UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______ to ______
Commission file number 2-39458
ERIE FAMILY LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1186315
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Erie Insurance Place, Erie, Pennsylvania 16530
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (814) 870-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 9,450,000 shares of Common
Stock outstanding on October 31, 1999.
1
<PAGE>
INDEX
ERIE FAMILY LIFE INSURANCE COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Financial Position--September 30, 1999 and
December 31, 1998
Statements of Operations--Three and nine months ended September 30, 1999
and 1998
Statements of Comprehensive Income--Three and nine months ended
September 30, 1999 and 1998
Statements of Cash Flows--Nine months ended September 30, 1999 and 1998
Notes to Financial Statements--September 30, 1999
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
Part I. FINANCIAL INFORMATION
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Invested Assets:
Fixed Maturities available-for-sale, at fair
value (amortized cost of $639,756,018
and $576,475,130, respectively) $ 627,722,189 $ 605,523,237
Equity Securities, at fair value
(cost of $133,729,227 and $124,609,940,
respectively) 141,100,515 135,793,710
Real Estate 1,479,300 1,541,445
Policy Loans 6,519,804 6,013,130
Real Estate Mortgage Loans 10,020,416 10,070,394
Other Invested Assets 24,331,556 15,940,561
--------------- ---------------
Total Invested Assets $ 811,173,780 $ 774,882,477
Cash and Cash Equivalents 9,094,354 44,808,427
Premiums Receivable from Policyholders 3,842,963 3,830,625
Reinsurance Recoverable 857,561 568,521
Other Receivables 259,337 355,067
Accrued Investment Income 13,692,241 10,282,002
Deferred Policy Acquisition Costs 75,629,758 70,916,261
Reserve Credit for Reinsurance Ceded 6,592,286 5,994,390
Other Assets 6,545,994 5,967,858
--------------- ---------------
Total Assets $ 927,688,274 $ 917,605,628
=============== ===============
<FN>
See notes to financial statements.
</FN>
</TABLE>
3
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- --------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy Liabilities and Accruals:
Future Life Policy Benefits $ 68,896,789 $ 64,539,220
Policy and Contract Claims 1,272,579 1,801,030
Annuity Deposits 554,949,236 524,122,492
Universal Life Deposits 90,977,959 81,354,026
Supplementary Contracts Not Including
Life Contingencies 567,993 607,094
Other Policyholder Funds 5,483,953 8,166,371
Federal Income Taxes Payable 44,897 612,272
Deferred Federal Income Tax 16,990,271 31,252,214
Reinsurance Premium Due 588,577 301,487
Accounts Payable and Accrued Expenses 4,844,812 4,215,186
Note Payable to Erie Indemnity Company 15,000,000 15,000,000
Due to Affiliate 1,297,003 1,686,227
Dividends Payable 1,559,252 1,417,500
--------------- --------------
Total Liabilities $ 762,473,321 $ 735,075,119
--------------- --------------
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 (Loss) Income (2,399,545) 26,171,727
Retained Earnings 163,204,498 151,948,782
--------------- --------------
Total Shareholders' Equity $ 165,214,953 $ 182,530,509
--------------- --------------
Total Liabilities and Shareholders' Equity $ 927,688,274 $ 917,605,628
=============== ==============
<FN>
See notes to financial statements.
</FN>
</TABLE>
4
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
Revenues:
Policy:
Life Premiums, net of premiums ceded of
$947,927, $887,513, $2,443,748 and
$2,629,820, respectively $ 9,548,834 $ 8,905,059 $ 29,119,975 $ 26,519,337
Group Premiums 627,310 588,617 1,877,507 1,788,737
--------------- ---------------- ---------------- ---------------
Total Policy Revenue $ 10,176,144 $ 9,493,676 $ 30,997,482 $ 28,308,074
Investment Income, net of expenses of
$453,855, $328,078, $1,321,807 and
$1,054,881, respectively 14,138,823 12,574,958 41,438,678 38,360,698
Net Realized Gains on Investment 2,236,192 775,430 4,886,833 3,477,700
Other Income 219,046 237,989 591,782 627,522
--------------- ---------------- ---------------- ---------------
Total Revenues $ 26,770,205 $ 23,082,053 $ 77,914,775 $ 70,773,994
--------------- ---------------- ---------------- ---------------
Benefits and Expenses:
Death Benefits, net of reinsurance recoveries
of $823,033, $275,635, $1,583,907 and
$844,370, respectively $ 2,505,123 $ 2,742,286 $ 7,736,490 $ 5,980,656
Interest on Annuity Deposits 7,933,179 7,690,314 23,270,021 22,503,604
Interest on Universal Life Deposits 1,362,008 1,213,658 3,890,600 3,451,024
Surrender and Other Benefits 279,198 262,445 823,696 828,126
Increase in Future Life Policy Benefits, net of
the increase in reserve credit for reinsurance
ceded of $204,420, $186,972, $597,896 and $631,395,
respectively 1,438,409 1,227,423 3,759,672 3,299,768
Amortization of Deferred Policy Acquisition Costs 1,145,121 1,069,605 4,148,672 3,715,556
Commissions, net of reinsurance reimbursements
of $265,924, $328,245, $682,240 and $952,491,
respectively 403,927 418,405 1,471,755 988,556
General Expenses 1,882,376 2,145,078 5,415,539 5,260,885
Taxes, Licenses and Fees 370,854 402,953 1,176,436 201,954
--------------- ---------------- ---------------- ---------------
Total Benefits and Expenses $ 17,320,195 $ 17,172,167 $ 51,692,881 $ 46,230,129
--------------- ---------------- ---------------- ---------------
Income From Operations $ 9,450,010 $ 5,909,886 $ 26,221,894 $ 24,543,865
Federal Income Tax
Current 2,610,287 869,745 7,606,686 5,582,381
Deferred 107,368 1,377,224 1,122,485 3,236,412
--------------- ---------------- ---------------- ---------------
Total Federal Income Tax 2,717,655 2,246,969 8,729,171 8,818,793
--------------- ---------------- ---------------- ---------------
Net Income $ 6,732,355 $ 3,662,917 $ 17,492,723 $ 15,725,072
=============== ================ ================ ===============
Net Income Per Share $ 0.71 $ 0.39 $ 1.85 $ 1.66
=============== ================ ================ ===============
Dividends Declared Per Share $ 0.165 $ 0.15 $ 0.66 $ 0.60
=============== ================ ================ ===============
<FN>
See notes to financial statements.
</FN>
</TABLE>
5
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
Net Income $ 6,732,355 $ 3,662,917 $ 17,492,723 $ 15,725,072
--------------- ---------------- ---------------- ---------------
Unrealized Gains (Losses) on Securities:
Unrealized Holding (Losses) Gains Arising
During Period (14,524,321) (8,651,292) (39,068,868) 1,079,338
Less: Reclassification Adjustment for Gains
Included in Net Income (2,236,192) (775,430) (4,886,833) (3,477,700)
--------------- ---------------- ---------------- ---------------
Net Unrealized Holding Losses
Arising During Period $ (16,760,513) $ (9,426,722) $ (43,955,701) $ (2,398,362)
--------------- ---------------- ---------------- ---------------
Income Tax Benefit Related to
Unrealized Losses 5,866,180 3,299,353 15,384,429 839,427
--------------- ---------------- ---------------- ---------------
Other Comprehensive Loss,
Net of Tax $ (10,894,333) $ (6,127,369) $ (28,571,272) $ (1,558,935)
--------------- ---------------- ---------------- ---------------
Comprehensive (Loss) Income $ (4,161,978) $ (2,464,452) $ (11,078,549) $ 14,166,137
=============== ================ ================ ===============
<FN>
See notes to financial statements.
</FN>
</TABLE>
6
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------------ ------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 17,492,723 $ 15,725,072
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of bond and mortgage premium 211,532 370,567
Amortization of deferred policy acquisition costs 4,148,672 3,715,556
Real estate depreciation 62,145 62,145
Deferred federal income taxes 1,122,485 3,236,412
Realized gains on investments (4,886,833) (3,477,700)
(Increase) decrease in premium receivable (12,338) 35,918
Decrease (increase) in other receivables 95,730 (80,873)
Increase in accrued investment income (3,410,239) (1,945,675)
Policy acquisition costs deferred (8,862,169) (7,977,273)
Increase in other assets (578,136) (1,721,587)
Increase in reinsurance recoverable and reserve credits (886,936) (543,597)
Increase in future policy benefits and claims 3,829,118 3,287,935
Decrease in other policyholder funds (2,682,418) (1,964,343)
Increase (decrease) in reinsurance premium due 287,090 (151,871)
Decrease in federal income tax (567,375) (1,678,288)
Increase in accounts payable and due to affiliate 240,402 3,234,283
------------------------ ------------------------
Net cash provided by operating activities $ 5,603,453 $ 10,126,681
------------------------ ------------------------
Cash flows from investing activities:
Purchase of investments:
Fixed maturities $ (137,081,056) $ (110,588,282)
Equity securities (42,994,613) (49,349,639)
Mortgage loans (66,286) 0
Other invested assets (9,105,027) (9,849,688)
Sales/maturities of investments:
Fixed maturities 79,518,818 76,957,477
Equity securities 32,820,528 33,702,953
Other invested assets 1,663,926 3,669,984
Principal payments received on mortgage loans 116,538 103,284
Loans made to policyholders (1,107,867) (1,120,633)
Payments received on policy loans 601,193 452,517
------------------------ ------------------------
Net cash used in investing activities $ (75,633,846) $ (56,022,027)
------------------------ ------------------------
Cash flows from financing activities:
Increase in annuity and supplementary contract deposits $ 30,787,643 $ 21,748,009
Increase in universal life deposits 9,623,933 9,178,165
Dividends paid to shareholders (6,095,256) (4,110,752)
------------------------ ------------------------
Net cash provided by financing activities $ 34,316,320 $ 26,815,422
------------------------ ------------------------
Net decrease in cash and cash equivalents (35,714,073) (19,079,924)
Cash and cash equivalents at beginning of year 44,808,427 42,287,398
------------------------ ------------------------
Cash and cash equivalents at end of quarter $ 9,094,354 $ 23,207,474
======================== ========================
Supplemental disclosures of cash flow information: Cash paid during
the year for:
Income taxes $ 7,967,531 $ 7,060,000
Interest 483,750 483,750
<FN>
See notes to financial statements.
</FN>
</TABLE>
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1998.
NOTE B -- INVESTMENTS
Management considers all fixed maturities and marketable equity securities
available-for-sale. Marketable equity securities consist primarily of common and
non-redeemable preferred stocks while fixed maturities consist of bonds, notes
and redeemable preferred stock. Available-for-sale securities are stated at fair
value, with the unrealized gains and losses, net of tax, reported as a separate
component of shareholders' equity. Management determines the appropriate
classification of fixed maturities at the time of purchase and reevaluates such
designation as of each statement of financial position date.
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
(In Thousands) Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
September 30, 1999
Fixed Maturities:
U.S. Treasuries and Government
Agencies $ 6,623 $ 269 $ 14 $ 6,878
States and Political Subdivisions 2,055 63 0 2,118
Special Revenue 11,045 363 0 11,408
Public Utilities 61,897 946 2,011 60,832
U.S. Banks, Trusts and Insurance
Companies 113,455 1,110 3,455 111,110
U.S. Industrial and Miscellaneous 382,812 2,843 9,499 376,156
Foreign Governments-Agency 2,991 0 145 2,846
Foreign Banks, Trusts and Insurance
Companies 9,980 12 329 9,663
Foreign Industrial and Miscellaneous 43,898 288 2,188 41,998
--------------- --------------- ---------------- ---------------
Total Bonds $ 634,756 $ 5,894 $ 17,641 $ 623,009
Redeemable Preferred Stock 5,000 0 287 4,713
--------------- --------------- ---------------- ---------------
Total Fixed Maturities $ 639,756 $ 5,894 $ 17,928 $ 627,722
--------------- --------------- ---------------- ---------------
Equity Securities:
Common Stock $ 62,310 $ 17,695 $ 8,801 $ 71,204
Non-Redeemable Preferred Stock 71,419 716 2,238 69,897
--------------- --------------- ---------------- ---------------
Total Equity Securities $ 133,729 $ 18,411 $ 11,039 $ 141,101
--------------- --------------- ---------------- ---------------
Total Available-for-Sale Securities $ 773,485 $ 24,305 $ 28,967 $ 768,823
=============== =============== ================ ===============
</TABLE>
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
If management determines that any declines in market value of these investments
are other than temporary, the securities will be written-down to the realizable
value of the investment and the write down reflected in income. If a bond is in
default of interest payments and it is determined that liquidation of the
security would be in the Company's best interest, the security will be sold to
return the proceeds to income producing assets.
At September 30, 1999, the amortized cost of the Company's five largest
investments in corporate debt securities totaled $35.5 million, none of which
individually exceeded $8.0 million. These investments had a market value of
$35.3 million.
Real estate investments are carried on the statements of financial position at
cost, less allowances for depreciation and possible losses. Commercial mortgage
loans on real estate are carried at their unpaid balances, adjusted for
amortization of premium or discount, less allowances for possible loan losses.
Policy loans are carried at their unpaid balances.
The fair values of the Company's investments in real estate, mortgage loans,
policy loans, and other invested assets, approximate the values presented in the
financial statements.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction with the
financial statements and related notes found on pages 3 through 9, since they
contain important information that is helpful in evaluating the Company's
operating results and financial condition.
OVERVIEW
Net income increased 83.8% to $6,732,355, or $0.71 per share, in the third
quarter of 1999 from $3,662,917 or $0.39 per share, in the third quarter of
1998. Solid premium growth and investment gains contributed to the outstanding
financial results for the third quarter of 1999. Net income for the nine months
ended September 30, 1999 increased 11.2% to $17,492,723, or $1.85 per share,
compared to $15,725,072 or $1.66 per share for the same period in 1998.
REVENUES
Analysis of Policy Revenue
Total policy revenue increased $682,468 or 7.2%, to $10,176,144 in the third
quarter of 1999. Premiums on traditional life insurance policies increased 6.2%
to $7,793,150 for the quarter ended September 30, 1999. Annuity products
generated deposits of $12,650,232 in the third quarter of 1999 compared to
$9,254,180 generated in the third quarter of 1998, an increase of $3,396,052, or
36.7%. Of this amount, ordinary annuity deposits increased $1,769,446, or 33.5%,
to $7,047,687 for the quarter ended September 30, 1999. Universal life products
generated premiums and deposits of $5,453,252 in the third quarter of 1999
compared to $4,923,456 produced in the third quarter of 1998, an increase of
10.8%. Total policy revenue increased $2,689,408 or 9.5%, to $30,997,482 for the
nine months ended September 30, 1999.
Analysis of Investment-related Income
Net investment income increased $1,563,865, or 12.4% in the third quarter of
1999 due to increased levels of investment from cash flows generated by the
Company's operations and by cash from annuity and universal life deposits. For
the nine months ended September 30, 1999, net investment income increased
$3,077,980, or 8.0%, to $41,438,678.
During the third quarter of 1999 and 1998, the Company generated net realized
gains on investments of $2,236,192 and $775,430, respectively, from the sale
of equity and fixed maturity investments.
Total invested assets of the Company were $811,173,780 at September 30, 1999,
an increase of $36,291,303, or 4.7%, over the December 31, 1998 levels.
BENEFITS AND EXPENSES
Analysis of Policy-related Benefits and Expenses
Death benefits on life insurance policies were down $237,163 or 8.6% to
$2,505,123 in the third quarter of 1999. For the nine months ended September 30,
1999, death benefits on life insurance policies increased $1,755,834, or 29.4%,
to $7,736,490. This comparison is heavily influenced by death benefits incurred
on life insurance policies the first six months of 1998, which were unusually
low. Random fluctuations of this kind can be expected when mortality results are
measured over a short time period, due to the fairly small number of claims
involved. These short-term fluctuations can significantly influence quarterly
results without impacting long-term profitability. The Company's mortality
experience has been favorable over the past several years and management
believes that its underwriting philosophy and practices continue to be sound.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
Interest on deposits held by the Company for Policyholders increased $391,215,
or 4.4%, to $9,295,187 in the third quarter of 1999. Interest on deposits held
by the Company increased $1,205,993, or 4.6%, for the nine months ended
September 30, 1999. The increase in interest on deposits for the first nine
months of 1999 was caused by the 6.7% increase in annuity and universal life
deposits during the first nine months of 1999. The interest rate currently
credited on universal life deposits ranges from 6.0% to 6.75% while the rate
currently credited on annuity deposits ranges from 5.0% to 5.75%.
Analysis of Other Expenses
Total operating expenses, excluding taxes, licenses and fees, declined 10.8% to
$2,286,303 for the quarter ended September 30, 1999 from $2,563,483 for the same
period in 1998. Included in the third quarter 1998 expenses were nonrecurring
costs associated with the implementation of the policy administration system
"Cyberlife". As a result, third quarter 1999 operating expenses relative to 1998
operating expenses were lower. For the nine months ended September 30, 1999 and
1998, these operating expenses totaled $6,887,294 and $6,249,441, respectively,
an increase of $637,853, or 10.2%.
Certain operating expenses of the Company are paid by Erie Indemnity Company,
the management company of the Erie Insurance Exchange, and reimbursed monthly by
the Company. Additionally, a portion of the common overhead expenses of the Erie
Insurance Group are allocated to Erie Family Life. These expenses comprise the
majority of the Company's general expenses.
General expenses, a component of total operating expenses, include wages and
salaries, Employee benefits, data processing expenses, occupancy expenses and
other office and general administrative expenses of the Company. Certain general
expenses of the Company are deferred as policy acquisition costs. Medical
inspection and exam fees related to new business production, wages, salaries and
Employee benefits of underwriting personnel, and bonuses paid to branch sales
Employees for the production of life and annuity business, are all deferred.
Deferred policy acquisition costs are amortized over the premium paying period
of the related policies in proportion to the ratio of the annual premium revenue
to the total anticipated premium revenue.
Another component of total operating expenses is commissions. Direct commission
costs include new and renewal commissions, production bonuses and Company
contest awards. These direct commission expenses are reported on the Statements
of Operations net of commissions received from reinsurers and commission
expenses capitalized as part of the deferred policy acquisition costs (DAC).
Most first-year and incentive commissions and some second-year commissions
qualify for deferral as DAC. These deferred policy acquisition 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.
Taxes, licenses and fees declined $32,099 in the third quarter of 1999 to
$370,854 and increased $974,482 in the first nine months of 1999 to $1,176,436.
This year to date increase was the result of a $954,000 refund due the Company,
in the first quarter of 1998, from the Pennsylvania Life and Health Insurance
Guaranty Association which reduced the 1998 expense.
FINANCIAL CONDITION
Reserve Liabilities
The Company's primary commitment is its obligation to meet the payment of future
policy benefits under the terms of its life insurance and annuity contracts. To
meet these future obligations, the Company establishes life insurance reserves
based upon the type of policy, the age of the insured, and the number of years
the policy has been in force. The Company also establishes annuity and universal
life reserves based on the amount of Policyholder deposits (less applicable
policy charges) plus interest earned on those deposits. On September 30, 1999,
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.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
Investments
The Company's investment strategies are designed and portfolios are structured
to match the features of the life insurance and annuity products sold by the
Company. Annuities and life insurance policies are long-term products,
therefore, the Company's investment strategy takes a long-term perspective
emphasizing investment quality, diversification, and superior investment
returns. The Company's investments are managed on a total return approach that
focuses on current income and capital appreciation.
The Company's invested assets are liquid in order to meet commitments to our
Policyholders. At September 30, 1999, the Company's investment portfolio
consisting of cash, marketable short-term investments, investment grade bonds,
common stock, and preferred stock, totaled $769 million or 82.9% of total
assets.
Included in the fixed maturity category are high-quality bonds with a carrying
value of $618,984,939 that are rated at investment grade levels (Baa/BBB or
better). This represents 98.6% of the Company's total fixed maturities held at
September 30, 1999. Included in this investment-grade category are $339 million
or 54.0% of total fixed maturities, characterized as the "highest" quality or
"Class 1" securities as defined by the National Association of Insurance
Commissioners (NAIC). Generally, the fixed maturity securities in the Company's
portfolio are rated by external rating agencies. If not externally rated, they
are rated by the Company on a basis consistent with the basis used by the rating
agencies.
As with the fixed maturity portfolio, the Company's non-redeemable preferred
stock portfolio provides a source of highly predictable current income that is
very competitive with high-grade bonds. These securities are well diversified
within each market sector. The preferred stocks are of a high-quality (all of
the almost $70 million of preferred stock are rated "highest" or "high" quality
as defined by the NAIC) and extremely marketable. There are no preferred stocks
in the Company's portfolio rated in the "low," "lowest," or "in or near default"
quality categories established by the NAIC. Common stock provides capital
appreciation potential within the portfolio. Common stock investments inherently
provide no assurance of producing income since dividends are not guaranteed. As
with all investments, the continuing value of common stock is subject to change
based on the underlying value of the issuer. Common stocks also are subject to
valuation fluctuations driven by investment market conditions.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company's ability to secure enough cash to meet
its contractual obligations and operating needs. Generally, insurance premiums
and deposits are collected prior to claims and benefit disbursements and these
funds are invested to provide necessary cash flows in future years. The
Company's major sources of cash from operations are life insurance premiums and
investment income. The net positive cash flow is used to fund Company
commitments and to build the investment portfolio, thereby increasing future
investment returns. Net cash provided by operating activities for the nine
months ended September 30, 1999 was $5,603,453 compared to $10,126,681 for the
nine months ended September 30, 1998. The Company's liquidity position remains
strong as total invested assets increased by $36 million, or 4.7%, during the
first nine months of 1999 to $811 million at September 30, 1999.
Annuity and universal life deposits, which do not appear as revenue on the
financial statements, provide cash. These deposits do not involve a mortality or
morbidity risk and are accounted for using methods applicable to comparable
interest-bearing obligations of other types of financial institutions. This
method of accounting records deposits as a liability rather than as a revenue.
Annuity and universal life deposits were $15,408,713 in the third quarter of
1999 and $11,730,903 in the third quarter of 1998.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
The Company's current commitments for expenditures as of September 30, 1999 are
primarily for policy death benefits, policy surrenders and withdrawals, general
operating expenses, federal income taxes, and dividends to shareholders. These
commitments are met by cash flows from policy revenue, annuity and universal
life deposits and investment income. Management believes its cash flow from
operations and its liquid assets and marketable securities will enable the
Company to meet any foreseeable cash requirements. As an added measure of
liquidity, the Company has in place a $10 million line of credit with a bank. At
September 30, 1999, there were no borrowings on this line of credit.
Dividends declared and unpaid to shareholders totaled $1,559,252 at September
30, 1999.
The Company's 1998 year-end Risk Based Capital Analysis as reflected in its 1998
statutory annual statement shows total adjusted capital of $107,639,503 and
authorized control level risk based capital of $19,737,569. These results are
indicative of the strong capital position of the Company.
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 is perhaps more pervasive than any
previous risk management issue faced by businesses of all types. To effectively
manage the risks associated with the Year 2000 Issue, management has taken
measures over the past six years designed to reduce the Company's potential for
business interruption.
The effect of the Year 2000 Issue cannot be measured exactly with certainty; 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 14.
Company's State of Readiness
Exposure to systems failure is a risk faced by the Company every day. Unlike the
every day risks, the date change to the Year 2000 is predictable. Efforts to
mitigate the Company's exposure through effective identification, remediation,
testing and contingency planning are organized and have been conducted on all
major business processes to minimize the risks.
To assure that the Company effectively addresses this risk, management put in
place a structure that provides oversight of Year 2000 project activities, which
were organized along the major business processes 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
area to assure consistency and adequacy of risk management activities and to
collect companywide project status and cost information.
Each key business process was evaluated to assure that underlying systems and
components exposed to potential Year 2000 failure were 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 underlying component 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.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
Remediation of the Company's mainframe applications was completed and component
testing was conducted during the first quarter of 1999. As individual components
were re-coded, component functionality was tested. To supplement component
testing and to provide a greater degree of assurance that business functions
will be uninterrupted, full systems Year 2000 simulation testing was conducted
in the second and third quarters of 1999. Full systems testing entails
simultaneous testing of the underlying components necessary to support key
business processes. Where possible and practical, this effort incorporated key
third parties with whom we were coordinating our testing efforts. The results of
testing did not indicate that key business processing applications will
encounter any material problems in the Year 2000 due to the inability to
recognize dates in the Year 2000.
As testing neared completion, each business area consulted with the Y2K Office
to develop contingency plans to address the possibility of component or business
process failures. Contingency plans were developed during the third quarter of
1999. Testing and facilitation of the plans began during the third quarter and
will be complete by mid-fourth quarter 1999.
Cost to Address Year 2000 Issues
Costs incurred to address the Year 2000 Issue include personnel costs (to
re-code and test internal systems, test external party interfaces, develop
contingency plans and replace software and hardware devices that are not Year
2000 compliant) consulting fees and personal computer software and hardware
replacement costs. Costs that have been incurred to date have been charged to
operations as incurred. The estimated cost incurred to date and future costs
through completion approximate $150,000. Total third quarter 1999 costs incurred
approximated $50,000.
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, is preparing contingency plans during the last nine months of 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
The 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 last
three 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.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION (Continued)
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995: Statements contained herein expressing the beliefs of management such as
those contained in the "Benefits and Expenses - Analysis of Policy-related
Benefits and Expenses", the "Liquidity and Capital Resources" and the
"Investments" sections hereof, and the other statements which are not historical
facts contained in this report are forward looking statements that involve risks
and uncertainties. These risks and uncertainties include but are not limited to:
legislative, judicial, and regulatory changes, the impact of competitive
products and pricing, product development, geographic spread of risk,
catastrophic events, better (or worse) mortality rates, securities markets
fluctuations and technological difficulties and advancements.
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
All other exhibits for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore, have been omitted.
The Company did not file any reports on Form 8-K during the three-month period
ended September 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Erie Family Life Insurance Company
(Registrant)
Date: November 8, 1999
\s\ Stephen A. Milne
(Stephen A. Milne, President & CEO)
\s\ Philip A. Garcia
(Philip A. Garcia, Executive Vice President & CFO)
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ERIE
FAMILY LIFE INSURANCE COMPANY'S STATEMENT OF FINANCIAL POSITION AND STATEMENT OF
OPERATIONS DATED SEPTEMBER 30, 1999 AND ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 627,722,189
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 141,100,515
<MORTGAGE> 10,020,416
<REAL-ESTATE> 1,479,300
<TOTAL-INVEST> 811,173,780
<CASH> 9,094,354
<RECOVER-REINSURE> 857,561
<DEFERRED-ACQUISITION> 75,629,758
<TOTAL-ASSETS> 927,688,274
<POLICY-LOSSES> 715,391,977
<UNEARNED-PREMIUMS> 213,601
<POLICY-OTHER> 1,272,579
<POLICY-HOLDER-FUNDS> 5,270,352
<NOTES-PAYABLE> 0
0
0
<COMMON> 4,410,000
<OTHER-SE> 160,804,953
<TOTAL-LIABILITY-AND-EQUITY> 927,688,274
30,997,482
<INVESTMENT-INCOME> 41,438,678
<INVESTMENT-GAINS> 4,886,833
<OTHER-INCOME> 591,782
<BENEFITS> 39,480,479
<UNDERWRITING-AMORTIZATION> 4,148,672
<UNDERWRITING-OTHER> 8,063,730
<INCOME-PRETAX> 26,221,894
<INCOME-TAX> 8,729,171
<INCOME-CONTINUING> 17,492,723
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,492,723
<EPS-BASIC> 1.85
<EPS-DILUTED> 1.85
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
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</TABLE>
