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, 1997
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 April 30, 1997.
Class B Common Stock, no par value, with a stated value of
$70.00 per share-- 3,070 shares as of April 30, 1997.
The common stock is the only class of stock the Registrant is presently
authorized to issue.
1
<PAGE>
INDEX
ERIE INDEMNITY COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Position--March 31, 1997 and
December 31, 1996
Consolidated Statements of Operations--Three months ended March 31, 1997
and 1996
Consolidated Statements of Cash Flows--Three months ended March 31, 1997
and 1996
Notes to Consolidated Financial Statements--March 31, 1997
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
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PART I. FINANCIAL INFORMATION
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
-------------- ------------
(Unaudited)
<S> <C> <C>
INVESTMENTS
Fixed Maturities:
Available-for-Sale (amortized cost of
$303,201,484 and $301,093,212,
respectively) $ 306,892,904 $ 310,175,864
Equity Securities (cost of $120,059,134 and
$116,070,434, respectively) 134,948,272 131,618,139
Real Estate Mortgage Loans 8,007,442 7,293,651
Other Invested Assets 7,104,015 7,010,019
---------------- --------------
Total Investments $ 456,952,633 $456,097,673
Cash and Cash Equivalents 23,272,667 18,719,624
Equity in Erie Family Life
Insurance Company 27,166,906 28,686,137
Accrued Interest and Dividends 6,580,495 5,570,033
Premiums Receivable from Policyholders 101,627,196 103,847,320
Reinsurance Recoverable, Non-affiliates 181,810 163,691
Deferred Policy Acquisition Costs 9,693,948 9,540,998
Receivables from Erie Insurance Exchange
and Affiliates 512,165,569 478,304,267
Note Receivable from Erie Family
Life Insurance Company 15,000,000 15,000,000
Agent loans 7,958,871 7,945,946
Prepaid expenses 13,223,969 6,957,026
Property and Equipment 9,819,284 9,841,538
Deferred and prepaid federal income taxes 0 4,056,974
Other Assets 7,821,527 5,907,978
----------------- ------------
Total Assets $ 1,191,464,875 $1,150,639,205
================= ===============
</TABLE>
(Continued)
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 1997 1996
----------------- --------------------
(Unaudited)
<S> <C> <C>
LIABILITIES
Unpaid Losses and Loss Adjustment Expenses $ 403,299,764 $ 386,425,019
Unearned Premiums 215,501,716 216,938,069
Accounts Payable 6,047,038 6,034,486
Accrued Commissions 75,612,361 75,518,593
Accrued Payroll and Payroll Taxes 7,028,034 5,268,275
Accrued Vacation and Sick Pay 7,915,193 7,435,360
Deferred Compensation 1,639,187 1,587,570
Income Taxes Payable 9,000,074 2,035,054
Dividends Payable 6,411,788 6,411,788
Benefit Plans Liability 7,556,956 7,226,300
--------------------- ---------------------
Total Liabilities $ 740,012,111 $ 714,880,514
--------------------- ---------------------
SHAREHOLDERS' EQUITY
Capital Stock
Class A Common, stated value $.0292
per share; authorized 74,996,930 shares;
issued and outstanding 67,032,000 shares 1,955,100 1,955,100
Class B Common, stated value $70.00
per share; authorized 3,070 shares;
Issued and outstanding 3,070 shares 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) 11,385,557 17,490,491
Retained Earnings 430,067,207 408,268,200
--------------------- ---------------------
Total Shareholders' Equity $ 451,452,764 $ 435,758,691
--------------------- ---------------------
Total Liabilities and
Shareholders' Equity $ 1,191,464,875 $ 1,150,639,205
===================== =====================
</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: 1997 1996
<S> <C> <C>
Management Fee Revenue $ 113,254,329 $ 108,288,722
Service Agreement Revenue 1,271,791 1,265,517
Other Operating Revenue 608,974 310,367
-------------------- --------------------
Total Revenues from Management Operations 115,135,094 109,864,606
Cost of Management Operations 83,461,535 79,176,650
-------------------- --------------------
Net Revenues From
Management Operations 31,673,559 30,687,956
-------------------- --------------------
INSURANCE UNDERWRITING OPERATIONS:
Premiums Earned 25,850,574 24,552,197
Losses and Loss Adjustment Expenses Incurred 18,897,779 23,571,443
Policy Acquisition and Other
Underwriting Expenses 7,000,708 6,797,910
-------------------- --------------------
Total Losses and Expenses 25,898,487 30,369,353
-------------------- --------------------
Underwriting Losses (47,913) (5,817,156)
-------------------- -------------------
INVESTMENT OPERATIONS:
Equity in Earnings of Erie Family
Life Insurance Company 951,844 579,387
Interest and Dividends 7,627,759 6,006,215
Realized Gain on Investments 1,137,325 482,928
-------------------- --------------------
Total Revenues from Investment Operations 9,716,928 7,068,530
-------------------- --------------------
Income Before Income Taxes 41,342,574 31,939,330
Provision for Income Taxes 13,131,779 8,441,253
-------------------- --------------------
Net Income $ 28,210,795 $ 23,498,077
==================== ====================
Net Income per Share $ .38 $ .32
==================== ====================
Dividends Declared per Share:
Class A $ 0.095 $ 0.083
-------------------- --------------------
Class B $ 14.25 $ 12.50
-------------------- --------------------
</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, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 28,210,795 $ 23,498,077
Adjustment to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 454,484 290,216
Deferred income tax expense (benefit) 217,787 (1,035,984)
Realized gain on investments (1,137,325) (482,928)
Amortization of bond discount (13,198) (62,372)
Undistributed earnings of Erie Family Life (675,917) (323,958)
Increase (decrease) in deferred compensation 51,617 (372,499)
Increase in accrued interest and dividends (1,010,462) (348,670)
Increase in receivables (31,659,297) (594,539)
Increase in policy acquisition costs (152,950) (154,484)
Increase in prepaid expenses and other assets (8,173,349) (188,031)
Increase (decrease) in accounts payable and
accrued expenses 2,582,800 (1,137,017)
Increase (decrease) in accrued commissions 93,768 (2,249,395)
Increase in income taxes payable 12,937,072 8,117,388
Increase (decrease) in loss reserves 16,874,746 (1,474,087)
(Decrease) increase in unearned premiums (1,436,353) 1,944,624
------------------ -----------------
Net cash provided by operating
activities 17,164,218 25,426,341
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities (9,999,340) (37,182,075)
Equity securities (12,939,623) (15,814,915)
Mortgage loans (747,801) 0
Other invested assets (6,868) (2,172,890)
Sales/maturities of investments:
Fixed maturities 7,960,502 9,179,905
Equity securities 10,031,953 5,481,185
Mortgage loans 34,072 11,245
Other invested assets 0 680,952
Net loss on other invested assets (87,127) 0
Purchase of property and equipment 0 (120)
Purchase of computer software (432,230) (192,359)
Loans to Agents (294,374) (255,420)
Collections on Agent loans 281,449 252,338
------------------ -----------------
Net cash used in investing activities $ (6,199,387) $ (40,012,154)
(Continued)
</TABLE>
See Notes to Consolidated Financial Statements.
6
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ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Dividends paid to shareholders $ (6,411,788) $ (5,624,375)
--------------------- --------------------
Net cash used in financing activities (6,411,788) (5,624,375)
--------------------- --------------------
Net increase (decrease) in cash and cash
equivalents 4,553,043 (20,210,188)
Cash and cash equivalents at beginning of period 18,719,624 56,856,983
--------------------- --------------------
Cash and cash equivalents at end of period $ 23,272,667 $ 36,646,795
===================== ====================
</TABLE>
Supplemental disclosures of cash flow information:
Cash paid during the three months ended March 31, 1997 and 1996 for income taxes
was $23,028 and $8,568, respectively.
See Notes to Consolidated Financial Statements.
7
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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, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. 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, 1996.
NOTE B -- RECLASSIFICATIONS
Certain amounts as previously reported in the 1996 financial statements have
been reclassified to conform to the current year's presentation.
NOTE C -- EARNINGS PER SHARE
Earnings per share is based on the weighted average number of Class A shares
outstanding (67,032,000 as retroactively stated in 1996), plus giving effect to
the conversion of the weighted average number of Class B shares outstanding
(3,070 in 1997 and 1996) 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 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.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
Available-for-Sale Securities
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gain Losses Value
<S> <C> <C> <C> <C>
March 31, 1997
U.S. Government $ 11,995 $ 127 $ 241 $ 11,881
Foreign Governments 1,988 0 53 1,935
Obligations of States
and Political Subdivisions 28,120 954 108 28,966
Special Revenue 135,103 4,226 228 139,101
Public Utilities 8,735 62 23 8,774
Industrial and Miscellaneous 117,260 1,326 2,350 116,236
------------- ------------ ----------- -------------
Total Fixed Maturities $ 303,201 $ 6,695 $ 3,003 $ 306,893
------------- ------------ ----------- -------------
Common Stock $ 44,428 $ 15,356 $ 3,106 $ 56,678
Preferred Stock 75,631 2,812 173 78,270
------------- ------------ ----------- -------------
Total Equity Securities $ 120,059 $ 18,168 $ 3,279 $ 134,948
------------- ------------ ----------- -------------
$ 423,260 $ 24,863 $ 6,282 $ 441,841
============= ============ =========== =============
Available-for-Sale Securities
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gain Losses Value
December 31, 1996
U.S. Government $ 12,000 $ 212 $ 72 $ 12,140
Foreign Governments 1,988 25 5 2,007
Obligations of States and
Political Subdivisions 28,127 1,321 40 29,408
Special Revenue 136,950 5,349 90 142,209
Public Utilities 7,238 141 7,380
Industrial and Miscellaneous 114,790 2,835 593 117,032
------------- ------------ ----------- -------------
Total Fixed Maturities $ 301,093 $ 9,883 $ 800 $ 310,176
------------- ------------ ----------- -------------
Common Stock $ 37,003 $ 14,567 $ 1,525 $ 50,045
Preferred Stock 79,067 2,539 33 81,573
------------- ------------ ----------- -------------
Total Equity Securities $ 116,070 $ 17,106 $ 1,558 $ 131,618
------------- ------------ ----------- -------------
$ 417,163 $ 26,989 $ 2,358 $ 441,794
============= ============ =========== =============
</TABLE>
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Deferred income taxes decreased by $2,117,000 at March 31, 1997 and increased by
$965,000 at December 31, 1996 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, 1997 March 31, 1996
-------------- --------------
Revenues $ 21,631,389 $ 18,587,603
Benefits and expenses 15,045,371 14,362,906
------------------ ------------------
Income before income taxes 6,586,018 4,224,697
Income taxes 2,184,954 1,545,891
------------------ ------------------
Net income $ 4,401,064 $ 2,678,806
================== ==================
Dividends paid to
shareholders $ 1,181,252 $ 1,071,000
================== ==================
Net unrealized
(depreciation)
appreciation on
investment securities,
net of deferred taxes $ (3,004,822) $ 5,003,206
================== ==================
NOTE F -- NOTE RECEIVABLE FROM EFL
On December 29, 1995, EFL issued a surplus note to the Company in return for
cash 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. In March of 1997, EFL received such approval for the
accrual of interest totaling $241,875, which is included as a receivable in the
Company's statement of financial position at March 31, 1997.
NOTE G -- EMPLOYEE SAVINGS PLAN
Effective with the pay period beginning May 8, 1997, Company employees have a
new investment option in the Employee Savings Plan with regard to future
matching contributions. This option allows employees to invest all or part of
the Company's matching contributions in the Erie Indemnity Company Class A
common stock fund.
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 20.1% for the first quarter of 1997 to
$28,210,795, or $.38 per share, from $23,498,077 or $.32 per share, for the
first quarter of 1996 (adjusted for the 3-for-1 split of the Class A shares in
May 1996). The growth in first quarter net income was driven by improvement in
all operating segments of the Company. Management operations improved as
management fee revenue continued to grow. At the same time, insurance
underwriting operations improved considerably from the storm-influenced results
experienced in the first quarter 1996. Revenue from investment operations also
grew at a healthy pace as the Company's cash flow was invested for higher
returns and non-recurring realized capital gains were recognized during the
quarter.
RESULTS OF OPERATIONS
Analysis of Management Operations
For the first quarter 1997 management fee revenue derived from the management
operations of the Company, which serves as attorney-in-fact for the Erie
Insurance Exchange (the Exchange), increased 4.6% to $113,254,329 from
$108,288,722 for the first quarter 1996. The management fee charged by the
Company is a percentage of direct and affiliated assumed written premiums of the
Exchange, which increased 6.8% during the first quarter of 1997. However, the
direct and affiliated assumed premium growth in the Exchange's core lines of
insurance, with the exception of workers compensation, was 9.4% for the first
quarter of 1997 versus the same period in 1996. The Exchange's overall premium
growth was negatively influenced by rate reductions in Pennsylvania workers
compensation due to workers compensation legislative reforms.
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 1997 was 24.0% while the rate charged in the first quarter of 1996
was 24.5%. The Board of Directors reduced the management fee rate to 24% for the
period April 1, 1996 through December 31, 1996. In December 1996 the Board voted
to maintain the 24% management fee rate for all of 1997. The Company's Board of
Directors has the authority to change the management fee rate at its discretion,
but cannot exceed a rate of 25%.
Service agreement revenue totaled $1,271,791 for the first quarter of 1997
compared to $1,265,517 for the first quarter of 1996, an increase of 0.5%.
Service agreement revenue is derived from the management of nonaffiliated
reinsurance assumed business on behalf of the Exchange. The Company receives a
fee equal to 7% of voluntary reinsurance premiums assumed from nonaffiliated
insurers. The payment of brokerage commissions on this business is 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 increased 5.4% to $83,461,535 for the three
months ended March 31, 1997 from $79,176,650 for the same period in 1996.
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 increased 8.5% to $55,458,798 for the first
quarter of 1997, compared to $51,101,391 in the first quarter of 1996.
Commission costs grew faster than the rate of growth in direct and affiliated
assumed written premiums of the Exchange due to increased provisions for agent
bonuses resulting from improved underwriting profitability in the first quarter
of 1997 versus the first quarter of 1996.
Personnel costs, including salaries, employee benefits, and payroll taxes, are
the second largest component in cost of operations, after commissions. The
Company's personnel costs, net of those reimbursed by affiliated companies,
totaled $17,022,190 for the three month period ended March 31, 1997, compared to
$17,836,768 for the same period in 1996, a decrease of 4.8%.
Net revenues from the Company's management operations rose 3.2% to $31,673,559
for the three months ended March 31, 1997 compared to $30,687,956 for the same
period in 1996. The gross margin from management operations (net revenue divided
by total revenue), dropped slightly to 27.5% in the first quarter of 1997, from
27.9% for the first quarter of 1996.
Analysis of Insurance Operations
The insurance underwriting operations of the Company's wholly-owned
subsidiaries, Erie Insurance Company and Erie Insurance Company of New York,
which assume a 5.5% proportional share of the property/casualty underwriting
results of the Erie Insurance Group, improved as compared to the 1996
underwriting results which were impacted by severe winter weather in the first
quarter of 1996. In the first quarter of 1997, premiums earned for the Company's
property/casualty insurance subsidiaries grew 5.3% to $25,850,574 compared to
$24,552,197 for the same period in 1996. Losses, loss adjustment expenses and
underwriting expenses incurred decreased 14.7% for the first quarter of 1997
amounting to $25,898,487 compared to $30,369,353 for the prior year's first
quarter. Mild weather conditions in the majority of the Company's operating
territories in the first quarter of 1997 compared to the severe winter
storm-related losses experienced in the first quarter of 1996 was largely
responsible for the improved underwriting results. Also included in the first
quarter of 1997 underwriting results are $1,262,112 in Company recoveries under
the aggregate excess of loss reinsurance arrangement which went into effect on
January 1, 1997. Thus, the net underwriting loss in the first quarter of 1997
improved to $47,913 from a loss of $5,817,156 experienced in the first quarter
of 1996.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The Generally Accepted Accounting Principles (GAAP) combined ratio for the
Company's property/casualty insurance operations was 100.2% for the three months
ended March 31, 1997 compared to a ratio of 123.7% for the same period in 1996.
The GAAP combined ratio is the ratio of loss, loss adjustment, acquisition, and
underwriting expenses incurred to premiums earned.
Catastrophes are an inherent risk of the property/casualty insurance business,
which can have a material impact on year-to-year fluctuations in the Company's
property/casualty insurance underwriting operating results. The Company
experienced two such catastrophes during 1996, with the severe winter weather in
the first quarter and Hurricane Fran in the third quarter accounting for $8.1
million of underwriting losses and expenses or approximately $.07 per share,
after federal income taxes. No material weather-related catastrophes occurred in
the first quarter of 1997. The Company continually reviews its methods for
estimating its liability for losses and loss adjustment expenses, which includes
an estimate for losses incurred but not reported. Such liabilities are
necessarily based on estimates and, while management believes the amount is
adequate, the ultimate liability may be in excess of or less than amounts
provided.
Analysis of Investment Operations
Total revenues from investment operations for the first quarter of 1997
increased by 37.5% to $9,716,928 from $7,068,530 posted in the first quarter of
1996. The Company's 21.6% investment in an affiliated life insurer, Erie Family
Life Insurance Company (EFL) increased 64.3% in the first quarter of 1997. The
Company's investment earnings were a direct result of EFL's net income
increasing to $4,401,064 from $2,678,806 for the three months ended March 31,
1997 and 1996, respectively. Also contributing to the increase in revenues from
investment operations was a 27.0% increase in interest and dividends.
Non-recurring capital gains also increased from $482,928 in the first quarter of
1996 to $1,137,325 in the first quarter of 1997.
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, 1997, 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 $465 million, or 39%, of total assets. These resources
provide the liquidity the Company requires to meet demands on its funds.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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, 1997, 96.7% of total investments were invested in fixed
maturities and equity securities. Mortgage loans and other invested assets
represented only 3.3% 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.
At March 31, 1997, the Company's five largest investments in corporate debt
securities totaled $19.1 million, none of which individually exceeded $4.7
million. These investments had a market value of $19.6 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, 1997 and
1996, were $17,164,218 and $25,426,341 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, 1997 and
1996, totaled $6,411,788 and $5,624,375, 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 1997.
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 liabilities at March 31, 1997 and
December 31, 1996 of $119,976 and $2,035,054, respectively.
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
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Commissioners (NAIC) formula at December 31, 1996. 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, 1996.
At March 31, 1997 and December 31, 1996, the Company's receivables from its
affiliates totaled $512,165,569 and $478,304,267, 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.
The individual receivable from the Exchange and its affiliates at March 31, 1997
and December 31, 1996 are as follows:
March 31, 1997 December 31, 1996
-------------- -----------------
Exchange-Management Fee and
Expense Reimbursements $ 124,673,094 $ 108,589,885
EFL-Expense Reimbursements 761,870 1,049,007
Exchange-Reinsurance Recoverable
from Losses and Unearned
Premium Balances Ceded 386,730,605 368,665,375
---------------- ------------------
$ 512,165,569 $ 478,304,267
================ ==================
OTHER MATTERS
On December 14, 1989, the shareholders adopted the Erie Indemnity Company Stock
Redemption Plan (the Plan). The Plan entitles estates of qualified shareholders
to cause the Company to redeem shares of stock of the Company at a price equal
to the fair market value of the stock at time of redemption. On December 12,
1995, the Board of Directors amended the restated the Plan. The restatement
limits the redemption amount to an aggregation of: (1) an initial amount of $10
million as of December 31, 1995 and (2) beginning in 1996 and annually
thereafter, an additional annual amount as determined by the Board in its sole
discretion, not to exceed 20 percent of the Company's net income from management
operations during the prior fiscal year. This aggregate amount is reduced by
redemption amounts paid. However, at no time shall the aggregate redemption
limitation exceed 20 percent of the Company's retained earnings determined as of
the close of the prior year. In addition, the restated plan limits the
repurchase from any single shareholder's estate to 33 percent of total share
holdings of such shareholder. At the Board of Directors meeting on February 29,
1996 the Board approved an increase in the redemption amount of $14,350,186. On
March 11, 1997, the Board approved an increase in the redemption amount of
$16,655,226 to $41,005,412.
"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 "Results of Operations - Analysis of Insurance
Operations", "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, weather
and weather-related events, other types of catastrophic events, fluctuations of
securities markets, and technological difficulties and advancements.
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
April 29, 1997.
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, III Edmund J. Mehl
J. Ralph Borneman, Jr. Stephen A. Milne
Patricia A. Goldman John M. Petersen
Susan H. 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, 1997. This
ratification received 3,048 affirmative votes with no
negative votes or abstentions.
(2) The adoption of Erie Indemnity Company Long-Term
Incentive Plan for senior executives of the Company was
voted on by Class A and Class B shareholders. This
adoption received 59,903,618 affirmative votes and
1,343,493 negative votes.
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, 1997.
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 May 5, 1997 /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, 1997 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-31-1997 DEC-31-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<DEBT-HELD-FOR-SALE> 306,893 310,176
<DEBT-CARRYING-VALUE> 0 0
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<EQUITIES> 134,948 93,901
<MORTGAGE> 8,007 4,421
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<TOTAL-INVEST> 456,953 369,310
<CASH> 23,273 36,647
<RECOVER-REINSURE> 182 196
<DEFERRED-ACQUISITION> 9,694 9,166
<TOTAL-ASSETS> 1,191,465 1,039,371
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