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 June 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 July 29, 1999.
1
<PAGE>
INDEX
ERIE FAMILY LIFE INSURANCE COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Financial Position--June 30, 1999 and December 31, 1998
Statements of Operations--three and six months ended June 30, 1999
and 1998
Statements of Comprehensive Income--three and six months ended
June 30, 1999 and 1998
Statements of Cash Flows--six months ended June 30, 1999 and 1998
Notes to Financial Statements
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>
June 30, December 31,
1999 1998
-------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Invested Assets:
Fixed Maturities available-for-sale, at fair
value (amortized cost of $638,733,440
and $576,475,130, respectively) $ 636,785,293 $ 605,523,237
Equity Securities, at fair value
(cost of $135,420,824 and $124,609,940,
respectively) 150,463,356 135,793,710
Real Estate 1,500,015 1,541,445
Policy Loans 6,322,957 6,013,130
Real Estate Mortgage Loans 10,062,729 10,070,394
Other Invested Assets 18,024,942 15,940,561
-------------- ---------------
Total Invested Assets $ 823,159,292 $ 774,882,477
Cash and cash equivalents 884,124 44,808,427
Premiums Receivable from Policyholders 3,816,006 3,830,625
Reinsurance Recoverable 150,060 568,521
Other Receivables 188,837 355,067
Accrued Investment Income 10,919,693 10,282,002
Deferred Policy Acquisition Costs 74,415,571 70,916,261
Reserve Credit for Reinsurance Ceded 6,387,866 5,994,390
Federal Income Tax Recoverable 864,538 0
Other Assets 7,179,128 5,967,858
-------------- ---------------
Total Assets $ 927,965,115 $ 917,605,628
============== ===============
<FN>
See notes to financial statements.
</FN>
</TABLE>
3
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- ---------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy Liabilities and Accruals:
Future Life Policy Benefits $ 67,253,960 $ 64,539,220
Policy and Contract Claims 1,195,333 1,801,030
Annuity Deposits 547,069,459 524,122,492
Universal Life Deposits 87,924,419 81,354,026
Supplementary Contracts Not
including Life Contingencies 567,097 607,094
Other Policyholder Funds 5,670,418 8,166,371
Federal Income Taxes Payable 0 612,272
Deferred Income Taxes 22,749,082 31,252,214
Reinsurance Premium Due 326,484 301,487
Accounts Payable and Accrued Expenses 4,614,554 4,215,186
Note Payable to Erie Indemnity Company 15,000,000 15,000,000
Due to Affiliate 1,539,622 1,686,227
Dividends Payable 3,118,504 1,417,500
-------------- --------------
Total Liabilities $ 757,028,932 $ 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 8,494,788 26,171,727
Retained Earnings 158,031,395 151,948,782
-------------- --------------
Total Shareholders' Equity $ 170,936,183 $ 182,530,509
-------------- --------------
Total Liabilities and Shareholders' Equity $ 927,965,115 $ 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 Six Months Ended
June 30 June 30
--------------------------------- --------------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
Revenues:
Policy:
Life Premiums, net of premiums ceded of
$763,000, $971,074, $1,495,821 and
$1,742,307, respectively $ 10,350,242 $ 9,251,146 $ 19,571,141 $ 17,614,278
Group Premiums 627,586 582,074 1,250,197 1,200,120
--------------- ---------------- ---------------- --------------
Total Policy Revenue $ 10,977,828 $ 9,833,220 $ 20,821,338 $ 18,814,398
Investment Income, Net of Expenses of
$459,471, $368,822, $867,952 and
$726,803, respectively 13,929,662 12,995,512 27,299,855 25,785,740
Net Realized Gains on Investment 1,825,792 866,108 2,650,641 2,702,270
Other Income 135,443 225,625 372,736 389,533
--------------- ---------------- ---------------- --------------
Total Revenues $ 26,868,725 $ 23,920,465 $ 51,144,570 $ 47,691,941
--------------- ---------------- ---------------- --------------
Benefits and Expenses:
Death Benefits, net of reinsurance recoveries
of $134,979, $53,384, $760,874 and
$568,735, respectively 2,670,125 1,760,225 5,231,367 3,238,370
Interest on Annuity Deposits 8,033,420 7,319,108 15,336,842 14,813,290
Interest on Universal Life Deposits 1,254,473 1,151,303 2,528,592 2,237,366
Surrender and Other Benefits 261,749 299,884 544,498 565,681
Increase in Future Life Policy Benefits, net of
the increase in reserve credit for reinsurance
ceded of $222,448, $192,838, $393,476 and $444,423,
respectively 1,163,242 1,139,514 2,321,263 2,072,345
Amortization of Deferred Policy Acquisition Costs 1,409,685 1,350,161 3,003,551 2,645,951
Commissions, net of reinsurance reimbursements
of $201,710, $414,936, $416,316 and $624,246,
respectively 535,292 273,310 1,067,828 570,151
General Expenses 1,796,814 1,665,434 3,533,163 3,115,807
Taxes, Licenses and Fees 404,696 343,987 805,582 (200,999)
--------------- ---------------- ---------------- --------------
Total Benefits and Expenses $ 17,529,496 $ 15,302,926 $ 34,372,686 $ 29,057,962
--------------- ---------------- ---------------- --------------
Income From Operations $ 9,339,229 $ 8,617,539 $ 16,771,884 $ 18,633,979
Provision for Federal Income Taxes:
Current 2,691,183 2,078,993 4,996,399 4,712,636
Deferred 769,357 974,200 1,015,117 1,859,188
--------------- ---------------- ---------------- --------------
Total Provision for Federal Income Taxes 3,460,540 3,053,193 6,011,516 6,571,824
--------------- ---------------- ---------------- --------------
Net Income $ 5,878,689 $ 5,564,346 $ 10,760,368 $ 12,062,155
=============== ================ ================ ==============
Net Income Per Share $ 0.62 $ 0.59 $ 1.14 $ 1.28
=============== ================ ================ ==============
Dividends Declared Per Share $ 0.33 $ 0.30 $ 0.50 $ 0.45
=============== ================ ================ ==============
<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 Six Months Ended
June 30 June 30
--------------------------------- --------------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
Net Income $ 5,878,689 $ 5,564,346 $ 10,760,368 $ 12,062,155
--------------- ---------------- ---------------- --------------
Unrealized (Losses) Gains on Securities:
Unrealized Holding (Losses) Gains Arising
During Period (14,649,852) 4,423,513 (24,544,547) 9,730,630
Less: Reclassification Adjustment for Gains
Included in Net Income (1,825,792) (866,108) (2,650,641) (2,702,270)
--------------- ---------------- ---------------- --------------
Net Unrealized Holding (Losses) Gains
Arising During Period $ (16,475,644) $ 3,557,405 $ (27,195,188) $ 7,028,360
--------------- ---------------- ---------------- --------------
Income Tax Benefit (Expense) Related to
Unrealized (Losses) Gains 5,766,409 (1,245,092) 9,518,249 (2,459,926)
--------------- ---------------- ---------------- --------------
Other Comprehensive (Loss) Income, Net of Tax $ (10,709,235) $ 2,312,313 $ (17,676,939) $ 4,568,434
--------------- ---------------- ---------------- --------------
Comprehensive (Loss) Income $ (4,830,546) $ 7,876,659 $ (6,916,571) $ 16,630,589
=============== ================ ================ ==============
<FN>
See notes to financial statements.
</FN>
</TABLE>
6
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,760,368 $ 12,062,155
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of bond and mortgage premium 140,546 296,516
Amortization of deferred policy acquisition costs 3,003,551 2,645,951
Real estate depreciation 41,430 41,430
Deferred federal income taxes 1,015,117 1,859,188
Realized gains on investments (2,650,641) (2,702,270)
Decrease in premiums receivable 14,619 76,816
Decrease (increase) in other receivables 166,230 (13,366)
Increase in accrued investment income (637,691) (290,125)
Policy acquisition costs deferred (6,502,861) (5,458,613)
Increase in other assets (1,211,270) (1,617,462)
Decrease (increase) in reinsurance recoverables
and reserve credits 24,985 (179,990)
Increase in future policy benefits and claims 2,109,043 1,546,044
Decrease in other policyholder funds (2,495,953) (2,929,902)
Increase (decrease) in reinsurance premium due 24,997 (213,731)
Decrease in federal income tax payable (1,476,810) (778,861)
Increase in accounts payable and due to affiliate 252,771 766,556
---------------------- ----------------------
Net cash provided by operating activities $ 2,578,431 $ 5,110,336
---------------------- ----------------------
Cash flows from investing activities:
Purchase of investments:
Fixed maturities $ (115,055,239) $ (102,188,874)
Equity securities (36,301,753) (15,978,933)
Mortgage loans (66,286) 0
Other invested assets (3,409,377) (9,579,849)
Sales/maturities of investments:
Fixed maturities 58,515,103 49,554,055
Equity securities 22,282,604 28,009,764
Other invested assets 1,267,298 429,621
Principal payments received on mortgage loans 74,132 68,747
Loans made to policyholders (718,905) (749,872)
Payments received on policy loans 409,078 292,445
---------------------- ----------------------
Net cash used in investing activities $ (73,003,345) $ (50,142,896)
---------------------- ----------------------
Cash flows from financing activities:
Increase in annuity and supplementary contracts $ 22,906,970 $ 16,641,637
Increase in universal life deposits 6,570,393 6,267,120
Dividends paid to shareholders (2,976,752) (2,693,252)
---------------------- ----------------------
Net cash provided by financing activities $ 26,500,611 $ 20,215,505
---------------------- ----------------------
Net decrease in cash and cash equivalents (43,924,303) (24,817,055)
Cash and cash equivalents at beginning of year 44,808,427 42,287,398
---------------------- ----------------------
Cash and cash equivalents at end of quarter $ 884,124 $ 17,470,343
====================== ======================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Income taxes $ 6,325,208 $ 5,360,000
Interest 483,750 483,750
<FN>
See notes to financial statements.
</FN>
</TABLE>
7
<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 six-month period ended June 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>
June 30, 1999
Fixed Maturities:
U.S. Treasuries and Government
Agencies $ 15,607 $ 485 $ 15 $ 16,077
States and Political Subdivisions 2,056 80 0 2,136
Special Revenue 11,046 449 0 11,495
Public Utilities 62,327 1,317 1,051 62,593
U.S. Banks, Trusts and Insurance
Companies 111,456 2,042 3,111 110,387
U.S. Industrial and Miscellaneous 383,355 4,723 5,412 382,666
Foreign Governments-Agency 2,990 0 146 2,844
Foreign Banks, Trusts and Insurance
Companies 5,989 0 200 5,789
Foreign Industrial and Miscellaneous 38,907 533 1,450 37,990
---------- ---------- --------- ----------
Total Bonds $ 633,733 $ 9,629 $ 11,385 $ 631,977
Redeemable Preferred Stock 5,000 0 192 4,808
---------- ---------- --------- ----------
Total Fixed Maturities $ 638,733 $ 9,629 $ 11,577 $ 636,785
---------- ---------- --------- ----------
Equity Securities:
Common Stock $ 60,102 $ 20,302 $ 5,291 $ 75,113
Non-Redeemable Preferred Stock 75,319 1,684 1,653 75,350
---------- ---------- --------- ----------
Total Equity Securities $ 135,421 $ 21,986 $ 6,944 $ 150,463
---------- ---------- --------- ----------
Total Available-for-Sale Securities $ 774,154 $ 31,615 $ 18,521 $ 787,248
========== ========== ========= ==========
</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 June 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 $35.7 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 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 9, since they
contain important information that is helpful in evaluating the Company's
operating results and financial condition.
OVERVIEW
Net income increased 5.6% to $5,878,689, or $0.62 per share, in the second
quarter of 1999 from $5,564,346 or $0.59 per share, in the second quarter of
1998. A $1,144,608, or 11.6% increase in total policy revenue and a $959,684
increase in realized gains on investments in the second quarter of 1999 were the
primary reasons for this increase in net income. Net income for the six months
ended June 30, 1999 decreased 10.8% to $10,760,368, or $1.14 per share, compared
to $12,062,155 or $1.28 per share for the same period in 1998. A 61.5% increase
in death claims in the first six months of 1999, combined with a $954,000 refund
from the Pennsylvania Life and Health Guaranty Association in the first quarter
of 1998, accounted for this decline in earnings.
REVENUES
Analysis of Policy Revenue
Total policy revenue increased $1,144,608 or 11.6%, to $10,977,828 in the second
quarter of 1999. Premiums on traditional life insurance policies increased 8.3%
to $8,125,039 for the quarter ended June 30, 1999. Annuity products generated
deposits of $16,835,092 in the second quarter of 1999 compared to $12,825,768
generated in the second quarter of 1998, an increase of $4,009,324, or 31.3%. Of
this amount, ordinary annuity deposits increased $4,768,417, or 55.5%, to
$13,367,107 for the quarter ended June 30, 1999. Universal life products
generated premiums and deposits of $5,565,697 in the second quarter of 1999
compared to $5,175,254 produced in the second quarter of 1999, an increase of
7.5%. Total policy revenue increased $2,006,940 or 10.7%, to $20,821,338 for the
six months ended June 30, 1999.
Analysis of Investment-related Income
Net investment income increased $934,150, or 7.2% in the second 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 six
months ended June 30, 1999, net investment income increased $1,514,115, or 5.9%,
to $27,299,855.
During the second quarter of 1999 and 1998, the Company generated net realized
gains of $1,825,792 and $866,108, respectively, from the sale of equity and
fixed maturity investments.
Total investments of the Company were $823,159,292 at June 30, 1999, an increase
of $48,276,815, or 6.2%, over the December 31, 1998 levels.
BENEFITS AND EXPENSES
Analysis of Policy-related Benefits and Expenses
Death benefits on life insurance policies increased $909,900 or 51.7% to
$2,670,125 in the second quarter of 1999. For the six months ended June 30,
1999, death benefits on life insurance policies increased $1,992,997, or 61.5%,
to $5,231,367. Mortality experience is best viewed over the long term, since
short-term fluctuations can significantly influence quarterly results without
impacting long-term profitability. The Company's mortality experience has been
good over the past several years and management believes that its underwriting
philosophy and practices are sound.
10
<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 increased $817,482,
or 9.7%, to $9,287,893 in the second quarter of 1999. Interest on deposits held
by the Company increased $814,778, or 4.8%, for the six months ended June 30,
1999. The increase in interest on deposits in the second quarter of 1999 was
caused by the 9.2% increase in annuity and universal life deposits in the second
quarter of 1999 when compared to the same period in 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%.
Analysis of Other Expenses
During the second quarter of 1999 commission expense increased $261,982 to
$535,292. A portion of this increase is the result of an increase in premiums of
11.6% 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). Commissions received from reinsurers totaled $201,709 in the second
quarter of 1999 and $414,936 in the second quarter of 1998. 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 increased to $131,380, or 7.9%, to $1,796,814 in the second
quarter of 1999. For the six months ended June 30, 1999, general expenses
increased $417,356, or 13.4%, to $3,533,163. Personnel costs included in general
expenses increased $392,484 for the six months ended June 30, 1999, due to a
9.0% increase in the number of employees plus normal merit-based salary growth.
General expenses, other than personnel costs, increased 29.0% for the second
quarter of 1999 due to consulting fees paid related to the new policy
administration system, Cyberlife.
Erie Indemnity Company is a 21.6% 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 the Company's 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 $60,709 in the second quarter of 1999 to
$404,696 and increased $1,006,581 in the first six months of 1999 to $805,582.
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.
11
<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 June 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.
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 June 30, 1999, the Company's investment portfolio consisting
of cash, marketable short-term investments, investment grade bonds, common
stock, and preferred stock, totaled $779.6 million or 84.0% of total assets.
Included in the fixed maturity category are high-quality bonds with a carrying
value of $628,287,603 that are rated at investment grade levels (Baa/BBB or
better). Included in this investment-grade category are $335 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.
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 a high-quality (all of the $80.1 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
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
used to fund Company commitments and to build the investment portfolio,
thereby increasing future investment returns. Net cash provided by
operating activities for the six months ended June 30, 1999 was $2,578,431
compared to $5,110,336 for the six months ended June 30, 1998. The Company's
liquidity position remains strong as invested assets increased by $48 million
during the first six months of 1999 to $823 million at June 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 $19,825,121 in the second quarter of
1999 and $17,049,670 in the second quarter of 1998.
The Company's current commitments for expenditures as of June 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
June 30, 1999, there were no borrowings on this line of credit.
Dividends declared to shareholders totaled $3,118,504 in the second 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 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 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 15.
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
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
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
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 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 continued throughout the second 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. Less than 150 hours of
remediation effort remains to be completed during the second half 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 is being 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 incorporates key third parties with whom we are coordinating our testing
efforts.
As testing is nearing completion, each business area is consulting with the Y2K
Office to develop contingency plans to address the possibility of component or
business process failures. Contingency plans were developed during the second
quarter of 1999. Testing and facilitation of the plans will be conducted during
the third quarter.
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 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. 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
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATION (Continued)
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 six
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.
***********************************
"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 "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.
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 June 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: July 29, 1999
\s\ Stephen A. Milne
(Stephen A. Milne, President & CEO)
\s\ Philip A. Garcia
(Philip A. Garcia, Executive Vice President & CFO)
<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 JUNE 30, 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> JUN-30-1999
<DEBT-HELD-FOR-SALE> 636,785,293
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 150,463,356
<MORTGAGE> 10,062,729
<REAL-ESTATE> 1,500,015
<TOTAL-INVEST> 823,159,292
<CASH> 884,124
<RECOVER-REINSURE> 150,060
<DEFERRED-ACQUISITION> 74,415,571
<TOTAL-ASSETS> 927,965,115
<POLICY-LOSSES> 702,814,935
<UNEARNED-PREMIUMS> 193,102
<POLICY-OTHER> 1,195,333
<POLICY-HOLDER-FUNDS> 5,477,316
<NOTES-PAYABLE> 0
0
0
<COMMON> 4,410,000
<OTHER-SE> 166,526,183
<TOTAL-LIABILITY-AND-EQUITY> 927,965,115
20,821,338
<INVESTMENT-INCOME> 27,299,855
<INVESTMENT-GAINS> 2,650,641
<OTHER-INCOME> 372,736
<BENEFITS> 25,962,562
<UNDERWRITING-AMORTIZATION> 3,003,551
<UNDERWRITING-OTHER> 5,406,573
<INCOME-PRETAX> 16,771,884
<INCOME-TAX> 6,011,516
<INCOME-CONTINUING> 10,760,368
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,760,368
<EPS-BASIC> 1.14
<EPS-DILUTED> 1.14
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
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</TABLE>
