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, 2000
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 28, 2000.
1
<PAGE>
INDEX
ERIE FAMILY LIFE INSURANCE COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Statements of Financial Position-June 30, 2000 and December 31, 1999
Statements of Operations-Three and six months ended June 30, 2000 and
1999
Statements of Comprehensive Income-Three and six months ended June 30,
2000 and 1999
Statements of Cash Flows-Six months ended June 30, 2000 and 1999
Notes to Financial Statements-June 30, 2000
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>
(Dollars in thousands)
June 30, December 31,
ASSETS 2000 1999
---------- ----------
(Unaudited)
<S> <C> <C>
Investments:
Fixed Maturities at fair value (amortized cost
of $686,838 and $651,659, respectively) $ 657,082 $ 628,877
Equity Securities at fair value
(cost of $128,388 and $124,674, respectively) 150,868 142,095
Real Estate 1,417 1,458
Policy Loans 7,252 6,724
Real Estate Mortgage Loans 8,381 9,975
Other Invested Assets 43,421 28,331
--------- ---------
Total Invested Assets $ 868,421 $ 817,460
Cash and Cash Equivalents 5,937 27,358
Premiums Receivable from Policyholders 4,302 4,056
Reinsurance Recoverable 318 464
Other Receivables 93 171
Accrued Investment Income 12,065 10,896
Deferred Policy Acquisition Costs 79,742 77,588
Reserve Credit for Reinsurance Ceded 7,316 6,927
Prepaid Federal Income Taxes 2,381 758
Other Assets 9,160 8,854
--------- ---------
Total Assets $ 989,735 $ 954,532
========= =========
<FN>
See notes to financial statements.
</FN>
</TABLE>
3
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30, December 31,
2000 1999
---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
<S> <C> <C>
Liabilities:
Policy Liabilities and Accruals:
Future Life Policy Benefits $ 73,341 $ 70,329
Policy and Contract Claims 2,509 1,305
Annuity Deposits 572,694 569,218
Universal Life Deposits 101,121 94,640
Supplementary Contracts Not
Including Life Contingencies 586 581
Other Policyholder Funds 5,029 5,623
Deferred Income Taxes 22,995 17,853
Reinsurance Premium Due 374 692
Accounts Payable and Accrued Expenses 4,595 5,116
Note Payable to Erie Indemnity Company 15,000 15,000
Due to Affiliate 2,345 1,513
Dividends Payable 3,402 1,559
--------- ---------
Total Liabilities $ 803,991 $ 783,429
--------- ---------
Shareholders' Equity:
Common Stock, $.40 Par Value Per Share;
Authorized 15,000,000 Shares; 9,450,000
Shares Issued and Outstanding $ 3,780 $ 3,780
Additional Paid-In Capital 630 630
Accumulated Other Comprehensive Income (Loss) 5,014 ( 2,344)
Retained Earnings 176,320 169,037
--------- ---------
Total Shareholders' Equity $ 185,744 $ 171,103
--------- ---------
Total Liabilities and Shareholders' Equity $ 989,735 $ 954,532
========= =========
<FN>
See notes to financial statements.
</FN>
</TABLE>
4
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30 June 30
--------------------------- --------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenues:
Policy:
Life Premiums, net of premiums ceded of
$1,200, $763, $2,103 and
$1,496, respectively $ 10,986 $ 10,350 $ 20,783 $ 19,571
Group Premiums 657 628 1,332 1,250
-------- -------- -------- --------
Total Policy Revenue $ 11,643 $ 10,978 $ 22,115 $ 20,821
Investment Income, net of expenses of
$454, $459, $917 and
$868, respectively 16,365 13,930 32,100 27,300
Net Realized Gains on Investments 1,603 1,826 3,852 2,651
Other Income 211 135 515 373
-------- -------- -------- --------
Total Revenues $ 29,822 $ 26,869 $ 58,582 $ 51,145
======== ======== ======== ========
Benefits and Expenses:
Death Benefits, net of reinsurance recoveries
of $263, $135, $1,285 and
$761, respectively $ 3,444 $ 2,670 $ 6,170 $ 5,231
Interest on Annuity Deposits 8,331 8,033 16,883 15,337
Interest on Universal Life Deposits 1,510 1,254 2,968 2,529
Surrender and Other Benefits 271 262 546 544
Increase in Future Life Policy Benefits, net of
the increase in reserve credit for reinsurance
ceded of $256, $222, $389 and
$393, respectively 1,529 1,163 2,623 2,321
Amortization of Deferred Policy Acquisition Costs 2,456 1,410 3,933 3,004
Commissions, net of reinsurance reimbursements
of $545, $202, $924 and $416, respectively 225 535 702 1,068
General Expenses 2,502 1,797 4,720 3,533
Taxes, Licenses and Fees 563 405 1,097 806
-------- -------- -------- --------
Total Benefits and Expenses $ 20,831 $ 17,529 $ 39,642 $ 34,373
-------- -------- -------- --------
Income From Operations $ 8,991 $ 9,340 $ 18,940 $ 16,772
Provision for Federal Income Taxes:
Current 2,404 2,691 5,380 4,997
Deferred 707 770 1,173 1,015
-------- -------- -------- --------
Total Provision for Federal Income Taxes 3,111 3,461 6,553 6,012
-------- -------- -------- --------
Net Income $ 5,880 $ 5,879 $ 12,387 $ 10,760
======== ======== ======== ========
Net Income Per Share $ 0.62 $ 0.62 $ 1.31 $ 1.14
======== ======== ======== ========
Dividends Declared Per Share $ 0.36 $ 0.33 $ 0.54 $ 0.50
======== ======== ======== ========
<FN>
See notes to financial statements.
</FN>
</TABLE>
5
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
<TABLE>
<CAPTION>
(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- ---------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net Income $ 5,880 $ 5,879 $ 12,387 $ 10,760
------- -------- -------- --------
Unrealized (Losses) Gains on Securities:
Unrealized Holding (Losses) Gains Arising
During Period ( 7,229) ( 14,650) 15,173 ( 24,544)
Less: Reclassification Adjustment for Gains
Included in Net Income ( 1,603) ( 1,826) ( 3,852) ( 2,651)
------- -------- -------- --------
Net Unrealized Holding (Losses) Gains
Arising During Period ($ 8,832) ($ 16,476) $ 11,321 ($ 27,195)
------- -------- -------- --------
Income Tax Benefit (Expense) Related to
Unrealized (Losses) Gains 3,091 5,767 ( 3,963) 9,518
------- -------- -------- --------
Other Comprehensive (Loss) Income, Net of Tax ($ 5,741) ($ 10,709) $ 7,358 ($ 17,677)
------- -------- -------- --------
Comprehensive Income (Loss) $ 139 ($ 4,830) $ 19,745 ($ 6,917)
======= ======== ======== ========
<FN>
See notes to financial statements.
</FN>
</TABLE>
6
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
(Dollars in Thousands)
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,387 $ 10,760
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of bond and mortgage premium 107 141
Amortization of deferred policy acquisition costs 3,933 3,004
Real estate depreciation 41 41
Deferred federal income taxes 1,173 1,015
Realized gains on investments ( 3,852) ( 2,651)
(Increase) decrease in premiums receivable ( 246) 15
Decrease in other receivables 78 166
Increase in accrued investment income ( 1,169) ( 638)
Policy acquisition costs deferred ( 6,087) ( 6,503)
Increase in other assets ( 306) ( 1,211)
(Increase) decrease in reinsurance recoverables
and reserve credits ( 243) 25
Increase in future policy benefits and claims 4,216 2,109
Decrease in other policyholder funds ( 594) ( 2,496)
(Decrease) increase in reinsurance premium due ( 318) 25
Decrease in federal income taxes payable ( 1,623) ( 1,477)
Increase in accounts payable and due to affiliate 312 253
-------- ---------
Net cash provided by operating activities $ 7,809 $ 2,578
-------- ---------
Cash flows from investing activities:
Purchase of investments:
Fixed maturities ($ 60,507) ($ 115,055)
Equity securities ( 18,817) ( 36,302)
Mortgage loans 0 ( 66)
Other invested assets ( 3,751) ( 3,409)
Sales/maturities of investments:
Fixed maturities 28,905 58,515
Equity securities 15,269 22,283
Other invested assets 1,903 1,267
Principal payments received on mortgage loans 1,594 74
Loans made to policyholders ( 1,118) ( 719)
Payments received on policy loans 590 409
-------- ---------
Net cash used in investing activities ($ 35,932) ($ 73,003)
-------- ---------
<FN>
See notes to financial statements.
</FN>
</TABLE>
7
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
<TABLE>
<CAPTION>
(Dollars in Thousands)
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
--------------- ---------------
<S> <C> <C>
Cash flows from financing activities:
Increase in annuity and supplementary contracts $ 3,481 $ 22,907
Increase in universal life deposits 6,481 6,571
Dividends paid to shareholders ( 3,260) ( 2,977)
-------- --------
Net cash provided by financing activities $ 6,702 $ 26,501
-------- -------
Net decrease in cash and cash equivalents ( 21,421) ( 43,924)
Cash and cash equivalents at beginning of year 27,358 44,808
-------- --------
Cash and cash equivalents at end of quarter $ 5,937 $ 884
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 596 $ 597
Income taxes 6,900 6,325
<FN>
See notes to financial statements.
</FN>
</TABLE>
8
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
All amounts are in thousands of dollars, except per share data.
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, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. 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, 1999.
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 stock 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
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
June 30, 2000
Fixed Maturities:
U.S. Treasuries and Government
Agencies $ 12,122 $ 276 $ 75 $ 12,323
States and Political Subdivisions 195 8 0 203
Special Revenue 9,500 221 0 9,721
Public Utilities 61,802 587 2,864 59,525
U.S. Banks, Trusts and Insurance
Companies 115,632 392 5,769 110,255
U.S. Industrial and Miscellaneous 416,202 1,788 18,490 399,500
Foreign Governments-Agency 2,992 0 108 2,884
Foreign Banks, Trusts and Insurance
Companies 9,981 0 735 9,246
Foreign Industrial and Miscellaneous 52,748 184 5,193 47,739
--------- -------- -------- ---------
Total Bonds $ 681,174 $ 3,456 $ 33,234 $ 651,396
Redeemable Preferred Stock 5,664 47 25 5,686
--------- -------- -------- ---------
Total Fixed Maturities $ 686,838 $ 3,503 $ 33,259 $ 657,082
--------- -------- -------- ---------
Equity Securities:
Common Stock $ 66,038 $ 33,321 $ 6,730 $ 92,629
Non-Redeemable Preferred Stock 62,350 290 4,401 58,239
--------- -------- -------- ---------
Total Equity Securities $ 128,388 $ 33,611 $ 11,131 $ 150,868
--------- -------- -------- ---------
Total Available-for-Sale Securities $ 815,226 $ 37,114 $ 44,390 $ 807,950
========= ======== ======== =========
</TABLE>
9
<PAGE>
ERIE FAMILY LIFE INSURANCE COMPANY
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 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.
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. Other invested assets include
investments in U.S. domestic and foreign private equity and real estate limited
partnerships. The private equity limited partnerships are carried at their
equity in the estimated market values. At June 30, 2000 and December 31, 1999,
net unrealized gains on private equity limited partnerships totaled $9.9 million
and $1.2 million, respectively, net of deferred taxes. These amounts are
included in total shareholders' equity as accumulated other comprehensive income
(loss). Real estate limited partnerships are recorded using the equity method,
which approximates the Company's share of the carrying value of the real estate
investments held by the partnerships.
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.
NOTE C - SEGMENT AND PREMIUM INFORMATION
The Company offers a range of products and services, but operates as one
reportable life insurance segment. The Company's portfolio of life insurance
includes permanent life, endowment and term policies, including whole life,
mortgage and decreasing term, group, and universal life insurance.
The following is a detail of life premiums and annuity and universal life
deposits by major product grouping.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------- --------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Life insurance premiums earned:
Term $ 7,910 $ 7,187 $ 14,555 $ 13,320
Whole life 1,465 1,349 2,744 2,539
Universal life 2,811 2,573 5,587 5,204
Other 657 631 1,332 1,254
-------- -------- -------- --------
Total direct premiums earned $ 12,843 $ 11,740 $ 24,218 $ 22,317
Reinsurance, net 1,200 763 2,103 1,496
-------- -------- -------- --------
Total policy revenue $ 11,643 $ 10,977 $ 22,115 $ 20,821
======== ======== ======== ========
Deposits:
Universal life $ 2,936 $ 2,992 $ 5,713 $ 5,917
Annuity 12,577 16,833 24,357 35,060
-------- -------- -------- --------
Total deposits $ 15,513 $ 19,825 $ 30,070 $ 40,977
======== ======== ======== ========
</TABLE>
NOTE D -- GEOGRAPHIC EXPANSION
On March 7, 2000, the Erie Insurance Group, of which the Company is a member,
announced its intention to expand its marketing territory into Wisconsin.
Wisconsin will be the tenth state served by the Company, in addition to the
District of Columbia. In Wisconsin, the Company intends to write all lines of
life and annuity products it currently offers.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 increased slightly to $5,880,107, or $.62 per share, in the second
quarter of 2000, compared to $5,878,689, or $.62 per share, for the second
quarter of 1999. Strong investment gains and continued premium growth were
offset by an increase in total benefits and expenses, contributing to the
financial results in 2000. Net income for the six months ended June 30, 2000
increased 15.1% to $12,386,531, or $1.31 per share, compared to $10,760,368, or
$1.14 per share for the same period in 1999.
REVENUES
Analysis of Policy Revenue
Total policy revenue increased $665,089, or 6.1%, to $11,642,917 in the second
quarter of 2000. Contributing to this growth was an increase in premiums on
universal life insurance policies of 9.2% to $2,810,516 for the quarter ended
June 30, 2000. Total policies in force on universal life insurance products
increased 4.1% to 41,415 at June 30, 2000 compared to 39,767 policies at June
30, 1999. Total policy revenue increased $1,293,581, or 6.2%, to $22,114,919 for
the six months ended June 30, 2000.
During 1999, the Company introduced a new life insurance product: ERIE Flagship
Term. This new term insurance product is designed for sale of face amounts of
$300,000 and above and complements the Company's Term Protector series. This new
product contributed $506,888 to total life premiums for the six months ended
June 30, 2000.
Because this new term product is more competitively priced for larger face
amounts, the Company's reinsurance premiums ceded and related commission and
expense allowances have increased during 2000. The net retention amount on this
product, however, is the same as the other traditional life insurance policies
the Company currently offers. Reinsurance premiums ceded related to the ERIE
Flagship Term product amounted to $304,456 for the quarter ended June 30, 2000
and $399,409 for the first six months of 2000.
Analysis of Investment-related Income
Net investment income increased $2,435,584, or 17.5%, in the second quarter of
2000 due to increased levels of investment from cash flows generated by the
Company's operations and by cash from universal life deposits. In addition, a
distribution of $974,591 was received from a limited partnership investment. For
the six months ended June 30, 2000, net investment income increased $4,799,764,
or 17.6%.
Net realized gains from the sale of equity and fixed maturity investments
decreased 12.2% to $1,603,260 in the second quarter of 2000, compared to
$1,825,791 in the second quarter of 1999. Total invested assets of the Company
were $868,421,184 at June 30, 2000, an increase of $50,961,303, or 6.2%, over
the December 31, 1999 levels.
BENEFITS AND EXPENSES
Analysis of Policy-related Benefits and Expenses
Net death benefits on life insurance policies increased $774,295, or 29.0% in
the second quarter of 2000 to $3,444,421. For the six months ended June 30,
2000, death benefits on life insurance policies increased $938,834, or 18%, to
$6,170,201.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Random fluctuations in death benefits incurred can be expected when mortality
results are measured over a short time period due to the small number of claims
involved.
These short-term fluctuations can influence quarterly or annual results without
impacting long-term profitability. Management believes that its underwriting
philosophy and practices are sound.
Interest expense incurred on deposits increased 6.0% to $9,840,756 in the second
quarter of 2000, from $9,287,893 in the second quarter of 1999. For the six
months ended June 30, 2000, interest expense incurred on deposits increased
$1,985,312 or 11.1%. The increase in interest expense was the result of an
increase in the credited interest rate on annuity deposits during the first
quarter of 2000 combined with the $38,820,978 increase in deposits at June 30,
2000 when compared to June 30, 1999. The interest rate credited on universal
life deposits ranges from 6.0% to 6.75% in 2000 and 1999 while the rate credited
on annuity deposits in 2000 increased to a range of 5.25% to 6.25% from 5.0% to
5.75% in 1999.
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 second quarter 2000 future life policy
benefit expenses were $1,529,101, compared to $1,163,242 in the second quarter
of 1999, an increase of 31.5%. For the six months ended June 30, 2000, life
policy benefits increased $302,078 or 13.0%.
Amortization of deferred policy acquisition costs increased 74.2% to $2,455,607
in the second quarter of 2000. For the six months ended June 30, 2000, the
increase in amortization of deferred policy acquisition costs was $929,558, or
31.0%. The increase is due to utilizing updated projection assumptions to more
closely reflect actual experience.
Analysis of Other Expenses
Total operating expenses, excluding taxes, licenses and fees increased 16.9% to
$2,726,807 at June 30, 2000 compared to $2,332,109 at June 30, 1999. Certain
operating expenses of the Company are paid by the Erie Indemnity Company, the
management Company of the Erie Insurance Exchange, and reimbursed monthly by the
Company. Additionally, a portion of the Erie Insurance Group common overhead
expenses attributed to the Company are also reimbursed monthly. 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, related to the
acquisition and underwriting of new policies, 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 salaries,
employee benefits and bonuses paid to branch sales Employees for the production
of life and annuity business, are all deferred.
General expenses, net of deferred policy acquisition costs, increased $705,558
or 39.2% to $2,502,376 for the quarter ended June 30, 2000. For the six months
ended June 30, 2000, net general expenses increased $1,187,275 or 33.6%, to
$4,720,441. During 1999, certain expenses, including salaries and benefits,
associated with the implementation of the Company's policy administration
system, CyberLife, were capitalized in accordance with SOP 98-1 and therefore
not charged against income in 1999. The capitalization of these costs ended in
1999 when the system was placed into use. These expenses are now being charged
against income. In addition, amortization of the capitalized costs of the
CyberLife system began in late 1999, when the system was placed into use. The
amortization costs for the quarter ended June 30, 2000 was $62,365. Excluding
the effect of the 1999 capitalized costs and current year amortization, general
expenses for the second quarter 2000 would have increased 15.0% from the second
quarter 1999. The remaining quarterly increase is due to increased staffing
levels and consulting fees when compared to the same period in 1999. For the six
months ended June 30, 2000, the increase, excluding the effect of the 1999
capitalized costs, would have been 8.5%.
Another component of total operating expenses is commissions to independent
Agents. Direct commission costs include new and renewal commissions, production
bonuses and promotional incentives to Agents.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
These direct commission expenses are reported on the Statements of Operations
net of commissions received from reinsurers. The reported expense is also
affected by the amount of commission expenses capitalized as deferred policy
acquisition costs (DAC). Commissions, which vary with and are related primarily
to the production of new business, have been deferred and are capitalized as
DAC. Most first-year and incentive commissions and some second-year commissions
qualify for deferral as DAC. During the second quarter of 2000, commission
expense decreased $310,860 to $224,431, compared to the second quarter of 1999.
For the six months ended June 30, 2000, commission expense decreased $366,238 to
$701,589. A portion of this decrease is the result of a decrease in promotional
incentive costs to Agents for the Company's participation in an Erie Insurance
Group promotion, that ended in August 1999. Also, for the six months ended June
30, 2000, the commission allowance received from reinsurers has increased
$507,190 to $923,507, due primarily to the introduction of the new ERIE Flagship
Term product in 2000. These plans provide a greater commission and expense
allowance on new business than traditional plans have in the past.
Taxes, licenses and fees increased $158,503 to $563,199 in the second quarter of
2000 compared to $404,696 in the second quarter of 1999. For the six months
ended June 30, 2000, these expenses increased $291,560, or 36.2%, to $1,097,140,
compared to $805,580 for the six months ended June 30, 1999. A portion of this
is the result of an increase in state premium tax expense due to increased
premium volume and decreased guarantee association tax credits allowed to offset
premium tax expenses. The remaining increase is due primarily to a second
quarter 2000 refund of premium tax reimbursements collected from a reinsurer in
prior years.
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, 2000, 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
has not held or issued derivative financial instruments in 2000 or 1999.
The Company's invested assets are liquid in order to meet commitments to our
Policyholders. At June 30, 2000, the Company's investment portfolio consisting
of cash, marketable short-term investments, investment grade bonds, common
stock, and preferred stock, totaled $799 million or 80.7% of total assets. These
resources provide the liquidity the Company requires to meet the unforeseen
demands on its funds.
At June 30, 2000, the amortized cost of the Company's five largest investments
in corporate debt securities totaled $33.4 million, none of which individually
exceeded $8.0 million. These investments had a market value of $33.0 million.
The Company's investments are subject to certain risks, including interest rate
and price risk. The Company monitors exposure to interest rate risk through
periodic reviews of asset and liability positions. Estimates of cash flows
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
and the impact of interest rate fluctuations relating to the investment
portfolio are monitored regularly. Price risk is defined as the potential
loss in estimated fair value resulting from an adverse change in prices.
The Company's objective is to earn competitive relative returns by investing
in a diverse portfolio of high-quality, liquid securities. Portfolio
characteristics are analyzed regularly and market risk is actively managed
through a variety of techniques. Portfolio holdings are diversified across
industries and concentrations in any one company or industry are limited by
parameters established by management and the Company's Board of Directors.
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 provided by operating activities for the six months ended June 30, 2000
was $7,809,253 compared to $2,578,431 for the six months ended June 30, 1999.
The Company's liquidity position remains strong as invested assets increased by
almost $51 million during the first six months of 2000 to $868 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 $15,512,708 in the
second quarter of 2000 and $19,825,121 in the second quarter of 1999.
The Company's current commitments for expenditures as of June 30, 2000 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 arranged for a $10 million
line of credit with a commercial bank. At June 30, 2000 and 1999, there were no
borrowings on this line of credit.
The Company's 1999 year-end Risk Based Capital Analysis as reflected in its 1999
statutory annual statement shows total adjusted capital of $128,324,572 and
authorized control level risk based capital of $26,506,217. These results are
indicative of the strong capital position of the Company and are well in excess
of levels that would require regulatory action.
********************
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995: Certain forward-looking statements contained herein involve risks and
uncertainties. Many factors could cause future results to differ materially from
those discussed. Examples of such factors include but are not limited to: better
(or worse) mortality rates, changes in insurance regulations or legislation that
disadvantage the Company in the marketplace and recession, economic conditions
or stock market changes affecting pricing or demand for insurance products or
ability to generate investment income. Growth and profitability have been and
will be potentially materially affected by these and other factors.
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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, 2000.
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: August 11, 2000 \s\ Stephen A. Milne
(Stephen A. Milne, President & CEO)
\s\ Philip A. Garcia
(Philip A. Garcia, Executive Vice President & CFO)
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