UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 2-39458
ERIE FAMILY LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1186315
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Erie Insurance Place, Erie, Pennsylvania 16530
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (814) 870-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 9,450,000 shares of Common
Stock outstanding on October 31, 1998.
1
<PAGE>
INDEX
ERIE FAMILY LIFE INSURANCE COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Financial Position--September 30, 1998 and
December 31, 1997
Statements of Operations--three and nine months ended
September 30, 1998 and 1997
Statements of Comprehensive Income--three and nine months
ended September 30, 1998 and 1997
Statements of Cash Flows--nine months ended September 30, 1998 and 1997
Notes to Financial Statements--September 30, 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
Part I. Financial Information
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
--------------------- ----------------
(Unaudited)
<S> <C> <C>
Investments:
Fixed Maturities available-for-sale, at fair
value (amortized cost of $570,227,004
and $535,792,641, respectively) $ 599,351,459 $ 558,177,487
Equity Securities, at fair value
(cost of $129,558,063 and $111,786,894,
respectively) 129,475,091 120,841,893
Real Estate 1,562,161 1,624,306
Policy Loans 5,767,787 5,099,671
Real Estate Mortgage Loans 9,946,716 10,049,733
Other Invested Assets 13,598,814 7,240,282
--------------------- ----------------
Total Investments $ 759,702,028 $ 703,033,372
Cash and cash equivalents 23,207,474 42,287,398
Premiums Receivable from Policyholders 3,435,467 3,471,385
Reinsurance Recoverable 263,039 350,837
Other Receivables 263,584 182,711
Accrued Interest and Dividends 12,218,934 10,273,259
Deferred Policy Acquisition Costs 68,828,802 64,567,085
Prepaid Federal Income Taxes 1,825,272 146,984
Reserve Credit for Reinsurance Ceded 5,672,925 5,041,530
Other Assets 4,900,889 3,179,302
--------------------- ----------------
Total Assets $ 880,318,414 $ 832,533,863
===================== ================
</TABLE>
See notes to financial statements.
3
<PAGE>
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
--------------------- --------------
(Unaudited)
<S> <C> <C>
Liabilities:
Policy Liabilities and Accruals:
Future Life Policy Benefits $ 63,344,945 $ 59,413,782
Policy and Contract Claims 1,406,449 2,049,677
Annuity Deposits 511,408,978 489,444,701
Universal Life Deposits 78,068,477 68,890,312
Supplementary Contracts Not
including Life Contingencies 609,659 825,927
Other Policyholder Funds 4,630,987 6,595,330
Deferred Federal Income Tax 26,806,302 24,409,317
Reinsurance Premium Due 272,874 424,745
Accounts Payable and Accrued Liabilities 5,410,400 2,668,688
Note Payable to Affiliate 15,000,000 15,000,000
Due to Affiliate 1,649,002 1,156,431
Dividends Payable 2,835,000 1,275,752
--------------------- --------------
Total Liabilities $ 711,443,073 $ 672,154,662
--------------------- --------------
Shareholders' Equity:
Common Stock, $.40 Par Value Per Share;
Authorized 15,000,000 Shares; 9,450,000
Shares Issued And Outstanding $ 3,780,000 $ 3,780,000
Additional Paid-In Capital 630,000 630,000
Accumulated Other Comprehensive Income,
net of Deferred Tax of $10,164,520
and $11,003,949, respectively 18,876,966 20,435,901
Retained Earnings 145,588,375 135,533,300
--------------------- --------------
Net Shareholders' Equity $ 168,875,341 $ 160,379,201
--------------------- --------------
Total Liabilities and Shareholders'
Equity $ 880,318,414 $ 832,533,863
===================== ==============
</TABLE>
See notes to financial statements.
4
<PAGE>
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
<S> <C> <C> <C> <C>
1998 1997 1998 1997
Revenues:
Policy:
Life Premiums, net of premiums ceded of
$887,513, $887,210, $2,629,820 and
$2,608,848, respectively $ 8,905,059 $ 8,097,260 $ 26,519,337 $ 24,285,999
Group 588,617 564,167 1,788,737 1,657,792
--------------- ---------------- ---------------- ---------------
Total Policy Revenue $ 9,493,676 $ 8,661,427 $ 28,308,074 $ 25,943,791
Investment Income, Net of Expenses of
$328,078, $328,986, $1,054,881 and
$976,860, respectively 12,574,958 12,418,846 38,360,698 37,031,620
Realized Gains on Investment 775,430 2,507,707 3,477,700 3,875,794
Other Income 237,989 189,902 627,522 515,326
--------------- ---------------- ---------------- ---------------
Total Revenues $ 23,082,053 $ 23,777,882 $ 70,773,994 $ 67,366,531
--------------- ---------------- ---------------- ---------------
Benefits and Expenses:
Death Benefits, net of reinsurance recoveries
of $275,635, $244,888, $844,370 and
$760,790, respectively 2,742,286 2,346,461 5,980,656 6,998,725
Interest on Annuity Deposits 7,690,314 6,851,856 22,503,604 20,570,532
Interest on Universal Life Deposits 1,213,658 1,029,153 3,451,024 2,873,383
Surrender and Other Benefits 262,445 269,319 828,126 882,066
Increase in Future Life Policy Benefits, net of
the increase in reserve credit for reinsurance
ceded of $186,972, $166,048, $631,395 and
$468,728, respectively 1,227,423 1,343,157 3,299,768 4,103,086
Amortization of Deferred Policy
Acquisition Costs 1,069,605 693,000 3,715,556 2,253,404
Commissions, net of reinsurance reimbursements
of $328,245, $331,582, $952,491 and $927,307,
respectively 418,405 327,071 988,556 1,206,028
General Expenses 2,145,078 1,602,345 5,260,885 5,008,760
Taxes, Licenses and Fees 402,953 257,666 201,954 829,338
--------------- ---------------- ---------------- ---------------
Total Benefits and Expenses $ 17,172,167 $ 14,720,028 $ 46,230,129 $ 44,725,322
--------------- ---------------- ---------------- ---------------
Income From Operations $ 5,909,886 $ 9,057,854 $ 24,543,865 $ 22,641,209
Federal Income Tax
Current 869,745 3,146,011 5,582,381 6,605,161
Deferred 1,377,224 385,172 3,236,412 1,495,050
--------------- ---------------- ---------------- ---------------
Total Federal Income Tax 2,246,969 3,531,183 8,818,793 8,100,211
--------------- ---------------- ---------------- ---------------
Net Income $ 3,662,917 $ 5,526,671 $ 15,725,072 $ 14,540,998
=============== ================ ================ ===============
Net Income Per Share $ 0.39 $ 0.58 $ 1.66 $ 1.54
=============== ================ ================ ===============
Dividends Declared Per Share $ 0.15 $ 0.135 $ 0.60 $ 0.54
=============== ================ ================ ===============
</TABLE>
See notes to financial statements.
5
<PAGE>
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
<S> <C> <C> <C> <C>
1998 1997 1998 1997
Net Income $ 3,662,917 $ 5,526,671 $ 15,725,072 $ 14,540,998
--------------- ---------------- ---------------- ---------------
Unrealized Gains (Losses) on Securities:
Unrealized Holding (Losses) Gains Arising
During Period (8,651,292) 18,162,803 1,079,338 20,057,819
Less: Reclassification Adjustment for Gains
Included in Net Income (775,430) (2,507,707) (3,477,700) (3,875,794)
--------------- ---------------- ---------------- ---------------
Net Unrealized Holding Gains (Losses)
Arising During Period $ (9,426,722) $ 15,655,096 $ (2,398,362) $ 16,182,025
--------------- ---------------- ---------------- ---------------
Income Tax Benefit (Expense) Related to
Unrealized Gains 3,299,353 (5,481,245) 839,427 (5,663,709)
--------------- ---------------- ---------------- ---------------
Other Comprehensive (Loss) Income,
Net of Tax $ (6,127,369) $ 10,173,851 $ (1,558,935) $ 10,518,316
--------------- ---------------- ---------------- ---------------
Comprehensive (Loss) Income $ (2,464,452) $ 15,700,522 $ 14,166,137 $ 25,059,314
=============== ================ ================ ===============
</TABLE>
See notes to financial statements.
6
<PAGE>
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,725,072 $ 14,540,998
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of bond and mortgage
premium and discount 370,567 926,033
Amortization of deferred policy acquisition
costs 3,715,556 2,253,404
Real Estate Depreciation 62,145 64,798
Deferred federal income taxes 3,236,412 1,495,050
Realized gains on investments (3,477,700) (3,875,794)
(Increase) decrease in other assets (1,721,587) 2,264,169
(Increase) decrease in other receivables (80,873) 276,953
Decrease (increase) in premium receivable 35,918 (90,322)
Increase in reinsurance recoverable
and reserve credits (543,597) (483,510)
Increase in accrued investment income (1,945,675) (1,950,862)
Increase in deferred policy acquisition
costs (7,977,273) (7,403,257)
Increase in future policy benefits and claims 3,287,935 4,859,436
(Decrease) increase in other policyholder funds (1,964,343) 1,980,960
(Decrease) increase in reinsurance premium due (151,871) 70,021
Increase (decrease) in accounts payable and accrued
liabilities and due to affiliate 3,234,283 (1,228,824)
Increase in prepaid federal income tax (1,678,288) (67,374)
------------------ -------------------
Net cash provided by operating
activities $ 10,126,681 $ 13,631,879
------------------ -------------------
Cash flows from investing activities:
Purchase of investments:
Fixed maturities $ (110,588,282) $ (64,669,917)
Equity securities (49,349,639) (34,596,577)
Sales/maturities of investments:
Fixed maturities 76,957,477 36,259,958
Equity securities 33,702,953 38,613,027
Purchase of mortgage loans 0 (1,183,667)
Principal payments received on mortgage loans 103,284 95,714
Loans made to policyholders (1,120,633) (1,053,304)
Payments received on policy loans 452,517 518,041
Purchase of other invested assets (9,849,688) (774,745)
Proceeds from other invested assets 3,669,984 475,464
------------------ -------------------
Net cash used in investing activities $ (56,022,027) $ (26,316,006)
------------------ -------------------
</TABLE>
See notes to financial statements
7
<PAGE>
STATEMENTS OF CASH FLOWS--Continued (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Cash flows from financing activities:
Increase in annuity and supplementary
contract deposits $ 21,748,009 $ 27,521,499
Increase in Universal Life Deposits 9,178,165 9,283,893
Dividends paid to shareholders (4,110,752) (3,732,756)
------------------ -------------------
Net cash provided by financing
activities $ 26,815,422 $ 33,072,636
------------------ -------------------
Net (decrease) increase in cash and
cash equivalents (19,079,924) 20,388,509
Cash and cash equivalents at beginning of year 42,287,398 6,284,102
------------------ -------------------
Cash and cash equivalents at end of quarter $ 23,207,474 $ 26,672,611
================== ===================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 483,750 $ 483,750
Income taxes 7,060,000 6,473,896
</TABLE>
See notes to the financial statements
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1997.
NOTE B -- INVESTMENTS
Invested assets of the Company consist of investments in fixed maturities,
preferred stock, common stock, real estate, mortgage and policy loans and other
invested assets. At September 30, 1998, 78.9% of total invested assets were
invested in fixed maturities. Preferred stocks represent 10.7% or $81.5 million
and common stocks represent 6.3% or $48 million of total invested assets at
September 30, 1998. Real estate and mortgage loans make up only 1.5% of total
invested assets. Mortgage loan and real estate investments have the potential
for higher returns but also carry more risk, including less liquidity and
greater uncertainty of rate of return.
The Company has classified all of its fixed maturity portfolio as
available-for-sale at September 30, 1998. Management believes that having all
fixed maturities classified as available-for-sale securities will allow the
Company to meet its liquidity needs and provide greater flexibility for its
investment managers to restructure the Company's investments in response to
changes in market conditions or strategic direction. Securities classified as
available-for-sale are carried at market value with unrealized gains and losses
included in shareholders' equity.
The Company's fixed maturities at September 30, 1998 consist of investments in
bonds of $596.4 million and investments in redeemable preferred stock of $2.9
million. Consistent with the Company's investment objective, the fixed maturity
portfolio is of very high quality and well diversified within each market
sector. The portfolio is conservatively managed with the goal of achieving
reasonable returns while limiting exposure to risk. At September 30, 1998, the
amortized cost, gross unrealized gains, gross unrealized losses and carrying
value for fixed maturities were as follows:
Fixed Maturities at 9-30-98 (In Thousands)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasuries $ 4,382 $ 886 $ 0 $ 5,268
U.S. Government Agency 17,545 770 56 18,259
States & Political Subdivisions 2,057 132 0 2,189
Special Revenue 11,096 849 0 11,945
Public Utilities 74,566 3,796 1,103 77,259
U.S. Banks, Trusts & Insurance
Companies 115,514 8,358 1,053 122,819
U.S. Industrial & Miscellaneous Bonds 315,706 17,213 575 332,344
Foreign Governments-Agency 2,989 0 665 2,324
Foreign Industrial & Miscellaneous 23,372 999 373 23,998
--------------- --------------- ---------------- ---------------
Total Bonds 567,227 33,003 3,825 596,405
Redeemable Preferred Stock 3,000 0 54 2,946
--------------- --------------- ---------------- ---------------
Total Fixed Maturities $ 570,227 $ 33,003 $ 3,879 $ 599,351
=============== =============== ================ ===============
</TABLE>
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Included in the fixed maturity category are high-quality bonds with a carrying
value of $590,227,699 that are rated at investment grade levels (Baa/BBB or
better). Included in this investment-grade category are $350 million
characterized as the "highest" quality or "Class 1" securities as defined by the
National Association of Insurance Commissioners (NAIC). Generally, the fixed
maturity securities in the Company's portfolio are rated by external rating
agencies. If not externally rated, they are rated by the Company on a basis
consistent with the basis used by the rating agencies.
If management determines that any declines in market value of these investments
are other than temporary, the securities will be written-down to the realizable
value of the investment and the write down reflected in income. If a bond is in
default of interest payments and it is determined that liquidation of the
security would be in the Company's best interest, the security will be sold to
return the proceeds to income producing assets.
At September 30, 1998, the amortized cost of the Company's five largest
investments in corporate debt securities totaled $35.5 million, none of which
individually exceeded $8.1 million. These investments had a market value of
$37.5 million.
Equity securities consist of common and preferred stocks, which are carried on
the balance sheet at market value. As with the fixed maturity portfolio, the
Company's preferred stock portfolio provides a source of highly predictable
current income that is very competitive with high-grade bonds. These securities
are well diversified within each market sector. The preferred stocks are of very
high-quality (all of the $81.5 million of preferred stock are rated "highest" or
"high" quality as defined by the NAIC) and extremely marketable. There are no
preferred stocks in the Company's portfolio rated in the "low," "lowest," or "in
or near default" quality categories established by the NAIC. Common stock
provides capital appreciation potential within the portfolio. Common stock
investments inherently provide no assurance of producing income since dividends
are not guaranteed. As with all investments, the continuing value of common
stock is subject to change based on the underlying value of the issuer. Common
stocks also are subject to valuation fluctuations driven by investment market
conditions.
Equity Securities at 9-30-98 (In Thousands)
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Common Stock:
U.S. Banks, Trusts &
Insurance Companies $ 3,891 $ 3,619 $ 15 $ 7,495
U.S. Industrial & Miscellaneous 43,420 6,276 9,172 40,524
---------------- ---------------- --------------- ---------------
Total Common Stock 47,311 9,895 9,187 48,019
Preferred Stock:
Public Utilities 4,000 50 0 4,050
U.S. Banks, Trusts &
Insurance Companies 43,654 1,333 377 44,610
Foreign Banks, Trusts &
Insurance Companies 12,873 310 500 12,683
U.S. Industrial & Miscellaneous 17,820 248 1,895 16,173
Foreign Industrial &
Miscellaneous 3,900 40 0 3,940
---------------- ---------------- --------------- ---------------
Total Preferred Stock 82,247 1,981 2,772 81,456
---------------- ---------------- --------------- ---------------
Total Equity Securities $ 129,558 $ 11,876 $ 11,959 $ 129,475
================ ================ =============== ===============
</TABLE>
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Real estate investments are carried on the statements of financial position at
cost, less allowances for depreciation and possible losses. Commercial mortgage
loans on real estate are carried at their unpaid balances, adjusted for
amortization of premium or discount, less allowances for possible loan losses.
Policy loans are carried at their unpaid balances.
The fair values of the Company's investments in real estate, mortgage loans,
policy loans, and other invested assets, approximate the values presented in the
financial statements.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction with the
financial statements and related notes found on pages 3 through 11, since they
contain important information that is helpful in evaluating the Company's
operating results and financial condition.
OVERVIEW
Erie Family Life Insurance Company (the Company) is incorporated in the
Commonwealth of Pennsylvania. The Company is engaged primarily in the business
of underwriting and selling nonparticipating individual and group life insurance
policies, including universal life, and annuities. The Company markets its
products through independent Agents and operates in eight states in the eastern
United States and the District of Columbia and is subject to the supervision and
regulation of the states in which it writes business. A large portion of the
Company's business is written in Pennsylvania.
Net income decreased to $3,662,917, or $.39 per share, in the third quarter of
1998 from $5,526,671 or $.58 per share, in the third quarter of 1997, a decrease
of 33.7%. The decrease in realized gains on investments from $2,507,707 in the
third quarter of 1997 to $775,430 in the third quarter of 1998 and an increase
in death benefits from $2,346,461 in the third quarter of 1997 to $2,742,286 in
the third quarter of 1998 were the primary reasons for the decrease in net
income. Revenue growth continued to be strong as total policy revenue increased
by 9.6% to $9,493,676 in the current period.
REVENUES, BENEFITS, AND EXPENSES
Policy Revenues. Total policy revenues increased 9.6% to $9,493,676 in the third
quarter of 1998 from $8,661,427 in the third quarter of 1997. Included in these
totals are universal life premiums of $2,450,144 in the third quarter of 1998
compared to $2,226,773 in the third quarter of 1997, an increase of 10%. Group
policy revenues increased from $564,167 in the third quarter of 1997 to $588,617
in the third quarter of 1998. For the nine months ended September 30, 1998,
policy revenue rose 9.1% to $28,308,074 compared to $25,943,791 recorded for the
same period in 1997.
Deposits. First year and single universal life and annuity deposits decreased
23.1% to $8,055,435 in the third quarter of 1998 compared to $10,480,444 in the
third quarter of 1997. New ordinary annuity sales dropped from $5,602,109 in the
third quarter of 1997 to $3,999,459 in the third quarter of 1998, a decrease of
28.6%. Generally, lower interest rates and a flattening interest yield curve
have made fixed annuities less attractive compared to other investment
alternatives. Also included in these amounts are structured settlement annuities
sold to the Erie Insurance Group property/casualty affiliate companies which
totaled $3,583,266 in the third quarter of 1998 and $4,030,897 in the third
quarter of 1997.
Net Investment Income. Net investment income in the third quarter of 1998 was
$12,574,958 compared to $12,418,846 in the third quarter of 1997. For the nine
months ended September 30, 1998, net investment income was $38,360,698, an
increase of 3.6% over the $37,031,620 reported for the same period in 1997. 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 the third quarter of 1998 and 1997, the
Company generated realized gains of $775,430 and $2,507,707, respectively, from
the sale of equity and fixed maturity investments.
Death Benefits. Net death benefits on life insurance policies increased 16.9% in
the third quarter of 1998 to $2,742,286, compared to $2,346,461, for the same
period in 1997. For the nine month period ended September 30, 1998, death
benefits totaled $5,980,656, a decrease of 14.5% from the $6,998,725 reported
for the nine months ended September 30, 1997. Mortality experience should be
evaluated over the long term, rather than over short periods where unusual
fluctuations may influence the results. This is particularly true for a company
the size of Erie Family Life, which is growing. The Company's mortality
experience has been good over the past several years and management believes
that its underwriting philosophy and practices are sound.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
Interest on Annuity and Universal Life Deposits. Interest on deposits held by
the Company for Policyholders increased 13.0% to $8,903,972 in the third quarter
of 1998 from $7,881,009 in the third quarter of 1997. This increase was due to
the $65 million in deposits made by Policyholders during the 12-month period
ended September 30, 1998. At September 30, 1998, annuity deposits accruing
interest were $511 million and universal life deposits accruing interest were
$78 million. During the third quarter of 1998, the interest rate credited on
universal life and annuity deposits remained unchanged. The current interest
rate currently credited on universal life deposits ranges from 6.25% to 7.00%
while the rate currently credited on annuity deposits ranges from 5.00% to
6.25%.
Increase in Future Life Policy Benefits. The liability for future life policy
benefits is computed considering various factors such as anticipated mortality,
future investment yields, withdrawals and anticipated credit for reinsurance.
The 1998 third quarter increase in future life policy benefits was $1,227,423,
compared to $1,343,157 in the third quarter of 1997 a decrease of 8.6%. The
third quarter 1998 increase in future life policy benefits is consistent with
the $1.1 million average quarterly increase recorded in 1997.
Commission Expense. During the third quarter of 1998 commission expense
increased $91,334 to $418,405. Direct commission costs include some new and most
renewal commissions, production bonuses and Company contest awards. These direct
commission expenses are reduced by commissions received from reinsurers and the
expense is affected by the amount of commission expenses capitalized as part of
the deferred policy acquisition costs (DAC). Commission costs, which vary with
and are related primarily to the production of new business, have been deferred
and are capitalized as DAC. Most first-year and bonus commissions and some
second-year commissions qualify for deferral, i.e., additions to the DAC. These
costs are being amortized over the premium paying period of the related policies
in proportion to the ratio of the annual premium revenue to the total
anticipated premium revenue.
General Expenses. General expenses amounted to $2,145,078 in the third quarter
of 1998 compared to $1,602,345 for the same period in 1997. General expenses
include approximately $350,000 associated with the implementation of a new
policy administration system known as "Cyberlife". There were no comparable
expenses in the 1997 period.
Erie Indemnity Company is a 21.6 percent shareholder of Erie Family Life
Insurance Company and the Management Company for the Erie Insurance Exchange.
Certain operating expenses of the Company are paid by Erie Indemnity Company and
reimbursed monthly by the Company. Additionally, a portion of the common
overhead expenses of the Erie Insurance Group are allocated to Erie Family Life.
These expenses comprise the majority of Company general expenses.
General expenses include wages and salaries, Employee benefits, data processing
expenses, occupancy expenses and other office and general administrative
expenses of the Company. Certain general expenses of the Company are deferred as
policy acquisition costs. Medical inspection and exam fees related to new
business production, wages, salaries and Employee benefits of underwriting
personnel, and bonuses paid to branch sales Employees for the production of life
and annuity business, are all deferred. Deferred acquisition costs are amortized
over the premium paying period of the related policies in proportion to the
ratio of the annual premium revenue to the total anticipated premium revenue.
Taxes, Licenses, and Fees. Taxes, licenses and fees increased by $145,287 to
$402,953 in the third quarter of 1998 compared to $257,666 in the third quarter
of 1997. The majority of this increase was due to a reduction in premium tax
credits in the third quarter of 1998 when compared to the same period in 1997.
For the nine months ended September 30, 1998 taxes, licenses and fees amounted
to $201,954 compared to $829,338 at September 30, 1997. The $627,384 decrease
was caused by a $954,000 refund that is due the Company from the Pennsylvania
Life and Health Insurance Guaranty Association because of a recalculation of
annuity assessments paid in previous years.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company's ability to secure enough cash to meet
its contractual obligations and operating needs. Generally, insurance premiums
and deposits are collected prior to claims and benefit disbursements and these
funds are invested to provide necessary cash flows in future years. The
Company's major sources of cash from operations are life insurance premiums,
annuity and universal life deposits and investment income. The net positive cash
flow is used to fund Company commitments and to build the investment portfolio,
thereby increasing future investment returns. Net cash provided by operating
activities for the nine months ended September 30, 1998 was $10,126,681 compared
to $13,631,879 for the nine months ended September 30, 1997. The Company's
liquidity position remains strong as invested assets increased by $57 million
during the first nine months of 1998 to $760 million at September 30, 1998.
Annuity and universal life deposits, which do not appear as revenue on the
financial statements, provide cash. These deposits do not involve a mortality or
morbidity risk and are accounted for using methods applicable to comparable
"interest-bearing obligations" of other types of financial institutions. This
method of accounting records deposits as a liability rather than as a revenue.
Annuity and universal life deposits were $11,730,903 in the third quarter of
1998 and $14,396,286 in the third quarter of 1997.
The Company's current commitments for expenditures as of September 30, 1998 are
primarily for policy death benefits, policy surrenders and withdrawals, general
operating expenses, federal income taxes, and dividends to shareholders. These
commitments are met by cash flows from policy revenue, annuity and universal
life deposits and investment income. Management believes its cash flow from
operations and its liquid assets and marketable securities will enable the
Company to meet any foreseeable cash requirements. As an added measure of
liquidity, the Company has in place a $10 million line of credit with a bank. At
September 30, 1998, there were no borrowings on this line of credit.
The amount of dividends Erie Family Life, a Pennsylvania-domiciled life insurer,
can pay to its shareholders without the prior approval of the Pennsylvania
Insurance Commissioner is limited by statute to the greater of: (a) 10 percent
of its statutory surplus as regards policyholders as shown on its last annual
statement on file with the commissioner, or (b) the net income as reported for
the period covered by such annual statement, but shall not include pro rata
distributions of any class of the insurer's own securities. Accordingly, the
maximum dividend payout which may be made in 1998 without prior Pennsylvania
Insurance Commissioner approval is $12,924,000.
Dividends declared to shareholders totaled $1,417,500 in the third quarter of
1998.
The Company's 1997 year-end Risk Based Capital Analysis as reflected in its 1997
statutory annual statement shows total adjusted capital of $90,727,646 and
authorized control level risk based capital of $15,031,184. These results are
indicative of the strong capital position of the Company.
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 September 30, 1998,
there was no material difference between the carrying value and fair value of
the Company's investment-type policies. These life insurance and annuity
reserves are supported primarily by the Company's long-term, fixed-income
investments, as the underlying policy reserves are generally also of a long-term
nature.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
Investments
The Company's investment strategies are designed and portfolios are structured
to match the features of the life insurance and annuity products sold by the
Company. Annuities and life insurance policies are long-term products,
therefore, the Company's investment strategy takes a long-term perspective
emphasizing investment quality, diversification, and superior investment
returns. The Company's investments are managed prudently on a total return
approach that focuses on current income and capital appreciation.
The Company's invested assets are liquid in order to meet commitments to our
Policyholders. At September 30, 1998, the Company's investment portfolio of cash
and money market investments, investment grade bonds, common stocks, and
preferred stocks, all of which are readily marketable, totaled $746 million or
84.7% of total assets. These resources provide the liquidity the Company
requires to meet the unforeseen demands on its funds.
ACCOUNTING PRONOUNCEMENTS
SOP 98-1
During the first quarter of 1998, the Company adopted AICPA Statement of
Position (SOP) 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". In accordance with SOP 98-1 the Company began
capitalizing internal use software costs. The adoption of this statement
resulted in an increase in net income of $292,000, or $.03 per share for the
third quarter of 1998 and $715,000 or $.08 per share for the nine months ended
September 30, 1998.
YEAR 2000 READINESS DISCLOSURE
As a financial services enterprise, Erie Family Life Insurance Company is
dependent on computer systems and applications to conduct business. Like all
companies with information and systems dependencies, the Company is continually
faced with significant information technology challenges. Among these challenges
is the so-called "Year 2000 Issue," the inability of many computer systems to
recognize dates beginning with the year 2000 and subsequent years.
The effect of the Year 2000 Issue cannot be exactly measured with certainty at
the present time and any forecasts about the effect of the Year 2000 Issue and
remediation projections are necessarily forward-looking statements and are
subject to the risks and uncertainties noted on page 17.
Company's State Of Readiness
The Company is evaluating it's year 2000 readiness inclusive of it's existing
legacy systems, it's replacement to the legacy systems, (collectively, "Internal
Systems"), it's personal computer hardware and software and it's external
business contacts.
Internal Systems: In 1997, the Company began implementation of a new, state of
the art, life insurance processing and administrative system known as Cyberlife,
a product of Cybertek Corporation. The system is vendor certified as year 2000
compliant. Applications are being implemented along product specific lines
beginning with traditional life insurance products expected to be placed into
production during the first half of 1999. Implementation will extend beyond year
2000 for many of the Cyberlife system applications. Consequently, the Company
will be operating both in the Cyberlife and legacy systems into the year 2000.
As assessment of the state of readiness of those legacy systems and applications
which will continue to function into the Year 2000 has been conducted by
management. Based on this assessment project plans have been developed inclusive
of programming effort and program testing. Management believes the remediation
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATION (Continued)
effort will entail less than 1400 hours of programming and program testing
effort to make legacy systems Year 2000 compliant. The remediation plan calls
for this work to be completed by the end of the first quarter of 1999.
Plans for integrated business testing will be developed, including an estimate
of hours, during the fourth quarter of 1998. Integrated business testing is
planned for the second quarter of 1999, following implementation and testing of
traditional life on Cyberlife.
Personal Computer Software and Hardware: The Company in the conduct of everyday
business uses personal computers extensively. Business critical uses include
policy issuance, policy valuation and policy servicing functionality such as
document storage and retrieval. Use of word processing and other administrative
tools are also prevalent in the Company. The preponderance of personal computers
in use by Company personnel were placed in service as compliant devices over the
past 18 months. Related software applications are also relatively new and
believed to be year 2000 compliant. An inventory of personal computer software
was taken in the first quarter of 1998 and was used as a basis to obtain
certification from vendors as to the year 2000 compliance of important
applications. This inventory will be reviewed and updated each quarter and any
important applications that are in question will be tested during the first half
of 1999, if possible. To the extent necessary, personal computer hardware
devices and software will be replaced with alternative products or available
upgrades will be made, depending on the circumstances.
External Business Contacts: During the fourth quarter of 1998, the Company will
prioritize an inventory of key outside parties whom management believes support
mission critical operations of the Company. Dialogue with these vendors has been
ongoing throughout 1998. For this category of outside party, extensive
qualification of their year 2000 readiness will be established. Qualification
will include some combination of testing and contingency planning depending upon
management's relative comfort level with the outside parties state of readiness
and the availability of suitable alternative providers. The qualification
process will be planned during the fourth quarter of 1998 and qualification
procedures will be conducted beginning in the first quarter of 1999.
Cost to Address Year 2000 Issues
Based upon known factors and the measures taken to date, management does not
anticipate significant future costs in order to address the Year 2000 Issue.
Costs anticipated include personnel costs (programming, testing internal
systems, testing external party interfaces, developing contingency plans and
replacing software and hardware devices that are not year 2000 compliant) and
purchase of personal computer software and hardware. Costs that have been
incurred to date have been charged to operations as incurred. Estimates of both
the cost incurred to date and future costs are not anticipated to be material
to the financial position and results of operations of the Company.
Risk of the Company's Year 2000 Issues
The proper functioning of the Company's computer systems and applications is
critical to the continued operations of the Company. Management believes that
all mission critical systems and applications will be Year 2000 compliant
sufficiently in advance of January 1, 2000, and, therefore, believes Year 2000
will not adversely affect the operations of the Company.
It is possible that certain key external parties will certify their systems as
year 2000 compliant but such readiness will not be verifiable. The inability of
the Company to respond to uncontrollable circumstances is always a concern. For
example, if numerous key third parties are unable to perform, operations of the
Company could be adversely affected. The Company as part of overall risk
management will be preparing contingency plans during the first half of 1999 in
response to the possibility of key third party failure. Management does not
anticipate, nor would management characterize these scenarios, as having a
greater than remote possibility of occurrence.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
Company's Contingency Plans if a Vendor or the Company fail to Address Year
2000 Issues
This risk described above will be addressed, as described, through contingency
planning. The level of contingency planning will be commensurate with the
relative importance of the external party to the operations of the Company and
the relative risk that the party will be unable to operate satisfactorily in
2000. Such contingency plans will be developed during the first and second
quarter of 1999.
The statements herein are forward-looking statements containing the beliefs of
management that involve risks and uncertainties. These risks and uncertainties
include but are not limited to, human or mechanical errors in correcting Year
2000 Issues; incorrect or improper (intentional or otherwise) representations by
third parties as to their compliance or remediation efforts; the failure of
third parties to follow through on their remediation efforts and the inability
to identify and/or locate processing chips that are subject to Year 2000
problems.
*********************************************
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995: Statements contained herein expressing the beliefs of management such as
those contained in "Note B to the Financial Statements", the "Revenue Benefits
and Expenses - Death Benefits", the "Liquidity and Capital Resources" and the
"Investments" sections hereof, and the other statements which are not historical
facts contained in this report are forward looking statements that involve risks
and uncertainties. These risks and uncertainties include but are not limited to:
legislative, judicial, and regulatory changes, the impact of competitive
products and pricing, product development, geographic spread of risk,
catastrophic events, better (or worse) mortality rates, securities markets
fluctuations and technological difficulties and advancements.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three-month period
ending September 30, 1998.
Exhibit 27 - Financial Data Schedule
All other exhibits for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore, have been omitted.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Erie Family Life Insurance Company
(Registrant)
Date: November 13, 1998
/s/ Stephen A. Milne
(Stephan A. Milne,President & CEO)
/s/ Philip A. Garcia
(Philip A. Garcia, Executive
Vice President & CFO)
18
<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 SEPTEMBER 30, 1998 AND ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 599,351,459
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 129,475,091
<MORTGAGE> 9,946,716
<REAL-ESTATE> 1,562,161
<TOTAL-INVEST> 759,702,028
<CASH> 23,207,474
<RECOVER-REINSURE> 263,039
<DEFERRED-ACQUISITION> 68,828,802
<TOTAL-ASSETS> 880,318,414
<POLICY-LOSSES> 653,432,059
<UNEARNED-PREMIUMS> 203,084
<POLICY-OTHER> 1,406,449
<POLICY-HOLDER-FUNDS> 4,630,987
<NOTES-PAYABLE> 0
0
0
<COMMON> 4,410,000
<OTHER-SE> 164,465,341
<TOTAL-LIABILITY-AND-EQUITY> 880,318,414
28,308,074
<INVESTMENT-INCOME> 38,360,698
<INVESTMENT-GAINS> 3,477,700
<OTHER-INCOME> 627,522
<BENEFITS> 36,063,178
<UNDERWRITING-AMORTIZATION> 3,715,556
<UNDERWRITING-OTHER> 6,451,395
<INCOME-PRETAX> 24,543,865
<INCOME-TAX> 8,818,793
<INCOME-CONTINUING> 15,725,072
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,725,072
<EPS-PRIMARY> 1.66
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