UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 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 April 30, 1999.
1
<PAGE>
INDEX
ERIE FAMILY LIFE INSURANCE COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Financial Position--March 31, 1999 and December 31, 1998
Statements of Operations--Three months ended March 31, 1999 and 1998
Statements of Comprehensive Income--Three months ended March 31, 1999
and 1998
Statements of Cash Flows--Three months ended March 31, 1999 and 1998
Notes to Financial Statements--March 31, 1999
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
PART I. FINANCIAL INFORMATION
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Investments:
Fixed Maturities at fair value (amortized cost
of $599,997,161 and $576,475,130,
respectively) $ 616,856,693 $ 605,523,237
Equity Securities, at fair value
(cost of $130,884,988 and $124,609,940,
respectively) 143,412,220 135,793,710
Real Estate 1,520,730 1,541,445
Policy Loans 6,112,766 6,013,130
Real Estate Mortgage Loans 10,099,247 10,070,394
Other Invested Assets 16,898,579 15,940,561
------------- -------------
Total Investments $ 794,900,235 $ 774,882,477
Cash and cash equivalents 28,488,592 44,808,427
Premiums Receivable from Policyholders 3,491,577 3,830,625
Reinsurance Recoverable 64,363 568,521
Other Receivables 212,743 355,067
Accrued Investment Income 12,910,398 10,282,002
Deferred Policy Acquisition Costs 72,284,264 70,916,261
Reserve Credit for Reinsurance Ceded 6,165,418 5,994,390
Other Assets 6,252,575 5,967,858
------------- -------------
Total Assets $ 924,770,165 $ 917,605,628
============= =============
<FN>
See notes to financial statements.
</FN>
</TABLE>
3
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Liabilities:
Policy Liabilities and Accruals:
Future Life Policy Benefits $ 65,868,269 $ 64,539,220
Policy and Contract Claims 1,255,641 1,801,030
Annuity Deposits 537,745,361 524,122,492
Universal Life Deposits 84,520,639 81,354,026
Supplementary Contracts Not
including Life Contingencies 590,706 607,094
Other Policyholder Funds 4,502,570 8,166,371
Federal Income Taxes Payable 1,132,969 612,272
Deferred Income Taxes 27,746,134 31,252,214
Reinsurance Premium Due 155,171 301,487
Accounts Payable and Accrued Expenses 4,388,066 4,215,186
Note Payable to Erie Indemnity Company 15,000,000 15,000,000
Due to Affiliate 1,420,154 1,686,227
Dividends Payable 1,559,252 1,417,500
------------- -------------
Total Liabilities $ 745,884,932 $ 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 Income 19,204,023 26,171,727
Retained Earnings 155,271,210 151,948,782
------------- -------------
Total Shareholders' Equity $ 178,885,233 $ 182,530,509
------------- -------------
Total Liabilities and Shareholders'
Equity $ 924,770,165 $ 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 Three Months Ended
March 31, 1999 March 31, 1998
------------------ ------------------
<S> <C> <C>
Revenues:
Policy:
Life Premiums, net of premiums ceded of
$732,821 and $771,233, respectively $ 9,220,899 $ 8,363,132
Group Premiums 622,611 618,046
------------- -------------
Total Policy Revenue $ 9,843,510 $ 8,981,178
Investment Income, Net of Expenses of
$408,481 and $337,266, respectively 13,370,193 12,790,228
Net Realized Gains on Investments 824,849 1,836,161
Other Income 237,293 163,909
------------- -------------
Total Revenues $ 24,275,845 $ 23,771,476
------------- -------------
Benefits and Expenses:
Death Benefits, net of reinsurance recoveries
of $625,895 and $515,351, respectively 2,561,242 1,478,145
Interest on Annuity Deposits 7,303,422 7,494,182
Interest on Universal Life Deposits 1,274,119 1,086,063
Surrender and Other Benefits 282,749 265,797
Increase in Future Life Policy Benefits, net of
the increase in reserve credit for reinsurance
ceded of $171,028 and $251,585, respectively 1,158,021 932,831
Amortization of Deferred Policy
Acquisition Costs 1,593,866 1,295,790
Commissions, net of reinsurance reimbursements
of $214,606 and $209,310, respectively 532,536 296,841
General Expenses 1,736,349 1,450,373
Taxes, Licenses and Fees 400,886 (544,986)
------------- -------------
Total Benefits and Expenses $ 16,843,190 $ 13,755,036
------------- -------------
Income From Operations $ 7,432,655 $ 10,016,440
Provision for Federal Income Taxes:
Current 2,305,216 2,633,643
Deferred 245,760 884,988
------------- -------------
Total Provision for Federal Income Taxes 2,550,976 3,518,631
------------- -------------
Net Income $ 4,881,679 $ 6,497,809
============= =============
Net Income Per Share $ 0.52 $ 0.69
============= =============
Dividends Declared Per Share $ 0.165 $ 0.15
============= =============
<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 Three Months Ended
March 31, 1999 March 31, 1998
------------------ ------------------
<S> <C> <C>
Net Income $ 4,881,679 $ 6,497,809
------------- -------------
Unrealized (Losses) Gains on Securities:
Unrealized Holding (Losses) Gains Arising
During Period (9,894,695) 5,307,116
Less: Reclassification Adjustment for Gains
Included in Net Income (824,849) (1,836,161)
------------- ------------
Net Unrealized Holding (Losses) Gains
Arising During Period $ (10,719,544) $ 3,470,955
------------- -------------
Income Tax Benefit (Expense) Related to
Unrealized (Losses) Gains 3,751,840 (1,214,834)
------------- -------------
Other Comprehensive (Loss) Income,
Net of Tax $ (6,967,704) $ 2,256,121
------------- -------------
Comprehensive (Loss) Income $ (2,086,025) $ 8,753,930
============= =============
<FN>
See notes to financial statements.
</FN>
</TABLE>
6
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,881,679 $ 6,497,809
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of bond and mortgage
premium 70,626 155,949
Amortization of deferred policy acquisition costs 1,593,866 1,295,790
Real estate depreciation 20,715 20,715
Deferred federal income taxes 245,760 884,988
Realized gains on investments (824,849) (1,836,161)
Decrease in premiums receivable 339,048 296,592
Decrease (increase) in other receivables 142,324 (43,666)
Increase in accrued investment income (2,628,396) (1,627,934)
Policy acquisition costs deferred (2,961,869) (2,602,633)
Increase in other assets (284,717) (1,041,368)
Decrease (increase) in reinsurance receivables
and reserve credits 333,130 (376,252)
Increase in future life policy benefits and claims 783,660 986,296
Decrease in other policyholder funds (3,663,801) (2,064,079)
Decrease in reinsurance premium due (146,316) (188,487)
Increase in federal income tax payable 520,697 2,267,895
Decrease in accounts payable and due to affiliate (93,189) (783,648)
------------- ------------
Net cash (used in) provided by operating activities $ (1,671,632) $ 1,841,806
------------- ------------
Cash flows from investing activities:
Purchase of investments:
Fixed maturities $ (55,916,993) $ (41,709,780)
Equity securities (12,057,506) (6,215,468)
Mortgage loans (66,286) 0
Other invested assets (848,937) (4,009,279)
Sales/maturities of investments:
Fixed maturities 32,502,381 13,952,283
Equity securities 6,429,169 12,491,060
Other invested assets 16,488 148,031
Principal payments received on mortgage loans 37,523 34,870
Loans made to policyholders (348,394) (294,345)
Payments received on policy loans 248,758 132,041
------------- -------------
Net cash used in investing activities $ (30,003,797) $ (25,470,587)
------------- -------------
<FN>
See notes to financial statements.
</FN>
</TABLE>
7
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS--Continued (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
------------------ ------------------
<S> <C> <C>
Cash flows from financing activities:
Increase in annuity and supplementary
contracts $ 13,606,481 $ 12,185,188
Increase in universal life deposits 3,166,613 3,259,398
Dividends paid to shareholders (1,417,500) (1,275,752)
------------- -------------
Net cash provided by financing
activities $ 15,355,594 $ 14,168,834
------------- -------------
Net decrease in cash and cash equivalents (16,319,835) (9,459,947)
Cash and cash equivalents at beginning of year 44,808,427 42,287,398
------------- -------------
Cash and cash equivalents at end of quarter $ 28,488,592 $ 32,827,451
============= =============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Income taxes $ 1,700,000 $ 300,000
<FN>
See notes to financial statements.
</FN>
</TABLE>
8
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended March 31, 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
The Company has classified all of its fixed maturity portfolio as
available-for-sale at March 31, 1999. Management believes that having all fixed
maturities classified as available-for-sale securities will allow the Company to
meet its liquidity needs and provide greater flexibility for its investment
managers to restructure the Company's investments in response to changes in
market conditions or strategic direction. Securities classified as
available-for-sale are carried at market value with unrealized gains and losses,
net of tax, included in shareholders' equity.
At March 31, 1999, the amortized cost, gross unrealized gains, gross unrealized
losses and estimated fair value for fixed maturities were as follows:
Fixed Maturities at 3-31-99
(In Thousands)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasuries and Government
Agencies $ 17,617 $ 801 $ 11 $ 18,407
States and Political Subdivisions 2,056 113 0 2,169
Special Revenue 11,063 617 0 11,680
Public Utilities 67,377 2,704 178 69,903
U.S. Banks, Trusts and Insurance
Companies 113,773 4,901 1,816 116,858
U.S. Industrial and Miscellaneous 358,448 11,450 1,842 368,056
Foreign Governments-Agency 2,990 0 135 2,855
Foreign Banks, Trusts and Insurance
Companies 1,989 0 3 1,986
Foreign Industrial & Miscellaneous 24,684 690 431 24,943
--------- --------- --------- ---------
Total Fixed Maturities $ 599,997 $ 21,276 $ 4,416 $ 616,857
========= ========= ========= =========
</TABLE>
Included in the fixed maturity category are high-quality bonds with a carrying
value of $604,434,443 that are rated at investment grade levels (Baa/BBB or
better). Included in this investment-grade category are $336.9 million
characterized as the "highest" quality or "Class 1" securities as defined by the
National Association of Insurance Commissioners (NAIC). Generally, the fixed
maturity securities in the Company's portfolio are rated by external rating
agencies. If not externally rated, they are rated by the Company on a basis
consistent with the basis used by the rating agencies.
If management determines that any declines in market value of these investments
are other than temporary, the securities will be written-down to the realizable
value and 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.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
At March 31, 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 $36.4 million.
Equity securities consist of common and preferred stocks, which are carried on
the balance sheet at market value. As with the fixed maturity portfolio, the
Company's preferred stock portfolio provides a source of highly predictable
current income that is very competitive with high-grade bonds. These securities
are well diversified within each market sector. The preferred stocks are of very
high-quality (all of the $76.3 million of preferred stock are rated "highest" or
"high" quality as defined by the NAIC) and extremely marketable. Common stock
provides capital appreciation potential within the portfolio. Common stock
investments inherently provide no assurance of producing income since dividends
are not guaranteed. As with all investments, the continuing value of common
stock is subject to change based on the underlying value of the issuer. Common
stocks also are subject to valuation fluctuations driven by investment market
conditions.
Equity Securities at 3-31-99
(In Thousands)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Common Stock:
U.S. Banks, Trusts and
Insurance Companies $ 7,849 $ 4,974 $ 235 $ 12,588
U.S. Industrial and Miscellaneous 46,992 13,049 6,182 53,859
Foreign Industrial and
Miscellaneous 725 0 80 645
--------- --------- --------- ---------
Total Common Stock 55,566 18,023 6,497 67,092
Preferred Stock:
Public Utilities 4,000 10 0 4,010
U.S. Banks, Trusts and
Insurance Companies 41,106 1,676 115 42,667
U.S. Industrial and Miscellaneous 13,440 210 1,094 12,556
Foreign Banks, Trusts and
Insurance Companies 12,873 472 318 13,027
Foreign Industrial and
Miscellaneous 3,900 160 0 4,060
--------- --------- --------- ---------
Total Preferred Stock 75,319 2,528 1,527 76,320
--------- --------- --------- ---------
Total Equity Securities $ 130,885 $ 20,551 $ 8,024 $ 143,412
========= ========= ========= =========
</TABLE>
Real estate investments are carried on the statements of financial position at
cost, less allowances for depreciation and possible losses. Commercial mortgage
loans on real estate are carried at their unpaid balances, adjusted for
amortization of premium or discount, less allowances for possible loan losses.
Policy loans are carried at their unpaid balances.
The fair values of the Company's investments in real estate, mortgage loans,
policy loans, and other invested assets, approximate the values presented in the
financial statements.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION
The following discussion and analysis should be read in conjunction with the
financial statements and related notes found on pages 3 through 10, since they
contain important information that is helpful in evaluating the Company's
operating results and financial condition.
FINANCIAL OVERVIEW
Net income decreased to $4,881,679, or $.52 per share, in the first quarter of
1999 from $6,497,809 or $.69 per share, in the first quarter of 1998. A
$1,011,312 reduction in realized gains on investments, to $824,849 in the first
quarter of 1999, an increase in death benefits of 73.3% in the first quarter of
1999 and a $954,000 refund due from the Pennsylvania Life and Health Guaranty
Association in the first quarter of 1998 were the primary reasons for the
decline in net income. Revenue growth continued to be strong as total policy
revenue increased by 9.6% to $9,843,510 in the current period.
REVENUES
Analysis of Policy Revenue
Total policy revenues increased $862,332 or 9.6%, to $9,843,510 in the first
quarter of 1999 from $8,981,178 in the first quarter of 1998. Premiums on
traditional life insurance policies increased 9.7% to $7,442,458 for the quarter
ended March 31, 1999. Annuity products generated deposits of $18,228,042 in the
first quarter of 1999 compared to $16,773,956 generated in the first quarter of
1998, an increase of $1,454,086, or 8.7%. Of this amount, structured settlement
deposits increased $1,762,093, or 29.5%, to $7,730,853 at March 31, 1999.
Universal life products generated premiums and deposits of $5,555,962 in the
first quarter of 1999 compared to $5,079,635 produced in the first quarter of
1998, an increase of 9.4%.
Overall application production for the Company was strong in the first quarter
of 1999, up 2.4% from the first quarter of 1998. During the first quarter of
1999, more than 7,150 life and annuity applications have been submitted. Of the
total submissions, 1,986, or 27.8% were from our "Term Protector Series"
products and 1,020, or 14.3% were from our universal life products.
Analysis of Investment-related Income
Net investment income in the first quarter of 1999 increased $579,965, or 4.5%,
to $13,370,193. The majority of the increase in income generated by the
investment portfolio was due to increased levels of investment from cash flows
generated by the Company's operations and annuity and universal life deposits.
During the first quarter of 1999 and 1998, the Company generated realized gains
of $824,849 and $1,836,161, respectively, from the sale of equity and fixed
maturity investments.
BENEFITS AND EXPENSES
Analysis of Policy-related Benefits and Expenses
Net death benefits on life insurance policies increased 73.3% in the first
quarter of 1999 to $2,561,242, compared to $1,478,145, for the same period in
1998. Mortality experience is best viewed over the long term, 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.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
Interest on deposits held by the Company for Policyholders decreased slightly to
$8,577,541 in the first quarter of 1999 from $8,580,245 in the first quarter of
1998. During the first quarter of 1999, the interest rate credited on universal
life and annuity deposits decreased slightly. The overall reduction in credited
interest was caused by a reduction in the credited interest rate approved by the
Board of Directors in the fourth quarter of 1998. The interest rate currently
credited on universal life deposits ranges from 6.00% to 6.75% while the rate
currently credited on annuity deposits ranges from 5.00% to 5.75%.
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 1999 first quarter increase in future
life policy benefits was $1,158,021, compared to $932,831 in the first quarter
of 1998, an increase of 24.1%.
Analysis of Other Expenses
During the first quarter of 1999 commission expense increased $235,695 to
$532,536. A portion of this increase is the result of an increase in premiums of
9.6% and an increase in promotional incentive costs to agents due to the
Company's participation in the "Caribbean Classic" contest. This contest runs
from June 1998 to August 1999. Direct commission costs include new and renewal
commissions, production bonuses and Company contest awards. These direct
commission expenses are reduced by commissions received from reinsurers and
commission expenses capitalized as part of the deferred policy acquisition costs
(DAC). Commission costs, which vary with and are related primarily to the
production of new business, have been deferred and are capitalized as DAC. Most
first-year and 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.
General expenses amounted to $1,736,349 in the first quarter of 1999 compared to
$1,450,373 for the same period in 1998, an increase of 20%. Personnel costs
included in general expenses increased $387,798 due to a 10.3% increase in the
number of employees plus normal merit-based salary growth.
Erie Indemnity Company is a 21.6 percent shareholder of Erie Family Life
Insurance Company and the Management Company for the Erie Insurance Exchange.
Certain operating expenses of the Company are paid by Erie Indemnity Company and
reimbursed monthly by the Company. Additionally, a portion of the common
overhead expenses of the Erie Insurance Group are allocated to Erie Family Life.
These expenses comprise the majority of Company general expenses.
General expenses include wages and salaries, Employee benefits, data processing
expenses, occupancy expenses and other office and general administrative
expenses of the Company. Certain general expenses of the Company are deferred as
policy acquisition costs. Medical inspection and exam fees related to new
business production, wages, salaries and Employee benefits of underwriting
personnel, and bonuses paid to branch sales Employees for the production of life
and annuity business, are all deferred. Deferred acquisition costs are amortized
over the premium paying period of the related policies in proportion to the
ratio of the annual premium revenue to the total anticipated premium revenue.
Taxes, licenses and fees increased $945,872 to $400,880 in the first quarter of
1999 compared to ($544,986) in the first quarter of 1998. This 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 because of a
recalculation of annuity assessments paid in previous years.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
FINANCIAL CONDITION
Reserve Liabilities
The Company's primary commitment is its obligation to meet the payment of future
policy benefits under the terms of its life insurance and annuity contracts. To
meet these future obligations, the Company establishes life insurance reserves
based upon the type of policy, the age of the insured, and the number of years
the policy has been in force. The Company also establishes annuity and universal
life reserves based on the amount of Policyholder deposits (less applicable
policy charges) plus interest earned on those deposits. On March 31, 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.
Investments
The Company's investment strategies are designed and portfolios are structured
to match the features of the life insurance and annuity products sold by the
Company. Annuities and life insurance policies are long-term products,
therefore, the Company's investment strategy takes a long-term perspective
emphasizing investment quality, diversification, and superior investment
returns. The Company's investments are managed prudently on a total return
approach that focuses on current income and capital appreciation.
The Company's invested assets are liquid in order to meet commitments to our
Policyholders. At March 31, 1999, the Company's investment portfolio consisting
of cash, marketable short-term investments, investment grade bonds, common
stock, and preferred stock, totaled $776.3 million or 84% of total assets. These
resources provide the liquidity the Company requires to meet the unforeseen
demands on its funds.
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
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 used in operating activities for the three months ended March 31, 1999
was $1,671,632 compared to cash provided by operating activities of $1,841,806
for the three months ended March 31, 1998. The Company's liquidity position
remains strong as invested assets increased by $20 million during the first
three months of 1999 to almost $795 million.
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 a revenue. Annuity and universal life deposits were $21,151,535 in the
first quarter of 1999 and $19,492,758 in the first quarter of 1998.
The Company's current commitments for expenditures as of March 31, 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
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
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. The Company has also
arranged for a $10 million line of credit with a commercial bank. At March 31,
1999, there were no borrowings on this line of credit.
Dividends declared to shareholders totaled $1,559,250 in the first quarter of
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 presents a 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 16.
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 management has in
place a structure that provides oversight of Year 2000 risk management
activities. 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.
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.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
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 1,000 hours. Management believes minimal
effort remains to be completed during 1999.
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 the second quarter 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 is nearing completion, each business unit is consulting with the Y2K
Office to develop contingency plans to address the possibility of component or
business process failures addresses 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 total costs in order to address the Year 2000 Issue.
Costs incurred 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) consulting fees 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.
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
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 first
nine months of 1999.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
The statements herein are forward-looking statements containing the beliefs of
management that involve risks and uncertainties. These risks and uncertainties
include, but are not limited to, human or mechanical errors in correcting Year
2000 issues; incorrect or improper (intentional or otherwise) representations by
third parties as to their compliance or remediation efforts; the failure of
third parties to follow through on their remediation efforts and the inability
to identify and/or locate processing chips that are subject to Year 2000
problems.
***********************************
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995: Statements contained herein expressing the beliefs of management such as
those contained in "Note B to the Financial Statements", the "Benefits and
Expenses - Analysis of Policy-related Benefits and Expenses", the "Financial
Condition - Investments" and the "Liquidity and Capital Resources" 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.
16
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
On April 27, 1999, the Registrant held its Annual Meeting of Shareholders:
A. The Following Directors were elected at the Annual Meeting of Shareholders
for a one-year term and until a successor is elected and qualified:
Peter B. Bartlett Edmund J. Mehl
Samuel P. Black, III Stephen A. Milne
J. Ralph Borneman, Jr. John M. Petersen
Patricia A. Goldman Jan R. Van Gorder, Esq.
Susan Hirt Hagen Harry H. Weil, Esq.
F. William Hirt
B. The following other matter was voted upon at the meeting and the following
number of affirmative votes were cast with respect to such matter:
The proposal to ratify the selection of Brown, Schwab, Bergquist &
Company as independent public accountants to examine the financial
statements and perform the annual audit of the Company for the year
ending December 31, 1999 was ratified. This proposal received 8,836,906
affirmative votes, 760 negative votes with 15,412 abstentions.
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 March 31, 1999.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Erie Family Life Insurance Company
(Registrant)
Date: May 10, 1999
\s\ Stephen A. Milne
(Stephen A. Milne, President & CEO)
\s\ Philip A. Garcia
(Philip A. Garcia, Executive Vice President & CFO)
18
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ERIE
FAMILY LIFE INSURANCE COMPANY'S STATEMENT OF FINANCIAL POSITION AND STATEMENT OF
OPERATIONS DATED MARCH 31, 1999 AND ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
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0
0
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9,843,510
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