agreement shall be sufficient if in writing, and if personally
delivered or when sent by first class certified or registered mail, postage
prepaid, return receipt requested--in the case of the Executive, to his
residence address as set forth below, and in the case of the Company, to the
address of its principal place of business as set forth below, to the attention
of the Chairman of the Board, or in case the Executive is the Chairman of the
Board, to the Chairman of the Compensation Committee of the Board -- or to such
other person or at such other address with respect to each party as such party
shall notify the other in writing.
17. Construction of Agreement.
(a) Governing Law. This Agreement shall be
governed by and construed under the laws of the Commonwealth
of Pennsylvania.
(b) Severability. In the event that any one or more
of the provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, the validity, legality or
enforceability of the remaining provisions shall not in any
way be affected or impaired thereby.
(c) Headings. The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience of
reference only and shall not constitute a part of this
Agreement.
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18. Entire Agreement. This Agreement contains the entire
agreement of the parties concerning the Executive's employment and all promises,
representations, understandings, arrangements and prior agreements on such
subject are merged herein and superseded hereby, including the Employment
Agreement effective November 20, 1995 which is expressly superseded hereby. The
provisions of this Agreement may not be amended, modified, repealed, waived,
extended or discharged except by an agreement in writing signed by the party
against whom enforcement of any amendment, modification, repeal, waiver,
extension or discharge is sought. No person acting other than pursuant to a
resolution of the Board of Directors or the Committee shall have authority on
behalf of the Company to agree to amend, modify, repeal, waive, extend or
discharge any provision of this Agreement or anything in reference thereto or to
exercise any of the Company's rights to terminate or to fail to extend this
Agreement.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
officers thereunto duly authorized, and the Executive has hereunto set his hand
all as of the day and year first above written.
ATTEST: ERIE INDEMNITY COMPANY
/s/ J. R. Van Gorder /s/ F. William Hirt
____________________________ By:__________________________________
J. R. Van Gorder F. William Hirt
Secretary Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ Philip A. Garcia
____________________________ _____________________________________(SEAL)
Philip A. Garcia
786 Stockbridge Drive
Erie, PA 16505
95
Exhibit 10.6
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") made effective as of the
16th day of December, 1997 (the "Effective Date") by and between ERIE INDEMNITY
COMPANY, a Pennsylvania corporation with its principal place of business at
Erie, Pennsylvania (the "Company"), and JOHN J. BRINLING, JR. (the "Executive");
WITNESSETH:
WHEREAS, the Company has determined that it is in the best
interests of the Company and its shareholders to secure the continued employment
of the Executive on the terms and subject to the conditions set forth in this
Agreement; and
WHEREAS, the Executive desires and is willing to accept
employment with the Company on the terms and subject to the conditions set forth
herein;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Term. The Company hereby agrees to continue the employment
of the Executive and the Executive hereby agrees to continue to serve the
Company pursuant to the terms and conditions of this Agreement as Executive Vice
President of the Company, or in such other position with the Company of at least
commensurate responsibility and authority in all material respects, for a term
of two years commencing on the Effective Date hereof and expiring on December
15, 1999, unless earlier terminated pursuant to Section 5 hereof.
Notwithstanding the foregoing, the Executive shall serve in said office(s) at
the pleasure of the Company's Board of Directors (the "Board of Directors") and
the Executive may be removed from said office(s) at any time with or without
Cause, as hereinafter defined, pursuant to Sections 5(b) or 5(d) hereof;
provided that any such removal shall be without prejudice to any contract rights
the Executive may have hereunder. Subject to Section 8(a)(6) and Section 8(b)
hereof, this Agreement shall expire by its terms on December 15, 1999.
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2. Duties and Responsibilities. The Executive's duties
hereunder shall be those which shall be prescribed by the Company's Bylaws, as
amended from time to time, and by the Board of Directors or any committee
thereof from time to time and shall include such executive authority, duties,
powers and responsibilities as customarily attend the office as Executive Vice
President of a company comparable to the Company. The Executive shall discharge
such duties consistent with sound business practices and in accordance with law
and the Company's general employment policies, in each case, as in effect from
time to time, in all material respects and the Executive shall use best efforts
to promote the best interests of the Company. During the term of this Agreement,
the Executive's position (including the Executive's status and reporting
requirements), authority, duties, powers and responsibilities shall at all times
be at least commensurate in all material respects with the most significant of
those held, exercised or assigned to the Executive as of the Effective Date. The
Executive shall devote the Executive's knowledge, skill and all of the
Executive's professional time, attention and energies (reasonable absences for
vacations and illness excepted), to the business of the Company in order to
perform such assigned duties faithfully, competently and diligently. It is
understood and agreed between the parties that the Executive may (i) engage in
charitable and community activities, including serving on boards of directors or
trustees of and holding other leadership positions in non-profit organizations
unless the objectives and requirements of such positions are determined by the
Board of Directors to be inconsistent with the performance of the Executive's
duties hereunder, and, (ii) manage personal investments, so long as such
activities do not interfere or conflict with the Executive's performance of
responsibilities and obligations hereunder. It is expressly agreed that any such
activities engaged in by the Executive as of the Effective Date shall not
thereafter be deemed to interfere with the Executive's obligations and
responsibilities hereunder. The Executive agrees that the approval of the Board
of Directors or a committee thereof shall be required before the Executive first
accepts a position as director of any for-profit corporation after the date
hereof.
3. Compensation. During the term of this Agreement, the
Executive shall receive, for all services rendered to the Company hereunder,
the following (hereinafter referred to collectively as "Compensation"):
(a) Salary. The Executive shall be paid an annual
base salary at an annual rate at least equal to the annual
rate being paid or payable to the Executive by the Company in
the month in which the Effective Date occurs, with such
increases thereafter as shall be determined from time to time
to be fair and reasonable by the Board of Directors or by the
Executive Compensation Committee of the Board of Directors
(the "Committee") in its discretion after taking into account,
among other things, the authority, duties, powers and
responsibilities of the Executive's position, the Executive's
performance, the Company's performance, the compensation of
persons in comparable positions at the Company and at other
comparable companies, and the effect of inflation. The
Executive's annual base salary shall not be reduced after any
such increase. The Executive's annual base salary shall be
payable in equal installments in accordance with the Company's
general salary payment policies, but no less frequently than
bi-weekly.
(b) Incentive Compensation. The Executive shall be
eligible for awards under the Company's incentive compensation
plans, if any, applicable to senior executive officers of the
Company or to key employees of the Company or its
subsidiaries, including, but not limited to, management
incentive plans and stock option plans, in accordance with and
subject to the terms thereof (including any provisions
providing for changes in the level of or termination of
benefits thereunder), on a basis commensurate with the
Executive's position and authorities, duties, powers and
responsibilities.
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(c) Employee Benefit Plans. The Executive and the
Executive's "dependents," as that term may be defined under
the applicable employee benefit plan(s) of the Company, shall
be included, to the extent eligible thereunder and subject to
the terms of the plans (including any provisions for changing
the level of or termination of benefits thereunder), in all
plans, programs and policies which provide benefits for
Company employees and their dependents on a basis commensurate
with the Executive's position and authorities, duties, powers
and responsibilities including, without limitation, health
care insurance, health and welfare plans, pension and
retirement plans, group life insurance plans, split dollar
life insurance plans, short and long-term disability plans,
survivors' benefits, executive supplemental benefits, holidays
and other similar or comparable benefits made available to the
Company's employees and senior executive officers
(hereinafter, such plans, programs and policies shall be
collectively referred to as the "Erie Benefit Plans"). Such
plans, programs and policies shall include, but are not
limited to, the Erie Insurance Group Retirement Plan for
Employees, the Erie Insurance Group Employee Savings Plan, the
Erie Insurance Group Deferred Compensation Plan, the Erie
Insurance Group Split Dollar Life Insurance Plan, the Erie
Insurance Group Supplemental Executive Retirement Plan, and
the Erie Insurance Group Health Protection, Prescription Drug,
Dental Assistance and Vision Care Plans.
(d) Perquisites. The Executive shall be entitled to
all perquisites which the Company from time to time makes
available to senior executive officers of the Company. Such
perquisites shall include, but are not limited to, parking,
club dues, tax preparation assistance, and an annual physical
examination.
(e) Expenses and Working Facilities. The Executive is
hereby authorized to incur, and shall be reimbursed by the
Company for, any and all reasonable and necessary business
related expenses, including, but not limited to, expenses for
business travel, entertainment, gifts and similar matters,
which expenses are incurred by the Executive on behalf of the
Company or any of its subsidiaries, upon presentation of
itemized accounts of such expenses in accordance with Company
policies. The Executive shall be furnished during the term of
this Agreement with offices and other working facilities in
the Company's principal executive offices located in Erie,
Pennsylvania (or other location of the principal executive
offices within the Erie metropolitan area) and secretarial and
other assistance suitable to the Executive's position and
adequate for the performance of duties hereunder.
(f) Performance Appraisal. The Executive's
performance may be evaluated by the Board of Directors or the
Committee from time to time. The Executive shall be entitled
to such additional remuneration, including but not limited to
annual bonuses based on performance, as the Board of Directors
or the Committee may, in its discretion, determine from time
to time.
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4. Absences. The Executive shall be entitled to vacations in
accordance with the Company's vacation policy in effect from time to time (but
in no event shall the Executive be entitled to fewer vacation days than under
the Company's vacation policy as in effect on the Effective Date) and to
absences because of illness or other incapacity, and shall also be entitled to
such other absences, whether for holiday, personal time, conventions, or for any
other purpose, as are granted to the Company's other senior executive officers
or as are approved by the Board of Directors or the Committee, which approval
shall not be unreasonably withheld.
5. Termination. The Executive's employment hereunder may be
terminated only as follows:
(a) Expiration of Term of Office. Upon the expiration
of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof, the
Board of Directors may (i) determine that the Executive should
not continue in such office(s) or (ii) that the Executive
should not be elected or appointed to an office with duties,
authorities, powers and responsibilities that are at least
commensurate with those of said office(s), in either case, for
reasons other than for Cause (if the reasons for such
noncontinuance, nonreelection or nonreappointment constitute
Cause, then Section 5(d) hereof will apply).
(b) By the Company Without Cause. The Company may at
any time terminate the Executive's employment hereunder
without Cause only by the affirmative vote of a majority of
the entire Board of Directors, and upon no less than thirty
(30) days' prior written notice to the Executive.
(c) By the Executive Without Good Reason. The
Executive may at any time terminate employment hereunder for
any reason upon no less than thirty (30) days' written notice
to the Company. Section 5(e) shall apply to any termination of
employment by the Executive for Good Reason.
(d) By the Company For Cause. The Company may
terminate the Executive's employment hereunder for Cause. In
such event, the Company shall give to the Executive prompt
written notice (in addition to any notice which may be
required by Section 5(d)(1) hereof) specifying in reasonable
detail the basis for such termination. For purposes of this
Agreement, "Cause" shall mean any of the following conduct by
the Executive:
(1) The deliberate and intentional
breach of any material provision of
this Agreement, which breach
Executive shall have failed to cure
within thirty (30) days after
Executive's receipt of written
notice from the Company specifying
the specific nature of the
Executive's breach;
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(2) The deliberate and intentional
engaging by Executive in gross
misconduct that is materially and
demonstrably inimical to the best
interests, monetary or otherwise, of
the Company; or
(3) Conviction of a felony or conviction
of any crime involving moral
turpitude, fraud or deceit.
For purposes of this definition, no act, or failure to act, on the Executive's
part shall be considered "deliberate and intentional" unless done, or omitted to
be done, by the Executive not in good faith and without reasonable belief that
such action or omission was in the best interest of the Company.
(e) By the Executive for Good Reason. The Executive
may terminate employment hereunder for Good Reason upon
providing thirty (30) days written notice to the Company after
the Executive reasonably becomes aware of the circumstances
giving rise to such Good Reason. For purposes of this
Agreement, "Good Reason" means the following conduct of the
Company, unless the Executive shall have consented thereto in
writing:
(1) Material breach of any material
provision of this Agreement by the
Company, which breach shall not have
been cured by the Company within
thirty (30) days after Company's
receipt from the Executive or the
Executive's agent of written notice
specifying in reasonable detail the
nature of the Company's breach;
(2) The assignment to the Executive of
any duties inconsistent in any
material respect with the
Executive's position (including any
reduction of the Executive's status
and reporting requirements),
authority, duties, powers or
responsibilities with the Company as
contemplated by Section 2 of this
Agreement, or any other action by
the Company, including the removal
of the Executive from or any failure
to reelect or reappoint the
Executive to the office(s) specified
in Section 2 or a commensurate
office(s) (other than for Cause),
which results in a diminution of the
Executive's authority, duties,
position, responsibilities or
status, excluding for this purpose
any isolated, insubstantial and
inadvertent action respecting the
Executive not taken in bad faith and
which is remedied by the Company
within thirty (30) days after
receipt of written notice from the
Executive to the Company;
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(3) The Company's relocation of the
Executive out of the Company's
principal executive offices or the
relocation of the Company's
principal executive offices to a
location outside the Erie,
Pennsylvania metropolitan area,
except for required short-term
travel on the Company's behalf to
the extent necessary for the
Executive to carry out his normal
duties in the ordinary course of
business;
(4) The failure of the Company to obtain
the assumption in writing of its
obligations to perform this
Agreement by any successor as
provided in Section 14 hereof not
less than five days prior to a
merger, consolidation or sale as
contemplated in Section 14; or
(5) A reduction in the overall level of
compensation of the Executive. For
purposes of this subsection 5, the
following shall not constitute a
reduction in the overall level of
compensation of the Executive: (i)
changes in the cash/stock mix of
compensation payable to the
Executive; (ii) a reduction in the
overall level of compensation of the
Executive resulting from the failure
to achieve corporate, business unit
and/or individual performance goals
established for purposes of
incentive compensation for any year
or other period; provided that the
aggregate short-term incentive
opportunity, when combined with the
Executive's base salary, provides,
in the aggregate, an opportunity for
the Executive to realize at least
the same overall level of
compensation as was paid in the
immediately prior year or period at
target performance levels; and
provided, further, that such target
performance levels are reasonable at
all times during the measurement
period, taking into account the fact
that one of the purposes of such
compensation is to incent the
Executive; (iii) reductions in
compensation resulting from changes
to any Erie Benefit Plan (provided
that such changes are generally
applicable to all participants in
such Erie Benefit Plan); and (iv)
any combination of the foregoing.
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(f) Disability. In the event that the Executive shall
be unable to perform the Executive's duties hereunder on a
full time basis for a period of one hundred-eighty (180)
consecutive calendar days by reason of incapacity due to
illness, accident or other physical or mental disability, then
the Company may, at its discretion, terminate the Executive's
employment hereunder if the Executive, within ten (10) days
after receipt of written notice of termination (which notice
may be given before or after the end of the entire 180 day
period), shall not have returned to the performance of all of
his duties hereunder on a full-time basis.
(g) Death. The Executive's employment under this
Agreement shall terminate upon the Executive's death.
(h) Mutual Written Agreement. This Agreement
and the Executive's employment hereunder may be terminated
at any time by the mutual written agreement of the Executive
and the Company.
6. Compensation in the Event of Termination. In the event that the
Executive's employment hereunder terminates prior to the expiration of this
Agreement for any reason provided in Section 5 hereof, the Company shall pay the
Executive, compensation and provide the Executive and the Executive's eligible
dependents with benefits as follows:
(a) Executive's Nonreelection to Office; Termination
By Company Without Cause; Termination By Executive for Good
Reason. In the event that the Executive's employment hereunder
is terminated: (i) because the Executive does not continue in
office pursuant to Section 5(a) hereof; or (ii) by the Company
without Cause pursuant to Section 5(b) hereof; or (iii) by the
Executive for Good Reason pursuant to Section 5(e) hereof,
then in any such event the Company shall pay or provide, as
applicable, the following compensation and benefits to the
Executive:
(1) Three (3) times the following: (A)
the highest annual base salary paid
or payable to the Executive in the
then current year or any one (1) of
the three (3) calendar years
preceding Executive's termination of
employment hereunder; plus (B) an
amount equal to the sum of the
Executive's highest award(s) under
the Company's Annual Incentive Plans
for any one (1) of the three (3)
calendar years preceding the date of
the termination of Executive's
employment hereunder (such total is
referred to herein as "Covered
Compensation"). Such payment to the
Executive by the Company shall be
paid in a lump sum unless the
Executive elects, and so notifies
the Company in writing prior to the
termination of the Executive's
employment hereunder, to receive
such payment in three (3) equal
annual installments. The lump sum or
first payment, as the case may be,
shall be paid within sixty (60) days
after the date of the termination of
the Executive's employment
hereunder;
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(2) Any awards or other compensation to
which the Executive is entitled
under any of the Company's
compensation plans or Erie Benefit
Plans to the extent not covered in
subsection (1) hereof;
(3) Any award to which the Executive
would be entitled under the
Company's Long-Term Incentive Plan
as in effect on December 16, 1997,
calculated under the provision of
that Plan as if the Executive ceases
to be an Employee of the Company by
reason of death, disability or
normal retirement;
(4) Continuing coverage for all purposes
(including eligibility, coverage,
vesting and benefit accruals, as
applicable), for a period of three
(3) years after the date of the
termination of Executive's
employment hereunder, to the extent
not prohibited by law, for the
Executive and the Executive's
eligible dependents under all of the
Erie Benefit Plans in effect and
applicable to Executive and the
Executive's eligible dependents as
of the date of termination. In the
event that the Executive and/or the
Executive's eligible dependents,
because of the Executive's
terminated status, cannot be covered
or fully covered under any or all of
the Erie Benefit Plans, the Company
shall continue to provide the
Executive and/or the Executive's
eligible dependents with the same
level of such coverage in effect
prior to termination, payable from
the general assets of the Company if
necessary. Notwithstanding the
foregoing, the Executive may elect
(by giving written notice to the
Company prior to the termination of
employment hereunder), on a benefit
by benefit basis, to receive in lieu
of continuing coverage, cash in an
amount equal to the present value
(using a 6.5% discount rate over
three years) of the projected cost
to the Company of providing such
benefit for such three year period.
The aggregate amount of cash to
which the Executive is entitled
pursuant to the preceding sentence
shall be payable by the Company to
the Executive within sixty (60) days
after the date of the termination of
Executive's employment hereunder;
and
(5) For a period of three (3) years
after the date of the termination of
Executive's employment hereunder,
such perquisites as are made
available to the Executive as of the
date of the termination of
Executive's employment hereunder.
The Executive's subsequent death, disability or attainment of age 65 or any
other age shall in no way affect or limit the Company's obligations under this
Section 6(a).
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(b) Termination By the Company for Cause. In the
event that the Company shall terminate the Executive's
employment hereunder for Cause pursuant to Section 5(d), this
Agreement shall forthwith terminate and the obligations of the
parties hereto shall be as set forth in Section 8 hereof.
(c) Termination by the Executive Without Good Reason.
In the event that the Executive shall terminate employment
hereunder other than for Good Reason pursuant to Section 5(c),
this Agreement shall forthwith terminate and the obligations
of the parties hereto shall be as set forth in Section 8
hereof.
(d) Disability. In the event that the Company elects
to terminate the Executive's employment hereunder pursuant to
Section 5(f), the Executive shall continue to receive from the
date of such termination through the expiration date of this
Agreement, sixty percent (60%) of the then current annual base
salary to which the Executive was entitled pursuant to Section
3(a) hereof immediately preceding such termination, in
accordance with the payroll practices of the Company for
senior executive officers, reduced, however, by the amount of
any proceeds from Social Security and disability insurance
policies provided by and at the expense of the Company.
(e) Death. In the event of the death of the Executive
during the term of this Agreement, the then current annual
base salary to which the Executive was entitled pursuant to
Section 3(a) hereof immediately preceding the Executive's
death shall be paid, in twelve (12) equal monthly installments
following the date of death, to the last beneficiary
designated by the Executive under the Company's group life
insurance policy maintained by the Company or such other
written designation expressly provided to the Company for the
purposes hereof or, failing either such designation, to the
Executive's estate.
(f) Mutual Written Consent. In the event that the
Executive and the Company shall terminate the Executive's
employment by mutual written agreement, the Company shall pay
such compensation and provide such benefits, if any, as the
parties may mutually agree upon in writing.
The Executive shall not be required to mitigate the amount of any payment
provided for in this Section 6 by seeking employment or otherwise, nor shall any
amounts received from employment or otherwise by the Executive offset in any
manner the obligations of the Company hereunder except as specifically provided
in Section 6(d) hereof.
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7. Certain Additional Payments by the Company. Notwithstanding
anything in this Agreement to the contrary, in the event it is determined that
any payment or distribution by the Company to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (a "Payment"), is subject to the excise
tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), or any successor provision, on excess parachute payments, as that
term is used and defined in Sections 4999 and 280G of the Code, then the
Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount equal to the then current rate of tax under said Section
4999 multiplied by the total of the amounts so paid or payable, including the
Gross-Up Payment, which are deemed to be a part of an excess parachute payment.
8. Effect of Expiration of Agreement or Termination of
Executive's Employment. Upon the expiration of this Agreement by its terms or
the termination of the Executive's employment hereunder, neither the Company nor
the Executive shall have any remaining duties or obligations hereunder except
that:
(a) The Company shall:
(1) Pay the Executive's accrued salary
and any other accrued benefits under
Sections 3(a), (b), and (c) hereof;
(2) Reimburse the Executive for expenses
already incurred in accordance with
Section 3(e) hereof;
(3) Pay or otherwise provide for any
benefits, payments or continuation
or conversion rights in accordance
with the provisions of any Erie
Benefit Plan of which the Executive
or any of the Executive's dependents
is or was a participant or as
otherwise required by law;
(4) Pay the Executive and the
Executive's beneficiaries any
compensation and/or provide the
Executive or the Executive's
eligible dependents any benefits, as
the case may be, due pursuant to
Section 6 or Section 7 hereof; and
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(5) Unless the employment of the
Executive is terminated by the
Company for Cause, pay the Executive
or the Executive's beneficiaries the
full amount or amounts accrued under
the Supplemental Executive
Retirement Plan of the Company (the
"SERP") as in effect on the
Effective Date (or as such benefits
may be enhanced by subsequent
amendments or supplements to such
SERP), as though, solely for
purposes of determining any
otherwise applicable actuarial
reduction factors, the event of the
termination of Executive's
employment hereunder or expiration
of this Agreement occurred on the
Executive's Normal Retirement Date
as defined in such SERP. Accrued
benefits under the SERP shall be
fully vested and nonforfeitable upon
such termination (including
termination on account of the
Executive's death) or expiration.
Any reductions in SERP benefits that
would otherwise apply pursuant to
Section 10.1 of the Company's
Retirement Plan for Employees (or
pursuant to any successor provision
of such plan or any successor plan)
relating to Section 415(b) of the
Code shall not be applicable for
purposes hereof. No further approval
by the Board of Directors or the
Committee with respect to payments
under the SERP in accordance with
the preceding sentences shall be
required. Unreduced payments may
begin at age 55, but in no event
would payments be made under this
Section 8(a)(5) before the Executive
reaches age fifty-five (55). The
Company shall purchase for the
Executive, naming the Executive
and/or the Executive's designee the
owner, a paid up annuity, from an
insurer reasonably acceptable to the
Executive but in any event having an
A.M. Best rating of A+ or better (or
other comparable rating), that will
pay to the Executive an amount equal
to the benefit to which the
Executive would otherwise be
entitled under the SERP and payable
at the times such SERP benefit would
be payable in accordance with the
provisions hereof. Upon the purchase
and delivery to the Executive of
such an annuity, the Executive shall
release the Company from any further
obligation under the SERP. The
Company further agrees to pay the
Executive immediately upon
termination, a cash payment (the
"Tax Gross-up") equal to the sum of
the following: (i) all taxes
(federal, state, local, and payroll
taxes) incurred and due and owing by
the Executive, arising from the cost
of the annuity purchased by the
Company to meet the requirements of
this Section 8(a)(5), and (ii) any
such taxes incurred and due and
owing with respect to the
. amount paid in (i)
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(6) Continue to remain bound by the
terms of Section 12 hereof.
(b) The Executive shall remain bound by the terms of
Sections 9 and 13 hereof for a period of thirty six (36)
months after the expiration of the Agreement by its terms;
provided, that the Executive shall not be bound by the terms
of Section 9(b) after the termination of employment (other
than a termination of the Executive by the Company for Cause)
if such termination occurs after the expiration of this
Agreement by its terms.
9. Covenants as to Confidential Information and Competitive
Conduct. The Executive hereby acknowledges and agrees as follows: (i) this
Section 9 is necessary for the protection of the legitimate business interests
of the Company, (ii) the restrictions contained in this Section 9 with regard to
geographical scope, length of term and types of restricted activities are
reasonable; (iii) the Executive has received adequate and valuable new
consideration for entering into this Agreement, and (iv) the Executive's
expertise and capabilities are such that this obligation hereunder and the
enforcement hereof by injunction or otherwise will not adversely affect the
Executive's ability to earn a livelihood.
(a) Confidentiality of Information and Nondisclosure.
The Executive acknowledges and agrees that the Executive's
employment by the Company under this Agreement necessarily
involves knowledge of and access to confidential and
proprietary information pertaining to the business of the
Company and its subsidiaries. Accordingly, the Executive
agrees that at all times during the term of this Agreement and
at any time thereafter, the Executive will not, directly or
indirectly, without the express written approval of the
Company, unless directed by applicable legal authority
(including any court of competent jurisdiction, governmental
agency having supervisory authority over the business of the
Company or the subsidiaries, or any legislative or
administrative body having supervisory authority over the
business of the Company or its subsidiaries) having
jurisdiction over the Executive, disclose to or use, or
knowingly permit to be so disclosed or used, for the benefit
of himself, any person, corporation or other entity other than
the Company, (i) any information concerning any financial
matters, customer relationships, competitive status, supplier
matters, internal organizational matters, current or future
plans, or other business affairs of or relating to the Company
or its subsidiaries, (ii) any management, operational, trade,
technical or other secrets or any other proprietary
information or other data of the Company or its subsidiaries,
or (iii) any other information related to the Company or its
subsidiaries or which the Executive should reasonably believe
will be damaging to the Company or its subsidiaries which has
not been published and is not generally known outside of the
Company. The Executive acknowledges that all of the foregoing
constitutes confidential and proprietary information, which is
the exclusive property of the Company.
107
<PAGE>
(b) Restrictive Covenant. During the term of, and for
a period of one (1) year (the "Restrictive Period") after the
termination of the Executive's employment hereunder for any
reason (other than a termination of the Executive hereunder
pursuant to Section 5(a), 5(b) or 5(e), hereof), the Executive
shall not render, directly, or indirectly, services to any
person, firm, corporation, association or other entity which
conducts the same or similar business as the Company or its
subsidiaries at the date of the Executive's termination of
employment hereunder within the states in which the Company or
any of its subsidiaries is then licensed and doing business at
the date of the Executive's termination of employment
hereunder without the prior written consent of the Board of
Directors, which may be withheld in its discretion. In the
event the Executive violates any of the provisions contained
in this Section 9(b) hereof, the Restrictive Period shall be
increased by the period of time from the commencement by the
Executive of any violation until such violation has been cured
to the satisfaction of the Company. The Executive further
agrees that at no time during the Restrictive Period will the
Executive attempt to directly or indirectly solicit or hire
employees of Company or its subsidiaries or induce any of them
to terminate their employment with the Company or any of the
subsidiaries. Notwithstanding the foregoing, the performance
by the Executive of rights and duties under an agency
agreement with the Company shall not constitute a breach of
this Section 9(b).
(c) Company Remedies. The Executive acknowledges and
agrees that any breach of this Section 9 will result in
immediate and irreparable harm to the Company, and that the
Company cannot be reasonably or adequately compensated by
damages in an action at law. In the event of a breach by the
Executive of the provisions of this Section 9, the Company
shall be entitled, to the extent permitted by law, immediately
to cease to pay or provide the Executive or the Executive's
dependents any compensation or benefit being, or to be, paid
or provided to the Executive pursuant to Section 3, Section 6
or Section 8 of this Agreement, and also to obtain immediate
injunctive relief restraining the Executive from conduct in
breach of the covenants contained in this Section 9. Nothing
herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for such breach,
including the recovery of damages from the Executive.
108
<PAGE>
10. Resolution of Differences Over Breaches of Agreement.
Except as otherwise provided herein, in the event of any controversy, dispute or
claim arising out of, or relating to, this Agreement, or the breach thereof, or
arising out of any other matter relating to the Executive's employment with the
Company, the parties may seek recourse only for temporary or preliminary
injunctive relief to the courts having jurisdiction thereof and if any relief
other than injunctive relief is sought, the Company and the Executive agree that
such underlying controversy, dispute or claim shall be settled by arbitration
conducted in Erie, Pennsylvania in accordance with this Section 10 and the
Commercial Arbitration Rules of the American Arbitration Association ("AAA").
The matter shall be heard and decided, and awards rendered by a panel of three
(3) arbitrators (the "Arbitration Panel"). The Company and the Executive shall
each select one arbitrator from the AAA National Panel of Commercial Arbitrators
(the "Commercial Panel") and AAA shall select a third arbitrator from the
Commercial Panel. The award rendered by the Arbitration Panel shall be final and
binding as between the parties hereto and their heirs, executors,
administrators, successors and assigns, and judgment on the award may be entered
by any court having jurisdiction thereof. Except as provided in Section 11
hereof, each party shall bear sole responsibility for all expenses and costs
incurred by such party in connection with the resolution of any controversy,
dispute or claim in accordance with this Section 10.
11. Payment of Executive's Legal Fees. If the Executive is
required to bring any action to enforce rights or to collect moneys due under
this Agreement, the Company shall pay to the Executive the fees and expenses
incurred by the Executive in bringing and pursuing such action if the Executive
is successful, in whole or in part, on the merits or otherwise (including by way
of a settlement involving a payment of money by the Company to the Executive),
in such action. The Company shall pay such fees and expenses in advance of the
final disposition of such action upon receipt of an undertaking from the
Executive to repay to the Company such advances if the Executive is not
ultimately successful, in whole or in part, on the merits or otherwise, in such
action.
12. Severance Pay upon Termination of Employment after
Expiration of the Agreement. Notwithstanding the expiration of this Agreement by
its terms and notwithstanding the terms of any corporate severance policy then
in effect and applicable to the Executive, if the employment of the Executive is
terminated without Cause by the Company, by the Executive for Good Reason or
upon the expiration of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof (for reasons other than
for Cause), in any case, within thirty-six (36) months after the expiration of
this Agreement by its terms, then (i) the Company shall pay to the Executive
severance compensation in an amount equal to two (2) times the Executive's
Covered Compensation as determined on the date of such termination, and (ii) the
Executive and the Executive's eligible dependents shall be entitled to
continuing coverage under the Company's then-existing group health plans
(including medical, dental, prescription drug and vision plans, if any) for a
period of two (2) years after the date of the termination of the Executive's
employment, to the extent not prohibited by law and subject to the terms of such
plans including provisions as to deductibles and copayments and changes in
levels of coverage that are generally applicable to employees. The payment to
the Executive by the Company pursuant to subsection (i) of the preceding
sentence shall be paid in a lump sum unless the Executive elects, and so
notifies the Company in writing prior to the Executive's termination of
employment, to receive such payment in two (2) equal annual installments. The
lump sum or first payment, as the case may be, shall be paid within thirty (30)
days after the date of termination of the Executive's employment.
109
<PAGE>
13. Release. The Executive hereby acknowledges and agrees that
neither the Company nor any of its representatives or agents will be obligated
to pay any compensation or benefit which the Executive has a right to be paid or
provided to the Executive or the Executive's dependents pursuant to Section 6,
Section 8 or Section 12 of this Agreement, unless the Executive, if requested by
the Company in its sole discretion, executes a release in a form reasonably
acceptable to the Company, which releases any and all claims the Executive has
or may have against the Company or its subsidiaries, agents, officers,
directors, successors or assigns.
14. Waiver. The waiver by a party hereto of any breach by the
other party hereto of any provision of this Agreement shall not operate or be
construed as a waiver of any other or subsequent breach by a party hereto.
15. Assignment. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the Company, and the Company
shall be obligated to require any successor to expressly acknowledge and assume
its obligations hereunder. This Agreement shall inure to the extent provided
hereunder to the benefit of and be enforceable by the Executive or the
Executive's legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. The Executive may not delegate any of the
Executive's duties, responsibilities, obligations or positions hereunder to any
person and any such purported delegation shall be void and of no force and
effect.
16. Notices. Any notices required or permitted to be given
under this Agreement shall be sufficient if in writing, and if personally
delivered or when sent by first class certified or registered mail, postage
prepaid, return receipt requested--in the case of the Executive, to his
residence address as set forth below, and in the case of the Company, to the
address of its principal place of business as set forth below, to the attention
of the Chairman of the Board, or in case the Executive is the Chairman of the
Board, to the Chairman of the Compensation Committee of the Board -- or to such
other person or at such other address with respect to each party as such party
shall notify the other in writing.
17. Construction of Agreement.
(a) Governing Law. This Agreement shall be
governed by and construed under the laws of the Commonwealth
of Pennsylvania.
(b) Severability. In the event that any one or more
of the provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, the validity, legality or
enforceability of the remaining provisions shall not in any
way be affected or impaired thereby.
(c) Headings. The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience of
reference only and shall not constitute a part of this
Agreement.
110
<PAGE>
18. Entire Agreement. This Agreement contains the entire
agreement of the parties concerning the Executive's employment and all promises,
representations, understandings, arrangements and prior agreements on such
subject are merged herein and superseded hereby, including the Employment
Agreement effective November 20, 1995 which is expressly superseded hereby. The
provisions of this Agreement may not be amended, modified, repealed, waived,
extended or discharged except by an agreement in writing signed by the party
against whom enforcement of any amendment, modification, repeal, waiver,
extension or discharge is sought. No person acting other than pursuant to a
resolution of the Board of Directors or the Committee shall have authority on
behalf of the Company to agree to amend, modify, repeal, waive, extend or
discharge any provision of this Agreement or anything in reference thereto or to
exercise any of the Company's rights to terminate or to fail to extend this
Agreement.
111
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
officers thereunto duly authorized, and the Executive has hereunto set his hand
all as of the day and year first above written.
ATTEST: ERIE INDEMNITY COMPANY
/s J. R. Van Gorder /s/ F. William Hirt
____________________________ By:__________________________________
J. R. Van Gorder F. William Hirt
Secretary Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ John J. Brinling, Jr.
____________________________ _____________________________________(SEAL)
John J. Brinling, Jr.
5691 Culpepper Drive
Erie, PA 16506
112
INCORPORATED BY REFERENCE, PAGE 14 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Policy Revenue $ 35,193,472 $ 31,116,162 $ 28,073,997 $ 24,893,483 $ 22,156,822
Investment & Other Income 50,642,561 46,617,179 41,519,626 36,100,738 31,363,811
Realized Gains on Investments 5,201,365 4,986,897 7,483,798 4,411,334 10,433,318
Total Revenue $ 91,037,398 $ 82,720,238 $ 77,077,421 $ 65,405,555 $ 63,953,951
Benefits & Expenses 60,834,143 56,077,551 50,673,549 38,926,049 36,077,676
Income from Operations 30,203,255 26,642,687 26,403,872 26,479,506 27,876,275
Federal Income Tax (Benefit):
Current 9,004,943 5,378,656 7,607,573 8,179,901 8,275,631
Deferred 1,637,944 3,597,781 914,707 1,469,927 1,496,402
Total Federal Income Tax 10,642,887 8,976,437 8,522,280 9,649,828 9,772,033
Cumulative effect on years prior to
1993 of changing the method of
accounting for income taxes 0 0 0 0 (567,610)
Net Income $ 19,560,368 $ 17,666,250 $ 17,881,592 $ 16,829,678 $ 17,536,632
Net Income per share $ 2.07 $ 1.87 $ 1.89 $ 1.78 $ 1.86
Cash dividends declared
per share $ 0.54 $ 0.50 $ 0.453 $ 0.40 $ 0.367
Total Assets $ 832,533,863 $ 740,650,660 $ 673,794,161 $ 528,632,132 $ 455,135,563
Shareholders Equity $ 160,379,201 $ 132,630,489 $ 128,905,402 $ 90,855,581 $ 89,744,886
Book Value per share $ 16.97 $ 14.03 $ 13.64 $ 9.61 $ 9.50
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 give retroactive effect for the three-for-one common stock split effective May 2, 1996.
</FN>
</TABLE>
113
<PAGE>
INCORPORATED BY REFERENCE, PAGE 15 OF THE COMPANY'S 1997 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 25-32, as 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 23 herein. 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 United States and the District of Columbia and is subject to supervision
and regulations of the states in which it writes business. A large portion of
the Company's business is written in Pennsylvania.
Net income increased to $19,560,368, or $2.07 per share, in 1997 from
$17,666,250, or $1.87 per share in 1996, an increase of 10.7 percent. Operating
results remained strong as policy revenue increased by 13.1 percent in 1997 and
life insurance in force increased by more than $1.1 billion during 1997. Total
life insurance in force at December 31, 1997 increased to more than $11.9
billion.
RESULTS OF OPERATIONS
REVENUES
Policy Revenue
Life premiums increased 13.0 percent to $32,826,827 in 1997 from $29,038,797 in
1996 and $25,764,413 in 1995. The growth in total life premiums is a function of
growth in new life insurance premiums and the renewal of policies written in
prior years. New life insurance coverage placed in force during 1997 was
$2,224,323,000 compared to $2,129,639,000 in 1996 and $1,877,983,000 in 1995.
This represents an increase of 4.4 percent in 1997 and an increase of 13.4
percent in 1996 compared to 1995. First-year life insurance premiums were
$6,860,504 in 1997, $6,505,484 in 1996 and $5,624,117 in 1995, an increase of
5.5 percent in 1997 and 15.7 percent in 1996. Renewal premiums increased 15.2
percent in 1997 to $25,966,323. Group policy revenue increased $289,280 or 13.9
percent, to $2,366,645 in 1997. In 1996, group policy revenue decreased $232,219
to $2,077,365 from $2,309,584 in 1995. The 1995 group policy revenue amount
included $449,000 in premium tax loads added to the premium charged on
structured settlements. This charge was no longer assessed by the Company
beginning in 1996 as the Pennsylvania premium tax on non-qualified annuities was
repealed in 1996.
114
<PAGE>
INCORPORATED BY REFERENCE, PAGES 15 AND 16 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
First-year and single universal life and annuity deposits were $50,675,240 in
1997, $50,651,063 in 1996 and $57,606,715 in 1995. Total annuity and universal
life deposits were $69,040,378, $67,716,398 and $74,541,897 in 1997, 1996 and
1995, respectively. Generally, lower market interest rates and a flattening
interest yield curve in 1997 and 1996 made fixed annuities less attractive
compared to other savings alternatives. Annuity deposits recorded in connection
with annuity contracts purchased by the Erie Insurance Group Retirement Plan
for retired vested Employees receiving benefits were $1,992,060, $4,894,042 and
$6,024,125 for the years ended December 31, 1997, 1996 and 1995, 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 $17,780,582, $13,504,953 and
$22,018,313 in 1997, 1996 and 1995, respectively.
Investment Income, Net of Expenses
Net investment income in 1997 was $49,914,292 compared to $45,948,969 in 1996
and $40,962,812 in 1995, an increase of 8.6 percent in 1997 and 12.2 percent in
1996. The ratio of net investment income to mean invested assets increased
slightly during 1997 to 7.5 percent, compared to 7.4 percent in 1996 and 7.8
percent in 1995. 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 Investments
During 1997, 1996 and 1995, the Company generated realized gains of $5,201,365,
$4,986,897 and $7,483,798, respectively, from the sale of equity securities and
fixed maturity investments. Net gains from the sale of equity securities were
$4,289,507 in 1997, $4,534,697 in 1996 and $5,855,110 in 1995. Net gains from
the sale or maturity of fixed maturities totaled $911,858, $452,200 and
$1,628,688 in 1997, 1996 and 1995, respectively.
BENEFITS AND EXPENSES
Death Benefits
Net death benefits on life insurance policies increased 14.7 percent in 1997 to
$11,117,175, compared to $9,688,242 in 1996 and $7,438,758 in 1995. The increase
in death benefits is greater than the 11.5 percent increase in the Company's
life insurance in force in 1997. However, mortality experience needs to be
analyzed over the long-term, rather than short periods where unusual
fluctuations may influence the results. From 1992 through 1997, net death
benefits increased by about 133 percent, consistent with the 130 percent growth
in the Company's life insurance in force, over the same period. Management
believes that its underwriting philosophy and practices are sound.
115
<PAGE>
INCORPORATED BY REFERENCE, PAGE 16 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
Interest on Annuity and Universal Life Deposits
Total interest credited on deposits increased 11.6 percent to $31,585,629 in
1997 from $28,299,828 in 1996. This increase in interest expense was primarily
due to new annuity and universal life deposits of $69,040,378 received from
Policyholders during 1997. At December 31, 1997, annuity deposits accruing
interest were $489 million, an increase of 8.6 percent from December 31, 1996,
and universal life deposits accruing interest were $69 million, an increase of
21.2 percent from December 31, 1996. The interest rate credited on universal
life deposits ranges from 6.25 percent to 7.00 percent. The rate credited on
annuity deposits ranges from 5.00 percent to 6.25 percent.
Surrender and Other Benefits
Surrender and other benefits include life surrender benefits, matured
endowments, disability benefits, interest on death benefits and changes in the
Company's share of the Pennsylvania Employees Group Life Insurance (PEGLI) pool.
PEGLI is a voluntary reinsurance pool which insures Commonwealth of Pennsylvania
employees upon their retirement. The plan is administered by the CIGNA group,
which provides information to determine each company's share of pool assets and
liabilities on a yearly basis. During 1997, the change in the Company's share of
the PEGLI pool caused a decrease in benefits of $904,897 compared to a decrease
of $66,559 in 1996. The change in the Company's share of the PEGLI pool cannot
be predicted prior to receiving the year end report. Also during 1997, life
surrender benefits increased $90,188 or 12.3 percent, to $824,086. These
fluctuations resulted in a decrease in surrender and other benefits of $744,156,
or 71.0 percent, to $303,318 in 1997.
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 1997 increase in future life policy
benefits was $4,538,298, compared to $4,549,404 in 1996 and $4,619,996 in 1995.
In 1997, the future policy benefit additions due to increased life insurance in
force were offset by increased credits for reinsurance and increases in the
policy lapse rate. This resulted in a future life policy benefit that decreased
slightly from the amount reported in 1996.
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 policy
acquisition costs (DAC) increased 17.6 percent to $3,694,966 in 1997 from
$3,141,350 in 1996. The growth in amortization expense was affected by changes
in premium revenue patterns and by an increase in the policy lapse rate.
Commissions
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 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.
116
<PAGE>
INCORPORATED BY REFERENCE, PAGE 17 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
Total ordinary commissions, which include first year and renewal commissions and
production bonuses, net of applicable deferrals increased $373,466, or 12.6
percent, in 1997. This increase is in line with the 13.1 percent increase in
policy revenues in 1997 when compared to 1996.
Company contests include trips awarded to Agents for reaching certain levels of
production. In 1996, the Company participated in the Erie Insurance Group travel
incentive program "California Dreamin'." The estimated contest costs to the
Company net of deferrals were charged to commission expense in 1996.
Commission reimbursements from ceded reinsurance contracts have been deducted
from the commission expense paid to agents. These reimbursements totaled
$1,462,295 in 1997, $1,367,873 in 1996 and $1,272,530 in 1995.
General Expenses
General expenses amounted to $6,358,610 in 1997 compared to $5,839,795 in 1996
and $5,802,088 in 1995. 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. Operating expenses of the
Company are paid by Erie Indemnity Company and reimbursed monthly by the
Company. The portion of Erie Insurance Group common overhead expenses
attributable to the Company are also reimbursed monthly. These expenses comprise
the majority of the Company's general expenses.
Taxes, Licenses and Fees
Taxes, licenses and fees decreased $199,013 to $1,470,584 in 1997. The decrease
was due to decreased assessments made by the state life insurance guaranty
associations. Statutory assessments totaled $234,000 in 1997, $707,000 in 1996
and $1,251,000 in 1995. The assessments 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 $200,000 of
the 1997 assessments, $2,000 of the 1996 assessments and $340,000 of the 1995
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 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. On June 30, 1995, Pennsylvania Act
21-1995 was signed into law which repealed the tax on non-qualified annuities
effective January 1, 1996.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL CONSIDERATIONS & ANALYSIS
Liquidity is a measure of the Company's ability to secure enough cash to meet
its contractual obligations 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,
117
<PAGE>
INCORPORATED BY REFERENCE, PAGES 17 AND 18 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
thereby increasing future investment returns. Net cash provided by operating
activities in 1997 was $14,963,909, compared to $14,480,503 in 1996, and
$8,297,378 in 1995. The Company's liquidity position remains strong as invested
assets increased by 7.5 percent during 1997 to $703 million at December 31,
1997. The majority of invested assets are liquid marketable securities.
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 revenue.
Annuity and universal life deposits received were $69,040,378 in 1997,
$67,716,398 in 1996 and $74,541,897 in 1995.
The Company's commitments for expenditures as of December 31, 1997 are primarily
for policy death benefits, policy surrenders and withdrawals, general operating
expenses, 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 and its liquid assets and
marketable securities, will enable the Company to meet foreseeable cash
requirements. As an added measure of liquidity, the Company has in place a $10
million line of credit with a bank. There were no borrowings under this line in
1997, 1996 or 1995.
The Company is in the process of replacing its life and annuity policy
administration systems with a new state-of-the art system. Expenditures for
computer hardware, software, technical and user training, project administration
and consulting will be incurred in connection with this project. The total
future cost of this project as of December 31, 1997 will be in excess of $2
million.
During 1994 Pennsylvania adopted the NAIC Model Actuarial Opinion and Memorandum
Regulation. As a result, the Company's actuarial opinion for each year includes
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
nine different interest rate scenarios. The projected annual gains and market
value surplus results were positive under all nine scenarios.
REGULATORY CONSIDERATIONS
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
118
<PAGE>
INCORPORATED BY REFERENCE, PAGES 18 AND 19 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
The Company had regulatory total adjusted capital of $91 million and a ratio of
total adjusted capital to authorized control level risk-based capital of 6:1 at
December 31, 1997, levels which exceed, by a substantial margin, the minimum
risk-based capital requirements.
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 for $15 million. Interest on
this note is charged at an annual rate of 6.45 percent.
Notwithstanding any other provision in this note, no payment of all or any
portion of the principal amount of this note may be demanded by the Erie
Indemnity Company prior to December 31, 2005, provided that the Company may pay
upon ten (10) days' prior written notice to the Erie Indemnity Company, the
interest on, all or any portion of the principal of, this note at any time
without premium or penalty, subject to the prior consent of the Insurance
Commissioner of the Commonwealth of Pennsylvania (the "Commissioner").
Commencing on December 31, 2005, the outstanding principal balance of this note
(including all accrued interest) shall be repayable on demand by the Erie
Indemnity Company or under such terms as the Erie Indemnity Company 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.
Dividend Restrictions
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
$5,103,008 in 1997.
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 December 31, 1997,
there was no material difference between the carrying value and fair value of
the Company's investment-type policies. These life insurance and annuity
reserves are supported primarily by the Company's long-term, fixed income
investments as the underlying policy reserves are generally also of a long-term
nature.
119
<PAGE>
INCORPORATED BY REFERENCE, PAGE 19 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
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 capital appreciation and current income.
At December 31, 1997, the Company's investment portfolio consisting of
marketable short-term investments, investment-grade bonds, common stocks and
preferred stocks totaled $718 million or 86.3 percent of total assets. These
resources provide the liquidity the Company requires to meet known and
unforeseen demands on its funds. At December 31, 1997, 79.4 percent of total
invested assets were invested in fixed maturities. Preferred stocks represent
13.2 percent or $93 million and common stocks represent 4.0 percent or $28
million of total invested assets at December 31, 1997, while real estate and
mortgage loans make up only 1.7 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
consisted of the following:
Invested Assets
(In Thousands)
December 31,
1997 1996
Fixed Maturities
Available-for-Sale $558,177 $515,530
Equity Securities
Preferred Stock 92,502 110,566
Common Stock 28,340 5,986
Real Estate 1,624 1,710
Mortgage Loans 10,050 8,956
Policy Loans 5,100 4,382
Other Invested Assets 7,240 6,787
----------- ----------
Total invested assets $703,033 $653,917
Fixed Maturities
The Company's fixed maturities consist principally of investments in bonds. 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.
120
<PAGE>
INCORPORATED BY REFERENCE, PAGE 20 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
Diversification of Fixed Maturities
at December 31, 1997
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasuries $ 4,268 $ 543 $ 0 $ 4,811
U.S. Government
agency 27,519 728 302 27,945
States and political
subdivisions 2,058 155 0 2,213
Special revenue 14,210 1,106 0 15,316
Public utilities 80,491 3,097 842 82,746
U. S. banks, trusts and
insurance companies 99,820 6,051 287 105,584
U. S. industrial and
miscellaneous 285,565 12,661 636 297,590
Foreign governments-
agency 2,988 0 641 2,347
Foreign banks, trusts
and insurance
companies 5,000 99 0 5,099
Foreign industrial
and miscellaneous 13,874 652 0 14,526
--------- --------- --------- ---------
Total Fixed Maturities $ 535,793 $ 25,092 $ 2,708 $ 558,177
========= ========= ========= =========
</TABLE>
Fixed maturity investments consist of high-quality, marketable bonds, 99.2
percent or $554 million of which are rated at investment-grade levels (Baa/BBB
or better). Included in this investment-grade category are $351 million of bonds
characterized as of the "highest" quality or "Class 1" securities as defined by
the NAIC. Below investment-grade category consist of $4.4 million of "medium"
quality bonds. 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.
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 respond 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, 1997 and 1996, unrealized
gains on fixed maturities available-for-sale amounted to $14,550,150 and
$3,836,632, respectively, net of deferred taxes.
121
<PAGE>
INCORPORATED BY REFERENCE, PAGES 20 AND 21 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
Equity Securities
Equity securities consist of common and nonredeemable preferred stocks which are
carried on the statements of financial position at market value. At December 31,
1997, common and nonredeemable preferred stock held by the Company had net
unrealized gains of $9,054,999. 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, 95.2 percent or $88.1 million of which are of
the "highest" or "high" quality, as defined by the NAIC. The remaining $4.4
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.
Diversification of Equity Securities
at December 31, 1997
<TABLE>
<CAPTION>
Unrealized Unrealized Carrying
Actual Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
Common stock:
U. S. Banks, trusts
and insurance
companies $ 731 $ 209 $ 0 $ 940
U. S. Industrial and
miscellaneous 27,648 3,116 3,364 27,400
Preferred stock:
Public utilities 4,000 50 0 4,050
U. S. Banks, trusts
and insurance
companies 55,302 7,003 122 62,183
U. S. Industrial and
miscellaneous 12,441 1,815 15 14,241
Foreign banks,
trusts and insurance
companies 7,765 365 162 7,968
Foreign industrial
and miscellaneous 3,900 160 0 4,060
--------- -------- -------- ---------
Total Equity Securities $ 111,787 $ 12,718 $ 3,663 $ 120,842
========= ======== ======== =========
</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, 1997, the Company did not own any derivative securities.
122
<PAGE>
INCORPORATED BY REFERENCE, PAGES 21 AND 22 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
MANAGEMENT CHANGES
Philip A. Garcia was appointed Executive Vice President and Chief Financial
Officer of the Erie Insurance Group on October 2, 1997. Mr. Garcia replaced
Thomas M. Sider, who retired June 30, 1997 after 26 years of service to the Erie
Insurance Group. Mr. Garcia began his career with the Company in 1981 and has
held several positions in the life and property/casualty accounting operations
since that time. Immediately prior to his appointment, Mr. Garcia had served as
senior vice president and controller of the Company for the past four years.
The Company's former internal audit manager, Timothy G. NeCastro, was appointed
Senior Vice President and Controller of the Erie Insurance Group on November 10,
1997.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
INVESTMENT OPERATIONS
The Company's portfolio of fixed maturities and equity securities is subject to
the ongoing risks associated with fluctuations in interest rates and stock
market conditions in general. Current investment results may not be indicative
of performance in future periods.
REGULATORY
Federal action begun in 1997 could culminate in significant changes in the way
insurance companies, banks and securities firms are regulated in the future. The
elimination of some regulatory barriers to banks entering the insurance market
and the interjection of Federal governmental regulation into the traditionally
state-regulated insurance industry could dramatically change the ground rules
under which insurance products are marketed. Further action and advancing
technology will likely influence the way the property and casualty and life
insurance industries distribute, price and service their products.
YEAR 2000
Financial services companies like Erie Family Life are largely dependent upon
information technology in conducting their day-to-day operations. Like many
companies, Erie Family Life is continually faced with substantial information
technology challenges. Among these challenges is the so-called "Year 2000
Issue", the inability of many computer systems to recognize the year 2000 and
subsequent years.
The Company is in the process of addressing its technology challenges, including
the Year 2000 Issue, by replacing virtually all of its current administration
systems (some of which are not Year 2000 compliant) with the Cyberlife policy
administration system. Cyberlife is a state-of-the-art, relational database,
client/server system that will provide support for all of the Company's life and
annuity products. The client/server architecture will enhance significantly the
Company's ability to provide prompt and efficient customer service while
streamlining a wide range of administrative processes. The system supports a
full range of life and annuity products, which will improve the Company's
ability to develop and introduce new products.
123
<PAGE>
INCORPORATED BY REFERENCE, PAGE 22 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
The Company's plans are to have Cyberlife fully installed and operational by the
end of 1998 and all policy data converted to Cyberlife in 1999.
In addition to those systems operated by the Company, systems resident with our
major service providers are of a concern to maintaining ongoing and
uninterrupted service. The Company's plans address these external concerns by
assessing the readiness of outside parties and considering alternatives in
situations in which any more than remote exposure might exist. During 1998, the
Company also is continuing its assessment of the ability of external service
providers to provide mission critical service to the Company.
MARKET FOR THE REGISTRANT'S
COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Currently there is no market on which the Registrant's stock is traded. The
Company had 1,145 shareholders of common stock on December 31, 1997.
The Company's Board of Directors approved a three-for-one (3 for 1) split of its
common stock on May 2, 1996.
Date Dividends Declared Dividends per Share Declared
February 29, 1996 .125*
May 1, 1996 .125*
June 17, 1996 .125
September 17, 1996 .125
March 5, 1997 .135
April 29, 1997 .135
June 17, 1997 .135
September 15, 1997 .135
*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", "Investments", "Factors Which May Affect Future Results", and the
"Year 2000" 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 market
fluctuations and technological difficulties and advancements.
124
<PAGE>
INCORPORATED BY REFERENCE, PAGE 23 OF THE COMPANY'S 1997 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. The consideration for an annuity may be paid over a
period of time or in a lump sum.
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. Under GAAP, 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 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 differences 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 Surplus - Statutory Surplus is the excess of assets over liabilities
and capital, as determined in accordance with statutory accounting practices.
125
<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, 1997
Fixed Maturities - Available For Sale 79.4%
Preferred Stocks 13.2%
Common Stocks 4.0%
Mortgage Loans 1.5%
Other Invested Assets 1.0%
Policy Loans 0.7%
Real Estate 0.2%
Graph #2 DIVERSIFICATION OF FIXED MATURITIES
at December 31, 1997 - Carrying/Market Value
U.S. Industrial & Miscellaneous 53.3%
U.S. Banks, Trusts and Insurance Companies 18.9%
Public Utilities 14.8%
U.S. Government & Treasuries 5.9%
Foreign 3.9%
Special Revenue 2.8%
States & Political Subdivision 0.4%
Graph #3 QUALITY* OF BOND PORTFOLIO
Carrying/Market Value
A/A $251.2 Million 45.0%
Baa/BBB $147.7 Million 26.5%
Aa/AA $85.5 Million 15.3%
Aaa/AAA $69.4 Million 12.4%
Ba/BB $4.4 Million 0.8%
* As rated by Standard & Poor's or Moody's Investor's Service, Inc.
Graph #4 DIVERSIFICATION OF EQUITY SECURITIES
at December 31, 1997 - Carrying/Market Value
(2) U.S. Banks & Insurance 51.4%
(1) U.S. Industrial & Miscellaneous 22.7%
(2) U.S. Industrial & Miscellaneous 11.8%
(2) Foreign Banks & Insurance 6.6%
(2) Foreign Industrial & Miscellaneous 3.4%
(2) Public Utilities 3.3%
(1) U.S. Banks & Insurance 0.8%
(1) Common Stock
(2) Preferred Stock
126
<PAGE>
INCORPORATED BY REFERENCE, PAGE 24 OF THE COMPANY'S 1997 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, 1997 and 1996, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.
/s/ Brown Schwab Bergquist & Co.
Erie, Pennsylvania
February 17, 1998
127
<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
As of December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Investments
Fixed maturities available-for-sale,
at fair value (amortized cost of
$535,792,641 and $509,627,188,
respectively) $558,177,487 $515,529,699
Equity securities, at fair value
(cost of $111,786,894 and
$111,463,042, respectively) 120,841,893 116,552,145
Real estate 1,624,306 1,710,329
Policy loans 5,099,671 4,381,657
Real estate mortgage loans 10,049,733 8,955,760
Other invested assets 7,240,282 6,787,226
------------ ------------
Total investments $703,033,372 $653,916,816
Cash and cash equivalents 42,287,398 6,284,102
Premiums receivable from policyholders 3,471,385 2,974,305
Reinsurance recoverable 350,837 212,583
Other receivables 182,711 567,216
Accrued interest and dividends 10,273,259 9,792,095
Deferred policy acquisition costs 64,567,085 58,026,428
Reserve credit for reinsurance ceded 5,041,530 4,199,907
Prepaid federal income taxes 146,984 0
Other assets 3,179,302 4,677,208
------------ ------------
Total assets $832,533,863 $740,650,660
============ ============
</TABLE>
128
<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------- ------------
<S> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Future life policy benefits $ 59,413,782 $ 54,033,860
Policy and contract claims 2,049,677 1,703,105
Annuity deposits 489,444,701 450,570,003
Universal life deposits 68,890,312 56,856,590
Supplementary contracts not
including life contingencies 825,927 839,258
Other policyholder funds 6,595,330 5,763,271
Current federal income taxes
payable 0 686,353
Deferred income taxes 24,409,317 15,614,492
Reinsurance premium due 424,745 203,198
Accounts payable and accrued
expenses 2,668,688 4,519,782
Note payable to affiliate 15,000,000 15,000,000
Due to affiliate 1,156,431 1,049,007
Dividends payable 1,275,752 1,181,252
------------ ------------
Total liabilities $672,154,662 $608,020,171
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $.40 par value
per share; authorized
15,000,000 shares;
9,450,000 shares issued
and outstanding $ 3,780,000 $ 3,780,000
Additional paid-in capital 630,000 630,000
Net unrealized gain
on available-for-sale securities,
net of deferred taxes of $11,003,944
and $3,847,065, respectively 20,435,901 7,144,549
Retained earnings 135,533,300 121,075,940
------------ ------------
Total shareholders' equity $160,379,201 $132,630,489
------------ ------------
Total liabilities and
shareholders' equity $832,533,863 $740,650,660
============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
129
<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Policy
Life premiums $32,826,827 $29,038,797 $25,764,413
Group 2,366,645 2,077,365 2,309,584
----------- ----------- -----------
Total policy
revenue $35,193,472 $31,116,162 $28,073,997
Investment income, net
of expenses 49,914,292 45,948,969 40,962,812
Realized gains on
investments 5,201,365 4,986,897 7,483,798
Other income 728,269 668,210 556,814
----------- ----------- -----------
Total revenues $91,037,398 $82,720,238 $77,077,421
----------- ----------- -----------
Benefits and expenses
Death benefits $11,117,175 $ 9,688,242 $ 7,438,758
Interest on annuity
deposits 27,663,157 25,108,877 22,718,786
Interest on universal
life deposits 3,922,472 3,190,951 2,628,397
Surrender and other
benefits 303,318 1,047,474 721,412
Increase in future life
policy benefits 4,538,298 4,549,404 4,619,996
Amortization of deferred
policy acquisition
costs 3,694,966 3,141,350 2,358,127
Commissions 1,765,563 1,841,861 1,531,798
General expenses 6,358,610 5,839,795 5,802,088
Taxes, licenses
and fees 1,470,584 1,669,597 2,854,187
----------- ----------- -----------
Total benefits
and expenses $60,834,143 $56,077,551 $50,673,549
----------- ----------- -----------
Income from
operations $30,203,255 $26,642,687 $26,403,872
----------- ----------- -----------
Federal income taxes
Current $ 9,004,943 $ 5,378,656 $ 7,607,573
Deferred 1,637,944 3,597,781 914,707
----------- ----------- -----------
Total federal
income taxes $10,642,887 $ 8,976,437 $ 8,522,280
----------- ----------- -----------
Net income $19,560,368 $17,666,250 $17,881,592
=========== =========== ===========
Net income per
share $ 2.07 $ 1.87 $ 1.89
=========== =========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
130
<PAGE>
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net
Unrealized Net
Additional Gain (Loss) Share-
Common Paid-In on Retained holders'
Stock Capital Securities Earnings Equity
<S> <C> <C> <C> <C> <C>
Balance at
January 1,
1995 $3,780,000 $630,000 ($ 8,091,525) $ 94,537,106 $ 90,855,581
Net income 17,881,592 17,881,592
Net unrealized
gains on
available-
for-sale
securities 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 unrealized
losses on
available-
for-sale
securities ( 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
Net income 19,560,368 19,560,368
Net unrealized
gains on
available-
for-sale
securities 13,291,352 13,291,352
Dividends
declared,
$.54 per
share ( 5,103,008) ( 5,103,008)
---------- -------- ----------- ------------ ------------
Balance at
December 31,
1997 $3,780,000 $630,000 $20,435,901 $135,533,300 $160,379,201
========== ======== =========== ============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
131
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $19,560,368 $17,666,250 $17,881,592
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Net amortization of
bond and mortgage
premium and discount 1,294,213 733,881 129,922
Amortization of deferred
policy acquisition
costs 3,694,966 3,141,350 2,358,127
Real estate depreciation 86,023 86,066 102,233
Deferred federal
income taxes 1,637,944 3,597,781 914,707
Realized gains on
investments ( 5,201,365) ( 4,986,897) ( 7,483,798)
Increase in premiums
receivable ( 497,080) ( 272,727) ( 400,857)
Decrease (increase) in
other receivables 384,505 ( 312,542) 6,904
Increase in accrued
investment income ( 481,164) ( 747,959) ( 655,835)
Deferred policy
acquisition costs ( 10,235,623) ( 10,405,486) ( 8,168,624)
Decrease (increase) in
other assets 1,497,906 ( 1,667,895) ( 1,017,015)
Increase in reinsurance
receivables and reserve
credits ( 979,877) ( 662,786) ( 51,832)
Increase in future life
policy benefits and
claims 5,726,494 6,071,200 4,818,105
Increase (decrease) in
other policyholder funds 832,059 524,374 ( 1,113,579)
Increase (decrease) in
reinsurance premium due 221,547 ( 157,280) 167,343
(Decrease)increase in
federal income taxes
currently payable ( 833,337) 424,882 1,112,791
(Decrease)increase in
accounts payable and
due to affiliate ( 1,743,670) 1,448,291 ( 302,806)
----------- ----------- ----------
Net cash provided by
operating activities $14,963,909 $14,480,503 $ 8,297,378
----------- ----------- -----------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
132
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities ($76,210,662) ($149,403,614) ($119,758,853)
Equity securities ( 38,955,248) ( 18,394,580) ( 40,995,932)
Mortgage loans ( 1,222,745) ( 2,752,196) 0
Sales/maturities of investments:
Fixed maturities 49,662,504 41,270,911 60,191,905
Equity securities 42,920,903 37,128,238 37,486,994
Principal payments received
on mortgage loans 129,123 1,026,426 572,056
Loans made to policyholders ( 1,373,918) ( 1,317,369) ( 999,584)
Payments received on
policy loans 655,904 630,242 486,365
Purchase of other invested assets ( 856,802) ( 3,170,391) ( 2,510,832)
Proceeds from other invested assets 403,747 478,885 602,254
----------- ------------ -----------
Net cash used in
investing activities ($24,847,194) ($ 94,503,448) ($64,925,627)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in annuity
deposits and
supplementary contracts $38,861,367 $ 45,189,708 $64,209,943
Increase in universal
life deposits 12,033,722 10,884,748 9,864,440
Borrowed money 0 0 15,000,000
Dividends paid to
shareholders ( 5,008,508) ( 4,614,756) ( 4,158,000)
----------- ------------ -----------
Net cash provided by
financing activities $45,886,581 $ 51,459,700 $84,916,383
----------- ------------ -----------
Net increase (decrease) in cash
and cash equivalents $36,003,296 ($ 28,563,245) $28,288,134
Cash and cash equivalents at
beginning of year 6,284,102 34,847,347 6,559,213
----------- ------------ -----------
Cash and cash equivalents at
end of year $42,287,398 $ 6,284,102 $34,847,347
=========== ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the
year for:
Interest $ 967,500 $ 971,154 $ 632
Income taxes $9,838,280 $ 4,953,774 $ 6,494,782
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
133
<PAGE>
INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
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 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). Operating expenses of the
Company are paid by EIC. The Company reimburses EIC for direct
expenses and its share of common expenses. The Company also
sells a significant amount of annuities to its affiliated
companies of the Erie Insurance Group.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles that
differ from statutory accounting practices prescribed or
permitted for insurance companies by regulatory authorities.
Reclassifications
Certain amounts reported in the 1996 and 1995 financial
statements have been reclassified to conform to the current
year's financial statement presentation.
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.
134
<PAGE>
INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments
Fixed maturities and marketable equity securities are
classified as available-for-sale. Equity securities consist
primarily of common and nonredeemable preferred stocks while
fixed maturities consist of bonds, notes and redeemable
preferred stock. Available-for-sale securities are stated at
fair value, with the unrealized gains and losses, net of tax,
reported as a separate component of shareholders' equity. There
are no securities classified as "trading" securities or
"held-to-maturity" securities.
Premiums and discounts on investments in debt securities are
amortized over their contractual lives.
Realized gains and losses on sales of investments, including
losses from declines in value of specific securities determined
by management to be other-than-temporary, are recognized in
income on the specific identification method. Interest and
dividend income is recorded as earned.
Mortgage loans on commercial real estate are recorded at unpaid
balances, adjusted for amortization of premium or discount. A
valuation allowance is provided for impairment in net
realizable value based on periodic valuations. The change in
the allowance is reflected on the income statement in net
realized gain on investments.
Other invested assets (primarily investments in real estate
limited partnerships) are recorded under the equity method of
accounting.
Financial instruments
Fair values of available-for-sale securities are based on quoted
market prices, where available, or dealer quotations. The
carrying value of short-term financial instruments approximates
fair value because of the short-term maturity of these
instruments. The carrying value of receivables and liabilities
arising in the ordinary course of business approximates their
fair values.
Premium revenues and losses
Premiums on traditional life insurance contracts are reported as
earned revenue when due. Reserves for future policy benefits are
established as premiums are earned. 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.
135
<PAGE>
INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred policy acquisition costs
The costs of acquiring new business, principally commissions
and certain costs of issuing policies, including underwriting
costs 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 as 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>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance at
beginning
of year $58,026,428 $50,762,292 $44,951,795
Additions 10,235,623 10,405,486 8,168,624
Amortization ( 3,694,966) ( 3,141,350) ( 2,358,127)
----------- ----------- -----------
Balance at end
of year $64,567,085 $58,026,428 $50,762,292
=========== =========== ===========
</TABLE>
Insurance liabilities
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.
Interest rate assumptions for non-interest sensitive life
insurance range from 3.5% to 4% on policies issued in 1980 and
prior years and 6% to 7.25% on policies issued in 1981 and
subsequent years. Mortality and withdrawal assumptions are
based on tables typically used in the industry.
Annuities are credited with varying interest rates determined
at the discretion of the Company subject to certain minimums.
During 1997, annuity deposits earned interest at rates ranging
from 5.00% to 6.25%. 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.
136
<PAGE>
INCORPORATED BY REFERENCE, PAGES 29 AND 30 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reinsurance
The Statements of Operations are reflected net of reinsurance
activities. Gross revenue and benefits and expenses incurred
are reduced for amounts expected to be recovered under
reinsurance agreements. Reinsurance transactions are recorded
"gross" on the Statement of Financial Position.
Income taxes
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 taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible
temporary differences and deferred tax liabilities are
recognized for taxable temporary differences. Deferred tax
assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
Earnings per share
Earnings per share amounts are based on the weighted average
number of common shares outstanding during each of the
respective years.
Cash equivalents
The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents. Carrying amounts approximate fair value because
of the short maturity of these investments.
Liability for guaranty fund assessments
The Company may be required, under the solvency or guaranty
laws of the various states in which it is licensed, to pay
assessments up to prescribed limits to fund policyholder
losses or liabilities of insolvent insurance companies.
Certain states permit these assessments, or a portion thereof,
to be recovered as an offset to future premium taxes.
Assessments are recognized based on notification of liability
by regulatory authorities, including provision for certain
future amounts payable, and, when subject to credit against
future premium taxes and judged to be recoverable, may be
capitalized and amortized on a basis consistent with the
credits to be realized under applicable state law.
Recent accounting standards
In June 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (FAS) No.
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. Comprehensive income is
defined in the Statement as all changes in equity during a
period except those resulting from investments by owners and
distributions to owners. The Company will continue to display
an amount for net income and, in addition, an amount for
comprehensive income beginning with the quarter ending March
31, 1998.
137
<PAGE>
INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS
The following tables summarize the cost and market value of
available-for-sale securities at December 31, 1997 and 1996 based
on current year classifications. Prior year data may have been
categorized differently to the extent of current year
classification changes.
<TABLE>
<CAPTION>
Available-for-Sale Securities
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Values
(In Thousands)
December 31, 1997
<S> <C> <C> <C> <C>
Fixed Maturities:
U. S. Treasuries $ 4,268 $ 543 $ 0 $ 4,811
U. S. Government
agency 27,519 728 302 27,945
States and political
subdivisions 2,058 155 0 2,213
Special revenue 14,210 1,106 0 15,316
Public utilities 80,491 3,097 842 82,746
U. S. banks, trusts and
insurance companies 99,820 6,051 287 105,584
U. S. industrial and
miscellaneous 285,565 12,661 636 297,590
Foreign governments-
agency 2,988 0 641 2,347
Foreign banks, trusts
and insurance
companies 5,000 99 0 5,099
Foreign industrial
and miscellaneous 13,874 652 0 14,526
-------- ------- ------ --------
Total fixed
maturities $535,793 $25,092 $2,708 $558,177
======== ======= ====== ========
Equity Securities:
Common stock:
U. S. banks, trusts
and insurance
companies $ 731 $ 209 $ 0 $ 940
U. S. Industrial and
miscellaneous 27,648 3,116 3,364 27,400
Preferred stock:
Public utilities 4,000 50 0 4,050
U. S. banks, trusts
and insurance
companies 55,302 7,003 122 62,183
U. S. industrial and
miscellaneous 12,441 1,815 15 14,241
Foreign banks, trusts
and insurance
companies 7,765 365 162 7,968
Foreign industrial
and miscellaneous 3,900 160 0 4,060
-------- ------- ------ --------
Total equity
securities $111,787 $12,718 $3,663 $120,842
======== ======= ====== ========
Total available-for-
sale securities $647,580 $37,810 $6,371 $679,019
======== ======= ====== ========
</TABLE>
138
<PAGE>
INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
Available-for-Sale Securities
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Values
(In Thousands)
December 31, 1996
<S> <C> <C> <C> <C>
Fixed Maturities:
U. S. Treasuries $ 4,274 $ 286 $ 0 $ 4,560
U. S. Government
agency 30,823 677 804 30,696
States and political
subdivisions 2,063 203 0 2,266
Special revenue 19,242 827 132 19,937
Public utilities 88,626 2,076 1,534 89,168
U. S. banks, trusts
and insurance
companies 80,064 2,128 501 81,691
U. S. industrial
and miscellaneous 271,626 5,745 3,616 273,755
Foreign governments-
agency 2,986 0 16 2,970
Foreign industrial
and miscellaneous 9,923 564 0 10,487
-------- ------- ------ --------
Total fixed
maturities $509,627 $12,506 $6,603 $515,530
======== ======= ====== ========
Equity Securities:
Common stock:
U. S. industrial and
miscellaneous $ 5,500 $ 491 $ 5 $ 5,986
Preferred stock:
Public utilities 4,000 0 60 3,940
U. S. banks, trusts and
insurance companies 75,797 3,686 488 78,995
U. S. industrial and
miscellaneous 16,441 1,363 0 17,804
Foreign banks, trusts
and insurance
companies 5,825 180 138 5,867
Foreign industrial
and miscellaneous 3,900 60 0 3,960
-------- ------- ------ --------
Total equity
securities $111,463 $ 5,780 $ 691 $116,552
======== ======= ====== ========
Total available-for-
sale securities $621,090 $18,286 $7,294 $632,082
======== ======= ====== ========
</TABLE>
139
<PAGE>
INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1997 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, 1997, by remaining term to
contractual maturity:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Values
(In Thousands)
<S> <C> <C>
Due in one year or less $ 4,511 $ 4,511
Due after one year through five years 68,964 69,121
Due after five years through ten years 120,285 121,942
Due after ten years 342,033 362,603
-------- --------
$535,793 $558,177
======== ========
</TABLE>
Bonds having a fair value of $1,976,000 at December 31, 1997
were on deposit with various regulatory authorities as required
by law. Fixed maturities (bonds) having a fair value of
$14,689,000 are 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, 1997.
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, 1997, net unrealized gains on these securities of
$20,435,901 consisted of $37,810,426 in unrealized gains less
$6,370,581 in unrealized losses and deferred taxes of
$11,003,944.
140
<PAGE>
INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 1997 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Realized gains:
Fixed maturities $1,264,129 $ 778,043 $3,339,981
Equity securities 4,465,757 4,910,984 6,633,652
---------- ---------- ----------
$5,729,886 $5,689,027 $9,973,633
---------- ---------- ----------
Realized losses:
Fixed maturities $ 352,271 $ 325,843 $1,711,293
Equity securities 176,250 376,287 778,542
---------- ---------- ----------
$ 528,521 $ 702,130 $2,489,835
---------- ---------- ----------
Net realized gain on
Investments $5,201,365 $4,986,897 $7,483,798
========== ========== ==========
</TABLE>
Changes in unrealized gains include the following for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Equity securities $ 3,965,896 $ 4,528,256 $ 8,580,049
Fixed maturities
available-for-sale 16,482,335 ( 18,706,955) 26,799,457
Transferred to
available-for-sale
securities 0 0 2,239,307
Deferred federal
income taxes ( 7,156,879) 4,962,544 ( 13,166,584)
----------- ----------- -----------
Increase (decrease)
in unrealized
gains $13,291,352 ($ 9,216,155) $24,452,229
=========== =========== ===========
</TABLE>
Investment income consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest $41,723,007 $36,755,946 $31,160,233
Dividends 8,942,415 10,168,153 10,033,662
Other 662,141 423,120 464,892
Less expenses ( 1,413,271) ( 1,398,250) ( 695,975)
----------- ----------- -----------
$49,914,292 $45,948,969 $40,962,812
=========== =========== ===========
</TABLE>
141
<PAGE>
INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 1997 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1 $ 1,703,105 $ 897,026 $ 797,485
Less reinsurance
recoverables ( 132,971) ( 135,597) ( 112,203)
Less unpaid matured
endowments 0 ( 16,370) 0
---------- ---------- ----------
Net balance at January 1 $ 1,570,134 $ 745,059 $ 685,282
Total death claims
incurred 11,117,175 9,688,242 7,438,758
Total death claims paid,
net of reinsurance
recoveries 10,800,180 8,863,167 7,378,981
----------- ---------- ----------
Net balance at
December 31 $ 1,887,129 $1,570,134 $ 745,059
Plus reinsurance
recoverables 162,548 132,971 135,597
Plus unpaid matured
endowment 0 0 16,370
----------- ---------- ----------
Balance at December 31 $ 2,049,677 $1,703,105 $ 897,026
=========== ========== ==========
</TABLE>
NOTE 5. LIFE PREMIUMS AND ANNUAL ANNUITY & UNIVERSAL LIFE DEPOSITS
Premiums on life insurance contracts and deposits on annuity and
universal life contracts are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Life insurance
premiums:
First year $ 6,860,504 $ 6,505,484 $ 5,624,117
Renewal 25,966,323 22,533,313 20,140,296
----------- ----------- -----------
$32,826,827 $29,038,797 $25,764,413
=========== =========== ===========
Annuity & universal
life deposits, net
of loading:
First year
and single $50,675,240 $50,651,063 $57,606,715
Renewal 18,365,138 17,065,335 16,935,182
----------- ----------- -----------
$69,040,378 $67,716,398 $74,541,897
=========== =========== ===========
</TABLE>
142
<PAGE>
INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
NOTE 5. LIFE PREMIUMS AND ANNUAL ANNUITY & UNIVERSAL LIFE DEPOSITS
(CONTINUED)
Annuity deposits in 1997, 1996 and 1995 included $1,992,060,
$4,894,042 and $6,024,125, 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
totaled $17,780,582, $13,504,953 and $22,018,313, in 1997, 1996
and 1995, respectively.
NOTE 6. FEDERAL INCOME TAXES
A reconciliation of the provision for income taxes with amounts
determined by applying the statutory federal income tax rates to
pre-tax income is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Federal income taxes
at statutory rates $10,571,139 $9,324,940 $9,241,355
Dividends received
deduction and
tax-exempt interest ( 298,866) ( 772,484) ( 437,130)
Other 370,614 423,981 ( 281,945)
---------- ---------- ----------
Income tax expense $10,642,887 $8,976,437 $8,522,280
=========== ========== ==========
</TABLE>
Temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities which give rise
to deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Deferred policy acquisition costs $19,563,458 $17,613,507
Liability for future life and
annuity policy benefits (7,217,765) (6,739,570)
Unrealized gains 11,003,944 3,847,065
Other 1,059,680 893,490
----------- -----------
Deferred tax liability $24,409,317 $15,614,492
=========== ===========
</TABLE>
NOTE 7. RELATED PARTY TRANSACTIONS
Expense reimbursements
Operating expenses of the Company are paid by EIC and common
expenses are allocated. Reimbursements are made to EIC on a
monthly basis. The amount of these reimbursements for the
Company totaled $13,038,000, $10,095,000 and $10,231,000 in
1997, 1996 and 1995, respectively.
The Employees of the Company participate in the pension and
other Employee benefit plans of EIC. The benefits are based
on years of service and salary. Pension costs are funded by
EIC in amounts sufficient to at least meet ERISA minimum
funding requirements. Pension and other benefit costs
allocated to the Company equaled $182,624, $166,965 and
$203,699 in 1997, 1996 and 1995, respectively.
143
<PAGE>
INCORPORATED BY REFERENCE, PAGES 31 AND 32 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
NOTE 7. RELATED PARTY TRANSACTIONS (CONTINUED)
Annuities purchased by affiliates
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 $33,672,000 and
$32,812,000 at December 31, 1997 and 1996, respectively. The
reserves held for structured settlement annuities sold to the
affiliated property/casualty insurance companies equal
$111,219,000 and $94,096,000 at December 31, 1997 and 1996,
respectively. See also Note 5.
Note payable to EIC
The Company issued a surplus note to EIC for $15,000,000. The
note bears an annual interest rate of 6.45% and all payments
of interest and principal of the note may be repaid only out
of unassigned surplus of the Company and are subject to prior
approval of the Pennsylvania Insurance Commissioner. Interest
on the surplus note is scheduled to be paid semi-annually.
The note will be payable on demand on or after December 31,
2005. During 1997 and 1996, the Company paid interest to EIC
totaling $967,500.
Rental income
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 $1,196,441 and $1,110,419 at December 31, 1997 and 1996,
respectively.
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.
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.
144
<PAGE>
INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
NOTE 8. REINSURANCE (CONTINUED)
Policy revenues, benefits and expenses reflected in the
Statements of Operations have been reduced by the following
amounts due to reinsurance cessions:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Policy revenue $3,760,595 $3,634,876 $3,354,484
Death benefits 1,318,963 1,846,353 1,040,858
Future life policy
benefits 841,623 715,717 98,567
Commissions 1,462,295 1,367,873 1,272,530
</TABLE>
The Company has an insignificant amount of reinsurance-assumed
activity.
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, 1997, 1996 and 1995,
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Statutory net income $12,923,916 $12,636,652 $ 9,373,483
Reconciling items:
Policy liabilities
and accruals 1,023,822 1,326,891 287,030
Deferred policy
acquisition costs,
net of amortization 6,540,657 7,264,136 5,810,497
Investment valuation
differences 1,014,686 836,719 3,436,669
Deferred taxes ( 1,637,944) ( 3,597,781) ( 914,707)
Other, net ( 304,769) ( 800,367) ( 111,380)
----------- ----------- -----------
GAAP net income $19,560,368 $17,666,250 $17,881,592
=========== =========== ===========
</TABLE>
145
<PAGE>
INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
NOTES TO FINANCIAL STATEMENTS
NOTE 9. STATUTORY NET INCOME and SHAREHOLDERS' EQUITY, DIVIDEND
RESTRICTIONS and ACCOUNTING PRACTICES (CONTINUED)
A reconciliation of shareholders' equity as filed with
regulatory authorities to shareholders' equity reported in the
accompanying financial statements as of December 31, 1997 and
1996, follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Statutory shareholders' equity $ 79,651,074 $ 73,410,532
Reconciling items:
Asset valuation and interest
maintenance reserves 25,578,142 23,909,912
Investment valuation differences 30,209,060 9,236,050
Deferred policy acquisition costs 64,567,085 58,026,428
Surplus note ( 15,000,000) ( 15,000,000)
Policy liabilities and accruals 3,444,355 2,073,738
Deferred taxes ( 24,409,317) ( 15,614,492)
Deferred and uncollected
premiums ( 4,235,579) ( 3,952,730)
Other, net 574,381 541,051
------------ ------------
GAAP shareholders' equity $160,379,201 $132,630,489
============ ============
</TABLE>
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 distribution 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
$5,103,008 in 1997.
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
In May 1996, a three-for-one common stock split 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.
146
<PAGE>
INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 1997 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
1997 and 1996 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>
1997
Policy revenue $ 8,468,025 $ 8,814,338 $ 8,661,427 $ 9,249,682
Investment income 12,401,283 12,211,491 12,418,846 12,882,672
Realized gain
on investments 621,782 746,305 2,507,707 1,325,571
Other income 140,299 185,125 189,902 212,943
----------- ----------- ----------- ----------
Total revenues $21,631,389 $21,957,259 $23,777,882 $23,670,868
=========== =========== =========== ===========
Income from
operations $ 6,586,018 $ 6,997,337 $ 9,057,854 $ 7,562,046
Federal income taxes 2,184,954 2,384,074 3,531,183 2,542,676
----------- ----------- ----------- -----------
Net income $ 4,401,064 $ 4,613,263 $ 5,526,671 $ 5,019,370
=========== =========== =========== ===========
Net income
per share $ 0.47 $ 0.49 $ 0.58 $ 0.53
=========== =========== =========== ===========
1996
Policy revenue $ 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
=========== =========== =========== ===========
Net income
per share $ 0.28 $ 0.47 $ 0.48 $ 0.64
=========== =========== =========== ===========
</TABLE>
147
<PAGE>
<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 DECEMBER 31, 1997 AND ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 558,177,487
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 120,841,893
<MORTGAGE> 10,049,733
<REAL-ESTATE> 1,624,306
<TOTAL-INVEST> 703,033,372
<CASH> 42,287,398
<RECOVER-REINSURE> 350,837
<DEFERRED-ACQUISITION> 64,567,085
<TOTAL-ASSETS> 832,533,863
<POLICY-LOSSES> 618,574,722
<UNEARNED-PREMIUMS> 131,926
<POLICY-OTHER> 2,049,677
<POLICY-HOLDER-FUNDS> 6,595,330
<NOTES-PAYABLE> 0
0
0
<COMMON> 4,410,000
<OTHER-SE> 155,969,201
<TOTAL-LIABILITY-AND-EQUITY> 832,533,863
35,193,472
<INVESTMENT-INCOME> 49,914,292
<INVESTMENT-GAINS> 5,201,365
<OTHER-INCOME> 728,269
<BENEFITS> 47,544,420
<UNDERWRITING-AMORTIZATION> 3,694,966
<UNDERWRITING-OTHER> 9,594,757
<INCOME-PRETAX> 30,203,255
<INCOME-TAX> 10,642,887
<INCOME-CONTINUING> 19,560,368
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,560,368
<EPS-PRIMARY> 2.07
<EPS-DILUTED> 2.07
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
