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, 1998
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, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Annual Report to shareholders for the fiscal year
ended December 31, 1998 (the "Annual Report") are incorporated by reference into
Parts II and IV of this Form 10-K Report.
1
<PAGE>
INDEX
PART ITEM NUMBER AND CAPTION PAGE
I Item 1. Business 3
I Item 2. Properties 6
I Item 3. Legal Proceedings 6
I Item 4. Submission of Matters to a
Vote of Security Holders 6
II Item 5. Market for Company's Common Stock
and Related Shareholder Matters 7
II Item 6. Selected Financial Data 7
II Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 7
II Item 8. Financial Statements and Supplementary Data 7
II Item 9. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosure 7
III Item 10. Directors and Executive Officers
of the Company 8
III Item 11. Executive Compensation 12
III Item 12. Security Ownership of Certain
Beneficial Owners and Management 18
III Item 13. Certain Relationships and Related
Transactions 20
IV Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 21
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 1998 had a
ratio of 6:1 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 1998 1997 1996 1995 1994
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ordinary Life (including Total
and Permanent Disability and
Additional Accidental Death) 93.4% 93.3% 93.3% 91.8% 92.1%
Group 6.6 6.7 6.7 8.2 7.9
------ ------ ------ ------ ------
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
$17,883,171 in annuity deposits in 1998, $17,780,582 in 1997 and
$13,504,953 in 1996. Also included in the annuity deposits are annuity
contracts purchased by the Erie Insurance Group Retirement Plan for
Employees. These annuity contracts purchased totaled $6,413,460 in 1998,
$1,992,060 in 1997 and $4,894,042 in 1996.
Classes of Deposits
Total Deposits
For the year ended December 31,
<TABLE>
<CAPTION>
Class 1998 1997 1996 1995 1994
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Universal Life Deposit $ 10,692,515 $ 10,773,738 $ 9,465,576 $ 8,490,667 $ 7,482,156
Annuity Deposit 56,727,779 58,306,640 58,250,822 66,051,230 62,048,541
------------- ------------- --------------- -------------- --------------
$ 67,420,294 $ 69,040,378 $ 67,716,398 $ 74,541,897 $ 69,530,697
</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, the District of Columbia, and most recently,
Illinois. 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 (NAIC), 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 follows the statutory accounting
practices minimum risk-based capital requirements on domestic insurance
companies that were developed by the 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 $108 million
and a ratio of total adjusted capital to authorized control level
risk-based capital of more than 5:1 at December 31, 1998. 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 1998,
annuity deposits earned interest at rates ranging from 5.00% to 6.00%.
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 89 full-time Employees are provided through Erie Indemnity
Company. All employees are salaried and 5 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 1998 was 8.8%.
Reinsurance Profitability - Not Applicable.
New Types of Insurance - Not Applicable.
Total Insurance In Force for the last five years Net of
Reinsurance was:
1998 - $11,961,512,000
1997 - $10,754,141,000
1996 - $ 9,646,962,000
1995 - $ 8,370,940,000
1994 - $ 7,481,537,000
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 provided in Schedule I
"Summary of Investments other than Investments in Related Parties." This
property is leased to the Erie Indemnity Company. Rental income for 1998 was
$343,000. 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.
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 1998.
6
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Currently there is no market on which the Company's stock is traded. The
Company had 1,108 recordholders of Common Stock at December 31, 1998.
Date Dividends Declared Date Dividends Paid Dividends per Share
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
February 17, 1998 April 1, 1998 .150
April 28, 1998 July 1, 1998 .150
June 15, 1998 October 1, 1998 .150
September 16, 1998 January 4, 1999 .150
ITEM 6. SELECTED FINANCIAL DATA
The information contained in "Selected Financial Data" on Page 16 of the
Company's 1998 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 17 through 25 of the Company's 1998 Annual
Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The 1998 Financial Statements and the Company's Independent Auditors' Report on
pages 26 through 36 of the Company's 1998 Annual Report are incorporated herein
by reference, as is the unaudited information set forth in the Notes to the
Financial Statements under the caption "Quarterly Results of Operations
(Unaudited)" on page 36.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
7
<PAGE>
PART III
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 04/01/99 Held During the Last Five Years
<S> <C>
Peter B. Bartlett 3C,4,5 Director since 1996. Partner, Brown Brothers Harriman & Co. since
65 1974; Director--the Company, Erie Insurance Company and Erie Indemnity
Company, Attorney-in-Fact for Erie Insurance Exchange and Kennametal, Inc.
Samuel P. Black, III 2,4 Director since 1997. President, Treasurer and Secretary, Samuel P.
57 Black & Associates, Inc.--insurance agency; Director--the Company, 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, Body-Borneman
60 Associates, Inc., insurance agency. President, Body-Borneman, Ltd. and Body-Borneman, Inc.,
insurance agencies. Director--the Company, 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
52 Officer 1984-present.
Robert H. Dreyer Senior Vice President of the Company since 1990. Chief Actuary 1983-
61 Present.
Philip A. Garcia Executive Vice President and Chief Financial Officer of the Company,
42 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 1993 - 1997. Vice President
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 04/01/99 Held During the Last Five Years
<S> <C>
Patricia A. Goldman 2,4C Director since 1996. Retired; Senior Vice President for Communications,
57 USAir, Inc. from 1988 to 1994; Director--the Company, Erie Insurance Company, Erie Indemnity
Company, Attorney-in-Fact for Erie Insurance Exchange and Crown Central Petroleum Company.
Susan Hirt Hagen1,* Director since 1980. Managing Partner, Hagen, Herr & Peppin, Group
63 Relations Consultants since 1990; Director--the Company, 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.
F. William Hirt1C,* Director since 1967. Chairman of the Board of the Company, Erie Insurance Company,
73 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--the Company, Erie Insurance Company, Flagship City Insurance
Company, Erie Indemnity Company, Attorney-in-Fact for Erie Insurance Exchange,
Erie Insurance Property & Casualty Company and Erie Insurance Company of New York.
Edmund J. Mehl 1,2C,4 Director since 1969. Retired Chairman and Chief Executive Officer,
75 Dispatch Printing, Inc.; Director--the Company, 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
* F. William Hirt is the brother of Susan Hirt Hagen.
C Committee Chairman
</FN>
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Present Principal Position with Erie
Name and Age Family Life and Other Material Positions
as of 04/01/99 Held During the Last Five Years
<S> <C>
Stephen A. Milne 1,5 President, Chief Executive Officer and Director of the Company, Erie
50 Indemnity Company, Attorney-in-Fact for Erie Insurance Exchange, and Erie
Insurance Company since February 12, 1996. President and Chief Executive
Officer of the Company, 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
1994-1996. 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 Company, Erie Indemnity
38 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 Company, Erie
70 Indemnity Company, Attorney-in-Fact for Erie Insurance Exchange, 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 the 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 Company, 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>
10
<PAGE>
<TABLE>
<CAPTION>
Present Principal Position with Erie
Name and Age Family Life and Other Material Positions
as of 04/01/99 Held During the Last Five Years
<S> <C>
Jan R. Van Gorder 1 Director since 1990. Senior Executive Vice President, Secretary and General Counseo of the
51 Company, Erie Indemnity Company, Attorney-in-Fact for Erie Insurance Exchange, and Erie
Insurance Company 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--the Company, 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 2,3,4C,5C Director since 1995. Counsel, Reed, Smith, Shaw & McClay, Attorneys,
65 since 1998, Partner 1969 to 1997, Associate 1964 to 1969; Director--the Company, 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
48 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>
11
<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, 1998, 1997, and 1996, to the Chief
Executive Officer of the Company and the four other most highly compensated
executive officers of the Company during 1998 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
Principal Position Year Salary Bonus(1) Compensation Compensation(2)
Stephen A. Milne 1998 $587,892 $437,391 $2,216 $66,051
President and Chief 1997 539,462 174,697 1,014 66,219
Executive Officer 1996 467,305 39,351 1,014 26,020
Jan R. Van Gorder 1998 $321,032 $143,511 $2,268 $27,887
Senior Executive Vice 1997 321,032 103,469 2,268 26,263
President, Secretary 1996 312,555 25,433 1,014 26,431
& General Counsel
John J. Brinling, 1998 $224,686 $103,143 $2,268 $25,731
Jr., Executive 1997 214,395 68,733 2,268 27,209
Vice President of 1996 202,126 34,652 946 24,098
EFL
Philip A. Garcia 1998 $224,040 $97,910 $510 $20,677
Executive Vice 1997 160,703 58,744 383 4,470
President & Chief 1996 142,255 9,039 332 3,966
Financial Officer
Douglas F. Ziegler 1998 $186,880 $77,753 $923 $5,153
Senior Vice 1997 160,847 53,941 784 4,643
President, Treasurer 1996 143,184 4,953 732 4,393
& Chief Investment
Officer
(1) The amounts indicated in the bonus column above represent amounts earned
by the named executives during 1998 under the Company's Annual Incentive
Plan. The purpose of the Annual Incentive Plan is to promote the best
interests of the Erie Insurance Exchange 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's financial goals compared to a selected peer group. The amounts
indicated also include minor perquisites to the named executive officers.
In 1998, these amounts were $11,323, $11,095, $11,288, $5,550 and $450
for Messrs. Milne, Van Gorder, Brinling, Garcia, and Ziegler,
respectively.
(2) Amounts indicated in the Annual Compensation column include the premiums
for group life insurance policies and supplemental group life insurance
policies for the named executive officers.
(3) 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 1998,
contributions made to the Employee Savings Plan amounted to $15,507,
$10,391, $7,911, $6,559, and $5,153, on behalf of Messrs. Milne, Van
Gorder, Brinling, Garcia and Ziegler, respectively. For the year 1997,
contributions made to the Employee Savings Plan amounted to $12,194,
$8,676, $6,432, $4,470, and $4,643 on behalf of Messrs. Milne, Van
Gorder, Brinling, Garcia and Ziegler, respectively. For the year 1996,
contributions made to the Employee Savings Plan amounted to $11,729,
$8,689, $6,026, $3,966, and $4,393 on behalf of Messrs. Milne, Van
12
<PAGE>
Gorder, Brinling, Garcia and Ziegler, respectively. Premiums paid during
1998 for split dollar life insurance policies for Messrs. Milne, Van
Gorder, Brinling, Garcia and Ziegler, respectively, were as follows:
$50,544, $17,496, $17,820, $14,118 and $-0-. Premiums paid during 1997
for split dollar life insurance policies for Messrs. Milne, Van Gorder,
Brinling, Garcia and Zeigler, respectively, were 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 Ziegler, respectively, were as follows: $14,291, $17,742,
$18,072, $-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 1998, no
miscellaneous expense reimbursements were incurred for Messrs. Milne, Van
Gorder, Brinling, Garcia and Ziegler, respectively. For the year 1997,
miscellaneous expenses reimbursements amounted to $2,494, $-0-, $3,077,
$-0- and $-0- for Messrs. Milne, Van Gorder, Brinling, Garcia and
Ziegler, respectively. For the year 1996, no miscellaneous expenses were
incurred for Messrs. Milne, Van Gorder, Brinling, Garcia and Ziegler,
respectively.
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 of the Company; 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. At a meeting of the Board of Directors held on March 9, 1999, the
Board of Directors extended the term of each executive officer's employment
agreement for one year. The employment agreements have the following principal
terms:
(a) A four-year term for Mr. Milne, expiring in December 2002, and for the
other executives a two-year term expiring in December 2000, 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:
(i) an amount equal to the sum of three times the executive's highest
annual base salary during the preceding three years plus an amount
equal to three times the total of the executive's highest award during
the preceding three years under the Company's Annual Incentive Plan;
(ii) any award or other compensation to which the executive is entitled
under the Company's Long-Term Incentive Plan; (iii) continuing
participation in any employee benefit plans for a period of three years
following termination to the extent the executive and his dependents
were eligible to participate in such programs immediately prior
to the executive's termination; and (iv) immediate vesting and
nonforfeitability of accrued benefits under the Company's Supplemental
Retirement Plan for Certain Members of the Erie Insurance Group
Retirement Plan for Employees ("Supplemental Employee Retirement
Plan");
(e) Provisions relating to confidentiality and nondisclosure 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.
13
<PAGE>
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.
Long-Term Incentive Plan
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 interests of such
employees with those of the shareholders of the Company. The Plan was approved
by shareholders in 1997 as a performance-based plan under the Code. 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 executive's 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 restricted shares of Class A Common Stock of the Erie Indemnity
Company equal to the dollar value of the phantom share units at the end of the
performance period. The vesting period for the restricted shares of Class A
Common Stock 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. The
following table sets forth target awards granted to the Company's five highest
paid executive officers in 1998 for the three-year performance period of 1998
through 2000 and for target awards granted to the Company's five highest paid
executive officers in 1997 for the three-year performance period of 1997 through
1999.
<TABLE>
<CAPTION>
LONG TERM INCENTIVE PLAN
AWARDS IN LAST FISCAL YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
Name Number of Shares, Performance Estimated Future Payouts
Units or Other or Other Period Under Non-Stock
Rights (#) Until Maturation Price-Based Plans
or Payout
- ------------------------------------------------------------------------------------------------------------------------------------
Phantom Share Units Threshold Target Maximum
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Milne, S. 45,839 1997-1999 -0- $188,812 (1)
76,757 1998-2000 -0- $377,623 (1)
Van Gorder, J. 27,279 1997-1999 -0- $112,361 (1)
22,839 1998-2000 -0- $112,361 (1)
Brinling, J. 18,218 1997-1999 -0- $ 75,038 (1)
15,253 1998-2000 -0- $ 75,038 (1)
Garcia, P. 12,719 1997-1999 -0- $ 52,390 (1)
14,243 1998-2000 -0- $ 70,070 (1)
Ziegler, D. 13,438 1997-1999 -0- $ 55,350 (1)
12,948 1998-2000 -0- $ 63,701 (1)
</TABLE>
(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.
14
<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 (the "Retirement
Plans").
PENSION PLAN TABLE
Years of Service
Remuneration 15 20 25 30 35
- ------------------------------------------------------------------------------
$ 150,000 $ 45,000 $ 60,000 $ 75,000 $ 90,000 $ 90,000
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 the Retirement Plans is the base salary reported in
the Summary Compensation Table.
Under the Retirement Plans, 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 - 22 years, Jan R. Van Gorder
- - 18 years, John J. Brinling, Jr. - 30 years, Philip A. Garcia - 18 years and
Douglas F. Ziegler - 10 years.
The benefits under Retirement Plans 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 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 Code similar to those provided to all other full time
employees as if the Code limitations were not in effect. Those benefits are
incorporated into the Pension Plan Table.
Director Compensation
The annual retainer for the 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 for attendance at meetings of the Board of Directors and its
committees. The total amount allocated to the Company for directors fees in 1998
was $78,437. Director Petersen also is compensated pursuant to a consulting
arrangement as disclosed in Item 13.
15
<PAGE>
Compensation Committee Interlocks and Insider Participation
The Executive Compensation Committee (the "Compensation Committee") of the
Company presently consists of Peter B. Bartlett, Chairman, J. Ralph Borneman,
Jr. and Harry H. Weil. No member of the Compensation 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 Compensation Committee, 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 Compensation Committee. 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.
- ------------------------
* - J. Ralph Borneman, Jr. is an officer and a principal shareholder of the
insurance agencies named herein which receive commissions in the ordinary course
of business from the Company. Mr. Borneman does not qualify as an outside
director for purposes of approving performance-based incentive plans as
qualified under section 162(m) of the Code. Mr. Borneman has recused himself
from voting on such plans as a member of the Compensation Committee.
- ------------------------
Report of the Executive Compensation Committee of the Company
The Compensation 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 the Compensation
Committee by the Board of Directors. The Board of Directors has authorized the
Compensation Committee to consider the compensation of the four highest paid
officers, including the Chief Executive Officer. The Compensation Committee is
currently composed of three directors who are not officers or employees of the
Company or any of its affiliates. The purpose of the Compensation 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 Company's 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 shareholder value and policyholder security. 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 Section 162(m) of the Code, the Company is not allowed a federal income
tax deduction for compensation, under certain circumstances, paid to certain
executive officers to the extent that such 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 with the exception of Stephen
A. Milne, President and Chief Executive Officer of the Company, in 1998. The
Compensation Committee may consider adopting policies with respect to this
limitation on deductibility when appropriate.
The Compensation Committee reviewed the salary ranges and base salaries of the
four highest paid executives, including the Chief Executive Officer, in 1998.
The Compensation 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 Compensation
Committee then reviews the salary ranges for the Chief Executive Officer and the
other three highest paid 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 Compensation 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, company asset size and 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
Compensation Committee also consulted data obtained from Towers Perrin, a
nationally recognized consulting firm with specific expertise in the insurance
industry, to make recommendations regarding executive compensation.
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.
16
<PAGE>
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 of Directors approved adoption of an annual incentive plan and long-term
incentive plan for senior executives of the Company as recommended by the
Executive Committee at its meeting of March 11, 1997 (the "Annual Incentive
Plan" and the "Long-Term Incentive Plan," respectively). The purpose of the
Annual Incentive Plan is to promote the best interests of the Company while
enhancing shareholder value 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 awards will be paid in
cash only.
Annual Incentive Plan target award levels, expressed as a percentage of base
salary, are established annually by the Compensation Committee. Payments under
the Annual Incentive Plan are based on a combination of individual executive
performance and the Company's performance.
The Long-Term Incentive Plan, which was approved by shareholders on April 29,
1997, for purposes of qualifying the plan as a performance-based plan under
Section 162(m) of the Code, is designed to maximize returns to shareholders 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 Compensation Committee.
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 1998 compensation. Compensation of the next three most
highly compensated individuals is determined by the Compensation 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 Compensation Committee.
The Company's Executive Compensation Committee:
Peter B. Bartlett, Chairman
J. Ralph Borneman, Jr.
Harry H. Weil
17
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of 2/28/99
(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 16530
(b) Shares beneficially owned directly or indirectly by all Directors and
Officers:
Name & Address Shares
of Beneficial Beneficially Percent of
Owner Owned Class
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 --
30261/2Q Street, NW
Washington, DC 20007
Susan Hirt Hagen 154,782 1.64%
5727 Grubb Rd.
Erie, PA 16506
F. William Hirt 167,034 1.77%
3270 Kingston Court
Erie, PA 16506
Edmund J. Mehl 12,150 .13%
504 Frontier Dr.
Erie, PA 16505
Stephen A. Milne 200 --
100 Culbertson Drive
Lake City, PA 16423
18
<PAGE>
(b) Shares beneficially owned directly or indirectly by all Directors and
Officers:
Name & Address Shares
of Beneficial Beneficially Percent of
Owner Owned Class
John M. Petersen 92,141 .98%
124 Voyageur Dr.
Erie, PA 16505
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
Douglas F. Ziegler 570 --
378 Ridgeview Drive
Erie, PA 16505
Officers and directors
as a group (16 persons) 564,220(2) 5.97%(2)
(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 Erie
Indemnity's holding of Common Stock of the Company. There are two H.O.
Hirt Trusts, one for the benefit of F. William Hirt and one for the
benefit of Susan Hirt Hagen. Each of the H.O. Hirt Trusts is the record
owner of 1,170 shares of Class B Common Stock, or 38.11% of the
outstanding shares of the Company's Class B Common Stock. The trustees
of the H.O. Hirt Trusts are F. William Hirt, Susan Hirt Hagen and
Banker's Trust Company of New York. Mr. Hirt and Mrs. Hagen, who are
brother and sister, are each the beneficial owner of 1,170 shares of
Class B Common Stock held by the H.O. Hirt Trusts. 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.
19
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors Borneman and Black 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 the companies' standard commission schedules and agents' contracts.
Such payments made in 1998 to the agencies for commissions written on
insurance policies from the property and casualty affiliated insurers and
Erie Family Life Insurance Company amounted to $2,843,333 and $541,307 for
the Borneman and the Black insurance agencies, respectively. Of these
amounts, the Company paid commissions of $121,310 and $33,437 to the
Borneman and the Black insurance agencies, respectively.
Director Borneman, in his capacity as an insurance agent, placed a worker's
compensation insurance policy covering employees of the Company with
Fireman's Fund Insurance Company. Although director Borneman has received
no compensation to date in connection with the placement of that policy, in
the future he may be entitled to receive a commission from Fireman's Fund
in accordance with Fireman's Fund's standard commission schedules and
agents' contracts for placing that insurance policy.
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 provided to the Company, and its affiliates, by
Dispatch Printing, Inc. amounted to $99,293 in 1998.
John M. Petersen, a director and former President and Chief Executive
Officer, and previous Chief Investment Officer of the Erie Insurance Group
of Companies, 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 stocks 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 1998 by the Company, the Erie
Insurance Exchange, the Erie Indemnity Company, and the pension trust was
$60,707, $3,230,854, $120,797 and $107,687, respectively.
Director Bartlett is a partner of Brown Brothers Harriman & Co. ("Brown
Brothers"). During 1998, the Company and its affiliates invested
approximately $16,609,958 in various limited partnerships, of which Brown
Brothers through its Corporate Finance Division is the general partner,
and, as the general partner, was paid management fees by Partnerships, of
which $429,113 was the combined amount allocable to the Company, the Erie
Insurance Exchange and the Erie Indemnity Company, based upon their limited
partnership interests. Director Bartlett has not and will not receive any
compensation from Brown Brothers with respect to any income earned by Brown
Brothers or its Corporate Finance Division from the management of the
investments by the Company and its affiliates in such limited partnerships.
20
<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 26 through 36 in the Company's annual report to
shareholders for the year ended December 31, 1998.
Independent Auditors' Report
Statements of Financial Position - December 31, 1998 and 1997
Statements of Operations for the years ended December 31, 1998,
1997 and 1996
Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996
Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996
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 24
Schedule I - Summary of Investments other than
Investments in Related Parties 25
Schedule III - Supplementary Insurance Information 26
Schedule IV - Reinsurance 27
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.
21
<PAGE>
(3) Exhibits:
Exhibit
Number Description of Exhibit
3.1 Amended and Restated By-laws of Registrant
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 1998 Annual Report to Security Holders. Reference is
made to the Annual Report furnished to the Commission,
herewith.
27 Financial Data Schedule
- ---------------------------
* Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K Annual Report for the year ended
December 31, 1997 that was filed with the Commission on March 11,
1998.
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 fourth quarter ended December 31, 1998.
22
<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 9, 1999 ERIE FAMILY LIFE INSURANCE COMPANY
(Registrant)
Principal Officers
/s/ Stephen A. Milne
Stephen A. Milne, President and CEO
/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
Peter B. Bartlett Edmund J. Mehl
/s/ Samuel P. Black, III /s/ Stephen A. Milne
Samuel P. Black, III Stephen A. Milne
/s/ J. Ralph Borneman /s/ John M. Petersen
J. Ralph Borneman John M. Petersen
/s/ Patricia A. Goldman /s/ Jan R. Van Gorder
Patricia A. Goldman Jan R. Van Gorder
Susan Hirt Hagen /s/ Harry H. Weil
Harry H. Weil
/s/ F. William Hirt
F. William Hirt
23
<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, 1998 and 1997 and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998, as contained in the 1998
annual report, incorporated by reference in the annual report on Form 10-K for
the year ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1998
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 16, 1999
24
<PAGE>
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
<TABLE>
<CAPTION>
December 31, 1998
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 $ 4,406,278 $ 5,179,278 $ 5,179,278
U. S. Government Agency 16,025,013 16,584,434 16,584,434
States & Political Subdivisions 2,056,746 2,163,346 2,163,346
Special Revenue 11,064,596 11,847,457 11,847,457
Public Utilities 70,265,181 73,540,979 73,540,979
U. S. Banks, Trusts, and Insurance Companies 113,542,943 120,988,299 120,988,299
U. S. Industrial and Miscellaneous 331,431,877 347,249,132 347,249,132
Foreign Governments - Agency 2,989,533 2,681,700 2,681,700
Foreign Industrial and Miscellaneous 24,692,963 25,288,612 25,288,612
- -----------------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities available-for-sale $ 576,475,130 $ 605,523,237 $ 605,523,237
- -----------------------------------------------------------------------------------------------------------------------------------
Equity Securities
Common Stock
U. S. Banks, Trusts and Insurance Companies $ 7,254,301 $ 11,605,477 $ 11,605,477
U. S. Industrial and Miscellaneous 40,574,024 45,710,001 45,710,001
Non-Redeemable Preferred Stocks:
Public Utilities 4,000,000 4,040,000 4,040,000
U. S. Banks, Trusts and Insurance Companies 43,056,959 44,769,972 44,769,972
U. S. Industrial and Miscellaneous 12,951,292 12,638,260 12,638,260
Foreign Banks, Trusts, and Insurance Companies 12,873,364 12,930,000 12,930,000
Foreign Industrial and Miscellaneous 3,900,000 4,100,000 4,100,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total Equity Securities $ 124,609,940 $ 135,793,710 $ 135,793,710
- -----------------------------------------------------------------------------------------------------------------------------------
Real Estate
Investment Property $ 1,541,445 $ 1,541,445 $ 1,541,445
Policy Loans 6,013,130 6,013,130 6,013,130
Mortgage Loans 10,070,394 10,070,394 10,070,394
Other Invested Assets 15,940,561 15,940,561 15,940,561
- -----------------------------------------------------------------------------------------------------------------------------------
Total Investments $ 734,650,600 $ 774,882,477 $ 774,882,477
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
SCHEDULE III - 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>
1998
Ordinary Life Insurance $ 61,387,166 $ 144,849,922 $ 138,375 $ 1,594,030
Group Life Insurance 0 1,043,324 0 207,000
Annuities 9,529,094 524,122,492 0 0
Supplemental Contracts 0 607,094 0 0
- ---------------------------------------------------------------------------------------------------------------------
Total $ 70,916,260 $ 670,622,832 $ 138,375 $ 1,801,030
- ---------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
SCHEDULE III - 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>
1998
Ordinary Life Insurance $ 35,732,584 $ 16,128,825 $ 17,265,146 $ 4,147,159 $ 8,828,794
Group Life Insurance 2,501,243 75,545 834,674 0 623,339
Annuities 4,729 36,073,973 29,775,077 248,396 447,308
Supplemental Contracts 0 51,000 95,026 0 3,583
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 38,238,556 $ 52,329,343 $ 47,969,923 $ 4,395,555 $ 9,903,024
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Net of reinsurance ceded
</FN>
</TABLE>
<PAGE>
SCHEDULE IV - 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, 1998
Life Insurance in force $ 13,235,757,000 $ 1,307,123,000 $ 32,878,000 $ 11,961,512,000 0.27%
Premiums for the year
Life Insurance 39,786,469 4,053,885 0 35,732,584 -0-
Group 2,409,053 0 96,919 2,505,972 3.87%
- -----------------------------------------------------------------------------------------------------------------------------------
Total Premiums $ 42,195,522 $ 4,053,885 $ 96,919 $ 38,238,556 0.25%
- -----------------------------------------------------------------------------------------------------------------------------------
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%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
3.1 Amended and Restated By-laws of Registrant 29
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 1998 Annual Report to Security Holders. Reference is made
to the Annual Report furnished to the Commission, herewith. 47
27 Financial Data Schedule 82
* Such exhibit is incorporated by reference to the like titled exhibit in the
Registrant's Form 10-K Annual Report for the year ended December 31, 1997
that was filed with the Commission on March 11, 1998.
28
EXHIBIT 3.1
BYLAWS
-- of --
ERIE FAMILY LIFE INSURANCE COMPANY
March 11, 1998
ARTICLE I
Offices
Section 1.01. Principal Office. The principal office of Erie
Family Life Insurance Company, a Pennsylvania business corporation, shall be
located in the City of Erie, Pennsylvania.
ARTICLE II
Meetings of Shareholders
Section 2.01. Annual Meeting. The Annual Meeting of Shareholders shall
be held each year, at a day and time fixed by the Board of Directors. At the
Annual Meeting, the Shareholders then entitled to vote shall elect Directors and
shall transact such other business as may properly be brought before the
meeting. In elections for Directors, voting need not be by ballot, except upon
demand made by a Shareholder entitled to vote at the election and before the
voting begins.
Section 2.02. Special Meetings.
(a) Call of Special Meetings. Special meetings of the
Shareholders may be called at any time by:
(1) the Chairman of the Board,
(2) the Chief Executive Officer,
(3) the Board of Directors,
(4) the Chairman of the Executive Committee, or
(5) Shareholders entitled to cast at least twenty percent
(20%) of the votes that all Shareholders are entitled
to cast at the particular meeting.
29
<PAGE>
(b) Fixing of Time for Meeting. At any time, upon written request of
any person who has called a special meeting, it shall be the duty of the
Secretary to fix the day and time of the meeting, which shall be held not more
than 60 days after the receipt of the request. If the Secretary neglects or
refuses to fix the day and time of the meeting, the person or persons calling
the meeting may do so.
Section 2.03. Place of Meeting. The place of meeting for any Annual or
Special Meeting of Shareholders of the corporation shall be at the principal
office of the corporation, unless another place is designated by the Board of
Directors in the notice of the meeting.
Section 2.04. Notice of Meeting.
(a) General Rule. Written notice of every meeting of the Shareholders
stating the place, day and time of the meeting shall be given by, or at the
direction of, the Secretary to each Shareholder of record entitled to vote at
the meeting at least:
(1 ten days prior to the day named for a meeting called
to consider a fundamental transaction under 15 Pa.C.S.
Chapter 19; or
(2) five days prior to the day named for the meeting in any
other case.
If the Secretary neglects or refuses to give notice of a meeting, the person or
persons calling the meeting may do so. In the case of a Special Meeting of
Shareholders, the notice shall specify the general nature of the business to be
transacted.
(b) Manner of Giving Notice. Whenever written notice is required to be
given to any Shareholder, it may be given either personally or by sending a copy
thereof by first class or express mail, postage prepaid, or by telegram (with
messenger service specified), telex or TWX (with answerback received) or courier
service, charges, prepaid, or by telecopier, to the address (or to the telex,
TWX, telecopier or telephone number) of the Shareholder appearing on the books
of the corporation. If the notice is sent by mail, telegraph or courier service,
it shall be deemed to have been given to the person entitled thereto when
deposited in the United States mail or with a telegraph office or courier
service for delivery to that person or, in the case of telex or TWX, when
dispatched or, in the case of telecopier, when received.
(c) Adjourned Shareholder Meetings. When a meeting of Shareholders is
adjourned, it shall not be necessary to give any notice of the adjourned meeting
or of the business to be transacted at an adjourned meeting, other than by
announcement at the meeting at which the adjournment is taken, unless the Board
fixes a new record date for the adjourned meeting.
30
<PAGE>
(d) Notice of Action by Shareholders on Bylaws. In the case of a
meeting of Shareholders that has as one of its purposes action on the bylaws,
written notice shall be given to each Shareholder that the purpose, or one of
the purposes, of the meeting is to consider the adoption, amendment or repeal of
the bylaws. There shall be included in, or enclosed with, the notice a copy of
the proposed amendment or a summary of the changes to be effected thereby.
Section 2.05. Quorum.
(a) General Rule. A meeting of Shareholders of the corporation duly
called shall not be organized for the transaction of business unless a quorum is
present. The presence, in person or by proxy, of Shareholders entitled to cast
at least a majority of the votes that all Shareholders are entitled to cast on a
particular matter to be acted upon at the meeting shall constitute a quorum for
the purposes of consideration and action on the matter. Shares of the
corporation owned, directly or indirectly, by it and controlled, directly or
indirectly, by the Board of Directors of this corporation, as such, shall not be
counted in determining the total number of outstanding shares for quorum
purposes at any given time.
(b) Withdrawal of a Quorum. The Shareholders present at a duly
organized meeting can continue to do business until adjournment, notwithstanding
the withdrawal of enough Shareholders to leave less than a quorum.
(c) Adjournment for Lack of Quorum. If a meeting cannot be organized
because a quorum has not attended, those present may, except as provided in the
Business Corporation Law, adjourn the meeting to such time and place as they may
determine.
(d) Adjournments Generally. Any meeting at which Directors are to be
elected shall be adjourned only from day to day, or for such longer periods not
exceeding 15 days each as the Shareholders present and entitled to vote shall
direct, until the Directors have been elected. Any other regular or special
meeting may be adjourned for such period as the Shareholders present and
entitled to vote shall direct.
Section 2.06. Informal Action by Shareholders. Any action required or
permitted to be taken at a meeting of the Shareholders or of a class of
Shareholders may be taken without a meeting if, prior or subsequent to the
action, a consent or consents thereto by all of the Shareholders who would be
entitled to vote at a meeting for such purpose shall be filed in writing with
the Secretary of the corporation.
Section 2.07. Waiver of Notice. Whenever any written notice is required
to be given to any Shareholder, a waiver thereof in writing signed by the
Shareholder entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of the notice. Attendance of a
person at any meeting shall constitute a waiver of notice of the meeting except
where a person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
was not lawfully called or convened.
31
<PAGE>
Section 2.08. Voting and Other Action by Proxy.
(a)General Rule.
(1) Every Shareholder entitled to vote at a meeting of
Shareholders or to express consent or dissent to corporate action in
writing without a meeting may authorize another person to act for the
Shareholder by proxy.
(2) The presence of, or vote or other action at a meeting of
Shareholders, or the expression of consent or dissent to corporate
action in writing, by a proxy of a Shareholder shall constitute the
presence of, or vote or action by, or written consent or dissent of the
Shareholder.
(3) Where two or more proxies of a Shareholder are present,
the corporation shall, unless otherwise expressly provided in the
proxy, accept as the vote of all shares represented thereby the vote
cast by a majority of them and, if a majority of the proxies cannot
agree whether the shares represented shall be voted or upon the manner
of voting the shares, the voting of the shares shall be divided equally
among those persons.
(b) Minimum Requirements. Every proxy shall be executed in writing by
the Shareholder or by the duly authorized attorney-in-fact of the Shareholder
and filed with the Secretary of the corporation. A proxy, unless coupled with an
interest, shall be revocable at will, notwithstanding any other agreement or any
provision in the proxy to the contrary, but the revocation of a proxy shall not
be effective until written notice thereof has been given to the Secretary of the
corporation. An unrevoked proxy shall not be valid after three years from the
date of its execution unless a longer time is expressly provided therein. A
proxy shall not be revoked by the death or incapacity of the maker unless,
before the vote is counted or the authority is exercised written notice of the
death or incapacity is given to the Secretary of the corporation.
(c) Expenses. Unless otherwise restricted in the articles, the
corporation shall pay the reasonable expenses of solicitation of votes, proxies
or consents of Shareholders by or on behalf of the Board of Directors or its
nominees for election to the Board, including solicitation by professional proxy
solicitors and otherwise.
Section 2.09. Voting by Fiduciaries and Pledgees. Shares of the
corporation standing in the name of a trustee or other fiduciary and shares held
by an assignee for the benefit of creditors or by a receiver may be voted by the
trustee, fiduciary, assignee or receiver. A shareholder whose shares are pledged
shall be entitled to vote the shares until the shares have been transferred into
the name of the pledgee, or a nominee of the pledgee, but nothing in this
section shall affect the validity of a proxy given to a pledgee or nominee.
32
<PAGE>
Section 2.10. Voting by Joint Holders of Shares.
(a)General Rule. Where shares of the corporation are held jointly
or as tenants in common by two or more persons, as fiduciaries or otherwise:
(1) if only one or more of such persons is present in person
or by proxy, all of the shares standing in the names of such persons
shall be deemed to be represented for the purpose of determining a
quorum and the corporation shall accept as the vote of all the shares
the vote cast by a joint owner or a majority of them; and
(2) if the persons are equally divided upon whether the shares
held by them shall be voted or upon the manner of voting the shares,
the voting of the shares shall be divided equally among the persons
without prejudice to the rights of the joint owners or the beneficial
owners thereof among themselves.
(b) Exception. If there has been filed with the Secretary of the
corporation a copy, certified by an attorney-at-law to be correct, of the
relevant portions of the agreement under which the shares are held or the
instrument by which the trust or estate was created or the order of court
appointing them or of an order of court directing the voting of the shares, the
persons specified as having such voting power in the document latest in date of
operative effect so filed, and only those persons, shall be entitled to vote the
shares but only in accordance therewith.
Section 2.11. Voting by Corporations.
(a) Voting by Corporate Shareholders. Any corporation that is a
Shareholder of this corporation may vote by any of its officers or agents, or by
proxy appointed by any officer or agent, unless some other person, by resolution
of the Board of Directors of the other corporation or a provision of its
articles or bylaws, a copy of which resolution or provision certified to be
correct by one of its officers has been filed with the Secretary of this
corporation, is appointed its general or special proxy in which case that person
shall be entitled to vote the shares.
(b) Controlled Shares. Shares of this corporation owned, directly or
indirectly, by it and controlled, directly or indirectly, by the Board of
Directors of this corporation, as such, shall not be voted at any meeting and
shall not be counted in determining the total number of outstanding shares for
voting purposes at any given time.
Section 2.12. Determination of Shareholders of Record.
33
<PAGE>
(a) Fixing Record Date. The Board of Directors may fix a time prior to
the date of any meeting of Shareholders as a record date for the determination
of the Shareholders entitled to notice, or to vote at, the meeting, which time,
except in the case of an adjourned meeting, shall be not more than 90 days prior
to the date of the meeting of Shareholders. Only Shareholders of record on the
date fixed shall be so entitled notwithstanding any transfer of shares on the
books of the corporation after any record date fixed as provided in this
subsection. The Board of Directors may similarly fix a record date for the
determination of Shareholders of record for any other purpose. When a
determination of Shareholders of record has been made as provided in this
section for purposes of a meeting, the determination shall apply to any
adjournment thereof unless the Board fixes a new record date for the adjourned
meeting.
(b) Determination When a Record Date is not Fixed. If a record date is
not fixed:
(1) The record date for determining Shareholders entitled to
notice of or to vote at a meeting of Shareholders shall be at the close
of business on the day next preceding the day on which notice is given
or, if notice is waived, at the close of business on the day
immediately preceding the day on which the meeting is held.
(2) The record date for determining Shareholders entitled to
express consent or dissent to corporate action in writing without a
meeting, when prior action by the Board of Directors is not necessary,
shall be the close of business on the day on which the first written
consent or dissent is filed with the Secretary of the corporation.
(3) The record date for determining Shareholders for any other
purpose shall be at the close of business on the day on which the Board
of Directors adopts the resolution relating thereto.
Section 2.13. Voting Lists.
(a) General Rule. The officer or agent having charge of the transfer
books for shares of the corporation shall make a complete list of the
Shareholders entitled to vote at any meeting of Shareholders, arranged in
alphabetical order, with the address of and the number of shares held by each.
The list shall be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any Shareholder during the whole time
of the meeting for the purposes thereof.
(b) Effect of List. Failure to comply with the requirements of this
section shall not affect the validity of any action taken at a meeting prior to
a demand at the meeting by any Shareholder entitled to vote thereat to examine
the list. The original share register or transfer book, or a duplicate thereof
kept in this Commonwealth, shall be prima facie evidence as to who are the
Shareholders entitled to examine the list or share register or transfer book or
to vote at any meeting of Shareholders.
34
<PAGE>
Section 2.14. Judges of Election.
(a) Appointment. In advance of any meeting of Shareholders of the
corporation, the Board of Directors may appoint Judges of Election, who need not
be Shareholders, to act at the meeting or any adjournment thereof. If Judges of
Election are not so appointed, the presiding officer of the meeting may, and on
the request of any Shareholder shall, appoint Judges of Election at the meeting.
The number of Judges shall be one or three. A person who is a candidate for
office to be filled at the meeting shall not act as a Judge.
(b) Vacancies. In case any person appointed as a Judge fails to appear
or fails or refuses to act, the vacancy may be filled by appointment made by the
Board of Directors in advance of the convening of the meeting or at the meeting
by the presiding officer thereof.
(c) Duties. The Judges of Election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, the authenticity, validity and effect of proxies,
receive votes or ballots, hear and determine all challenges and questions in any
way arising in connection with the right to vote, count and tabulate all votes,
determine the result and do such acts as may be proper to conduct the election
or vote with fairness to all Shareholders. The Judges of Election shall perform
their duties impartially, in good faith, to the best of their ability and as
expeditiously as is practical. If there are three Judges of Election, the
decision, act or certificate of a majority shall be effective in all respects as
the decision, act or certificate of all.
(d) Report. On request of the presiding officer of the meeting, or of
any Shareholder, the Judges shall make a report in writing of any challenge or
question or matter determined by them, and execute a certificate of any fact
found by them. Any report or certificate made by them shall be prima facie
evidence of the facts stated therein.
ARTICLE III
Directors
Section 3.01. General Powers. All powers vested by law in the
corporation shall be exercised by or under the authority of, and the business
and affairs of the corporation shall be managed under the direction of, the
Board of Directors.
35
<PAGE>
Section 3.02. Number, Tenure and Qualifications. The Board of Directors
shall consist of not less than seven (7), nor more than sixteen (16), Directors
(the exact number to be fixed from time to time by resolution of the Board), the
majority of whom shall be citizens and residents of the United States, each of
whom shall be at least eighteen (18) years of age, elected at the Annual Meeting
of Shareholders, to serve until the ensuing Annual Meeting and until a successor
is elected and qualified or until his or her earlier death, resignation or
removal. No person who is seventy (70) years of age or older shall be elected a
Director unless already a Director in office and qualifying under one or more of
the following exceptions if such person is: (a) seventy-five (75) years of age
or older on the date of the 1990 Annual Meeting; or (b) under seventy-five (75)
years of age on the date of the 1990 Annual Meeting, provided however, that such
person cannot continue to serve beyond the end of the term in which becoming
seventy-five (75) years of age; or (c) seventy (70) years of age or older and
serving as a Trustee of the H. O. Hirt Trust, so long as the Trust holds the
majority Class B, or equivalent, voting shares of the corporation; or (d)
seventy (70) years of age or older and serving, or previously served, in at
least one of the two highest full-time executive positions of the corporation
for a period of at least one (1) year.
Section 3.03. Meetings. The Annual Meeting of the Board of Directors
shall be held immediately after the Annual Meeting of Shareholders for the
purpose of organization and the election of officers, and notice thereof shall
be given in the same manner as hereinbefore provided in the case of the Annual
Meeting of Shareholders. The Board of Directors shall provide, by resolution,
for the holding of at least four (4) regular meetings including the annual
meeting on specified days or dates without notice. Special meetings of the Board
of Directors may be called by or at the request of the Chairman of the Board or
by the President, or by at least three (3) Directors. Written notice of every
special meeting of Directors stating the place, day and time of the meeting
shall be given not less than five (5) days before the meeting, either personally
or by first class or express mail or by telegraph, telex or TWX (with answerback
received) or courier services, charges prepaid, or by telecopier. If the notice
is sent by mail, telegraph or courier service, it shall be deemed to have been
given to the person entitled thereto when deposited in the United States mail or
with a telegraph office or courier service for delivery to that person or, in
the case of telex or TWX, when dispatched or, in the case of telecopier, when
received.
Section 3.04. Waiver of Notice. Whenever any written notice is required
to be given to any Director, a waiver thereof in writing signed by the Director
entitled to the notice, whether before or after the time stated therein, shall
be deemed equivalent to the giving of the notice. Attendance of a person at any
meeting shall constitute a waiver of notice of the meeting except where a person
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting was not lawfully
called or convened.
Section 3.05. Quorum. A majority of the Directors in office of the
corporation shall be necessary to constitute a quorum for the transaction of
business; provided, however, that a quorum shall consist of at least five (5)
Directors if the Board consists of only seven (7) Directors. The acts of a
majority of the directors present and voting at a meeting at which a quorum is
present shall be the acts of the Board of Directors.
Section 3.06. Limiting Liability of Directors. (The provisions
of this Section were adopted by the Shareholders of the corporation on April 28,
1987.)
36
<PAGE>
A. A Director of the corporation shall stand in a fiduciary relation to the
corporation and shall perform his duties as a Director, including his duties as
a member of any committee of the Board of Directors upon which he may serve, in
good faith, in a manner he reasonably believes to be in the best interest of the
corporation, and with such care, including reasonable inquiry, skill and
diligence, as a person of ordinary prudence would use under similar
circumstances. In performing his duties, a Director shall be entitled to rely in
good faith on information, opinions, reports or statements, including financial
statements and other financial data, in each case prepared or presented by any
of the following:
(1) One or more officers or employees of the corporation whom the
Director reasonably believes to be reliable and competent in
the matters present, or
(2) Counsel, public accountants or other persons as to matters
which the Director reasonably believes to be within the
professional or expert competence of such persons, or
(3) A committee of the Board of Directors upon which he does not
serve, duly designated in accordance with law, as to matters
within its designated authority, which committee the Director
reasonably believes to merit confidence.
A Director shall not be considered to be acting in good faith if he has
knowledge concerning the matter in question that would cause his reliance to be
unwarranted.
B. In discharging the duties of their respective positions, the Board of
Directors, committees of the Board of Directors and individual Directors, may,
in considering the best interest of the corporation, consider the effects of any
action upon employees, upon suppliers and customers of the corporation and upon
communities in which offices or other establishments of the corporation are
located, and all other pertinent factors. The consideration of these factors
shall not constitute a violation of subsection A of this section.
C. Absent breach of fiduciary duty, lack of good faith or self-dealing, any
action taken as a Director or any failure to take any action as a Director shall
be presumed to be in the best interests of the corporation.
D. Subsections (d) through (f) of 15 Pa.C.S. Section 511 shall not be applicable
to the Company. The remaining subsections of Section 511 shall continue to be
applicable to the Company. (Added 7/24/90)
E. A Director of the corporation shall not be personally liable for monetary
damages as such for any action taken, or any failure to take any action, unless:
(1) The Director has breached or failed to perform his duties of
his office under subsections A through C of this section, and
(2) The breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness.
F. The provisions of subsection E of this section shall not apply to:
37
<PAGE>
(1)The responsibility or liability of a Director pursuant to any
criminal statute, or
(2)The liability of a Director for the payment of taxes pursuant to
local, state or federal law.
Section 3.07. Executive Committee.
(a) General Rule. There shall be an Executive Committee which, except
as provided in subsection (b), shall have and exercise all power and authority
of the Board of Directors between meetings of the Board. The Executive Committee
shall consist of not fewer than three (3) regular members including the Chief
Executive Officer of the corporation who shall be Chairman of the Executive
Committee, unless another member shall be designated by resolution of the Board.
All of the regular members shall be designated by resolution of the Board. Not
less than one-third of the committee must be Directors who are not officers or
employees of the corporation or of any entity controlling, controlled by, or
under common control with the corporation and who are not beneficial owners of a
controlling interest in the voting securities of the corporation. The Executive
Committee shall meet at any time and place designated and at least six hours
oral or written notice given by or on behalf of the Chairman of the Executive
Committee, and shall report promptly to the entire Board of Directors the
substance of any action taken by the Executive Committee, which action may be
changed by the Board without prejudice to intervening rights.
(b) Limitation on Authority. The Executive Committee shall not have any
power or authority as to the following:
(1) The submission to Shareholders of any action requiring
approval of Shareholders under the Business Corporation Law.
(2) The creation or filling of vacancies in the Board of
Directors.
(3) The adoption, amendment or repeal of these bylaws.
(4) The amendment or repeal of any resolution of the Board
that by its terms is amendable or repealable only by the Board.
(5) Action on matters committed by a resolution of the Board
of Directors to another committee of the Board.
Section 3.08. Audit Committee and Audit.
38
<PAGE>
(a) Appointment. The Board of Directors shall appoint annually an Audit
Committee which shall consist of not less than three (3) Directors who are not
employees of the corporation. the Audit Committee shall determine the nature and
extent of the audit of the records and of the verification and certification of
the accounts of the corporation, and not later than at the last meeting of the
Board in a calendar year, shall recommend to the Board the engagement and
compensation of an independent Certified Public Accountant or firm of such
accountants to audit the said records and certify the said accounts for the
ensuing calendar year. In making said audit, verification and certification,
said accountant or firm shall be under the direction of the Audit Committee and
shall be responsible to and shall report to the Board of Directors and not to
the officers of the corporation. The Chief Executive Officer and the President,
if not also the Chief Executive Officer, shall be non-voting, ex-officio members
of the Audit Committee.
(b) Audit. The Audit Committee shall present the audit in full to the
Board of Directors at a meeting of the Board which shall be held at least two
weeks prior to the next Annual Meeting of Shareholders. The audit of the
corporation need not be mailed to Shareholders, but it shall be available for
inspection by any Shareholders at the office of the corporation during usual
business hours and at the Annual Meeting.
Section 3.09. Alternate Committee Members. The Board of Directors may
designate one or more Directors as alternate members of any committee who may
replace any absent or disqualified member at any meeting of the committee or for
the purposes of any written action by the committee. In the absence or
disqualification of a member and alternate member or members of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not constituting a quorum, may unanimously appoint another
Director to act at the meeting in the place of the absent or disqualified
member.
Section 3.10. Other Committees. The Board of Directors may designate
from time to time any other committees as the Board may deem necessary and
appropriate. The Board may set the number of members of any such committee and
may appoint such members.
Section 3.11. Informal Action by Directors. Any action required or
permitted to be taken at a meeting of the Directors may be taken without a
meeting if, prior or subsequent to the action, a consent or consents thereto by
all of the Directors in office is filed with the Secretary of the corporation.
Any action without a meeting of the Board shall be limited to those situations
where time is of the essence and not in lieu of a regularly scheduled meeting.
Section 3.12. Vacancies. Vacancies in the Board of Directors, including
vacancies resulting from an increase in the number of Directors, may be filled
by a majority vote of the remaining members of the Board though less than a
quorum, or by a sole remaining Director, and each person so selected shall be a
director to serve for the balance of the unexpired term, and until a successor
has been selected and qualified or until his or her earlier death, resignation
or removal.
39
<PAGE>
Section 3.13. Removal of Directors
(a) Removal by the Shareholders. The entire Board of Directors, or any
class of the Board, or any individual Director may be removed from office
without assigning any cause by the vote of Shareholders, or of the holders of a
class or series of shares, entitled to elect Directors, or the class of
Directors. In case the Board or a class of the Board or any one or more
Directors are so removed, new Directors may be elected at the same meeting. The
Board of Directors may be removed at any time with or without cause by the
unanimous vote or consent of Shareholders entitled to vote thereon.
(b) Removal by the Board. The Board of Directors may declare vacant the
office of a Director who has been judicially declared of unsound mind or who has
been convicted of an offense punishable by imprisonment for a term of more than
one year or if, within 60 days after notice of his or her selection, the
Director does not accept the office either in writing or by attending a meeting
of the Board of Directors.
Section 3.14. Compensation. The Board of Directors shall have the
authority to fix compensation of Directors for their services as Directors, and
a Director may be a salaried officer of the corporation, who shall not receive
any additional compensation as a Director.
ARTICLE IV
Officers
Section 4.01. Number. The officers of the corporation shall be a
Chairman of the Board, a President, a Secretary, a Treasurer, and as many
Executive Vice Presidents, and Senior Vice Presidents as from time to time may
be determined by the Board of Directors. The President, Secretary and Treasurer
may not be the same person. The Treasurer must be a natural person. There shall
also be as many Vice Presidents and Assistant Officers as from time to time may
be determined by the Chief Executive Officer. Other officers, including the
office of Vice Chairman of the Board, as from time to time may be determined may
be added by resolution of the Board of Directors.
Section 4.02. Election, Appointment and Term of Office. The Board of
Directors shall elect annually at their first meeting following the Annual
Meeting of Shareholders, the following officers to serve until the next Annual
Meeting of Directors and until their successors are duly elected and qualified
or until their earlier death, resignation or removal:
(1) the three highest paid officers of the corporation,
(2) the Chairman of the Board and the President if they are
not among the three highest paid officers, and
(3) such other officers as the Board of Directors from time to
time may designate by resolution.
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<PAGE>
All officers not required to be elected by the Board or not designated by the
Board to be elected by the Board shall be appointed by the Chief Executive
Officer to serve at his or her pleasure.
Section 4.03. Standard of Care. An officer of the corporation shall
perform his or her duties as an officer in good faith, in a manner he or she
reasonably believes to be in the best interests of the corporation and with such
care, including reasonable inquiry, skill and diligence, as a person of ordinary
prudence would use under similar circumstances. A person who so performs his or
her duties shall not be liable by reason of having been an officer of this
corporation.
Section 4.04. Duties and Responsibilities. Officers of the corporation
shall have the duties and responsibilities assigned to them in their respective
position descriptions approved by the Chief Executive Officer in addition to the
following duties and responsibilities of the various offices:
(a) Chairman of the Board. The Chairman of the Board shall be the Chief
Executive Officer of the corporation unless otherwise provided by resolution of
the Board of Directors and shall have general supervision of the business,
affairs and property of the corporation and over its several officers. The
Chairman of the Board shall preside at all meetings of the Shareholders and of
the Board of Directors, and shall perform such other duties as from time to time
may be assigned by the Board of Directors. The Chairman of the Board shall be
ex-officio member of all committees, if any, but shall have no vote on the Audit
Committee and the Executive Compensation Committee.
(b) President. The President, in the absence of the Chairman of the
Board, or a Vice Chairman of the Board, if any, shall preside at all meetings of
the Shareholders and the Board of Directors. The President shall have and
exercise all the powers and authority of the Chairman of the Board when the
Chairman and a Vice Chairman, if any, are absent or unable to act during a
vacancy in the office of the Chairman of the Board. The President shall also
have such other duties and responsibilities as from time to time may be assigned
by the Chief Executive Officer or the Board of Directors.
(c) Secretary. The Secretary, or an Assistant Secretary, shall be
present at all meetings of the Board of Directors and of the Shareholders, and
the Secretary shall keep a record of all proceedings of the Board and its
committees and the Shareholders. The Secretary shall notify the Shareholders and
members of the Board of all regular and special meetings, have charge of the
corporate seal and of the books and records of the corporation pertaining to
actions of the Board or the Shareholders, and shall have such other duties and
authority as prescribed by the Pennsylvania Business Corporation Law and any
other applicable law. The Secretary shall also perform such duties as are
customary and incident to the office of the Secretary and shall have such other
duties as from time to time may be assigned by the Chief Executive Officer or
the Board of Directors.
41
<PAGE>
(d) Treasurer. The Treasurer shall have the care and custody of all
funds and securities of the corporation, depositing the same in the name of the
corporation with such bank or banks as the Board of Directors may select. The
Treasurer shall also perform such duties as are customary and incident to the
office of Treasurer and shall have such other duties as from time to time may be
assigned by the Chief Executive Officer or the Board of Directors.
(e) Executive Vice Presidents. An Executive Vice President shall, in
the absence of the President, perform all the duties of the President. If there
is more than one Executive Vice President, the Chief Executive Officer may
designate one of them to be senior. Executive Vice Presidents shall also have
such other duties and responsibilities as from time to time may be assigned by
the Chief Executive Officer or the Board of Directors.
(f) Senior Vice Presidents, Vice Presidents, Assistant Vice Presidents
and Other Officers. Senior Vice Presidents, Vice Presidents and Assistant Vice
Presidents and other officers shall perform such duties as from time to time may
be assigned by the Chief Executive Officer. The duties and responsibilities of
the Vice Chairman of the Board shall be assigned by resolution of the Board of
Directors.
Section 4.05. Compensation. The compensation of officers elected by the
Board of Directors shall be fixed by the Board of Directors subject to change
from time to time as the Board may determine; and the compensation of officers,
assistant officers, and agents appointed by the Chief Executive Officer shall be
fixed by the Chief Executive Officer subject to change from time to time as the
Chief Executive Officer shall determine.
ARTICLE V
Share Certificates and Their Transfer
Section 5.01. Share Certificates.
(a) Form. Certificates for shares of the corporation shall be in such
form as approved by the Board of Directors, and shall state that the corporation
is incorporated under the laws of Pennsylvania, the name of the person to whom
issued, and the number and class of shares and the designation of the series (if
any) that the certificate represents. The share register or transfer books and
blank share certificates shall be kept by the Secretary or by any transfer agent
or registrar designated by the Board of Directors for that purpose.
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<PAGE>
(b) Issuance. The share certificates of the corporation shall be
numbered, dated, and registered in the share register on transfer books of the
corporation as they are issued. They shall be signed by the Chairman of the
Board or the President and by the Secretary or the Treasurer, and shall bear the
corporate seal, which may be a facsimile, engraved or printed; but where such
certificate is signed by a transfer agent or a registrar the signature of any
corporate officer upon such certificate may be a facsimile, engraved or printed.
In case any officer who has signed, or whose facsimile signature has been placed
upon, any share certificate shall have ceased to be such officer because of
death, resignation or otherwise, before the certificate is issued, it may be
issued with the same effect as if the officer had not ceased to be such at the
date of its issue. The provisions of this Section 5.01 shall be subject to any
inconsistent or contrary agreement at the time between the corporation and any
transfer agent or registrar.
Section 5.02. Transfer of Shares. Transfer of shares of the corporation
shall be made on the books of the corporation by the registered holder thereof
or by his attorney thereunto authorized by a power of attorney, duly executed
and filed with the Secretary of the corporation and upon surrender for
cancellation of the certificate or certificates for such shares. No transfer
shall be made inconsistent with the provisions of the Uniform Commercial Code,
13 Pa.C.S. "8101 et. seq., and its amendments and supplements.
Section 5.03. Record Holder of Shares. The corporation shall be
entitled to treat the person in whose name any share or shares of the
corporation stand on the books of the corporation as the absolute owner thereof,
and shall not be bound to recognize any equitable or other claim to, or interest
in, such share or shares on the part of any other person.
Section 5.04. Lost, Destroyed or Mutilated Certificates. The holder of
any shares of the corporation shall immediately notify the corporation of any
loss, destruction or mutilation of the certificate therefore, and the Secretary
may, in his discretion, cause a new certificate or certificates to be issued to
such holder, in case of mutilation of the certificate, upon the surrender of the
mutilated certificate or, in case of loss or destruction of the certificate,
upon satisfactory proof of such loss or destruction and, if the Secretary shall
so determine, the deposit of a bond in such form and in such sum, and with such
surety or sureties, as he may direct.
ARTICLE VI
Corporate Actions
Section 6.01. Voting Securities of Other Corporations. Securities held
by the corporation in any other corporation shall be voted in person or by proxy
by the Chief Executive Officer or any other person duly authorized by the Chief
Executive Officer.
ARTICLE VII
Indemnification of Directors, Officers & Employees
Section 7.01. (The provisions of this Section were adopted by the
Shareholders on April 28, 1987.)
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<PAGE>
The Company shall indemnify any Director, officer or employee, who was or is a
party to, or is threatened to be made a party to or who is called as a witness
in connection with any threatened, pending, or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, including
an action by or in the right of the corporation by reason of the fact that he is
or was a Director, officer or employee of the corporation, or is or was serving
at the request of the corporation as a Director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding unless the act or failure to act giving rise to the
claim for indemnification is determined by a court to have constituted willful
misconduct or recklessness.
The indemnification and advancement of expenses provided by, or granted pursuant
to, this Article VII shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any bylaw, agreement, contract, vote of Shareholders, vote of disinterested
Directors or pursuant to the direction, howsoever embodied, of any court of
competent jurisdiction or otherwise, both as to action in his official capacity
and as to action on another capacity while holding such office. It is the policy
of the corporation that indemnification of, and advancement of expenses to,
Directors, officers and employees of the corporation shall be made to the
fullest extent permitted by law. To this end, the provisions of this Article VII
shall be deemed to have been amended for the benefit of Directors, officers and
employees of the corporation effective immediately upon any modification of the
Business Corporation Law of the Commonwealth of Pennsylvania (the "BCL") or the
Directors' Liability Act of the Commonwealth of Pennsylvania (the "DLA") which
expands or enlarges the power or obligation of corporations organized under the
BCL or subject to the DLA to indemnify, or advance expenses to, Directors,
officers and employees of the corporation.
The corporation shall pay expenses incurred by an officer, Director or other
employee, in defending a civil or criminal action, suit or proceeding in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such person to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
corporation.
The indemnification and advancement of expenses provided by, or granted pursuant
to, this Article VII shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a Director, officer or
employee and shall inure to the benefit of the heirs, executors and
administrators of such person.
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<PAGE>
The corporation shall have the authority to create a fund of any nature, which
may, but need not be, under the control of a trustee, or otherwise secure or
insure in any manner, its indemnification obligations, whether arising under
these Bylaws or otherwise. This authority shall include, without limitation, the
authority to (i) deposit funds in trust or in escrow, (ii) establish any form of
self-insurance, (iii) secure its indemnity obligation by grant of a security
interest, mortgage or other lien on the assets of the corporation, or (iv)
establish a letter of credit, guaranty or surety arrangement for the benefit of
such persons in connection with the anticipated indemnification or advancement
of expenses contemplated by this Article VII. The provision of this Article VII
shall not be deemed to preclude the indemnification of, or advancement of
expenses to, any person who is not specified in Section 7.01 of this Article
VII, but whom the corporation has the power or obligation to indemnify, or to
advance expenses for, under the provisions of the BCL or the DLA or otherwise.
The authority granted by this section shall be exercised by the Board of
Directors of the corporation.
Section 7.02. Proceedings Initiated by Indemnified Persons.
Notwithstanding any other provision of this Article VII, the corporation shall
not indemnify any person under this Article VII for any liability incurred in an
action, suit or proceeding initiated (which shall not be deemed to include
counterclaims or affirmative defenses) or participated in as an intervenor or
amicus curiae by the person seeking indemnification unless such initiation of or
participation in the action, suit or proceeding is authorized, either before or
after its commencement, by the affirmative vote of a majority of the Directors
in office. This section does not apply to successfully prosecuting or defending
the rights of any person to indemnification granted by or pursuant to this
Article VII.
ARTICLE VIII
Amendments
Section 8.01. Amendments. These bylaws may be altered, amended or
repealed and new bylaws adopted, either (i) by vote of the Shareholders at any
duly organized annual or special meeting of Shareholders, or (ii) with respect
to those matters that are not by statute committed expressly to the Shareholders
and regardless of whether the Shareholders have previously adopted or approved
the bylaw being amended or repealed, by vote of a majority of the Board of
Directors of the corporation in office at any regular or special meeting of
Directors. Any change in these bylaws shall take effect when adopted unless
otherwise provided in the resolution affecting the change.
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<PAGE>
I hereby certify that the foregoing By-Laws were adopted by unanimous vote at
the Organizational Meeting of the Subscribers to stock of the ERIE FAMILY LIFE
INSURANCE COMPANY on June 6, 1967, and were amended at the following meetings:
the 9th Annual Meeting of Stockholders, April 27, 1976; the 10th Annual Meeting
of Stockholders, April 26, 1977; the 13th Annual Meeting of Stockholders, April
29, 1980; the 58th Board of Directors Meeting, May 23, 1980; the 63rd Board of
Directors Meeting, March 4, 1981; the 69th Board of Directors Meeting, August
24, 1982; the 72nd Board of Directors Meeting, April 26, 1983; the 22nd Annual
Meeting of Stockholders, April 25, 1989; a Special Meeting of the Board of
Directors, July 24, 1990; the 108th Board of Directors Meeting, September 16,
1991; the 109th Board of Directors Meeting, December 19, 1991; the 120th Board
of Directors Meeting, March 1, 1994; the 133rd Board of Directors Meeting,
September 17, 1996; 140th Board of Directors Meeting, March 11, 1998.
/S/ J. R. Van Gorder
J. R. Van Gorder, Secretary
INCORPORATED BY REFERENCE, PAGE 16 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Total policy revenue $ 38,238,556 $ 35,193,472 $ 31,116,162 $ 28,073,997 $ 24,893,483
Investment & other income 53,088,424 50,642,561 46,617,179 41,519,626 36,100,738
Net realized gains on investments 4,882,586 5,201,365 4,986,897 7,483,798 4,411,334
Total Revenues $ 96,209,566 $ 91,037,398 $ 82,720,238 $ 77,077,421 $ 65,405,555
Benefits & expenses 62,268,502 60,834,143 56,077,551 50,673,549 38,926,049
Income from operations $ 33,941,064 $ 30,203,255 $ 26,642,687 $ 26,403,872 $ 26,479,506
Provision for federal income taxes 11,855,585 10,642,887 8,976,437 8,522,280 9,649,828
Net income $ 22,085,479 $ 19,560,368 $ 17,666,250 $ 17,881,592 $ 16,829,678
Net income per share $ 2.34 $ 2.07 $ 1.87 $ 1.89 $ 1.78
FINANCIAL POSITION
Total assets $ 917,605,628 $ 832,533,863 $ 740,650,660 $ 673,794,161 $ 528,632,132
Shareholders' equity $ 182,530,509 $ 160,379,201 $ 132,630,489 $ 128,905,402 $ 90,855,581
Book value per share $ 19.32 $ 16.97 $ 14.03 $ 13.64 $ 9.61
Dividends declared per share $ 0.60 $ 0.54 $ 0.50 $ 0.453 $ 0.40
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>
47
<PAGE>
INCORPORATED BY REFERENCE, PAGE 17 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
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 26-36, as they contain
important information that is helpful in evaluating the Company's operating
results and financial condition.
RESULTS OF OPERATIONS
OVERVIEW
Net income increased to $22,085,479, or $2.34 per share, in 1998 from
$19,560,368, or $2.07 per share in 1997, an increase of 12.9 percent. Operating
results remained strong as total policy revenue increased by 8.7 percent in
1998. Life insurance in force increased by more than $1.3 billion to almost
$13.3 billion at December 31, 1998.
REVENUES
Analysis of Policy Revenue
Life premiums increased $2,905,757, or 8.9 percent, for the year ended December
31, 1998 and $3,788,030, or 13.0 percent, for the year ended December 31, 1997.
The growth in total life premiums is a function of growth in the renewal of
policies written in prior years. Renewal premiums increased 11.6 percent in 1998
to $28,969,834. New life insurance coverage placed in force during 1998 was
$2,562,163,000 compared to $2,224,323,000 in 1997 and $2,129,639,000 in 1996.
Group premiums increased 5.9 percent to $2,505,972 in 1998 and 13.9 percent to
$2,366,645 in 1997.
First-year and single universal life and annuity deposits remained relatively
constant at $50,820,133 in 1998, $50,675,240 in 1997 and $50,651,063 in 1996.
Total annuity and universal life deposits were $67,420,294, $69,040,378 and
$67,716,398 in 1998, 1997 and 1996, respectively. Generally, lower market
interest rates and a flattening interest yield curve made fixed annuities
relatively less attractive compared to other investment alternatives. Annuity
deposits recorded in connection with annuity contracts purchased by the Erie
Insurance Group Retirement Plan, for retired vested Employees receiving
benefits, were $6,413,460, $1,992,060 and $4,894,042 for the years ended
December 31, 1998, 1997 and 1996, respectively. Also included in annuity
deposits are annuities purchased by affiliated property/casualty insurance
companies for use in connection with the structured settlement of insurance
claims. Structured settlement annuity deposits sold to Erie Insurance Group
affiliate companies totaled $17,883,171, $17,780,582 and $13,504,953 in 1998,
1997 and 1996, respectively.
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<PAGE>
INCORPORATED BY REFERENCE, PAGES 17 AND 18 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
Analysis of Investment-related Income
Net investment income increased $2,415,051, or 4.8 percent, for the year ended
December 31, 1998 and $3,965,323, or 8.6 percent, for the year ended December
31, 1997. The ratio of net investment income to mean invested assets continues
to remain steady at 7.2 percent in 1998, compared to 7.5 percent in 1997 and 7.4
percent in 1996. 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 by cash from annuity and universal
life deposits. Net cash provided in 1998 from annuity deposits and universal
life deposits was $34,458,958 and $12,463,714, respectively.
During 1998, 1997 and 1996, the Company generated net realized gains on
investments of $4,882,586, $5,201,365 and $4,986,897, respectively, primarily
from the sale of equity securities and fixed maturity investments.
BENEFITS AND EXPENSES
Analysis of Policy-related Benefits and Expenses
Net death benefits on life insurance policies declined 23.9 percent in 1998 to
$8,459,035, compared to $11,117,175 in 1997 and $9,688,242 in 1996. Mortality
experience is best viewed as a long-term consideration, since short-term
fluctuations may significantly influence results. The Company's mortality
experience has been good over the past several years and management believes
that its underwriting philosophy and practices are sound.
Total interest credited on annuity and universal life deposits increased
$2,936,673, or 9.3 percent, for the year ended December 31, 1998 and $3,285,801,
or 11.6 percent, for the year ended December 31, 1997. This increase in interest
expense was primarily due to new annuity and universal life deposits of
$67,420,294 received from Policyholders during 1998 and $69,040,378 received
during 1997. At December 31, 1998, annuity deposits accruing interest were $524
million, an increase of 7.1 percent from December 31, 1997, and universal life
deposits accruing interest were $81 million, an increase of 18.1 percent from
December 31, 1997. The interest rate credited on universal life deposits ranged
from 6.25 percent to 7.00 percent. The rate credited on annuity deposits ranged
from 5.00 percent to 6.00 percent.
Surrender and other benefits increased by $512,690 to $816,008 for the year
ended December 31, 1998 and declined by $744,156 to $303,318 for the year ended
December 31, 1997. 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 that provides reinsurance
coverage to primary insurers who insure Commonwealth of Pennsylvania employees
upon their retirement. The CIGNA group administers the plan and provides
information to determine each company's share of pool assets and liabilities on
a yearly basis. During 1998, the change in the Company's share of the PEGLI pool
caused a decrease in benefits of $279,584 compared to a decrease of $904,897 in
1997. The change in the Company's share of the PEGLI pool is subject to
fluctuations inherent in the underwriting of life insurance products.
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 increase in future life policy
benefits totaled $4,172,578, compared to $4,538,298 in 1997 and $4,549,404 in
1996. In 1998, the future policy benefit additions, due to increased life
insurance in force, were offset by increased credits for reinsurance and a shift
in product mix from whole life policies to term policies.
Generally, the costs incurred by the Company to acquire business, including
underwriting, commission and bonus costs, are capitalized and 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 $700,589, or 19.0 percent, for the year ended
December 31, 1998 and $553,616, or 17.6 percent, for the year ended December 31,
1997. The growth in amortization expense in 1998 and 1997 was affected by a
decrease in underlying interest rate assumptions.
49
<PAGE>
INCORPORATED BY REFERENCE, PAGE 18 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
Analysis of Other Expenses
Direct commission costs include new and renewal commissions, and promotional
incentives to Agents. These direct commission expenses are offset by ceded
commissions received from reinsurers. The reported expense is also affected by
the amount of commission expenses capitalized to the DAC. Commissions, 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 incentive commissions
and some second-year commissions qualify for deferral as 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.
Commission expense increased slightly to $1,776,577 in 1998 from $1,765,563 in
1997. Commission expense fell 4.1 percent in 1997 from $1,841,861 in 1996. Ceded
reinsurance commissions are netted against commission expense. Ceded commissions
totaled $1,653,737 in 1998, $1,462,295 in 1997 and $1,367,873 in 1996.
Company promotional incentives include trips awarded to Agents for selling the
Company's products. In 1998, the Company participated in the Erie Insurance
Group travel incentive program "Caribbean Classic," where Agents can earn a
Caribbean cruise in March, 2000 for meeting certain production goals. The
contest period runs from June of 1998 to August of 1999. In 1996, the Company
participated in another travel incentive program "California Dreamin'." The
estimated cost of these incentive awards, net of deferrals, is included in
commission expense.
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, which consist of salaries and wages, employee benefits, data
processing expenses, occupancy costs, and other office and general
administrative expenses, comprise a majority of the Company's general expenses.
Certain of these expenses of the Company are deferred as policy acquisition
costs, including medical inspection and exam fees related to new policy sales,
salaries and Employee benefits of underwriting personnel, and incentive awards
to sales management for the production of life and annuity business.
General expenses increased $1,186,484, or 18.7 percent, for the year ended
December 31, 1998 and $518,815, or 8.9 percent, for the year ended December 31,
1997. The 1998 increase is primarily due to approximately $680,000 of start-up
project costs related to new policy administration system (the "Cyberlife"
system). There were no Cyberlife system expenses charged to operations in 1997.
Taxes, licenses and fees declined $889,231 to $581,353 in 1998 and $199,013 to
$1,470,584 in 1997. The 1998 decrease was a result of a $954,000 refund due the
Company from the Pennsylvania Life and Health Insurance Guaranty Association
resulting from a recalculation of annuity assessments paid in previous years.
The 1997 decrease was due to reduced assessments made by the state life
insurance guaranty associations.
50
<PAGE>
INCORPORATED BY REFERENCE, PAGE 19 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
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, 1998,
there was no material difference between the carrying value and fair value of
the Company's investment-type policies. These life insurance and annuity
reserves are supported primarily by the Company's long-term, fixed income
investments as the underlying policy reserves are generally also of a long-term
nature.
INVESTMENTS
The Company's investment strategies are designed and portfolios are structured
to match the features of the life insurance and annuity products sold by the
Company. Annuities and life insurance policies are long-term products;
therefore, the Company's investment strategy takes a long-term perspective
emphasizing investment quality, diversification and superior investment returns.
The Company's investments are managed prudently on a total return approach that
focuses on capital appreciation and current income.
At December 31, 1998, the Company's investment portfolio consisting of
marketable short-term investments, investment-grade bonds, common stocks and
preferred stocks totaled $777 million, or 84.7 percent, of total assets. These
resources provide the liquidity the Company requires to meet known and
unforeseen demands on its funds. At December 31, 1998, 78.1 percent of total
invested assets were invested in fixed maturities. Preferred stock represents
10.1 percent or $78 million and common stock represents 7.4 percent, or $57
million, of total invested assets at December 31, 1998, while real estate and
mortgage loans and other invested assets (primarily investments in real estate
and security limited partnership) make up only 3.6 percent of total invested
assets. Mortgage loans 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,
1998 1997
-------- --------
Fixed maturities available-
for-sale $605,523 $558,177
Equity securities:
Preferred stock 78,479 92,502
Common stock 57,315 28,340
Real estate 1,541 1,624
Mortgage loans 10,070 10,050
Policy loans 6,013 5,100
Other invested assets 15,941 7,240
-------- --------
Total invested assets $774,882 $703,033
-------- --------
51
<PAGE>
INCORPORATED BY REFERENCE, PAGE 20 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
Fixed Maturities
The Company's fixed maturities consist 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.
Diversification of Fixed Maturities
at December 31, 1998
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasuries and
government agencies $ 20,431 $ 1,360 $ 27 $ 21,764
States and political
subdivisions 2,056 107 0 2,163
Special revenue 11,065 783 0 11,848
Public utilities 70,265 3,731 455 73,541
U. S. banks, trusts and
insurance companies 113,543 8,531 1,086 120,988
U. S. industrial and
miscellaneous 331,432 17,019 1,202 347,249
Foreign governments-
agency 2,990 0 308 2,682
Foreign industrial
and miscellaneous 24,693 908 313 25,288
-------- ------- ------ ---------
Total fixed maturities $576,475 $32,439 $3,391 $ 605,523
======== ======= ====== =========
</TABLE>
Fixed maturity investments consist of high-quality, marketable bonds, 98.1
percent or $594 million of which are rated at investment-grade levels (Baa/BBB
or better). Included in this investment-grade category are $349 million of bonds
characterized as of the "highest" quality or "Class 1" securities as defined by
the National Association of Insurance Commissioners (NAIC). The below
investment-grade category consisted of $11.8 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, 1998 and 1997, net unrealized
gains on fixed maturities available-for-sale amounted to $18.9 million and $14.6
million, respectively, net of deferred taxes.
52
<PAGE>
INCORPORATED BY REFERENCE, PAGE 21 OF THE COMPANY'S 1998 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,
1998 and 1997, common and nonredeemable preferred stock held by the Company had
net unrealized gains of $7.3 million and $5.9 million, net of deferred taxes,
respectively. 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, all of which are of the "highest" or "high" quality, as
defined by the NAIC. The common stock portfolio provides liquidity,
diversification and income opportunities to meet the earnings objectives of the
Company.
Diversification of Equity Securities
at December 31, 1998
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
Common stock:
U. S. banks, trusts
and insurance
companies $ 7,254 $ 4,523 $ 172 $ 11,605
U. S. industrial and
miscellaneous 40,574 11,751 6,615 45,710
Preferred stock:
Public utilities 4,000 40 0 4,040
U. S. banks, trusts
and insurance
companies 43,057 1,864 151 44,770
U. S. industrial and
miscellaneous 12,951 216 529 12,638
Foreign banks,
trusts and insurance
companies 12,874 441 384 12,931
Foreign industrial
and miscellaneous 3,900 200 0 4,100
-------- ------- ------ --------
Total equity securities $124,610 $19,035 $7,851 $135,794
======== ======= ====== ========
</TABLE>
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, thereby increasing future investment returns.
Net cash provided by operating activities in 1998 was $19,803,314 compared to
$14,963,909 in 1997, and $14,480,503 in 1996. The Company's liquidity position
remains strong as invested assets increased 10.2 percent to $775 million at
December 31, 1998. The majority of invested assets are liquid marketable
securities.
53
<PAGE>
INCORPORATED BY REFERENCE, PAGES 21 AND 22 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
Annuity and universal life deposits, which do not appear as revenue on the
financial statements, are a source of funds. 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 $67,420,294
in 1998, $69,040,378 in 1997 and $67,716,398 in 1996.
The Company's commitments for expenditures as of December 31, 1998 are primarily
for policy death benefits, policy surrenders and withdrawals, general operating
expenses, federal income taxes, dividends to shareholders and its additional
investment in the new policy administration system (Cyberlife). 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. The Company has also arranged for
a $10 million line of credit with a commercial bank. There were no borrowings
under this credit line in 1998, 1997 or 1996.
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 follows the statutory accounting practices
(SAP) minimum Risk-Based Capital (RBC) requirements for domestic insurance
companies that were developed by the NAIC. The NAIC standard set for measuring
RBC is a method of calculating the minimum amount of capital appropriate for an
insurance company to support its overall business operations in consideration of
its size and risk profile. The RBC formula is used by the state insurance
regulators as an early warning tool to identify, for the purpose of initiating
regulatory action, insurance companies that potentially are inadequately
capitalized. In addition, the formula defines minimum capital standards that
will supplement the current system of low fixed minimum capital and surplus
requirements on a state-by-state basis. At December 31, 1998, the Company
substantially exceeded the minimum risk-based capital levels that require
regulatory action.
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.
54
<PAGE>
INCORPORATED BY REFERENCE, PAGES 22 AND 23 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
IMPACT OF RECENT ACCOUNTING STANDARDS
CAPITALIZATION OF INTERNAL USE SOFTWARE COSTS
In March of 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This SOP was effective for fiscal years
beginning after December 15, 1998 and provided guidance on accounting for the
costs of computer software developed or obtained for internal use. The Company
adopted this SOP in the first quarter of 1998. Certain salaries and benefits
were capitalized and deferred and will be charged against future operations.
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 requires a company to utilize a "management approach" to reporting segment
information. The Company currently reports segment information consistent with
that of internal management reporting and, as a result, the adoption of this
standard has little effect on current presentation of financial statement
information.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
GEOGRAPHIC EXPANSION
In addition to its current operating territory, which includes eight states and
the District of Columbia, the Company, Erie Insurance Exchange and Erie
Insurance Company are licensed to do business in the state of Illinois. The Erie
Insurance Group, through these entities, began marketing insurance in Illinois
early in 1999. All products currently being marketed in other states will be
written in Illinois, subject to the requirements of Illinois law. The expansion
into a new operating territory offers the opportunity for premium growth.
FINANCIAL SERVICES DEREGULATION
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.
MARKETING CONSIDERATIONS
The Company offers investment products which compete with numerous other
investment alternatives commercially available. The Company's ability to attract
investors depends in large part on the relative attractiveness of its products
compared to those other available products. Factors such as the interest rate
environment and the performance of the stock market influence this ability but
are not controllable by management.
INVESTMENT OPERATIONS
The Company's portfolio of fixed maturities and equity securities, in particular
the common stock portfolio, is subject to the ongoing risks associated with
fluctuations in interest rates, the stock market and general business
conditions. Past investment results are not indicative of investment performance
in future periods. The Company's common stock portfolio of $57.3 million, or 7.4
percent of invested assets, is subject to stock market price volatility that
could affect the investment returns from these assets and the Company's
operating results.
55
<PAGE>
INCORPORATED BY REFERENCE, PAGES 23 AND 24 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
YEAR 2000 READINESS DISCLOSURE
Erie Family Life Insurance Company is dependent on electronic processing and
information systems to conduct business. Like all companies with such
dependencies, the Company is continually faced with significant decisions and
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 beyond. The Year 2000 Issue presents a profound risk
management issue which is perhaps more pervasive than any previous issue faced
by businesses of all types. To effectively manage the risks associated with the
Year 2000 Issue, management has taken measures designed to reduce exposure to
business interruption.
The effect of the Year 2000 Issue cannot be measured exactly with certainty 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 24.
Company's State of Readiness
Exposure to systems failure is a risk faced by the Company every day. Unlike
these other risks, the date change to the Year 2000 is predictable. Efforts to
mitigate the Company's exposure through effective identification, remediation
and contingency planning at the Company are organized and being conducted on all
major business processes to minimize the risks.
To assure that the Company effectively addresses this risk at all levels of the
organization, management has in place a structure that provides oversight of
Year 2000 risk management activities being conducted within the major business
units of the Company. Oversight by Executive and Senior Management is being
facilitated through a dedicated project office. This office, (the "Y2K Office")
works in consultation with each business unit to assure consistency and adequacy
of risk management activities and to collect companywide project status and cost
information.
Within each key business unit, each key business process is being evaluated to
assure that underlying systems and components exposed to potential Year 2000
failure are appropriately identified and addressed. Underlying system components
include internal operating systems (hardware and software), infrastructure
elements, including non-information technology components and systems,
communications systems and devices, internally developed mainframe applications,
personal computer hardware and software, external parties and providers and
peripheral devices.
Each of the underlying components supporting key business processes were
identified and mission critical business processes were prioritized during 1998.
Priority was assigned based on the relative importance of the component to the
business process and based on the importance of the business process relative to
other business processes.
Efforts to remediate non-compliant internal components began in January of 1999
and are continuing throughout the first quarter of 1999. It is estimated that
the total effort for all remediation, including application reviews conducted in
1998, will amount to approximately 1000 hours. Management estimates that
approximately 300 hours of programming effort remains to be completed during
1999, which the Company believes to be insignificant.
As individual components are being re-coded, component functionality is being
tested prior to placing remediated systems into production. To supplement
component testing and to provide a greater degree of assurance that our business
functions will be uninterrupted, full systems Year 2000 simulation testing is
planned for March, April and May of 1999. Full systems testing will entail
simultaneous testing of the underlying components necessary to support key
business processes. This effort incorporates key third parties with which we are
coordinating our testing efforts. As testing progresses, each business unit is
consulting with the Y2K Office to develop contingency plans to address the
possibility of component or business process failures. The extent of contingency
planning will be responsive to the risk of failure and the relative importance
of the component or business process. Contingency planning is addressing both
business continuity and system recovery.
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 (to test internal systems, test
external party interfaces, develop contingency plans and replace software and
hardware devices that are not Year 2000 compliant) and personal computer
software and hardware replacement costs. 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 material to the financial position and results
of operations of the Company. Management believes the cost (if any) to replace
non-compliant software and hardware will be insignificant.
56
<PAGE>
INCORPORATED BY REFERENCE, PAGES 24 AND 25 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
During the first quarter of 1999, Erie Indemnity Company engaged consultants
from an international professional services firm to prepare a Y2K project
methodology evaluation. The Y2K project of the Company is included in the
engagement. The consultants recommendations concerning certain aspects of our
project methodology and remediation, testing and planning effort, have been
incorporated into our Y2K program. Approximately $25,000 of consulting fees will
be borne by Erie Family Life in 1999.
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. By systematically
addressing the Year 2000 Issue, the costs and uncertainty associated with it
have been reduced significantly. Management believes that all critical business
process systems and applications will be Year 2000 compliant sufficiently in
advance of January 1, 2000 and, therefore, 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 when in fact they are not. The inability of the Company to
respond to uncontrollable circumstances is always a concern. For example, if
numerous key third parties are unable to support the operations of the Company,
operations could be adversely affected. The Company, as part of overall risk
management, will be preparing contingency plans during 1999 in response to the
possibility of key third party failure. Management does not anticipate these
scenarios as having a greater than remote possibility of occurrence.
Company's Contingency Plans if a Vendor or the Company fail to Address Year 2000
Issues
This risk described above will be addressed 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 are being developed and will be finalized during the first
nine months 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.
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 1,108 shareholders of record of common stock on December 31, 1998.
Date Dividends Declared Dividends per Share Declared
February 17, 1998 $ .150
April 28, 1998 .150
June 15, 1998 .150
September 16, 1998 .150
-------
$ .600
March 5, 1997 $ .135
April 29, 1997 .135
June 17, 1997 .135
September 15, 1997 .135
-------
$ .540
"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 Readiness Disclosure" 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.
57
<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, 1998
Fixed Maturities - Available For Sale 78%
Preferred Stocks 10%
Common Stocks 7%
Other Invested Assets 2%
Mortgage Loans 1%
Policy Loans 1%
Real Estate 1%
Graph #2 DIVERSIFICATION OF FIXED MATURITIES
at December 31, 1998 - Carrying/Market Value
U.S. Industrial & Miscellaneous 57%
U.S. Banks, Trusts and Insurance Companies 20%
Public Utilities 12%
Foreign Industrial & Miscellaneous 4%
U.S. Treasuries & Government Agencies 3%
Special Revenue 2%
Foreign Government Agencies 1%
States & Political Subdivisions 1%
Graph #3 QUALITY* OF BOND PORTFOLIO
at December 31, 1998 - Carrying/Market Value
A/A 40%
Baa/BBB 33%
Aa/AA 17%
Aaa/AAA 8%
Ba/BB 2%
* As rated by Standard & Poor's or Moody's Investor's Service, Inc.
Graph #4 DIVERSIFICATION OF EQUITY SECURITIES
at December 31, 1998 - Carrying/Market Value
(2) U.S. Banks & Insurance 33%
(1) U.S. Industrial & Miscellaneous 34%
(2) Foreign Banks & Insurance 10%
(2) U.S. Industrial & Miscellaneous 9%
(1) U.S. Banks & Insurance 8%
(2) Foreign Industrial & Miscellaneous 3%
(2) Public Utilities 3%
(1) Common Stock
(2) Preferred Stock
58
<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1998 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, 1998 and 1997, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1998
in conformity with generally accepted accounting principles.
/s/ Brown Schwab Bergquist & Co.
Erie, Pennsylvania
February 16, 1999
59
<PAGE>
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
As of December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Investments:
Fixed maturities at fair value
(amortized cost of $576,475,130
and $535,792,641, respectively) $605,523,237 $558,177,487
Equity securities at fair value
(cost of $124,609,940 and
$111,786,894, respectively) 135,793,710 120,841,893
Real estate 1,541,445 1,624,306
Policy loans 6,013,130 5,099,671
Real estate mortgage loans 10,070,394 10,049,733
Other invested assets 15,940,561 7,240,282
------------ ------------
Total investments $774,882,477 $703,033,372
Cash and cash equivalents 44,808,427 42,287,398
Premiums receivable from policyholders 3,830,625 3,471,385
Reinsurance recoverable 568,521 350,837
Other receivables 355,067 182,711
Accrued investment income 10,282,002 10,273,259
Deferred policy acquisition costs 70,916,261 64,567,085
Reserve credit for reinsurance ceded 5,994,390 5,041,530
Prepaid federal income taxes 0 146,984
Other assets 5,967,858 3,179,302
------------ ------------
Total assets $917,605,628 $832,533,863
============ ============
</TABLE>
60
<PAGE>
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
----------- -----------
<S> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Future life policy benefits $ 64,539,220 $ 59,413,782
Policy and contract claims 1,801,030 2,049,677
Annuity deposits 524,122,492 489,444,701
Universal life deposits 81,354,026 68,890,312
Supplementary contracts not
including life contingencies 607,094 825,927
Other policyholder funds 8,166,371 6,595,330
Federal income taxes payable 612,272 0
Deferred income taxes 31,252,214 24,409,317
Reinsurance premium due 301,487 424,745
Accounts payable and accrued
expenses 4,215,186 2,668,688
Note payable to Erie Indemnity Company 15,000,000 15,000,000
Due to affiliate 1,686,227 1,156,431
Dividends payable 1,417,500 1,275,752
------------ ------------
Total liabilities $735,075,119 $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 26,171,727 20,435,901
Retained earnings 151,948,782 135,533,300
------------ ------------
Total shareholders' equity $182,530,509 $160,379,201
------------ ------------
Total liabilities and
shareholders' equity $917,605,628 $832,533,863
============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
61
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Policy
Life premiums $35,732,584 $32,826,827 $29,038,797
Group premiums 2,505,972 2,366,645 2,077,365
----------- ----------- -----------
Total policy
revenue $38,238,556 $35,193,472 $31,116,162
Net investment income 52,329,343 49,914,292 45,948,969
Net realized gains on
investments 4,882,586 5,201,365 4,986,897
Other income 759,081 728,269 668,210
----------- ----------- -----------
Total revenues $96,209,566 $91,037,398 $82,720,238
BENEFITS AND EXPENSES
Death benefits $ 8,459,035 $11,117,175 $ 9,688,242
Interest on annuity
deposits 29,869,646 27,663,157 25,108,877
Interest on universal
life deposits 4,652,656 3,922,472 3,190,951
Surrender and other
benefits 816,008 303,318 1,047,474
Increase in future life
policy benefits 4,172,578 4,538,298 4,549,404
Amortization of deferred
policy acquisition
costs 4,395,555 3,694,966 3,141,350
Commissions 1,776,577 1,765,563 1,841,861
General expenses 7,545,094 6,358,610 5,839,795
Taxes, licenses
and fees 581,353 1,470,584 1,669,597
---------- ----------- -----------
Total benefits
and expenses $62,268,502 $60,834,143 $56,077,551
----------- ----------- -----------
Income from
operations $33,941,064 $30,203,255 $26,642,687
Provision for federal income
taxes 11,855,585 10,642,887 8,976,437
----------- ----------- -----------
Net income $22,085,479 $19,560,368 $17,666,250
----------- ----------- -----------
Net income per
share $ 2.34 $ 2.07 $ 1.87
=========== =========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
62
<PAGE>
INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Total
Shareholders' Comprehensive Retained
Equity Income Earnings
<S> <C> <C> <C>
Balance, January 1, 1996 $128,905,402 $108,134,698
Comprehensive income
Net income 17,666,250 $ 17,666,250 17,666,250
Other comprehensive loss,
net of tax
Unrealized holding losses
arising during year ( 5,974,672) ( 5,974,672)
Less: reclassification
adjustment for gains
included in net income ( 3,241,483) ( 3,241,483)
------------
Other comprehensive loss,
net of tax ( 9,216,155)
------------
Comprehensive income $ 8,450,095
============
Dividends declared,
$.50 per share ( 4,725,008) ( 4,725,008)
------------ ------------
Balance, December 31, 1996 $132,630,489 $121,075,940
------------ ------------
Comprehensive income
Net income 19,560,368 $ 19,560,368 19,560,368
Other comprehensive income,
net of tax
Unrealized holding gains
arising during year 16,672,239 16,672,239
Less: reclassification
adjustment for gains
included in net income ( 3,380,887) ( 3,380,887)
------------
Other comprehensive income,
net of tax 13,291,352
------------
Comprehensive income $ 32,851,720
============
Dividends declared,
$.54 per share ( 5,103,008) ( 5,103,008)
------------ ------------
Balance, December 31, 1997 $160,379,201 $135,533,300
------------ ------------
Comprehensive income
Net income 22,085,479 $ 22,085,479 22,085,479
Other comprehensive income,
net of tax
Unrealized holding gains
arising during year 8,909,507 8,909,507
Less: reclassification
adjustment for gains
included in net income ( 3,173,681) ( 3,173,681)
------------
Other comprehensive income,
net of tax 5,735,826
------------
Comprehensive income $ 27,821,305
============
Dividends declared,
$.60 per share ( 5,669,997) ( 5,669,997)
------------ ------------
Balance, December 31, 1998 $182,530,509 $151,948,782
============ ============
</TABLE>
63
<PAGE>
INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Common Additional
Income Stock Paid-in Capital
<S> <C> <C> <C>
Balance, January 1, 1996 $16,360,704 $ 3,780,000 $ 630,000
Comprehensive income
Net income
Other comprehensive loss,
net of tax
Unrealized holding losses
arising during year
Less: reclassification
adjustment for gains
included in net income
Other comprehensive loss,
net of tax ( 9,216,155)
Comprehensive income
Dividends declared,
$.50 per share
------------ ------------ -----------
Balance, December 31, 1996 $ 7,144,549 $ 3,780,000 $ 630,000
------------ ------------ -----------
Comprehensive income
Net income
Other comprehensive income,
net of tax
Unrealized holding gains
arising during year
Less: reclassification
adjustment for gains
included in net income
Other comprehensive income,
net of tax 13,291,352
Comprehensive income
Dividends declared,
$.54 per share
------------ ------------ -----------
Balance, December 31, 1997 $20,435,901 $ 3,780,000 $ 630,000
------------ ------------ -----------
Comprehensive income
Net income
Other comprehensive income,
net of tax
Unrealized holding gains
arising during year
Less: reclassification
adjustment for gains
included in net income
Other comprehensive income,
net of tax 5,735,826
Comprehensive income
Dividends declared,
$.60 per share
------------ ------------ -----------
Balance, December 31, 1998 $26,171,727 $ 3,780,000 $ 630,000
============ ============ ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
64
<PAGE>
INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $22,085,479 $19,560,368 $17,666,250
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Net amortization of
bond and mortgage
premium 451,675 1,294,213 733,881
Amortization of deferred
policy acquisition
costs 4,395,555 3,694,966 3,141,350
Real estate depreciation 82,861 86,023 86,066
Deferred federal
income tax expense 3,754,376 1,637,944 3,597,781
Realized gains on
investments ( 4,882,586) ( 5,201,365) ( 4,986,897)
Increase in premiums
receivable ( 359,240) ( 497,080) ( 272,727)
(Increase) decrease in
other receivables ( 172,356) 384,505 ( 312,542)
Increase in accrued
investment income ( 8,743) ( 481,164) ( 747,959)
Policy acquisition costs
deferred ( 10,744,731) ( 10,235,623) ( 10,405,486)
(Increase) decrease in
other assets ( 2,788,553) 1,497,906 ( 1,667,895)
Increase in reinsurance
receivables and reserve
credits ( 1,170,544) ( 979,877) ( 662,786)
Increase in future life
policy benefits and
claims 4,876,791 5,726,494 6,071,200
Increase in other
policyholder funds 1,571,041 832,059 524,374
(Decrease) increase in
reinsurance premium due ( 123,258) 221,547 ( 157,280)
Increase (decrease) in
federal income taxes
payable 759,254 ( 833,337) 424,882
Increase (decrease) in
accounts payable and
due to affiliate 2,076,293 ( 1,743,670) 1,448,291
----------- ----------- -----------
Net cash provided by
operating activities $19,803,314 $14,963,909 $14,480,503
----------- ----------- -----------
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
65
<PAGE>
INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities ($138,281,886) ($ 76,210,662) ($149,403,614)
Equity securities ( 61,357,377) ( 38,955,248) ( 18,394,580)
Mortgage loans ( 159,612) ( 1,222,745) ( 2,752,196)
Other invested assets ( 9,537,131) ( 856,802) ( 3,170,391)
Sales/maturities of investments:
Fixed maturities 98,876,751 49,662,504 41,270,911
Equity securities 51,508,703 42,920,903 37,128,238
Other invested assets 1,047,998 403,747 478,885
Principal payments received
on mortgage loans 139,309 129,123 1,026,426
Loans made to policyholders ( 1,549,153) ( 1,373,918) ( 1,317,369)
Payments received on
policy loans 635,693 655,904 630,242
------------ ------------ ------------
Net cash used in
investing activities ($ 58,676,705) ($ 24,847,194) ($ 94,503,448)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in annuity
deposits and
supplementary contracts $ 34,458,958 $ 38,861,367 $ 45,189,708
Increase in universal
life deposits 12,463,714 12,033,722 10,884,748
Dividends paid to
shareholders ( 5,528,252) ( 5,008,508) ( 4,614,756)
------------ ------------ -------------
Net cash provided by
financing activities $ 41,394,420 $ 45,886,581 $ 51,459,700
------------ ------------ -------------
Net increase (decrease) in cash
and cash equivalents $ 2,521,029 $ 36,003,296 ($ 28,563,245)
Cash and cash equivalents at
beginning of year 42,287,398 6,284,102 34,847,347
------------ ------------ -------------
Cash and cash equivalents at
end of year $ 44,808,427 $ 42,287,398 $ 6,284,102
============ ============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the
year for:
Interest $ 967,500 $ 967,500 $ 971,154
Income taxes $ 7,341,952 $ 9,838,280 $ 4,953,774
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
66
<PAGE>
INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
All amounts are in thousands of dollars, except per share data.
NOTE 1. NATURE OF BUSINESS
Erie Family Life Insurance Company (the Company) was
incorporated in the Commonwealth of Pennsylvania on May 23,
1967. The Company is engaged in the business of underwriting and
selling nonparticipating individual and group life insurance
policies, including universal life and annuity products. The
Company markets its products through independent agents in eight
states and the District of Columbia and is subject to
supervision and regulations of the states in which it does
business. A majority of the Company's business is written in
Pennsylvania, Ohio, Maryland and Virginia.
The Company is owned 21.6% by the Erie Indemnity Company
(EIC) and 52.2% by the Erie Insurance Exchange (Exchange).
EIC is the attorney-in-fact for the Exchange. Operating expenses
of the Company are paid by EIC. The Company reimburses EIC for
direct expenses and share of common expenses. The Company also
sells a significant amount of annuities to 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 1997 and 1996 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.
The development of liabilities for future policy benefits for
the Company's products requires management to make estimates and
assumptions regarding mortality, morbidity, lapse, expense, and
investment experience. Such estimates are primarily based on
historical experience and, future expectations of mortality,
morbidity, expense, persistency, and investment assumptions.
Actual results could differ materially from those estimates.
Management monitors actual experience, and where circumstances
warrant, revises its assumptions and the related future policy
benefit estimates.
67
<PAGE>
INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
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 comprehensive income and
shareholders' equity. There are no securities classified as
"trading" securities or "held-to-maturity" securities.
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 would be provided for impairment in net
realizable value based on periodic valuations.
Other invested assets (primarily investments in real estate and
security 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.
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.
Recognition of 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.
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
68
<PAGE>
INCORPORATED BY REFERENCE, PAGES 31 AND 32 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Deferred policy acquisition costs are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at
beginning
of year $64,567 $58,026 $50,762
Additions 10,745 10,236 10,405
Amortization ( 4,396) ( 3,695) ( 3,141)
------- ------- -------
Balance at end
of year $70,916 $64,567 $58,026
======= ======= =======
</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 1998, annuity deposits earned interest at rates ranging
from 5% to 6%. 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.
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.
69
<PAGE>
INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Assessments are recognized when they are imposed or
information indicates it is probable one will be imposed, and
an event obligating the Company has occurred and the amount is
reasonably estimated. When the assessment is subject to credit
against future premium taxes and judged to be recoverable, it
may be capitalized and amortized on a basis consistent with
the credits to be realized under applicable state law. The
Company's estimated liability for guaranty fund and other
assessments at December 31, 1998 and 1997 totaled $14 and
$214, respectively.
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 Statements 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.
Software development costs
In March of 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This SOP provided guidance on
accounting for the costs of computer software developed or
obtained for internal use. The Company adopted this SOP in the
first quarter of 1998. Software development costs totaling
$1,002 or $0.11 per share in 1998 were capitalized and
included in other assets. These costs will be amortized on a
straight-line basis over the expected life of the product when
the software is ready for its intended use.
Year 2000 costs
Costs related to Year 2000 programming, testing and
contingency planning are charged to operations as incurred.
Comprehensive income
The Company adopted the provisions of the Statement of
Financial Accounting Standards (FAS) No. 130, "Reporting
Comprehensive Income," in 1998. Comprehensive income is
defined as any change in equity from transactions and other
events originating from nonowner sources. The Company began
displaying comprehensive income in the first quarter of 1998
and has displayed accumulated comprehensive income in the
Statements of Shareholders' Equity at December 31, 1998. Prior
year amounts have been restated to reflect this change.
70
<PAGE>
INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Disclosure about segments of an enterprise
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 requires a company to
utilize a "management approach" to reporting segment
information. The Company currently reports segment information
consistent with that of internal management reporting and, as a
result, the adoption of this standard has little effect on
current presentation of financial statement information.
Earnings per share
Earnings per share amounts are based on the weighted average
number of common shares outstanding during each of the
respective years.
NOTE 3. INVESTMENTS
Net investment income consists of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Fixed maturities $42,068 $39,466 $35,300
Equity securities 8,120 8,942 10,168
Other 3,668 2,919 1,879
------- ------- -------
Total investment income $53,856 $51,327 $47,347
Investment expense 1,527 1,413 1,398
------- ------- -------
Net investment income $52,329 $49,914 $45,949
======= ======= =======
</TABLE>
Realized gains and losses on investments reflected in operations
were as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Realized gains:
Fixed maturities $1,936 $1,264 $ 778
Equity securities 3,657 4,466 4,911
Other, net 180 0 0
------ ------ ------
Total gains $5,773 $5,730 $5,689
------ ------ ------
Realized losses:
Fixed maturities $ 207 $ 353 $ 326
Equity securities 683 176 376
------ ------ ------
Total losses $ 890 $ 529 $ 702
------ ------ ------
Net realized gains on
investments $4,883 $5,201 $4,987
====== ====== ======
</TABLE>
71
<PAGE>
INCORPORATED BY REFERENCE, PAGE 33 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (CONTINUED)
The following tables summarize the cost and market value of
securities at December 31, 1998 and 1997 based on current year
classifications.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
December 31, 1998
<S> <C> <C> <C> <C>
Fixed Maturities:
U. S. treasuries and $ 20,431 $ 1,360 $ 27 $ 21,764
government agencies
States and political
subdivisions 2,056 107 0 2,163
Special revenue 11,065 783 0 11,848
Public utilities 70,265 3,731 455 73,541
U. S. banks, trusts
and insurance companies 113,543 8,531 1,086 120,988
U. S. industrial
and miscellaneous 331,432 17,019 1,202 347,249
Foreign governments-
agency 2,990 0 308 2,682
Foreign industrial
and miscellaneous 24,693 908 313 25,288
------- ------- ------- -------
Total fixed
maturities $576,475 $32,439 $ 3,391 $605,523
======== ======= ======= ========
Equity Securities:
Common stock:
U. S. banks, trusts
and insurance companies $ 7,254 $ 4,523 $ 172 $ 11,605
U. S. industrial and
miscellaneous 40,574 11,751 6,615 45,710
Non-redeemable
preferred stock:
Public utilities 4,000 40 0 4,040
U. S. banks, trusts and
insurance companies 43,057 1,864 151 44,770
U. S. industrial and
miscellaneous 12,951 216 529 12,638
Foreign banks, trusts
and insurance
companies 12,874 441 384 12,931
Foreign industrial
and miscellaneous 3,900 200 0 4,100
-------- ------- ------- --------
Total equity
securities $124,610 $19,035 $ 7,851 $135,794
======== ======= ======= ========
Total available-for-sale
securities $701,085 $51,474 $11,242 $741,317
======== ======= ======= ========
</TABLE>
72
<PAGE>
INCORPORATED BY REFERENCE, PAGE 33 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
December 31, 1997
<S> <C> <C> <C> <C>
Fixed Maturities:
U. S. treasuries and
government agencies $ 31,787 $ 1,271 $ 302 $ 32,756
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
Non-redeemable
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>
73
<PAGE>
INCORPORATED BY REFERENCE, PAGE 34 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (CONTINUED)
The following is a summary of fixed maturities at December 31,
1998, by remaining term to contractual maturity:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
<S> <C> <C>
Due in one year or less $ 10,003 $ 10,024
Due after one year through five years 137,651 139,668
Due after five years through ten years 118,948 121,958
Due after ten years 309,873 333,873
-------- --------
$576,475 $605,523
======== ========
</TABLE>
Bonds having a fair value of $2,056 at December 31, 1998 were on
deposit with various regulatory authorities as required by law.
Fixed maturities (bonds) having a fair value of $6,993 are
pledged as collateral on a $10,000 line of credit with a bank.
There were no borrowings outstanding on the line during December
31, 1998 and 1997.
Net unrealized gains and losses on investments are credited to
or charged directly to other comprehensive income. At December
31, 1998, net unrealized gains on investment securities of
$26,172 consisted of $51,506 in unrealized gains less $11,242 in
unrealized losses and deferred taxes of $14,092.
Changes in unrealized gains include the following for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
Equity securities $2,129 $ 3,966 $ 4,528
Fixed maturities 6,664 16,482 ( 18,707)
Other invested assets 31 0 0
Deferred federal
income taxes ( 3,088) ( 7,157) 4,963
------ ------- ------
Increase (decrease)
in unrealized
gains $5,736 $13,291 ($9,216)
====== ======= ======
</TABLE>
74
<PAGE>
INCORPORATED BY REFERENCE, PAGE 34 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
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>
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
Balance at January 1 $2,050 $ 1,703 $ 897
Less reinsurance
recoverables ( 163) ( 133) ( 136)
Less unpaid matured
endowments 0 0 ( 16)
------ ------- ------
Net balance at January 1 $1,887 $ 1,570 $ 745
Total death claims
incurred 8,459 11,117 9,688
Total death claims paid,
net of reinsurance
recoveries 8,994 10,800 8,863
------ ------- ------
Net balance at
December 31 $1,352 $ 1,887 $1,570
Plus reinsurance
recoverables 449 163 133
------ ------- ------
Balance at December 31 $1,801 $ 2,050 $1,703
====== ======= ======
</TABLE>
75
<PAGE>
INCORPORATED BY REFERENCE, PAGE 34 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
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>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Life insurance
premiums:
First year $ 6,763 $ 6,861 $ 6,506
Renewal 28,970 25,966 22,533
------- ------- -------
$35,733 $32,827 $29,039
======= ======= =======
Annuity & universal
life deposits, net
of loading:
First year
and single $50,820 $50,675 $50,651
Renewal 16,600 18,365 17,065
------- ------- -------
$67,420 $69,040 $67,716
======= ======= =======
</TABLE>
Annuity deposits in 1998, 1997 and 1996 included $6,413, $1,992
and $4,894, respectively, of deposits on annuity contracts
purchased by the Erie Insurance Group Retirement Plan for
Employees. Structured settlement annuities sold to affiliated
property and casualty companies of the Erie Insurance Group
totaled $17,883, $17,781 and $13,505, in 1998, 1997 and 1996,
respectively.
NOTE 6. FEDERAL INCOME TAXES
The provision for federal income taxes consists of the following
for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Current $ 8,101 $ 9,005 $ 5,378
Deferred 3,755 1,638 3,598
------- ------- -------
$11,856 $10,643 $ 8,976
======= ======= =======
</TABLE>
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>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Federal income taxes
at statutory rates $11,879 $10,571 $9,325
Dividends received
deduction and
tax-exempt interest ( 182) ( 299) ( 772)
Other 159 371 423
------- ------- ------
Provision for federal
income taxes $11,856 $10,643 $8,976
======= ======= ======
</TABLE>
76
<PAGE>
INCORPORATED BY REFERENCE, PAGES 34 AND 35 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 6. FEDERAL INCOME TAXES (CONTINUED)
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,
1998 1997
------- -------
<S> <C> <C>
Deferred policy acquisition costs $21,523 $19,563
Liability for future life and
annuity policy benefits ( 6,117) ( 7,218)
Unrealized gains 14,092 11,004
Other 1,754 1,060
------- -------
Deferred income tax liability $31,252 $24,409
======= =======
</TABLE>
A reconciliation of the provision for income taxes with
comprehensive income reported in the Statements of Shareholders'
Equity is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Unrealized gains (losses) on
securities:
Unrealized holding gains
(losses) arising during
year $13,707 $25,649 ($ 9,192)
Less: reclassification
adjustment for gains
included in net income 4,883 5,201 4,987
------- ------ -------
Net unrealized holding gains
(losses) arising during
year $ 8,824 $20,448 ($14,179)
------- ------- -------
Income tax (expense) benefit
related to unrealized gains
(losses) ($ 3,088) ($ 7,157) $ 4,963
------- ------- -------
Other comprehensive income
(loss), net of tax $ 5,736 $13,291 ($ 9,216)
======= ======= ========
</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 $14,305, $13,038 and $10,095 in 1998, 1997
and 1996, 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
reimbursed by the Company to EIC equaled $181, $183 and $167
in 1998, 1997 and 1996, respectively.
77
<PAGE>
INCORPORATED BY REFERENCE, PAGE 35 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 7. RELATED PARTY TRANSACTIONS (CONTINUED)
Annuities purchased by affiliates
The Erie Insurance Group affiliated property and 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 $41,834 and $33,672 at December 31, 1998 and 1997,
respectively. The reserves held for structured settlement
annuities sold to the affiliated property and casualty
insurance companies equal $128,382 and $111,219 at December
31, 1998 and 1997, respectively. See also Note 5.
Note payable to EIC
The $15,000 note payable to EIC 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, 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 1998 and
1997, the Company paid interest to EIC totaling $968 in each
year.
Property and Equipment
The Company owns certain real estate which it leases to EIC.
The real estate is recorded net of accumulated depreciation
of $1,279 and $1,196 at December 31, 1998 and 1997,
respectively. Rentals paid to the Company under this lease
agreement totaled $343 in 1998 and $423 in 1997 and 1996.
Future minimum rentals under this agreement are as follows:
--------------------------------------- ---------------------
1999 $ 303
2000 309
2001 312
2002 318
2003 321
Thereafter 1,450
--------------------------------------- ---------------------
Total $ 3,013
======================================= =====================
78
<PAGE>
INCORPORATED BY REFERENCE, PAGES 35 AND 36 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 7. RELATED PARTY TRANSACTIONS (CONTINUED)
EIC purchases certain software and equipment for use by the
Company. Depreciation and applicable interest are charged to
the Company throughout the estimated useful life of the asset
and included in general expenses. Depreciation and interest
charged the Company in 1998 and 1997 amounted to $384 and $369,
respectively.
NOTE 8. REINSURANCE
The Company cedes insurance to other insurers and reinsurers
under individual risk contracts. Reinsurance arrangements
mitigate losses arising from large risks.
Amounts recoverable or credited under reinsurance contracts are
included in total assets as reinsurance recoverable or credited
for reinsurance ceded. The cost of reinsurance related to
long-duration contracts is accounted for over the life of the
reinsured policies using assumptions consistent with those used
to account for the underlying policies.
A contingent liability exists with respect to reinsurance
receivables and the reserve credit for reinsurance ceded which
would become a liability in the event such reinsurance companies
are unable to meet their obligations under the existing
reinsurance agreements. These agreements do not relieve the
Company of its primary obligation to its Policyholders.
Policy revenues, benefits and expenses reflected in the
Statements of Operations have been reduced by the following
amounts due to reinsurance cessions:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Policy revenue $4,054 $3,761 $3,635
Death benefits 1,490 1,319 1,846
Future life policy
benefits 953 842 716
Commissions 1,654 1,462 1,368
</TABLE>
The Company has an insignificant amount of assumed reinsurance
activity.
NOTE 9. STATUTORY INFORMATION
The Company prepares its statutory financial statements in
accordance with accounting practices prescribed by the
Pennsylvania Insurance Department. Accounting principles used to
prepare statutory financial statements differ from financial
statements prepared on the basis of generally accepted
accounting principles.
79
<PAGE>
INCORPORATED BY REFERENCE, PAGE 36 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 9. STATUTORY INFORMATION (CONTINUED)
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, 1998, 1997 and 1996,
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Statutory net income $13,787 $12,924 $12,637
Reconciling items:
Policy liabilities
and accruals 2,344 1,024 1,327
Deferred policy
acquisition costs,
net of amortization 6,349 6,540 7,264
Investment valuation
differences 2,360 1,015 837
Deferred taxes ( 3,754) ( 1,638) ( 3,598)
Capitalized salaries and
benefits 1,541 0 0
Other ( 542) ( 305) ( 801)
------- ------- -------
GAAP net income $22,085 $19,560 $17,666
======= ======= =======
</TABLE>
A reconciliation of shareholders' equity as filed with
regulatory authorities to shareholders' equity reported in the
accompanying financial statements as of December 31, 1998 and
1997, follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Statutory shareholders' equity $ 85,907 $79,651
Reconciling items:
Asset valuation and interest
maintenance reserves 37,324 25,578
Investment valuation differences 30,745 30,209
Deferred policy acquisition costs 70,916 64,567
Surplus note ( 15,000) ( 15,000)
Policy liabilities and accruals 6,447 3,444
Deferred taxes ( 31,252) ( 24,409)
Deferred and uncollected
premiums ( 4,807) ( 4,236)
Capitalized salaries and benefits 1,541 0
Other 710 575
------- -------
GAAP shareholders' equity $182,531 $160,379
======== ========
</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
1999 without prior Pennsylvania Commissioner approval is
$13,787. Dividends to shareholders totaled $5,670 in 1998.
80
<PAGE>
INCORPORATED BY REFERENCE, PAGE 36 OF THE COMPANY'S 1998 ANNUAL
REPORT TO SHAREHOLDERS
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following summaries of operations for the four quarters of
1998 and 1997 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>
1998
Total policy revenue $ 8,981 $ 9,833 $ 9,494 $ 9,931
Net investment income 12,790 12,996 12,575 13,968
Net realized gains
on investments 1,836 866 775 1,406
Other income 164 226 238 131
------- ------- ------- -------
Total revenues $23,771 $23,921 $23,082 $25,436
======= ======= ======= =======
Income from
operations $10,017 $ 8,617 $ 5,910 $ 9,397
Provision for federal
income taxes 3,519 3,053 2,247 3,037
------- ------- ------- -------
Net income $ 6,498 $ 5,564 $ 3,663 $ 6,360
======= ======= ======= =======
Net income
per share $ 0.69 $ 0.59 $ 0.39 $ 0.67
======= ======= ======= =======
Comprehensive income (loss) $ 8,754 $ 7,877 ($ 2,464) $13,654
======= ======= ======= =======
1997
Total policy revenue $ 8,468 $ 8,814 $ 8,661 $ 9,250
Net investment income 12,401 12,211 12,419 12,883
Net realized gains
on investments 622 746 2,508 1,326
Other income 140 186 190 212
------- ------- ------- -------
Total revenues $21,631 $21,957 $23,778 $23,671
======= ======= ======= =======
Income from
operations $ 6,586 $ 6,997 $ 9,058 $ 7,562
Provision for federal
income taxes 2,185 2,384 3,531 2,543
------- ------- ------- -------
Net income $ 4,401 $ 4,613 $ 5,527 $ 5,019
======= ======= ======= =======
Net income
per share $ 0.47 $ 0.49 $ 0.58 $ 0.53
======= ======= ======= =======
Comprehensive income (loss) ($ 5,748) $15,107 $15,701 $ 7,792
======= ======= ======= =======
</TABLE>
81
<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, 1998 AND ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 605,523,237
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 135,793,710
<MORTGAGE> 10,070,394
<REAL-ESTATE> 1,541,445
<TOTAL-INVEST> 774,882,477
<CASH> 44,808,427
<RECOVER-REINSURE> 568,521
<DEFERRED-ACQUISITION> 70,916,261
<TOTAL-ASSETS> 917,605,628
<POLICY-LOSSES> 670,622,832
<UNEARNED-PREMIUMS> 138,375
<POLICY-OTHER> 1,801,030
<POLICY-HOLDER-FUNDS> 8,166,371
<NOTES-PAYABLE> 0
0
0
<COMMON> 4,410,000
<OTHER-SE> 178,120,509
<TOTAL-LIABILITY-AND-EQUITY> 917,605,628
38,238,556
<INVESTMENT-INCOME> 52,329,343
<INVESTMENT-GAINS> 4,882,586
<OTHER-INCOME> 759,081
<BENEFITS> 47,969,923
<UNDERWRITING-AMORTIZATION> 4,395,555
<UNDERWRITING-OTHER> 9,903,024
<INCOME-PRETAX> 33,941,064
<INCOME-TAX> 11,855,585
<INCOME-CONTINUING> 22,085,479
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,085,479
<EPS-PRIMARY> 2.34
<EPS-DILUTED> 2.34
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
