FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 1997
Commission file number 0-24000
ERIE INDEMNITY COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0466020
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Erie Insurance Place, Erie, Pennsylvania 16530
(Address of principal executive offices) (Zip Code)
(814) 870-2000
Registrant's telephone number, including area code
Not applicable
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Class A Common Stock, no par value, with a stated value of
$.0292 per share-- 67,032,000 shares as of November
1, 1997.
Class B Common Stock, no par value, with a stated value of
$70.00 per share-- 3,070 shares as of November 1,
1997.
The common stock is the only class of stock the Registrant is presently
authorized to issue.
1
<PAGE>
INDEX
ERIE INDEMNITY COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Position--September 30, 1997 and
December 31, 1996
Consolidated Statements of Operations--Three and Nine months ended
September 30, 1997 and 1996
Consolidated Statements of Cash Flows--Nine months ended
September 30, 1997 and 1996
Notes to Consolidated Financial Statements--September 30, 1997
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
PART I. FINANCIAL INFORMATION
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
--------------------- -------------------
(Unaudited)
<S> <C> <C>
INVESTMENTS
Fixed Maturities:
Available-for-Sale (amortized cost of
$320,579,035 and $301,093,212,
respectively) $ 334,052,801 $ 310,175,864
Equity Securities (cost of $132,019,020 and
$116,070,434, respectively) 161,246,024 131,618,139
Real Estate Mortgage Loans 8,383,188 7,293,651
Other Invested Assets 7,563,875 7,010,019
-------------------- -------------------
Total Investments $ 511,245,888 $ 456,097,673
Cash and Cash Equivalents 53,583,025 18,719,624
Equity in Erie Family Life
Insurance Company 33,002,445 28,686,137
Accrued Interest and Dividends 6,725,519 5,570,033
Premiums Receivable from Policyholders 108,399,350 103,847,320
Reinsurance Recoverable, Non-affiliates 121,360 163,691
Deferred Policy Acquisition Costs 10,608,076 9,540,998
Receivables from Erie Insurance Exchange
and Affiliates 514,081,209 478,304,267
Note Receivable from Erie Family
Life Insurance Company 15,000,000 15,000,000
Agent Loans 8,086,475 7,945,946
Prepaid Expenses 11,118,059 6,957,026
Property and Equipment 9,774,985 9,841,538
Prepaid Federal Income Taxes 161,265 4,056,974
Other Assets 8,116,022 5,907,978
--------------------- ---------------------
Total Assets $ 1,290,023,678 $ 1,150,639,205
===================== =====================
</TABLE>
(Continued)
See Notes to Consolidated Financial Statements.
3
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
--------------------- --------------------
(Unaudited)
<S> <C> <C>
LIABILITIES
Unpaid Losses and Loss Adjustment Expenses $ 410,286,956 $ 386,425,019
Unearned Premiums 229,974,386 216,938,069
Accounts Payable 6,295,080 6,034,486
Accrued Commissions 83,638,591 75,518,593
Accrued Payroll and Payroll Taxes 6,327,269 5,268,275
Accrued Vacation and Sick Pay 7,159,830 7,435,360
Deferred Compensation 1,791,530 1,587,570
Deferred Income Taxes 9,292,578 2,035,054
Dividends Payable 6,411,787 6,411,788
Benefit Plans Liability 7,566,419 7,226,300
--------------------- ---------------------
Total Liabilities $ 768,744,426 $ 714,880,514
--------------------- ---------------------
SHAREHOLDERS' EQUITY
Capital Stock
Class A Common, stated value $.0292
per share; authorized 74,996,930 shares;
issued and outstanding 67,032,000 shares 1,955,100 1,955,100
Class B Common, stated value $70.00
per share; authorized 3,070 shares;
Issued and outstanding 3,070 shares 214,900 214,900
Additional Paid-In Capital 7,830,000 7,830,000
Net Unrealized Gain on Available-for-Sale
Securities (net of deferred taxes) 31,463,577 17,490,491
Retained Earnings 479,815,675 408,268,200
--------------------- ---------------------
Total Shareholders' Equity $ 521,279,252 $ 435,758,691
--------------------- ---------------------
Total Liabilities and
Shareholders' Equity $ 1,290,023,678 $ 1,150,639,205
===================== =====================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------- --------------------------------------
MANAGEMENT OPERATIONS 1997 1996 1997 1996
<S> <C> <C> <C> <C>
Management Fee Revenue $ 122,875,909 $ 115,620,834 $ 360,124,010 $ 341,331,890
Service Agreement Revenue 1,830,528 1,333,576 4,158,813 3,765,021
Other Operating Revenue 352,841 312,324 1,414,073 931,655
------------------ ------------------ ----------------- -----------------
Total Revenues from Management Operations 125,059,278 117,266,734 365,696,896 346,028,566
Cost of Management Operations 88,596,644 81,549,000 262,182,313 246,178,301
------------------ ------------------ ----------------- -----------------
Net Revenues From
Management Operations 36,462,634 35,717,734 103,514,583 99,850,265
------------------ ------------------ ----------------- -----------------
INSURANCE UNDERWRITING OPERATIONS:
Premiums Earned 27,099,189 25,740,991 79,838,028 75,300,404
Losses and Loss Adjustment Expenses Incurred 19,790,114 21,286,647 59,015,371 64,100,588
Policy Acquisition and Other
Underwriting Expenses 7,608,033 7,171,992 21,952,443 20,991,733
------------------ ------------------ ----------------- -----------------
Total Losses and Expenses 27,398,147 28,458,639 80,967,814 85,092,321
------------------ ------------------ ----------------- -----------------
Underwriting Loss ( 298,958) (2,717,648) (1,129,786) (9,791,917)
----------------- ------------------ ---------------- -----------------
INVESTMENT OPERATIONS:
Equity in Earnings of Erie Family
Life Insurance Company 1,195,419 982,370 3,145,218 2,515,879
Interest and Dividends 8,426,271 6,549,490 23,818,995 18,483,504
Realized Gain on Investments 2,205,947 2,281,202 4,703,031 3,365,363
------------------ ------------------ ----------------- -----------------
Revenue from Investment Operations 11,827,637 9,813,062 31,667,244 24,364,746
------------------ ------------------ ----------------- -----------------
Income Before Income Taxes 47,991,313 42,813,148 134,052,041 114,423,094
Provision for Income Taxes 15,863,037 13,626,362 43,269,202 35,271,887
------------------ ------------------ ----------------- -----------------
Net Income $ 32,128,276 $ 29,186,786 $ 90,782,839 $ 79,151,207
================== ================== ================= =================
Net Income per Share $ 0.43 $ 0.39 $ 1.22 $ 1.06
================== ================== ================= =================
Dividends Declared per Share:
Class A non-voting Common $ 0.095 $ 0.0833 $ 0.29 $ 0.25
------------------ ------------------ ----------------- -----------------
Class B Common $ 14.25 $ 12.50 $ 42.75 $ 37.50
------------------ ------------------ ----------------- -----------------
See Notes to Consolidated Financial Statements.
</TABLE>
5
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------- ------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 90,782,839 $ 79,151,207
Adjustment to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,366,444 889,914
Deferred income tax expense 1,099,882 1,026,328
Realized gain on investments (4,703,031) (3,365,363)
Amortization of bond discount (103,771) (194,091)
Undistributed earnings of Erie Family Life (2,317,438) (1,493,955)
Increase (decrease) in deferred compensation 203,960 (289,700)
Increase in accrued interest and dividends (1,155,486) (986,620)
Increase in receivables (40,286,641) (45,966,612)
Increase in policy acquisition costs (1,067,078) (872,119)
Increase in prepaid expenses and
other assets (942,328) (2,475,008)
Increase (decrease) in accounts payable and
accrued expenses 1,384,177 (1,032,427)
Decrease (increase) in prepaid federal income taxes 3,895,709 (1,263,913)
Increase in prepaid pension (5,357,160) (1,377,002)
Increase in accrued commissions 8,119,998 4,536,639
Increase in loss reserves 23,861,937 25,578,778
Increase in unearned premiums 13,036,317 23,466,555
------------- ------------
Net cash provided by operating
activities $ 87,818,330 $ 75,332,611
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities (50,847,456) (87,014,797)
Equity securities (47,168,709) (48,633,780)
Mortgage loans (1,183,667) (1,968,775)
Other invested assets (860,241) (3,094,093)
Sales/maturities of investments:
Fixed maturities 27,946,620 31,889,829
Equity securities 39,449,450 17,481,773
Mortgage loans 94,319 44,817
Other invested assets 0 1,209,545
Net gain on other invested assets 290,538 0
Purchase of property and equipment (34,469) (561,281)
Purchase of computer software (1,265,422) (479,332)
Loans to Agents (1,043,025) (815,178)
Collections on Agent loans 902,497 813,461
------------- ------------
Net cash used in investing activities $ (33,719,565) $ (91,127,811)
(Continued)
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES
Dividends paid to shareholders $ (19,235,364) $ (16,873,124)
--------------- ---------------
Net cash used in financing activities $ (19,235,364) $ (16,873,124)
--------------- ---------------
Net decrease in cash and cash equivalents 34,863,401 (32,668,324)
Cash and cash equivalents at beginning of period 18,719,624 56,856,983
--------------- --------------
Cash and cash equivalents at end of period $ 53,583,025 $ 24,188,659
=============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the nine months ended September 30, 1997 and 1996 for income
taxes was $39,920,994 and $37,543,743, respectively.
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended September 30,
1997 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. For further information, refer to the financial
statements and footnotes thereto included in the Company's Form 10-K for the
year ended December 31, 1996.
NOTE B -- RECLASSIFICATIONS
Certain amounts as previously reported in the 1996 financial statements have
been reclassified to conform to the current year's presentation.
NOTE C -- EARNINGS PER SHARE
Earnings per share is based on the weighted average number of Class A shares
outstanding (67,032,000 as retroactively stated in 1996), plus giving effect to
the conversion of the weighted average number of Class B shares outstanding
(3,070 in 1997 and 1996) at a rate of 2,400 Class A shares for one Class B share
as set out in the Articles of Incorporation. Equivalent shares outstanding total
74,400,000.
NOTE D -- INVESTMENTS
Fixed maturities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost. The amortized cost of fixed maturities
classified as held-to-maturity is adjusted for amortization of premiums and
accretion of discounts to maturity. The Company currently holds no
held-to-maturity securities.
Fixed maturities determined by management not to be held-to-maturity and
marketable equity securities are classified as available-for-sale. Marketable
equity securities consist primarily of common and nonredeemable preferred stocks
while fixed maturities consist of bonds and notes. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of tax,
reported as a separate component of shareholders' equity. Management determines
the appropriate classification of fixed maturities at the time of purchase and
reevaluates such designation as of each statement of financial position date.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following is a summary of available-for-sale securities:
Available-for-Sale Securities
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
September 30, 1997
U.S. Government $ 11,997 $ 262 $ 10 $ 12,249
Foreign Governments 1,989 2 22 1,969
Obligations of States
and Political Subdivisions 36,418 2,491 2 38,907
Special Revenue 117,384 6,458 6 123,836
Public Utilities 7,173 136 0 7,309
Industrial and Miscellaneous 145,618 4,385 220 149,783
------------- ------------ ----------- -------------
Total Fixed Maturities $ 320,579 $ 13,734 $ 260 $ 334,053
------------- ------------ ----------- -------------
Common Stock $ 53,107 $ 29,003 $ 5,137 $ 76,973
Preferred Stock 78,912 5,391 30 84,273
------------- ------------ ----------- -------------
Total Equity Securities $ 132,019 $ 34,394 $ 5,167 $ 161,246
------------- ------------ ----------- -------------
$ 452,598 $ 48,128 $ 5,427 $ 495,299
============= ============ =========== =============
</TABLE>
Available-for-Sale Securities
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1996
U.S. Government $ 12,000 $ 212 $ 72 $ 12,140
Foreign Governments 1,988 25 5 2,007
Obligations of States and
Political Subdivisions 28,127 1,321 40 29,408
Special Revenue 136,950 5,349 90 142,209
Public Utilities 7,238 141 7,380
Industrial and Miscellaneous 114,790 2,835 593 117,032
------------- ------------ ----------- -------------
Total Fixed Maturities $ 301,093 $ 9,883 $ 800 $ 310,176
------------- ------------ ----------- -------------
Common Stock $ 37,003 $ 14,567 $ 1,525 $ 50,045
Preferred Stock 79,067 2,539 33 81,573
------------- ------------ ----------- -------------
Total Equity Securities $ 116,070 $ 17,106 $ 1,558 $ 131,618
------------- ------------ ----------- -------------
$ 417,163 $ 26,989 $ 2,358 $ 441,794
============= ============ =========== =============
</TABLE>
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Deferred income taxes increased by $6,158,000 at September 30, 1997 and
increased by $965,000 at December 31, 1996 related to the change in unrealized
gains (losses) on available-for-sale securities.
Mortgage loans on real estate are recorded at unpaid balances, adjusted for
amortization of premium or discount. A valuation allowance is provided for
impairment in net realizable value based on periodic valuations. The change in
the allowance is reflected on the income statement in realized gain (loss) on
investments.
NOTE D -- SUMMARIZED INCOME STATEMENT INFORMATION OF AFFILIATE
The Company has a 21.6% investment in Erie Family Life Insurance Company (EFL)
and accounts for this investment using the equity method. The following
represents summarized income statement information for EFL:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
<S> <C> <C>
Revenues $ 67,366,531 $ 59,279,149
Benefits and expenses 44,725,322 41,842,146
------------------ ------------------
Income before income taxes 22,641,209 17,437,003
Income taxes 8,100,211 5,804,800
------------------ ------------------
Net income $ 14,540,998 $ 11,632,203
================== ==================
Dividends paid to shareholders $ 3,732,756 $ 3,433,504
================== ==================
Net unrealized (depreciation) appreciation on
investment securities, net of deferred taxes $ 17,662,865 $ 681,612
================== ==================
</TABLE>
NOTE E -- NOTE RECEIVABLE FROM EFL
On December 29, 1995, EFL issued a surplus note to the Company in return for
cash of $15 million. The note bears an annual interest rate of 6.45% and all
payments of interest and principal of the note may be repaid only out of
unassigned surplus of EFL and are subject to prior approval of the Pennsylvania
Insurance Commissioner. At September 30, 1997, EFL paid the Company interest in
the amount of $483,750.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and related notes found on pages 3 through 10, since they
contain important information that is helpful in evaluating the Company's
operating results and financial condition.
OPERATING RESULTS
Financial Overview
Consolidated net income rose by 10.1% for the third quarter of 1997 to
$32,128,276, or $.43 per share, from $29,186,786 or $.39 per share, for the
third quarter of 1996. The growth in third quarter net income was driven by
improvement in all the Company's principle operating segments. Gains made in the
Company's management and investment operations were further supported by a
reduction in underwriting losses during the third quarter.
For the nine months ended September 30, 1997, consolidated net income increased
14.7% to $90,782,839 or $1.22 per share, from $79,151,207 or $1.06 per share
earned for the same period in 1996. Management operations improved as management
fee revenue continued to grow. Insurance underwriting operations improved
considerably from the storm-influenced results experienced during the first nine
months of 1996. Revenue from investment operations also grew at a healthy pace,
as the Company's cash flow was invested for higher returns and increased
non-recurring realized capital gains continue to be recognized during 1997.
RESULTS OF OPERATIONS
Analysis of Management Operations
For the third quarter 1997 management fee revenue derived from the management
operations of the Company, which serves as attorney-in-fact for the Erie
Insurance Exchange (the Exchange), rose 6.3% to $122,875,909 in the three months
ended September 30, 1997 from $115,620,834 for the third quarter 1996.
Management fee revenue increased 13.4% to $360,124,010 in the first nine months
of 1997 compared to $341,331,890 for the same period in 1996.
The rate of growth in the management fee revenue was the same as the rate of
growth in the direct and affiliated assumed premium written of the Exchange on
which the management fee revenue is based, as the management fee rate charged in
the third quarter of 1997 and 1996 was 24%. The direct and affiliated assumed
premium in the Exchange's core lines of insurance, with the exception of
workers' compensation, grew by 8% for the third quarter 1997 versus the same
period in 1996. The Exchange's overall premium growth was negatively influenced
by the rate reduction in Pennsylvania workers' compensation insurance driven by
recent Pennsylvania workers' compensation legislative reforms.
Service agreement revenue totaled $1,830,528 for the third quarter of 1997
compared to $1,333,576 for the third quarter of 1996, an increase of 37.3%.
Included in these amounts are management fees charged by the Company for
services provided related to the nonaffiliated reinsurance assumed business of
the Exchange for which the Company receives a 7% service fee. These fees totaled
$1,369,329 for the third quarter of 1997 and $1,333,576 for the same period in
1996. Also included in service agreement revenue for the third quarter of 1997
is a portion of service charges collected from policyholders of the Exchange,
which amounted to $461,199. Beginning
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
September 1, 1997 the Company was reimbursed by the Exchange a portion of the
service charges the Exchange collected from policyholders as reimbursement for
the costs incurred by the Company in providing extended payment terms on
policies written by the Exchange.
The cost of management operations grew 8.6% for the third quarter of 1997 to
$88,596,644 from $81,549,000 during the third quarter of 1996. The cost of
management operations excluding commission costs, rose 1.1% for the three months
ended September 30, 1997 to $28,036,087 from $27,734,696 recorded in the third
quarter of 1996 as productivity improvements and modest growth in operating
costs continued.
The Company is responsible for the payment of commissions to the independent
Agents who sell insurance products for the Company's subsidiaries and the
Exchange, and its subsidiary, Flagship City Insurance Company, as enumerated in
the subscriber's agreement with the Exchange. The Agents receive commissions
based on fixed percentage fee schedules with different commission rates by line
of insurance. Also included in commission expense are the costs of promotional
incentives for Agents and Agent profit-sharing bonuses. Agent profit-sharing
bonuses are based upon the underwriting profitability of the insurance written
and serviced by the Agent within the Erie Insurance Group of companies.
Commissions are the largest component of the cost of management operations.
The Company's commission costs increased 12.5% to $60,560,557 for the third
quarter of 1997, compared to $53,814,304 in the third quarter of 1996. For the
nine months ended September 30, 1997, commission costs increased 9.8% to
$177,087,553 from $161,242,187. Commission costs grew faster than the rate of
growth in direct and affiliated assumed written premiums of the Exchange due to
increased provisions for agent bonuses resulting from improved profitability in
the third quarter of 1997 versus the third quarter of 1996. The growth in
premiums written on a quarterly and year-to-date basis were 6.3% and 6.2%,
respectively.
Personnel costs, including salaries, employee benefits, and payroll taxes, are
the second largest component in cost of operations, after commissions. The
Company's personnel costs, net of those reimbursed by affiliated companies,
totaled $17,188,596 for the three month period ended September 30, 1997,
compared to $16,227,238 for the same period in 1996, an increase of 5.9%.
Personnel costs rose .1% to $51,815,332 for the nine months ended September 30,
1997 from $51,466,263 for the respective period in 1996.
Net revenues from the Company's management operations rose 2.1% to $36,462,634
for the three months ended September 30, 1997 compared to $35,717,734 for the
same period in 1996. This continued growth in quarterly results contributed to
the 3.7% increase in net revenues from management operations for the nine months
ended September 30, 1997. The gross margin from management operations (net
revenue divided by total revenue), of 29.2% in the third quarter of 1997, was
consistent with the gross margin reported in the third quarter of 1996.
Analysis of Insurance Operations
The insurance underwriting operations of the Company's wholly-owned
subsidiaries, Erie Insurance Company and Erie Insurance Company of New York,
which share proportionally in the property/ casualty underwriting results of the
Erie Insurance Group, improved during the third quarter of 1997 versus the same
period in 1996. In the third quarter of 1997, premiums earned for the Company's
property/casualty insurance subsidiaries grew 5.3% to $27,099,189 compared to
$25,740,991 for the same period in 1996. Losses, loss adjustment expenses and
other underwriting expenses incurred
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
decreased by 3.7% for the third quarter of 1997 to $27,398,147 compared to
$28,458,639 for the prior year's third quarter. Underwriting losses in the third
quarter of 1997 were positively affected by milder weather conditions in the
majority of our operating territories. In the third quarter of 1996, insurance
underwriting operations were negatively affected by continued loss development
related to the severe winter storms of 1996 as well as losses from Hurricane
Fran, which struck North Carolina in September 1996. As a result of growth in
premiums earned and a decline in losses, the underwriting loss for the third
quarter of 1997 narrowed to $298,958 compared to a third quarter 1996 loss of
$2,717,648.
For the nine months ended September 30, 1997, the Erie Insurance Company and
Erie Insurance Company of New York's underwriting loss was $1,129,786 compared
to a loss of $9,791,917 for the same period in 1996.
The GAAP combined ratio for the Company's property/casualty insurance operations
improved to 101.4% for the nine months ended September 30, 1997 compared to a
ratio of 113.0% for the same period in 1996. There was also improvement in the
GAAP combined ratio during the third quarter of 1997 which was 101.1%, down from
110.6% for the third quarter of 1996. The GAAP combined ratio is the ratio of
loss, loss adjustment, acquisition, and other underwriting expenses incurred to
premiums earned.
Catastrophes are an inherent risk in the property/casualty insurance business
and can have a material impact on the Company's property/casualty insurance
underwriting operating results. The Company experienced two catastrophes during
1996, with severe winter weather in the first quarter and Hurricane Fran in the
third quarter accounting for $8.1 million of underwriting losses and expenses or
approximately $.07 per share, after federal income taxes. No weather-related
catastrophes, that were material to the financial position of the Company,
occurred in the first nine months of 1997. The Company continually reviews its
methods for estimating its liability for losses and loss adjustment expenses,
which includes an estimate for losses incurred but not reported. Such
liabilities are necessarily based on estimates and, while management believes
the amount is adequate, the ultimate liability may be in excess of or less than
amounts provided.
Analysis of Investment Operations
Revenue from investment operations for the third quarter of 1997 increased by
20.5% to $11,827,637 from $9,813,062 posted in the third quarter of 1996. A
28.7% increase in dividend and interest income, $2.2 million of non-recurring
realized capital gains on investments and increased income from Erie Family
Life, fueled the growth in revenues from investment operations in the third
quarter of 1997.
Revenue from investment operations for the nine months ended September 30, 1997
increased 30% to $31,667,244 from $24,364,746 for the same period in 1996. The
Company benefited from its 21.6% investment in an affiliated life insurer, Erie
Family Life Insurance Company (EFL). This investment is accounted for under the
equity method of accounting. Consequently, the Company's investment earnings
were a direct result of EFL's net income of $14,540,998 and $11,632,203 at
September 30, 1997 and 1996, respectively. The earnings recognized from the
investment in EFL increased to $3,145,218 for the nine months ended September
30, 1997 from $2,515,879 for the same period in 1996.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
FINANCIAL CONDITION
Investments
The Company's investment strategy takes a long-term perspective emphasizing
investment quality, diversification and superior investment returns. Investments
are managed on a total return approach that focuses on current income and
capital appreciation. The Company's investments are also liquid in order to meet
the short- and long-term commitments of the Company. At September 30, 1997, the
Company's investment portfolio of investment-grade bonds, common stock and
preferred stock, all of which are readily marketable, and cash and short-term
investments, totaled $549 million, or 42.6%, of total assets. These resources
provide the liquidity the Company requires to meet demands on its funds.
The total investments of the Company consist of investments in fixed maturities,
common stock, preferred stock, real estate mortgage loans and other invested
assets. At September 30, 1997, 96.8% of total investments were invested in fixed
maturities and equity securities. Mortgage loans and other invested assets
represented only 3.2% of total investments at that date. Mortgage loans and real
estate investments have the potential for higher returns, but also carry more
risk, including less liquidity and greater uncertainty in the rate of return.
Consequently, these investments have been kept to a minimum by the Company.
The Company's investments are subject to certain risks, including interest rate
and reinvestment risk. Fixed maturity and preferred stock security values
generally fluctuate inversely with movements in interest rates. The Company's
corporate and municipal bond investments may contain call and sinking fund
features which may result in early redemptions. Declines in interest rates could
cause early redemptions or prepayments which could require the Company to
reinvest at lower rates.
At September 30, 1997, the Company's five largest investments in corporate debt
securities totaled $19.1 million, none of which individually exceeded $5
million. These investments had a market value of $20 million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company's ability to secure enough cash to meet
its contractual obligations and operating needs. The Company's major sources of
funds from operations are the net cash flow generated from management operations
as the attorney-in-fact for the Exchange, the net cash flow from the Erie
Insurance Company's 5% and the Erie Insurance Company of New York's .5%
participation in the underwriting results of the reinsurance pool with the
Exchange, and the Company's investment income from affiliated and non-affiliated
investments. With respect to the management fee cash flow, funds are generally
released from the Exchange to the Company on a premiums collected basis, as the
Company incurs commission expense on premiums collected rather than written
premiums. The Company generates sufficient net positive cash flow from its
operations which is used to fund its commitments and to build its investment
portfolio, thereby increasing future investment returns. The Company also
maintains a high degree of liquidity in its investment portfolio in the form of
readily marketable fixed maturities, common stocks and short-term investments.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Company's consolidated statements of cash flows indicate that net cash flows
provided by operating activities for the nine months ended September 30, 1997
and 1996, were $87,818,330 and $75,332,611 respectively. Those statements also
classify the other sources and uses of cash by investing activities and
financing activities.
Dividends declared to shareholders in the three months ended September 30, 1997
and 1996, totaled $6,411,787 and $5,624,420, respectively. There are state law
restrictions on the payment of dividends from the insurance subsidiaries to the
Company. No dividends were paid to the Company from its property/casualty
insurance subsidiaries during the first nine months of 1997.
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to deferred tax assets and
liabilities resulted in net deferred tax liabilities at September 30, 1997 of
$9,292,578 and at December 31, 1996 of $2,035,054.
The Company's property/casualty insurance subsidiaries enjoy a strong capital
position which is demonstrated in their risk-based capital ratios calculated
using the National Association of Insurance Commissioners (NAIC) formula at
December 31, 1996. Such calculations indicated that the Company's
property/casualty insurance subsidiaries' Total Adjusted Capital was
substantially above the Authorized Control Level Risk-Based Capital requirements
of the NAIC since their ratios are all in excess of three to one (3:1) at
December 31, 1996.
At September 30, 1997 and December 31, 1996, the Company's receivables from its
affiliates totaled $514,081,209 and $478,304,267, respectively. These
receivables, primarily due from the Exchange, are a result of the
attorney-in-fact management fee, expense reimbursements and the intercompany
reinsurance pool and potentially expose the Company to concentrations of credit
risk.
OTHER MATTERS
New Chief Financial Officer Appointed
Philip A. Garcia, CPA, FLMI, ACS, was named executive vice president and chief
financial officer on October 1, 1997. Mr. Garcia has been with the Company for
the past 17 years and had been senior vice president and controller since
September 1993.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act
of 1995: Statements
contained herein expressing the beliefs of management such as those contained in
the "Results of Operations - Analysis of Insurance Operations", "Financial
Condition - Investments", and the "Liquidity and Capital Resources" sections
hereof, and the other statements which are not historical facts contained in
this report are forward looking statements that involve risks and uncertainties.
These risks and uncertainties include but are not limited to: legislative,
judicial, and regulatory changes, the impact of competitive products and
pricing, product development, geographic spread of risk, weather and
weather-related events, other types of catastrophic events, fluctuations of
securities markets, and technological difficulties and advancements.
15
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
All other exhibits for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore, have been omitted.
The Company did not file any reports on Form 8-K during the three months ended
September 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Erie Indemnity Company
(Registrant)
Date 11/06/97
/s/ Jan R. Van Gorder
(Jan R. Van Gorder, Executive Vice President,
Secretary & General Counsel)
/s/ Philip A. Garcia
(Philip A. Garcia, Executive Vice President & CFO)
16
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS FDS CONTAINS INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF
THE ERIE INDEMNITY COMPANY FOR THE QUARTER ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN REFERENCE TO THE COMPANY'S FORM 10-Q
</LEGEND>
<CIK> 0000922621
<NAME> ERIE INDEMNITY COMPANY
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<DEBT-HELD-FOR-SALE> 334,053 291,617
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<EQUITIES> 161,246 118,315
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<CASH> 53,583 24,189
<RECOVER-REINSURE> 121 172
<DEFERRED-ACQUISITION> 10,608 9,884
<TOTAL-ASSETS> 1,290,024 1,131,769
<POLICY-LOSSES> 410,287 382,918
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79,838 75,300
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