FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended March 31, 1996
Commission file number 0-24000
ERIE INDEMNITY COMPANY
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0466020
------------------------------- ------------------
(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)
(814) 870-2000
----------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- ----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 periods 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 issuer's classes of
common stock, as of the latest practical date.
Class A Common Stock, no par value, with a stated value of $.0292 per share--
67,032,000 shares as of May 3, 1996 (See Note C in the Notes to Consolidated
Financial Statements).
Class B Common Stock, no par value, with a stated value of $70.00 per share--
3,070 shares as of May 3, 1996.
The common stock is the only class of stock the Registrant is presently
authorized to issue.
1
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INDEX
ERIE INDEMNITY COMPANY
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Position--March 31, 1996 and
December 31, 1995
Consolidated Statements of Operations--Three months ended March 31, 1996
and 1995
Consolidated Statements of Cash Flows--Three months ended March 31, 1996
and 1995
Notes to Consolidated Financial Statements--March 31, 1996
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 INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1996 1995
------ ---- ----
(Unaudited)
<S> <C> <C>
INVESTMENTS
Fixed Maturities:
Available-for-Sale (amortized cost of
$258,070,139 and $229,922,533,
respectively) $ 264,352,657 $ 241,960,567
Equity Securities (cost $82,098,548 and
$71,421,388, respectively) 93,901,473 81,139,076
Real Estate Mortgage Loans 4,421,365 4,432,361
Other Invested Assets 6,634,522 5,142,585
--------- ---------
Total Investments $ 369,310,017 $ 332,674,589
Cash and Cash Equivalents 36,646,795 56,856,983
Equity in Erie Family Life
Insurance Company 25,747,826 27,880,363
Accrued Interest and Dividends 5,328,824 4,980,154
Premiums Receivable from Policyholders 98,803,891 99,534,004
Reinsurance Recoverable, Non-affiliates 196,439 160,988
Deferred Policy Acquisition Costs 9,166,218 9,011,734
Receivables from Erie Insurance Exchange
and Affiliates 453,066,778 451,777,577
Note Receivable from Erie Family
Life Insurance Company 15,000,000 15,000,000
Property and Equipment 8,144,200 8,241,937
Federal Income Taxes Recoverable 0 932,379
Deferred Income Taxes 2,546,811 185,282
Other Assets 15,413,052 15,195,754
---------- ----------
Total Assets $ 1,039,370,851 $ 1,022,431,744
===================== =====================
(Continued)
</TABLE>
See notes to Consolidated Financial Statements.
3
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
---- ----
(Unaudited)
<S> <C> <C>
LIABILITIES
Losses and Loss Adjustment Expenses $ 355,860,040 $ 357,334,127
Unearned Premiums 204,751,198 202,806,574
Accounts Payable 4,232,017 5,839,745
Accrued Commissions 70,448,469 72,697,864
Accrued Payroll and Payroll Taxes 6,719,468 8,093,690
Accrued Vacation and Sick Pay 6,954,085 6,740,212
Deferred Compensation 1,366,717 1,739,216
Income Taxes Payable 7,185,009 0
Dividends Payable 5,624,375 5,624,375
Benefit Plans Liability 9,122,760 7,491,700
--------- ---------
Total Liabilities 672,264,138 668,367,503
----------- -----------
SHAREHOLDERS' EQUITY
Capital Stock
Class A common, stated value $.0292
per share; authorized 74,996,930-Note C 1,955,100 1,955,100
Class B common, stated value $70.00
per share; authorized 3,070 214,900 214,900
Additional Paid-In Capital 7,830,000 7,830,000
Net Unrealized Gain on Available-for-Sale
Securities (net of deferred taxes) 12,809,485 17,643,443
Retained Earnings 344,297,228 326,420,798
----------- -----------
Total Shareholders' Equity 367,106,713 354,064,241
----------- -----------
Total Liabilities and
Shareholders' Equity $ 1,039,370,851 $ 1,022,431,744
===================== =====================
</TABLE>
See notes to Consolidated Financial Statements.
4
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ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------------------------------------------
MANAGEMENT OPERATIONS: 1996 1995
<S> <C> <C>
Management Fee Revenue $ 109,554,239 $ 106,341,913
Other Operating Revenue 310,367 322,229
------- -------
Total Revenues from Management Operations 109,864,606 106,664,142
Cost of Management Operations 79,176,650 80,347,282
---------- ----------
Net revenues from
management operations 30,687,956 26,316,860
---------- ----------
INSURANCE UNDERWRITING OPERATIONS:
Premiums Earned 24,552,197 21,823,193
Losses and Loss Adjustment Expenses Incurred 23,571,443 18,040,379
Policy Acquisition and Other
Underwriting Expenses 6,797,910 5,581,097
--------- ---------
Total Losses and Expenses 30,369,353 23,621,476
---------- ----------
Underwriting Loss (5,817,156) (1,798,283)
---------- ----------
INVESTMENT OPERATIONS:
Equity in Earnings of Erie Family
Life Insurance Company 579,387 667,406
Interest and Dividends 6,006,215 4,618,272
Realized Gain (Loss) on Investments 482,928 (82,552)
------- -------
Total Revenues from Investment Operations 7,068,530 5,203,126
--------- ---------
Income Before Income Taxes 31,939,330 29,721,703
Provision for Income Taxes 8,441,253 9,624,828
--------- ---------
Net Income $ 23,498,077 $ 20,096,875
=================== ==================
Earnings per share (Note C):
Net Income per Share prior to 3:1 stock split $ 0.95 $ 0.81
------------------- ------------------
Net Income per Share subsequent to 3:1 stock split $ 0.32 $ 0.27
------------------- ------------------
Dividends Declared (Note C):
Class A prior to 3:1 stock split $ 0.25 $ 0.195
------------------- ------------------
Class A subsequent to 3:1 stock split $ .083 $ .065
------------------- ------------------
Class B $ 12.50 $ 9.75
------------------- ------------------
</TABLE>
See notes to Consolidated Financial Statements.
5
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ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 23,498,077 $ 20,096,875
Depreciation and amortization 290,216 216,706
Deferred income tax benefit (1,035,984) (532,617)
Adjustment to reconcile net income
to net cash provided by (used in)
operating activities:
Realized (gain) loss on investments (482,928) 82,552
Amortization of bond discount (62,372) (53,843)
Undistributed earnings of equity investee (323,958) (435,828)
Decrease in deferred compensation (372,499) (21,525)
Increase in accrued interest and dividends (348,670) (795,504)
Increase in receivables (594,539) (18,786,632)
Increase in policy acquisition costs (154,484) (922,877)
Increase in other assets (188,031) (939,178)
(Decrease) increase in accounts payable and
accrued expenses (1,137,017) 2,258,385
Decrease in accrued commissions (2,249,395) (1,954,843)
Increase in income taxes payable 8,117,388 10,571,558
(Decrease) increase in loss reserves (1,474,087) 6,702,722
Increase in unearned premiums 1,944,624 5,653,428
--------- ---------
Net cash provided by operating
activities 25,426,341 21,139,379
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities (37,182,075) (36,843,873)
Equity securities (15,814,915) (4,876,750)
Other invested assets (2,172,890) (1,422,096)
Sales/maturities of investments:
Fixed maturities 9,179,905 397,977
Equity securities 5,481,185 405,636
Mortgage loans 11,245 140,225
Other invested assets 680,952 0
(Continued)
</TABLE>
See notes to Consolidated Financial Statements.
6
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
CASH FLOW FROM INVESTING ACTIVITIES (Continued)
Purchase of property and equipment $ (120) $ (12,779)
Purchase of computer software (192,359) (270,991)
Loans to Agents (255,420) (2,580,748)
Collections on Agent loans 252,338 213,819
------- -------
Net cash used in investing activities (40,012,154) (44,849,580)
CASH FLOW FROM FINANCING ACTIVITIES
Dividends paid to shareholders (5,624,375) (4,387,013)
---------- ----------
Net cash used in financing activities (5,624,375) (4,387,013)
---------- ----------
Net decrease in cash and cash
equivalents (20,210,188) (28,097,214)
Cash and cash equivalents at beginning of period 56,856,983 52,110,474
---------- ----------
Cash and cash equivalents at end of period $ 36,646,795 $ 24,013,260
================== =================
</TABLE>
Supplemental disclosures of cash flow information: Cash paid during the three
months ended March 31, 1996 and 1995 for income taxes was $8,568 and $4,577,
respectively.
See notes to Consolidated Financial Statements.
7
<PAGE>
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated 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 Article 10 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, 1996
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. For further information, refer to the financial
statements and footnotes thereto included in the Company's Form 10-K for the
year ended December 31, 1995.
NOTE B -- RECLASSIFICATIONS
Certain amounts as previously reported in the 1995 financial statements have
been reclassified to conform to the current year's presentation.
NOTE C -- EARNINGS PER SHARE
At the Annual Meeting of the Company's shareholders held on May 1, 1996, the
number of authorized shares of the Company's Class A Common Stock was increased
pursuant to a vote of the shareholders from 24,996,920 to 74,996,930 shares and
a three-for-one (3:1) stock split was effected (See also Item 4., herein). Thus,
earnings per share is based on the weighted average number of Class A shares
outstanding (67,032,000 as retroactively stated in 1996 and 1995), plus giving
effect to the conversion of the weighted average number of Class B shares
outstanding (3,070 in 1996 and 1995) at a rate of 2,400 Class A shares for one
Class B share as set out in the Articles of Incorporation. Equivalent shares
outstanding total 74,400,000.
NOTE D -- INVESTMENTS
Fixed maturities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost. The amortized cost of fixed maturities
classified as held-to-maturity is adjusted for amortization of premiums and
accretion of discounts to maturity. The Company currently holds no
held-to-maturity securities.
Fixed maturities determined by management not to be held-to-maturity and
marketable equity securities are classified as available-for-sale. Marketable
equity securities consist primarily of common and nonredeemable preferred stocks
while fixed maturities consist of bonds and notes. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of tax,
reported as a separate component of stockholders' equity. Management determines
the appropriate classification of fixed maturities at the time of purchase and
reevaluates such designation as of each balance sheet date.
8
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following is a summary of available-for-sale securities:
Available-for-Sale Securities
(In Thousands)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
March 31, 1996
U.S. Treasuries $ 6,995 $ 198 $ 96 $ 7,097
Obligations of States
and Political Subdivisions 30,080 713 82 30,711
Special Revenue 165,324 4,692 315 169,701
Public Utilities 7,936 77 45 7,968
Industrial and Miscellaneous 47,735 1,692 551 48,876
------- ------ ----- -------
Total Fixed Maturities 258,070 7,372 1,089 264,353
------- ------ ----- -------
Common Stock 32,516 12,616 1,366 43,766
Preferred Stock 49,583 1,112 560 50,135
------- ------ ----- -------
Total Equity Securities 82,099 13,728 1,926 93,901
------- ------ ----- -------
$ 340,169 $ 21,100 $ 3,015 $ 358,254
============= ============ =========== =============
Available-for-Sale Securities
(In Thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
December 31, 1995
U.S. Treasuries $ 6,991 $ 324 $ 1 $ 7,314
Obligations of States and
Political Subdivisions 25,024 1,122 26,146
Special Revenue 160,678 7,387 168,065
Public Utilities 7,939 103 47 7,995
Industrial and Miscellaneous 29,291 3,157 7 32,441
------- ------ ----- -------
Total Fixed Maturities $ 229,923 $ 12,093 $ 55 $ 241,961
------------- ------------ ----------- -------------
Common Stock $ 27,178 $ 10,637 $ 1,110 $ 36,705
Preferred Stock 44,243 1,227 1,036 44,434
------- ------ ----- -------
Total Equity Securities 71,421 11,864 2,146 81,139
------- ------ ----- -------
$ 301,344 $ 23,957 $ 2,201 $ 323,100
============= ============ =========== =============
</TABLE>
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Deferred income taxes decreased by $1,326,000 at March 31, 1996 and were reduced
by $7,106,000 at December 31, 1995, related to the change in unrealized gains
(losses) on available-for-sale securities.
Mortgage loans on real estate are recorded at unpaid balances, adjusted for
amortization of premium or discount. A valuation allowance is provided for
impairment in net realizable value based on periodic valuations. The change in
the allowance is reflected on the income statement in realized gain (loss) on
investments.
NOTE E -- SUMMARIZED INCOME STATEMENT INFORMATION OF AFFILIATE
The Company has a 21.6% investment in Erie Family Life Insurance Company (EFL)
and accounts for this investment using the equity method. The following
represents summarized income statement information for EFL:
Three Months Ended Three Months Ended
March 31, 1996 March 31, 1995
-------------- --------------
Revenues $ 18,790,421 $ 17,286,515
Benefits and expenses 14,565,724 12,697,935
---------- ----------
Income before income taxes 4,224,697 4,588,580
Income taxes 1,545,891 1,502,821
---------- ----------
Net income $ 2,678,806 $ 3,085,759
================= =================
Dividends paid to
shareholders $ 1,071,000 $ 945,000
================= =================
NOTE F -- NOTE RECEIVABLE FROM EFL
On December 29, 1995, EFL issued a surplus note to the Company in return for a
cash sum of $15 million. The note bears an annual interest rate of 6.45% and all
payments of interest and principal of the note may be repaid only out of
unassigned surplus of EFL and are subject to prior approval of the Pennsylvania
Insurance Commissioner. On March 25, 1996, EFL received such approval for the
accrual/payment of interest in the amount of $241,875, which is included as a
receivable in the Company's statement of financial position at March 31, 1996.
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.
OPERATING RESULTS
Financial Overview
- ------------------
Consolidated net income rose by 16.9% for the first quarter of 1996 to
$23,498,077, or $.32 per share, from $20,096,875 or $.27 per share, for the
first quarter of 1995. This growth in first quarter net income was driven by
improvement in the management and investment operations of the Company.
Management operations improved as management fee revenue continued to grow and
the cost of management operations declined slightly. Revenue from investment
operations grew at a healthy pace as the Company's excess cash flows were
invested. The insurance underwriting operations, however, worsened due to the
winter storm related losses experienced in the first quarter of 1996.
RESULTS OF OPERATIONS
Analysis of Management Operations
- ---------------------------------
Management fee revenue derived from the management operations of the Company,
which serves as attorney-in-fact for the Erie Insurance Exchange (the Exchange),
rose 3.0 percent to $109,554,239 in the first three months of 1996 compared to
$106,341,913 for the same period in 1995. That portion of management fee revenue
from direct and affiliated assumed written premiums rose 6.3 percent to
$108,288,722 for the first quarter 1996 from $101,879,488 for the same period in
1995. The management fee charged by the Company is a percentage of the direct
and affiliated assumed written premiums of the Exchange, which increased 8.5%
during the first quarter of 1996. The rate of growth in management fee revenue,
from direct and affiliated assumed written premiums, was less than the growth in
direct and affiliated assumed written premiums as the management fee rate
charged the Exchange in the first quarter of 1996 was 24.5% while the rate
charged in the first quarter of 1995 was 25%. The management fee charged the
Exchange was 25% during all of 1994 and the first quarter of 1995 and 24.5% for
the period April 1, 1995 through March 31, 1996. Effective April 1, 1996 through
December 31, 1996, the Company's Board of Directors further reduced the
management fee charged the Exchange to 24%.
During the second quarter of 1995, a new service arrangement was entered into
with the Company and the Exchange for the management of nonaffiliated
reinsurance assumed business on behalf of the Exchange. Management did so in an
effort to maintain a separate fee structure that would more equitably compensate
the Company for its management services separate from its attorney-in-fact
agreement. Prior to this change, the Company received a fee of 24.5% of assumed
reinsurance premiums. As a result of this separate reinsurance service
arrangement, the Company receives a fee equal to 7% of voluntary reinsurance
premiums assumed from nonaffiliated insurers, and will no longer be responsible
for the payment of brokerage commissions on this business, which is now the
responsibility of the Exchange.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The cost of management operations declined to $79,176,650 for the three months
ended March 31, 1996, from $80,347,282 for the same period in 1995, a decrease
of 1.5%. Net revenues from management operations rose 16.6% to $30,687,956 for
the three months ended March 31, 1996 due to the improvement in gross margins
(net revenue divided by total revenue from management operations) in the first
quarter. Gross operating margins rose to 27.9% in the three months ended March
31, 1996 compared to gross operating margins of 24.7% for the same respective
period in 1995. This improvement in gross operating margins is mainly the result
of management continuing to carefully control operating expenses, particularly
personnel, occupancy, data processing and other discretionary costs.
The Company is responsible for the payment of commissions to the independent
Agents who sell insurance products for the Company's subsidiaries and the
Exchange, and its subsidiary, Flagship City Insurance Company, as enumerated in
the subscriber's agreement with the Exchange. The Agents receive commissions
based on fixed percentage fee schedules with different commission rates by line
of insurance. Also included in commission expense are the costs of promotional
incentives for Agents and Agent profit-sharing bonuses. Agent profit-sharing
bonuses are based upon the underwriting profitability of the insurance written
and serviced by the Agent within the Erie Insurance Group of companies.
Commissions are the largest component of the cost of management operations.
The Company's commission costs decreased 1.4% to $51,101,391 for the first
quarter of 1996, compared to $51,830,546 in the first quarter of 1995. This
decrease is primarily the result of the new reinsurance service arrangement
entered into during the second quarter of 1995, as mentioned previously, whereby
the Company is no longer responsible for the payment of brokerage commissions on
behalf of the Exchange on non-affiliated assumed reinsurance. As of March 31,
1995, the Company reimbursed the Exchange for brokerage commissions paid in
connection with the nonaffiliated reinsurance assumed business in the amount of
$3,607,507. Additionally, during the first quarter of 1996 promotional incentive
and Agent bonus costs, which is a component part of commission costs, decreased
36.6% to $1,467,377 versus $2,315,567 for the first quarter of 1995. The
majority of this decrease was due to lower Agent bonus levels and promotional
incentives which are a direct result of the underwriting results of the Erie
Insurance Group. Commission costs, minus the effects of promotional incentive
costs, Agent bonus costs, and brokerage commissions paid on non-affiliated
assumed reinsurance business, increased 8.1% to $49,634,014 from $45,907,472 for
the first quarter of 1995, which is in line with the growth in premiums written.
The Company's personnel costs (salaries, employee benefits, and payroll taxes)
net of those reimbursed by affiliated companies, totalled $18,382,199 for the
three month period ended March 31, 1996, compared to $17,626,688 for the same
period in 1995, an increase of 4.3%. Personnel costs are the second largest
component in cost of operations, after commissions.
Analysis of Insurance Operations
- --------------------------------
The insurance underwriting operations of the Company's wholly-owned subsidaries,
Erie Insurance Company and Erie Insurance Company of New York, which share
proportionally in the property/casualty underwriting results of the Erie
Insurance Group, were impacted negatively by severe winter weather in the first
quarter of 1996. As a result, the underwriting loss experienced in the first
quarter 1996 amounted to about $4 million greater than that experienced in the
first quarter 1995. Premiums earned for the Company's property/casualty
insurance subsidiaries grew 12.5% to $24,552,197 for the first quarter 1996
compared to $21,823,193 for the same period in 1995. Losses, loss adjustment
expenses and underwriting expenses incurred increased at a greater rate than
premiums earned; up 28.6% for the first quarter of 1996 amounting to $30,369,353
compared to $23,621,476 for the prior year's first quarter.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Analysis of Investment Operations
- ---------------------------------
Total revenues from investment operations for the three months ended March 31,
1996 increased 35.9% to $7,068,530 from $5,203,126 for the same period in 1995.
Income from investment operations rose primarily due to an increase in interest
and dividend income generated from the Company's investment portfolio as
increased cash flows were invested. Interest and dividend income was $6,006,215
for the three-month period ended March 31, 1996 compared to $4,618,272 for the
same period in 1995, an increase of 30.0%.
The Company also benefited from its 21.6% investment in an affiliated life
insurer, Erie Family Life Insurance Company (EFL). This investment is accounted
for under the equity method of accounting. Consequently, the Company's
investment earnings were a direct result of EFL's net income of $2,678,806 and
$3,085,759 at March 31, 1996 and 1995, respectively. The earnings recognized
from the investment in EFL decreased to $579,387 for the three months ended
March 31, 1996 from $667,406 for the same period in 1995, as EFL recognized
fewer non-recurring realized capital gains and incurred increased levels of
death benefits expense in the first quarter of 1996.
FINANCIAL CONDITION
Investments
- -----------
The Company's investment strategy takes a long-term perspective emphasizing
investment quality, diversification and superior investment returns. Investments
are managed on a total return approach that focuses on current income and
capital appreciation. The Company's investments are also liquid in order to meet
the short- and long-term commitments of the Company. At March 31, 1996, the
Company's investment portfolio of investment-grade bonds, common stock and
preferred stock, all of which are readily marketable, and cash and short-term
investments, totaled $395 million, or 38%, of total assets. These resources
provide the liquidity the Company requires to meet demands on its funds.
The total investments of the Company consist of investments in fixed maturities,
common stock, preferred stock, real estate mortgage loans and other invested
assets. At March 31, 1996, 97% of total investments were invested in fixed
maturities and equity securities. Mortgage loans and other invested assets
represented only 3% of total investments at that date. Mortgage loans and real
estate investments have the potential for higher returns, but also carry more
risk, including less liquidity and greater uncertainty in the rate of return.
Consequently, these investments have been kept to a minimum by the Company.
The Company's investments are subject to certain risks, including interest rate
and reinvestment risk. Fixed maturity and preferred stock security values
generally fluctuate inversely with movements in interest rates. The Company's
corporate and municipal bond investments may contain call and sinking fund
features which may result in early redemptions. Declines in interest rates could
cause early redemptions or prepayments which could require the Company to
reinvest at lower rates.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
At March 31, 1996, the Company's five largest investments in corporate debt
securities totaled $10.8 million, none of which individually exceeded $2.5
million. These investments had a market value of $11.0 million.
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. The Company's major sources of
funds from operations are the net cash flow generated from management operations
as the attorney-in-fact for the Exchange, the net cash flow from the Erie
Insurance Company's 5% and the Erie Insurance Company of New York's .5%
participation in the underwriting results of the reinsurance pool with the
Exchange, and the Company's investment income from affiliated and non-affiliated
investments. With respect to the management fee cash flow, funds are generally
released from the Exchange to the Company on a premiums collected basis, as the
Company incurs commission expense on premiums collected rather than written
premiums. The Company generates sufficient net positive cash flow from its
operations which is used to fund its commitments and to build its investment
portfolio, thereby increasing future investment returns. The Company also
maintains a high degree of liquidity in its investment portfolio in the form of
readily marketable fixed maturities, common stocks and short-term investments.
The Company's consolidated statements of cash flows indicate that net cash flows
provided by operating activities for the three months ended March 31, 1996 and
1995, were $25,426,341 and $21,139,379 respectively. Those statements also
classify the other sources and uses of cash by investing activities and
financing activities.
Dividends declared to shareholders in the three months ended March 31, 1996 and
1995, totaled $5,624,375 and $4,387,014, respectively. There are state law
restrictions on the payment of dividends from the insurance subsidiaries to the
Company. No dividends were paid to the Company from its property/casualty
insurance subsidiaries during the first quarter of 1996.
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to deferred tax assets and
liabilities resulted in net deferred tax assets at March 31, 1996 and December
31, 1995 of $2,546,811 and $185,282, respectively. Management believes it is
more likely than not that the Company will have sufficient taxable income in
future years to realize the benefits of the deferred tax assets.
The Company's property/casualty insurance subsidiaries enjoy a strong capital
position which is demonstrated in their risk-based capital ratios calculated
using the National Association of Insurance Commissioners (NAIC) formula at
December 31, 1995. Such calculations indicated that the Company's
property/casualty insurance subsidiaries' Total Adjusted Capital was
substantially above the Authorized Control Level Risk-Based Capital requirements
of the NAIC since their ratios are all in excess of three to one (3:1) at
December 31, 1995.
At March 31, 1996 and December 31, 1995, the Company's receivables from its
affiliates totaled $453,066,778 and $451,777,577, respectively. These
receivables, primarily due from the Exchange, are a result of the
attorney-in-fact management fee, expense reimbursements and the intercompany
reinsurance pool and potentially expose the Company to concentrations of credit
risk.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The individual receivable from the Exchange and its affiliates at March 31, 1996
and December 31, 1995 are as follows:
March 31, 1996 December 31, 1995
--------------- -----------------
Exchange-Management Fee and
Expense Reimbursements $ 114,900,443 $ 105,612,765
EFL-Expense Reimbursements 771,000 1,392,365
Exchange-Reinsurance Recoverable
from Losses and Unearned
Premium Balances Ceded 337,395,335 344,772,447
--------------- -----------------
$ 453,066,778 $ 451,777,577
=============== =================
15
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
a. The Company's Annual Meeting of Shareholders was held
May 1, 1996.
b. At the Annual Meeting of Shareholders, all of the Company's
directors were elected at said meeting, as follows:
Peter B. Bartlett Irvin H. Kochel
Samuel P. Black, Jr. Edmund J. Mehl
J. Ralph Borneman, Jr. Stephen A. Milne
Patricia A. Goldman John M. Petersen
Susan Hirt Hagen Seth E. Schofield
Thomas B. Hagen Jan R. Van Gorder
F. William Hirt Harry H. Weil
Since all directors of the Company were elected at the Annual
Meeting of Shareholders, there are no directors whose term of
office as a director continued after the meeting.
c. The following other matters were voted upon at the meeting and
the following number of affirmative votes were cast with respect
to such matters:
(1) The ratification of the firm of Brown, Schwab, Bergquist &
Co. as independent public accountants to examine the
financial statements and perform the annual audit of the
Company for the year ending December 31, 1996 was ratified.
This ratification received 3,032 affirmative votes with no
negative votes or abstentions.
(2) The amendment to the Company's Articles of Incorporation to
(a) increase the number of authorized shares of the
Company's Class A Common Stock from 24,996,920 shares to
74,996,930 shares, (b) reclassify the presently issued
shares of Class A Common Stock by effecting a three-for-one
(3-for-1) split of the Class A Common Stock and (c) revise
the provisions relating to dividends, conversion and
liquidation preferences so as to maintain the current
relationship between the Company's Class A Common Stock and
Class B Common Stock with respect to dividends, conversion
and liquidation preferences. This amendment received
19,160,336 affirmative votes of the Class A shareholders,
3,032 affirmative votes of the Class B shareholders, with no
negative votes and 2,341 Class A shareholder abstentions.
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months ended
March 31, 1996.
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 Indemnity Company
(Registrant)
Date ______________ /s/ Stephen A. Milne
------------------------
Stephen A. Milne, President & CEO
/s/ Thomas M. Sider
--------------------------------
Thomas M. Sider, Executive Vice
President & CFO
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS FDS CONTAINS INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF
THE ERIE INDEMNITY COMPANY FOR THE QUARTER ENDED MARCH 31, 1996 AND IS
QUALIFIED IN REFERENCE TO THE COMPANY'S FORM 10-Q
</LEGEND>
<CIK> 0000922621
<NAME> ERIE INDEMNITY COMPANY
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<DEBT-HELD-FOR-SALE> 264,353 157,624
<DEBT-CARRYING-VALUE> 0 60,282
<DEBT-MARKET-VALUE> 0 60,993
<EQUITIES> 93,901 57,569
<MORTGAGE> 4,421 4,861
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 369,310 284,961
<CASH> 36,647 24,013
<RECOVER-REINSURE> 196 503
<DEFERRED-ACQUISITION> 9,166 8,591
<TOTAL-ASSETS> 1,039,371 910,806
<POLICY-LOSSES> 355,860 351,526
<UNEARNED-PREMIUMS> 204,751 182,955
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<NOTES-PAYABLE> 0 0
0 0
0 0
<COMMON> 2,170 2,170
<OTHER-SE> 364,937 280,288
<TOTAL-LIABILITY-AND-EQUITY> 1,039,371 910,806
24,552 21,823
<INVESTMENT-INCOME> 6,586 5,286
<INVESTMENT-GAINS> 483 (83)
<OTHER-INCOME> 0 0
<BENEFITS> 0 0
<UNDERWRITING-AMORTIZATION> 6,798 5,581
<UNDERWRITING-OTHER> 23,571 18,040
<INCOME-PRETAX> 31,939 29,722
<INCOME-TAX> 8,441 9,625
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 23,498 20,097
<EPS-PRIMARY> .32 .27
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