FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from to
Commission File Number 0-24000
ERIE INDEMNITY COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0466020
(State or other jurisdiction (I.R.S. Employer
of 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, no par value
Class B Common Stock, no par value
(Tile of class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock of nonaffiliates: There is no active
market for the Class B voting stock and no Class B voting stock has been sold in
the last year upon which a price could be established.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 67,032,000 Class A shares and
3,070 Class B shares of Common Stock outstanding on February 28, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's Annual Report to shareholders for the fiscal
year ended December 31, 1996 (the "Annual Report") are incorporated by
reference into Parts I, II and IV of this Form 10-K Report.
2. Portions of the Registrant's proxy statement relating to the annual meeting
of shareholders to be held April 29, 1997 are incorporated by reference
into Part III of this Form 10-K Report.
INDEX
PART ITEM NUMBER AND CAPTION PAGE
I Item 1. Business 3
I Item 2. Properties 18
I Item 3. Legal Proceedings 18
I Item 4. Submission of Matters to a
Vote of Security Holders 18
II Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters 19
II Item 6. Selected Consolidated Financial Data 19
II Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 19
II Item 8. Financial Statements and Supplementary
Data 19
II Item 9. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosures 19
III Item 10. Directors and Executive Officers
of the Registrant 20
III Item 11. Executive Compensation 22
III Item 12. Security Ownership of Certain
Beneficial Owners and Management 22
III Item 13. Certain Relationships and Related
Transactions 22
IV Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 25
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PART I
Item 1. Business
Erie Indemnity Company (the "Company") is a Pennsylvania business
corporation formed in 1925 to be the attorney-in-fact for Erie Insurance
Exchange (the "Exchange"), a Pennsylvania-domiciled reciprocal insurance
exchange. The Company's principal business activity consists of management of
the Exchange, and management fees received from the Exchange accounted for
approximately 76.3% of the Company's consolidated revenues in 1996. The Company
is also engaged in the property/casualty insurance business through its wholly
owned subsidiaries, Erie Insurance Company (Erie Insurance Co.), Erie Insurance
Company of New York (Erie NY) and Erie Insurance Property & Casualty Company
(Erie P&C) and through its management of Flagship City Insurance Company
(Flagship), a subsidiary of the Exchange. In addition, the Company holds
investments in both affiliated and unaffiliated entities, including a 21.6%
common stock interest in Erie Family Life Insurance Company (EFL), an affiliated
life insurance company, accounted for under the equity method of accounting.
Together with the Exchange, the Company and its subsidiaries and affiliates
operate collectively under the name "Erie Insurance Group". See the chart on the
following page which details the organization of the Erie Insurance Group.
As of December 31, 1996, the Company had 3,107 full-time
employees. Of that total, 1,490 full-time employees provide claims-specific
services exclusively for the Exchange and 74 full-time employees perform general
services exclusively for EFL. Both the Exchange and EFL reimburse the Company
monthly for these services. None of the Company's employees is covered by a
collective bargaining agreement. The Company believes that its relationship with
its employees is good.
Management Operations
The Exchange, which commenced operations in 1925, underwrites a
broad line of personal and commercial property and casualty insurance coverages,
including automobile, homeowners, commercial multi-peril and workers'
compensation. Erie Insurance Co. was organized in 1972 as a stock casualty
insurance company to supplement the lines of business written by the Exchange,
and was acquired by the Company from the Exchange as of December 31, 1991. Since
January 1, 1992, Erie Insurance Co. and the Exchange have participated in an
intercompany reinsurance pool whereby the parties share proportionately in the
results of the property/casualty insurance operations conducted by Erie
Insurance Co. and the Exchange. Effective January 1, 1995, Erie NY began
participating in this intercompany reinsurance pool whereby Erie Insurance Co.
maintained its 5% participation in the pool and Erie NY assumed a .5%
participation in the pool thus reducing the Exchange's participation in the pool
from 95% to 94.5% at that date. Flagship was organized in 1992 as a stock
casualty insurance company to conduct the Exchange's residual automobile market
business. Erie P&C was organized in 1993 to conduct Erie Insurance Group's
business in West Virginia and to write workers' compensation insurance in
Pennsylvania. Erie NY was purchased in 1994 to conduct Erie Insurance Group's
business in New York State together with Erie Insurance Company. At December 31,
1996, the Erie Insurance Group conducted business in nine states and the
District of Columbia through approximately 1,045 agencies with approximately
4,626 agents, respectively.
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CORPORATE ORGANIZATION CHART
ERIE INDEMNITY COMPANY - Incorporated: April 17, 1925 (PA)
Total Capital Stock: 75,000,000 @ no par value (74,996,930 share
Class A, 3,070 shares Class B)
Shares Outstanding: 67,032,000 (Class A), 3,070 (Class B)
ERIE INSURANCE EXCHANGE - Began Operation: April 20, 1925
(A reciprocval Insurance Exvhange)
EI HOLDING CORP. - Incorporated: September 28, 1990 (DE)
Total Capital Stock: 100 @ $1.00 par value
Shares Outstanding: 100
EI SERVICE CORP. - Incorporated December 15, 1982 (PA)
Total Capital Stock: 100 @ $1.00 par value
Shares Outstanding: 100
ERIE INSURANCE COMPANY - Incorporated September 11, 1972 (PA)
Total Capital Stock: 23,500 @ $100 par value
Shares Outstanding: 23,500
ERIE INSURANCE COMPANY OF NEW YORK - Incorporated September 15, 1885 (NY)
Total Capital Stock: 23,500 @ $100 par value
Shares Outstanding: 23,500
ERIE INSURANCE PROPERTY & CASUALTY COMPANY - Incorporates January 19, 1993 (PA)
Total Capital Stock: 23,500 @ $100 par value
Shares Outstanding: 23,500
FLAGSHIP CITY INSURANCE COMPANY - Incorporated January 22, 1992 (PA)
Total Capital Stock: 23,500 @ $100 par value
Shares Outstanding: 23,500
ERIE FAMILY LIFE INSURANCE COMPANY - Incorporated May 23, 1967 (PA)
Total Capital Stock: 15,000,000 @ $.40 par value
Shares Outstanding: 9,450,000
The Erie Indemnity Company is the Attorney-in-Fact for the Erie Insurance
Exchange. EI Holding Corp., EI Service Corp., Erie Insurance Company and Erie
Insurance Property & Casualty Company are owned 100% by the Erie Indemnity
Company. The Erie Insurance Company of New York is 100% owned by the Erie
Insurance Company. The Flagship City Insurance Company is 100% owned by the
Erie Insurance Exchange. The Erie Indemnity Company owns 21.6% or the
outstanding stock of the Erie Family Life Insurance Company while the Erie
Insurance Exchange owns 52.2% of the outstanding stock of the Erie Family Life
Insurance Company.
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Property/Casualty Insurance Operations
One of the distinguishing features of the property/casualty
insurance industry is that its products generally are priced before its costs
are known, as premium rates usually are determined before losses are reported.
Changes in statutory and case law can dramatically affect the liabilities
associated with known risks after the insurance contract is in place. The number
of competitors and the similarity of products offered, as well as regulatory
constraints, limit the ability of property/casualty insurance companies to
increase prices in response to declines in profitability.
The profitability of the property/casualty insurance business is
generally subject to many factors, including rate competition, the severity and
frequency of claims, natural disasters, state regulation of premium rates,
defaults of reinsurers, interest rates, general business conditions, regulatory
measures and court decisions that define and may expand the extent of coverage
and the amount of compensation due for injuries and losses. Historically, the
overall financial performance of the property/casualty insurance industry has
tended to fluctuate in cyclical market patterns. A typical market cycle has been
composed of a period of heightened premium rate competition and depressed
underwriting performance, often referred to as a "soft market", followed by a
period of constricted industry capital and underwriting capacity, increasing
premium rates and underwriting performance, often referred to as a "hard
market". During a soft market, competitive conditions can result in premium
rates which are inadequate and therefore unprofitable and underwriting terms and
conditions which are not as favorable to a property/casualty insurer as during
hard markets.
The Exchange, Flagship, Erie Insurance Co., Erie P&C and Erie NY
all have current ratings of A++ (Superior) from A.M. Best with respect to their
financial strength and claims-paying ability. In evaluating an insurer's
financial and operating performance, A.M. Best reviews the insurer's
profitability, leverage and liquidity as well as the insurer's book of business,
the adequacy and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its loss reserves and the experience and
competency of its management. Management believes that this A.M. Best rating of
A++ (Superior) is an important factor in marketing Erie Insurance Group's
property/casualty insurance to its agents and customers and that insurance
carriers with the higher ratings have some competitive advantage. A.M. Best's
classifications are A++ and A+ (Superior), A and A- (Excellent), B++ and B+
(Very Good), B and B- (Good), C++ and C+ (Fair), C and C- (Marginal), D (Below
Minimum Standards) and E and F (Liquidation). According to A.M. Best, a
"Superior" rating is assigned to those companies which, in A.M. Best's opinion,
have achieved superior overall performance when compared to the standards
established by A.M. Best and have a very strong ability to meet their
obligations to policyholders over a long period. A.M. Best's ratings are based
upon factors relevant to policyholders and are not directed towards the
protection of investors.
The property/casualty insurers managed by the Company are
licensed to do business in 15 states and in the District of Columbia, and at
December 31, 1996 operated in nine states and the District of Columbia although
the Erie Insurance Group's business consisted primarily of private passenger and
commercial automobile and homeowners insurance business written in Pennsylvania,
Ohio, West Virginia, Maryland and Virginia.
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The Company, in managing the property/casualty insurers of the
Erie Insurance Group, has followed several strategies which the management of
the Company believes have resulted in underwriting results which are better than
those of the property and casualty industry in general. The principal strategies
employed by the Company in managing these insurers are:
o An underwriting philosophy and product mix designed to
produce an Erie Insurance Group-wide underwriting profit,
i.e., a combined ratio of less than 100%, through careful
risk selection and adequate pricing. The careful selection
of risk allows for lower claims frequency and loss
severity, thereby enabling insurance to be offered at
favorable prices.
o A focus on providing consistent, high quality service to
policyholders and agents in both underwriting and claims
handling.
o A business concept designed to provide the advantages of
localized marketing, underwriting and claims servicing
with the economies of scale from centralized accounting,
administrative, investment, data processing and other
support services.
o A careful agent selection process, in which Erie Insurance
Group seeks to be the lead underwriter with its agents in
order to enhance the agency relationship and the
likelihood of receiving the most desirable underwriting
opportunities from its agents.
Life Insurance Operations
EFL, which was organized in 1967 as a Pennsylvania-domiciled life
insurance company, has an A.M. Best rating of A+ (Superior). EFL is primarily
engaged in the business of underwriting and selling non-participating individual
and group life insurance policies, including universal life and individual and
group annuity products in eight states and the District of Columbia. At December
31, 1996, on a Generally Accepted Accounting Principles (GAAP) basis, EFL had
assets of $741 million and shareholders' equity of $133 million. At December 31,
1996, of EFL's total liabilities of $608 million, insurance and annuity reserves
accounted for $570 million and a note payable to the Company amounted to $15
million. Of EFL's investment portfolio of $660 million at December 31, 1996,
cash and short-term investments accounted for $6 million, available-for-sale
securities were $632 million, real estate was $2 million, policy loans were $4
million, mortgages accounted for $9 million and other invested assets were $7
million.
Financial Information About Industry Segments
Reference is made to Note 13 of the Notes to the Consolidated
Financial Statements included in the Annual Report, page 33 for information as
to revenues, net income and identifiable assets attributable to the three
business segments (management operations, property/casualty insurance operations
and life insurance operations) in which the Company is engaged.
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Lines of Business
The Erie Insurance Group property/casualty insurers managed by
the Company write both personal and commercial lines of business. The commercial
lines consist primarily of commercial automobile, commercial multi-peril and
workers' compensation insurance. The personal lines consist primarily of
automobile and homeowners insurance. A description of these types of insurance
follows:
Commercial
o Automobile -- policies that provide protection to
businesses against liability for bodily injury and
property damage arising from automobile accidents, and
provide protection against loss from damage to automobiles
owned by the insured business.
o Multi-peril -- policies that provide protection to
businesses against many perils, usually combining
liability and physical damage coverages.
o Workers' compensation -- policies purchased by employers
to provide benefits to employees for injuries sustained
during employment. The extent of coverage is established
by the workers' compensation laws of each state.
Personal
o Private passenger automobile -- policies that provide
protection against liability for bodily injury and
property damage arising from automobile accidents, and
provide protection against loss from damage to automobiles
owned by the insured.
o Homeowners -- policies that provide coverage for damage to
residences and their contents from a broad range of
perils, including fire, lightning, windstorm and theft.
These policies also cover liability of the insured arising
from injury to other persons or their property while on
the insured's property and under other specified
conditions.
See "Selected Market and Geographic Information" contained on page
22 of the Annual Report for direct premiums written by jurisdiction and line of
business in addition to statutory loss and loss adjustment expense ratios by
line of business.
The property/casualty insurers managed by the Company are required
to participate in involuntary insurance programs for automobile insurance, as
well as other property and casualty lines, in states in which such companies
operate. These programs include joint underwriting associations, assigned risk
plans, fair access to insurance requirements ("FAIR") plans, reinsurance
facilities and windstorm plans. Legislation establishing these programs requires
all companies that write lines covered by these programs to provide coverage
(either directly or through reinsurance) for insureds who cannot
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obtain insurance in the voluntary market. The legislation creating these
programs usually allocates a pro rata portion of risks attributable to such
insureds to each company on the basis of direct premiums written or the
exposures insured. Generally, state law requires participation in such programs
as a condition to doing business in that state. The loss ratio on insurance
written under involuntary programs has traditionally been greater than the loss
ratio on insurance in the voluntary market; however, the impact of these
involuntary programs on the property/casualty insurers managed by the Company
has been immaterial.
Combined Ratios
The following table sets forth for the periods indicated the
combined ratio of Erie Insurance Co. and Erie NY, prepared in accordance with
statutory accounting principles (SAP) prescribed or permitted by state insurance
authorities and the combined ratio of Erie Insurance Co. and Erie NY prepared in
accordance with GAAP. The combined ratio is a traditional measure of
underwriting profitability. When the combined ratio is under 100%, underwriting
results are generally considered profitable. Conversely, when the combined ratio
is over 100% underwriting results are generally considered unprofitable. The
combined ratio does not reflect investment income, federal income taxes or other
non-operating income or expense. The operating income of Erie Insurance Co. and
Erie NY is dependent upon income from both underwriting operations and
investments.
Year Ended
December 31,
1996 1995
GAAP combined ratio........................ 111.4% 104.0%
====== ======
Statutory operating ratios:
Loss ratio............................... 83.3 75.9
Expense ratio............................ 26.4 26.0
Dividend ratio........................... 1.0 1.1
----- -----
Statutory combined ratio................. 110.7% 103.0%
====== ======
Industry statutory combined ratio(1)....... 107.0% 106.5%
====== ======
- - - ---------------
(1) Source: A.M. Best
The Company's wholly owned subsidiary, Erie Insurance Company,
participates in an intercompany reinsurance pooling agreement with the Exchange.
This reinsurance pooling agreement provides for Erie Insurance Company to share
proportionately in the results of all property/casualty insurance operations of
the Exchange and its subsidiaries. Since the inception of this pooling agreement
on January 1, 1992, Erie Insurance Company's proportionate share of the
reinsurance pool has been 5 percent.
As mentioned previously, on January 1, 1995, the Exchange began
retroceding to the Erie Insurance Company of New York, as part of the existing
intercompany reinsurance pooling arrangement, .5 percent of its total direct
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and assumed writings. Erie Insurance Company maintained its 5 percent
participation in the reinsurance pool which, when combined with the .5 percent
participation of the Erie Insurance Company of New York, results in a 5.5
percent participation level for the Company's affiliates in 1995. As a result of
the increased participation of the Company's subsidiaries in the reinsurance
pooling agreement in 1995, the Company's premiums, losses and expenses were 10
percent more than they would have been had the level of participation remained
the same.
For the calendar years 1996 and 1995, the Company incurred
underwriting losses from its insurance underwriting operations in the amount of
$11,579,211, and $3,737,618, respectively. The 1996 underwriting results of the
Company's wholly-owned subsidiaries, Erie Insurance Company and Erie Insurance
Company of New York, were impacted negatively by severe winter weather in the
first quarter of 1996 and catastrophe losses experienced from Hurricane Fran in
the eastern United States, particularly North Carolina, and other storm-related
catastrophe losses elsewhere in our operating territories during the third
quarter of 1996. Losses resulting from these catastrophes were about $8.1
million in 1996 or about $.07 per share, after federal income taxes. The
majority of these losses were property losses on homeowners and commercial
property lines of business. Milder weather during 1995 resulted in better
underwriting results for the property/casualty companies of the Erie Insurance
Group when compared to 1996.
Reserves
Loss reserves are estimates of the amounts the insurer expects to
pay to claimants at a given point in time, based on facts and circumstances then
known. It can be expected that the ultimate claims liability will exceed or be
less than such estimates. Reserves are based on estimates of future trends and
claims severity, judicial theories of liability and other factors. Management
believes that the reserves currently established by the Company are adequate to
cover the eventual cost of the claims liability of the property and casualty
insurers managed by the Company. However, during the loss adjustment period,
additional facts regarding individual claims may become known, and consequently
it often becomes necessary to refine and adjust the estimates of liability.
Adjustments are reflected in operating results in the year in which the changes
in the estimates of liability are made.
In establishing the liability for unpaid losses and loss
adjustment expenses related to asbestos-related illnesses and toxic waste
cleanup, management considers facts currently known and the current state of the
law and coverage litigation. Liabilities are recognized for known claims
(including the cost of related litigation) when sufficient information has been
developed to indicate the involvement of a specific insurance policy, and
management can reasonably estimate its liability. In addition, liabilities have
been established to cover additional exposures on both known and unasserted
claims.
The establishment of appropriate reserves is an inherently
uncertain process, and there can be no assurance that the ultimate liability
will not exceed the loss and loss adjustment expense reserves of the property
and casualty insurers managed by the Company. An increase in these reserves
would
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have an adverse effect on the results of operations and financial condition of
the property/casualty insurers managed by the Company. As is the case for
virtually all property/casualty insurance companies, the Company has found it
necessary, in the past, to revise, in non-material amounts, estimated future
liabilities as reflected in the loss and loss adjustment expense reserves of the
property/casualty insurers managed by the Company, and further adjustments could
be required in the future.
On the basis of the Company's internal procedures, which analyze
the Company's experience with similar cases and historical trends such as
reserving patterns, loss payments, pending levels of unpaid claims and product
mix, as well as court decisions and economic conditions, management believes
adequate provision has been made for the loss and loss adjustment expense
reserves of the Company's property/casualty insurers managed by the Company.
Differences between reserves reported in the Company's financial
statements prepared on the basis of GAAP and financial statements prepared on
the basis of SAP are not significant.
The following table sets forth the development of reserves for
unpaid losses and loss adjustment expenses for the business of the Company's
property/casualty subsidiaries on a GAAP basis for 1993, 1994, 1995 and 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993
-------- -------- -------- ------
(in thousands)
<S> <C> <C> <C> <C>
Reserve for unpaid losses and
loss adjustment expense..................... $386,425 $357,334 $344,824 $353,939
========
Liability as of:
One year later.............................. 351,684 327,283 323,996
Two years later............................. 332,821 322,883
--------
Three years later........................... 332,771
--------
Cumulative deficiency (excess)............... ( 5,650) ( 12,003) ( 21,168)
======= ======= =======
Cumulative amount of liability
paid through:
One year later............................. $132,649 $134,044 $140,667
======== ======== ========
Two years later............................ $200,024 $214,818
======== ========
Three years later.......................... $247,339
========
</TABLE>
See Note 7 of the Notes to Consolidated Financial Statements
contained in the Annual Report page 32 for discussion of the development of such
reserves and activity contained in the unpaid loss and loss adjustment expense
reserves for the three years ended December 31, 1996, 1995 and 1994.
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Reinsurance
Effective January 1, 1994, the insurers managed by the Company
have discontinued all ceded reinsurance treaties, other than with affiliated
insurers, due to the strong surplus position of the insurers managed by the
Company, the cost of reinsurance and the low ratio of the premium writings of
the insurers managed by the Company to their surplus. The Company does not
believe this discontinuance of reinsurance treaties will have a material adverse
effect, over the long-term, on the results of operations of the insurance
companies managed by the Company because of the strong surplus positions of the
companies, the cost savings to be realized from the discontinuance of the
reinsurance treaties and the low ratio of writings to surplus of those
companies. However, the absence of such treaties could have an adverse effect on
the results of operations of the insurance companies managed by the Company in a
given year, if the frequency or severity of claims were substantially higher
than historical averages because of an unusual event during a short-term period.
Although the Company experienced significant winter storm losses in 1996 and
1994, the Company would not have recognized substantial recoveries from these
discontinued treaties had they been in effect during the year. The insurers
managed by the Company continue to maintain facultative reinsurance on certain
individual property/casualty risks.
Effective January 1, 1997, Erie Insurance Company and Erie
Insurance Company of New York placed in effect an all lines aggregate excess of
loss reinsurance agreement with the Exchange that supersedes the prior
catastrophe excess of loss reinsurance agreement between the parties. Under the
new agreement, Erie Insurance Company and Erie Insurance Company of New York
reinsure their net retained share of the intercompany reinsurance pool such that
once Erie Insurance Company and Erie Insurance Company of New York have
sustained ultimate net losses that exceed an amount equal to 72.5 percent of
Erie Insurance Company and Erie Insurance Company of New York's net premiums
earned, the Exchange will be liable for 95 percent of the amount of such excess
up to but not exceeding an amount equal to 95 percent of 15 percent of Erie
Insurance Company and Erie Insurance Company of New York's net premiums earned.
Losses equal to 5 percent of the net ultimate net loss in excess of the
retention under the contract are retained net by Erie Insurance Company and Erie
Insurance Company of New York. The annual premium for this reinsurance treaty is
1.01 percent of the net premiums earned by Erie Insurance Company and Erie
Insurance Company of New York during the term of this agreement subject to a
minimum premium of $800,000. This reinsurance treaty is excluded from the
intercompany reinsurance pooling agreement. This reinsurance agreement replaces
the earlier reinsurance agreements between the Company and Erie Insurance
Company and Erie Insurance Company of New York, which are described below.
In 1995 and 1996, Erie Insurance Company of New York had in effect
a property catastrophe excess of loss reinsurance agreement with the Exchange
whereby Erie Insurance Company of New York reinsures its net retained share of
the intercompany reinsurance pool such that once Erie Insurance Company of New
York has sustained an ultimate net loss of $250,000 by reason of its .5 percent
share of the results of the intercompany reinsurance pool, the Exchange was
liable for the amount of the ultimate net loss for the Company's
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net retained share of the intercompany reinsurance pool in excess of $250,000
for a limit of liability to the Exchange of $2,250,000 for each occurrence. The
annual premium for this reinsurance treaty with the Exchange was $150,000 in
1996. This reinsurance treaty was excluded from the intercompany reinsurance
pooling agreement.
In 1994, 1995 and 1996, Erie Insurance Company had in effect a
property catastrophe excess of loss reinsurance agreement with the Exchange
whereby Erie Insurance Company reinsured its net retained share of the
intercompany reinsurance pool such that once Erie Insurance Company has
sustained an ultimate net loss of $10,000,000 by reason of its 5 percent share
of the results of the intercompany reinsurance pool, the Exchange was liable for
the amount of the ultimate net loss for the Company's net retained share of the
intercompany reinsurance pool in excess of $10,000,000 for a limit of liability
to the Exchange of $25,000,000 for each occurrence. The annual premium for this
reinsurance treaty with the Exchange was $274,170 in 1996. This reinsurance
treaty was excluded from the intercompany reinsurance pooling agreement.
See the chart on the following page for information concerning
inter-company reinsurance among the property/casualty insurers managed by the
Company.
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Erie Insurance Group
Inter-Company Reinsurance Chart
As of December 31, 1996
Source of Business:
The Erie Insurance Company, Erie Insurance Company of New York, Flagship City
Insurance Company and Erie Insurance Porperty & Casualty Company cede 100% of
their business to the Erie Insurance Exchange. This is considered the group's
Intercompany Reinsurance pool of business.
Allocation of Business:
The Erie Insurance Exchange then retrocedes 5% of the pool to the Erie Insurance
Company and .5% of the pool to the Erie Insurance Company of New York. The
Erie Insurance Exchange retains the remaining 94.5% of the pool.
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Competition
The property/casualty insurance industry is extremely competitive
on the basis of both price and service. There are numerous companies competing
for this business in the geographic areas where Erie Insurance Group operates,
many of which are substantially larger and have greater financial resources than
Erie Insurance Group. Competition may take the form of lower prices, broader
coverage, greater product flexibility or higher quality services. In addition,
because the insurance products of Erie Insurance Group are marketed exclusively
through independent insurance agencies, most of which represent more than one
company, Erie Insurance Group faces competition to retain qualified independent
agencies and competes for business in each agency.
Regulation
Government Regulation
The property/casualty insurers managed by the Company are subject
to supervision and regulation in the states in which they transact business. The
primary purpose of such supervision and regulation is the protection of
policyholders. The extent of such regulation varies, but generally derives from
state statutes which delegate regulatory, supervisory and administrative
authority to state insurance departments. Accordingly, the authority of the
state insurance departments includes the establishment of standards of solvency
which must be met and maintained by insurers, the licensing to do business of
insurers and agents, the nature of the limitations on investments, premium rates
for property/casualty insurance, the provisions which insurers must make for
current losses and future liabilities, the deposit of securities for the benefit
of policyholders, the approval of policy forms, notice requirements for the
cancellation of policies and the approval of certain changes in control. State
insurance departments also conduct periodic examinations of the affairs of
insurance companies and require the filing of annual and other reports relating
to the financial condition of insurance companies.
The states in which the property/casualty insurers managed by the
Company operate have guaranty fund laws under which insurers doing business in
such states can be assessed on the basis of premiums written by the insurer in
that state in order to fund policyholder liabilities of insolvent insurance
companies. Under these laws in general, an insurer is subject to assessments,
depending upon its market share of a given line of business, to assist in the
payment of policyholder claims against insolvent insurers. The property/
casualty insurers managed by the Company have made accruals for their portion of
assessments related to such insolvencies based upon the most current information
furnished by the guaranty associations. During the five years ended December 31,
1996, the amount of such insolvency assessments paid by the property/casualty
insurers managed by the Company was not material.
The amount of dividends that the Company's Pennsylvania-domiciled
property/casualty insurance subsidiaries, Erie Insurance Co. and Erie P&C, can
pay without the prior approval of the Pennsylvania Insurance Commissioner is
limited by Pennsylvania regulations to not more than the greater of: (a) ten
14
<PAGE>
percent of its surplus as to policyholders reported on its last annual
statement, or (b) the net income as reported on its last annual statement. The
amount of dividends that the Company's New York-domiciled property/casualty
subsidiary, Erie NY, can pay without the prior approval of the New York
Superintendent of Insurance is limited to the lesser of: (a) ten percent of its
surplus as to policyholders as reported on its last annual statement, or (b) one
hundred percent of its adjusted net investment income during such period. As of
December 31, 1996, amounts available for payment of dividends to the Company in
1997 without the prior approval of the Pennsylvania Insurance Commissioner were
$4,840,332 from Erie Insurance Co. and $471,888 from Erie P&C. The amount
available without prior approval of the New York Superintendent of Insurance was
$688,107 as of December 31, 1996. No dividends were paid to the Company by its
property/casualty insurance subsidiaries in 1996. See also Note 12 of the Notes
to Consolidated Financial Statements contained in the Annual Report, page 33.
15
<PAGE>
Financial Regulation
The Company's property/casualty insurance subsidiaries are
required to file financial statements prepared using SAP with state regulatory
authorities. SAP differs from GAAP primarily in the recognition of revenue and
expense. The adjustments necessary to reconcile the Company's property/ casualty
insurance subsidiaries' net income and shareholders' equity determined by using
SAP to net income and shareholders' equity determined in accordance with GAAP
are as follows:
<TABLE>
<CAPTION>
Net Income
Year Ended
December 31,
-------------------------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
SAP amounts.................................. $ 1,806 $ 4,345
Adjustments:
Deferred policy acquisition
costs..................................... 529 1,344
Deferred income taxes...................... 677 355
Salvage and subrogation.................... (104) 614
Incurred premium adjustment................ (529) (1,344)
Amortization of goodwill................... (619) (104)
Consolidating eliminations
and adjustments........................... (1) 3
------- -------
GAAP amounts................................. $ 1,759 $ 5,213
======= =======
</TABLE>
<TABLE>
<CAPTION>
Shareholders' Equity
As of December 31,
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
SAP amounts.................................. $53,154 $51,179 $46,716
Adjustments:
Deferred policy acquisition
costs..................................... 9,541 9,012 7,668
Deferred income taxes...................... 4,478 3,847 3,738
Salvage and subrogation.................... 2,863 2,967 2,353
Statutory reserves......................... 1 5
Incurred premium adjustment................ (9,541) (9,012) (7,668)
Unrealized gains (losses)
under FAS115, net of
deferred taxes............................ 3,005 4,584 (1,384)
Amortization of goodwill................... (619) (104)
Consolidating eliminations
and adjustments........................... 50 192 149
------- ------- -------
GAAP amounts................................. $62,931 $62,666 $51,577
======= ======= =======
</TABLE>
16
<PAGE>
In 1994, Pennsylvania imposed minimum risk-based capital
requirements for property/casualty insurance companies as developed by the NAIC.
Risk-based capital is a method of measuring the minimum amount of capital
appropriate for an insurance company to support its overall business operations
in consideration of its size and risk profile. The formulas for determining the
amount of risk-based capital specify various weighing factors that are applied
to financial balances or various levels of activity based on the perceived
degree of risk. Regulatory compliance is determined by the ratio of the
Company's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level risk-based capital, as defined by the NAIC. The NAIC
provides for four different levels of regulatory action with respect to
statutory annual statements for the calendar year 1994 and thereafter. The NAIC
levels and ratios are as follows:
Ratio of Total Adjusted Capital to
NAIC Required Authorized Control Level Risk-Based
Regulatory Event Capital (Less Than or Equal To)
Company Action Level 2 (or 2.5 with negative trends)
Regulatory Action Level 1.5
Authorized Control Level 1
Mandatory Control Level .7
At the "Company Action Level", the insurer must submit a
comprehensive plan to the regulatory authority which discusses proposed
corrective actions to improve its capital position. At the "Regulatory Action
Level", the regulatory authority will perform a special examination of the
insurer and issue an order specifying corrective actions that must be taken. At
the "Authorized Control Level", the regulatory authority is authorized (although
not mandated) to take regulatory control of the insurer. At the "Mandatory
Control Level", the regulatory authority must take regulatory control of the
insurer. Regulatory control may lead to rehabilitation or liquidation of an
insurer.
Calculations using the NAIC formula and the Company's property/
casualty insurance subsidiaries' statutory financial statements as of December
31, 1996 indicate that the ratio of total adjusted capital of such companies to
their authorized control level risk-based capital requirements was substantially
above its requirements as such ratio of all companies was in excess of four to
one (4:1) at December 31, 1996.
Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995: Statements contained herein expressing the beliefs of
management such as those expressed regarding the adequacy of reserves for future
claim payments, the effect of the discontinuance of reinsurance treaties, and
the resolution of legal proceedings and the other statements contained herein
which are not historical facts, are forward looking statements that involve
risks and uncertainties. These risks and uncertainties include but are not
limited to: legislature, regulatory and judicial changes and pronouncements, the
impact of competitive products and pricing, product development, geographic
spread of risk, weather and weather-related events, other types of catastrophic
events, investment increases and decreases and technological difficulties and
advancements.
17
<PAGE>
Item 2. Properties
The Company and its subsidiaries, the Exchange and its
subsidiaries and EFL share a corporate home office complex in Erie,
Pennsylvania. The complex contains 545,880 square feet, and is owned by the
Exchange. At December 31, 1996, the Company also operated 19 field offices in
eight states. Of these offices, 15 provide both agency support and claims
services and are referred to as "Branch Offices", while the remaining four
provide only claims services and are considered "Claims Offices".
The Company owns three of its field offices. Three other offices
are owned by and leased from the Exchange. The rent for the home office and the
three field offices paid to the Exchange totaled $10,949,306 in 1996. One office
is owned by and leased from EFL at an annual rental in 1996 of $423,120. The
remaining ten offices are leased from various unaffiliated parties at an
aggregate annual rental in 1996 of approximately $1,061,731. The Company is
reimbursed by its affiliates for a percentage of the rent for office space used
by its affiliates, which reimbursement was approximately 51% in 1996.
Item 3. Legal Proceedings
The Registrant is not involved in any material pending legal
proceedings other than ordinary routine litigation incidental to its business.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the fourth quarter of 1996.
18
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Reference is made to "Market Price of and Dividends on the
Common Equity and Related Shareholder Matters" on page 36 of the Annual Report
for the year ended December 31, 1996 for information regarding the high and low
sales prices for the registrant's stock and additional information regarding
such stock of the Company.
As of February 28, 1997, there were approximately 4,586
beneficial shareholders of the Company's Class A non-voting common stock and 28
beneficial shareholders of the Company's Class B voting common stock.
Item 6. Selected Consolidated Financial Data
Reference is made to "Selected Consolidated Financial Data" on page
9 of the Annual Report for the year ended December 31, 1996.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 10 through 21 of the
Annual Report for the year ended December 31, 1996.
Item 8. Financial Statements and Supplementary Data
Reference is made to the "Consolidated Financial Statements"
included on pages 24 through 27 and to the "Quarterly Financial Data" contained
in the Notes to Consolidated Financial Statements on page 33 of the Annual
Report for the year ended December 31, 1996.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosures
None.
19
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) The answer to this item, with respect to directors of the
Registrant, is incorporated by reference to pages 6 through 10 of the Company's
proxy statement relating to the annual meeting of shareholders to be held on
April 29, 1997.
(b) Certain information as to the executive officers of the Company
is as follows:
<TABLE>
<CAPTION>
Age Principal Occupation for Past
as of Five Years and Positions with
Name 12/31/96 Erie Insurance Group
<S> <C> <C>
President & Chief Executive Officer
Stephen A. Milne 48 President, Chief Executive Officer and a
Director of the Company, EFL and Erie
Insurance Co. since February 12, 1996 and
President and Chief Executive Officer of
Flagship, Erie P&C, and Erie NY since March
19, 1996; Executive Vice President -
Insurance Operations of the Company, Erie
Insurance Co., Flagship, Erie P&C, and Erie
NY January 11, 1994 - February 12, 1996.
Owner, Bennett-Damascus Insurance Agency
March 1991-December 31, 1993; Senior Vice
President-Agency Division, the Company,
EFL, and Erie Insurance Co. 1988 - 1991;
Director Flagship and Erie P&C 1996 -
present; Director, Erie NY 1994 - present.
Executive Vice Presidents
Thomas M. Sider 47 Executive Vice President and Chief
Financial Officer since 1993; Senior Vice
President and Controller 1982 - 1993
Jan R. Van Gorder, Esq. 49 Senior Executive Vice President, Secretary
and General Counsel of the Company, EFL and
Erie Insurance Co. since 1990, and of
Flagship and Erie P&C since 1992 and 1993,
respectively, and of Erie NY since April,
1994; Senior Vice President, Secretary and
General Counsel of the Company, EFL and
Erie Insurance Co. for more than five years
prior thereto; Director, the Company, EFL,
Erie Insurance Co., Erie NY, Flagship and
Erie P&C.
Senior Vice Presidents
John C. Bender 51 Senior Vice President since 1992; Vice
President 1983 - 1992
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Age Principal Occupation for Past
as of Five Years and Positions with
Name 12/31/96 Erie Insurance Group
<S> <C> <C>
Eugene C. Connell 42 Senior Vice President since 1990; Vice
President 1988 - 1990
Philip A. Garcia 40 Senior Vice President and Controller since
1993; Vice President 1988 - 1993
Dennis M. Geib 53 Senior Vice President since 1990; Vice
President 1986 - 1990
Elaine A. Lamm 58 Senior Vice President since 1990; Vice
President 1988 - 1990
George R. Lucore 46 Senior Vice President since March, 1995.
Regional Vice President 1993 - March 1995;
Assistant Vice President 1988 - 1993
Jeffrey A. Ludrof 37 Senior Vice President since 1994; Regional
Vice President 1993-1994; Assistant Vice
President 1989-1993
David B. Miller 42 Senior Vice President since August 1996;
Independent Insurance Agent 1991 - 1996;
Vice President 1989 - 1991
James R. Roehm 48 Senior Vice President since 1991; Vice
President 1987 - 1991
Douglas F. Ziegler 46 Senior Vice President, Treasurer and Chief
Investment Officer since 1993; Vice
President and Managing Director of Treasury
Administration 1988 - 1993
Regional Vice Presidents
B. Crawford Banks 60 Regional Vice President since 1993; Vice
President 1988 - 1993
Douglas N. Fitzgerald 40 Regional Vice President since 1993; Vice
President 1987 - 1993
Terry L. Hamman 42 Regional Vice President since May, 1995;
Assistant Vice President 1993 - May, 1995
Managing Director
Michael S. Zavasky 44 Vice President and Managing Director of
Reinsurance since 1990; Vice President
1988 - 1990
</TABLE>
21
<PAGE>
Item 11. Executive Compensation
The answer to this item is incorporated by reference to pages 12
through 20 of the Company's proxy statement dated April 1, 1997 relating to the
annual meeting of shareholders to be held on April 29, 1997, except for the
Performance Graph, which has not been incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The answer to this item is incorporated by reference to pages 3
through 5 of the Company's proxy dated April 1, 1997 relating to the annual
meeting of shareholders to be held on April 29, 1997.
Item 13. Certain Relationships and Related Transactions
Since the formation of the Company and the Exchange in 1925, the
Company, as the attorney-in-fact appointed by the policyholders of the Exchange,
has managed the property/casualty insurance operations of the Exchange. The
Company's operations are interrelated with the operations of the Exchange, and
the Company's results of operations are largely dependent on the success of the
Exchange.
The Company believes that its various transactions with the
Exchange and EFL, which are summarized herein, are fair and reasonable and have
been on terms no less favorable to the Company than the terms that could have
been negotiated with an independent third party.
Pursuant to the Subscribers Agreement by which the Company
serves as attorney-in-fact for the Exchange, the Company's Board of Directors
establishes periodically an annual management fee for the Company's services as
attorney-in-fact which may not exceed 25% of the direct and assumed written
premiums of the Exchange. The Company's Board of Directors has the ability to
establish the percentage charged at its discretion within these parameters. Such
percentage was 23% from July 1, 1990 to June 30, 1991 and was 25% from July 1,
1991 through March 31, 1995. Such percentage was 24.5% as decided by the Board
of Directors beginning April 1, 1995 through March 31, 1996. The Board elected
to change such percentage to 24% for the period April 1, 1996 through December
31, 1996. Further, the Board voted to maintain the 24% management fee rate for
all of 1997. The activities performed by the Company as attorney-in-fact for the
Exchange include insurance underwriting, policy issuance, policy exchange and
cancellation, processing of invoices for premiums, the establishing and
monitoring of loss reserves, oversight of reinsurance transactions, investment
management, payment of insurance commissions to insurance agents, compliance
with rules and regulations of supervisory authorities and monitoring of legal
affairs. The Company is obligated to conduct these activities at its own
expense, and realizes profits or losses depending upon whether its costs of
providing such services is less than the amount it receives from the Exchange,
in which case the Company has a profit from acting as attorney-in-fact, or
greater, in which case the Company has a loss from such activities. The
Exchange, however, bears the financial responsibility for the payment of
insurance losses, loss adjustment expenses, investment expenses, legal expenses,
assessments, damages, licenses, fees, establishment of reserves and surplus and
taxes. For the five years ended December 31, 1996, 1995, 1994, 1993 and 1992 the
amounts paid by the Exchange to the Company were $447,973,516, $424,404,971,
$407,275,573, $375,038,960 and $337,551,358, respectively.
22
<PAGE>
The Company receives a fee of 7 percent of voluntary reinsurance
premiums assumed from non-affiliated insurers as compensation for the management
and administration of this business on behalf of the Exchange. Prior to the
service agreement on non-affiliated assumed reinsurance, which was effective
January 1, 1995, the Company received a management fee based on premiums written
and was responsible for the payment of brokerage commissions. Service agreement
revenue from the management of non-affiliated assumed reinsurance business grew
15.1 percent to $5,069,140 in 1996 from $4,401,232 in 1995.
The Company's subsidiary, Erie Insurance Co., has participated
in a reinsurance pool with the Exchange since January 1, 1992 whereby Erie
Insurance Co. transfers, or "cedes" to the Exchange all of its direct premiums
written and the Exchange retrocedes to Erie Insurance Co. a 5% participation of
the pooled business, which also includes all of the property and casualty
insurance business of the Exchange. All premiums, losses, loss adjustment
expenses and other underwriting expenses are prorated among the parties on the
basis of their participation in the pool. The pooling agreement does not legally
discharge Erie Insurance Co. from its primary liability for the full amount of
the policies ceded. However, it makes the Exchange liable to Erie Insurance Co.
to the extent of the business ceded. The pooling agreement provides that it may
be amended or terminated at the end of any calendar year by agreement of the
parties. Effective January 1, 1995, the pooling agreement was amended to provide
that the Exchange's share of the pool be reduced from 95% to 94.5% and that Erie
Insurance Co. and Erie NY have a 5.5% share of the pool. Prior to January 1,
1992, all property/casualty insurance business of Erie Insurance Co. was
reinsured 100% with the Exchange under the terms of a quota share reinsurance
treaty. Erie P&C and Flagship, a subsidiary of the Exchange, reinsure 100% of
their property/casualty insurance business with the Exchange under the terms of
quota share reinsurance treaties with the Exchange.
The Company and the Exchange periodically purchase annuities
from EFL for use in connection with the structured settlement of insurance
claims. The Company's share of such purchases, through its subsidiaries, Erie
Insurance Co. and Erie NY, amounted to $742,772, $1,235,722 and $583,263 for the
years ended December 31, 1996, 1995 and 1994, respectively, and the reserves
held by EFL at December 31, 1996 for such annuities were approximately
$5,175,280. In addition, the Erie Insurance Group Retirement Plan for Employees
has, from time to time, purchased individual annuities from EFL for each retired
vested employee or beneficiary receiving benefits. Such purchases amounted to
$4,894,042, $6,024,125 and $8,880,714 for the years ended December 31, 1996,
1995 and 1994, respectively. The annuities purchased in 1994 included annuities
for those individuals that retired from the Company or its subsidiaries in 1993
and 1994. The reserves held by EFL for all such annuities were approximately
$32,812,000 at December 31, 1996.
On December 29, 1995, EFL issued a surplus note to the Company
in return for a cash (or cash equivalent) 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 the
prior approval of the Pennsylvania Insurance Commissioner. Interest on the
surplus note is scheduled to be paid quarterly. The note will be payable on
demand on or after December 31, 2005. Payment of principal and/or interest is
subordinated to payment of all other liabilities of EFL. During 1996, EFL
received approval for the payment of interest totaling $967,500, which was paid
to the Company by EFL at December 31, 1996.
23
<PAGE>
Director and former CEO and President, and previous Chief
Investment Officer of the Erie Insurance Group of Companies, John M. Petersen,
who retired as an employee of the Company on December 31, 1995, entered into a
consulting arrangement with the Company effective January 2, 1996. Under the
terms of the arrangement, the Company engaged Mr. Petersen as a consultant to
furnish the Company and its pension trust, the Exchange, and EFL, with
investment services with respect to their investments in common stock. As
compensation for services to be rendered by Mr. Petersen, a fee of .15 of 1
percent, on an annualized basis, of the total fair market value of the common
stock under management, will be paid to Mr. Petersen. The Company also will pay
for all necessary and reasonable expenses related to Mr. Petersen's consulting
services performed under this arrangement. The amount paid Mr. Petersen pursuant
to this arrangement in 1996 was $2,078,758.
Directors Black and Borneman are officers and principal
shareholders of insurance agencies which receive insurance commissions in the
ordinary course of business from the insurance companies managed by the Company
in accordance with such companies' standard commission schedules and agents'
contracts.
Reference is also made to Item 2 hereof.
24
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial statements, financial statement schedules and exhibits
filed:
(1) Consolidated Financial Statements
Page*
Erie Indemnity Company and Subsidiaries:
Report of Independent Auditors.................................... 23
Consolidated Statements of Operations
for the three years ended
December 31, 1996, 1995 and 1994.............................. 24
Consolidated Statements of Financial
Position as of December 31, 1996
and 1995........................................................ 25
Consolidated Statements of Cash Flows
for the three years ended
December 31, 1996, 1995 and 1994.............................. 26
Consolidated Statements of Shareholders'
Equity for the three years ended
December 31, 1996, 1995 and 1994.............................. 27
Notes to Consolidated Financial Statements........................ 28
(2) Financial Statement Schedules
Page
Erie Indemnity Company and Subsidiaries:
Report of Independent Auditors on Schedules....................... 31
Schedule I. Summary of Investments - Other
than Investments in Related
Parties........................................ 32
Schedule IV. Reinsurance......................................... 33
Schedule VI. Supplemental Information
Concerning Property/Casualty
Insurance Operations........................... 34
All other schedules have been omitted since they are not required,
not applicable or the information is included in the financial statements or
notes thereto.
* Refers to the respective page of Erie Indemnity Company's 1996 Annual Report
to Shareholders. The Consolidated Financial Statements and Notes to Consolidated
Financial Statements and Auditors' Report thereon on pages 23 to 33 are
incorporated by reference. With the exception of the portions of such Annual
Report specifically incorporated by reference in this Item and Items 1, 5, 6, 7
and 8, such Annual Report shall not be deemed filed as part of this Form 10-K
Report or otherwise subject to the liabilities of Section 18 of the Securities
Exchange Act of 1934.
25
<PAGE>
(3) Exhibits
Exhibit
Number Description of Exhibit
3.1* Articles of Incorporation of Registrant
3.2** Amended and Restated By-laws of Registrant
4A* Form of Registrant's Class A Common
Stock certificate
4B* Form of Registrant's Class B Common
Stock certificate
10.1*** Retirement Plan for Employees of Erie
Insurance Group, effective as of
December 31, 1989
10.2*** Restatement of Supplemental Retirement
Plan for Certain Members of the Erie
Insurance Group Retirement Plan for
Employees, effective as of January 1,
1990
10.3*** Deferred Compensation Plan of
Registrant
10.4*** Retirement Plan for Outside Directors
of Registrant, effective as of
January 1, 1991
10.5*** Employee Savings Plan of Erie Insurance
Group, effective as of April 1, 1992
10.6*** Amendment to Employee Savings Plan of
Erie Insurance Group
10.7*** Supplemental 401(k) Plan of Erie Insurance
Group effective as of Janaury 1, 1994
10.8*** Service Agreement dated January 1, 1989
between Registrant and Erie Insurance
Company
10.9*** Service Agreement dated June 21, 1993
between Registrant and Erie Insurance
Property & Casualty Company
10.10*** Service Agreement dated June 21, 1993
between Registrant and Flagship City
Insurance Company
10.11*** Reinsurance Pooling Agreement dated
January 1, 1992 between Erie Insurance
Company and Erie Insurance Exchange
26
<PAGE>
Exhibit
Number Description of Exhibit
10.12*** Form of Subscriber's Agreement whereby
policyholders of Erie Insurance Exchange
appoint Registrant as their
attorney-in-fact
10.13* Stock Redemption Plan of Registrant dated
December 14, 1989
10.14* Stock Purchase Agreement dated December 20,
1991, between Registrant and Erie Insurance
Exchange relating to the capital stock of
Erie Insurance Company
10.15** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1,
1994 between Erie Insurance Exchange
and Erie Insurance Co.
10.16**** Stock Redemption Plan of Registrant as
restated December 12, 1995
10.17**** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1, 1995
between Erie Insurance Exchange and Erie
Insurance Company of New York
10.18**** Service Agreement dated January 1, 1995
between Registrant and Erie Insurance
Company of New York
10.19***** Consulting Agreement for Investing Services
dated January 2, 1996 between Erie Indemnity
Company and John M. Petersen
10.20***** Agreement dated April 29, 1994 between Erie
Indemnity Company and Thomas M. Sider
10.21 Aggregate Excess of Loss Reinsurance Agreement
effective January 1, 1997 between Erie Insurance
Exchange, by and through its Attorney-in-Fact,
Erie Indemnity Company and Erie Insurance Company
and its wholly owned subsidiary Erie Insurance
Company of New York
11 Statement re computation of per share
earnings
13 1996 Annual Report to Security Holders.
Reference is made to the Annual Report
furnished to the Commission, herewith.
21 Subsidiaries of Registrant
27 Financial Data Schedule
28 Information from Reports Furnished to State
Insurance Regulatory Authorities
27
<PAGE>
Exhibit
Number Description of Exhibit
28# Analysis of Losses and Loss Expenses --
Schedule P of the 1996 Annual Statement of
Erie Insurance Company
28# Analysis of Losses and Loss Expenses --
Schedule P of the 1996 Annual Statement of
Erie Insurance Property & Casualty Company
28# Analysis of Losses and Loss Expenses --
Schedule P of the 1996 Annual Statement of
Erie Insurance Company of New York
* Such exhibit is incorporated by reference to the like numbered exhibit
in Registrant's Form 10 Registration Statement Number 0-24000 filed
with the Securities and Exchange Commission on May 2, 1994.
** Such exhibit is incorporated by reference to the like numbered exhibit
in Registrant's Form 10/A Registration Statement Number 0-24000 filed
with the Securities and Exchange Commission on August 3, 1994.
*** Such exhibit is incorporated by reference to the like titled but
renumbered exhibit in Registrant's Form 10 Registration Statement
Number 0-24000 filed with the Securities and Exchange Commission on May
2, 1994.
**** Such exhibit is incorporated by reference to the like titled exhibit in
the Registrant's Form 10-K annual report for the year ended December
31, 1995 that was filed with the Commission on March 25, 1996.
***** Such exhibit is incorporated by reference to the like titled exhibit in
the Registrant's Form 10-K/A amended annual report for the year ended
December 31, 1995 that was filed with the Commission on April 25, 1996.
# Such exhibit is being filed under FORM SE pursuant to Rule 202 of
Regulation S-T.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1996, Registrant did not file any
reports on Form 8-K.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 11, 1997 By: /s/ F. William Hirt
F. William Hirt, Chairman of the Board
By: /s/ Stephen A. Milne
Stephen A. Milne, President & CEO
By: /s/ Thomas M. Sider
Thomas M. Sider, Executive Vice President
& Chief Financial Officer
By: /s/ Philip A. Garcia
Philip A. Garcia, Senior Vice President
& Controller
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Date: March 11, 1997 By: /s/ Peter B. Bartlett
Peter B. Bartlett, Director
Date: March 11, 1997 By: /s/ Samuel P. Black, Jr.
Samuel P. Black, Jr., Director
Date: March 11, 1997 By: /s/ J. Ralph Borneman, Jr.
J. Ralph Borneman, Jr., Director
Date: March 11, 1997 By: /s/ Patricia A. Goldman
Patricia A. Goldman, Director
Date: March 11, 1997 By: /s/ Susan Hirt Hagen
Susan Hirt Hagen, Director
Date: March 11, 1997 By: /s/ Thomas B. Hagen
Thomas B. Hagen, Director
29
<PAGE>
Date: March 11, 1997 By: /s/ F. William Hirt
F. William Hirt, Chairman of the Board
Date: March 11, 1997 By: /s/ Irvin H. Kochel
Dr. Irvin H. Kochel, Director
Date: March 11, 1997 By: /s/ Stephen A. Milne
Stephen A. Milne, Director
Date: March 11, 1997 By: /s/ Edmund J. Mehl
Edmund J. Mehl, Director
Date: March 11, 1997 By: /s/ John M. Petersen
John M. Petersen, Director
Date: March 11, 1997 By: /s/ Seth E. Schofield
Seth E. Schofield, Director
Date: March 11, 1997 By: /s/ Jan R. Van Gorder
Jan R. Van Gorder, Director, Sr. Executive
Vice President, Secretary & General
Counsel
Date: March 11, 1997 By: /s/ Harry H. Weil
Harry H. Weil, Director
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders
Erie Indemnity Company
We have audited the consolidated statements of financial position of Erie
Indemnity Company and subsidiaries (Company) as of December 31, 1996 and 1995
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996, as
contained in the 1996 annual report, incorporated by reference in the annual
report on Form 10-K for the year ended December 31, 1996. In connection with our
audits of the financial statements, we also have audited the financial statement
schedules, as listed in the accompanying index. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Erie Indemnity
Company and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ Brown Schwab Bergquist & Co.
Erie, Pennsylvania
February 18, 1997
31
<PAGE>
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
<TABLE>
<CAPTION>
December 31, 1996
Cost or Amount at which
Amortized Fair Shown in the
Type of Investment Cost Value Balance Sheet
(In Thousands)
<S> <C> <C> <C>
Available-for-Sale Securities
Common Stocks
U.S. Industrial and
Miscellaneous $ 37,003 $ 50,045 $ 50,045
Non-Redeemable Preferred Stocks
Public Utilities 10,652 10,821 10,821
U.S. Banks, Trusts and
Insurance Companies 44,106 45,868 45,868
U.S. Industrial and
Miscellaneous 24,309 24,884 24,884
Fixed Maturities
U.S. Treasuries 12,000 12,140 12,140
Foreign Governments 1,988 2,007 2,007
Obligations of State and
Political Subdivisions 28,127 29,408 29,408
Special Revenue 136,950 142,209 142,209
Public Utilities 7,238 7,380 7,380
U.S. Industrial and
Miscellaneous 114,790 117,032 117,032
-------------------------------------------------
Total Available-for-Sale
Securities $ 417,163 $ 441,794 $ 441,794
-------------------------------------------------
Real Estate Mortgage Loans $ 7,294 $ 7,294 $ 7,294
Other Invested Assets 7,010 7,010 7,010
-------------------------------------------------
Total Investments $ 431,467 $ 456,098 $ 456,098
-------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE IV - REINSURANCE
Percentage
Ceded to Assumed of Amount
Gross Other From Other Net Assumed
Amount Companies Companies Amount to Net
<S> <C> <C> <C> <C> <C>
December 31, 1996
Premiums for the year
Property and Liability Insurance $321,735,580 $324,617,961 $104,392,140 $101,509,759 102.8%
------------------------------------------------------------------------------------------------
December 31, 1995
Premiums for the year
Property and Liability Insurance $289,801,421 $293,132,397 $ 96,205,277 $ 92,874,301 103.6%
------------------------------------------------------------------------------------------------
December 31, 1994
Premiums for the year
Property and Liability Insurance $266,091,231 $269,153,771 $ 81,138,460 $ 78,075,920 103.9%
------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
Deferred
Policy Reserves for Discount, if
Acquisition Unpaid Loss & LAE any deducted Unearned
Costs Expenses from reserves Premiums
<S> <C> <C> <C> <C>
@ 12/31/96
Consolidated P&C Entities $ 9,540,998 $386,425,019 $ 0 $216,938,069
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
----------------------------------------------------------------------------------
Total $ 9,540,998 $386,425,019 $ 0 $216,938,069
----------------------------------------------------------------------------------
@ 12/31/95
Consolidated P&C Entities $ 9,011,734 $357,334,127 $ 0 $202,806,574
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
----------------------------------------------------------------------------------
Total $ 9,011,734 $357,334,127 $ 0 $202,806,574
----------------------------------------------------------------------------------
@ 12/31/94
Consolidated P&C Entities $ 7,667,652 $344,823,708 $ 0 $177,301,657
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
----------------------------------------------------------------------------------
Total $ 7,667,652 $344,823,708 $ 0 $177,301,657
----------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (CONTINUED)
Loss and Loss Adjustment Expense
Net Incurred Related to
Earned Investment (1) (2)
Premiums Income Current Year Prior Years
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
@ 12/31/96
Consolidated P&C Entities $101,509,759 $ 11,031,742 $ 85,311,000 $ (240,000)
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------
Total $101,509,759 $ 11,031,742 $ 85,311,000 $ (240,000)
---------------------------------------------------------------------------
@ 12/31/95
Consolidated P&C Entities $ 92,874,301 $ 10,342,751 $ 73,145,000 $ (2,210,000)
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------
Total $ 92,874,301 $ 10,342,751 $ 73,145,000 $ (2,210,000)
---------------------------------------------------------------------------
@ 12/31/94
Consolidated P&C Entities $ 78,075,920 $ 8,033,792 $ 68,694,000 $ (4,767,000)
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------
Total $ 78,075,920 $ 8,033,792 $ 68,694,000 $ (4,767,000)
---------------------------------------------------------------------------
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (CONTINUED)
Amortization
of Deferred Net
Policy Loss & LAE Premiums
Acquistion Costs Paid Written
----------------------------------------------------------
<S> <C> <C> <C>
@ 12/31/96
Consolidated P&C Entities $ 18,909,000 $ 79,208,000 $105,020,049
Unconsolidated P&C Entities 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0
----------------------------------------------------------
Total $ 18,909,000 $ 79,208,000 $105,020,049
----------------------------------------------------------
@ 12/31/95
Consolidated P&C Entities $ 17,041,000 $ 60,827,000 $100,561,533
Unconsolidated P&C Entities 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0
----------------------------------------------------------
Total $ 17,041,000 $ 60,827,000 $100,561,533
----------------------------------------------------------
@ 12/31/94
Consolidated P&C Entities $ 14,908,000 $ 60,401,000 $ 81,369,411
Unconsolidated P&C Entities 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0
----------------------------------------------------------
Total $ 14,908,000 $ 60,401,000 $ 81,369,411
----------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
3.1* Articles of Incorporation of Registrant
3.2** Amended and Restated By-laws of Registrant
4A* Form of Registrant's Class A Common
Stock certificate
4B* Form of Registrant's Class B Common
Stock certificate
10.1*** Retirement Plan for Employees of Erie
Insurance Group, effective as of
December 31, 1989
10.2*** Restatement of Supplemental Retirement
Plan for Certain Members of the Erie
Insurance Group Retirement Plan for
Employees, effective as of January 1,
1990
10.3*** Deferred Compensation Plan of
Registrant
10.4*** Retirement Plan for Outside Directors
of Registrant, effective as of
January 1, 1991
10.5*** Employee Savings Plan of Erie Insurance
Group, effective as of April 1, 1992
10.6*** Amendment to Employee Savings Plan of
Erie Insurance Group
10.7*** Supplemental 401(k) Plan of Erie Insurance
Group effective as of Janaury 1, 1994
10.8*** Service Agreement dated January 1, 1989
between Registrant and Erie Insurance
Company
10.9*** Service Agreement dated June 21, 1993
between Registrant and Erie Insurance
Property & Casualty Company
10.10*** Service Agreement dated June 21, 1993
between Registrant and Flagship City
Insurance Company
10.11*** Reinsurance Pooling Agreement dated
January 1, 1992 between Erie Insurance
Company and Erie Insurance Exchange
36
<PAGE>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
10.12*** Form of Subscriber's Agreement whereby
policyholders of Erie Insurance Exchange
appoint Registrant as their
attorney-in-fact
10.13* Stock Redemption Plan of Registrant dated
December 14, 1989
10.14* Stock Purchase Agreement dated December 20,
1991, between Registrant and Erie Insurance
Exchange relating to the capital stock of
Erie Insurance Company
10.15** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1,
1994 between Erie Insurance Exchange
and Erie Insurance Co.
10.16**** Stock Redemption Plan of Registrant
restated as of December 12, 1995
10.17**** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1, 1995
between Erie Insurance Exchange and Erie
Insurance Company of New York
10.18**** Service Agreement dated January 1, 1995
between Registrant and Erie Insurance
Company of New York
10.19***** Consulting Agreement for Investing Services
dated January 2, 1996 between Erie Indemnity
Company and John M. Petersen
10.20***** Agreement dated April 29, 1994 between Erie
Indemnity Company and Thomas M. Sider
10.21 Aggregate Excess of Loss Reinsurance Agreement
effective January 1, 1997 between Erie Insurance
Exchange, by and through its Attorney-in-Fact,
Erie Indemnity Company and Erie Insurance Company
and its wholly owned subsidiary Erie Insurance
Company of New York
11 Statement re computation of per share
earnings
13 1996 Annual Report to Security Holders.
Reference is made to the Annual Report
furnished to the Commission, herewith.
21 Subsidiaries of Registrant
27 Financial Data Schedule
37
<PAGE>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
28 Information from Reports Furnished to State
Insurance Regulatory Authorities
28# Analysis of Losses and Loss Expenses --
Schedule P of the 1996 Annual Statement of
Erie Insurance Company
28# Analysis of Losses and Loss Expenses --
Schedule P of the 1996 Annual Statement of
Erie Insurance Property & Casualty Company
28# Analysis of Losses and Loss Expenses --
Schedule P of the 1996 Annual Statement of
Erie Insurance Company of New York
* Such exhibit is incorporated by reference to the like numbered exhibit
in Registrant's Form 10 Registration Statement Number 0-24000 filed
with the Securities and Exchange Commission on May 2, 1994.
** Such exhibit is incorporated by reference to the like numbered exhibit
in Registrant's Form 10/A Registration Statement Number 0-24000 filed
with the Securities and Exchange Commission on August 3, 1994.
*** Such exhibit is incorporated by reference to the like titled but
renumbered exhibit in Registrant's Form 10 Registration Statement
Number 0-24000 filed with the Securities and Exchange Commission on May
2, 1994.
**** Such exhibit is incorporated by reference to the like titled exhibit in
the Registrant's Form 10-K annual report for the year ended December
31, 1995 that was filed with the Commission on March 25, 1996.
***** Such exhibit is incorporated by reference to the like titled exhibit in
the Registrant's Form 10-K/A amended annual report for the year ended
December 31, 1995 that was filed with the Commission on April 25, 1996.
# Such exhibit is being filed under FORM SE pursuant to Rule 202 of
Regulation S-T.
38
<PAGE>
INCORPORATED BY REFERENCE, PAGE 9 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Years ended December 31
1996 1995 1994 1993 1992
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating Data:
Net revenues from management operations $127,429 $111,276 $96,328 $77,056 $77,752
Underwriting loss (11,579) (3,738) (8,250) (1,567) (4,835)
Revenue from investment operations 36,198 30,473 16,939 15,451 13,772
Income before income taxes and cumulative
effect of change in accounting principle 152,048 138,011 105,017 90,940 86,689
Income after taxes and before cumulative
effect of change in accounting principle 105,132 93,551 71,729 62,408 57,548
Net Income $105,132 $93,551 $71,729 $60,423 $57,548
Earnings per Share:
Income before cumulative effect of change
in accounting principle $1.41 $1.26 $0.96 $0.84 $0.77
Cumulative effect on prior years of change
in accounting principle -- -- -- (0.03) --
Net Income per Share $1.41 $1.26 $0.96 $0.81 $0.77
Balance Sheet Data:
Investments (1) $484,784 $360,555 $255,449 $216,442 $121,474
Receivables from Exchange and affiliate 478,304 451,778 433,109 468,463 534,120
Total assets (1) 1,150,639 1,022,432 869,531 817,191 771,667
Shareholders' equity 435,759 354,064 260,934 210,188 160,574
Book value per share (2) 5.86 4.76 3.51 2.83 2.16
Dividends declared per Class A share (2) $0.345 $0.28 $0.225 $0.17 $0.1375
Dividends declared per Class B share $51.75 $41.75 $33.75 $26.00 $20.625
<FN>
(1) Includes Investment in Erie Family Life Insurance Company.
(2) All per share data has been adjusted to reflect the three-for-one stock split of Class A Common Stock effective May 2, 1996.
</FN>
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGES 10 AND 11 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
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 24 to 33 as they contain
important information helpful in evaluating the Company's operating results and
financial condition. (Note: A glossary of certain terms used in this discussion
can be found on page 21, herein. The terms are italicized the first time they
appear in the text.)
Overview
Erie Indemnity Company (the Company) is a Pennsylvania business corporation
formed in 1925 to be the attorney-in-fact for Erie Insurance Exchange (the
Exchange), a Pennsylvania- domiciled reciprocal insurance exchange. The
Company's principal business activity consists of management of the affairs of
the Exchange. Management fees received from the Exchange account for the
majority of the Company's consolidated revenues. The Company also is engaged in
the property/casualty insurance business through its wholly owned subsidiaries,
Erie Insurance Company, Erie Insurance Property & Casualty Company, and Erie
Insurance Company of New York and through its management of Flagship City
Insurance Company (Flagship), a subsidiary of the Exchange. The Company also has
investments in both affiliated and unaffiliated entities, including a 21.6
percent common stock interest in Erie Family Life Insurance Company (EFL), an
affiliated life insurance company. Together with the Exchange, the Company and
its subsidiaries and affiliates operate collectively under the name Erie
Insurance Group.
In its role as attorney-in-fact for the Policyholders of the Exchange, the
Company may charge a management fee up to 25 percent of the affiliated assumed
and direct premiums written by the Exchange. The management fee is compensation
for: (a) acting as attorney-in-fact for the Exchange, (b) managing the business
and affairs of the Exchange, and (c) paying certain general administrative
expenses including sales commissions, salaries, employee benefits, taxes, rent,
depreciation, data processing expenses and other general and administrative
expenses not incurred in the adjustment of losses or the management of
investments. All premiums collected, less the management fee paid to Erie
Indemnity Company, are retained by the Exchange for the purpose of paying
losses, loss adjustment expenses, investment expenses and other miscellaneous
expenses including taxes, licenses and fees. The Company does pay certain loss
adjustment and investment expenses on behalf of the Exchange; however, the
Company is reimbursed fully for these expenses by the Exchange. The management
fee charged the Exchange was 25 percent of the Exchange's assumed and direct
written premiums during the first quarter of 1995 and all of 1994. The Company's
Board of Directors reduced the management fee charged the Exchange to 24.5
percent beginning April 1, 1995 through March 31, 1996. Effective April 1, 1996
through December 31, 1996, the Board elected, at its December 12, 1995 meeting,
to further reduce the management fee to 24 percent. The Company's Board of
Directors took this action based upon a review of the relative financial
positions of the Erie Insurance Exchange and the Company. The Board considered
the long-term needs of the Exchange to ensure its continued growth,
competitiveness, and superior financial strength, which benefits the Company. In
December 1996, the Board voted to maintain the management fee rate at 24 percent
through December 31, 1997. The Company's Board of Directors has the authority to
change the management fee at its discretion.
The Company acquired all of the outstanding capital stock of Erie Insurance
Company from the Exchange on December 31, 1991. Effective January 1, 1992, Erie
Insurance Company and the Exchange entered into an intercompany reinsurance
pooling agreement whereby Erie Insurance Company cedes 100 percent of its gross
premiums, losses and underwriting expenses to the Exchange and the Exchange
retrocedes to Erie Insurance Company 5 percent
<PAGE>
INCORPORATED BY REFERENCE, PAGE 11 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
of the pooled underwriting business. Erie Insurance Company's underwriting
results are then consolidated with the operating results of the Company. On
April 20, 1994 the Erie Insurance Company completed its conversion of the
Cooperative Insurance Company of Western New York to a stock company renamed the
Erie Insurance Company of New York. Erie Insurance Company of New York commenced
writing direct business in New York on January 1, 1995. Further, Erie Insurance
Company also has been admitted as a licensed insurer in New York and began
writing automobile, homeowners, and commercial business in New York on January
1, 1995.
As part of the intercompany reinsurance pooling agreement, Erie Insurance
Company of New York cedes 100 percent of its direct writings to the Exchange and
effective January 1, 1995 the Exchange retrocedes to Erie Insurance Company of
New York .5 percent of its assumed and direct written premium. Erie Insurance
Company has maintained its 5 percent participation in the reinsurance pool
in 1995, resulting in an increase in the total participation of the
Company's subsidiaries, in the reinsurance pool, from 5.0 to 5.5 percent. The
Company's subsidiaries also retained their 5.5 percent participation in the
reinsurance pool in 1996. The Exchange retained the remaining 94.5 percent of
the assumed and direct written premium of the intercompany reinsurance pool
in 1995 and 1996.
In June 1994, the Erie Insurance Company made a $5,000,000 capital contribution
to the Erie Insurance Company of New York to provide it with sufficient capital
to support its .5 percent participation in the reinsurance pool. On January 1,
1995 the intercompany reinsurance pooling agreement required the transfer of
$8,900,000 of pooled assets and liabilities from the Exchange to the Erie
Insurance Company of New York as part of its .5 percent share.
The results of the Company's insurance operations are affected by the conditions
that affect all property/casualty insurance companies, such as increased
competition, catastrophic events, changes in the regulatory and legislative
environments, and changes in general economic and investment conditions.
As part of its investment activities, the Company owns 21.6 percent of EFL's
outstanding common stock. EFL, which commenced business in 1967, markets various
life insurance products, principally non-participating individual and group life
policies, including universal life and individual and group annuity products, in
nine jurisdictions. EFL has contributed 10.6 percent, 12.7 percent and 21.5
percent of the Company's income from investment activities in the years 1996,
1995 and 1994, respectively. The Company's remaining investment income consists
of interest and dividends from its investment portfolio and net realized gain
(loss) on the sale of various investments.
The amount of dividends EFL, a Pennsylvania-domiciled life insurer, can pay to
its shareholders without the prior approval of the Pennsylvania Insurance
Commissioner is limited by regulations to not more than the greater of: (a) 10
percent of its statutory surplus as reported on its last statutory annual
statement or (b) net income as reported on its last statutory annual statement.
At December 31, 1996, the Company's share, as a 21.6 percent shareholder of EFL,
of the maximum dividend payable by EFL without the prior approval of the
Pennsylvania Insurance Commissioner was $2,274,000. The amount of EFL dividends
paid by EFL to the Company totaled $1,021,767 in 1996.
The amount of dividends that the Company's Pennsylvania-domiciled
property/casualty insurance subsidiaries, Erie Insurance Company and Erie
Insurance Property & Casualty Company, can pay without the prior approval of the
Pennsylvania Insurance Commissioner is limited by Pennsylvania regulations to
not more than the greater of: (a) 10 percent of its statutory surplus as
reported on its last annual statement, or (b) the net income as reported on its
last annual statement. The amount of dividends that the Erie Insurance Company's
New York-domiciled property/casualty subsidiary, Erie Insurance Company of New
York, can pay without the prior approval of the New York Superintendent of
Insurance is limited to the lesser of: (a) 10 percent of its statutory surplus
as reported on its last annual statement, or (b) one hundred percent of its
adjusted net investment income during such period. At December 31, 1996, the
maximum dividend payable by the Company's property/casualty insurance
subsidiaries was $6,000,327. No dividends were paid to the Company by its
property/casualty insurance subsidiaries in 1996.
<PAGE>
INCORPORATED BY REFERENCE, PAGES 11 AND 12 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
The non-affiliated investments of the Company consist principally of
high-quality marketable debt and equity securities. Non-affiliated investments
are described more fully in the Financial Condition section of the Management's
Discussion and Analysis.
Operating Results
Overview
Consolidated net income in 1996 was a record $105,132,359, or $1.41 per share,
compared to $93,550,797, or $1.26 per share in 1995, a 12.4 percent increase.
The 1996 results, when compared with 1995's results, were affected favorably by
improved results in the management and investment operating segments of the
Company which were offset partially by the unfavorable results of the insurance
underwriting operations. Management operations experienced an improvement in
gross margins and revenues from investment operations improved significantly as
the Company's excess cash flows were reinvested for higher returns and the
Company earned realized capital gains. The underwriting results of the Company's
property/casualty insurance subsidiaries worsened due to losses related to
severe winter weather in the first quarter 1996 and losses related to Hurricane
Fran in the third quarter 1996. The 1995 net income exceeded the 1994 net income
of $71,728,832 or $.96 per share, by 30.4 percent. The 1995 results, when
compared with 1994's results, were affected favorably by the improvement in
gross margins from all operating segments of the Company. Returns on average
shareholders' equity continued to be strong in 1996 at 26.6 percent, which
compared favorably with the outstanding returns realized in 1995 and 1994 of
30.4 percent and 30.5 percent respectively.
Results of Operations
Analysis of Management Operations
Total revenues from management operations rose to $449,192,089 in 1996, compared
to $425,792,549 in 1995, an increase of 5.5 percent. Management fee revenue
derived from the direct and affiliated assumed written premiums of the Exchange
rose 5.5 percent to $442,904,376 in 1996 from $420,003,739 in 1995. In 1996 the
Exchange continued to experience written premium growth rates that generally
exceeded industry growth rates. Affiliated assumed and direct premiums written
of the Exchange grew 7.5 percent in 1996. The growth in affiliated assumed and
direct premiums written was greater than the growth in management fee revenue
due to a reduction in the management fee rate charged the Exchange by the
Company in 1996. The Board of Directors reduced the management fee rate charged
the Exchange to 24 percent from 24.5 percent, for the period April 1, 1996
through December 31, 1996. The Company's Board of Directors took this action
based upon a review of the relative financial positions of the Erie Insurance
Exchange and the Company. The Board considered the long-term needs of the
Exchange to ensure its continued growth, competitiveness, and superior financial
strength, which benefits the Company. In December 1996 the Board voted to
maintain the 24 percent management fee rate for all of 1997.
Total revenues from management operations in 1995 of $425,792,549 were 4.1
percent above the 1994 total revenues from management operations of
$409,068,659. The Board of Directors reduced the management fee rate charged the
Exchange by the Company to 24.5 percent from 25 percent, for the period April 1,
1995 through March 31, 1996. During all of 1994 the management fee rate charged
by the Company was 25 percent.
Service agreement revenue from the management of non-affiliated assumed
reinsurance business grew 15.2 percent to $5,069,140 in 1996 from $4,401,232 in
1995. The Company receives a fee of 7 percent of voluntary reinsurance premiums
assumed from non-affiliated insurers as compensation for the management and
administration of this business on behalf of the Exchange. Prior to the service
agreement on non-affiliated assumed reinsurance, which was effective January 1,
1995, the Company received a management fee based on premiums written and was
responsible for the payment of brokerage commissions. In 1994 management fee
revenue includes $14,388,409 from management fees on non-affiliated assumed
reinsurance. The cost of management operations in 1994 includes $11,666,025 in
brokerage commissions, paid by the Company, in connection with this business.
Net revenues from management operations rose 14.5 percent to $127,428,577
in 1996 versus
<PAGE>
INCORPORATED BY REFERENCE, PAGES 12 AND 13 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
$111,276,227 in 1995 and $96,327,610 in 1994. Gross margins from management
operations improved for the third year in a row rising to 28.4 percent in 1996
from 26.1 percent in 1995 and 23.5 percent in 1994. This continued improvement
in gross margins is largely the result of continued control of operating costs,
particularly personnel costs and discretionary spending. The cost of management
operations rose 2.3 percent in 1996 to $321,763,512 from $314,516,322 in 1995.
In 1996, the growth in the cost of management operations of 2.3 percent compared
favorably with the rate of growth in management fee revenue of 5.5 percent.
The largest component of the cost of management operations, Agent commissions,
rose 4.3 percent to $209,756,209 from $201,155,576 in 1995. The Company is
responsible for the payment of commissions, other than brokerage commissions on
non-affiliated assumed reinsurance, to the independent Agents who sell insurance
products for the Company's insurance subsidiaries and the Exchange and its
subsidiary, Flagship. The Agent commissions are based on fixed percentage fee
schedules with different commission rates by line of insurance. Generally,
commissions are paid by the Company when premiums are collected. Also included
in commission expense are the costs of promotional incentives for Agents, Agents
profit sharing bonuses and brokerage commissions paid on voluntary assumed
reinsurance business before January 1, 1995. 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 on direct
and affiliated assumed business rose 6.1 percent to $203,367,469 in 1996 from
$191,621,427 in 1995. Promotional incentive and Agent profit sharing bonus costs
declined 33 percent to $6,388,739 in 1996 from $9,534,149 in 1995. The decline
was due to underwriting losses from the insurance operations of the Group which
resulted in lower profit sharing bonuses paid to the agency force in 1996. The
Company incurred no commission costs beginning in 1995 on non-affiliated assumed
reinsurance business per the terms of a separate service arrangement with the
Exchange governing this business. In 1994 the Company incurred commission
expense of $11,666,025 on the non-affiliated assumed reinsurance business
written by the Exchange.
The 1995 commission expense increased 1.5 percent to $201,155,576 versus 1994.
Commissions on direct and affiliated assumed business rose 9.1 percent to
$191,621,427 in 1995 from $175,699,756 in 1994, which is in line with the growth
in direct and affiliated assumed written premiums.
The cost of management operations, excluding commission costs, fell 1.2 percent
in 1996 to $112,007,304 from $113,360,746 in 1995. The Company's personnel
costs, net of reimbursement from affiliates, totaled $68,949,232, $66,576,363,
and $70,133,195 in 1996, 1995, and 1994, respectively. Personnel costs are the
second largest cost component in the cost of management operations, after
commissions. Personnel costs increased 3.6 percent in 1996, compared to a 5.1
percent decrease in 1995. The 1996 increase in the growth rate of personnel
costs was due to a combination of a .4 percent increase in the number of
employees plus normal merit-based salary growth. In 1995 the number of employees
declined 2.5 percent from a year earlier. Significant productivity gains were
made by the Company in 1996 and 1995 by utilizing information technology in
underwriting and administrative support areas, which has allowed Company
employment levels to remain stable or decline.
The cost of management operations, excluding commissions and personnel costs,
declined by 8.0 percent in 1996 to $43,058,071 compared to a 5.5 percent
increase in other costs of management operations to $46,784,383 in 1995. The
decline in the cost of management operations in 1996, excluding commissions and
personnel costs, was driven by lower data processing costs, lower occupancy
costs and reduced underwriting expenses.
Analysis of Insurance Underwriting Operations
The Company's wholly owned subsidiary, Erie Insurance Company, participates in
an intercompany reinsurance pooling agreement with the Exchange. This
reinsurance pooling agreement provides for Erie Insurance Company to share
proportionately in the results of all property/casualty insurance operations of
the Exchange and its subsidiaries. Since the inception of this pooling agreement
on January 1, 1992, Erie Insurance Company's proportionate share of the
reinsurance pool has been 5 percent.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 13 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
As mentioned previously, on January 1, 1995, the Exchange began retroceding to
the Erie Insurance Company of New York, as part of the existing intercompany
reinsurance pooling arrangement, .5 percent of its total direct and assumed
writings. Erie Insurance Company maintained its 5 percent participation in the
reinsurance pool which, when combined with the .5 percent participation of the
Erie Insurance Company of New York, results in a 5.5 percent participation level
for the Company's affiliates in 1995. As a result of the increased participation
of the Company's subsidiaries in the reinsurance pooling agreement in 1995, the
Company's premiums, losses and expenses were 10 percent more than they would
have been had the level of pool participation remained the same.
For the calendar years 1996, 1995 and 1994, the Company incurred underwriting
losses from its insurance underwriting operations in the amount of $11,579,211,
$3,737,618, and $8,249,900, respectively. The 1996 underwriting results of the
Company's wholly-owned subsidiaries, Erie Insurance Company and Erie Insurance
Company of New York, were impacted negatively by severe winter weather in the
first quarter of 1996 and catastrophe losses experienced from Hurricane Fran in
the eastern United States, particularly North Carolina, and other storm-related
catastrophe losses elsewhere in our operating territories during the third
quarter of 1996. Losses resulting from these catastrophes were about $8.1
million in 1996 or about $.07 per share, after federal income taxes. The
majority of these losses were property losses on homeowners and commercial
property lines of business. Milder weather during 1995 resulted in better
underwriting results for the property/casualty companies of the Erie Insurance
Group when compared to 1996 and 1994. During the first quarter of 1994
significant underwriting losses were incurred by the property/casualty companies
of the Erie Insurance Group as a result of severe winter weather in all of the
Group's underwriting territories. This severe winter weather was responsible for
approximately $6.2 million in catastrophe losses in 1994. As in 1996, the
majority of these catastrophe losses were property losses on homeowners and
commercial property lines of business.
Catastrophes are an inherent risk of the property/casualty insurance business.
Catastrophes can have a material impact on year-to-year fluctuations in the
Company's property/casualty insurance underwriting operating results. 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 based necessarily on estimates and, while
management believes the amount is adequate, the ultimate liability may be in
excess of or less than amounts provided.
Premiums earned totaled $101,509,759 in 1996, compared to $92,874,301 and
$78,075,920 in 1995 and 1994, respectively. The increase in premiums earned of
9.3 percent in 1996 is reflective of the strong growth in net premiums written
of the Erie Insurance Group. In 1995 premiums earned increased 19 percent. This
growth was due in part to the increased participation in the intercompany
reinsurance pooling arrangement of the Company's subsidiaries. Excluding the
effect of the increased pool participation, the growth in earned premiums was
about 9 percent in 1995.
Losses, loss adjustment expenses and underwriting expenses incurred totaled
$113,088,970 in 1996 compared to $96,611,919 in 1995 and $86,325,820 in 1994. In
1996, losses and loss expenses incurred rose 19.9 percent to $85,070,861 in part
due to the catastrophe losses previously described. In 1995 losses and loss
expenses incurred rose 11 percent to $70,934,755. The increased participation in
the intercompany reinsurance pooling arrangement was responsible for about 10
percent of the rise in loss and loss adjustment expense in 1995. Excluding the
effect of the increased participation, the growth in loss and loss adjustment
expense was about 1 percent compared to a 8.8 percent real growth in earned
premiums. In 1994, loss and loss adjustment expenses incurred were $63,926,959
and were affected adversely by catastrophe losses as previously described.
Policy acquisition and underwriting expenses rose 9.1 percent to $28,018,109 in
1996 from $25,677,164 in 1995 and $22,398,861 in 1994.
The 1996 GAAP combined ratio for the Company's property/casualty operations was
111.4 compared to a ratio of 104.0 in 1995 and 110.6 in 1994. The GAAP combined
ratio excluding catastrophe losses was 103.4 in 1996, 102.8 in 1995, and 102.7
in 1994.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 14 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
Analysis of Investment Operations
Total revenue from investment operations was $36,198,425 in 1996, compared to
$30,472,840 in 1995, and $16,938,761 in 1994, an increase of 18.8 percent and
79.9 percent, respectively. 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 reinvested and significant
realized capital gains were earned in 1996. The Company's investment income
consisted of interest and dividends from its investment portfolio, net realized
gains (losses) on the sale of investments and equity in the earnings of EFL, an
unconsolidated affiliate.
Interest and dividend income rose 23.9 percent to $25,794,260 in 1996 from
$20,814,258 in 1995, which was consistent with the growth in the Company's cash,
investments, and note receivable balances, which increased 21.1 percent in 1996.
In 1994 interest and dividend income was $13,303,120. The Company had
significant capital gains of $6,583,208 in 1996 as the Company took advantage of
the strong bond and stock market conditions. During 1995 the Company had capital
gains of $5,791,049, and during 1994 the Company incurred capital losses of
$4,378.
The Company's earnings from its 21.6 percent ownership of EFL totaled $3,820,957
in 1996 down from $3,867,533 in 1995 versus $3,640,019 in 1994. This investment
is accounted for under the equity method of accounting. Consequently, the
Company's investment earnings in 1996, 1995, and 1994 were a direct result of
its share of EFL's net income of $17,666,250, $17,881,592 and $16,829,678,
respectively. The decrease in EFL's net income in 1996 was due to a decrease in
realized gains on investments in 1996 when compared with 1995. EFL's realized
gains on investments were $4,986,897 in 1996, compared to $7,483,798 in 1995.
Financial Condition
Investments
Invested assets at December 31, 1996 and 1995 consisted of the following:
Distribution of Invested Assets
at December 31, 1996
(thousands) Carrying Value
1996 1995
---- ----
Fixed Maturities:
Available-for-sale 310,176 241,961
-------- --------
Equity Securities:
Common Stock 50,045 36,705
Preferred Stock 81,573 44,434
-------- --------
Total Equity Securities 131,618 81,139
Real Estate Mortgage Loans 7,294 4,432
Other Investments 7,010 5,143
-------- --------
Total Invested Assets $456,098 $332,675
======== ========
The Company's investment strategy takes a long-term perspective emphasizing
investment quality, diversification and superior investment returns. Investments
are managed on a
<PAGE>
INCORPORATED BY REFERENCE, PAGES 14 AND 15 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
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 December 31, 1996, 1995 and 1994, 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 represent 40 percent, 37 percent, and 32 percent, respectively, of
total assets, and provide the liquidity the Company requires to meet the 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 December 31, 1996, 1995 and 1994, 96.9 percent, 97.1 percent, and
96.5 percent, respectively, of total investments were invested in fixed
maturities and equity securities. Mortgage loans and other invested assets
represented only 3.1 percent, 2.9 percent and 3.5 percent at December 31, 1996,
1995 and 1994, respectively. 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.
Fixed Maturities
At December 31, 1996, the amortized cost, carrying/market values, gross
unrealized gains, and gross unrealized losses for fixed maturities were as
follows:
Diversification of Fixed Maturities
<TABLE>
<CAPTION>
at December 31, 1996
(thousands) Gross Gross Carrying/
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
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 & miscellaneous 114,790 2,835 593 117,032
--------- ---------- ---------- -----------
Total Fixed Maturities $ 301,093 $ 9,883 $ 800 $ 310,176
========= ========== ========== ===========
</TABLE>
The Company's objective is to maintain a fixed maturities portfolio that is of
very high quality and well diversified within each market sector. The fixed
maturities portfolio is managed conservatively with the goal of achieving
reasonable returns while limiting exposure to risk.
The Company invests in both taxable and tax-exempt securities as part of its
strategy to maximize after-tax income. This strategy considers, among other
factors, the impact of the alternate minimum tax. At December 31, 1996, the
carrying value of fixed maturity investments represented 68.0 percent of total
invested assets.
The Company's fixed maturity investments consist of high-quality, marketable
bonds all of which were rated at investment-grade levels (Baa/BBB or better) at
December 31, 1996.
<PAGE>
INCORPORATED BY REFERENCE, PAGES 15 AND 16 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
Included in this investment-grade category are $196.4 million or 63.3 percent of
the highest quality bonds rated Aaa/AAA or Aa/AA or bonds issued by the United
States government. At December 31, 1996, the Company had no below
investment-grade bonds. Generally, the fixed maturities in the Company's
portfolio are rated by external rating agencies; if such bonds are not rated
externally, they are rated by the Company on a basis consistent with that used
by the rating agencies. The following table shows the quality classifications of
the Company's fixed maturity portfolio at their carrying value at December 31,
1996.
Quality* of Fixed Maturities
at December 31, 1996
Carrying/Market Value
U. S. Treasury and Agency Securities $ 14,147,489
Aaa or AAA 119,642,371
Aa or AA 62,651,690
A 83,987,080
Baa or BBB 29,747,234
------------
Total Fixed Maturities $310,175,864
* As rated by Standard & Poor's or Moody's Investor's Service, Inc.
During the fourth quarter of 1995, the Financial Accounting Standards Board
(FASB) released a special report on FAS 115, "Accounting for Certain Investments
in Debt and Equity Securities." The special report was prepared as a guide in
helping companies understand and comply with the provisions of FAS 115. The
special report also included important transition provisions that gave reporting
enterprises a limited period to reassess and reclassify their securities
holdings into FAS 115's three reporting categories. This "fresh start" provision
allowed reporting enterprises to reclassify "held-to-maturity" securities to
either of the two other categories without restriction. Any security transferred
from held-to-maturity to the available-for-sale or trading classification is to
be marked-to-market at the time of transfer. At December 31, 1995, the Company
reclassified $60,259,316 or 100 percent of its held-to-maturity fixed maturity
securities to available-for-sale pursuant to the transition provisions of the
FASB's Special Report. As a result, the Company recognized $2,202,002 of
unrealized gains, net of deferred income taxes, at December 31, 1995, as an
adjustment to shareholders' equity related to this reclassification. Management
believes that having all fixed maturities classified as available-for-sale
securities will allow the Company to meet its liquidity needs and provide
greater flexibility for its investment managers to restructure the Company's
investments in response to changes in market conditions or strategic direction.
Securities classified as available-for-sale are carried at market value with
unrealized shareholders' gains and losses included in equity. At December 31,
1996 and 1995, unrealized gains (losses) on fixed maturities available-for-sale
amounted to $5,904,000 and $7,825,000, respectively, net of deferred taxes.
Prior to the adoption of FAS 115 in 1994, gains and losses on fixed maturities
were not recognized in the Company's financial statements until they were sold
or became impaired. Fixed maturities classified as held-to-maturity in 1994 are
carried at the lower of cost or market value. (See Note 1 of the Notes to
Financial Statements).
The Company attempts to achieve a balanced maturity schedule in order to
stabilize investment income in the event of a reduction in interest rates in a
year in which a large amount of securities could mature. The following table
sets forth the amortized cost and carrying/market value of fixed maturities at
December 31, 1996, by remaining term to maturity.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 16 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
Term to Maturity of Fixed Maturities
at December 31, 1996:
Percent of
Carrying/ Total Carrying/
Cost Market Value Market Value
Maturity during the year
ending December 31:
1997 $ 17,694,593 $ 17,715,738 5.7 %
1998-2001 48,308,437 48,187,878 15.5
2002-2006 69,534,481 71,375,978 23.0
Subsequent to 2006 165,555,701 172,896,270 55.8
------------ ------------ -----
$301,093,212 $310,175,864 100.0 %
------------ ------------ -----
The Amounts reported are based on actual maturity date. The amounts reported do
not reflect expected future prepayments.
Equity Securities
At December 31, 1996, the cost, carrying/market values, gross unrealized gains
and gross unrealized losses for equity securities were as follows:
Diversification of Equity Securities
<TABLE>
<CAPTION>
at December 31, 1996 -
(in thousands)
Gross Gross Carrying/
Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Common Stock:
U.S. banks, trusts and
insurance companies $ 3,034 $ 1,705 $ $ 4,739
U.S. industrial and
miscellaneous 33,969 12,862 1,525 45,306
Preferred Stock:
Public utilities 10,652 196 27 10,821
U.S. banks, trusts and
insurance companies 44,106 1,763 1 45,868
U.S. industrial and
miscellaneous 24,309 580 5 24,884
--------- ---------- ---------- --------
Total Equity Securities $ 116,070 $ 17,106 $ 1,558 $131,618
========= ========== ========== ========
</TABLE>
Equity securities consist of common stock and preferred stock which are carried
on the consolidated statements of financial position at current market value. At
December 31, 1996, common stock and preferred stock held by the Company had a
cost of $116,070,434 and a market value of $131,618,139, representing an
unrealized gain of $15,547,705. As with the fixed maturities portfolio, the
Company's preferred stock portfolio provides a source of highly predictable
current income that is very competitive with investment-grade bonds. The
preferred stocks are of very high quality and marketable. Common stocks provide
capital appreciation potential within the portfolio and represent only 11.0
percent of total invested assets.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 17 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
Investment in EFL
The Company owns 21.6 percent of the outstanding common stock of EFL, a member
company of the Erie Insurance Group. The Company's investment in EFL is
accounted for under the equity method of accounting; consequently, the Company's
carrying value of $28,686,137 represents 21.6 percent of the shareholders'
equity of EFL at December 31, 1996.
Liquidity and Capital Resources
Liquidity is a measure of an entity'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, service fees generated from the
service arrangement on non-affiliated assumed reinsurance, the net cash flow
from Erie Insurance Company's and Erie Insurance Company of New York's 5.5
percent participation in the underwriting results of the reinsurance pool with
the Exchange and investment income from affiliated and non-affiliated
investments. The management fee receivable from the Exchange has been offset by
monthly operating expenditures made by Erie Indemnity Company on behalf of the
Exchange. Generally these operating expenditures do not exceed the management
fee due for any month; therefore, the management fee receivable balance
historically has increased.
During the third quarter of 1994, the Exchange began to pay the Company the
balance of the management fee due for the month, less the operating expenditures
paid by the Company on its behalf, plus or minus the change in the Erie
Insurance Exchange's premium receivable balances times the management fee rate.
Since management fees traditionally have not been collected by the Company from
the Exchange until the premiums from Policyholders are collected, the change in
the premium receivable balance is used in determining the monthly amount
transferred. During 1996 and 1995, approximately $65.5 million and $50.4
million, respectively, were paid to the Company from the Exchange, in accordance
with the calculation described above. These funds have been invested by the
Company and the investment earnings are reflected in the investment operations
of the Company.
At December 31, 1996, 1995 and 1994, the Company's receivables from its
affiliates totaled $478,304,267, $451,777,577, and $433,109,143, respectively.
These receivables, primarily due from the Exchange as a result of the management
fee, expense reimbursements and the intercompany reinsurance pool, potentially
expose the Company to concentrations of credit risk.
The individual receivables from the Exchange and its affiliates at December 31,
1996 and December 31, 1995 are as follows:
Receivables from Erie Insurance Exchange and affiliates:
1996 1995
---- ----
Exchange-Management fee and
expense reimbursements $108,589,885 $105,612,765
EFL-Expense reimbursements 1,049,007 1,392,365
Exchange-Reinsurance recoverable
from losses and unearned
premium balances ceded 368,665,375 344,772,447
----------- ------------
Total Receivables from Erie Insurance
Exchange and affiliates $478,304,267 $451,777,577
============ ============
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 maintains a high
degree of liquidity in its investment
<PAGE>
INCORPORATED BY REFERENCE, PAGES 17 AND 18 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
portfolio in the form of readily marketable fixed maturities, common stock and
short-term investments. The Company's consolidated statements of cash flows
indicate that net cash flows provided from operating activities in 1996, 1995
and 1994 were $103,430,449, $111,825,472, and $98,128,023, respectively. Those
statements also classify the other sources and uses of cash by investing
activities and financing activities and disclose the amount of cash available at
the end of the year to meet the Company's obligations.
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 and 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.
Dividends declared to shareholders totaled $23,284,957, $18,785,419, and
$15,185,813, in 1996, 1995, and 1994, respectively. There are no regulatory
restrictions on the payment of dividends to the Company's shareholders, although
there are state law restrictions on the payment of dividends from the
subsidiaries of the Company to the Company. No major capital expenditures were
incurred in 1996, 1995 and 1994.
Temporary differences between the financial statement carrying amounts and tax
basis of assets and liabilities that give rise to deferred tax assets and
liabilities resulted in net deferred tax assets (liabilities) at December 31,
1996, 1995 and 1994 of $(2,035,054), $185,282, and $7,241,618, respectively. The
primary reason for the reduction in the deferred tax asset is due to an increase
in unrealized gains from available-for-sale securities from 1994. The deferred
tax liability generated from these unrealized gains amounted to $8,620,624 as of
1996, and $7,655,453 as of 1995, an increase of $965,171. Management believes it
is likely that the Company will have sufficient taxable income in future years
to realize the benefits of the deferred tax assets.
Financial Ratings
The following table summarizes the current A. M. Best Company ratings for the
insurers managed by the Company.
Erie Insurance Exchange A++
Erie Insurance Company A++
Erie Insurance Property & Casualty Company A++
Erie Insurance Company of New York A++
Flagship City Insurance Company A++
Erie Family Life Insurance Company A+
According to A. M. Best, a superior rating (A++ or A+) is assigned to those
companies which, in A. M. Best's opinion, have achieved superior overall
performance when compared to the standards established by A. M. Best and have a
very strong ability to meet their obligations to policyholders over the long
term. Financial strength ratings have become increasingly important to the
insurers managed by the Company and to the industry in marketing insurance
products.
Regulatory Risk-Based Capital
In 1994, the Commonwealth of Pennsylvania imposed minimum risk-based capital
requirements for property/casualty insurance companies as developed by the NAIC.
Risk-based capital is a method of measuring the minimum amount of capital
appropriate for an insurance
<PAGE>
INCORPORATED BY REFERENCE, PAGE 18 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
company to support its overall business operations in consideration of its size
and risk profile. The risk-based capital formula will be used by state insurance
regulators as an early warning tool to identify, for the purpose of initiating
regulatory action, insurance companies that potentially are inadequately
capitalized. In addition, the formula defines new minimum capital standards that
will supplement the current system of low fixed minimum capital and surplus
requirements on a state-by-state basis. Regulatory compliance is determined by a
ratio of the Company's regulatory total adjusted capital, as defined by the
NAIC, to its authorized control level risk-based capital, as defined by the
NAIC. The NAIC provides for four different levels of regulatory action with
respect to statutory annual statements for the calendar year 1994 and
thereafter. The levels and ratios are as follows:
NAIC Risk-Based Capital Levels and Ratios
Ratio of Total Adjusted Capital to
NAIC Required Authorized Control Level Risk-Based Capital
Regulatory Event (Less Than or Equal To)
Company Action Level 2.0 (or 2.5 with negative trends)
Regulatory Action Level 1.5
Authorized Control Level 1.0
Mandatory Control Level 0.7
At the Company Action Level, the insurer must submit a comprehensive plan to the
regulatory authority which discusses proposed corrective actions to improve its
capital position. At the Regulatory Action Level, the regulatory authority will
perform a special examination of the insurer and issue an order specifying
corrective actions that must be followed. At the Authorized Control Level, the
regulatory authority is authorized (although not mandated) to take regulatory
control of the insurer. And, at the Mandatory Control Level, the regulatory
authority must take regulatory control of the insurer. Regulatory control may
lead to rehabilitation or liquidation of an insurer.
Calculations using the NAIC formula and the Company's property/casualty
insurance subsidiaries' financial statements prepared under Statutory Accounting
Practices as of December 31, 1996 indicate that the Total Adjusted Capital was
substantially above the Authorized Control Level Risk-Based capital requirements
as the ratios are all in excess of three to one (3:1) at December 31, 1996.
Reinsurance
Effective January 1, 1994, the insurers managed by the Company have discontinued
all ceded reinsurance treaties, other than with affiliated insurers, due to the
strong surplus position of the insurers managed by the Company, the cost of
reinsurance and the low ratio of the premium writings of the insurers managed by
the Company to their surplus. The Company does not believe this discontinuance
of reinsurance treaties will have a material adverse effect, over the long-term,
on the results of operations of the insurance companies managed by the Company
because of the strong surplus positions of the companies, the cost savings to be
realized from the discontinuance of the reinsurance treaties and the low ratio
of writings to surplus of those companies. However, the absence of such treaties
could have an adverse effect on the results of operations of the insurance
companies managed by the Company in a given year, if the frequency or severity
of claims were substantially higher than historical averages because of an
unusual event during a short-term period. Although the Company experienced
significant winter storm losses in 1996 and 1994, the Company would not have
recognized substantial recoveries from these discontinued treaties had they been
in effect during the year. The insurers managed by the Company continue to
maintain facultative reinsurance on certain individual property/casualty risks.
Effective January 1, 1997, Erie Insurance Company and Erie Insurance Company of
New York placed in effect an all lines aggregate excess of loss reinsurance
agreement with the Exchange that supersedes the prior catastrophe excess of loss
reinsurance agreement between the parties. Under the new agreement, Erie
Insurance Company and Erie Insurance
<PAGE>
INCORPORATED BY REFERENCE, PAGES 18 AND 19 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
Company of New York reinsure their net retained share of the intercompany
reinsurance pool such that once Erie Insurance Company and Erie Insurance
Company of New York have sustained ultimate net losses that exceed an amount
equal to 72.5 percent of Erie Insurance Company and Erie Insurance Company of
New York's net premiums earned, the Exchange will be liable for 95 percent of
the amount of such excess up to but not exceeding an amount equal to 95 percent
of 15 percent of Erie Insurance Company's and Erie Insurance Company of New
York's net premiums earned. Losses equal to 5 percent of the net ultimate net
loss in excess of the retention under the contract are retained net by Erie
Insurance Company and Erie Insurance Company of New York. The annual premium for
this reinsurance treaty is 1.01 percent of the net premiums earned by Erie
Insurance Company and Erie Insurance Company of New York during the term of this
agreement subject to a minimum premium of $800,000. This reinsurance treaty is
excluded from the intercompany reinsurance pooling agreement. This reinsurance
agreement replaces the earlier reinsurance agreements between the Company and
Erie Insurance Company and Erie Insurance Company of New York, which are
described below.
In 1995 and 1996, Erie Insurance Company of New York had in effect a property
catastrophe excess of loss reinsurance agreement with the Exchange whereby Erie
Insurance Company of New York reinsures its net retained share of the
intercompany reinsurance pool such that once Erie Insurance Company of New York
has sustained an ultimate net loss of $250,000 by reason of its .5 percent share
of the results of the intercompany reinsurance pool, the Exchange was liable for
the amount of the ultimate net loss for the Company's net retained share of the
intercompany reinsurance pool in excess of $250,000 for a limit of liability to
the Exchange of $2,250,000 for each occurrence. The annual premium for this
reinsurance treaty with the Exchange was $150,000 in 1996. This reinsurance
treaty was excluded from the intercompany reinsurance pooling agreement.
In 1994, 1995 and 1996, Erie Insurance Company had in effect a property
catastrophe excess of loss reinsurance agreement with the Exchange whereby Erie
Insurance Company reinsured its net retained share of the intercompany
reinsurance pool such that once Erie Insurance Company has sustained an ultimate
net loss of $10,000,000 by reason of its 5 percent share of the results of the
intercompany reinsurance pool, the Exchange was liable for the amount of the
ultimate net loss for the Company's net retained share of the intercompany
reinsurance pool in excess of $10,000,000 for a limit of liability to the
Exchange of $25,000,000 for each occurrence. The annual premium for this
reinsurance treaty with the Exchange was $274,170 in 1996. This reinsurance
treaty was excluded from the intercompany reinsurance pooling agreement.
Effects of Inflation
Inflationary considerations can impact the Company's activities in several ways.
Inflationary expectations can impact the market value of the Company's portfolio
of securities, particularly bonds, notes and preferred stock. At December 31,
1996, the Company's investments totaled $456,097,673. Of this amount,
$391,749,000 was invested in interest rate sensitive bonds and preferred stock.
At December 31, 1996 the market value exceeded the book value of the Company's
interest rate sensitive bonds and preferred stock by $11,589,000.
Inflation also can affect the loss costs of property/casualty insurers and, as a
consequence, insurance rates. Insurance premiums are established before losses
and loss adjustment expenses, and the extent to which inflation may impact such
expenses, are known. Consequently, in establishing premium rates, the Company
attempts to anticipate the potential impact of inflation.
Property/Casualty Loss Reserves
General
The reserve liabilities for property/casualty losses and loss adjustment
expenses (LAE) represent estimates of the ultimate net cost of all unpaid losses
and loss adjustment expenses incurred through December 31, 1996 and 1995. The
reserves are determined using adjusters' individual case estimates and
statistical projections. These projections are
<PAGE>
INCORPORATED BY REFERENCE, PAGE 19 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
employed in four specific areas: (1) to calculate incurred but not reported
(IBNR) reserves, (2) to test the adequacy of case basis estimates of loss
reserves, (3) to calculate allocated LAE reserves and (4) to calculate
unallocated LAE reserves. These projections are reviewed continually and
adjusted as necessary, as experience develops and new information becomes known.
Such adjustments are reflected in current operations.
The IBNR reserve is based on the historical relationship of the emergence of
reported claims to earned premiums. The calculation includes components for
changes in claim costs resulting from trends in claims frequency and severity.
Allocated LAE reserves are based on long-term historical relationships of
incurred loss adjustment expenses to incurred losses. Unallocated LAE reserves
are based on the historical relationships of paid unallocated expenses to paid
losses.
Environmental-Related Claims
In establishing the liability for unpaid losses and loss adjustment expenses
related to environmental, toxic waste and hazardous products claims, management
considers facts currently known and the current state of the law and coverage
litigation. Establishing reserves for these types of claims is subject to
uncertainties that are generally greater than those represented by other types
of claims. Factors contributing to those uncertainties include a lack of
historical data, long reporting delays, uncertainty as to the number and
identity of insureds with potential exposure, unresolved legal issues regarding
policy coverage, and the extent and timing of any such contractual liability.
Courts have reached different and sometimes inconsistent conclusions as to when
the loss occurred and what policies provide coverage, what claims are covered,
whether there is an insured obligation to defend, how policy limits are
determined, how policy exclusions are applied and interpreted, and whether
cleanup costs represent insured property damage. Further, even if and when the
courts rule definitively on the various legal issues, many cases will still
present complicated factual questions affecting coverage that will need to be
resolved.
The Company has incurred few environmental claims and as a result has made few
indemnity payments to date. Because these payments have not been significant in
the aggregate and have varied in amount from claim to claim, management cannot
determine whether past claims experience will be representative of future claims
experience. The Company's property/casualty subsidiaries have established
reserves for these exposures in amounts which they believe to be adequate based
on information currently known by them. The Company does not believe that these
claims will have a material impact on the Company's liquidity, results of
operations, cash flows, or financial condition.
The Company had 31 reported open claims concerning environmental-related
liabilities at December 31, 1996 and 47 and 26 such claims at December 31, 1995
and 1994, respectively. The Company's property/casualty subsidiaries' share of
direct losses paid related to environmental-related claims was $5,308, $9,172,
and $2,659 related to years ended December 31, 1996, 1995 and 1994,
respectively. The Company's property/casualty subsidiaries' share of unpaid
direct losses amounted to $42,194, $53,512, and $60,523 related to years ended
December 31, 1996, 1995 and 1994, respectively.
Impact of Recent Accounting Standards
Accounting for Certain Investments in Debt and Equity Securities
On May 31, 1993, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." FAS 115 addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values
(other than those accounted for under the equity method or as investments in
consolidated subsidiaries) and all investments in debt securities. FAS 115
changes the accounting treatment related to the Company's fixed maturity
investments and requires segregation of these securities into three categories:
held to maturity, available for sale and trading. The Company holds no trading
securities. The Company adopted FAS 115 effective January 1, 1994. Unrealized
gains
<PAGE>
INCORPORATED BY REFERENCE, PAGES 19 AND 20 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
related to this reclassification increased shareholders' equity by $3,782,071,
as of January 1, 1994. This amount includes $2,053,550 from the effect of the
change to FAS 115 by the Company's equity investee, Erie Family Life Insurance
Company. The unrealized gain at January 1, 1994 is also net of deferred taxes of
$930,742.
At December 31, 1995 the Company reclassified 100 percent of its
held-to-maturity fixed maturity investments to the available-for-sale category
in accordance with the transition provisions of the special report on FAS 115
released by the FASB. The Company currently holds no held-to-maturity
securities.
Management Changes
On February 12, 1996, the Board of Directors of the Company elected Stephen A.
Milne President and Chief Executive Officer of Erie Family Life Insurance
Company, Erie Insurance Company, and the Company. On March 11, 1996 Mr. Milne
was elected President and Chief Executive Officer of Flagship City Insurance
Company, Erie Insurance Property & Casualty Company and Erie Insurance Company
of New York. Mr. Milne previously served as Executive Vice President-Insurance
Operations since 1993. Mr. Milne began his career with the Company in 1973 and
has held several positions in the claims and sales functions of the Company. In
1984 he became a Vice President and in 1987 was named Senior Vice President of
the Company's Marketing Services Division. Mr. Milne also was an ERIE Agent for
three years.
The former President and CEO, and previous Chief Investment Officer of the Erie
Insurance Group of Companies, John M. Petersen, who retired as an employee of
the Company on December 31, 1995, entered into a consulting arrangement with the
Company effective January 2, 1996. Under the terms of the arrangement, the
Company engaged Mr. Petersen as a consultant to furnish the Company and its
pension trust, the Erie Insurance Exchange, and Erie Family Life Insurance
Company, with investment services with respect to their investments in common
stocks.
Factors That May Affect Future Results
On January 30, 1997, the Erie Insurance Group announced its intention to expand
its marketing territory to the state of Illinois. Although the Exchange and EFL
currently are licensed in Illinois, a specific date for writing insurance in the
state has not yet been determined. The Group plans to write all lines of
insurance in Illinois that it currently offers elsewhere, including auto, home,
business and life. The addition of new operating territories positively affects
the growth of direct and affiliated assumed written premium of the Group, upon
which the management fee revenue of the Company is based.
Broad challenges to the property/casualty insurance industry's traditional
underwriting practices may continue in 1997 and beyond. So-called
"anti-redlining" legislation, which would force insurance companies to collect
and submit to the federal government a variety of data to help determine if
insurers engage in certain practices in urban markets, was not acted upon during
1996, but could be enacted in the future. Regulatory action on the redlining
issue also has been initiated by the Federal Department of Housing and Urban
Development (HUD), which may subject insurers to administrative regulations.
Traditional industry cost-based underwriting criteria and risk selection
practices have been challenged by various groups. These groups, which use HUD's
funds in their fair housing activities, have pushed for legislation or
regulations to standardize underwriting guidelines and establish uniform rating
territories that could lead to cross-product or territorial subsidization. These
regulations, if enacted, could impose on the insurers managed by the Company
excessive or unwarranted restrictions on underwriting and heavily regulated
insurance rates. In 1996, however, the Congress passed the Veterans
Administration, HUD, and Independent Agencies Conference report, which the
President signed, which included language expressing Congressional concern over
HUD's insurance-related activities. HUD recently testified that, due to
Congressional concerns about such activities, it does not intend to focus its
regulatory initiatives on property insurance.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 20 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
Legislative changes in the federal Superfund liability structure proposed by
Congress were not enacted in 1996. The insurance industry and other business
groups had proposed basic reforms as part of a new Superfund reauthorization
process. The industry continues to work for comprehensive reform and is opposed
to the imposition of a federal premium tax on insurers as part of the reforms.
Federal Natural Disaster Protection legislation was introduced in both Houses of
Congress in 1995. The legislation called the "Natural Disaster Protection and
Insurance Act of 1995" was opposed by the Clinton administration thus ending
further consideration of any type of natural disaster legislation by the 104th
Congress. The proposal would have established a national insurance program to
provide economic protection and help save lives in the event of natural
catastrophes such as earthquakes and hurricanes. The legislation would have
created a Natural Disaster Insurance Corporation to write earthquake and
hurricane coverage in disaster-prone areas and provide excess reinsurance to
participating insurers. The industry continues to promote a federal role in
making property insurance markets more stable and easing the availability
problem in natural catastrophe-prone regions. Alternatives to the legislation
proposed in 1995 will be pursued by the industry in 1997.
On June 24, 1996, the Pennsylvania Workers' Compensation Reform Act was signed
into law. This Act, now known as Act 57, calls for a reduction of workers'
compensation premiums in the state of Pennsylvania by insurance companies that
reflect reform outlined in the Act. This law is expected to reduce the premium
income generated by the Exchange and its affiliated companies, Erie Insurance
Company and Erie Insurance Property and Casualty Company on workers'
compensation business written in the state of Pennsylvania. Any reduction in
premiums written as a consequence of Act 57 will result in reduced management
fee revenue for the Company as its management fee revenue is based on premiums
written. However, commission expenses which are a cost of management operations,
also will be reduced proportionally with the reduction in premiums written. The
reduced workers' compensation premiums also will affect the Company's
property/casualty insurance subsidiaries operating results; however, lower
premium levels may be offset by lower loss costs arising from the cost
containment provisions of Act 57. The effect of this Act on the overall
financial condition of the Company is not expected to be material.
During 1996 federal banking reform legislation was proposed in Congress but was
hampered by issues surrounding the integration of banking and other financial
services, specifically banks affiliation with insurers and the sale of insurance
products by banks. In 1997 Congress most likely will advance financial service
and banking reform measures, including the issue of bank insurance powers. In
addition, during 1996 the U. S. Supreme Court ruled in the Barnett Bank case
that national banks can use subsidiary offices in small towns to sell insurance
anywhere in the country. The Barnett Bank decision held that state insurance
laws "that prevent or significantly interfere" with bank insurance activities
are preempted by federal banking laws. Regulatory and legislative reforms
affecting bank insurance powers and public policy will continue in 1997. The
property-casualty insurers managed by the Company, and EFL, could be affected
adversely by regulatory and/or legislative reforms which allow banks to sell
property-casualty and life insurance products in the Group's markets. The
Company, which derives a management fee based upon the direct and affiliated
assumed written premiums of the Group, would be affected adversely if increased
competition from banks resulted in lowered written premium growth.
"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 "Analysis of Insurance Underwriting Operations,"
"Reinsurance," "Effects of Inflation," "Property/Casualty Loss Reserves" and
"Factors That May Affect Future Results" 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 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, and technological difficulties and advancements.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 21 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
Glossary of Selected Insurance Terms
o Affiliated assumed reinsurance business:
Reinsurance contracts entered into by the Exchange, which assumes
risks, on a voluntary basis from other insurers within the Erie
Insurance Group of companies.
o Assume:
To receive from an insurer or a reinsurer all or part of the insurance
or reinsurance written by an insurance or reinsurance entity.
o Attorney-in-fact:
Legal entity (Erie Indemnity Company, a corporate attorney-in-fact)
which is legally appointed by another (subscribers of the Exchange) to
transact business on its behalf.
o Cede:
To transfer to an insurer or a reinsurer all or part of the insurance
or reinsurance written by an insurance or reinsurance entity.
o Direct premiums written:
Premiums on policies written by an insurer, excluding premiums for
reinsurance assumed or ceded by an insurer.
o GAAP:
Generally Accepted Accounting Principles.
o GAAP combined ratio:
Ratio of acquisition and underwriting expenses, losses and loss
adjustment expenses incurred to premiums earned.
o Gross margin from management operations:
Net revenues from management operations divided by total revenues from
management operations.
o Incurred but not reported reserves:
Estimated liabilities established by an insurer to reflect the losses
estimated to have been incurred but which are not yet reported to the
insurer.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 21 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
o Losses:
An occurrence that is the basis for submission and/or payment of a
claim. Losses may be covered, limited or excluded from coverage,
depending on the terms of the policy. "Loss" also refers to the amount
of the insurer's liability arising out of the occurrence.
o Loss adjustment expenses (LAE):
The expenses of settling claims, including legal and other fees and
expenses, and the portion of general expenses allocated to claim
settlement costs.
o Loss and LAE reserves:
Loss reserves are estimated liabilities established by an insurer to
reflect the estimated cost of claims payments and the related expenses
that the insurer ultimately will be required to pay in respect of
insurance it has written. Allocated LAE reserves are based on long-term
historical relationships of incurred loss adjustment expenses to
incurred losses. Unallocated LAE reserves are based on the historical
relationships of paid unallocated expenses to paid losses.
o NAIC:
The National Association of Insurance Commissioners, an association of
the top regulatory officials of all 50 states and the District of
Columbia organized to promote consistency of regulatory practices and
statutory accounting practices throughout the United States.
o Non-affiliated assumed reinsurance business:
Reinsurance contracts entered into by the Exchange, which voluntarily
assumes risks from insurance companies, that are not member companies
of the Erie Insurance Group of property/casualty insurance companies.
o Property/Casualty insurance:
Casualty insurance indemnifies an insured for losses caused by injuries
to third persons (i.e. not the policyholder) and represents the legal
liability imposed on the insured resulting therefrom. It includes, but
is not limited to, employers' liability, workers' compensation, public
liability, automobile liability and personal liability. Property
insurance indemnifies a person with an insurable interest in tangible
property for his property loss, damage or loss of use.
o Reciprocal insurance exchange:
An unincorporated group of persons known as subscribers who, under a
common name, exchange insurance contracts with each other for the
purpose of providing indemnity among themselves from losses through a
common attorney-in-fact. Each subscriber gives a power of attorney
under which the attorney-in-fact represents each subscriber in
exchanging insurance contracts with the other subscribers.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 21 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
o Reinsurance:
A procedure whereby an insurer cedes to another insurer all or a
portion of the risk insured and conveys/pays to that other insurer a
portion of the premium paid by the insured. Reinsurance makes the
assuming reinsurer liable to the extent of the coverage ceded. However,
in the event the reinsurer is unable to pay its portion of the loss
based on the coverage ceded, the ceding insurer would be responsible
for the entire loss.
o Retrocede:
To transfer again all or part of the insurance or reinsurance ceded to
an insurance or reinsurance entity.
o Statutory Accounting Practices (SAP):
SAP provides for recording transactions and preparing financial
statements in accordance with the rules and procedures prescribed or
permitted by state statute or regulatory authorities. Such practices
generally reflect a liquidating rather than a going concern basis of
accounting. The principal differences between SAP and GAAP are as
follows:
(a) under SAP, certain assets ("nonadmitted" assets) are eliminated
from the consolidated statements of financial position; (b) under SAP,
policy acquisition costs are expensed as incurred, while under GAAP,
they are deferred and amortized over the terms of the policies, (c)
under SAP, no provision is made for deferred income taxes and (d) under
SAP, certain reserves are recognized which are not recognized under
GAAP.
o Statutory Surplus as regards Policyholders:
Under SAP, the sum remaining after all liabilities are subtracted from
all assets. This sum is regarded as financial protection to
policyholders in the event an insurance company suffers unexpected or
catastrophic losses.
o Underwriting expenses:
The aggregate of policy acquisition expenses and general,
administrative and other expenses attributable to underwriting
operations.
o Underwriting results:
The excess or deficiency resulting from the difference between premiums
earned and the sum of incurred losses, loss adjustment expenses and
underwriting expenses.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 36 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
Market Price of and Dividends on the
Common Equity and Related Shareholder Matters
Common Stock Prices:
Effective October 2, 1995, the Class A non-voting common stock of the Company
was listed and began trading on the NASDAQ National Market System under the
symbol ERIE. The following sets forth the range of high and low bid and ask
prices by quarter as reported by the NASDAQ National Market System.
<TABLE>
<CAPTION>
Class A Sales Price
Bid Ask
Low High Low High
<S> <C> <C> <C> <C>
1996:
First Quarter 19 24 7/8 20 3/8 26 5/8
Second Quarter 24 1/2 39 1/2 26 44
Third Quarter 32 1/2 44 36 1/2 48 1/2
Fourth Quarter 24 35 1/2 27 37 1/2
1995:
First Quarter NA NA NA NA
Second Quarter NA NA NA NA
Third Quarter NA NA NA NA
Fourth Quarter 15 1/8 19 16 20 1/2
</TABLE>
In May 1996 the Company's Board of Directors approved a three-for-one split of
the Class A non-voting common stock. The above sales prices have been adjusted
to reflect the stock split.
Prior to registering on the NASDAQ National Stock Market, the Company annually
had engaged Duff & Phelps Capital Markets Co. (DPCM) to determine the current
fair market value of the Company's Class A non-voting common stock. In making
such determination, DPCM analyzed the Company's consolidated financial
statements, other financial and operating data provided by the Company and
DPCM's own research and other publicly available information. In conducting such
analysis, DPCM used a comparative company approach and discounted cash flow
analysis. The 1994 valuation of the Company's Class A common stock was completed
by DPCM on November 7, 1994. As of November 7, 1994, it was the opinion of DPCM,
after incorporating a 15 percent discount for limited marketability and lack of
seasoning, that the fair market value of a minority interest position in the
Company's Class A common stock was in the range of $12.00 to $13.00 per share
(adjusted for the 1996 stock split of Class A common stock). Prior to
registration on the NASDAQ National Market System, the Company annually mailed a
summary of the DPCM opinion to all holders of record of Class A common stock and
Class B common stock.
No established trading market exists for the Class B voting common stock.
On February 18, 1997, The Executive Committee of the Board of Directors approved
an enhancement to the Company's 401(K) plan for Employees which will permit
Employees to invest a portion of the plan's contributions in shares of Erie
Indemnity Class A common stock. The plan's Trustee will be authorized to buy
Erie Indemnity Company class A common stock on behalf of 401(K) plan
participants beginning May 8, 1997.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 36 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
Common Stock Dividends:
The Company historically has paid cash dividends on a quarterly basis at the
discretion of the Board of Directors. The payment and amount of future dividends
on the common stock will be determined by the Board of Directors and will depend
on, among other things, earnings, financial condition and cash requirements of
the Company at the time such payment is considered, and on the ability of the
Company to receive dividends from its subsidiaries, the amount of which is
subject to regulatory limitations. Dividends declared for each class of stock
during 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Dividends Declared
Class A Share Class B Share
<S> <C> <C>
1996:
First Quarter $ .083333 $ 12.50
Second Quarter .083333 12.50
Third Quarter .083334 12.50
Fourth Quarter .095 14.25
------- -----
.345 51.75
------- -----
1995:
First Quarter $ .065 $ 9.75
Second Quarter .065 9.75
Third Quarter .065 9.75
Fourth Quarter .083333 12.50
------- -----
.278333 41.75
------- -----
</TABLE>
As of February 28, 1997, there were approximately 1,391 shareholders of record
of the Company's Class A non-voting common stock and 28 shareholders of record
of the Company's Class B voting common stock.
Of the 67,032,000 shares of the Company's Class A common stock outstanding as of
February 28, 1997, approximately 24,231,930 shares are freely transferable
without restriction or further registration under the Securities Act of 1933, as
amended (the Act) unless purchased by affiliates of the Company as that term is
defined in Rule 144 under the Act. The 42,800,070 remaining outstanding shares
of Class A common stock (the Restricted Shares) are held by the Company's
directors, executive officers and their affiliates and are restricted securities
which are eligible to be sold publicly pursuant to an effective registration
statement under the Act or in accordance with an applicable exemption,
including, after September 28, 1994, Rule 144, from the registration
requirements under the Act. The Company is unable to estimate the amount of
Restricted Shares that may be sold under Rule 144 since this amount will depend
in part on the price for the Class A common stock, the personal circumstances of
the sellers and other factors. Sales of a substantial number of Restricted
Shares in the public market, or the availability of such shares, could affect
adversely the price of the Class A common stock.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated for purposes of Rule 144) who beneficially has owned
Restricted Shares for at least two years, including affiliates of the Company,
is entitled to sell within any three-month period a number of shares that does
not exceed the greater of (i) one percent of the number of shares of Class A
common stock then outstanding or (ii) the average weekly trading volume of the
Class A common stock in the over-the-counter market during the four calendar
weeks preceding the date on which notice of sale is filed with the SEC. Sales
<PAGE>
INCORPORATED BY REFERENCE, PAGE 36 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
under Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. However, a person (or persons whose shares are aggregated for purposes
of Rule 144) who is deemed not to have been an affiliate of the Company at any
time during the 90 days preceding a sale, and who beneficially has owned the
Restricted Shares for at least three years at the time of sale, would be
entitled to sell such shares under Rule 144(k) without regard to the aforesaid
limitations.
The Company serves as its own transfer agent and registrar.
<PAGE>
Index to Graphs included in the
Management's Discussion and Analysis
Graph #1 ERIE INSURANCE GROUP
Organizational Structure / Major Business Units
Pooling
Property / Casualty Insurance Participation
Erie Insurance Exchange 94.5%
Erie Insurance Company*** 5.0%
Erie Insurance Company of New York** 0.5%
Erie Insurance Property & Casualty Company*** 0.0%
Flagship City Insurance Company* 0.0%
* Wholly-owned by Erie Insurance Exchange
** Wholly-owned by Erie Insurance Company
*** Wholly-owned by Erie Indemnity Company
Management Operations
Erie Indemnity Company is the Attorney-in-Fact for the Erie
Insurance Exchange (A Reciprocal Insurance Exchange)
Life Insurance Operations
Erie Family Life Insurance Company
52.2% ownership by Erie Insurance Exchange
21.6% ownership by Erie Indemnity Company
Graph #2 NET INCOME AND RETURN ON AVERAGE EQUITY
(In millions of dollars, except ratios)
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Net Income for Year Ended December 31 $71,729 $93,551 $105,132
Return on Average Equity 30.5% 30.4% 26.6%
</TABLE>
Graph #3 NET REVENUES FROM MANAGEMENT
OPERATIONS AND GROSS MARGINS
(In millions of Dollars, except ratios)
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Net Revenues from Management Operations $96.3 $111.3 $127.4
Gross Margin from Management Operations 23.5% 26.1% 28.4%
</TABLE>
Graph #4 PREMIUMS EARNED AND GAAP
COMBINED RATIO EXCLUDING CATASTROPHES
(In millions of Dollars, except ratios)
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Premiums Earned for Year Ended December 31 $78.1 $92.9 $101.5
GAAP Combined Ratio Excluding Catastrophes 102.7 102.8 103.4
</TABLE>
<PAGE>
Index to Graphs included in the
Management's Discussion and Analysis
(Continued)
Graph #5 REVENUE FROM INVESTMENT OPERATIONS
(In millions of dollars)
<TABLE>
<CAPTION>
1994 1995 1996
<S> <C> <C> <C>
Realized Gain or Loss on Investments $0.0 $5.8 $6.6
Equity in Earnings of EFL $3.6 $3.9 $3.8
Interest and Dividends $13.3 $20.8 $25.8
Total Revenue from Investment Oparations $16.9 $30.5 $36.2
</TABLE>
Graph #6 DISTRIBUTION OF INVESTED ASSETS
at December 31, 1996 - Carrying Value
Fixed Maturities 68%
Preferred Stocks 18%
Common Stocks 11%
Real Estate Mortgage Loans 2%
Other 1%
Graph #7 DIVERSIFICATION OF FIXED MATURITIES
at December 31, 1996 - Carrying/Market Value
Special Revenue 46%
Industrial & Miscellaneous 38%
Political Subdivisions 9%
U.S. Government 4%
Public Utilities 2%
Foreign Governments 1%
Graph #8 QUALITY* OF BOND PORTFOLIO
at December 31, 1996 - Carrying/Market Value
Aaa/AAA 39%
A 27%
Aa/AA 20%
Baa/BBB 10%
U.S. Treasury & Agency Securities 4%
* As rated by Standard & Poor's or Moody's Investor's Service, Inc.
Graph #9 DIVERSIFICATION OF EQUITY SECURITIES
at December 31, 1996 - Carrying/Market Value
(2) Banks & Insurance 35%
(1) Industrial & Miscellaneous 34%
(2) Industrial & Miscellaneous 19%
(2) Public Utilities 8%
(1) Banks & Insurance 4%
(1) Common Stocks
(2) Preferred Stocks
INCORPORATED BY REFERENCE, PAGE 23 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
INDEPENDENT AUDITORS' REPORT
ON THE CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors and Shareholders
Erie Indemnity Company
Erie, Pennsylvania
We have audited the accompanying consolidated statements of financial position
of Erie Indemnity Company and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Erie Indemnity
Company and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
As described in Note 1 to the financial statements, the Company changed its
method of accounting for debt and equity securities in 1994.
Erie, Pennsylvania
February 18, 1997
<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As of December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
INVESTMENTS
Fixed maturities available-for-sale,
at fair value (amortized cost of
$301,093,212 and $229,922,533,
respectively) $ 310,175,864 $ 241,960,567
Equity securities, at fair value
(cost of $116,070,434 and $71,421,388,
respectively) 131,618,139 81,139,076
Real estate mortgage loans 7,293,651 4,432,361
Other invested assets 7,010,019 5,142,585
-------------- --------------
Total investments $ 456,097,673 $ 332,674,589
Cash and cash equivalents 18,719,624 56,856,983
Equity in Erie Family Life
Insurance Company 28,686,137 27,880,363
Accrued interest and dividends 5,570,033 4,980,154
Premiums receivable from Policyholders 103,847,320 99,534,004
Reinsurance recoverable, non-affiliates 163,691 160,988
Deferred policy acquisition costs 9,540,998 9,011,734
Receivables from Erie Insurance Exchange
and affiliates 478,304,267 451,777,577
Note receivable from Erie Family Life
Insurance Company 15,000,000 15,000,000
Agent loans 7,945,946 6,034,680
Prepaid expenses 6,957,026 3,573,405
Property and equipment 9,841,538 8,241,937
Deferred and prepaid federal income taxes 4,056,974 1,117,661
Other assets 5,907,978 5,587,669
-------------- --------------
Total assets $1,150,639,205 $1,022,431,744
============== ==============
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES
Unpaid losses and loss adjustment expenses $ 386,425,019 $ 357,334,127
Unearned premiums 216,938,069 202,806,574
Accounts payable 6,034,486 5,839,745
Accrued commissions 75,518,593 72,697,864
Accrued payroll and payroll taxes 5,268,275 8,093,690
Accrued vacation and sick pay 7,435,360 6,740,212
Deferred compensation 1,587,570 1,739,216
Deferred income taxes 2,035,054
Dividends payable 6,411,788 5,624,375
Benefit plans liability 7,226,300 7,491,700
-------------- --------------
Total liabilities $ 714,880,514 $ 668,367,503
-------------- --------------
SHAREHOLDERS' EQUITY
Capital stock
Class A common, stated
value $.0292 per share;
authorized 74,996,930 $ 1,955,100 $ 1,955,100
Class B common, stated value
$70 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) 17,490,491 17,643,443
Retained earnings 408,268,200 326,420,798
-------------- --------------
Total shareholders' equity $ 435,758,691 $ 354,064,241
-------------- --------------
Total liabilities and
shareholders' equity $1,150,639,205 $1,022,431,744
============== ==============
<FN>
The notes to consolidated financial statements are an integral part of these
statements.
</FN>
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 24 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
MANAGEMENT OPERATIONS:
Management fee revenue $442,904,376 $420,003,739 $407,275,573
Service agreement revenue 5,069,140 4,401,232
Other operating revenue 1,218,573 1,387,578 1,793,086
------------ ------------ ------------
Total revenue from
management operations $449,192,089 $425,792,549 $409,068,659
Cost of management operations 321,763,512 314,516,322 312,741,049
------------ ------------ ------------
Net revenue from
management operations $127,428,577 $111,276,227 $ 96,327,610
------------ ------------ ------------
INSURANCE UNDERWRITING OPERATIONS:
Premiums earned $101,509,759 $ 92,874,301 $ 78,075,920
------------ ------------ ------------
Losses and loss adjustment
expenses incurred $ 85,070,861 $ 70,934,755 $ 63,926,959
Policy acquisition and
other underwriting expenses 28,018,109 25,677,164 22,398,861
------------ ------------ ------------
Total losses and
expenses $113,088,970 $ 96,611,919 $ 86,325,820
------------ ------------ ------------
Underwriting loss ($ 11,579,211) ($ 3,737,618) ($ 8,249,900)
------------ ------------ -----------
INVESTMENT OPERATIONS:
Equity in earnings of Erie
Family Life Insurance Company $ 3,820,957 $ 3,867,533 $ 3,640,019
Interest and dividends 25,794,260 20,814,258 13,303,120
Realized gain (loss) on
investments 6,583,208 5,791,049 ( 4,378)
------------ ------------ -------------
Total revenue from
investment operations $ 36,198,425 $ 30,472,840 $ 16,938,761
------------ ------------ ------------
Income before income
taxes $152,047,791 $138,011,449 $105,016,471
Provision for income taxes 46,915,432 44,460,652 33,287,639
------------ ------------ ------------
NET INCOME $105,132,359 $ 93,550,797 $ 71,728,832
============ ============ ============
Net income per share $ 1.41 $ 1.26 $ .96
============ ============ ============
<FN>
The notes to consolidated financial statements are an integral part of these
statements.
</FN>
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Class A Capital Stock Class B
Shares Shares
Issued and Class A Class B Issued and
Outstanding Amount Amount Outstanding
<S> <C> <C> <C> <C>
Balance, January 1, 1994 67,032,000 $1,955,100 $214,900 3,070
Net income
Adjustment to beginning
balance for change in
accounting method -
FAS 115
Net unrealized losses
on available-for-sale
securities
Dividends:
Class A - $.225 per
share
Class B - $33.75
per share
Balance, December 31, 1994 67,032,000 $1,955,100 $214,900 3,070
Net income
Net unrealized gains on
available-for-sale
securities
Dividends:
Class A - $.2783 per
share
Class B - $41.75
per share
Balance, December 31, 1995 67,032,000 $1,955,100 $214,900 3,070
Net income
Net unrealized losses on
available-for-sale
securities
Dividends:
Class A - $.345 per
share
Class B - $51.75
per share
Balance, December 31, 1996 67,032,000 $1,955,100 $214,900 3,070
========== ========== ======== =====
<FN>
The notes to consolidated financial statements are an integral part of these
statements.
</FN>
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net Unrealized
Additional Gain (Loss) on Total
Paid-in Available-for-sale Retained Shareholders'
Capital Securities Earnings Equity
<S> <C> <C> <C> <C>
Balance, January 1, 1994 $7,830,000 $ 5,075,454 $195,112,401 $210,187,855
Net income 71,728,832 71,728,832
Adjustment to beginning
balance for change in
accounting method -
FAS 115 3,782,071 3,782,071
Net unrealized losses
on available-for-sale
securities ( 9,578,995) ( 9,578,995)
Dividends:
Class A - $.225 per
share ( 15,082,200) ( 15,082,200)
Class B - $33.75
per share ( 103,613) ( 103,613)
---------- ----------- ------------ ------------
Balance, December 31, 1994 $7,830,000 ($ 721,470) $251,655,420 $260,933,950
Net income 93,550,797 93,550,797
Net unrealized gains on
available-for-sale
securities 18,364,913 18,364,913
Dividends:
Class A - $.2783 per
share ( 18,657,245) ( 18,657,245)
Class B - $41.75
per share ( 128,174) ( 128,174)
---------- ----------- ------------ ------------
Balance, December 31, 1995 $7,830,000 $17,643,443 $326,420,798 $354,064,241
Net income 105,132,359 105,132,359
Net unrealized losses on
available-for-sale
securities ( 152,952) ( 152,952)
Dividends:
Class A - $.345 per
share ( 23,126,084) ( 23,126,084)
Class B - $51.75
per share ( 158,873) ( 158,873)
---------- ----------- ------------ ------------
Balance, December 31, 1996 $7,830,000 $17,490,491 $408,268,200 $435,758,691
========== =========== ============ ============
<FN>
The notes to consolidated financial statements are an integral part of these
statements.
</FN>
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ -------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $105,132,359 $ 93,550,797 $ 71,728,832
Adjustment to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 1,428,376 1,019,784 921,498
Deferred income tax expense
(benefit) 1,255,163 ( 49,439) ( 337,046)
Realized (gain) loss on
investments ( 6,583,208) ( 5,791,049) 4,378
Amortization of bond discount ( 19,640) ( 227,667) ( 195,591)
Undistributed earnings of
Erie Family Life ( 2,799,190) ( 2,982,739) ( 2,847,373)
Deferred compensation ( 151,646) 263,283 79,180
Increase in accrued interest
and dividends ( 589,879) ( 1,542,037) ( 792,990)
(Increase) decrease in
receivables ( 30,842,709) ( 30,929,496) 30,072,795
Increase in policy acquisition
costs ( 529,264) ( 1,344,082) ( 621,978)
(Increase) decrease in prepaid
expenses and other assets ( 3,587,508) ( 937,221) 863,245
(Decrease) increase in accounts
payable and accrued expenses ( 2,200,926) 2,887,942 1,430,529
Increase in accrued
commissions 2,820,729 17,367,002 819,501
(Decrease) increase in income
taxes payable ( 3,124,595) 2,525,058 ( 5,660,444)
Increase (decrease) in loss
reserves 29,090,892 12,510,419 ( 9,114,808)
Increase in unearned premiums 14,131,495 25,504,917 11,778,295
------------ ----------- ------------
Net cash provided by
operating activities $103,430,449 $111,825,472 $ 98,128,023
------------ ------------ ------------
(Continued on next page)
<FN>
The notes to consolidated financial statements are an integral part of these
statements.
</FN>
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ --------
<S> <C> <C> <C>
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities ($129,218,290) ($ 73,178,269) ($39,672,895)
Equity securities ( 71,925,472) ( 47,294,618) ( 18,181,841)
Mortgage loans ( 2,933,110) ( 1,004,729)
Other invested assets ( 3,114,141) ( 2,460,336) ( 1,599,684)
Sales/maturities of investments:
Fixed maturities 58,677,994 23,374,067 2,574,954
Equity securities 32,959,337 27,869,655 8,685,805
Mortgage loans 68,519 569,555 2,794,816
Other invested assets 1,422,557 561,956 2,895,684
Issuance of note receivable
to Erie Family Life
Insurance Company ( 15,000,000)
Purchase of property and
equipment ( 2,129,961) ( 98,249) ( 367,467)
Purchase of computer software ( 898,016) ( 1,491,911) ( 280,839)
Loans to agents ( 3,086,074) ( 3,268,595) ( 1,302,238)
Collections on agent loans 1,174,808 990,733 755,834
(Increase) decrease in cash
value of officer life
insurance ( 68,415) ( 104,898) 377,957
------------ ------------ ------------
Net cash used in
investing activities ($119,070,264) ($ 89,530,910) ($ 44,324,643)
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Principal payments on
mortgage payable ($ 2,433,899)
Dividends paid to
shareholders ($ 22,497,544) ($ 17,548,053) ( 13,948,446)
------------ ------------ ------------
Net cash used in
financing activities ($ 22,497,544) ($ 17,548,053) ($ 16,382,345)
------------ ------------ ------------
Net (decrease) increase in cash
and cash equivalents ($ 38,137,359) $ 4,746,509 $ 37,421,035
Cash and cash equivalents
at beginning of year 56,856,983 52,110,474 14,689,439
------------ ------------ ------------
Cash and cash equivalents
at end of year $ 18,719,624 $ 56,856,983 $ 52,110,474
============ ============ ============
<FN>
Net cash paid during 1996, 1995 and 1994 for income taxes was $48,784,864,
$41,985,033 and $39,923,500, respectively.
The notes to consolidated financial statements are an integral part of these
statements.
</FN>
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Nature of business
Erie Indemnity Company (Company) is the attorney-in-fact for
the Erie Insurance Exchange (Exchange) a reciprocal insurance
exchange. The Company earns all of its management fee for
administrative and underwriting services provided to the
Exchange and its affiliates. The Exchange is a
property/casualty insurer rated A++, Superior, by A. M. Best.
See also Note 8.
The Company also shares proportionately in the results of all
property/casualty insurance underwriting operations of the
Exchange. Effective January 1, 1992, the Exchange and Erie
Insurance Company (EIC), a wholly-owned subsidiary of the
Company, entered into a reinsurance pooling agreement.
Beginning January 1, 1995, the Erie Insurance Company of New
York (EINY), a wholly-owned subsidiary of the EIC, also became
a part of this intercompany reinsurance pooling agreement. Per
this agreement, EIC and EINY cede 100% of their
property/casualty insurance business, including
property/casualty insurance operation assets and liabilities,
to the Exchange. Insurance ceded by EIC and EINY to the
Exchange does not relieve EIC and EINY from their primary
liability as the original insurers. Following the assumption
and reinsurance of the business from EIC and EINY, the Exchange
retrocedes to EIC and EINY a specified percentage (5% for EIC
during 1996, 1995 and 1994 and .5% for EINY during 1996 and
1995) of all Erie Insurance Group pooled property/casualty
insurance business, including insurance operation assets and
liabilities.
The property and casualty insurers operate in nine states and
the District of Columbia. Business consists to a large extent
of private passenger and commercial automobile, homeowners
insurance and workers' compensation business in Pennsylvania,
Ohio, West Virginia, Maryland and Virginia.
Principles of consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Basis of presentation
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles that differ from statutory accounting practices
prescribed or permitted for insurance companies by regulatory
authorities.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Investments
Effective January 1, 1994, the Company adopted the provisions
of Financial Accounting Standards (FAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Initial
adoption of FAS 115 had no effect on income of the Company. FAS
115 required management to determine the appropriate
classification of securities as held-to- maturity, trading or
available-for-sale at the date of adoption, and thereafter at
the date individual investment securities are acquired. As a
result, upon adoption of FAS 115, the Company changed its
intent with respect to holding certain debt securities to
maturity and reclassified some of its debt securities to
securities available-for- sale.
Management determines the classification of fixed maturities at
the time of purchase and reevaluates such designation as of
each Statement of Financial Position date. 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 does
not hold 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. 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.
During 1995, the Financial Accounting Standards Board (FASB)
allowed a one-time reclassification of held-to-maturity
securities to available- for-sale securities. At December 31,
1995, the Company transferred all of its held-to-maturity
securities to available-for-sale pursuant to the transition
provisions of the FASB's Special Report on FAS 115. The Company
recognized $2,202,002 of unrealized gains, net of deferred
income taxes, at December 31, 1995 because of this
reclassification.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized gains and losses on sales of investments, including
losses from declines in value of specific securities determined
by management to be other-than-temporary, are recognized in
income on the specific identification method. Interest and
dividend income is recorded as earned.
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.
Other invested assets (primarily investments in real estate
limited partnerships) are recorded under the equity method of
accounting.
Financial Instruments - Disclosures About Fair Value
Included in the Notes to Consolidated Financial Statements are
various disclosures relating to the methods and assumptions
used to estimate fair value of each material type of financial
instrument. Fair values of available-for-sale securities are
based on quoted market prices, where available, or dealer
quotations. The carrying value of short-term financial
instruments approximates fair value because of the short-term
maturity of these instruments. The carrying value of
receivables and liabilities arising in the ordinary course of
business approximates their fair values.
Cash equivalents
Cash equivalents include, primarily, investments in bank money
market funds. The carrying amounts reported in the Consolidated
Statements of Financial Position approximate fair value due to
the short-term maturity of these investments.
Recognition of premium revenues and losses
Property and liability premiums are generally recognized as
revenue on a pro rata basis over the policy term. Unearned
premiums are established for the unexpired portion of premiums
written. Losses and loss adjustment expenses are recorded as
incurred. Premiums earned and losses and loss expenses incurred
are reflected in the consolidated statements of operations net
of amounts ceded to the Exchange. See also Note 11.
Deferred policy acquisition costs
Commissions and other costs of acquiring insurance that vary
with and are primarily related to the production of new and
renewal business are deferred and amortized over the terms of
the policies or reinsurance
<PAGE>
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
treaties to which they relate. The amount of costs to be
deferred would be reduced to the extent future policy premiums
and anticipated investment income would not exceed related
losses, expenses and policyholder dividends. Amortization
equaled $18,909,000, $17,041,000 and $14,908,000 in 1996, 1995
and 1994, respectively.
Insurance liabilities
Losses refer to amounts paid or expected to be paid for events
which have occurred. The cost of investigating, resolving and
processing these claims are referred to as loss adjustment
expenses. A liability is established for the total unpaid cost
of losses and loss adjustment expenses, which covers events
occurring in current and prior years.
The liability for losses and loss adjustment expenses includes
an amount determined from loss reports and individual cases and
an amount, based on past experience, for losses incurred but
not reported. Inflation is implicitly provided for in the
reserving function through analysis of costs, trends and
reviews of historical reserving results. 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 the amounts provided. The methods for making
such estimates and for establishing the resulting liability are
continually reviewed, and any adjustments are reflected in
earnings currently. Loss reserves are set at full expected cost
and are not discounted. The reserve for losses and loss
adjustment expenses is reported net of receivables for salvage
and subrogation of $2,863,000 and $2,967,000 at December 31,
1996 and 1995, respectively.
Environmental-related claims
In establishing the liability for unpaid losses and loss
adjustment expenses related to asbestos-related illnesses and
toxic waste cleanup, management considers facts currently known
and the current state of the law and coverage litigation.
Liabilities are recognized for known claims (including the cost
of related litigation) when sufficient information has been
developed to indicate the involvement of a specific insurance
policy, and management can reasonably estimate its liability.
In addition, liabilities have been established to cover
additional exposures on both known and unasserted claims.
Estimates of the liabilities are reviewed and updated
continually.
Guarantee fund assessments
The property/casualty insurance subsidiaries of the Company are
subject to insurance guarantee laws in the states in which they
write business. These laws provide for assessments against
insurance companies in the event of insolvency of other
insurance companies. The Company records an estimated liability
for assessments when notified of insolvencies. The Company's
estimated liability for guarantee fund assessments at December
31, 1996 and 1995 totalled $302,180 and $393,510, respectively.
<PAGE>
INCORPORATED BY REFERENCE, PAGES 28 AND 29 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reinsurance
The statements of operations are reflected net of reinsurance
activities. Gross losses and expenses incurred are reduced for
amounts expected to be recovered under reinsurance agreements.
Reinsurance transactions are recorded "gross" on the statement
of financial position. Estimated reinsurance recoverables and
receivables for ceded unearned premiums are recorded as assets
with liabilities recorded for related unpaid losses and
expenses, and unearned premiums.
Income taxes
Income tax provisions are based on earnings reported for
financial statement purposes. Provisions for income taxes
include deferred taxes resulting from changes in cumulative
temporary differences between the tax bases and financial
statement bases of assets and liabilities. Deferred taxes are
provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and deferred
tax liabilities are recognized for taxable temporary
differences. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of
enactment.
Property and equipment
Property and equipment are stated at cost. Improvements and
replacements are capitalized, while expenditures for
maintenance and repairs are charged to expense as incurred.
Depreciation of property and equipment is computed using
straight line and accelerated methods over the estimated useful
lives of the assets. The costs and accumulated depreciation and
amortization of property sold or retired are removed from the
accounts and gains or losses, if any, are reflected in earnings
for the year.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment as of December 31 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Land $ 736,648 $ 736,648
Buildings 5,833,709 5,833,709
Transportation equipment 450,528 450,528
Leasehold improvements 228,496 221,884
Computer equipment 2,123,350
Computer software 7,013,479 6,115,463
----------- ----------
$16,386,210 $13,358,232
Less accumulated depreciation 6,544,672 5,116,295
----------- ----------
$ 9,841,538 $ 8,241,937
=========== ===========
</TABLE>
Earnings per share
Earnings per share is based on the weighted average number of
Class A shares outstanding, also giving effect to the
conversion of the weighted average number of Class B shares
outstanding at a rate of 2,400 Class A shares for one Class B
share.
Reclassifications
Certain amounts, as previously reported in the 1995 and 1994
financial statements, have been reclassified to conform to the
current year's financial statement presentation. These
reclassifications had no effect on previously reported net
income or shareholders' equity.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 2. INVESTMENTS
The following tables contain cost and market value information on
equity securities (common and non-redeemable preferred stocks) and
debt securities (bonds) classified as available-for-sale at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Available-for-Sale Securities
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
December 31, 1996
U.S. Treasuries $ 12,000 $ 212 $ 72 $ 12,140
Foreign governments 1,988 25 5 2,008
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 7,379
Industrial and
miscellaneous 114,790 2,835 593 117,032
-------- ------ ------ --------
Total fixed
maturities $301,093 $ 9,883 $ 800 $310,176
-------- ------- ------ --------
Common stock:
Banks, trusts &
insurance companies $ 3,034 $ 1,705 $ $ 4,739
Industrial and
miscellaneous 33,969 12,862 1,525 45,306
Non-redeemable
preferred stock:
Public utilities 10,652 196 27 10,821
Banks, trusts &
insurance companies 44,106 1,763 1 45,868
Industrial and
miscellaneous 24,309 580 5 24,884
-------- ------ ------ --------
Total equity
securities $116,070 $17,106 $1,558 $131,618
-------- ------- ------ --------
$417,163 $26,989 $2,358 $441,794
======== ======= ====== ========
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 2. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
Available-for-Sale Securities
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
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:
Public utilities $ 470 $ 172 $ $ 642
Banks, trusts &
insurance companies 2,513 1,111 3,624
Industrial and miscellaneous 24,195 9,354 1,110 32,439
Non-redeemable
preferred stock:
Public utilities 9,144 234 28 9,350
Banks, trusts &
insurance companies 24,377 629 969 24,037
Industrial and miscellaneous 10,722 364 39 11,047
------- ------ ----- -------
Total equity securities $ 71,421 $11,864 $2,146 $ 81,139
-------- ------- ------ --------
$301,344 $23,957 $2,201 $323,100
======== ======= ====== ========
</TABLE>
During the years ended December 31, 1996, 1995 and 1994, fixed
maturity and equity available-for-sale securities were sold with
proceeds of $91,637,331, $51,243,722 and $11,260,759,
respectively. Gross realized gains on such sales totaled
$6,983,685 (equity securities equal $5,968,966 and fixed
maturities equal $1,014,719), $6,822,814 and $671,260 in 1996,
1995 and 1994, respectively, and the gross realized losses totaled
$576,329 (equity securities equal $378,204 and fixed maturities
equal $198,125), $1,011,064 and $1,084,128, in 1996, 1995 and
1994, respectively.
The Company has no significant investment concentrations of credit
risk by issuer or industry. Approximately 14.5% of the recorded
fixed maturity investments are special revenue bonds issued from
political subdivisions in West Virginia.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 2. INVESTMENTS (CONTINUED)
Changes in unrealized gains (losses) include the following for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Equity securities $5,830 $ 5,926 ($2,736)
Debt securities available-for-sale ( 2,955) 10,868 ( 4,878)
Held-to-maturity securities
transferred to available-for-
sale securities 3,388
Other ( 69)
Equity in unrealized gains
(losses) of Erie Family Life
Insurance ( 1,994) 5,289 ( 2,582)
Deferred federal income taxes ( 965) ( 7,106) 2,671
------ ------ ------
Net unrealized gain (loss)
on available-for-sale
securities ($ 153) $18,365 ($7,525)
====== ======= ======
</TABLE>
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1996, by remaining term to maturity,
are shown below.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
<S> <C> <C>
Available-for-Sale
Maturity during the year
ending December 31:
1997 $ 17,694,593 $ 17,715,738
1998 - 2001 48,308,437 48,187,878
2002 - 2006 69,534,481 71,375,978
Subsequent to 2006 165,555,701 172,896,270
------------ ------------
$301,093,212 $310,175,864
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGES 29 AND 30 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 2. INVESTMENTS (CONTINUED)
Other invested assets
Other invested assets include, primarily, investments in
limited partnerships which are engaged in real estate
activities. The fair value of these investments approximates
the recorded amounts. Fair values were determined based on
analyses of cash flows. The Company had realized gains (losses)
of $175,852, ($20,000) and $408,490 from its other invested
assets in 1996, 1995, and 1994, respectively.
NOTE 3. EQUITY IN ERIE FAMILY LIFE INSURANCE COMPANY (EFL)
The Company owns 21.6% of EFL's common shares outstanding which is
accounted for using the equity method of accounting. EFL is a
Pennsylvania-domiciled life insurance company operating in eight
states and the District of Columbia.
The following represents condensed financial information for EFL:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Investments $653,916,816 $569,425,117 $459,629,034
Total assets 740,650,660 673,794,161 528,632,132
Liabilities 608,020,171 544,888,759 437,776,551
Shareholders'
equity 132,630,489 128,905,402 90,855,581
Revenues 82,720,238 78,349,951 66,768,822
Net income 17,666,250 17,881,592 16,829,678
Dividends paid to
shareholders 4,614,756 4,158,000 3,701,253
</TABLE>
The Company's share of EFL's net unrealized gain (loss) on
securities is reflected in shareholders' equity. Such amounts
equalled $1,545,188, $3,538,604 and ($1,750,055) at December 31,
1996, 1995 and 1994, respectively. The 1996, 1995 and 1994 changes
in this net unrealized gain (loss) on securities were
($1,993,416), $5,288,659 and ($4,635,745), respectively. The
effect on the Erie Indemnity Company of EFL implementing FAS 115
in 1994 was an unrealized gain of $2,053,550.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 3. EQUITY IN ERIE FAMILY LIFE INSURANCE COMPANY (EFL) (CONTINUED)
Deferred federal income taxes have not been provided on the
Company's equity in undistributed earnings of EFL. It is Company
management's current intent to reinvest undistributed earnings
indefinitely and not liquidate its investment in EFL. The
unrecognized deferred tax liability at December 31, 1996, 1995 and
1994 is $1,981,000, $1,923,000 and $1,348,000, respectively.
NOTE 4. BENEFIT PLANS
Pension plan for Employees
The Company has a non-contributory defined benefit pension plan
covering substantially all Employees of the Erie Insurance
Group. Pension costs include the following components for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Service cost for
benefits earned
during the year $4,302,900 $4,629,000 $4,547,000
Interest cost on
projected benefit
obligation 5,127,800 5,441,700 5,117,800
Actual return on
plan assets (12,400,700) (16,991,300) ( 132,310)
Net amortization
and deferral 5,171,000 11,323,600 (5,305,490)
---------- ---------- ---------
Net pension
expense $2,201,000 $4,403,000 $4,227,000
========== ========== ==========
</TABLE>
Net amortization and deferral relates primarily to the
difference between the expected and actual return of plan
assets, and amortization of the initial transitional asset.
Assumptions used in accounting for the pension plan are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Discount rate used in
determining present values 7.50% 7.25% 7.50%
Annual increase in future
compensation levels 5.00% 5.00% 7.00%
Expected long-term rate of
return on assets 8.25% 8.25% 8.25%
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 4. BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of the plan at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Accumulated benefit obligation:
Vested $39,253,700 $39,751,100
Non-vested 4,190,400 1,079,600
---------- -----------
Total $43,444,100 $40,830,700
=========== ===========
Fair value of plan assets $98,761,400 $87,588,400
Less projected benefit obligation 72,016,400 65,425,200
----------- -----------
Plan assets in excess of projected
benefit obligation $26,745,000 $22,163,200
Unrecognized net gain ( 27,879,500) ( 25,962,700)
Unrecognized net initial
transition asset ( 1,635,600) ( 1,869,200)
Unrecognized prior service cost 3,823,700 4,271,100
----------- -----------
Prepaid asset/(accrued liability) $ 1,053,600 ($ 1,397,600)
=========== ===========
</TABLE>
The plan assets include cash, treasury bonds, corporate bonds,
common and preferred stocks, and mortgages.
The Company's funding policy is to contribute amounts
sufficient to meet minimum ERISA funding requirements plus such
additional amounts as may be determined to be appropriate.
The pension plan purchases individual annuities periodically
from EFL to settle retiree benefit payments. Such purchases
equalled $4,894,042, $6,024,125 and $8,880,714 in 1996, 1995
and 1994, respectively. These are non-participating annuity
contracts under which the Erie Family Life Insurance Company
has unconditionally contracted to provide specified benefits to
beneficiaries in return for a fixed premium from the plan.
However, the plan remains the primary obligor to the
beneficiaries and a contingent liability exists in the event
the Erie Family Life Insurance Company would not honor the
annuity contracts. The benefit obligation has been reduced for
these annuities purchased for retirees.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 4. BENEFIT PLANS (CONTINUED)
Supplemental pension plan for officers
Pension expense includes the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Service cost component $ 152,100 $140,800 $134,100
Interest cost on projected
benefit obligation 226,900 387,800 313,600
Net amortization and deferral 331,500 301,600 282,900
--------- -------- --------
Net pension expense $ 710,500 $830,200 $730,600
Settlement expenses 3,577,400
Total pension expense $ 710,500 $4,407,600 $730,600
========= ========== ========
</TABLE>
Net amortization and deferral represents amortization of the
initial projected benefit obligation over the estimated average
remaining service period of thirteen years. The settlement
expenses recognized in 1995 relate to annuity purchases made by
the Company during the year to cover vested benefits of three
retired officers.
The following table sets forth the funded status of the plan at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Accumulated benefit obligation $1,844,600 $1,199,500
========== ==========
Projected benefit obligation $3,501,100 $2,166,600
Unrecognized net loss ( 2,669,900) ( 1,021,600)
Unrecognized prior service cost ( 770,100) ( 953,600)
---------- ----------
Accrued pension liability $ 61,100 $ 191,400
========= =========
</TABLE>
The actuarial present value of benefits was determined using a
discount rate of 7.50%, 7.25% and 7.50% in 1996, 1995 and 1994,
respectively.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 4. BENEFIT PLANS (CONTINUED)
The additional pension liability recognized on the statement of
financial position is as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Accumulated benefit obligation $1,844,600 $1,199,500
Less accrued cost 61,100 191,400
---------- ----------
Additional accrued pension liability $1,783,500 $1,008,100
========== ==========
</TABLE>
Pension plan for outside directors
The Company also has an unfunded pension plan for outside
directors.
The director pension expense consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Interest cost on projected
benefit obligation $30,300 $25,100 $20,900
Net amortization and deferral 39,400 37,400 31,200
------- ------- -------
Net pension expense $69,700 $62,500 $52,100
======= ======= =======
</TABLE>
The unrecognized prior service cost is being amortized over a
15-year period.
The following table sets forth the funded status of the plan at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Vested accumulated benefit
obligation $414,300 $385,900
======== ========
Projected benefit obligation $414,300 $385,900
Unrecognized net loss ( 225,500) ( 184,700)
Unrecognized prior service cost ( 124,700) ( 150,800)
-------- --------
Accrued pension liability $ 64,100 $ 50,400
======== ========
</TABLE>
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accumulated benefit obligation $414,300 $385,900
Less accrued cost 64,100 50,400
------- -------
Additional accrued pension liability $350,200 $335,500
======== ========
</TABLE>
The actuarial present value of benefits was determined using an
average discount rate of 7.50%, 7.25% and 7.50% in 1996, 1995
and 1994, respectively.
<PAGE>
INCORPORATED BY REFERENCE, PAGES 30 AND 31 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 4. BENEFIT PLANS (CONTINUED)
An intangible asset has been recorded to reflect the transition
of the additional liability of the Company. The amount of this
asset at December 31, 1996 and 1995 for the supplemental
pension plan and pension plan for outside directors equals
$894,800 and $1,104,400, respectively.
Employee savings plan
The Company has an Employee Savings Plan for its Employees.
Eligible participants are permitted to make contributions of 1%
to 7% of compensation to the plan on a pre-tax salary reduction
basis in accordance with provisions of Section 401(k) of the
Internal Revenue Code. Beginning on October 12, 1995 the
Company began matching one-half of the participant
contributions up to 6% of compensation. Prior to this change
the Company matched one-half of the participant contributions
up to 5% of compensation. All Employees are eligible to
participate in the plan. The Company's contributions to the
plan in 1996, 1995 and 1994 were $2,687,907, $2,227,221 and
$2,060,822, respectively. Effective May, 1997, employees will
be permitted to invest a portion of employer contributions in
common stock (Class A) of the Company. The Company will buy
these shares in the open market.
Deferred compensation plan
The Company has a deferred compensation plan for certain
eligible Employees of the Company and its affiliates. Operating
expenses have been charged with $258,857, $224,280 and $227,467
to provide for the compensation deferred during 1996, 1995 and
1994, respectively.
Health and dental benefits
The Company has self-funded health and dental care plans for
all of its Employees. Estimated unpaid claims incurred are
accrued as a liability at December 31, 1996 and 1995.
Operations were charged $9,899,000, $10,828,000 and $9,701,000
in 1996, 1995 and 1994, respectively, for the cost of health
and dental care provided to Employees.
Postretirement benefits other than pensions
The Company provides postretirement medical coverage for
eligible retired Employees and dependents. The Company pays the
obligation when due.
The Company accounts for these benefits in accordance with
Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Other Than Pensions,"
which requires the accrual method of accounting for
postretirement health care cost benefits based on actuarially
determined costs to be recognized over the period the
Employee provides service to the Company.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 4. BENEFIT PLANS (CONTINUED)
The expense for postretirement health benefits for the years
ended December 31, 1996, 1995 and 1994 was $656,900, $675,300
and $734,200, respectively. The cash payments for such benefits
were $213,500, $184,900 and $178,300 in 1996, 1995 and 1994,
respectively.
The periodic expense for postretirement benefits included the
following components for the years ended December 31, 1996,
1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Service cost for benefits
earned during the year $337,400 $353,500 $387,100
Interest cost on accumulated
benefit obligation 319,500 321,800 325,200
Amortization of unrecognized
net loss 21,900
Total expense $656,900 $675,300 $734,200
======== ======== ========
</TABLE>
The recorded liabilities for postretirement health benefits,
none of which have been funded, at December 31, 1996 and 1995,
are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 201,700 $ 257,900
Fully eligible active
plan participants 889,300 704,700
Other active plan participants 3,384,000 3,399,500
Unrecognized gain 492,400 146,600
---------- ----------
Accrued postretirement liability $4,967,400 $4,508,700
========== ==========
</TABLE>
The accumulated benefit obligation for 1996, 1995 and 1994 was
determined using a discount rate of 7.50%, 7.25% and 7.50%,
respectively. The December 31, 1996 accumulated benefit
obligation was based on a 10.0% increase in the cost of covered
health care benefits during 1996. The expected health care cost
trend rate for 1997 is 9.5%. This rate is assumed to decrease
gradually to 5% per year in 2006 and to remain at that level
thereafter.
The effect on the present value of the accumulated benefit
obligation at December 31, 1996 of a 1% increase each year in
the health care cost trend rate used would increase the amount
of such obligation by $695,500, and the 1996 net periodic
expense would have increased by $115,400.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 5. INCOME TAXES
The provision (benefit) for income taxes consists of the following
for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Federal
Current $45,660,269 $44,510,091 $33,624,685
Deferred 1,255,163 ( 49,439) ( 337,046)
----------- ----------- -----------
$46,915,432 $44,460,652 $33,287,639
=========== =========== ===========
</TABLE>
A reconciliation of the provision for income taxes with amounts
determined by applying the statutory federal income tax rates to
pre-tax income is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Income tax at
statutory rates $53,216,727 $48,304,007 $36,755,765
Add (deduct):
Undistributed earnings
of affiliate ( 979,717) ( 1,029,339) ( 987,847)
Tax-exempt interest ( 3,337,942) ( 3,041,318) ( 1,915,612)
Dividends received
deduction ( 1,482,751) ( 1,004,348) ( 738,363)
Other items ( 500,885) 1,231,650 173,696
----------- ----------- -----------
$46,915,432 $44,460,652 $33,287,639
=========== =========== ===========
</TABLE>
Temporary differences and carryforwards which give rise to
deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Loss reserve discount $4,143,700 $4,063,554
Unearned premiums - 20% inclusion 3,528,043 3,282,323
Pension and other benefits 132,587 1,906,644
Deferred policy acquisition costs ( 3,339,349) ( 3,154,107)
Deferred compensation 555,650 608,729
Fixed assets - depreciation ( 72,225) ( 86,242)
Accrued vacation and other accruals 1,773,642 1,590,396
Unrealized gains ( 8,620,624) ( 7,655,453)
Other ( 136,478) ( 370,562)
---------- ----------
($2,035,054) $ 185,282
========== ==========
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 5. INCOME TAXES (CONTINUED)
Erie Indemnity Company, as a corporate attorney-in-fact for a
reciprocal insurer, is not subject to state corporate income
taxes.
NOTE 6. CAPITAL STOCK
Class A and B shares
Holders of Class B shares may, at their option, convert their
shares into Class A shares at the rate of 2,400 Class A shares
for each Class B share. There is no provision for conversion of
Class A shares to Class B shares and Class B shares surrendered
for conversion cannot be reissued. Each share of Class A common
stock outstanding at the time of the declaration of any
dividend upon shares of Class B common stock shall be entitled
to a dividend payable at the same time, at the same record
date, and in an amount at least equal to 2/3 of 1% of any
dividend declared on each share of Class B common stock. The
Company may declare and pay a dividend in respect of Class A
common stock without any requirement that any dividend be
declared and paid in respect of Class B common stock. Sole
voting power is vested in Class B common stock.
Redemption provisions
On December 14, 1989, the shareholders adopted the Erie
Indemnity Company Stock Redemption Plan. The plan entitles
heirs of 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 and 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% 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% 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% of total shareholdings of such shareholder. On February 29,
1996, the Board of Directors approved an increase in the
redemption amount of $14,350,186.
<PAGE>
INCORPORATED BY REFERENCE, PAGES 31 AND 32 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 6. CAPITAL STOCK (CONTINUED)
Stock split
In May, 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 of Class A common stock was
effected. All references in the consolidated financial
statements to number of shares outstanding, net income per
share, and dividends per share have been restated to reflect
the stock split. The stated value of the stock has also been
proportionately adjusted for the split.
NOTE 7. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE)
The following table provides a reconciliation of beginning and
ending liability balances for 1996, 1995 and 1994 for the
Company's wholly-owned property/casualty subsidiaries.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Total unpaid losses and loss adjustment
expenses at January 1, gross $357,334 $344,824 $353,939
Less reinsurance recoverables 278,325 275,923 288,564
-------- -------- --------
Net balance at January 1 79,009 68,901 65,375
Incurred related to:
Current year 85,311 73,145 68,694
Prior years ( 240) ( 2,210) ( 4,767)
-------- ------- ------
Total incurred 85,071 70,935 63,927
-------- ------- -------
Paid related to:
Current year 49,901 38,039 36,598
Prior years 29,307 22,788 23,803
-------- ------- -------
Total paid 79,208 60,827 60,401
-------- ------- -------
Net balance at December 31 84,872 79,009 68,901
Plus reinsurance recoverables 301,553 278,325 275,923
-------- ------- -------
Total unpaid losses and loss
adjustment expenses at
December 31, gross $386,425 $357,334 $344,824
======== ======== ========
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 8. RELATED PARTY TRANSACTIONS
Management fee
A management fee is charged to the Exchange for administrative
and underwriting services. The fee is recorded as revenue and
computed monthly as a percentage of Exchange direct and
affiliated assumed premiums written. The percentage rate is
adjusted periodically within specified limits by the Company's
Board of Directors. The management fee was charged to the
Exchange at the rate of 25% of premiums written in the first
quarter of 1995 and for all of 1994. Effective April 1, 1995
the management fee rate was reduced to 24.5%. For the period
beginning April 1, 1996 through December 31, 1996, the Board
elected to reduce the management fee rate from 24.5% to 24%.
The Board elected to maintain the 24% management fee rate for
all of 1997. A service arrangement fee is charged to the
Exchange to compensate the Company for its management of
non-affiliated assumed reinsurance business on behalf of the
Exchange. Prior to this service agreement, the Company received
a management fee on assumed reinsurance premiums written and
was responsible for the payment of brokerage commissions. Under
the new reinsurance service arrangement, which went into effect
January 1, 1995, the Company receives a fee of 7% of voluntary
reinsurance premiums assumed from non-affiliated insurers and
will no longer be responsible for the payment of brokerage
commissions on this business. The Company will continue to be
responsible for accounting and operating expenses in connection
with the administration of this business.
Expense reimbursements
The Company is reimbursed by the Exchange for adjusters'
salaries and other expenses incurred in connection with
adjustment of claims. The Company also incurs administrative
expenses on behalf of EFL. Reimbursements are made to the
Company from these affiliates monthly. The amounts of such
reimbursements were as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Erie Insurance Exchange $ 95,820,000 $83,662,000 $74,812,000
Erie Family Life
Insurance Company 10,095,000 10,231,000 8,664,000
----------- ----------- ----------
$105,915,000 $93,893,000 $83,476,000
============ =========== ===========
</TABLE>
Also, see Note 10 regarding real estate leased from affiliates.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 8. RELATED PARTY TRANSACTIONS (CONTINUED)
Note receivable from EFL
On December 29, 1995, EFL issued a surplus note to the Company
in return for a cash (or cash equivalent) 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. Interest
on the surplus note is scheduled to be paid quarterly. The note
will be payable on demand on or after December 31, 2005. During
1996, EFL received approval for the payment of interest
totaling $967,500, which was paid to the Company by EFL.
Structured settlements with EFL
The Company and Exchange periodically purchase annuities from
EFL in connection with the structured settlements of claims.
The Company's pro-rata share (5.5%) of such annuities purchased
equalled $742,772, $1,235,722 and $583,263 in 1996, 1995 and
1994, respectively.
NOTE 9. RECEIVABLES FROM ERIE INSURANCE EXCHANGE AND CONCENTRATIONS OF CREDIT
RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk include unsecured receivables from
the Exchange. A significant amount of the Company's revenue, and a
receivable of $478,304,267 at December 31, 1996 and $451,777,577
at December 31, 1995, are from the Exchange and affiliates.
Receivables from the Exchange and affiliates at December 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Exchange - Management fee
and expense reimbursements $108,589,885 $105,612,765
EFL - Expense reimbursements 1,049,007 1,392,365
Exchange - Reinsurance
recoverable from losses and
unearned premium balances
ceded to pool 368,665,375 344,772,447
------------ ------------
$478,304,267 $451,777,577
============ ============
</TABLE>
Premiums receivable from Policyholders at December 31, 1996 and
1995 equalled $103,847,320 and $99,534,004, respectively. A
significant amount of these receivables are ceded to the Exchange
as part of the reinsurance pooling arrangement.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 9. RECEIVABLES FROM ERIE INSURANCE EXCHANGE AND CONCENTRATIONS OF CREDIT
RISK (CONTINUED)
The property/casualty insurance business relates primarily to
private passenger and commercial automobile, homeowners and
workers' compensation insurance in ten jurisdictions. Premiums
from insureds in Pennsylvania, Maryland, West Virginia, Virginia
and Ohio account for a significant percentage of the business.
NOTE 10. LEASES
The Company occupies certain office facilities with initial or
remaining noncancellable lease terms in excess of one year. The
Allentown office is leased from EFL. The Company's aggregate lease
commitments for such facilities are as follows:
<TABLE>
<CAPTION>
Unaffiliated
Lessors EFL Total
<S> <C> <C> <C>
1997 $1,011,944 $423,120 $1,435,064
1998 604,292 423,120 1,027,412
1999 300,934 423,120 724,054
2000 273,340 423,120 696,460
2001 155,715 0 155,715
</TABLE>
The Company also leases office space on a year-to-year basis from
the Exchange.
The Company has lease agreements covering certain computer
equipment and software. These leases contain various early
termination provisions which allow the Company to cancel the
leases generally after three years from inception of the lease.
The Company's automobiles are leased for a minimum term of one
year. After one year, the lease term may be continued at the
Company's option for successive monthly renewal periods.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 10. LEASES (CONTINUED)
Rental expense is summarized below:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Office:
Erie Insurance Exchange $ 10,949 $ 10,814 $ 12,312
Erie Family Life
Insurance Company 423 423 423
Unaffiliated lessors 1,062 1,009 973
Computer equipment
and software 5,358 7,115 7,157
Automobiles 2,977 2,785 2,488
----------- ----------- -----------
$ 20,769 $ 22,146 $ 23,353
Reimbursements
from affiliates 9,686 10,373 10,461
----------- ----------- -----------
$ 11,083 $ 11,773 $ 12,892
=========== =========== ===========
</TABLE>
NOTE 11. REINSURANCE
EIC has a pooling arrangement with the Exchange, whereby EIC cedes
all its direct property/casualty insurance to the Exchange and
then assumes 5% of the total of the Exchange's insurance business
(including the business assumed from EIC and EINY).
Beginning January 1, 1995, the Exchange retroceded to EINY, as
part of the existing intercompany reinsurance pooling arrangement,
0.5% of its total direct and assumed writings. EIC maintained its
5% participation in the reinsurance pool, resulting in an increase
in the total participation of the Company's subsidiaries in the
pooling arrangement to 5.5%.
The Company and Exchange limit the maximum net loss which can
arise from certain individual risks by reinsuring (ceding) certain
levels of risks with other insurers or reinsurers, by negotiation
on individual risks in excess of $10,000,000. Effective January 1,
1994, EIC purchased from the Exchange, a Property Catastrophe
Excess of Loss Reinsurance Treaty. The coverage included in the
treaty is $25 million in excess of $10 million and is excluded
from the aforementioned pooling arrangement. The annual premium to
the Exchange for the treaty equalled $274,170, $562,500 and
$625,000 in 1996, 1995 and 1994, respectively.
Similarly, effective January 1, 1995, the EINY purchased from the
Exchange a Property Catastrophe Excess of Loss Reinsurance Treaty.
The coverage included in the treaty is $2,250,000 in excess of
$250,000 and is excluded from the aforementioned pooling
arrangement. The annual premium to the Exchange for the treaty
equalled $150,000 and $78,750 in 1996 and 1995, respectively.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 33 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 11. REINSURANCE (CONTINUED)
Effective January 1, 1997, EIC and EINY placed in effect an all
lines aggregate excess of loss reinsurance agreement with the
Exchange that supercedes the prior catastrophe excess of loss
reinsurance agreement between the parties. Under the new
agreement, EIC and EINY reinsure their net retained share of the
intercompany reinsurance pool such that once EIC and EINY have
sustained ultimate net losses that exceed an amount equal to 72.5
percent of EIC and EINY's net premiums earned, the Exchange will
be liable for 95 percent of the amount of such excess, up to but
not exceeding, an amount equal to 95 percent of 15 percent of EIC
and EINY's net premium earned. Losses equal to 5 percent of the
net ultimate net loss in excess of the retention under the
contract are retained net by EIC and EINY. The annual premium for
this reinsurance treaty is 1.01 percent of the net premium earned
by EIC and EINY during the term of this agreement subject to a
minimum premium of $800,000. This reinsurance treaty is excluded
from the intercompany reinsurance pooling agreement.
To the extent that the Exchange assumes reinsurance business, the
Company participates because of its pooling arrangement with the
Exchange. Similarly, the Company also participates in the business
cessions assumed from the Exchange. Reinsurance premiums,
commissions, expense reimbursements and reserves related to
reinsurance business are accounted for on bases consistent with
those used in accounting for the original policies issued and the
terms of the reinsurance contracts. Premiums ceded to the Exchange
have been reported as a reduction of premium income. The Company's
property and liability reinsurance assumed from foreign insurance
companies is accounted for using the periodic method, whereby
premiums are recognized as revenue over the policy term, and
claims, including an estimate of claims incurred but not reported,
are recognized as they occur. The amount of reinsurance business
assumed from foreign insurance companies is not significant.
Reinsurance contracts do not relieve the Company from its primary
obligations to Policyholders. A contingent liability exists with
respect to reinsurance receivables in the event reinsurers are
unable to meet their obligations under the reinsurance agreements.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 33 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 11. REINSURANCE (CONTINUED)
The following summarizes insurance and reinsurance activities for the Company:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Premiums Earned
Direct $321,735,580 $289,801,421 $266,091,231
Assumed-nonaffiliates 2,882,381 3,330,976 3,062,540
Ceded to Erie Insurance Exchange ( 324,617,961) ( 293,132,397) ( 269,153,771)
Assumed from Erie
Insurance Exchange 101,509,759 92,874,301 78,075,920
------------ ----------- ------------
Net $101,509,759 $ 92,874,301 $ 78,075,920
============ ============ ============
Losses and Loss Adjustment
Expenses Incurred
Direct $261,097,544 $236,611,754 $217,515,123
Assumed-nonaffiliates 2,511,009 3,023,989 2,953,197
Ceded to Erie Insurance Exchange ( 263,608,553) ( 239,635,743) ( 220,468,320)
Assumed from Erie
Insurance Exchange 85,070,861 70,934,755 63,926,959
------------ ----------- -----------
Net $ 85,070,861 $ 70,934,755 $ 63,926,959
============ ============ ============
</TABLE>
NOTE 12. STATUTORY INFORMATION
The Company's insurance subsidiaries are required to file
statutory financial statements with state insurance regulatory
authorities. Accounting principles used to prepare these statutory
financial statements differ from financial statements prepared on
the basis of generally accepted accounting principles.
Consolidated balances including amounts reported by the
consolidated and unconsolidated insurance subsidiaries on the
statutory basis would be as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Shareholders' equity
at December 31, $414,674,000 $328,457,000 $246,115,000
Net income for the
year ended
December 31, 104,007,000 91,550,000 69,794,000
</TABLE>
The amount of dividends the Company's Pennsylvania-domiciled
property/casualty subsidiaries, EIC and Erie Insurance Property &
Casualty Company, can pay without the prior approval of the
Pennsylvania Insurance Commissioner is limited by Pennsylvania
regulation to not more than the greater of: (a) ten percent of its
statutory surplus as reported on its last annual statement, or (b)
the net income as reported
<PAGE>
INCORPORATED BY REFERENCE, PAGE 33 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 12. STATUTORY INFORMATION (CONTINUED)
on its last annual statement. The amount of dividends that the
Erie Insurance Company's New York-domiciled property/casualty
subsidiary, EINY, can pay without the prior approval of the New
York Superintendent of Insurance is limited to the lesser of (a)
ten percent of its statutory surplus as reported on its last
annual statement, or (b) one hundred percent of its adjusted net
investment income during such period. At December 31, 1996, the
maximum dividend payable to the Company from its property/casualty
insurance subsidiaries was $6,000,327. No dividends were paid to
the Company from its property/casualty insurance subsidiaries in
1996 or 1995.
As a Pennsylvania-domiciled life insurance company, EFL may pay
dividends within the preceding twelve months of not more than the
greater of (i) 10% of its statutory surplus or (ii) the statutory
net gain from operations after dividends to Policyholders and
federal income taxes and before realized gains or losses for the
period covered by such statement. Dividends exceeding these limits
are subject to approval of the Pennsylvania Insurance Department.
At December 31, 1996, the Company's share of the maximum dividend
which could be paid by EFL was $2,274,000.
The NAIC has adopted Risk-Based Capital (RBC) requirements that
attempt to evaluate the adequacy of a property/casualty insurance
company's statutory capital and surplus in relation to investment,
insurance and other business risks. The RBC requirements provide
for four different levels of regulatory attention depending on the
ratio of the company's adjusted capital and surplus to its RBC. As
of December 31, 1996 and 1995, the adjusted capital and surplus of
the property/casualty insurance subsidiaries of the Company are
substantially in excess of the minimum level of RBC that would
require regulatory action.
NOTE 13. SEGMENT INFORMATION
The Company's principal operations consist of serving as
attorney-in-fact for the Exchange which constitutes its management
operations. The Company's property/casualty insurance operations
arise by virtue of a pooling arrangement with the Exchange. The
Company also has 21.6% equity interest in EFL which comprises its
life insurance operations segment.
<PAGE>
INCORPORATED BY REFERENCE, PAGE 33 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 13. SEGMENT INFORMATION (CONTINUED)
Summarized financial information for these operations is presented
below. Income amounts include each industry segment's share of
investment income.
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------ ------------
<S> <C> <C> <C>
Total revenue:
Management operations $ 470,537,814 $442,055,097 $414,333,609
Property/casualty
insurance operations 112,541,501 103,217,060 86,109,712
Life insurance operations 3,820,957 3,867,533 3,640,019
-------------- ------------ ------------
$ 586,900,272 $549,139,690 $504,083,340
============== ============ ============
Income (loss) before income taxes:
Management operations $ 148,774,303 $127,538,775 $101,592,560
Property/casualty
insurance operations ( 547,469) 6,605,141 ( 216,108)
Life insurance operations 3,820,957 3,867,533 3,640,019
-------------- ------------ ------------
$ 152,047,791 $138,011,449 $105,016,471
============== ============ ============
Net income:
Management operations $ 99,044,942 $ 84,431,472 $ 66,372,483
Property/casualty
insurance operations 2,337,984 5,316,652 1,773,562
Life insurance operations 3,749,433 3,802,673 3,582,787
-------------- ------------ ------------
$ 105,132,359 $ 93,550,797 $ 71,728,832
============== ============ ============
Identifiable assets:
Management operations $ 456,598,004 $ 369,600,128 $259,444,417
Property/casualty
insurance operations 665,355,064 624,951,253 590,435,375
Life insurance operations 28,686,137 27,880,363 19,650,736
-------------- -------------- ------------
$1,150,639,205 $1,022,431,744 $869,530,528
============== ============== ============
</TABLE>
<PAGE>
INCORPORATED BY REFERENCE, PAGE 33 OF THE COMPANY'S 1996 ANNUAL
REPORT TO SHAREHOLDERS
NOTE 14. QUARTERLY FINANCIAL DATA - UNAUDITED
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
1996
Net revenue from
management
operations $30,687,956 $33,444,575 $35,717,734 $27,578,312
Underwriting loss ( 5,817,156) ( 1,257,113) ( 2,717,648) ( 1,787,294)
Revenue from
investment
operations 7,068,530 7,483,154 9,813,062 11,833,679
Net income 23,498,077 26,466,344 29,186,786 25,981,152
Per share data:
Net income per
share $ .32 $ .36 $ .39 $ .35
========== ========== ========== ==========
Dividends declared:
Class A $ .0833 $ .0833 $ .0833 $ .095
========== ========== ========== ==========
Class B $ 12.50 $ 12.50 $ 12.50 $ 14.25
========== ========== ========== ==========
1995
Net revenue from
management
operations $26,316,860 $30,725,676 $31,697,844 $22,535,847
Underwriting (loss)
income ( 1,798,283) ( 1,942,929) ( 736,208) 739,802
Revenue from
investment
operations 5,203,126 6,008,460 9,473,606 9,787,648
Net income 20,096,875 23,115,732 27,269,453 23,068,737
Per share data:
Net income per
share $ .27 $ .31 $ .37 $ .31
========== ========== ========== ==========
Dividends declared:
Class A $ .065 $ .065 $ .065 $ .0833
========== ========== ========== ==========
Class B $ 9.75 $ 9.75 $ 9.75 $ 12.50
========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996 FORM 10-K OF THE ERIE INDEMNITY COMPANY AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-K
</LEGEND>
<CIK> 0000922621
<NAME> ERIE INDEMNITY COMPANY
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<PERIOD-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<DEBT-HELD-FOR-SALE> 310,176 241,961 0
<DEBT-CARRYING-VALUE> 0 0 0
<DEBT-MARKET-VALUE> 0 0 0
<EQUITIES> 131,618 81,139 0
<MORTGAGE> 7,294 4,432 0
<REAL-ESTATE> 0 0 0
<TOTAL-INVEST> 456,098 332,675 0
<CASH> 18,720 56,857 0
<RECOVER-REINSURE> 164 161 0
<DEFERRED-ACQUISITION> 9,541 9,012 0
<TOTAL-ASSETS> 1,150,639 1,022,432 0
<POLICY-LOSSES> 386,425 357,334 0
<UNEARNED-PREMIUMS> 216,938 202,807 0
<POLICY-OTHER> 0 0 0
<POLICY-HOLDER-FUNDS> 0 0 0
<NOTES-PAYABLE> 0 0 0
0 0 0
0 0 0
<COMMON> 2,170 2,170 0
<OTHER-SE> 433,589 351,894 0
<TOTAL-LIABILITY-AND-EQUITY> 1,150,639 1,022,432 0
101,510 92,874 78,076
<INVESTMENT-INCOME> 29,615 24,682 16,943
<INVESTMENT-GAINS> 6,583 5,791 (4)
<OTHER-INCOME> 0 0 0
<BENEFITS> 85,071 70,935 63,927
<UNDERWRITING-AMORTIZATION> 28,018 25,677 22,399
<UNDERWRITING-OTHER> 0 0 0
<INCOME-PRETAX> 152,048 138,011 105,016
<INCOME-TAX> 46,915 44,461 33,288
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 105,132 93,551 71,729
<EPS-PRIMARY> 1.41 1.26 .96<F1>
<EPS-DILUTED> 1.41 1.26 .96<F1>
<RESERVE-OPEN> 357,334 344,824 353,939
<PROVISION-CURRENT> 85,311 73,145 68,694
<PROVISION-PRIOR> (240) (2,210) (4,767)
<PAYMENTS-CURRENT> 49,901 38,039 36,598
<PAYMENTS-PRIOR> 29,307 22,788 23,803
<RESERVE-CLOSE> 386,425 357,334 344,824
<CUMULATIVE-DEFICIENCY> 132,649 200,024 247,339
<FN>
<F1>ALL PER SHARE DATA HAS BEEN RESTATED TO REFLECT THE COMMON STOCK SPLIT APPROVED
BY THE COMPANY'S SHAREHOLDERS ON MAY 1, 1996.
</FN>
</TABLE>
ERIE INSURANCE COMPANY and
ERIE INSURANCE COMPANY OF NEW YORK
Erie, Pennsylvania
AGGREGATE EXCESS OF LOSS REINSURANCE
This REINSURANCE CONTRACT is made between ERIE INSURANCE EXCHANGE, by and
through its Attorney-in-Fact, ERIE INDEMNITY COMPANY, of Erie, Pennsylvania
(hereafter called the "REINSURER"), and ERIE INSURANCE COMPANY and its wholly
owned subsidiary ERIE INSURANCE COMPANY OF NEW YORK, both of Erie, Pennsylvania
(herein referred to collectively (or individually as the context requires) as
the "COMPANY").
In consideration of the agreements and mutual promises contained herein, the
parties hereby agree that this Reinsurance Contract covers 95% of the Ultimate
Net Loss, as herein provided and specified, which may accrue to the COMPANY
under all policies, contracts, and binders of insurance and reinsurance as
respects coverages classified by the COMPANY as Property and Casualty as a
result of any loss or losses thereunder occurring during the term of this
Reinsurance Contract, subject to the following terms and conditions:
ARTICLE 1 - Term
This Reinsurance Contract shall cover the period commencing on the first day of
January, 1997, and ending on the thirty-first day of December, 1997, both days
inclusive.
ARTICLE 2 - Retention and Limit
No claim shall be made hereunder unless the COMPANY'S total Ultimate Net Losses,
as herein defined, occurring during the term of this Contract exceed an amount
equal to 72.5% of the COMPANY'S Net Premiums, as herein defined, earned during
the term of this Reinsurance Contract. The REINSURER shall then be liable for
95% of the amount of such excess up to but not exceeding an amount equal to 95%
of 15% of the COMPANY'S net premium earned during the term of this Reinsurance
Contract.
It is understood and agreed that losses equal to 5% of the Ultimate Net Loss in
excess of the retentions hereunder, shall be retained net by the COMPANY for its
own account.
ARTICLE 3 - Definition of Ultimate Net Loss
The term "Ultimate Net Loss" shall mean the liabilities incurred by the COMPANY
under insurance or reinsurance agreements, contracts, policies, certificates,
binders, endorsements or agreements of
1
<PAGE>
insurance or reinsurance and shall include those liabilities of the COMPANY
incurred under that certain Reinsurance Pooling Agreement between Erie Insurance
Exchange, Erie Insurance Company and Erie Insurance Company of New York
effective January 1, 1995 ("Reinsurance Pooling Agreement") as it currently
exists or may hereafter be amended, except that "Ultimate Net Loss" as used
herein shall not include unallocated loss adjustment expenses incurred by the
Company.
Nothing in this Article shall be construed to mean that losses are not
recoverable hereunder until the COMPANY'S Ultimate Net Loss has been
ascertained.
ARTICLE 4 - Definition of Net Premiums
The term "Net Premiums" shall mean direct premiums, less return premiums,
received by the COMPANY under insurance or reinsurance agreements, contracts,
policies, certificates, binders, endorsements, or agreements of insurance or
reinsurance, and shall include the COMPANY'S respective share of the premiums
received under the Reinsurance Pooling Agreement as it currently exists or may
hereafter be amended, less premiums for all reinsurances inuring to the benefit
of this Reinsurance Contract without deduction of dividends declared, paid, or
credited to policyholders.
ARTICLE 5 - Underwriting Warranty
It is warranted by the COMPANY that it will not knowingly retain net liability
in excess of the following respective amounts:
Property coverages: $10,000,000 as respects any one risk.
Casualty coverages: $5,000,000 as respects any one policy other than Workers'
Compensation policies.
It is understood that the COMPANY shall be the sole judge of what constitutes
any one risk as respects property coverages and any one policy as respects
casualty coverages.
ARTICLE 6 - Net Retained Liability
This Reinsurance Contract shall apply only to that portion of any insurance or
reinsurance which the COMPANY retains net for its own account, and in
calculating the amount of any loss hereunder, and also in computing the amount
in excess of which this Reinsurance Contract attaches, only loss or losses in
respect to that portion of any insurance or reinsurance which the COMPANY
retains net for its own account shall be included. It is, however, understood
and agreed that the amount of the REINSURER'S liability hereunder in respect to
any loss or losses shall not be increased by reason of the inability of the
COMPANY to collect from any other reinsurers, whether specific or general, any
amounts which may have become due from them, whether such inability arises from
the
2
<PAGE>
insolvency of such other reinsurers or otherwise.
ARTICLE 7 - Quota Share Reinsurance
Unless otherwise specially agreed, it is understood that, in the event the
COMPANY cedes reinsurance on a quota share or portfolio basis, the provisions of
this Reinsurance Contract shall apply as if such reinsurance had not been
effected.
ARTICLE 8 - Notice of Loss
In the event of a claim arising hereunder, notice shall be given to Erie
Insurance Exchange, 100 Erie Insurance Place, Erie, Pennsylvania, 16530-0001, to
the attention of the Managing Director of Reinsurance as soon as practicable.
ARTICLE 9 - Loss Settlements
All loss settlements made by the COMPANY, providing the same are within the
terms of this Reinsurance Contract, shall be unconditionally binding upon the
REINSURER, and amounts falling to the share of the REINSURER shall be payable by
it upon reasonable evidence of the amount due or to be due being given by the
COMPANY.
Should the COMPANY'S Ultimate Net Losses occurring during the term of this
Reinsurance Contract exceed, at any time, an amount equal to 72.5% of the Net
Premiums earned through that period of time, it is understood and agreed that,
at the option of the COMPANY, 95% of such excess and 95% of all such additional
Ultimate Net Losses occurring thereafter will be paid by the REINSURER, subject
to a limit of 95% of 15% of the Net Premiums earned as respects any losses
occurring during the term of this Reinsurance Contract. Any such payment shall
be subject to adjustment in accordance with the provisions of Article 3 after
the REINSURER'S ultimate liability hereunder has been determined.
ARTICLE 10 - Governing Law; Jurisdiction
Subject to "Article 15 - Arbitration", if the REINSURER fails to pay any amount
claimed to be due hereunder, the REINSURER, at the request of the COMPANY, will
submit to the jurisdiction of a court of competent jurisdiction within the
United States. Nothing in this clause constitutes or should be understood to
constitute a waiver of the REINSURER'S rights to commence an action in any court
of competent jurisdiction in the United States, to remove an action to a United
States District Court, or to seek a transfer of a case to another court as
permitted by the laws of the United States or of any state in the United States.
It is further agreed that service of process in such suit may be made upon the
REINSURER, and that
3
<PAGE>
the reinsurer will abide by the final decision of such court or of any appellate
court in the event of an appeal.
Further, pursuant to any statute of any state, territory, or district of the
United States which makes provision therefor, the REINSURER hereby designates
the Superintendent, Commissioner, or Director of Insurance, or other officer
specified for that purpose in the statute, or his successor or successors in
office, as its true and lawful attorney upon whom may be served any lawful
process in any action, suit, or proceeding instituted by or on behalf of the
COMPANY or any beneficiary hereunder arising out of this Reinsurance Contract,
and hereby authorizes the said officer to mail such process, or a true copy
thereof, to the COMPANY.
ARTICLE 11 - Insolvency
In the event of insolvency of the COMPANY, the reinsurance under this
Reinsurance Contract shall be payable by the REINSURER to the COMPANY or to its
liquidator, receiver, or statutory successor, on the basis of the liability of
the COMPANY under the policy or policies reinsured without diminution because of
the insolvency of the COMPANY.
It is further agreed that the liquidator, or receiver, or statutory successor of
the COMPANY, shall give written notice to the REINSURER of the pendency of any
claim against the COMPANY on the policies reinsured within a reasonable time
after such claim is filed in the insolvency proceeding, and that, during the
pendency of such claim, the REINSURER may investigate such claim and interpose,
at their own expense, in the proceeding where such claim is to be adjudicated,
any defense or defenses which they may deem available to the COMPANY or to its
liquidator, or receiver, or statutory successor. The expense thus incurred by
the REINSURER shall be chargeable, subject to court approval, against the
COMPANY as part of the expense of liquidation to the extent of a proportionate
share of the benefit which may accrue to the COMPANY solely as a result of the
defense undertaken by the REINSURER.
ARTICLE 12 - Premium
The premium for this reinsurance shall be 1.01% of the subject Net Premiums
earned by the COMPANY during the period this Reinsurance Contract remains in
force, and shall be subject to a minimum premium of $800,000.
The COMPANY shall pay to the REINSURER a deposit premium of $900,000 which shall
be payable in equal installments of $450,000 each on the first days of January
and July during the period this Reinsurance Contract remains in force. Final
adjustment of the premium hereunder shall be made as soon as may be reasonably
practicable after expiration of this Reinsurance Contract.
4
<PAGE>
ARTICLE 13 - Premium and Loss Payments
Premiums shall be payable directly to the REINSURER and losses shall be paid
directly to the COMPANY in United States currency.
ARTICLE 14 - Access to Records
The REINSURER, by its duly appointed representative, shall have the right, at
any reasonable time, to examine all papers in the possession of the COMPANY
referring business effected hereunder.
ARTICLE 15 - Arbitration
Except as provided in "Article 16 - Loss Commutation", should an irreconcilable
difference of opinion arise between the COMPANY and the REINSURER as to the
interpretation or payment under this Reinsurance Contract, it is hereby mutually
agreed that, as a condition precedent to any right of action hereunder, such
difference, upon the written request of either party, shall be submitted to
arbitration, one arbitrator to be chosen by the COMPANY, one by the REINSURER,
and an umpire to be chosen by the two arbitrators before they enter upon
arbitration.
In the event that either party should fail to choose an arbitrator within sixty
days following a written request by the other party to enter upon arbitration,
the requesting party may choose two arbitrators who shall in turn choose an
umpire before entering upon arbitration. If the arbitrators have not chosen an
umpire at the end of ten days following the last day of the selection of the two
arbitrators, each of the arbitrators shall name three, of whom the other
declines two, and the decision shall be made of the remaining two by drawing
lots. The arbitrators and the umpire shall be active or retired disinterested
officers of insurance or reinsurance companies or Underwriters at Lloyd's,
London, not under the control of either party to this Reinsurance Contract. Each
party shall present its case to the arbitrators within sixty days following the
date of their appointment.
The decision, in writing, of the arbitrators shall be final and binding upon
both parties as to questions of fact, but failing to agree, they shall call in
the umpire and the decision of the majority shall be final and binding as to
questions of fact upon both parties. Judgment upon the award rendered may be
entered in any court having jurisdiction. Each party shall bear the expense of
its own arbitrator and shall jointly and equally bear with the other the expense
of the umpire and of the arbitration. In the event that the two arbitrators are
chosen by one party, as above provided, the expense of the arbitrators, the
umpire, and the arbitration shall be equally divided between the two parties.
Any such arbitration shall take place at Erie, Pennsylvania, unless some other
location is mutually agreed upon by the two parties in interest.
5
<PAGE>
ARTICLE 16 - Loss Commutation
Sixty months after expiration of this Reinsurance Contract, the COMPANY and the
REINSURER agree to commute any unpaid net losses recoverable hereunder occurring
during the term of this Reinsurance Contract.
The COMPANY shall submit a statement of valuation of the net losses recoverable
showing the elements considered reasonable to establish the net losses to be
commuted. The COMPANY and the REINSURER shall agree upon the capitalized value
of such losses and the REINSURER shall pay to the COMPANY the amount so
determined. Payment by the REINSURER of the capitalized value of such losses
shall constitute a complete and final release of the REINSURER'S liability in
respect of such losses.
If the COMPANY and the REINSURER fail to agree on the capitalized value of such
losses within sixty days of receipt of the statement of valuation, then any
difference shall be settled by a panel of three Actuaries or Appraisers, one to
be chosen by each party and the third by the two so chosen. If either party
refuses or neglects to appoint an Actuary or Appraiser within sixty days after
the request in writing that the difference be settled by a panel of three
Actuaries or Appraisers, the other party may appoint two Actuaries or
Appraisers. If the two Actuaries or Appraisers fail to agree on the selection of
a third Actuary or Appraiser within thirty days of their appointment, then each
of them shall name two, one of whom the other shall decline and the
determination of the Actuary or Appraiser shall be made by drawing lots. All the
Actuaries or Appraisers shall be regularly engaged in the valuation of claims
subject to the provisions of this Article 16 - Commutation. None of the
Actuaries or Appraisers shall be under the control of either party to this
Reinsurance Contract nor shall they have any interest in the net losses being
commuted other than that which is required to fulfill their obligations
hereunder.
Each party shall submit its case to its Actuary or Appraiser within thirty days
of the appointment of the third Actuary or Appraiser. The decision in writing of
any two Actuaries or Appraisers, when filed with the COMPANY and the REINSURER,
shall be final and binding on both parties. The expense of the Actuaries or
Appraisers and of the Commutation shall be equally divided between the COMPANY
and the REINSURER. Said Commutation shall take place in Erie, Pennsylvania,
unless some other place is mutually agreed upon by the COMPANY and the
REINSURER.
The term "capitalized value" as used herein shall mean the estimated value of
all future payments hereunder, excluding any provision for incurred but not
reported losses, reduced to present value at an agreed upon rate of interest to
be determined at the time of commutation or the prime rate, whichever is less.
6
<PAGE>
ARTICLE 17 - Extended Expiration
Should this Reinsurance Contract terminate while a loss occurrence covered
hereunder is in progress, it is understood and agreed that, subject to the other
conditions of this Reinsurance Contract, the REINSURER shall be responsible for
their proportion of the entire loss or damage caused by such occurrence.
ARTICLE 18 - Singular Contains the Plural
In interpretation of this Reinsurance Contract, the singular includes the plural
and the plural includes the singular, should the context so require to give full
force and effect to the intent of the parties and the provisions hereunder.
ARTICLE 19 - Notice of Default; Cure
In the event of a default of any of the terms of this Reinsurance Contract,
notice of the default shall be given and the party against which a default is
alleged shall have fifteen days in which to cure such default, prior to any
action being taken hereunder.
ARTICLE 20 - Notices
Notice to REINSURER shall be given at the following address or at any address
specified in writing by REINSURER:
Erie Insurance Exchange
100 Erie Insurance Place
Erie, PA 16530
Notice to COMPANY shall be given at the following addresses or at any addresses
specified in writing by COMPANY:
Erie Insurance Company Erie Insurance Company of New York
100 Erie Insurance Place 4 West Avenue
Erie, PA 16530 Spencerport, NY 14559
Notice is effective when given in writing, upon personal delivery, or sent
postage pre-paid by regular mail, Federal Express or similar service, telex or
telecopier to the address specified herein.
7
<PAGE>
ARTICLE 21 - Amendments
This Reinsurance Contract may be altered or amended in any of its terms and
conditions by the written mutual consent of the parties, and such amendment
shall be considered as part of this Reinsurance Contract.
ARTICLE 22 - Binding Effect
The provisions of this Reinsurance Contract shall be binding on both parties and
their respective heirs, legal representatives, successors and assigns, binding
any receivers, trustees or other fiduciaries appointed in any federal state
insolvency proceeding or federal bankruptcy case.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives.
In Erie, Pennsylvania, this 26th day of February, 1997.
ERIE INSURANCE COMPANY
ATTEST:
/s/ Mark Torok /s/ T. M. Sider
- - - ---------------------------- -------------------------
ERIE INSURANCE COMPANY
OF NEW YORK
ATTEST:
/s/ Mark Torok /s/ J. R. Van Gorder
- - - ---------------------------- -------------------------
ERIE INSURANCE EXCHANGE, by
ERIE INDEMNITY COMPANY,
Attorney-in-Fact
ATTEST:
/s/ J.R. Van Gorder /s/ Michael S. Zavasky
- - - ---------------------------- -------------------------
8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11. - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
1996 1995 1994
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A common shares outstanding
(stated value $.0292 67,032,000 67,032,000 67,032,000
Class B common shares outstanding
(stated value $70) 3,070 3,070 3,070
Conversion of Class B shares to Class A shares
(One share of Class B for 2,400 shares of Class A) 7,368,000 7,368,000 7,368,000
-----------------------------------------------------------------------
Total 74,400,000 74,400,000 74,400,000
=======================================================================
Net income $105,132,359 $93,550,797 $71,728,832
=========== ========== ==========
Per-share amount $1.41 $1.26 $ .96
==== ==== ====
<FN>
Note: 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 and a three- for-one stock
split was effected. The amounts included for 1995 and 1994 have been restated to
reflect this transaction. See also Note 6 of the Notes to Consolidated Financial
Statements included on page 31 of the Annual Report for the year ended
December 31, 1996.
</FN>
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Registrant owns 100% of the outstanding stock of the following
companies:
Name State of Formation
Erie Insurance Property
& Casualty Company Pennsylvania
Erie Insurance Company Pennsylvania
EI Holding Corp. Delaware
EI Service Corp. Pennsylvania
Erie Insurance Company of New York -
Wholly-owned by Erie Insurance Company New York
EXHIBIT 28
INFORMATION FROM REPORTS FURNISHED
TO STATE INSURANCE REGULATORY AUTHORITIES
The information contained in this Exhibit represents information
contained in Schedule P of Annual Statements provided to state regulatory
authorities by the Company's property/casualty insurance company subsidiaries,
Erie Insurance Company, Erie Insurance Company of New York and Erie Insurance
Property & Casualty Company, net of reinsurance. However, under SFAS113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts" which the Company adopted in 1993, the prior practice of offsetting
assets and liabilities relating to reinsurance contracts was eliminated for GAAP
reporting purposes. Thus, the following is a reconciliation between the loss and
loss adjustment expenses reported on the Company's December 31, 1996
Consolidated Statements of Financial Position, contained in the Company's 1996
Annual Report, page 25, and that reported on the Erie Insurance Company's, Erie
Insurance Company of New York's and Erie Insurance Property & Casualty Company's
December 31, 1996 Annual Statements.
Loss and loss adjustment expense per Annual Statement:
Erie Insurance Company $ 79,758,662
Erie Insurance Property & Casualty Company 0
Erie Insurance Company of New York 7,975,867
------------
Subtotal - Loss and loss adjustment expense, net of
reinsurance $ 87,734,529
SFAS113 Reinsurance gross-up adjustment:
Erie Insurance Company 253,868,159
Erie Insurance Property & Casualty Company 44,711,792
Erie Insurance Company of New York 110,539
------------
Loss and loss adjustment expense per Erie Indemnity Company
Consolidated Financial Statements $386,425,019
============
