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, 1997
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, 1998.
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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, 1997 (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 28, 1998 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 14
I Item 3. Legal Proceedings 14
I Item 4. Submission of Matters to a
Vote of Security Holders 14
II Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters 15
II Item 6. Selected Consolidated Financial Data 15
II Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 15
II Item 8. Financial Statements and Supplementary
Data 15
II Item 9. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosures 15
III Item 10. Directors and Executive Officers
of the Registrant 16
III Item 11. Executive Compensation 18
III Item 12. Security Ownership of Certain
Beneficial Owners and Management 18
III Item 13. Certain Relationships and Related
Transactions 18
IV Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 21
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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 75.8% of the Company's consolidated revenues in 1997. 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, 1997, the Company had 3,237 full-time
employees. Of that total, 1,577 full-time employees provide claims-specific
services exclusively for the Exchange and 81 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,
1997, the Erie Insurance Group conducted business in nine states and the
District of Columbia through approximately 1,097 agencies with approximately
4,995 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 shares
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 reciprocal Insurance Exchange)
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 - Incorporated 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% of 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, 1997 operated in nine states and the District of Columbia. Erie
Insurance Group's business consists primarily of private passenger automobile,
homeowners, commercial multi-peril, workers compensation and commercial
automobile 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 risks 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, 1997, on a Generally Accepted Accounting Principles (GAAP) basis, EFL had
assets of $833 million and shareholders' equity of $160 million. At December 31,
1997, of EFL's total liabilities of $672 million, insurance and annuity reserves
accounted for $623 million and a note payable to the Company amounted to $15
million. Of EFL's investment portfolio of $703 million at December 31, 1997,
available-for-sale securities accounted for $679 million, real estate was $2
million, policy loans were $5 million, mortgage loans accounted for $10 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 41 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.
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:
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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
28 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 for the Company's wholly-owned subsidiaries.
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 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
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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,
1997 1996
GAAP combined ratio......................... 102.1% 111.4%
====== ======
Statutory operating ratios:
Loss ratio................................ 74.1 83.3
Expense ratio............................. 26.6 26.4
Dividend ratio............................ 0.9 1.0
----- -----
Statutory combined ratio.................. 101.6% 110.7%
====== ======
Industry statutory combined ratio(1)........ 101.8% 105.8%
====== ======
- ---------------
(1) Source: A.M. Best
For the calendar years 1997 and 1996, the Company incurred
underwriting losses from its insurance underwriting operations in the amount of
$2,259,425, and $11,579,211, respectively. Underwriting results were favorably
impacted by mild weather conditions and a lack of significant catastrophe losses
in the Company's operating territories in 1997. 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.
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
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(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 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, 1996 and
1997.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
-------- -------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Reserve for unpaid
losses and loss
adjustment expense.................. $413,409 $386,425 $357,334 $344,824 $353,939
========
Liability as of:
One year later...................... 395,308 351,684 327,283 323,996
-------
Two years later..................... 363,273 332,821 322,883
-------
Three years later................... 351,721 332,771
-------
Four years later..................... 350,787
-------
Cumulative deficiency
(excess) ........................ 8,883 5,939 6,897 ( 3,152)
===== ===== ===== =======
Cumulative amount of
liability paid through:
One year later...................... $142,425 $132,649 $134,044 $140,667
======== ======== ======== ========
Two years later..................... $200,171 $200,024 $214,818
======== ======== ========
Three years later................... $233,545 $247,339
======== ========
Four years later.................... $264,557
========
</TABLE>
See Note 8 of the Notes to Consolidated Financial Statements
contained in the Annual Report page 39 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, 1997, 1996 and 1995.
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Reinsurance
Reference is made to Note 11 of the Notes to Consolidated
Financial Statements contained in the Annual Report page 40 incorporated herein
by reference for a complete discussion of the reinsurance transactions involving
the Company and its affiliates.
Erie Insurance Group
Intercompany Reinsurance Chart
As of December 31, 1997
Source of Business:
The Erie Insurance Company, Erie Insurance Company of New York, Flagship City
Insurance Company and Erie Insurance Property & 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,
1997, the amount of such insolvency assessments paid by the property/casualty
insurers managed by the Company was not material.
Pennsylvania regulations limit the amount of dividends EFL can pay
its shareholders and limit the amount of dividends the Company's property/
casualty insurance subsidiaries can pay to the Company. The limitations are
fully described and reference is made herein to Note 12 of the Notes to
Consolidated Financial Statements contained in the Annual Report, pages 40
and 41 incorporated by reference.
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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,
------------------------------------
1997 1996
------- -------
(in thousands)
<S> <C> <C>
SAP amounts.................................. $ 8,446 $ 1,806
Adjustments:
Deferred policy acquisition
costs..................................... 742 529
Deferred income taxes...................... 1,409 677
Federal alternative minimum
tax credit recoverable.................... (1,815) 0
Salvage and subrogation.................... 94 (104)
Incurred premium adjustment................ (742) (529)
Amortization of goodwill................... 0 (619)
Bad debt write-offs -
prior period.............................. (78) 0
Consolidating eliminations
and adjustments........................... 0 (1)
------- -------
GAAP amounts................................. $ 8,056 $ 1,759
======= =======
</TABLE>
<TABLE>
<CAPTION>
Shareholders' Equity
As of December 31,
1997 1996 1995
------- ------- -------
(in thousands)
<S> <C> <C> <C>
SAP amounts.................................. $60,628 $53,154 $51,179
Adjustments:
Deferred policy acquisition
costs..................................... 10,284 9,541 9,012
Deferred income taxes...................... 5,998 4,478 3,847
Salvage and subrogation.................... 2,957 2,863 2,967
Statutory reserves......................... 1,823 0 1
Incurred premium adjustment................ (10,284) (9,541) (9,012)
Unrealized gains net of
deferred taxes............................ 6,697 3,005 4,584
Amortization of goodwill................... 0 (619) (104)
Federal alternative minimum
tax credit recoverable.................... (1,815) 0 0
Consolidating eliminations
and adjustments........................... 8 50 192
------- ------- -------
GAAP amounts................................. $76,296 $62,931 $62,666
======= ======= =======
</TABLE>
Pennsylvania imposes minimum risk-based capital requirements for
property/casualty insurance companies as developed by the NAIC. A full
description of these requirements is included in Management's Discussion and
Analysis of Financial Condition and Results of Operations under the heading
"Regulatory Risk-Based Capital" on page 24 of the Annual Report incorporated
herein by reference.
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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.
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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, 1997, 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 $11,288,401 in 1997. One office
is owned by and leased from EFL at an annual rental in 1997 of $423,120. The
remaining ten offices are leased from various unaffiliated parties at an
aggregate annual rental in 1997 of approximately $1,226,383. The Company is
reimbursed by its affiliates for a percentage of the rent for office space used
by its affiliates, which reimbursement was approximately 47% in 1997.
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 1997.
14
<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 44 of the Annual Report
for the year ended December 31, 1997, incorporated herein by reference, 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 27, 1998, there were approximately 1,349
beneficial shareholders of the Company's Class A non-voting common stock and 27
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
15 of the Annual Report for the year ended December 31, 1997, incorporated
herein by reference.
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 16 through 27 of the
Annual Report for the year ended December 31, 1997, incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
Reference is made to the "Consolidated Financial Statements"
included on pages 30 through 33 and to the "Quarterly Financial Data" contained
in the Notes to Consolidated Financial Statements on page 41 of the Annual
Report for the year ended December 31, 1997, incorporated herein by reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosures
None.
15
<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 9 of the Company's
proxy statement relating to the annual meeting of shareholders to be held on
April 28, 1998.
(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 12/31/97 Erie Insurance Group
<S> <C> <C>
President & Chief Executive Officer
Stephen A. Milne 49 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
Jan R. Van Gorder, Esq. 50 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.
Philip A. Garcia 41 Executive Vice President and Chief Financial Officer since
October 2, 1997; Director, the Erie NY, Flagship and Erie P&C;
Senior Vice President and Controller 1993 - 1997; Vice
President 1988 - 1993.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Age Principal Occupation for Past
as of Five Years and Positions with
Name 12/31/97 Erie Insurance Group
<S> <C> <C>
Senior Vice Presidents
John C. Bender 52 Senior Vice President since 1992; Vice President 1983 - 1992
Eugene C. Connell 43 Senior Vice President since 1990; Vice President 1988 - 1990
Dennis M. Geib 54 Senior Vice President since 1990; Vice President 1986 - 1990
Elaine A. Lamm 59 Senior Vice President since 1990; Vice President 1988 - 1990
George R. Lucore 47 Senior Vice President since March, 1995;
Regional Vice President 1993 - March, 1995;
Assistant Vice President 1988 - 1993
Jeffrey A. Ludrof 38 Senior Vice President since 1994;
Regional Vice President 1993 - 1994;
Assistant Vice President 1989 - 1993
David B. Miller 43 Senior Vice President since August 1996;
Independent Insurance Agent 1991 - 1996;
Vice President 1989 - 1991
Timothy G. NeCastro 37 Senior Vice President and Controller since November 10, 1997;
Department Manager Internal Audit November 1996 - 1997
James R. Roehm 49 Senior Vice President since 1991; Vice President 1987 - 1991
Douglas F. Ziegler 47 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 61 Regional Vice President since 1993; Vice President 1988 - 1993
Douglas N. Fitzgerald 41 Regional Vice President since 1993; Vice President 1987 - 1993
Terry L. Hamman 43 Regional Vice President since May, 1995;
Assistant Vice President 1993 - May, 1995
Managing Director
Michael S. Zavasky 45 Vice President and Managing Director of Reinsurance since 1990;
Vice President 1988 - 1990
</TABLE>
17
<PAGE>
Item 11. Executive Compensation
The answer to this item is incorporated by reference to pages 10
through 13 of the Company's proxy statement dated April 1, 1998 relating to the
annual meeting of shareholders to be held on April 28, 1998, 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 4
through 6 of the Company's proxy dated April 1, 1998 relating to the annual
meeting of shareholders to be held on April 28, 1998.
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 approximate
those which 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 affiliated 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% from
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 and to
maintain the 24% management fee rate for all of 1997. Beginning January 1, 1998
through December 31, 1998, the management fee charged the Exchange was
increased to 24.25%. 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 taxes. For the three years ended
December 31, 1997, 1996 and 1995 the management fees paid by the Exchange to
the Company were $467,602,283, $442,904,376 and $420,003,739, respectively.
18
<PAGE>
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. Service agreement revenue from the management
of non-affiliated assumed reinsurance business was $5,015,192 in 1997,
$5,069,140 in 1996 and $4,401,232 in 1995.
Effective September 1, 1997, the Company was reimbursed by the
Exchange a portion of the service charges collected from policyholders as
reimbursement for the costs incurred by the Company in providing extended
payment terms on policies written by the insurers managed by the Company.
Service charge revenue amounted to $2,011,181 in 1997.
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 $977,932, $742,772 and $1,235,722 for the
years ended December 31, 1997, 1996 and 1995, respectively, and the reserves
held by EFL at December 31, 1997 for such annuities were approximately
$6,117,045. 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
$1,992,060, $4,894,042 and $6,024,125 for the years ended December 31, 1997,
1996 and 1995, 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
$33,672,000 at December 31, 1997.
On December 29, 1995, EFL issued a surplus note to the Company
for $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
19
<PAGE>
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 semi-annually. 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 1997 and 1996, EFL paid the
Company interest totaling $967,500.
Information with respect to certain relationships with Company
directors is incorporated by reference to pages 15 through 16 of the Company's
proxy dated April 1, 1998 relating to the annual meeting of shareholders to be
held on April 28, 1998.
20
<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.................................. 29
Consolidated Statements of Operations
for the three years ended
December 31, 1997, 1996 and 1995.............................. 30
Consolidated Statements of Financial
Position as of December 31, 1997
and 1996 ................................................... 31
Consolidated Statements of Cash Flows
for the three years ended
December 31, 1997, 1996 and 1995.............................. 32
Consolidated Statements of Shareholders'
Equity for the three years ended
December 31, 1997, 1996 and 1995.............................. 33
Notes to Consolidated Financial Statements...................... 34
(2) Financial Statement Schedules
Page
Erie Indemnity Company and Subsidiaries:
Report of Independent Auditors on Schedules....................... 26
Schedule I. Summary of Investments - Other
than Investments in Related
Parties........................................ 27
Schedule IV. Reinsurance......................................... 28
Schedule VI. Supplemental Information
Concerning Property/Casualty
Insurance Operations........................... 29
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 1997 Annual Report
to Shareholders. The Consolidated Financial Statements and Notes to Consolidated
Financial Statements and Auditors' Report thereon on pages 29 to 41 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.
21
<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
10.12*** Form of Subscriber's Agreement whereby
policyholders of Erie Insurance Exchange
appoint Registrant as their
Attorney-in-Fact
22
<PAGE>
Exhibit
Number Description of Exhibit
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
10.22 1997 Annual Incentive Plan of Erie Indemnity
Company
10.23 Erie Indemnity Company Long-Term Incentive Plan
10.24 Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Stephen A.
Milne
10.25 Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Jan R. Van
Gorder
10.26 Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Philip A.
Garcia
10.27 Employment Agreement dated December 16, 1997 by and between
Erie Indemnity Company and John J. Brinling, Jr.
23
<PAGE>
Exhibit
Number Description of Exhibit
11 Statement re computation of per share
earnings
13 1997 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
28 Analysis of Losses and Loss Expenses --
Schedule P of the 1997 Annual Statement of
Erie Insurance Company
28 Analysis of Losses and Loss Expenses --
Schedule P of the 1997 Annual Statement of
Erie Insurance Property & Casualty Company
28 Analysis of Losses and Loss Expenses --
Schedule P of the 1997 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 incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1996 that was filed with the Commission on March 21,
1997.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1997, Registrant did not file any
reports on Form 8-K.
24
<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.
Date: March 11, 1998 ERIE INDEMNITY COMPANY
(Registrant)
Principal Officers
/s/ Stephen A. Milne
Stephen A. Milne, President and C.E.O.
/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
/s/ Timothy G. NeCastro
Timothy G. NeCastro, Senior Vice President & Controller
Board of Directors
/s/ Peter B. Bartlett /s/ Irvin H. Kochel
Peter B. Bartlett Dr. Irvin H. Kochel
/s/ Samuel P. Black, III /s/ Edmund J. Mehl
Samuel P.Black, III Edmund J. Mehl
/s/ J. Ralph Borneman /s/ Stephen A. Milne
J. Ralph Borneman Stephen A. Milne
/s/ Patricia A. Goldman /s/ John M. Petersen
Patricia A. Goldman John M. Petersen
/s/ Susan Hirt Hagen /s/ Seth E. Schofield
Susan Hirt Hagen Seth E. Schofield
/s/ Thomas B. Hagen /s/ Jan R. Van Gorder
Thomas B. Hagen Jan R. Van Gorder
/s/ F. William Hirt /s/ Harry H. Weil
F. William Hirt Harry H. Weil
25
<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, 1997 and 1996
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997, as
contained in the 1997 annual report, incorporated by reference in the annual
report on Form 10-K for the year ended December 31, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 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 17, 1998
26
<PAGE>
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
<TABLE>
<CAPTION>
DECEMBER 31, 1997
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 $ 61,553 $ 77,708 $ 77,708
Foreign Industrial and
Miscellaneous 3,209 2,462 2,462
Non-Redeemable Preferred Stocks
Public Utilities 2,619 2,646 2,646
U.S. Banks, Trusts and
Insurance Companies 46,901 50,248 50,248
U.S. Industrial and
Miscellaneous 25,909 27,914 27,914
Foreign Industrial and
Miscellaneous 3,932 4,155 4,155
Fixed Maturities
U.S. Treasuries 12,771 13,200 13,200
Foreign Governments - Agency 1,989 1,570 1,570
Obligations of State and
Political Subdivisions 41,931 44,771 44,771
Special Revenues 116,052 123,901 123,901
Public Utilities 7,171 7,331 7,331
U.S. Industrial and
Miscellaneous 150,666 156,582 156,582
Foreign Industrial and
Miscellaneous 2,556 2,618 2,618
-----------------------------------------------------
Total Available-for-Sale
Securities $ 477,259 $ 515,106 $ 515,106
-----------------------------------------------------
Real Estate Mortgage Loans $ 8,392 $ 8,392 $ 8,392
Other Invested Assets 7,932 7,932 $ 7,932
-----------------------------------------------------
Total Investments $ 493,583 $ 531,430 $ 531,430
-----------------------------------------------------
</TABLE>
27
<PAGE>
SCHEDULE IV - REINSURANCE
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Other from Other Net Assumed
Direct Companies Companies Amount to Net
<S> <C> <C> <C> <C> <C>
December 31,1997
Premiums for the year
Property and Liability Insurance $334,771,551 $340,165,100 $112,743,217 $107,349,668 105.0%
--------------------------------------------------------------------------------------------------
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%
--------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VI - SUPPLMENTAL 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>
@ 12/31/97
Consolidated P&C Entities $ 10,283 $413,409 $ 0 $219,211
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $ 10,283 $413,409 $ 0 $219,211
---------------------------------------------------------------------------------
@ 12/31/96
Consolidated P&C Entities $ 9,541 $386,425 $ 0 $216,938
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $ 9,541 $386,425 $ 0 $216,938
---------------------------------------------------------------------------------
@ 12/31/95
Consolidated P&C Entities $ 9,012 $357,334 $ 0 $202,807
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $ 9,012 $357,334 $ 0 $202,807
---------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (CONTINUED)
Loss and Loss Adjustment Expenses
Net Incurred Related to
Earned Investment (1) (2)
Premiums Income Current Year Prior Years
<S> <C> <C> <C> <C>
@ 12/31/97
Consolidated P&C Entities $107,350 $ 13,569 $ 77,345 $ 2,625
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $107,350 $ 13,569 $ 77,345 $ 2,625
---------------------------------------------------------------------------------
@ 12/31/96
Consolidated P&C Entities $101,510 $ 11,032 $ 85,311 $ (240)
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $101,510 $ 11,032 $ 85,311 $ (240)
---------------------------------------------------------------------------------
@ 12/31/95
Consolidated P&C Entities $ 92,874 $ 10,343 $ 73,145 $ (2,210)
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $ 92,874 $ 10,343 $ 73,145 $ (2,210)
---------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VI - SUPPLEMETAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (CONTINUED)
Amortization
of Deferred Net
Policy Loss & LAE Premiums
Acquisition Costs Paid Written
<S> <C> <C> <C>
@ 12/31/97
Consolidated P&C Entities $ 20,103 $ 75,343 $110,282
Unconsolidated P&C Entities 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0
------------------------------------------------------
Total $ 20,103 $ 75,343 $110,282
------------------------------------------------------
@ 12/31/96
Consolidated P&C Entities $ 18,909 $ 79,208 $105,020
Unconsolidated P&C Entities 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0
------------------------------------------------------
Total $ 18,909 $ 79,208 $105,020
------------------------------------------------------
@ 12/31/95
Consolidated P&C Entities $ 17,041 $ 60,827 $100,562
Unconsolidated P&C Entities 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0
------------------------------------------------------
Total $ 17,041 $ 60,827 $100,562
------------------------------------------------------
</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
31
<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
10.22 1997 Annual Incentive Plan of Erie Indemnity
Company 34-38
10.23 Erie Indemnity Company Long-Term Incentive Plan 39-48
10.24 Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Stephen A.
Milne 49-65
10.25 Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Jan R. Van
Gorder 66-82
32
<PAGE>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
10.26 Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Philip A.
Garcia 83-99
10.27 Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and John J.
Brinling, Jr. 100-116
11 Statement re computation of per share
earnings 117
13 1997 Annual Report to Security Holders.
Reference is made to the Annual Report
furnished to the Commission, herewith. 118-170
21 Subsidiaries of Registrant 171
27 Financial Data Schedule 172
28 Information from Reports Furnished to State
Insurance Regulatory Authorities 173
28 Analysis of Losses and Loss Expenses --
Schedule P of the 1997 Annual Statement of
Erie Insurance Company P
28 Analysis of Losses and Loss Expenses --
Schedule P of the 1997 Annual Statement of
Erie Insurance Property & Casualty Company P
28 Analysis of Losses and Loss Expenses --
Schedule P of the 1997 Annual Statement of
Erie Insurance Company of New York P
* 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 incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1996 that was filed with the Commission on March 21,
1997.
33
Exhibit 10.22
1997 ANNUAL INCENTIVE PLAN
OF
ERIE INDEMNITY COMPANY
1. PURPOSE. The purpose of the Annual Incentive Plan (the "Plan") of Erie
Indemnity Company (the "Company") is to promote the best interests of the Erie
Insurance Exchange while enhancing shareholder value of the Company and to
promote the attainment of significant business objectives by the Company, its
subsidiaries and affiliates by basing a portion of selected employees'
compensation on the performance of such employee and the Company (as defined
below).
2. DEFINITIONS.
a. "Award Agreement" means the agreement entered into between the
Company and a Participant, setting forth the terms and conditions applicable to
an award granted to the Participant under this Plan.
b. "Base Salary" shall mean the annual base salary for a Participant at
the end of the calendar year 1997.
c. "Combined Ratio" means the sum of the loss ratio (including loss
adjustment expenses), expense ratio and policyholder dividend ratio, as
determined in accordance with statutory accounting principles and reported to
A.M. Best Company for the combined property casualty operations of the Erie
Insurance Exchange and affiliated property casualty companies (collectively
"Erie"). For Erie the Combined Ratio shall be adjusted downward to reflect the
excess of management fees over actual expenses for the management operations.
d. "Company" means Erie Indemnity Company and any corporation,
partnership or other organization of which the Company owns or controls,
directly or indirectly, not less than 50% of the total combined voting power of
all classes of stock or other equity interests. For purposes of this Plan, the
term "Company" shall include any successors thereto.
e. "Committee" means the Executive Compensation Committee of the Board
of Directors of the Company, or its functional successor, unless some other
Board committee has been designated by the Board of Directors to administer the
Plan.
f. "Participant" means any individual who has met the eligibility
requirements set forth in Section 5 hereof and to whom a grant has been made and
is outstanding under the Plan.
g. "Peer Group" means a group of companies selected by the Committee on
an industry and line of business basis.
34
<PAGE>
h. "Performance Measures" means the criteria upon which awards for 1997
will be based and, unless otherwise determined by the Committee shall be: (i) a
combination of the difference between Erie's Combined Ratio for 1997 and the
averaged Combined Ratio of the Peer Group for 1997 and the difference between
the Erie's growth in net written premiums as compared to growth in net written
premiums of the Peer Group ("Financial Performance Measure"); and (ii) the
Participant's individual performance assessment under the Company's existing
performance assessment system ("Individual Performance Measure"). The Financial
Performance Measure and the Individual Performance Measure are collectively
referred to as (the "Performance Measures").
i. "Target Award" means 25% of a Participant's Base Salary for 1997.
3. ADMINISTRATION. The Plan shall be administered by the Committee.
The Committee's determinations under the Plan need not be uniform and
may be made by it selectively among persons who receive, or are eligible to
receive, awards under the Plan, whether or not such persons are similarly
situated. Whenever the Plan refers to a determination being made by the
Committee, it shall be deemed to mean a determination by the Committee in its
sole discretion.
Subject to the provisions of the Plan, the Committee shall be
authorized to interpret the Plan, to make, amend and rescind such rules as it
deems necessary for the proper administration of the Plan, to make all other
determinations necessary or advisable for the administration of the Plan and to
correct any defect or supply any omission or reconcile any inconsistency in the
Plan in the manner and to the extent the Committee deems desirable to carry the
Plan into effect. Any action taken or determination made by the Committee shall
be conclusive on all parties.
4. WEIGHTING OF PERFORMANCE MEASURES. The Target Award shall be weighted in a
manner so that 75% of the Target Award shall be based upon the Financial
Performance Measure and 25% of the Target Award shall be based upon the
Individual Performance Measure. Satisfaction of either of the Performance
Measures shall entitle a Participant to payment with respect to that portion of
the award notwithstanding the fact that the other Performance Measure is not
satisfied.
5. ELIGIBLE PERSONS. Any key employee of the Company who the Committee
determines, in its sole discretion, has a significant effect on the operations
of the Company shall be eligible to participate in the Plan. Any Participant in
this Plan shall be deemed ineligible to participate in the Erie Insurance Group
Employee Profit Sharing Bonus Plan. No employee shall have a right (a) to be
selected under the Plan, or (b) having once been selected, to (i) be selected
again or (ii) continue as an employee.
35
<PAGE>
6. MAXIMUM AMOUNT AVAILABLE FOR AWARDS. The aggregate maximum pay-out with
respect to awards for 1997 under the Plan shall be 15% of the increase in the
Company's after tax earnings (as defined by the Committee) in 1997 compared to
1996. In the event that the total awards earned under the Plan exceed this
limitation, each Participant's award shall be reduced on a pro rata basis until
the total pay-out of awards under the Plan does not exceed the Plan maximum
established in the preceding sentence.
7. DETERMINATION OF AWARDS. The Committee shall determine the actual award to
each Participant for the year, based upon the following formula:
Participant Award = (.75 of Target Award x Financial Performance Percentage
Earned) + (.25 of Target Award x Individual Performance Percentage Earned).
The Financial Performance Percentage Earned and Individual Performance
Percentage Earned shall be determined in accordance with Appendix I and Appendix
II, respectively. For the Financial Performance Percentage Earned, the amount
shall be mathematically interpolated between cells in the matrix based upon
Erie's actual differences in Combined Ratio and Growth in New Written Premiums.
The Individual Performance Percentage Earned shall be based on the performance
assessment conducted during calendar year 1997.
The total award payable to any Participant may range from zero (0) to
one hundred and sixty (160) percent of the Participant's Target Award, depending
upon whether, or the extent to which, the Performance Measures have been
achieved. Notwithstanding anything in this Plan to the contrary, a Participant
shall not be entitled to, and no amount shall be payable to, such Participant in
the event that the Participant's Performance Points (as reflected in Appendix
II) are below 94. All such determinations regarding the achievement of
Performance Measures and the determination of actual awards will be made by the
Committee.
8. DISTRIBUTION OF AWARDS. Awards under the Plan shall be paid in cash as soon
as practicable after 1997 audited financial statements for Erie have been
prepared and Peer Group data is available.
9. TERMINATION OF EMPLOYMENT. A Participant must be actively employed by the
Company on the date his or her award is determined by the Committee ("the
Payment Date") in order to be entitled to payment of any award. In the event
active employment of a Participant shall be terminated before the Payment Date
for any reason other than discharge for "Cause" (as defined in such employee's
employment agreement with the Company or, if no such agreement exists, as
defined by the Committee) or voluntary resignation, such Participant may receive
such portion of his or her award as may be determined by the Committee. A
Participant discharged for Cause shall not be entitled to receive any award for
the year. A Participant who voluntarily resigns prior to the Payment Date shall
not be entitled to receive any award unless otherwise determined by the
Committee.
36
<PAGE>
10. MISCELLANEOUS.
a. NONASSIGNABILITY. No award will be assignable or transferable
without the written consent of the Committee in its sole discretion, except by
will or by the laws of descent and distribution.
b. WITHHOLDING TAXES. Whenever payments under the Plan are to be made,
the Company will withhold therefrom an amount sufficient to satisfy any
applicable governmental withholding tax requirements related thereto.
c. AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors of the
Company may at any time amend, suspend or discontinue the Plan, in whole or in
part. The Committee may at any time alter or amend any or all Award Agreements
under the Plan to the extent permitted by law.
d. OTHER PAYMENTS OR AWARDS. Nothing contained in the Plan will be
deemed in any way to limit or restrict the Company from making any award or
payment to any person under any other plan, arrangement or understanding,
whether now existing or hereafter in effect.
e. PAYMENTS TO OTHER PERSONS. If payments are legally required to be
made to any person other than the person to whom any amount is available under
the Plan, payments will be made accordingly. Any such payment will be a complete
discharge of the liability of the Company under this Plan.
f. LIMITS OF LIABILITY.
1. Any liability of the Company to any Participant with
respect to an award shall be based solely upon contractual obligations created
by the Plan and the Award Agreement.
2. Neither the Company, nor any member of its Board of
Directors or of the Committee, nor any other person participating in any
determination of any question under the Plan, or in the interpretation,
administration or application of the Plan, shall have any liability to any party
for any action taken or not taken in good faith under the Plan.
g. RIGHTS OF EMPLOYEES.
1. Status as an employee eligible to receive an award under
the Plan shall not be construed as a commitment that any award will be made
under this Plan to such employee or to other such employees generally.
37
<PAGE>
2. Nothing contained in this Plan or in any Award Agreement
(or in any other documents related to this Plan or to any award or Award
Agreement) shall confer upon any employee or Participant any right to continue
in the employ or other service of the Company or constitute any contract or
limit in any way the right of the Company to change such person's compensation
or other benefits or to terminate the employment or other service of such person
with or without cause.
h. SECTION HEADINGS. The section headings contained herein are for the
purposes of convenience only, and in the event of any conflict, the text of the
Plan, rather than the section headings, will control.
i. INVALIDITY. If any term or provision contained herein will to any
extent be invalid or unenforceable, such term or provision will be reformed so
that it is valid, and such invalidity or unenforceability will not affect any
other provision or part hereof.
j. APPLICABLE LAW. The Plan, the Award Agreements and all actions taken
hereunder or thereunder shall be governed by, and construed in accordance with,
the laws of the Commonwealth of Pennsylvania without regard to the conflict of
law principles thereof.
k. EFFECTIVE DATE. The Plan shall be effective as of January 1, 1997.
/s/ Peter B. Bartlett
-----------------------------------------
Peter B. Bartlett, Chairman
Executive Compensation Committee
38
Exhibit 10.23
ERIE INDEMNITY COMPANY
LONG-TERM INCENTIVE PLAN
1. GENERAL
1.1 Purpose.
The purposes of the Long-Term Incentive Plan (the "Plan") are: (a) to
enhance the growth and profitability of Erie Indemnity Company, a
Pennsylvania business corporation ("Erie"), and its subsidiaries and
affiliates by providing the incentive of long-term rewards to key
employees who are capable of having a significant impact on the
performance of Erie and its subsidiaries and affiliates; (b) to attract
and retain employees of outstanding competence and ability; (c) to
further align the interests of such employees with those of
shareholders of Erie.
1.2 Definitions.
For the purpose of the Plan, the following terms shall have the
meanings indicated:
(a) "Board of Directors" or "Board" shall mean the Board of
Directors of Erie.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended, including any successor law thereto.
(c) "Company" shall mean Erie and any corporation, partnership, or
other organization of which Erie, directly or indirectly, owns
or controls not less than 50% of the total combined voting
power of all classes of stock or other equity interests. For
purposes of this Plan, the terms "Erie" and "Company" shall
include any successor thereto.
(d) "Common Stock" shall mean the Class A (non-voting) Common
Stock of Erie and a "share of Common Stock" shall mean one
share of Common Stock.
(e) "Disability" shall mean total and permanent disability within
the meaning of Section 22(e)(3) of the Code.
(f) "Fair Market Value" of shares of Common Stock on any given
date(s) shall be: (a) the daily average of the high and low
sales prices on the NASDAQ National Market System of such
shares on the date(s) in question, or, if the shares of Common
Stock shall not have been traded on any such date(s), the
closing price on the NASDAQ National Market System on the
first day prior thereto on which the shares of Common Stock
were so traded; or (b) if the shares of Common Stock are not
traded on the NASDAQ National Market System, such other amount
as may be determined by the Plan Administrator by any fair and
reasonable means.
39
<PAGE>
(g) "Participant" shall mean any key employee who has met the
eligibility requirements set forth in Section 1.4 hereof and
to whom a grant has been made and is outstanding under the
Plan.
(h) "Performance Period" shall mean, in relation to Phantom Share
Units, any period, for which performance objectives have been
established pursuant to Article 2.
(i) "Phantom Share Unit" shall mean a right, granted to a
Participant pursuant to Article 2.
(j) "Plan Administrator" shall mean: (i) the Executive
Compensation Committee of the Board of Directors (the
"Committee"), or its functional successor, unless some other
Board committee has been designated by the Board of Directors
to administer the Plan or any portion of the Plan; or (ii) in
the event that the Committee is not comprised of two or more
"Non-Employee Directors" within the meaning of Rule
16b-3(a)(3) promulgated under Section 16 of the Securities
Exchange Act of 1934, then the Plan Administrator shall, with
respect to officers and directors subject to Section 16, be
the Board.
(k) "Restricted Share" shall mean a share of Common Stock, granted
to a Participant pursuant to Article 3, subject to the
restrictions set forth in Section 3.1 hereof.
(l) "Retirement" shall mean the cessation of employment with the
Company after reaching age 55 and having completed at least 5
years of service.
(m) "Vesting Period" shall mean in relation to Restricted Shares
receivable in payment for Phantom Share Units, the period of
time during which such shares are subject to restrictions on
transferability and may be forfeited if the Participant's
employment is terminated.
1.3 Administration.
40
<PAGE>
The Plan shall be administered by the Plan Administrator and the Plan
Administrator shall act in accordance with the procedures established
under Erie's Articles of Incorporation, By-laws and under any
resolution of the Board. Subject to the provisions of the Plan, the
Plan Administrator shall have sole and complete authority to: (i)
subject to Section 1.4 hereof, select Participants after receiving the
recommendations of the management of the Company; (ii) determine the
number of Phantom Share Units or Restricted Shares subject to each
grant; (iii) determine the time or times when grants are to be made or
are to be effective; (iv) determine the terms and conditions, including
the performance objectives, subject to which grants may be made; (v)
extend the term of any grant; (vi) prescribe the form or forms of the
instruments evidencing any grants made hereunder, provided that such
forms are consistent with the Plan; (vii) adopt, amend, and rescind
such rules and regulations as, in its opinion, may be advisable for the
administration of the Plan; (viii) construe and interpret the Plan and
all rules, regulations, and instruments utilized thereunder; and (ix)
make all determinations deemed advisable or necessary for the
administration of the Plan. All determinations by the Plan
Administrator shall be final and binding.
1.4 Eligibility and Participation.
Participation in the Plan shall be limited to officers (who may also be
members of the Board of Directors) and other salaried key employees of
the Company as identified by the Plan Administrator to participate in
the Plan.
2. PROVISIONS APPLICABLE TO PHANTOM SHARE UNITS
2.1 Performance Periods.
The Plan Administrator shall establish Performance Periods applicable
to Phantom Share Units. Each such Performance Period shall commence
with the beginning of a fiscal year in which performance objectives are
established and have a duration of not less than three consecutive
fiscal years.
2.2 Performance Objectives.
The Plan Administrator shall establish one or more performance
objectives for each Performance Period , provided that such performance
objectives shall be established prior to the grant of any Phantom Share
Units with respect to such period. Performance objectives shall be
based on one or more of the following measures: (i) retained earnings
per share plus dividend, (ii) earnings or earnings per share, (iii)
assets or return on assets, (iv) shareholder's equity or return on
shareholder's equity, (v) revenues, (vi) costs, (vii) gross profit
margin, (viii) investment earnings, (ix) loss ratio, (x) combined
ratio, or (xi) any other measure determined by the Plan Administrator
to be in the best interests of the Company. The Plan Administrator may,
in its discretion, establish performance objectives for the Company as
a whole or for only the business unit of the Company in which a given
Participant is involved, or a combination thereof.
2.3 Grants of Phantom Share Units.
41
<PAGE>
The Plan Administrator may select employees to become Participants
(subject to the provisions of Section 1.4 hereof) and grant Phantom
Share Units to such Participants at any time prior to or during the
first fiscal year of a Performance Period. Before making grants, the
Plan Administrator shall receive the recommendations of the Chief
Executive Officer of the Company, which will take into account such
factors as level of responsibility, current and past performance, and
performance potential. Each grant to a Participant shall be evidenced
by a written instrument stating the number of Phantom Share Units
granted, the target value of each Phantom Share Unit, the Performance
Period, the performance objective or objectives, the Vesting Periods
and restrictions applicable to Restricted Shares receivable in payment
for Phantom Share Units and any other terms, conditions and rights with
respect to such grant.
2.4 Adjustment With Respect to Phantom Share Units.
Any other provision of the Plan to the contrary notwithstanding, the
Plan Administrator may at any time adjust performance objectives (up or
down), adjust the way performance objectives are measured, or shorten
any Performance Period, if it is determined that conditions, including,
but not limited to, changes in the economy, changes in competitive
conditions, changes in laws or governmental regulations, changes in
generally accepted accounting principles, changes in the Company's
accounting policies, acquisitions or dispositions, stock redemptions,
reductions or increases in the management fee rate payable to Erie by
Erie Insurance Exchange, reductions to shareholders' equity due to
reductions or increases in net unrealized gain on available-for-sale
securities or the occurrence of other events impacting the performance
objectives, so warrant; provided, however, that the Plan Administrator
may not make any such adjustment that would increase the economic
benefit to any "covered employee" as defined in Section 162(m) of the
Code.
2.5. Maximum Annual Award.
The maximum value of Phantom Share Units that may be earned by any
Participant in any year shall not exceed $500,000.
2.6 Payment for Phantom Share Units.
42
<PAGE>
Within 90 days after the end of any Performance Period, the Plan
Administrator shall determine the total dollar value of Phantom Share
Units held by each Participant for such Performance Period. Payment for
Phantom Share Units shall be in the form of Restricted Shares and shall
be subject to the terms and conditions of Section 3 hereof. Such Common
Stock shall be purchased in the open market, provided however, that if
the Common Stock of the Company is not readily available in the
marketplace, or purchase of the Common Stock for Restricted Shares
would artificially affect the price of the Common Stock, in the sole
discretion of the Plan Administrator, Restricted Shares shall be
payable in deferred stock units equal in value to the number of shares
of Common Stock that would have been paid to the Participant had the
Common Stock been available in the marketplace. The number of
Restricted Shares (or stock unit equivalents) granted shall be equal to
the actual total value of the Phantom Share Units at the end of the
Performance Period divided by the monthly average price of the Fair
Market Value of the Common Stock for the month following the end of the
Performance Period, rounded up to the nearest whole share.
2.7 Termination of Employment.
(a) Prior to the end of a Performance Period:
(i) Death, Disability or Normal Retirement: If a
Participant ceases to be an employee of the Company
prior to the end of a Performance Period by reason
of death, Disability or Normal Retirement (as defined
in the Company's qualified Retirement Plan for
Employees), the Performance Period for outstanding
Phantom Share Units shall be deemed to end as of the
end of the fiscal year in which such event occurred.
The total dollar value of Phantom Share Units held by
such Participant shall be based upon performance
during the reduced Performance Period and will be
paid in the form of shares of Common Stock in the
manner provided for by Section 2.6. Any shares of
Common Stock payable pursuant to this Section 2.7,
shall be free of any restrictions or risk of
forfeiture under the Plan and shall be registered in
the name of the Participant or the Participant's
beneficiary or estate, as the case may be, as soon as
practicable after the end of the applicable
Performance Period.
(ii) Other Terminations: If a Participant ceases to be an
employee prior to the end of a Performance Period for
any reason other than death, Disability or Normal
Retirement, the Participant shall immediately forfeit
all Phantom Share Units previously granted under the
Plan. The Plan Administrator may, however, in its
sole discretion, permit a Participant to retain all
or a portion of his Phantom Share Units if it finds
that the circumstances in the particular case so
warrant.
(b) After the end of a Performance Period, but prior to the end
of a Vesting Period:
(i) Death or Disability: If a Participant ceases to be an
employee of the Company by reason of death or
Disability, the Vesting Period shall be deemed to
have ended and shares of Common Stock held by the
Company with respect to Restricted Shares earned
by such Participant shall be paid as soon as
practicable in the manner set forth in 3.4 hereof
43
<PAGE>
(ii) Retirement: The Retirement of a Participant shall not
constitute a termination of employment for purposes
of this Section 2(b), and such Participant shall not
forfeit any Common Stock held by the Company with
respect to Restricted Shares earned by such
Participant.
(iii) Other Terminations: If a Participant ceases to be an
employee prior to the end of a Vesting Period for any
reason other than death, Disability or Retirement,
the Participant shall immediately forfeit all
unvested Restricted Shares previously granted with
respect to such Vesting Period in accordance with the
provisions of Section 3.2(c) hereof, unless the Plan
Administrator, in its sole discretion, finds that the
circumstances in the particular case so warrant and
allows a Participant whose employment has so
terminated to retain any or all of the Restricted
Shares granted to such Participant.
3. PROVISIONS APPLICABLE TO RESTRICTED SHARES
3.1 Vesting Periods.
At the time a Phantom Share Unit award is made, the Plan Administrator
shall establish a Vesting Period applicable to Restricted Stock which
shall not be more than three years. The Plan Administrator may provide
for the lapse of all or a portion of such Vesting Period in
installments and may accelerate or waive such Vesting Period, in whole
or in part, based on such factors as the Plan Administrator may
determine.
3.2 Rights and Restrictions Governing Restricted Shares.
44
<PAGE>
At the time of payment in Restricted Shares, subject to the receipt by
the Company of any applicable consideration for such Restricted Shares,
one or more certificates representing the appropriate number of shares
of Common Stock granted to a Participant shall be registered either in
his name or for his benefit either individually or collectively with
others, but shall be held by the Company for the account of the
Participant. The Participant shall have all rights of a holder as to
such shares of Common Stock, including the right to receive dividends,
subject to the following restrictions: (a) the Participant shall not be
entitled to delivery of certificates representing such shares of Common
Stock and any other such securities until the expiration of the
applicable Vesting Period; (b) none of the Restricted Shares may be
sold, transferred, assigned, pledged, or otherwise encumbered or
disposed of during the applicable Vesting Period; and (c) all of the
Restricted Shares shall be forfeited and all rights of the Participant
to such Restricted Shares shall terminate without further obligation on
the part of the Company unless the Participant remains in the
continuous employment of the Company for the entire Vesting Period or
portion thereof in relation to which such Restricted Shares were
granted, except as otherwise allowed by Section 2.7 hereof. At the time
of payment in Restricted Shares, if the Common Stock of the Company is
not readily available in the marketplace, or purchase of the Common
stock would artificially affect the price of the Common Stock, in the
sole discretion of the Plan Administrator, then in that event, the
Company shall have the option to pay to the Participant in cash the
Fair Market Value of the Restricted Shares on such payment date.
3.3 Adjustment with Respect to Restricted Shares.
Any other provisions of the Plan to the contrary notwithstanding, the
Plan Administrator may at any time shorten any Vesting Period, if it
determines that conditions, including but not limited to, changes in
the economy, changes in competitive conditions, changes in laws or
governmental regulations, changes in generally accepted accounting
principles, changes in the Company's accounting policies, acquisitions
or dispositions, or the occurrence of other unusual, unforeseen, or
extraordinary events, so warrant.
3.4 Payment of Restricted Shares.
In the event that a Participant is still employed by the Company at the
end of the Vesting Period or portion thereof, all applicable
restrictions shall lapse as to Restricted Shares granted in relation to
such Vesting Period, and one or more stock certificates for the
appropriate number of shares of Common Stock, free of restrictions,
shall be delivered to the Participant or such shares shall be credited
to a brokerage account if the Participant so directs.
3.5 Deferral of Payment.
The Plan Administrator may, in its sole discretion, offer a Participant
the right, by execution of a written agreement, to defer the receipt of
all or any portion of the payment, if any, for Restricted Shares. If
such an election to defer is made, the Common Stock receivable in
payment for Restricted Shares shall be deferred as stock units equal in
number to the number of shares of Common Stock that would have been
paid to the Participant. Such stock units shall represent only a
contractual right and shall not give the Participant any interest,
right, or title to any Common Stock during the deferral period. The
cash receivable in payment for fractional shares receivable for
Restricted Shares shall be deferred as cash units. Deferred cash units
may be credited annually with an appreciation factor specified in the
deferred compensation agreement, which will include dividend
equivalents. At the end of the deferral period, deferred stock units
and cash units shall be paid in Common Stock, except that any payment
attributable to fractional shares shall be paid in cash. All
other terms and conditions of deferred payments shall be as
contained in a written deferred compensation agreement.
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4. MISCELLANEOUS
4.1 Designation of Beneficiary.
A Participant may designate, in a writing delivered to the Company
before his death, a person or persons to receive, in the event of his
death, any rights to which he would be entitled under the Plan. A
Participant may also designate an alternate beneficiary to receive
payments if the primary beneficiary does not survive the Participant. A
Participant may designate more than one person as his beneficiary or
alternate beneficiary, in which case such persons would receive
payments as joint tenants with a right of survivorship. A beneficiary
designation may be changed or revoked by a Participant at any time by
filing a written statement of such change or revocation with the
Company. If a Participant fails to designate a beneficiary, then his
estate shall be deemed to be his beneficiary.
4.2 Employment Rights.
Neither the Plan nor any action taken hereunder shall be construed as
giving any employee of the Company the right to become a Participant,
and a grant under the Plan shall not be construed as giving any
Participant any right to be retained in the employ of the Company.
4.3 Nontransferability.
A Participant's rights under the Plan, including the right to any
amounts or shares payable, may not be assigned, pledged, or otherwise
transferred except, in the event of a Participant's death, to his
designated beneficiary or, in the absence of such a designation, by
will or the laws of descent and distribution.
4.4 Withholding.
The Company shall have the right, before any payment is made or a
certificate for any shares is delivered or any shares are credited to
any brokerage account, to deduct or withhold from any payment under the
Plan any Federal, state, local or other taxes, including transfer
taxes, required by law to be withheld or to require the Participant or
his beneficiary or estate, as the case may be, to pay any amount, or
the balance of any amount, required to be withheld.
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If and to the extent withholding of any Federal, state or local tax is
required in connection with the lapse of restrictions with respect to
Restricted Shares earned pursuant to Phantom Share Units, the
Participant may elect to pay such amount in cash or: (i) have the
Company hold back from the shares to be delivered, stock having a value
calculated to satisfy such withholding obligations; (ii) deliver
previously-owned shares of Common Stock held by the Participant having
a value equal to the tax withholding obligation provided that the
previously owned shares have been held for at least six months; or
(iii) utilize a combination of the foregoing procedures.
4.5 Relationship to Other Benefits.
No payment under the Plan shall be taken into account in determining
any benefits under any retirement, group insurance, or other employee
benefit plan of the Company. The Plan shall not preclude the
shareholders of Erie , the Board of Directors or any committee thereof,
or the Company from authorizing or approving other employee benefit
plans or forms or incentive compensation, nor shall it limit or prevent
the continued operation of other incentive compensation plans or other
employee benefit plans of the Company or the participation in any such
plans by Participants in the Plan.
4.6 No Trust or Fund Created.
Neither the Plan nor any grant made hereunder shall create or be
construed to create a trust or separate fund of any kind or a fiduciary
relationship between the Company and a Participant or any other person.
To the extent that any person acquires a right to receive payments from
the Company pursuant to a grant under the Plan, such right shall be no
greater than the right of any unsecured general creditor of the
Company.
4.7 Expenses.
The expenses of administering the Plan shall be borne by the Company.
4.8 Indemnification.
Service on the Committee shall constitute service as a member of the
Board of Directors so that members of the Committee shall be entitled
to indemnification and reimbursement as directors of the Company
pursuant to its Articles of Incorporation, By-Laws, or resolutions of
its Board of Directors or shareholders.
4.9 Tax Litigation.
The Company shall have the right to contest, at its expense, any tax
ruling or decision, administrative or judicial, on any issue that is
related to the Plan and that the Company believes to be important to
Participants in the Plan and to conduct any such contest or any
litigation arising therefrom to a final decision.
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4.10 Antidulution.
Phantom Share Units and Restricted Shares shall be subject to
appropriate adjustment by the Plan Administrator as to the number and
price of shares of Common Stock or other considerations subject to such
grants in the event of changes in the outstanding shares by reason of
stock dividends, stock splits, recapitalizations, reorganizations,
mergers, consolidations, combinations, exchanges, or other relevant
changes in capitalization occurring after the date of grant.
5. AMENDMENT AND TERMINATION
The Board of Directors may modify, amend, or terminate the Plan at any
time except that, no modification, amendment, or termination of the
Plan shall adversely affect the rights of a Participant under a grant
previously made to him without the consent of such Participant.
6. INTERPRETATION
6.1 Governmental and Other Regulations.
The Plan and any grant hereunder shall be subject to all applicable
Federal and state laws, rules, and regulations and to such approvals by
any regulatory or governmental agency that may, in the opinion of the
counsel for the Company, be required.
6.2 Governing Law.
The Plan shall be construed and its provisions enforced and
administered in accordance with the laws of the Commonwealth of
Pennsylvania applicable to contracts entered into and performed
entirely in such State.
7. EFFECTIVE DATE AND SHAREHOLDER APPROVAL
The Plan shall be effective as of January 1, 1997.
48
Exhibit 10.24
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") made effective as of the 16th
day of December, 1997 (the "Effective Date") by and between ERIE INDEMNITY
COMPANY, a Pennsylvania corporation with its principal place of business at
Erie, Pennsylvania (the "Company"), and STEPHEN A. MILNE (the "Executive");
WITNESSETH:
WHEREAS, the Company has determined that it is in the best
interests of the Company and its shareholders to secure the continued employment
of the Executive on the terms and subject to the conditions set forth in this
Agreement; and
WHEREAS, the Executive desires and is willing to accept
employment with the Company on the terms and subject to the conditions set forth
herein;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Term. The Company hereby agrees to continue the employment
of the Executive and the Executive hereby agrees to continue to serve the
Company pursuant to the terms and conditions of this Agreement as President and
CEO of the Company, or in such other position with the Company of at least
commensurate responsibility and authority in all material respects, for a term
of four years commencing on the Effective Date hereof and expiring on December
15, 2001, unless earlier terminated pursuant to Section 5 hereof.
Notwithstanding the foregoing, the Executive shall serve in said office(s) at
the pleasure of the Company's Board of Directors (the "Board of Directors") and
the Executive may be removed from said office(s) at any time with or without
Cause, as hereinafter defined, pursuant to Sections 5(b) or 5(d) hereof;
provided that any such removal shall be without prejudice to any contract rights
the Executive may have hereunder. Subject to Section 8(a)(6) and Section 8(b)
hereof, this Agreement shall expire by its terms on December 15, 2001.
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2. Duties and Responsibilities. The Executive's duties
hereunder shall be those which shall be prescribed by the Company's Bylaws, as
amended from time to time, and by the Board of Directors or any committee
thereof from time to time and shall include such executive authority, duties,
powers and responsibilities as customarily attend the office as President and
CEO of a company comparable to the Company. The Executive shall discharge such
duties consistent with sound business practices and in accordance with law and
the Company's general employment policies, in each case, as in effect from time
to time, in all material respects and the Executive shall use best efforts to
promote the best interests of the Company. During the term of this Agreement,
the Executive's position (including the Executive's status and reporting
requirements), authority, duties, powers and responsibilities shall at all times
be at least commensurate in all material respects with the most significant of
those held, exercised or assigned to the Executive as of the Effective Date. The
Executive shall devote the Executive's knowledge, skill and all of the
Executive's professional time, attention and energies (reasonable absences for
vacations and illness excepted), to the business of the Company in order to
perform such assigned duties faithfully, competently and diligently. It is
understood and agreed between the parties that the Executive may (i) engage in
charitable and community activities, including serving on boards of directors or
trustees of and holding other leadership positions in non-profit organizations
unless the objectives and requirements of such positions are determined by the
Board of Directors to be inconsistent with the performance of the Executive's
duties hereunder, and, (ii) manage personal investments, so long as such
activities do not interfere or conflict with the Executive's performance of
responsibilities and obligations hereunder. It is expressly agreed that any such
activities engaged in by the Executive as of the Effective Date shall not
thereafter be deemed to interfere with the Executive's obligations and
responsibilities hereunder. The Executive agrees that the approval of the Board
of Directors or a committee thereof shall be required before the Executive first
accepts a position as director of any for-profit corporation after the date
hereof.
3. Compensation. During the term of this Agreement,
the Executive shall receive, for all services rendered to the Company
hereunder, the following (hereinafter referred to collectively as
"Compensation"):
(a) Salary. The Executive shall be paid an annual
base salary at an annual rate at least equal to the annual
rate being paid or payable to the Executive by the Company in
the month in which the Effective Date occurs, with such
increases thereafter as shall be determined from time to time
to be fair and reasonable by the Board of Directors or by the
Executive Compensation Committee of the Board of Directors
(the "Committee") in its discretion after taking into account,
among other things, the authority, duties, powers and
responsibilities of the Executive's position, the Executive's
performance, the Company's performance, the compensation of
persons in comparable positions at the Company and at other
comparable companies, and the effect of inflation. The
Executive's annual base salary shall not be reduced after any
such increase. The Executive's annual base salary shall be
payable in equal installments in accordance with the Company's
general salary payment policies, but no less frequently than
bi-weekly.
(b) Incentive Compensation. The Executive shall be
eligible for awards under the Company's incentive compensation
plans, if any, applicable to senior executive officers of the
Company or to key employees of the Company or its
subsidiaries, including, but not limited to, management
incentive plans and stock option plans, in accordance with and
subject to the terms thereof (including any provisions
providing for changes in the level of or termination of
benefits thereunder), on a basis commensurate with the
Executive's position and authorities, duties, powers and
responsibilities.
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(c) Employee Benefit Plans. The Executive and the
Executive's "dependents," as that term may be defined under
the applicable employee benefit plan(s) of the Company, shall
be included, to the extent eligible thereunder and subject to
the terms of the plans (including any provisions for changing
the level of or termination of benefits thereunder), in all
plans, programs and policies which provide benefits for
Company employees and their dependents on a basis commensurate
with the Executive's position and authorities, duties, powers
and responsibilities including, without limitation, health
care insurance, health and welfare plans, pension and
retirement plans, group life insurance plans, split dollar
life insurance plans, short and long-term disability plans,
survivors' benefits, executive supplemental benefits, holidays
and other similar or comparable benefits made available to the
Company's employees and senior executive officers
(hereinafter, such plans, programs and policies shall be
collectively referred to as the "Erie Benefit Plans"). Such
plans, programs and policies shall include, but are not
limited to, the Erie Insurance Group Retirement Plan for
Employees, the Erie Insurance Group Employee Savings Plan, the
Erie Insurance Group Deferred Compensation Plan, the Erie
Insurance Group Split Dollar Life Insurance Plan, the Erie
Insurance Group Supplemental Executive Retirement Plan, and
the Erie Insurance Group Health Protection, Prescription Drug,
Dental Assistance and Vision Care Plans.
(d) Perquisites. The Executive shall be entitled to
all perquisites which the Company from time to time makes
available to senior executive officers of the Company. Such
perquisites shall include, but are not limited to, parking,
club dues, tax preparation assistance, and an annual physical
examination.
(e) Expenses and Working Facilities. The Executive is
hereby authorized to incur, and shall be reimbursed by the
Company for, any and all reasonable and necessary business
related expenses, including, but not limited to, expenses for
business travel, entertainment, gifts and similar matters,
which expenses are incurred by the Executive on behalf of the
Company or any of its subsidiaries, upon presentation of
itemized accounts of such expenses in accordance with Company
policies. The Executive shall be furnished during the term of
this Agreement with offices and other working facilities in
the Company's principal executive offices located in Erie,
Pennsylvania (or other location of the principal executive
offices within the Erie metropolitan area) and secretarial and
other assistance suitable to the Executive's position and
adequate for the performance of duties hereunder.
(f) Performance Appraisal. The Executive's
performance may be evaluated by the Board of Directors or the
Committee from time to time. The Executive shall be entitled
to such additional remuneration, including but not limited to
annual bonuses based on performance, as the Board of Directors
or the Committee may, in its discretion, determine from time
to time.
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4. Absences. The Executive shall be entitled to vacations in
accordance with the Company's vacation policy in effect from time to time (but
in no event shall the Executive be entitled to fewer vacation days than under
the Company's vacation policy as in effect on the Effective Date) and to
absences because of illness or other incapacity, and shall also be entitled to
such other absences, whether for holiday, personal time, conventions, or for any
other purpose, as are granted to the Company's other senior executive officers
or as are approved by the Board of Directors or the Committee, which approval
shall not be unreasonably withheld.
5. Termination. The Executive's employment hereunder may be
terminated only as follows:
(a) Expiration of Term of Office. Upon the expiration
of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof, the
Board of Directors may (i) determine that the Executive should
not continue in such office(s) or (ii) that the Executive
should not be elected or appointed to an office with duties,
authorities, powers and responsibilities that are at least
commensurate with those of said office(s), in either case, for
reasons other than for Cause (if the reasons for such
noncontinuance, nonreelection or nonreappointment constitute
Cause, then Section 5(d) hereof will apply).
(b) By the Company Without Cause. The Company may at
any time terminate the Executive's employment hereunder
without Cause only by the affirmative vote of a majority of
the entire Board of Directors, and upon no less than thirty
(30) days' prior written notice to the Executive.
(c) By the Executive Without Good Reason. The
Executive may at any time terminate employment hereunder for
any reason upon no less than thirty (30) days' written notice
to the Company. Section 5(e) shall apply to any termination of
employment by the Executive for Good Reason.
(d) By the Company For Cause. The Company may
terminate the Executive's employment hereunder for Cause. In
such event, the Company shall give to the Executive prompt
written notice (in addition to any notice which may be
required by Section 5(d)(1) hereof) specifying in reasonable
detail the basis for such termination. For purposes of this
Agreement, "Cause" shall mean any of the following conduct by
the Executive:
(1) The deliberate and intentional
breach of any material provision of
this Agreement, which breach
Executive shall have failed to cure
within thirty (30) days after
Executive's receipt of written
notice from the Company specifying
the specific nature of the
Executive's breach;
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(2) The deliberate and intentional
engaging by Executive in gross
misconduct that is materially and
demonstrably inimical to the best
interests, monetary or otherwise, of
the Company; or
(3) Conviction of a felony or conviction
of any crime involving moral
turpitude, fraud or deceit.
For purposes of this definition, no act, or failure to act, on the Executive's
part shall be considered "deliberate and intentional" unless done, or omitted to
be done, by the Executive not in good faith and without reasonable belief that
such action or omission was in the best interest of the Company.
(e) By the Executive for Good Reason. The Executive
may terminate employment hereunder for Good Reason upon
providing thirty (30) days written notice to the Company after
the Executive reasonably becomes aware of the circumstances
giving rise to such Good Reason. For purposes of this
Agreement, "Good Reason" means the following conduct of the
Company, unless the Executive shall have consented thereto in
writing:
(1) Material breach of any material
provision of this Agreement by the
Company, which breach shall not have
been cured by the Company within
thirty (30) days after Company's
receipt from the Executive or the
Executive's agent of written notice
specifying in reasonable detail the
nature of the Company's breach;
(2) The assignment to the Executive of
any duties inconsistent in any
material respect with the
Executive's position (including any
reduction of the Executive's status
and reporting requirements),
authority, duties, powers or
responsibilities with the Company as
contemplated by Section 2 of this
Agreement, or any other action by
the Company, including the removal
of the Executive from or any failure
to reelect or reappoint the
Executive to the office(s) specified
in Section 2 or a commensurate
office(s) (other than for Cause),
which results in a diminution of the
Executive's authority, duties,
position, responsibilities or
status, excluding for this purpose
any isolated, insubstantial and
inadvertent action respecting the
Executive not taken in bad faith and
which is remedied by the Company
within thirty (30) days after
receipt of written notice from the
Executive to the Company;
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(3) The Company's relocation of the
Executive out of the Company's
principal executive offices or the
relocation of the Company's
principal executive offices to a
location outside the Erie,
Pennsylvania metropolitan area,
except for required short-term
travel on the Company's behalf to
the extent necessary for the
Executive to carry out his normal
duties in the ordinary course of
business;
(4) The failure of the Company to obtain
the assumption in writing of its
obligations to perform this
Agreement by any successor as
provided in Section 14 hereof not
less than five days prior to a
merger, consolidation or sale as
contemplated in Section 14; or
(5) A reduction in the overall level of
compensation of the Executive. For
purposes of this subsection 5, the
following shall not constitute a
reduction in the overall level of
compensation of the Executive: (i)
changes in the cash/stock mix of
compensation payable to the
Executive; (ii) a reduction in the
overall level of compensation of the
Executive resulting from the failure
to achieve corporate, business unit
and/or individual performance goals
established for purposes of
incentive compensation for any year
or other period; provided that the
aggregate short-term incentive
opportunity, when combined with the
Executive's base salary, provides,
in the aggregate, an opportunity for
the Executive to realize at least
the same overall level of
compensation as was paid in the
immediately prior year or period at
target performance levels; and
provided, further, that such target
performance levels are reasonable at
all times during the measurement
period, taking into account the fact
that one of the purposes of such
compensation is to incent the
Executive; (iii) reductions in
compensation resulting from changes
to any Erie Benefit Plan (provided
that such changes are generally
applicable to all participants in
such Erie Benefit Plan); and (iv)
any combination of the foregoing.
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(f) Disability. In the event that the Executive shall
be unable to perform the Executive's duties hereunder on a
full time basis for a period of one hundred-eighty (180)
consecutive calendar days by reason of incapacity due to
illness, accident or other physical or mental disability, then
the Company may, at its discretion, terminate the Executive's
employment hereunder if the Executive, within ten (10) days
after receipt of written notice of termination (which notice
may be given before or after the end of the entire 180 day
period), shall not have returned to the performance of all of
his duties hereunder on a full-time basis.
(g) Death. The Executive's employment under this
Agreement shall terminate upon the Executive's death.
(h) Mutual Written Agreement. This Agreement
and the Executive's employment hereunder may be terminated
at any time by the mutual written agreement of the Executive
and the Company.
6. Compensation in the Event of Termination. In the event that the
Executive's employment hereunder terminates prior to the expiration of this
Agreement for any reason provided in Section 5 hereof, the Company shall pay the
Executive, compensation and provide the Executive and the Executive's eligible
dependents with benefits as follows:
(a) Executive's Nonreelection to Office; Termination
By Company Without Cause; Termination By Executive for Good
Reason. In the event that the Executive's employment hereunder
is terminated: (i) because the Executive does not continue in
office pursuant to Section 5(a) hereof; or (ii) by the Company
without Cause pursuant to Section 5(b) hereof; or (iii) by the
Executive for Good Reason pursuant to Section 5(e) hereof,
then in any such event the Company shall pay or provide, as
applicable, the following compensation and benefits to the
Executive:
(1) Three (3) times the following: (A)
the highest annual base salary paid
or payable to the Executive in the
then current year or any one (1) of
the three (3) calendar years
preceding Executive's termination of
employment hereunder; plus (B) an
amount equal to the sum of the
Executive's highest award(s) under
the Company's Annual Incentive Plans
for any one (1) of the three (3)
calendar years preceding the date of
the termination of Executive's
employment hereunder (such total is
referred to herein as "Covered
Compensation"). Such payment to the
Executive by the Company shall be
paid in a lump sum unless the
Executive elects, and so notifies
the Company in writing prior to the
termination of the Executive's
employment hereunder, to receive
such payment in three (3) equal
annual installments. The lump sum or
first payment, as the case may be,
shall be paid within sixty (60) days
after the date of the termination of
the Executive's employment
hereunder;
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(2) Any awards or other compensation to
which the Executive is entitled
under any of the Company's
compensation plans or Erie Benefit
Plans to the extent not covered in
subsection (1) hereof;
(3) Any award to which the Executive
would be entitled under the
Company's Long-Term Incentive Plan
as in effect on December 16, 1997,
calculated under the provision of
that Plan as if the Executive ceases
to be an Employee of the Company by
reason of death, disability or
normal retirement;
(4) Continuing coverage for all purposes
(including eligibility, coverage,
vesting and benefit accruals, as
applicable), for a period of three
(3) years after the date of the
termination of Executive's
employment hereunder, to the extent
not prohibited by law, for the
Executive and the Executive's
eligible dependents under all of the
Erie Benefit Plans in effect and
applicable to Executive and the
Executive's eligible dependents as
of the date of termination. In the
event that the Executive and/or the
Executive's eligible dependents,
because of the Executive's
terminated status, cannot be covered
or fully covered under any or all of
the Erie Benefit Plans, the Company
shall continue to provide the
Executive and/or the Executive's
eligible dependents with the same
level of such coverage in effect
prior to termination, payable from
the general assets of the Company if
necessary. Notwithstanding the
foregoing, the Executive may elect
(by giving written notice to the
Company prior to the termination of
employment hereunder), on a benefit
by benefit basis, to receive in lieu
of continuing coverage, cash in an
amount equal to the present value
(using a 6.5% discount rate over
three years) of the projected cost
to the Company of providing such
benefit for such three year period.
The aggregate amount of cash to
which the Executive is entitled
pursuant to the preceding sentence
shall be payable by the Company to
the Executive within sixty (60) days
after the date of the termination of
Executive's employment hereunder;
and
(5) For a period of three (3) years
after the date of the termination of
Executive's employment hereunder,
such perquisites as are made
available to the Executive as of the
date of the termination of
Executive's employment hereunder.
The Executive's subsequent death, disability or attainment of age 65 or any
other age shall in no way affect or limit the Company's obligations under this
Section 6(a).
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(b) Termination By the Company for Cause. In the
event that the Company shall terminate the Executive's
employment hereunder for Cause pursuant to Section 5(d), this
Agreement shall forthwith terminate and the obligations of the
parties hereto shall be as set forth in Section 8 hereof.
(c) Termination by the Executive Without Good Reason.
In the event that the Executive shall terminate employment
hereunder other than for Good Reason pursuant to Section 5(c),
this Agreement shall forthwith terminate and the obligations
of the parties hereto shall be as set forth in Section 8
hereof.
(d) Disability. In the event that the Company elects
to terminate the Executive's employment hereunder pursuant to
Section 5(f), the Executive shall continue to receive from the
date of such termination through the expiration date of this
Agreement, sixty percent (60%) of the then current annual base
salary to which the Executive was entitled pursuant to Section
3(a) hereof immediately preceding such termination, in
accordance with the payroll practices of the Company for
senior executive officers, reduced, however, by the amount of
any proceeds from Social Security and disability insurance
policies provided by and at the expense of the Company.
(e) Death. In the event of the death of the Executive
during the term of this Agreement, the then current annual
base salary to which the Executive was entitled pursuant to
Section 3(a) hereof immediately preceding the Executive's
death shall be paid, in twelve (12) equal monthly installments
following the date of death, to the last beneficiary
designated by the Executive under the Company's group life
insurance policy maintained by the Company or such other
written designation expressly provided to the Company for the
purposes hereof or, failing either such designation, to the
Executive's estate.
(f) Mutual Written Consent. In the event that the
Executive and the Company shall terminate the Executive's
employment by mutual written agreement, the Company shall pay
such compensation and provide such benefits, if any, as the
parties may mutually agree upon in writing.
The Executive shall not be required to mitigate the amount of any payment
provided for in this Section 6 by seeking employment or otherwise, nor shall any
amounts received from employment or otherwise by the Executive offset in any
manner the obligations of the Company hereunder except as specifically provided
in Section 6(d) hereof.
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7. Certain Additional Payments by the Company. Notwithstanding
anything in this Agreement to the contrary, in the event it is determined that
any payment or distribution by the Company to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (a "Payment"), is subject to the excise
tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), or any successor provision, on excess parachute payments, as that
term is used and defined in Sections 4999 and 280G of the Code, then the
Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount equal to the then current rate of tax under said Section
4999 multiplied by the total of the amounts so paid or payable, including the
Gross-Up Payment, which are deemed to be a part of an excess parachute payment.
8. Effect of Expiration of Agreement or Termination of
Executive's Employment. Upon the expiration of this Agreement by its terms or
the termination of the Executive's employment hereunder, neither the Company nor
the Executive shall have any remaining duties or obligations hereunder except
that:
(a) The Company shall:
(1) Pay the Executive's accrued salary
and any other accrued benefits under
Sections 3(a), (b), and (c) hereof;
(2) Reimburse the Executive for expenses
already incurred in accordance with
Section 3(e) hereof;
(3) Pay or otherwise provide for any
benefits, payments or continuation
or conversion rights in accordance
with the provisions of any Erie
Benefit Plan of which the Executive
or any of the Executive's dependents
is or was a participant or as
otherwise required by law;
(4) Pay the Executive and the
Executive's beneficiaries any
compensation and/or provide the
Executive or the Executive's
eligible dependents any benefits, as
the case may be, due pursuant to
Section 6 or Section 7 hereof; and
(5) Unless the employment of the
Executive is terminated by the
Company for Cause, pay the Executive
or the Executive's beneficiaries the
full amount or amounts accrued under
the Supplemental Executive
Retirement Plan of the Company (the
"SERP") as in effect on the
Effective Date (or as such benefits
may be enhanced by subsequent
amendments or supplements to such
SERP), as though, solely for
purposes of determining any
otherwise applicable actuarial
reduction
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factors, the event of the
termination of Executive's
employment hereunder or expiration
of this Agreement occurred on the
Executive's Normal Retirement Date
as defined in such SERP. Accrued
benefits under the SERP shall be
fully vested and nonforfeitable upon
such termination (including
termination on account of the
Executive's death) or expiration.
Any reductions in SERP benefits that
would otherwise apply pursuant to
Section 10.1 of the Company's
Retirement Plan for Employees (or
pursuant to any successor provision
of such plan or any successor plan)
relating to Section 415(b) of the
Code shall not be applicable for
purposes hereof. No further approval
by the Board of Directors or the
Committee with respect to payments
under the SERP in accordance with
the preceding sentences shall be
required. Unreduced payments may
begin at age 55, but in no event
would payments be made under this
Section 8(a)(5) before the Executive
reaches age fifty-five (55). The
Company shall purchase for the
Executive, naming the Executive
and/or the Executive's designee the
owner, a paid up annuity, from an
insurer reasonably acceptable to the
Executive but in any event having an
A.M. Best rating of A+ or better (or
other comparable rating), that will
pay to the Executive an amount equal
to the benefit to which the
Executive would otherwise be
entitled under the SERP and payable
at the times such SERP benefit would
be payable in accordance with the
provisions hereof. Upon the purchase
and delivery to the Executive of
such an annuity, the Executive shall
release the Company from any further
obligation under the SERP. The
Company further agrees to pay the
Executive immediately upon
termination, a cash payment (the
"Tax Gross-up") equal to the sum of
the following: (i) all taxes
(federal, state, local, and payroll
taxes) incurred and due and owing by
the Executive, arising from the cost
of the annuity purchased by the
Company to meet the requirements of
this Section 8(a)(5), and (ii) any
such taxes incurred and due and
owing with respect to the amount
paid in (i).
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(6) Continue to remain bound by the
terms of Section 12 hereof.
(b) The Executive shall remain bound by the terms of
Sections 9 and 13 hereof for a period of thirty six (36)
months after the expiration of the Agreement by its terms;
provided, that the Executive shall not be bound by the terms
of Section 9(b) after the termination of employment (other
than a termination of the Executive by the Company for Cause)
if such termination occurs after the expiration of this
Agreement by its terms.
9. Covenants as to Confidential Information and Competitive
Conduct. The Executive hereby acknowledges and agrees as follows: (i) this
Section 9 is necessary for the protection of the legitimate business interests
of the Company, (ii) the restrictions contained in this Section 9 with regard to
geographical scope, length of term and types of restricted activities are
reasonable; (iii) the Executive has received adequate and valuable new
consideration for entering into this Agreement, and (iv) the Executive's
expertise and capabilities are such that this obligation hereunder and the
enforcement hereof by injunction or otherwise will not adversely affect the
Executive's ability to earn a livelihood.
(a) Confidentiality of Information and Nondisclosure.
The Executive acknowledges and agrees that the Executive's
employment by the Company under this Agreement necessarily
involves knowledge of and access to confidential and
proprietary information pertaining to the business of the
Company and its subsidiaries. Accordingly, the Executive
agrees that at all times during the term of this Agreement and
at any time thereafter, the Executive will not, directly or
indirectly, without the express written approval of the
Company, unless directed by applicable legal authority
(including any court of competent jurisdiction, governmental
agency having supervisory authority over the business of the
Company or the subsidiaries, or any legislative or
administrative body having supervisory authority over the
business of the Company or its subsidiaries) having
jurisdiction over the Executive, disclose to or use, or
knowingly permit to be so disclosed or used, for the benefit
of himself, any person, corporation or other entity other than
the Company, (i) any information concerning any financial
matters, customer relationships, competitive status, supplier
matters, internal organizational matters, current or future
plans, or other business affairs of or relating to the Company
or its subsidiaries, (ii) any management, operational, trade,
technical or other secrets or any other proprietary
information or other data of the Company or its subsidiaries,
or (iii) any other information related to the Company or its
subsidiaries or which the Executive should reasonably believe
will be damaging to the Company or its subsidiaries which has
not been published and is not generally known outside of the
Company. The Executive acknowledges that all of the foregoing
constitutes confidential and proprietary information, which is
the exclusive property of the Company.
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(b) Restrictive Covenant. During the term of, and for
a period of one (1) year (the "Restrictive Period") after the
termination of the Executive's employment hereunder for any
reason (other than a termination of the Executive hereunder
pursuant to Section 5(a), 5(b) or 5(e), hereof), the Executive
shall not render, directly, or indirectly, services to any
person, firm, corporation, association or other entity which
conducts the same or similar business as the Company or its
subsidiaries at the date of the Executive's termination of
employment hereunder within the states in which the Company or
any of its subsidiaries is then licensed and doing business at
the date of the Executive's termination of employment
hereunder without the prior written consent of the Board of
Directors, which may be withheld in its discretion. In the
event the Executive violates any of the provisions contained
in this Section 9(b) hereof, the Restrictive Period shall be
increased by the period of time from the commencement by the
Executive of any violation until such violation has been cured
to the satisfaction of the Company. The Executive further
agrees that at no time during the Restrictive Period will the
Executive attempt to directly or indirectly solicit or hire
employees of Company or its subsidiaries or induce any of them
to terminate their employment with the Company or any of the
subsidiaries. Notwithstanding the foregoing, the performance
by the Executive of rights and duties under an agency
agreement with the Company shall not constitute a breach of
this Section 9(b).
(c) Company Remedies. The Executive acknowledges and
agrees that any breach of this Section 9 will result in
immediate and irreparable harm to the Company, and that the
Company cannot be reasonably or adequately compensated by
damages in an action at law. In the event of a breach by the
Executive of the provisions of this Section 9, the Company
shall be entitled, to the extent permitted by law, immediately
to cease to pay or provide the Executive or the Executive's
dependents any compensation or benefit being, or to be, paid
or provided to the Executive pursuant to Section 3, Section 6
or Section 8 of this Agreement, and also to obtain immediate
injunctive relief restraining the Executive from conduct in
breach of the covenants contained in this Section 9. Nothing
herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for such breach,
including the recovery of damages from the Executive.
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10. Resolution of Differences Over Breaches of Agreement.
Except as otherwise provided herein, in the event of any controversy, dispute or
claim arising out of, or relating to, this Agreement, or the breach thereof, or
arising out of any other matter relating to the Executive's employment with the
Company, the parties may seek recourse only for temporary or preliminary
injunctive relief to the courts having jurisdiction thereof and if any relief
other than injunctive relief is sought, the Company and the Executive agree that
such underlying controversy, dispute or claim shall be settled by arbitration
conducted in Erie, Pennsylvania in accordance with this Section 10 and the
Commercial Arbitration Rules of the American Arbitration Association ("AAA").
The matter shall be heard and decided, and awards rendered by a panel of three
(3) arbitrators (the "Arbitration Panel"). The Company and the Executive shall
each select one arbitrator from the AAA National Panel of Commercial Arbitrators
(the "Commercial Panel") and AAA shall select a third arbitrator from the
Commercial Panel. The award rendered by the Arbitration Panel shall be final and
binding as between the parties hereto and their heirs, executors,
administrators, successors and assigns, and judgment on the award may be entered
by any court having jurisdiction thereof. Except as provided in Section 11
hereof, each party shall bear sole responsibility for all expenses and costs
incurred by such party in connection with the resolution of any controversy,
dispute or claim in accordance with this Section 10.
11. Payment of Executive's Legal Fees. If the Executive is
required to bring any action to enforce rights or to collect moneys due under
this Agreement, the Company shall pay to the Executive the fees and expenses
incurred by the Executive in bringing and pursuing such action if the Executive
is successful, in whole or in part, on the merits or otherwise (including by way
of a settlement involving a payment of money by the Company to the Executive),
in such action. The Company shall pay such fees and expenses in advance of the
final disposition of such action upon receipt of an undertaking from the
Executive to repay to the Company such advances if the Executive is not
ultimately successful, in whole or in part, on the merits or otherwise, in such
action.
12. Severance Pay upon Termination of Employment after
Expiration of the Agreement. Notwithstanding the expiration of this Agreement by
its terms and notwithstanding the terms of any corporate severance policy then
in effect and applicable to the Executive, if the employment of the Executive is
terminated without Cause by the Company, by the Executive for Good Reason or
upon the expiration of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof (for reasons other than
for Cause), in any case, within thirty-six (36) months after the expiration of
this Agreement by its terms, then (i) the Company shall pay to the Executive
severance compensation in an amount equal to two (2) times the Executive's
Covered Compensation as determined on the date of such termination, and (ii) the
Executive and the Executive's eligible dependents shall be entitled to
continuing coverage under the Company's then-existing group health plans
(including medical, dental, prescription drug and vision plans, if any) for a
period of two (2) years after the date of the termination of the Executive's
employment, to the extent not prohibited by law and subject to the terms of such
plans including provisions as to deductibles and copayments and changes in
levels of coverage that are generally applicable to employees. The payment to
the Executive by the Company pursuant to subsection (i) of the preceding
sentence shall be paid in a lump sum unless the Executive elects, and so
notifies the Company in writing prior to the Executive's termination of
employment, to receive such payment in two (2) equal annual installments. The
lump sum or first payment, as the case may be, shall be paid within thirty (30)
days after the date of termination of the Executive's employment.
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13. Release. The Executive hereby acknowledges and agrees that
neither the Company nor any of its representatives or agents will be obligated
to pay any compensation or benefit which the Executive has a right to be paid or
provided to the Executive or the Executive's dependents pursuant to Section 6,
Section 8 or Section 12 of this Agreement, unless the Executive, if requested by
the Company in its sole discretion, executes a release in a form reasonably
acceptable to the Company, which releases any and all claims the Executive has
or may have against the Company or its subsidiaries, agents, officers,
directors, successors or assigns.
14. Waiver. The waiver by a party hereto of any breach by the
other party hereto of any provision of this Agreement shall not operate or be
construed as a waiver of any other or subsequent breach by a party hereto.
15. Assignment. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the Company, and the Company
shall be obligated to require any successor to expressly acknowledge and assume
its obligations hereunder. This Agreement shall inure to the extent provided
hereunder to the benefit of and be enforceable by the Executive or the
Executive's legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. The Executive may not delegate any of the
Executive's duties, responsibilities, obligations or positions hereunder to any
person and any such purported delegation shall be void and of no force and
effect.
16. Notices. Any notices required or permitted to be given
under this Agreement shall be sufficient if in writing, and if personally
delivered or when sent by first class certified or registered mail, postage
prepaid, return receipt requested--in the case of the Executive, to his
residence address as set forth below, and in the case of the Company, to the
address of its principal place of business as set forth below, to the attention
of the Chairman of the Board, or in case the Executive is the Chairman of the
Board, to the Chairman of the Compensation Committee of the Board -- or to such
other person or at such other address with respect to each party as such party
shall notify the other in writing.
17. Construction of Agreement.
(a) Governing Law. This Agreement shall be
governed by and construed under the laws of the Commonwealth
of Pennsylvania.
(b) Severability. In the event that any one or more
of the provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, the validity, legality or
enforceability of the remaining provisions shall not in any
way be affected or impaired thereby.
(c) Headings. The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience of
reference only and shall not constitute a part of this
Agreement.
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18. Entire Agreement. This Agreement contains the entire
agreement of the parties concerning the Executive's employment and all promises,
representations, understandings, arrangements and prior agreements on such
subject are merged herein and superseded hereby, including the Employment
Agreement effective November 20, 1995 which is expressly superseded hereby. The
provisions of this Agreement may not be amended, modified, repealed, waived,
extended or discharged except by an agreement in writing signed by the party
against whom enforcement of any amendment, modification, repeal, waiver,
extension or discharge is sought. No person acting other than pursuant to a
resolution of the Board of Directors or the Committee shall have authority on
behalf of the Company to agree to amend, modify, repeal, waive, extend or
discharge any provision of this Agreement or anything in reference thereto or to
exercise any of the Company's rights to terminate or to fail to extend this
Agreement.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
officers thereunto duly authorized, and the Executive has hereunto set his hand
all as of the day and year first above written.
ATTEST: ERIE INDEMNITY COMPANY
/s/ J. R. Van Gorder /s/ F. William Hirt
____________________________ By:__________________________________
J. R. Van Gorder F. William Hirt
Secretary Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ Stephen A. Milne
____________________________ _____________________________________(SEAL)
Stephen A. Milne
100 Culbertson Drive
Lake City, PA 16423
65
Exhibit 10.25
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") made effective as of the 16th
day of December, 1997 (the "Effective Date") by and between ERIE INDEMNITY
COMPANY, a Pennsylvania corporation with its principal place of business at
Erie, Pennsylvania (the "Company"), and JAN R. VAN GORDER (the "Executive");
WITNESSETH:
WHEREAS, the Company has determined that it is in the best
interests of the Company and its shareholders to secure the continued employment
of the Executive on the terms and subject to the conditions set forth in this
Agreement; and
WHEREAS, the Executive desires and is willing to accept
employment with the Company on the terms and subject to the conditions set forth
herein;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Term. The Company hereby agrees to continue the employment
of the Executive and the Executive hereby agrees to continue to serve the
Company pursuant to the terms and conditions of this Agreement as Senior
Executive Vice President of the Company, or in such other position with the
Company of at least commensurate responsibility and authority in all material
respects, for a term of two years commencing on the Effective Date hereof and
expiring on December 15, 1999, unless earlier terminated pursuant to Section 5
hereof. Notwithstanding the foregoing, the Executive shall serve in said
office(s) at the pleasure of the Company's Board of Directors (the "Board of
Directors") and the Executive may be removed from said office(s) at any time
with or without Cause, as hereinafter defined, pursuant to Sections 5(b) or 5(d)
hereof; provided that any such removal shall be without prejudice to any
contract rights the Executive may have hereunder. Subject to Section 8(a)(6) and
Section 8(b) hereof, this Agreement shall expire by its terms on December 15,
1999.
2. Duties and Responsibilities. The Executive's duties
hereunder shall be those which shall be prescribed by the Company's Bylaws, as
amended from time to time, and by the Board of Directors or any committee
thereof from time to time and shall include such executive authority, duties,
powers and responsibilities as customarily attend the office as Senior Executive
Vice President of a company comparable to the Company. The Executive shall
discharge such duties consistent with sound business practices and in accordance
with law and the Company's general employment policies, in each case, as in
effect from time to time, in all material respects and the Executive shall use
best efforts to promote the best interests of the Company. During the term of
this Agreement, the Executive's position (including the Executive's status and
reporting requirements), authority, duties, powers and responsibilities shall at
all times be at least commensurate in all material respects with the most
significant of those held, exercised or assigned
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to the Executive as of the Effective Date. The Executive shall devote the
Executive's knowledge, skill and all of the Executive's professional time,
attention and energies (reasonable absences for vacations and illness excepted),
to the business of the Company in order to perform such assigned duties
faithfully, competently and diligently. It is understood and agreed between the
parties that the Executive may (i) engage in charitable and community
activities, including serving on boards of directors or trustees of and holding
other leadership positions in non-profit organizations unless the objectives and
requirements of such positions are determined by the Board of Directors to be
inconsistent with the performance of the Executive's duties hereunder, and, (ii)
manage personal investments, so long as such activities do not interfere or
conflict with the Executive's performance of responsibilities and obligations
hereunder. It is expressly agreed that any such activities engaged in by the
Executive as of the Effective Date shall not thereafter be deemed to interfere
with the Executive's obligations and responsibilities hereunder. The Executive
agrees that the approval of the Board of Directors or a committee thereof shall
be required before the Executive first accepts a position as director of any
for-profit corporation after the date hereof.
3. Compensation. During the term of this Agreement
the Executive shall receive, for all services rendered to the Company
hereunder, the following (hereinafter referred to collectively as
"Compensation"):
(a) Salary. The Executive shall be paid an annual
base salary at an annual rate at least equal to the annual
rate being paid or payable to the Executive by the Company in
the month in which the Effective Date occurs, with such
increases thereafter as shall be determined from time to time
to be fair and reasonable by the Board of Directors or by the
Executive Compensation Committee of the Board of Directors
(the "Committee") in its discretion after taking into account,
among other things, the authority, duties, powers and
responsibilities of the Executive's position, the Executive's
performance, the Company's performance, the compensation of
persons in comparable positions at the Company and at other
comparable companies, and the effect of inflation. The
Executive's annual base salary shall not be reduced after any
such increase. The Executive's annual base salary shall be
payable in equal installments in accordance with the Company's
general salary payment policies, but no less frequently than
bi-weekly.
(b) Incentive Compensation. The Executive shall be
eligible for awards under the Company's incentive compensation
plans, if any, applicable to senior executive officers of the
Company or to key employees of the Company or its
subsidiaries, including, but not limited to, management
incentive plans and stock option plans, in accordance with and
subject to the terms thereof (including any provisions
providing for changes in the level of or termination of
benefits thereunder), on a basis commensurate with the
Executive's position and authorities, duties, powers and
responsibilities.
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(c) Employee Benefit Plans. The Executive and the
Executive's "dependents," as that term may be defined under
the applicable employee benefit plan(s) of the Company, shall
be included, to the extent eligible thereunder and subject to
the terms of the plans (including any provisions for changing
the level of or termination of benefits thereunder), in all
plans, programs and policies which provide benefits for
Company employees and their dependents on a basis commensurate
with the Executive's position and authorities, duties, powers
and responsibilities including, without limitation, health
care insurance, health and welfare plans, pension and
retirement plans, group life insurance plans, split dollar
life insurance plans, short and long-term disability plans,
survivors' benefits, executive supplemental benefits, holidays
and other similar or comparable benefits made available to the
Company's employees and senior executive officers
(hereinafter, such plans, programs and policies shall be
collectively referred to as the "Erie Benefit Plans"). Such
plans, programs and policies shall include, but are not
limited to, the Erie Insurance Group Retirement Plan for
Employees, the Erie Insurance Group Employee Savings Plan, the
Erie Insurance Group Deferred Compensation Plan, the Erie
Insurance Group Split Dollar Life Insurance Plan, the Erie
Insurance Group Supplemental Executive Retirement Plan, and
the Erie Insurance Group Health Protection, Prescription Drug,
Dental Assistance and Vision Care Plans.
(d) Perquisites. The Executive shall be entitled to
all perquisites which the Company from time to time makes
available to senior executive officers of the Company. Such
perquisites shall include, but are not limited to, parking,
club dues, tax preparation assistance, and an annual physical
examination.
(e) Expenses and Working Facilities. The Executive is
hereby authorized to incur, and shall be reimbursed by the
Company for, any and all reasonable and necessary business
related expenses, including, but not limited to, expenses for
business travel, entertainment, gifts and similar matters,
which expenses are incurred by the Executive on behalf of the
Company or any of its subsidiaries, upon presentation of
itemized accounts of such expenses in accordance with Company
policies. The Executive shall be furnished during the term of
this Agreement with offices and other working facilities in
the Company's principal executive offices located in Erie,
Pennsylvania (or other location of the principal executive
offices within the Erie metropolitan area) and secretarial and
other assistance suitable to the Executive's position and
adequate for the performance of duties hereunder.
(f) Performance Appraisal. The Executive's
performance may be evaluated by the Board of Directors or the
Committee from time to time. The Executive shall be entitled
to such additional remuneration, including but not limited to
annual bonuses based on performance, as the Board of Directors
or the Committee may, in its discretion, determine from time
to time.
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4. Absences. The Executive shall be entitled to vacations in
accordance with the Company's vacation policy in effect from time to time (but
in no event shall the Executive be entitled to fewer vacation days than under
the Company's vacation policy as in effect on the Effective Date) and to
absences because of illness or other incapacity, and shall also be entitled to
such other absences, whether for holiday, personal time, conventions, or for any
other purpose, as are granted to the Company's other senior executive officers
or as are approved by the Board of Directors or the Committee, which approval
shall not be unreasonably withheld.
5. Termination. The Executive's employment hereunder may be
terminated only as follows:
(a) Expiration of Term of Office. Upon the expiration
of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof, the
Board of Directors may (i) determine that the Executive should
not continue in such office(s) or (ii) that the Executive
should not be elected or appointed to an office with duties,
authorities, powers and responsibilities that are at least
commensurate with those of said office(s), in either case, for
reasons other than for Cause (if the reasons for such
noncontinuance, nonreelection or nonreappointment constitute
Cause, then Section 5(d) hereof will apply).
(b) By the Company Without Cause. The Company may at
any time terminate the Executive's employment hereunder
without Cause only by the affirmative vote of a majority of
the entire Board of Directors, and upon no less than thirty
(30) days' prior written notice to the Executive.
(c) By the Executive Without Good Reason. The
Executive may at any time terminate employment hereunder for
any reason upon no less than thirty (30) days' written notice
to the Company. Section 5(e) shall apply to any termination of
employment by the Executive for Good Reason.
(d) By the Company For Cause. The Company may
terminate the Executive's employment hereunder for Cause. In
such event, the Company shall give to the Executive prompt
written notice (in addition to any notice which may be
required by Section 5(d)(1) hereof) specifying in reasonable
detail the basis for such termination. For purposes of this
Agreement, "Cause" shall mean any of the following conduct by
the Executive:
(1) The deliberate and intentional
breach of any material provision of
this Agreement, which breach
Executive shall have failed to cure
within thirty (30) days after
Executive's receipt of written
notice from the Company specifying
the specific nature of the
Executive's breach;
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(2) The deliberate and intentional
engaging by Executive in gross
misconduct that is materially and
demonstrably inimical to the best
interests, monetary or otherwise, of
the Company; or
(3) Conviction of a felony or conviction
of any crime involving moral
turpitude, fraud or deceit.
For purposes of this definition, no act, or failure to act, on the Executive's
part shall be considered "deliberate and intentional" unless done, or omitted to
be done, by the Executive not in good faith and without reasonable belief that
such action or omission was in the best interest of the Company.
(e) By the Executive for Good Reason. The Executive
may terminate employment hereunder for Good Reason upon
providing thirty (30) days written notice to the Company after
the Executive reasonably becomes aware of the circumstances
giving rise to such Good Reason. For purposes of this
Agreement, "Good Reason" means the following conduct of the
Company, unless the Executive shall have consented thereto in
writing:
(1) Material breach of any material
provision of this Agreement by the
Company, which breach shall not have
been cured by the Company within
thirty (30) days after Company's
receipt from the Executive or the
Executive's agent of written notice
specifying in reasonable detail the
nature of the Company's breach;
(2) The assignment to the Executive of
any duties inconsistent in any
material respect with the
Executive's position (including any
reduction of the Executive's status
and reporting requirements),
authority, duties, powers or
responsibilities with the Company as
contemplated by Section 2 of this
Agreement, or any other action by
the Company, including the removal
of the Executive from or any failure
to reelect or reappoint the
Executive to the office(s) specified
in Section 2 or a commensurate
office(s) (other than for Cause),
which results in a diminution of the
Executive's authority, duties,
position, responsibilities or
status, excluding for this purpose
any isolated, insubstantial and
inadvertent action respecting the
Executive not taken in bad faith and
which is remedied by the Company
within thirty (30) days after
receipt of written notice from the
Executive to the Company;
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(3) The Company's relocation of the
Executive out of the Company's
principal executive offices or the
relocation of the Company's
principal executive offices to a
location outside the Erie,
Pennsylvania metropolitan area,
except for required short-term
travel on the Company's behalf to
the extent necessary for the
Executive to carry out his normal
duties in the ordinary course of
business;
(4) The failure of the Company to obtain
the assumption in writing of its
obligations to perform this
Agreement by any successor as
provided in Section 14 hereof not
less than five days prior to a
merger, consolidation or sale as
contemplated in Section 14; or
(5) A reduction in the overall level of
compensation of the Executive. For
purposes of this subsection 5, the
following shall not constitute a
reduction in the overall level of
compensation of the Executive: (i)
changes in the cash/stock mix of
compensation payable to the
Executive; (ii) a reduction in the
overall level of compensation of the
Executive resulting from the failure
to achieve corporate, business unit
and/or individual performance goals
established for purposes of
incentive compensation for any year
or other period; provided that the
aggregate short-term incentive
opportunity, when combined with the
Executive's base salary, provides,
in the aggregate, an opportunity for
the Executive to realize at least
the same overall level of
compensation as was paid in the
immediately prior year or period at
target performance levels; and
provided, further, that such target
performance levels are reasonable at
all times during the measurement
period, taking into account the fact
that one of the purposes of such
compensation is to incent the
Executive; (iii) reductions in
compensation resulting from changes
to any Erie Benefit Plan (provided
that such changes are generally
applicable to all participants in
such Erie Benefit Plan); and (iv)
any combination of the foregoing.
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(f) Disability. In the event that the Executive shall
be unable to perform the Executive's duties hereunder on a
full time basis for a period of one hundred-eighty (180)
consecutive calendar days by reason of incapacity due to
illness, accident or other physical or mental disability, then
the Company may, at its discretion, terminate the Executive's
employment hereunder if the Executive, within ten (10) days
after receipt of written notice of termination (which notice
may be given before or after the end of the entire 180 day
period), shall not have returned to the performance of all of
his duties hereunder on a full-time basis.
(g) Death. The Executive's employment under this
Agreement shall terminate upon the Executive's death.
(h) Mutual Written Agreement. This Agreement
and the Executive's employment hereunder may be terminated
at any time by the mutual written agreement of the Executive
and the Company.
6. Compensation in the Event of Termination. In the event that the
Executive's employment hereunder terminates prior to the expiration of this
Agreement for any reason provided in Section 5 hereof, the Company shall pay the
Executive, compensation and provide the Executive and the Executive's eligible
dependents with benefits as follows:
(a) Executive's Nonreelection to Office; Termination
By Company Without Cause; Termination By Executive for Good
Reason. In the event that the Executive's employment hereunder
is terminated: (i) because the Executive does not continue in
office pursuant to Section 5(a) hereof; or (ii) by the Company
without Cause pursuant to Section 5(b) hereof; or (iii) by the
Executive for Good Reason pursuant to Section 5(e) hereof,
then in any such event the Company shall pay or provide, as
applicable, the following compensation and benefits to the
Executive:
(1) Three (3) times the following: (A)
the highest annual base salary paid
or payable to the Executive in the
then current year or any one (1) of
the three (3) calendar years
preceding Executive's termination of
employment hereunder; plus (B) an
amount equal to the sum of the
Executive's highest award(s) under
the Company's Annual Incentive Plans
for any one (1) of the three (3)
calendar years preceding the date of
the termination of Executive's
employment hereunder (such total is
referred to herein as "Covered
Compensation"). Such payment to the
Executive by the Company shall be
paid in a lump sum unless the
Executive elects, and so notifies
the Company in writing prior to the
termination of the Executive's
employment hereunder, to receive
such payment in three (3) equal
annual installments. The lump sum or
first payment, as the case may be,
shall be paid within sixty (60) days
after the date of the termination of
the Executive's employment
hereunder;
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(2) Any awards or other compensation to
which the Executive is entitled
under any of the Company's
compensation plans or Erie Benefit
Plans to the extent not covered in
subsection (1) hereof;
(3) Any award to which the Executive
would be entitled under the
Company's Long-Term Incentive Plan
as in effect on December 16, 1997,
calculated under the provision of
that Plan as if the Executive ceases
to be an Employee of the Company by
reason of death, disability or
normal retirement;
(4) Continuing coverage for all purposes
(including eligibility, coverage,
vesting and benefit accruals, as
applicable), for a period of three
(3) years after the date of the
termination of Executive's
employment hereunder, to the extent
not prohibited by law, for the
Executive and the Executive's
eligible dependents under all of the
Erie Benefit Plans in effect and
applicable to Executive and the
Executive's eligible dependents as
of the date of termination. In the
event that the Executive and/or the
Executive's eligible dependents,
because of the Executive's
terminated status, cannot be covered
or fully covered under any or all of
the Erie Benefit Plans, the Company
shall continue to provide the
Executive and/or the Executive's
eligible dependents with the same
level of such coverage in effect
prior to termination, payable from
the general assets of the Company if
necessary. Notwithstanding the
foregoing, the Executive may elect
(by giving written notice to the
Company prior to the termination of
employment hereunder), on a benefit
by benefit basis, to receive in lieu
of continuing coverage, cash in an
amount equal to the present value
(using a 6.5% discount rate over
three years) of the projected cost
to the Company of providing such
benefit for such three year period.
The aggregate amount of cash to
which the Executive is entitled
pursuant to the preceding sentence
shall be payable by the Company to
the Executive within sixty (60) days
after the date of the termination of
Executive's employment hereunder;
and
(5) For a period of three (3) years
after the date of the termination of
Executive's employment hereunder,
such perquisites as are made
available to the Executive as of the
date of the termination of
Executive's employment hereunder.
The Executive's subsequent death, disability or attainment of age 65 or any
other age shall in no way affect or limit the Company's obligations under this
Section 6(a).
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(b) Termination By the Company for Cause. In the
event that the Company shall terminate the Executive's
employment hereunder for Cause pursuant to Section 5(d), this
Agreement shall forthwith terminate and the obligations of the
parties hereto shall be as set forth in Section 8 hereof.
(c) Termination by the Executive Without Good Reason.
In the event that the Executive shall terminate employment
hereunder other than for Good Reason pursuant to Section 5(c),
this Agreement shall forthwith terminate and the obligations
of the parties hereto shall be as set forth in Section 8
hereof.
(d) Disability. In the event that the Company elects
to terminate the Executive's employment hereunder pursuant to
Section 5(f), the Executive shall continue to receive from the
date of such termination through the expiration date of this
Agreement, sixty percent (60%) of the then current annual base
salary to which the Executive was entitled pursuant to Section
3(a) hereof immediately preceding such termination, in
accordance with the payroll practices of the Company for
senior executive officers, reduced, however, by the amount of
any proceeds from Social Security and disability insurance
policies provided by and at the expense of the Company.
(e) Death. In the event of the death of the Executive
during the term of this Agreement, the then current annual
base salary to which the Executive was entitled pursuant to
Section 3(a) hereof immediately preceding the Executive's
death shall be paid, in twelve (12) equal monthly installments
following the date of death, to the last beneficiary
designated by the Executive under the Company's group life
insurance policy maintained by the Company or such other
written designation expressly provided to the Company for the
purposes hereof or, failing either such designation, to the
Executive's estate.
(f) Mutual Written Consent. In the event that the
Executive and the Company shall terminate the Executive's
employment by mutual written agreement, the Company shall pay
such compensation and provide such benefits, if any, as the
parties may mutually agree upon in writing.
The Executive shall not be required to mitigate the amount of any payment
provided for in this Section 6 by seeking employment or otherwise, nor shall any
amounts received from employment or otherwise by the Executive offset in any
manner the obligations of the Company hereunder except as specifically provided
in Section 6(d) hereof.
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7. Certain Additional Payments by the Company. Notwithstanding
anything in this Agreement to the contrary, in the event it is determined that
any payment or distribution by the Company to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (a "Payment"), is subject to the excise
tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), or any successor provision, on excess parachute payments, as that
term is used and defined in Sections 4999 and 280G of the Code, then the
Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount equal to the then current rate of tax under said Section
4999 multiplied by the total of the amounts so paid or payable, including the
Gross-Up Payment, which are deemed to be a part of an excess parachute payment.
8. Effect of Expiration of Agreement or Termination of
Executive's Employment. Upon the expiration of this Agreement by its terms or
the termination of the Executive's employment hereunder, neither the Company nor
the Executive shall have any remaining duties or obligations hereunder except
that:
(a) The Company shall:
(1) Pay the Executive's accrued salary
and any other accrued benefits under
Sections 3(a), (b), and (c) hereof;
(2) Reimburse the Executive for expenses
already incurred in accordance with
Section 3(e) hereof;
(3) Pay or otherwise provide for any
benefits, payments or continuation
or conversion rights in accordance
with the provisions of any Erie
Benefit Plan of which the Executive
or any of the Executive's dependents
is or was a participant or as
otherwise required by law;
(4) Pay the Executive and the
Executive's beneficiaries any
compensation and/or provide the
Executive or the Executive's
eligible dependents any benefits, as
the case may be, due pursuant to
Section 6 or Section 7 hereof; and
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(5) Unless the employment of the
Executive is terminated by the
Company for Cause, pay the Executive
or the Executive's beneficiaries the
full amount or amounts accrued under
the Supplemental Executive
Retirement Plan of the Company (the
"SERP") as in effect on the
Effective Date (or as such benefits
may be enhanced by subsequent
amendments or supplements to such
SERP), as though, solely for
purposes of determining any
otherwise applicable actuarial
reduction factors, the event of the
termination of Executive's
employment hereunder or expiration
of this Agreement occurred on the
Executive's Normal Retirement Date
as defined in such SERP. Accrued
benefits under the SERP shall be
fully vested and nonforfeitable upon
such termination (including
termination on account of the
Executive's death) or expiration.
Any reductions in SERP benefits that
would otherwise apply pursuant to
Section 10.1 of the Company's
Retirement Plan for Employees (or
pursuant to any successor provision
of such plan or any successor plan)
relating to Section 415(b) of the
Code shall not be applicable for
purposes hereof. No further approval
by the Board of Directors or the
Committee with respect to payments
under the SERP in accordance with
the preceding sentences shall be
required. Unreduced payments may
begin at age 55, but in no event
would payments be made under this
Section 8(a)(5) before the Executive
reaches age fifty-five (55). The
Company shall purchase for the
Executive, naming the Executive
and/or the Executive's designee the
owner, a paid up annuity, from an
insurer reasonably acceptable to the
Executive but in any event having an
A.M. Best rating of A+ or better (or
other comparable rating), that will
pay to the Executive an amount equal
to the benefit to which the
Executive would otherwise be
entitled under the SERP and payable
at the times such SERP benefit would
be payable in accordance with the
provisions hereof. Upon the purchase
and delivery to the Executive of
such an annuity, the Executive shall
release the Company from any further
obligation under the SERP. The
Company further agrees to pay the
Executive immediately upon
termination, a cash payment (the
"Tax Gross-up") equal to the sum of
the following: (i) all taxes
(federal, state, local, and payroll
taxes) incurred and due and owing by
the Executive, arising from the cost
of the annuity purchased by the
Company to meet the requirements of
this Section 8(a)(5), and (ii) any
such taxes incurred and due and
owing with respect to the amount
paid in (i).
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(6) Continue to remain bound by the
terms of Section 12 hereof.
(b) The Executive shall remain bound by the terms of
Sections 9 and 13 hereof for a period of thirty six (36)
months after the expiration of the Agreement by its terms;
provided, that the Executive shall not be bound by the terms
of Section 9(b) after the termination of employment (other
than a termination of the Executive by the Company for Cause)
if such termination occurs after the expiration of this
Agreement by its terms.
9. Covenants as to Confidential Information and Competitive
Conduct. The Executive hereby acknowledges and agrees as follows: (i) this
Section 9 is necessary for the protection of the legitimate business interests
of the Company, (ii) the restrictions contained in this Section 9 with regard to
geographical scope, length of term and types of restricted activities are
reasonable; (iii) the Executive has received adequate and valuable new
consideration for entering into this Agreement, and (iv) the Executive's
expertise and capabilities are such that this obligation hereunder and the
enforcement hereof by injunction or otherwise will not adversely affect the
Executive's ability to earn a livelihood.
(a) Confidentiality of Information and Nondisclosure.
The Executive acknowledges and agrees that the Executive's
employment by the Company under this Agreement necessarily
involves knowledge of and access to confidential and
proprietary information pertaining to the business of the
Company and its subsidiaries. Accordingly, the Executive
agrees that at all times during the term of this Agreement and
at any time thereafter, the Executive will not, directly or
indirectly, without the express written approval of the
Company, unless directed by applicable legal authority
(including any court of competent jurisdiction, governmental
agency having supervisory authority over the business of the
Company or the subsidiaries, or any legislative or
administrative body having supervisory authority over the
business of the Company or its subsidiaries) having
jurisdiction over the Executive, disclose to or use, or
knowingly permit to be so disclosed or used, for the benefit
of himself, any person, corporation or other entity other than
the Company, (i) any information concerning any financial
matters, customer relationships, competitive status, supplier
matters, internal organizational matters, current or future
plans, or other business affairs of or relating to the Company
or its subsidiaries, (ii) any management, operational, trade,
technical or other secrets or any other proprietary
information or other data of the Company or its subsidiaries,
or (iii) any other information related to the Company or its
subsidiaries or which the Executive should reasonably believe
will be damaging to the Company or its subsidiaries which has
not been published and is not generally known outside of the
Company. The Executive acknowledges that all of the foregoing
constitutes confidential and proprietary information, which is
the exclusive property of the Company.
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(b) Restrictive Covenant. During the term of, and for
a period of one (1) year (the "Restrictive Period") after the
termination of the Executive's employment hereunder for any
reason (other than a termination of the Executive hereunder
pursuant to Section 5(a), 5(b) or 5(e), hereof), the Executive
shall not render, directly, or indirectly, services to any
person, firm, corporation, association or other entity which
conducts the same or similar business as the Company or its
subsidiaries at the date of the Executive's termination of
employment hereunder within the states in which the Company or
any of its subsidiaries is then licensed and doing business at
the date of the Executive's termination of employment
hereunder without the prior written consent of the Board of
Directors, which may be withheld in its discretion. In the
event the Executive violates any of the provisions contained
in this Section 9(b) hereof, the Restrictive Period shall be
increased by the period of time from the commencement by the
Executive of any violation until such violation has been cured
to the satisfaction of the Company. The Executive further
agrees that at no time during the Restrictive Period will the
Executive attempt to directly or indirectly solicit or hire
employees of Company or its subsidiaries or induce any of them
to terminate their employment with the Company or any of the
subsidiaries. Notwithstanding the foregoing, the performance
by the Executive of rights and duties under an agency
agreement with the Company shall not constitute a breach of
this Section 9(b).
(c) Company Remedies. The Executive acknowledges and
agrees that any breach of this Section 9 will result in
immediate and irreparable harm to the Company, and that the
Company cannot be reasonably or adequately compensated by
damages in an action at law. In the event of a breach by the
Executive of the provisions of this Section 9, the Company
shall be entitled, to the extent permitted by law, immediately
to cease to pay or provide the Executive or the Executive's
dependents any compensation or benefit being, or to be, paid
or provided to the Executive pursuant to Section 3, Section 6
or Section 8 of this Agreement, and also to obtain immediate
injunctive relief restraining the Executive from conduct in
breach of the covenants contained in this Section 9. Nothing
herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for such breach,
including the recovery of damages from the Executive.
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10. Resolution of Differences Over Breaches of Agreement.
Except as otherwise provided herein, in the event of any controversy, dispute or
claim arising out of, or relating to, this Agreement, or the breach thereof, or
arising out of any other matter relating to the Executive's employment with the
Company, the parties may seek recourse only for temporary or preliminary
injunctive relief to the courts having jurisdiction thereof and if any relief
other than injunctive relief is sought, the Company and the Executive agree that
such underlying controversy, dispute or claim shall be settled by arbitration
conducted in Erie, Pennsylvania in accordance with this Section 10 and the
Commercial Arbitration Rules of the American Arbitration Association ("AAA").
The matter shall be heard and decided, and awards rendered by a panel of three
(3) arbitrators (the "Arbitration Panel"). The Company and the Executive shall
each select one arbitrator from the AAA National Panel of Commercial Arbitrators
(the "Commercial Panel") and AAA shall select a third arbitrator from the
Commercial Panel. The award rendered by the Arbitration Panel shall be final and
binding as between the parties hereto and their heirs, executors,
administrators, successors and assigns, and judgment on the award may be entered
by any court having jurisdiction thereof. Except as provided in Section 11
hereof, each party shall bear sole responsibility for all expenses and costs
incurred by such party in connection with the resolution of any controversy,
dispute or claim in accordance with this Section 10.
11. Payment of Executive's Legal Fees. If the Executive is
required to bring any action to enforce rights or to collect moneys due under
this Agreement, the Company shall pay to the Executive the fees and expenses
incurred by the Executive in bringing and pursuing such action if the Executive
is successful, in whole or in part, on the merits or otherwise (including by way
of a settlement involving a payment of money by the Company to the Executive),
in such action. The Company shall pay such fees and expenses in advance of the
final disposition of such action upon receipt of an undertaking from the
Executive to repay to the Company such advances if the Executive is not
ultimately successful, in whole or in part, on the merits or otherwise, in such
action.
12. Severance Pay upon Termination of Employment after
Expiration of the Agreement. Notwithstanding the expiration of this Agreement by
its terms and notwithstanding the terms of any corporate severance policy then
in effect and applicable to the Executive, if the employment of the Executive is
terminated without Cause by the Company, by the Executive for Good Reason or
upon the expiration of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof (for reasons other than
for Cause), in any case, within thirty-six (36) months after the expiration of
this Agreement by its terms, then (i) the Company shall pay to the Executive
severance compensation in an amount equal to two (2) times the Executive's
Covered Compensation as determined on the date of such termination, and (ii) the
Executive and the Executive's eligible dependents shall be entitled to
continuing coverage under the Company's then-existing group health plans
(including medical, dental, prescription drug and vision plans, if any) for a
period of two (2) years after the date of the termination of the Executive's
employment, to the extent not prohibited by law and subject to the terms of such
plans including provisions as to deductibles and copayments and changes in
levels of coverage that are generally applicable to employees. The payment to
the Executive by the Company pursuant to subsection (i) of the preceding
sentence shall be paid in a lump sum unless the Executive elects, and so
notifies the Company in writing prior to the Executive's termination of
employment, to receive such payment in two (2) equal annual installments. The
lump sum or first payment, as the case may be, shall be paid within thirty (30)
days after the date of termination of the Executive's employment.
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13. Release. The Executive hereby acknowledges and agrees that
neither the Company nor any of its representatives or agents will be obligated
to pay any compensation or benefit which the Executive has a right to be paid or
provided to the Executive or the Executive's dependents pursuant to Section 6,
Section 8 or Section 12 of this Agreement, unless the Executive, if requested by
the Company in its sole discretion, executes a release in a form reasonably
acceptable to the Company, which releases any and all claims the Executive has
or may have against the Company or its subsidiaries, agents, officers,
directors, successors or assigns.
14. Waiver. The waiver by a party hereto of any breach by the
other party hereto of any provision of this Agreement shall not operate or be
construed as a waiver of any other or subsequent breach by a party hereto.
15. Assignment. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the Company, and the Company
shall be obligated to require any successor to expressly acknowledge and assume
its obligations hereunder. This Agreement shall inure to the extent provided
hereunder to the benefit of and be enforceable by the Executive or the
Executive's legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. The Executive may not delegate any of the
Executive's duties, responsibilities, obligations or positions hereunder to any
person and any such purported delegation shall be void and of no force and
effect.
16. Notices. Any notices required or permitted to be given
under this Agreement shall be sufficient if in writing, and if personally
delivered or when sent by first class certified or registered mail, postage
prepaid, return receipt requested--in the case of the Executive, to his
residence address as set forth below, and in the case of the Company, to the
address of its principal place of business as set forth below, to the attention
of the Chairman of the Board, or in case the Executive is the Chairman of the
Board, to the Chairman of the Compensation Committee of the Board -- or to such
other person or at such other address with respect to each party as such party
shall notify the other in writing.
17. Construction of Agreement.
(a) Governing Law. This Agreement shall be
governed by and construed under the laws of the Commonwealth
of Pennsylvania.
(b) Severability. In the event that any one or more
of the provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, the validity, legality or
enforceability of the remaining provisions shall not in any
way be affected or impaired thereby.
(c) Headings. The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience of
reference only and shall not constitute a part of this
Agreement.
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18. Entire Agreement. This Agreement contains the entire
agreement of the parties concerning the Executive's employment and all promises,
representations, understandings, arrangements and prior agreements on such
subject are merged herein and superseded hereby, including the Employment
Agreement effective November 20, 1995 which is expressly superseded hereby. The
provisions of this Agreement may not be amended, modified, repealed, waived,
extended or discharged except by an agreement in writing signed by the party
against whom enforcement of any amendment, modification, repeal, waiver,
extension or discharge is sought. No person acting other than pursuant to a
resolution of the Board of Directors or the Committee shall have authority on
behalf of the Company to agree to amend, modify, repeal, waive, extend or
discharge any provision of this Agreement or anything in reference thereto or to
exercise any of the Company's rights to terminate or to fail to extend this
Agreement.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
officers thereunto duly authorized, and the Executive has hereunto set his hand
all as of the day and year first above written.
ATTEST: ERIE INDEMNITY COMPANY
/s/ Mark T. Torok /s/ F. William Hirt
____________________________ By:__________________________________
Mark T. Torok F. William Hirt
Assistant Secretary Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ Jan R. Van Gorder
____________________________ _____________________________________(SEAL)
Jan R. Van Gorder
6796 Manchester Beach Rd.
Fairview, PA 16415
82
Exhibit 10.26
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") made effective as of the 16th
day of December, 1997 (the "Effective Date") by and between ERIE INDEMNITY
COMPANY, a Pennsylvania corporation with its principal place of business at
Erie, Pennsylvania (the "Company"), and PHILIP A. GARCIA (the "Executive");
WITNESSETH:
WHEREAS, the Company has determined that it is in the best
interests of the Company and its shareholders to secure the continued employment
of the Executive on the terms and subject to the conditions set forth in this
Agreement; and
WHEREAS, the Executive desires and is willing to accept
employment with the Company on the terms and subject to the conditions set forth
herein;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Term. The Company hereby agrees to continue the employment
of the Executive and the Executive hereby agrees to continue to serve the
Company pursuant to the terms and conditions of this Agreement as Executive Vice
President of the Company, or in such other position with the Company of at least
commensurate responsibility and authority in all material respects, for a term
of two years commencing on the Effective Date hereof and expiring on December
15, 1999, unless earlier terminated pursuant to Section 5 hereof.
Notwithstanding the foregoing, the Executive shall serve in said office(s) at
the pleasure of the Company's Board of Directors (the "Board of Directors") and
the Executive may be removed from said office(s) at any time with or without
Cause, as hereinafter defined, pursuant to Sections 5(b) or 5(d) hereof;
provided that any such removal shall be without prejudice to any contract rights
the Executive may have hereunder. Subject to Section 8(a)(6) and Section 8(b)
hereof, this Agreement shall expire by its terms on December 15, 1999.
2. Duties and Responsibilities. The Executive's duties
hereunder shall be those which shall be prescribed by the Company's Bylaws, as
amended from time to time, and by the Board of Directors or any committee
thereof from time to time and shall include such executive authority, duties,
powers and responsibilities as customarily attend the office as Executive Vice
President of a company comparable to the Company. The Executive shall discharge
such duties consistent with sound business practices and in accordance with law
and the Company's general employment policies, in each case, as in effect from
time to time, in all material respects and the Executive shall use best efforts
to promote the best interests of the Company. During the term of this Agreement,
the Executive's position (including the Executive's status and reporting
requirements), authority, duties, powers and responsibilities shall at all times
be at least commensurate in all material respects with the most significant of
those held, exercised or assigned
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to the Executive as of the Effective Date. The Executive shall devote the
Executive's knowledge, skill and all of the Executive's professional time,
attention and energies (reasonable absences for vacations and illness excepted),
to the business of the Company in order to perform such assigned duties
faithfully, competently and diligently. It is understood and agreed between the
parties that the Executive may (i) engage in charitable and community
activities, including serving on boards of directors or trustees of and holding
other leadership positions in non-profit organizations unless the objectives and
requirements of such positions are determined by the Board of Directors to be
inconsistent with the performance of the Executive's duties hereunder, and, (ii)
manage personal investments, so long as such activities do not interfere or
conflict with the Executive's performance of responsibilities and obligations
hereunder. It is expressly agreed that any such activities engaged in by the
Executive as of the Effective Date shall not thereafter be deemed to interfere
with the Executive's obligations and responsibilities hereunder. The Executive
agrees that the approval of the Board of Directors or a committee thereof shall
be required before the Executive first accepts a position as director of any
for-profit corporation after the date hereof.
3. Compensation. During the term of this Agreement,
the Executive shall receive, for all services rendered to the Company
hereunder, the following (hereinafter referred to collectively as
"Compensation"):
(a) Salary. The Executive shall be paid an annual
base salary at an annual rate at least equal to the annual
rate being paid or payable to the Executive by the Company in
the month in which the Effective Date occurs, with such
increases thereafter as shall be determined from time to time
to be fair and reasonable by the Board of Directors or by the
Executive Compensation Committee of the Board of Directors
(the "Committee") in its discretion after taking into account,
among other things, the authority, duties, powers and
responsibilities of the Executive's position, the Executive's
performance, the Company's performance, the compensation of
persons in comparable positions at the Company and at other
comparable companies, and the effect of inflation. The
Executive's annual base salary shall not be reduced after any
such increase. The Executive's annual base salary shall be
payable in equal installments in accordance with the Company's
general salary payment policies, but no less frequently than
bi-weekly.
(b) Incentive Compensation. The Executive shall be
eligible for awards under the Company's incentive compensation
plans, if any, applicable to senior executive officers of the
Company or to key employees of the Company or its
subsidiaries, including, but not limited to, management
incentive plans and stock option plans, in accordance with and
subject to the terms thereof (including any provisions
providing for changes in the level of or termination of
benefits thereunder), on a basis commensurate with the
Executive's position and authorities, duties, powers and
responsibilities.
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(c) Employee Benefit Plans. The Executive and the
Executive's "dependents," as that term may be defined under
the applicable employee benefit plan(s) of the Company, shall
be included, to the extent eligible thereunder and subject to
the terms of the plans (including any provisions for changing
the level of or termination of benefits thereunder), in all
plans, programs and policies which provide benefits for
Company employees and their dependents on a basis commensurate
with the Executive's position and authorities, duties, powers
and responsibilities including, without limitation, health
care insurance, health and welfare plans, pension and
retirement plans, group life insurance plans, split dollar
life insurance plans, short and long-term disability plans,
survivors' benefits, executive supplemental benefits, holidays
and other similar or comparable benefits made available to the
Company's employees and senior executive officers
(hereinafter, such plans, programs and policies shall be
collectively referred to as the "Erie Benefit Plans"). Such
plans, programs and policies shall include, but are not
limited to, the Erie Insurance Group Retirement Plan for
Employees, the Erie Insurance Group Employee Savings Plan, the
Erie Insurance Group Deferred Compensation Plan, the Erie
Insurance Group Split Dollar Life Insurance Plan, the Erie
Insurance Group Supplemental Executive Retirement Plan, and
the Erie Insurance Group Health Protection, Prescription Drug,
Dental Assistance and Vision Care Plans.
(d) Perquisites. The Executive shall be entitled to
all perquisites which the Company from time to time makes
available to senior executive officers of the Company. Such
perquisites shall include, but are not limited to, parking,
club dues, tax preparation assistance, and an annual physical
examination.
(e) Expenses and Working Facilities. The Executive is
hereby authorized to incur, and shall be reimbursed by the
Company for, any and all reasonable and necessary business
related expenses, including, but not limited to, expenses for
business travel, entertainment, gifts and similar matters,
which expenses are incurred by the Executive on behalf of the
Company or any of its subsidiaries, upon presentation of
itemized accounts of such expenses in accordance with Company
policies. The Executive shall be furnished during the term of
this Agreement with offices and other working facilities in
the Company's principal executive offices located in Erie,
Pennsylvania (or other location of the principal executive
offices within the Erie metropolitan area) and secretarial and
other assistance suitable to the Executive's position and
adequate for the performance of duties hereunder.
(f) Performance Appraisal. The Executive's
performance may be evaluated by the Board of Directors or the
Committee from time to time. The Executive shall be entitled
to such additional remuneration, including but not limited to
annual bonuses based on performance, as the Board of Directors
or the Committee may, in its discretion, determine from time
to time.
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4. Absences. The Executive shall be entitled to vacations in
accordance with the Company's vacation policy in effect from time to time (but
in no event shall the Executive be entitled to fewer vacation days than under
the Company's vacation policy as in effect on the Effective Date) and to
absences because of illness or other incapacity, and shall also be entitled to
such other absences, whether for holiday, personal time, conventions, or for any
other purpose, as are granted to the Company's other senior executive officers
or as are approved by the Board of Directors or the Committee, which approval
shall not be unreasonably withheld.
5. Termination. The Executive's employment hereunder may be
terminated only as follows:
(a) Expiration of Term of Office. Upon the expiration
of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof, the
Board of Directors may (i) determine that the Executive should
not continue in such office(s) or (ii) that the Executive
should not be elected or appointed to an office with duties,
authorities, powers and responsibilities that are at least
commensurate with those of said office(s), in either case, for
reasons other than for Cause (if the reasons for such
noncontinuance, nonreelection or nonreappointment constitute
Cause, then Section 5(d) hereof will apply).
(b) By the Company Without Cause. The Company may at
any time terminate the Executive's employment hereunder
without Cause only by the affirmative vote of a majority of
the entire Board of Directors, and upon no less than thirty
(30) days' prior written notice to the Executive.
(c) By the Executive Without Good Reason. The
Executive may at any time terminate employment hereunder for
any reason upon no less than thirty (30) days' written notice
to the Company. Section 5(e) shall apply to any termination of
employment by the Executive for Good Reason.
(d) By the Company For Cause. The Company may
terminate the Executive's employment hereunder for Cause. In
such event, the Company shall give to the Executive prompt
written notice (in addition to any notice which may be
required by Section 5(d)(1) hereof) specifying in reasonable
detail the basis for such termination. For purposes of this
Agreement, "Cause" shall mean any of the following conduct by
the Executive:
(1) The deliberate and intentional
breach of any material provision of
this Agreement, which breach
Executive shall have failed to cure
within thirty (30) days after
Executive's receipt of written
notice from the Company specifying
the specific nature of the
Executive's breach;
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(2) The deliberate and intentional
engaging by Executive in gross
misconduct that is materially and
demonstrably inimical to the best
interests, monetary or otherwise, of
the Company; or
(3) Conviction of a felony or conviction
of any crime involving moral
turpitude, fraud or deceit.
For purposes of this definition, no act, or failure to act, on the Executive's
part shall be considered "deliberate and intentional" unless done, or omitted to
be done, by the Executive not in good faith and without reasonable belief that
such action or omission was in the best interest of the Company.
(e) By the Executive for Good Reason. The Executive
may terminate employment hereunder for Good Reason upon
providing thirty (30) days written notice to the Company after
the Executive reasonably becomes aware of the circumstances
giving rise to such Good Reason. For purposes of this
Agreement, "Good Reason" means the following conduct of the
Company, unless the Executive shall have consented thereto in
writing:
(1) Material breach of any material
provision of this Agreement by the
Company, which breach shall not have
been cured by the Company within
thirty (30) days after Company's
receipt from the Executive or the
Executive's agent of written notice
specifying in reasonable detail the
nature of the Company's breach;
(2) The assignment to the Executive of
any duties inconsistent in any
material respect with the
Executive's position (including any
reduction of the Executive's status
and reporting requirements),
authority, duties, powers or
responsibilities with the Company as
contemplated by Section 2 of this
Agreement, or any other action by
the Company, including the removal
of the Executive from or any failure
to reelect or reappoint the
Executive to the office(s) specified
in Section 2 or a commensurate
office(s) (other than for Cause),
which results in a diminution of the
Executive's authority, duties,
position, responsibilities or
status, excluding for this purpose
any isolated, insubstantial and
inadvertent action respecting the
Executive not taken in bad faith and
which is remedied by the Company
within thirty (30) days after
receipt of written notice from the
Executive to the Company;
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(3) The Company's relocation of the
Executive out of the Company's
principal executive offices or the
relocation of the Company's
principal executive offices to a
location outside the Erie,
Pennsylvania metropolitan area,
except for required short-term
travel on the Company's behalf to
the extent necessary for the
Executive to carry out his normal
duties in the ordinary course of
business;
(4) The failure of the Company to obtain
the assumption in writing of its
obligations to perform this
Agreement by any successor as
provided in Section 14 hereof not
less than five days prior to a
merger, consolidation or sale as
contemplated in Section 14; or
(5) A reduction in the overall level of
compensation of the Executive. For
purposes of this subsection 5, the
following shall not constitute a
reduction in the overall level of
compensation of the Executive: (i)
changes in the cash/stock mix of
compensation payable to the
Executive; (ii) a reduction in the
overall level of compensation of the
Executive resulting from the failure
to achieve corporate, business unit
and/or individual performance goals
established for purposes of
incentive compensation for any year
or other period; provided that the
aggregate short-term incentive
opportunity, when combined with the
Executive's base salary, provides,
in the aggregate, an opportunity for
the Executive to realize at least
the same overall level of
compensation as was paid in the
immediately prior year or period at
target performance levels; and
provided, further, that such target
performance levels are reasonable at
all times during the measurement
period, taking into account the fact
that one of the purposes of such
compensation is to incent the
Executive; (iii) reductions in
compensation resulting from changes
to any Erie Benefit Plan (provided
that such changes are generally
applicable to all participants in
such Erie Benefit Plan); and (iv)
any combination of the foregoing.
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(f) Disability. In the event that the Executive shall
be unable to perform the Executive's duties hereunder on a
full time basis for a period of one hundred-eighty (180)
consecutive calendar days by reason of incapacity due to
illness, accident or other physical or mental disability, then
the Company may, at its discretion, terminate the Executive's
employment hereunder if the Executive, within ten (10) days
after receipt of written notice of termination (which notice
may be given before or after the end of the entire 180 day
period), shall not have returned to the performance of all of
his duties hereunder on a full-time basis.
(g) Death. The Executive's employment under this
Agreement shall terminate upon the Executive's death.
(h) Mutual Written Agreement. This Agreement
and the Executive's employment hereunder may be terminated
at any time by the mutual written agreement of the Executive
and the Company.
6. Compensation in the Event of Termination. In the event that the
Executive's employment hereunder terminates prior to the expiration of this
Agreement for any reason provided in Section 5 hereof, the Company shall pay the
Executive, compensation and provide the Executive and the Executive's eligible
dependents with benefits as follows:
(a) Executive's Nonreelection to Office; Termination
By Company Without Cause; Termination By Executive for Good
Reason. In the event that the Executive's employment hereunder
is terminated: (i) because the Executive does not continue in
office pursuant to Section 5(a) hereof; or (ii) by the Company
without Cause pursuant to Section 5(b) hereof; or (iii) by the
Executive for Good Reason pursuant to Section 5(e) hereof,
then in any such event the Company shall pay or provide, as
applicable, the following compensation and benefits to the
Executive:
(1) Three (3) times the following: (A)
the highest annual base salary paid
or payable to the Executive in the
then current year or any one (1) of
the three (3) calendar years
preceding Executive's termination of
employment hereunder; plus (B) an
amount equal to the sum of the
Executive's highest award(s) under
the Company's Annual Incentive Plans
for any one (1) of the three (3)
calendar years preceding the date of
the termination of Executive's
employment hereunder (such total is
referred to herein as "Covered
Compensation"). Such payment to the
Executive by the Company shall be
paid in a lump sum unless the
Executive elects, and so notifies
the Company in writing prior to the
termination of the Executive's
employment hereunder, to receive
such payment in three (3) equal
annual installments. The lump sum or
first payment, as the case may be,
shall be paid within sixty (60) days
after the date of the termination of
the Executive's employment
hereunder;
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(2) Any awards or other compensation to
which the Executive is entitled
under any of the Company's
compensation plans or Erie Benefit
Plans to the extent not covered in
subsection (1) hereof;
(3) Any award to which the Executive
would be entitled under the
Company's Long-Term Incentive Plan
as in effect on December 16, 1997,
calculated under the provision of
that Plan as if the Executive ceases
to be an Employee of the Company by
reason of death, disability or
normal retirement;
(4) Continuing coverage for all purposes
(including eligibility, coverage,
vesting and benefit accruals, as
applicable), for a period of three
(3) years after the date of the
termination of Executive's
employment hereunder, to the extent
not prohibited by law, for the
Executive and the Executive's
eligible dependents under all of the
Erie Benefit Plans in effect and
applicable to Executive and the
Executive's eligible dependents as
of the date of termination. In the
event that the Executive and/or the
Executive's eligible dependents,
because of the Executive's
terminated status, cannot be covered
or fully covered under any or all of
the Erie Benefit Plans, the Company
shall continue to provide the
Executive and/or the Executive's
eligible dependents with the same
level of such coverage in effect
prior to termination, payable from
the general assets of the Company if
necessary. Notwithstanding the
foregoing, the Executive may elect
(by giving written notice to the
Company prior to the termination of
employment hereunder), on a benefit
by benefit basis, to receive in lieu
of continuing coverage, cash in an
amount equal to the present value
(using a 6.5% discount rate over
three years) of the projected cost
to the Company of providing such
benefit for such three year period.
The aggregate amount of cash to
which the Executive is entitled
pursuant to the preceding sentence
shall be payable by the Company to
the Executive within sixty (60) days
after the date of the termination of
Executive's employment hereunder;
and
(5) For a period of three (3) years
after the date of the termination of
Executive's employment hereunder,
such perquisites as are made
available to the Executive as of the
date of the termination of
Executive's employment hereunder.
The Executive's subsequent death, disability or attainment of age 65 or any
other age shall in no way affect or limit the Company's obligations under this
Section 6(a).
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(b) Termination By the Company for Cause. In the
event that the Company shall terminate the Executive's
employment hereunder for Cause pursuant to Section 5(d), this
Agreement shall forthwith terminate and the obligations of the
parties hereto shall be as set forth in Section 8 hereof.
(c) Termination by the Executive Without Good Reason.
In the event that the Executive shall terminate employment
hereunder other than for Good Reason pursuant to Section 5(c),
this Agreement shall forthwith terminate and the obligations
of the parties hereto shall be as set forth in Section 8
hereof.
(d) Disability. In the event that the Company elects
to terminate the Executive's employment hereunder pursuant to
Section 5(f), the Executive shall continue to receive from the
date of such termination through the expiration date of this
Agreement, sixty percent (60%) of the then current annual base
salary to which the Executive was entitled pursuant to Section
3(a) hereof immediately preceding such termination, in
accordance with the payroll practices of the Company for
senior executive officers, reduced, however, by the amount of
any proceeds from Social Security and disability insurance
policies provided by and at the expense of the Company.
(e) Death. In the event of the death of the Executive
during the term of this Agreement, the then current annual
base salary to which the Executive was entitled pursuant to
Section 3(a) hereof immediately preceding the Executive's
death shall be paid, in twelve (12) equal monthly installments
following the date of death, to the last beneficiary
designated by the Executive under the Company's group life
insurance policy maintained by the Company or such other
written designation expressly provided to the Company for the
purposes hereof or, failing either such designation, to the
Executive's estate.
(f) Mutual Written Consent. In the event that the
Executive and the Company shall terminate the Executive's
employment by mutual written agreement, the Company shall pay
such compensation and provide such benefits, if any, as the
parties may mutually agree upon in writing.
The Executive shall not be required to mitigate the amount of any payment
provided for in this Section 6 by seeking employment or otherwise, nor shall any
amounts received from employment or otherwise by the Executive offset in any
manner the obligations of the Company hereunder except as specifically provided
in Section 6(d) hereof.
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7. Certain Additional Payments by the Company. Notwithstanding
anything in this Agreement to the contrary, in the event it is determined that
any payment or distribution by the Company to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (a "Payment"), is subject to the excise
tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), or any successor provision, on excess parachute payments, as that
term is used and defined in Sections 4999 and 280G of the Code, then the
Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount equal to the then current rate of tax under said Section
4999 multiplied by the total of the amounts so paid or payable, including the
Gross-Up Payment, which are deemed to be a part of an excess parachute payment.
8. Effect of Expiration of Agreement or Termination of
Executive's Employment. Upon the expiration of this Agreement by its terms or
the termination of the Executive's employment hereunder, neither the Company nor
the Executive shall have any remaining duties or obligations hereunder except
that:
(a) The Company shall:
(1) Pay the Executive's accrued salary
and any other accrued benefits under
Sections 3(a), (b), and (c) hereof;
(2) Reimburse the Executive for expenses
already incurred in accordance with
Section 3(e) hereof;
(3) Pay or otherwise provide for any
benefits, payments or continuation
or conversion rights in accordance
with the provisions of any Erie
Benefit Plan of which the Executive
or any of the Executive's dependents
is or was a participant or as
otherwise required by law;
(4) Pay the Executive and the
Executive's beneficiaries any
compensation and/or provide the
Executive or the Executive's
eligible dependents any benefits, as
the case may be, due pursuant to
Section 6 or Section 7 hereof; and
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(5) Unless the employment of the
Executive is terminated by the
Company for Cause, pay the Executive
or the Executive's beneficiaries the
full amount or amounts accrued under
the Supplemental Executive
Retirement Plan of the Company (the
"SERP") as in effect on the
Effective Date (or as such benefits
may be enhanced by subsequent
amendments or supplements to such
SERP), as though, solely for
purposes of determining any
otherwise applicable actuarial
reduction factors, the event of the
termination of Executive's
employment hereunder or expiration
of this Agreement occurred on the
Executive's Normal Retirement Date
as defined in such SERP. Accrued
benefits under the SERP shall be
fully vested and nonforfeitable upon
such termination (including
termination on account of the
Executive's death) or expiration.
Any reductions in SERP benefits that
would otherwise apply pursuant to
Section 10.1 of the Company's
Retirement Plan for Employees (or
pursuant to any successor provision
of such plan or any successor plan)
relating to Section 415(b) of the
Code shall not be applicable for
purposes hereof. No further approval
by the Board of Directors or the
Committee with respect to payments
under the SERP in accordance with
the preceding sentences shall be
required. Unreduced payments may
begin at age 55, but in no event
would payments be made under this
Section 8(a)(5) before the Executive
reaches age fifty-five (55). The
Company shall purchase for the
Executive, naming the Executive
and/or the Executive's designee the
owner, a paid up annuity, from an
insurer reasonably acceptable to the
Executive but in any event having an
A.M. Best rating of A+ or better (or
other comparable rating), that will
pay to the Executive an amount equal
to the benefit to which the
Executive would otherwise be
entitled under the SERP and payable
at the times such SERP benefit would
be payable in accordance with the
provisions hereof. Upon the purchase
and delivery to the Executive of
such an annuity, the Executive shall
release the Company from any further
obligation under the SERP. The
Company further agrees to pay the
Executive immediately upon
termination, a cash payment (the
"Tax Gross-up") equal to the sum of
the following: (i) all taxes
(federal, state, local, and payroll
taxes) incurred and due and owing by
the Executive, arising from the cost
of the annuity purchased by the
Company to meet the requirements of
this Section 8(a)(5), and (ii) any
such taxes incurred and due and
owing with respect to the amount
paid in (i).
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(6) Continue to remain bound by the
terms of Section 12 hereof.
(b) The Executive shall remain bound by the terms of
Sections 9 and 13 hereof for a period of thirty six (36)
months after the expiration of the Agreement by its terms;
provided, that the Executive shall not be bound by the terms
of Section 9(b) after the termination of employment (other
than a termination of the Executive by the Company for Cause)
if such termination occurs after the expiration of this
Agreement by its terms.
9. Covenants as to Confidential Information and Competitive
Conduct. The Executive hereby acknowledges and agrees as follows: (i) this
Section 9 is necessary for the protection of the legitimate business interests
of the Company, (ii) the restrictions contained in this Section 9 with regard to
geographical scope, length of term and types of restricted activities are
reasonable; (iii) the Executive has received adequate and valuable new
consideration for entering into this Agreement, and (iv) the Executive's
expertise and capabilities are such that this obligation hereunder and the
enforcement hereof by injunction or otherwise will not adversely affect the
Executive's ability to earn a livelihood.
(a) Confidentiality of Information and Nondisclosure.
The Executive acknowledges and agrees that the Executive's
employment by the Company under this Agreement necessarily
involves knowledge of and access to confidential and
proprietary information pertaining to the business of the
Company and its subsidiaries. Accordingly, the Executive
agrees that at all times during the term of this Agreement and
at any time thereafter, the Executive will not, directly or
indirectly, without the express written approval of the
Company, unless directed by applicable legal authority
(including any court of competent jurisdiction, governmental
agency having supervisory authority over the business of the
Company or the subsidiaries, or any legislative or
administrative body having supervisory authority over the
business of the Company or its subsidiaries) having
jurisdiction over the Executive, disclose to or use, or
knowingly permit to be so disclosed or used, for the benefit
of himself, any person, corporation or other entity other than
the Company, (i) any information concerning any financial
matters, customer relationships, competitive status, supplier
matters, internal organizational matters, current or future
plans, or other business affairs of or relating to the Company
or its subsidiaries, (ii) any management, operational, trade,
technical or other secrets or any other proprietary
information or other data of the Company or its subsidiaries,
or (iii) any other information related to the Company or its
subsidiaries or which the Executive should reasonably believe
will be damaging to the Company or its subsidiaries which has
not been published and is not generally known outside of the
Company. The Executive acknowledges that all of the foregoing
constitutes confidential and proprietary information, which is
the exclusive property of the Company.
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(b) Restrictive Covenant. During the term of, and for
a period of one (1) year (the "Restrictive Period") after the
termination of the Executive's employment hereunder for any
reason (other than a termination of the Executive hereunder
pursuant to Section 5(a), 5(b) or 5(e), hereof), the Executive
shall not render, directly, or indirectly, services to any
person, firm, corporation, association or other entity which
conducts the same or similar business as the Company or its
subsidiaries at the date of the Executive's termination of
employment hereunder within the states in which the Company or
any of its subsidiaries is then licensed and doing business at
the date of the Executive's termination of employment
hereunder without the prior written consent of the Board of
Directors, which may be withheld in its discretion. In the
event the Executive violates any of the provisions contained
in this Section 9(b) hereof, the Restrictive Period shall be
increased by the period of time from the commencement by the
Executive of any violation until such violation has been cured
to the satisfaction of the Company. The Executive further
agrees that at no time during the Restrictive Period will the
Executive attempt to directly or indirectly solicit or hire
employees of Company or its subsidiaries or induce any of them
to terminate their employment with the Company or any of the
subsidiaries. Notwithstanding the foregoing, the performance
by the Executive of rights and duties under an agency
agreement with the Company shall not constitute a breach of
this Section 9(b).
(c) Company Remedies. The Executive acknowledges and
agrees that any breach of this Section 9 will result in
immediate and irreparable harm to the Company, and that the
Company cannot be reasonably or adequately compensated by
damages in an action at law. In the event of a breach by the
Executive of the provisions of this Section 9, the Company
shall be entitled, to the extent permitted by law, immediately
to cease to pay or provide the Executive or the Executive's
dependents any compensation or benefit being, or to be, paid
or provided to the Executive pursuant to Section 3, Section 6
or Section 8 of this Agreement, and also to obtain immediate
injunctive relief restraining the Executive from conduct in
breach of the covenants contained in this Section 9. Nothing
herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for such breach,
including the recovery of damages from the Executive.
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10. Resolution of Differences Over Breaches of Agreement.
Except as otherwise provided herein, in the event of any controversy, dispute or
claim arising out of, or relating to, this Agreement, or the breach thereof, or
arising out of any other matter relating to the Executive's employment with the
Company, the parties may seek recourse only for temporary or preliminary
injunctive relief to the courts having jurisdiction thereof and if any relief
other than injunctive relief is sought, the Company and the Executive agree that
such underlying controversy, dispute or claim shall be settled by arbitration
conducted in Erie, Pennsylvania in accordance with this Section 10 and the
Commercial Arbitration Rules of the American Arbitration Association ("AAA").
The matter shall be heard and decided, and awards rendered by a panel of three
(3) arbitrators (the "Arbitration Panel"). The Company and the Executive shall
each select one arbitrator from the AAA National Panel of Commercial Arbitrators
(the "Commercial Panel") and AAA shall select a third arbitrator from the
Commercial Panel. The award rendered by the Arbitration Panel shall be final and
binding as between the parties hereto and their heirs, executors,
administrators, successors and assigns, and judgment on the award may be entered
by any court having jurisdiction thereof. Except as provided in Section 11
hereof, each party shall bear sole responsibility for all expenses and costs
incurred by such party in connection with the resolution of any controversy,
dispute or claim in accordance with this Section 10.
11. Payment of Executive's Legal Fees. If the Executive is
required to bring any action to enforce rights or to collect moneys due under
this Agreement, the Company shall pay to the Executive the fees and expenses
incurred by the Executive in bringing and pursuing such action if the Executive
is successful, in whole or in part, on the merits or otherwise (including by way
of a settlement involving a payment of money by the Company to the Executive),
in such action. The Company shall pay such fees and expenses in advance of the
final disposition of such action upon receipt of an undertaking from the
Executive to repay to the Company such advances if the Executive is not
ultimately successful, in whole or in part, on the merits or otherwise, in such
action.
12. Severance Pay upon Termination of Employment after
Expiration of the Agreement. Notwithstanding the expiration of this Agreement by
its terms and notwithstanding the terms of any corporate severance policy then
in effect and applicable to the Executive, if the employment of the Executive is
terminated without Cause by the Company, by the Executive for Good Reason or
upon the expiration of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof (for reasons other than
for Cause), in any case, within thirty-six (36) months after the expiration of
this Agreement by its terms, then (i) the Company shall pay to the Executive
severance compensation in an amount equal to two (2) times the Executive's
Covered Compensation as determined on the date of such termination, and (ii) the
Executive and the Executive's eligible dependents shall be entitled to
continuing coverage under the Company's then-existing group health plans
(including medical, dental, prescription drug and vision plans, if any) for a
period of two (2) years after the date of the termination of the Executive's
employment, to the extent not prohibited by law and subject to the terms of such
plans including provisions as to deductibles and copayments and changes in
levels of coverage that are generally applicable to employees. The payment to
the Executive by the Company pursuant to subsection (i) of the preceding
sentence shall be paid in a lump sum unless the Executive elects, and so
notifies the Company in writing prior to the Executive's termination of
employment, to receive such payment in two (2) equal annual installments. The
lump sum or first payment, as the case may be, shall be paid within thirty (30)
days after the date of termination of the Executive's employment.
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13. Release. The Executive hereby acknowledges and agrees that
neither the Company nor any of its representatives or agents will be obligated
to pay any compensation or benefit which the Executive has a right to be paid or
provided to the Executive or the Executive's dependents pursuant to Section 6,
Section 8 or Section 12 of this Agreement, unless the Executive, if requested by
the Company in its sole discretion, executes a release in a form reasonably
acceptable to the Company, which releases any and all claims the Executive has
or may have against the Company or its subsidiaries, agents, officers,
directors, successors or assigns.
14. Waiver. The waiver by a party hereto of any breach by the
other party hereto of any provision of this Agreement shall not operate or be
construed as a waiver of any other or subsequent breach by a party hereto.
15. Assignment. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the Company, and the Company
shall be obligated to require any successor to expressly acknowledge and assume
its obligations hereunder. This Agreement shall inure to the extent provided
hereunder to the benefit of and be enforceable by the Executive or the
Executive's legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. The Executive may not delegate any of the
Executive's duties, responsibilities, obligations or positions hereunder to any
person and any such purported delegation shall be void and of no force and
effect.
16. Notices. Any notices required or permitted to be given
under this Agreement shall be sufficient if in writing, and if personally
delivered or when sent by first class certified or registered mail, postage
prepaid, return receipt requested--in the case of the Executive, to his
residence address as set forth below, and in the case of the Company, to the
address of its principal place of business as set forth below, to the attention
of the Chairman of the Board, or in case the Executive is the Chairman of the
Board, to the Chairman of the Compensation Committee of the Board -- or to such
other person or at such other address with respect to each party as such party
shall notify the other in writing.
17. Construction of Agreement.
(a) Governing Law. This Agreement shall be
governed by and construed under the laws of the Commonwealth
of Pennsylvania.
(b) Severability. In the event that any one or more
of the provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, the validity, legality or
enforceability of the remaining provisions shall not in any
way be affected or impaired thereby.
(c) Headings. The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience of
reference only and shall not constitute a part of this
Agreement.
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18. Entire Agreement. This Agreement contains the entire
agreement of the parties concerning the Executive's employment and all promises,
representations, understandings, arrangements and prior agreements on such
subject are merged herein and superseded hereby, including the Employment
Agreement effective November 20, 1995 which is expressly superseded hereby. The
provisions of this Agreement may not be amended, modified, repealed, waived,
extended or discharged except by an agreement in writing signed by the party
against whom enforcement of any amendment, modification, repeal, waiver,
extension or discharge is sought. No person acting other than pursuant to a
resolution of the Board of Directors or the Committee shall have authority on
behalf of the Company to agree to amend, modify, repeal, waive, extend or
discharge any provision of this Agreement or anything in reference thereto or to
exercise any of the Company's rights to terminate or to fail to extend this
Agreement.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
officers thereunto duly authorized, and the Executive has hereunto set his hand
all as of the day and year first above written.
ATTEST: ERIE INDEMNITY COMPANY
/s/ J. R. Van Gorder /s/ F. William Hirt
____________________________ By:__________________________________
J. R. Van Gorder F. William Hirt
Secretary Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ Philip A. Garcia
____________________________ _____________________________________(SEAL)
Philip A. Garcia
786 Stockbridge Drive
Erie, PA 16505
99
Exhibit 10.27
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") made effective as of the
16th day of December, 1997 (the "Effective Date") by and between ERIE INDEMNITY
COMPANY, a Pennsylvania corporation with its principal place of business at
Erie, Pennsylvania (the "Company"), and JOHN J. BRINLING, JR. (the "Executive");
WITNESSETH:
WHEREAS, the Company has determined that it is in the best
interests of the Company and its shareholders to secure the continued employment
of the Executive on the terms and subject to the conditions set forth in this
Agreement; and
WHEREAS, the Executive desires and is willing to accept
employment with the Company on the terms and subject to the conditions set forth
herein;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Term. The Company hereby agrees to continue the employment
of the Executive and the Executive hereby agrees to continue to serve the
Company pursuant to the terms and conditions of this Agreement as Executive Vice
President of the Company, or in such other position with the Company of at least
commensurate responsibility and authority in all material respects, for a term
of two years commencing on the Effective Date hereof and expiring on December
15, 1999, unless earlier terminated pursuant to Section 5 hereof.
Notwithstanding the foregoing, the Executive shall serve in said office(s) at
the pleasure of the Company's Board of Directors (the "Board of Directors") and
the Executive may be removed from said office(s) at any time with or without
Cause, as hereinafter defined, pursuant to Sections 5(b) or 5(d) hereof;
provided that any such removal shall be without prejudice to any contract rights
the Executive may have hereunder. Subject to Section 8(a)(6) and Section 8(b)
hereof, this Agreement shall expire by its terms on December 15, 1999.
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2. Duties and Responsibilities. The Executive's duties
hereunder shall be those which shall be prescribed by the Company's Bylaws, as
amended from time to time, and by the Board of Directors or any committee
thereof from time to time and shall include such executive authority, duties,
powers and responsibilities as customarily attend the office as Executive Vice
President of a company comparable to the Company. The Executive shall discharge
such duties consistent with sound business practices and in accordance with law
and the Company's general employment policies, in each case, as in effect from
time to time, in all material respects and the Executive shall use best efforts
to promote the best interests of the Company. During the term of this Agreement,
the Executive's position (including the Executive's status and reporting
requirements), authority, duties, powers and responsibilities shall at all times
be at least commensurate in all material respects with the most significant of
those held, exercised or assigned to the Executive as of the Effective Date. The
Executive shall devote the Executive's knowledge, skill and all of the
Executive's professional time, attention and energies (reasonable absences for
vacations and illness excepted), to the business of the Company in order to
perform such assigned duties faithfully, competently and diligently. It is
understood and agreed between the parties that the Executive may (i) engage in
charitable and community activities, including serving on boards of directors or
trustees of and holding other leadership positions in non-profit organizations
unless the objectives and requirements of such positions are determined by the
Board of Directors to be inconsistent with the performance of the Executive's
duties hereunder, and, (ii) manage personal investments, so long as such
activities do not interfere or conflict with the Executive's performance of
responsibilities and obligations hereunder. It is expressly agreed that any such
activities engaged in by the Executive as of the Effective Date shall not
thereafter be deemed to interfere with the Executive's obligations and
responsibilities hereunder. The Executive agrees that the approval of the Board
of Directors or a committee thereof shall be required before the Executive first
accepts a position as director of any for-profit corporation after the date
hereof.
3. Compensation. During the term of this Agreement, the
Executive shall receive, for all services rendered to the Company hereunder,
the following (hereinafter referred to collectively as "Compensation"):
(a) Salary. The Executive shall be paid an annual
base salary at an annual rate at least equal to the annual
rate being paid or payable to the Executive by the Company in
the month in which the Effective Date occurs, with such
increases thereafter as shall be determined from time to time
to be fair and reasonable by the Board of Directors or by the
Executive Compensation Committee of the Board of Directors
(the "Committee") in its discretion after taking into account,
among other things, the authority, duties, powers and
responsibilities of the Executive's position, the Executive's
performance, the Company's performance, the compensation of
persons in comparable positions at the Company and at other
comparable companies, and the effect of inflation. The
Executive's annual base salary shall not be reduced after any
such increase. The Executive's annual base salary shall be
payable in equal installments in accordance with the Company's
general salary payment policies, but no less frequently than
bi-weekly.
(b) Incentive Compensation. The Executive shall be
eligible for awards under the Company's incentive compensation
plans, if any, applicable to senior executive officers of the
Company or to key employees of the Company or its
subsidiaries, including, but not limited to, management
incentive plans and stock option plans, in accordance with and
subject to the terms thereof (including any provisions
providing for changes in the level of or termination of
benefits thereunder), on a basis commensurate with the
Executive's position and authorities, duties, powers and
responsibilities.
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(c) Employee Benefit Plans. The Executive and the
Executive's "dependents," as that term may be defined under
the applicable employee benefit plan(s) of the Company, shall
be included, to the extent eligible thereunder and subject to
the terms of the plans (including any provisions for changing
the level of or termination of benefits thereunder), in all
plans, programs and policies which provide benefits for
Company employees and their dependents on a basis commensurate
with the Executive's position and authorities, duties, powers
and responsibilities including, without limitation, health
care insurance, health and welfare plans, pension and
retirement plans, group life insurance plans, split dollar
life insurance plans, short and long-term disability plans,
survivors' benefits, executive supplemental benefits, holidays
and other similar or comparable benefits made available to the
Company's employees and senior executive officers
(hereinafter, such plans, programs and policies shall be
collectively referred to as the "Erie Benefit Plans"). Such
plans, programs and policies shall include, but are not
limited to, the Erie Insurance Group Retirement Plan for
Employees, the Erie Insurance Group Employee Savings Plan, the
Erie Insurance Group Deferred Compensation Plan, the Erie
Insurance Group Split Dollar Life Insurance Plan, the Erie
Insurance Group Supplemental Executive Retirement Plan, and
the Erie Insurance Group Health Protection, Prescription Drug,
Dental Assistance and Vision Care Plans.
(d) Perquisites. The Executive shall be entitled to
all perquisites which the Company from time to time makes
available to senior executive officers of the Company. Such
perquisites shall include, but are not limited to, parking,
club dues, tax preparation assistance, and an annual physical
examination.
(e) Expenses and Working Facilities. The Executive is
hereby authorized to incur, and shall be reimbursed by the
Company for, any and all reasonable and necessary business
related expenses, including, but not limited to, expenses for
business travel, entertainment, gifts and similar matters,
which expenses are incurred by the Executive on behalf of the
Company or any of its subsidiaries, upon presentation of
itemized accounts of such expenses in accordance with Company
policies. The Executive shall be furnished during the term of
this Agreement with offices and other working facilities in
the Company's principal executive offices located in Erie,
Pennsylvania (or other location of the principal executive
offices within the Erie metropolitan area) and secretarial and
other assistance suitable to the Executive's position and
adequate for the performance of duties hereunder.
(f) Performance Appraisal. The Executive's
performance may be evaluated by the Board of Directors or the
Committee from time to time. The Executive shall be entitled
to such additional remuneration, including but not limited to
annual bonuses based on performance, as the Board of Directors
or the Committee may, in its discretion, determine from time
to time.
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4. Absences. The Executive shall be entitled to vacations in
accordance with the Company's vacation policy in effect from time to time (but
in no event shall the Executive be entitled to fewer vacation days than under
the Company's vacation policy as in effect on the Effective Date) and to
absences because of illness or other incapacity, and shall also be entitled to
such other absences, whether for holiday, personal time, conventions, or for any
other purpose, as are granted to the Company's other senior executive officers
or as are approved by the Board of Directors or the Committee, which approval
shall not be unreasonably withheld.
5. Termination. The Executive's employment hereunder may be
terminated only as follows:
(a) Expiration of Term of Office. Upon the expiration
of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof, the
Board of Directors may (i) determine that the Executive should
not continue in such office(s) or (ii) that the Executive
should not be elected or appointed to an office with duties,
authorities, powers and responsibilities that are at least
commensurate with those of said office(s), in either case, for
reasons other than for Cause (if the reasons for such
noncontinuance, nonreelection or nonreappointment constitute
Cause, then Section 5(d) hereof will apply).
(b) By the Company Without Cause. The Company may at
any time terminate the Executive's employment hereunder
without Cause only by the affirmative vote of a majority of
the entire Board of Directors, and upon no less than thirty
(30) days' prior written notice to the Executive.
(c) By the Executive Without Good Reason. The
Executive may at any time terminate employment hereunder for
any reason upon no less than thirty (30) days' written notice
to the Company. Section 5(e) shall apply to any termination of
employment by the Executive for Good Reason.
(d) By the Company For Cause. The Company may
terminate the Executive's employment hereunder for Cause. In
such event, the Company shall give to the Executive prompt
written notice (in addition to any notice which may be
required by Section 5(d)(1) hereof) specifying in reasonable
detail the basis for such termination. For purposes of this
Agreement, "Cause" shall mean any of the following conduct by
the Executive:
(1) The deliberate and intentional
breach of any material provision of
this Agreement, which breach
Executive shall have failed to cure
within thirty (30) days after
Executive's receipt of written
notice from the Company specifying
the specific nature of the
Executive's breach;
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(2) The deliberate and intentional
engaging by Executive in gross
misconduct that is materially and
demonstrably inimical to the best
interests, monetary or otherwise, of
the Company; or
(3) Conviction of a felony or conviction
of any crime involving moral
turpitude, fraud or deceit.
For purposes of this definition, no act, or failure to act, on the Executive's
part shall be considered "deliberate and intentional" unless done, or omitted to
be done, by the Executive not in good faith and without reasonable belief that
such action or omission was in the best interest of the Company.
(e) By the Executive for Good Reason. The Executive
may terminate employment hereunder for Good Reason upon
providing thirty (30) days written notice to the Company after
the Executive reasonably becomes aware of the circumstances
giving rise to such Good Reason. For purposes of this
Agreement, "Good Reason" means the following conduct of the
Company, unless the Executive shall have consented thereto in
writing:
(1) Material breach of any material
provision of this Agreement by the
Company, which breach shall not have
been cured by the Company within
thirty (30) days after Company's
receipt from the Executive or the
Executive's agent of written notice
specifying in reasonable detail the
nature of the Company's breach;
(2) The assignment to the Executive of
any duties inconsistent in any
material respect with the
Executive's position (including any
reduction of the Executive's status
and reporting requirements),
authority, duties, powers or
responsibilities with the Company as
contemplated by Section 2 of this
Agreement, or any other action by
the Company, including the removal
of the Executive from or any failure
to reelect or reappoint the
Executive to the office(s) specified
in Section 2 or a commensurate
office(s) (other than for Cause),
which results in a diminution of the
Executive's authority, duties,
position, responsibilities or
status, excluding for this purpose
any isolated, insubstantial and
inadvertent action respecting the
Executive not taken in bad faith and
which is remedied by the Company
within thirty (30) days after
receipt of written notice from the
Executive to the Company;
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(3) The Company's relocation of the
Executive out of the Company's
principal executive offices or the
relocation of the Company's
principal executive offices to a
location outside the Erie,
Pennsylvania metropolitan area,
except for required short-term
travel on the Company's behalf to
the extent necessary for the
Executive to carry out his normal
duties in the ordinary course of
business;
(4) The failure of the Company to obtain
the assumption in writing of its
obligations to perform this
Agreement by any successor as
provided in Section 14 hereof not
less than five days prior to a
merger, consolidation or sale as
contemplated in Section 14; or
(5) A reduction in the overall level of
compensation of the Executive. For
purposes of this subsection 5, the
following shall not constitute a
reduction in the overall level of
compensation of the Executive: (i)
changes in the cash/stock mix of
compensation payable to the
Executive; (ii) a reduction in the
overall level of compensation of the
Executive resulting from the failure
to achieve corporate, business unit
and/or individual performance goals
established for purposes of
incentive compensation for any year
or other period; provided that the
aggregate short-term incentive
opportunity, when combined with the
Executive's base salary, provides,
in the aggregate, an opportunity for
the Executive to realize at least
the same overall level of
compensation as was paid in the
immediately prior year or period at
target performance levels; and
provided, further, that such target
performance levels are reasonable at
all times during the measurement
period, taking into account the fact
that one of the purposes of such
compensation is to incent the
Executive; (iii) reductions in
compensation resulting from changes
to any Erie Benefit Plan (provided
that such changes are generally
applicable to all participants in
such Erie Benefit Plan); and (iv)
any combination of the foregoing.
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(f) Disability. In the event that the Executive shall
be unable to perform the Executive's duties hereunder on a
full time basis for a period of one hundred-eighty (180)
consecutive calendar days by reason of incapacity due to
illness, accident or other physical or mental disability, then
the Company may, at its discretion, terminate the Executive's
employment hereunder if the Executive, within ten (10) days
after receipt of written notice of termination (which notice
may be given before or after the end of the entire 180 day
period), shall not have returned to the performance of all of
his duties hereunder on a full-time basis.
(g) Death. The Executive's employment under this
Agreement shall terminate upon the Executive's death.
(h) Mutual Written Agreement. This Agreement
and the Executive's employment hereunder may be terminated
at any time by the mutual written agreement of the Executive
and the Company.
6. Compensation in the Event of Termination. In the event that the
Executive's employment hereunder terminates prior to the expiration of this
Agreement for any reason provided in Section 5 hereof, the Company shall pay the
Executive, compensation and provide the Executive and the Executive's eligible
dependents with benefits as follows:
(a) Executive's Nonreelection to Office; Termination
By Company Without Cause; Termination By Executive for Good
Reason. In the event that the Executive's employment hereunder
is terminated: (i) because the Executive does not continue in
office pursuant to Section 5(a) hereof; or (ii) by the Company
without Cause pursuant to Section 5(b) hereof; or (iii) by the
Executive for Good Reason pursuant to Section 5(e) hereof,
then in any such event the Company shall pay or provide, as
applicable, the following compensation and benefits to the
Executive:
(1) Three (3) times the following: (A)
the highest annual base salary paid
or payable to the Executive in the
then current year or any one (1) of
the three (3) calendar years
preceding Executive's termination of
employment hereunder; plus (B) an
amount equal to the sum of the
Executive's highest award(s) under
the Company's Annual Incentive Plans
for any one (1) of the three (3)
calendar years preceding the date of
the termination of Executive's
employment hereunder (such total is
referred to herein as "Covered
Compensation"). Such payment to the
Executive by the Company shall be
paid in a lump sum unless the
Executive elects, and so notifies
the Company in writing prior to the
termination of the Executive's
employment hereunder, to receive
such payment in three (3) equal
annual installments. The lump sum or
first payment, as the case may be,
shall be paid within sixty (60) days
after the date of the termination of
the Executive's employment
hereunder;
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(2) Any awards or other compensation to
which the Executive is entitled
under any of the Company's
compensation plans or Erie Benefit
Plans to the extent not covered in
subsection (1) hereof;
(3) Any award to which the Executive
would be entitled under the
Company's Long-Term Incentive Plan
as in effect on December 16, 1997,
calculated under the provision of
that Plan as if the Executive ceases
to be an Employee of the Company by
reason of death, disability or
normal retirement;
(4) Continuing coverage for all purposes
(including eligibility, coverage,
vesting and benefit accruals, as
applicable), for a period of three
(3) years after the date of the
termination of Executive's
employment hereunder, to the extent
not prohibited by law, for the
Executive and the Executive's
eligible dependents under all of the
Erie Benefit Plans in effect and
applicable to Executive and the
Executive's eligible dependents as
of the date of termination. In the
event that the Executive and/or the
Executive's eligible dependents,
because of the Executive's
terminated status, cannot be covered
or fully covered under any or all of
the Erie Benefit Plans, the Company
shall continue to provide the
Executive and/or the Executive's
eligible dependents with the same
level of such coverage in effect
prior to termination, payable from
the general assets of the Company if
necessary. Notwithstanding the
foregoing, the Executive may elect
(by giving written notice to the
Company prior to the termination of
employment hereunder), on a benefit
by benefit basis, to receive in lieu
of continuing coverage, cash in an
amount equal to the present value
(using a 6.5% discount rate over
three years) of the projected cost
to the Company of providing such
benefit for such three year period.
The aggregate amount of cash to
which the Executive is entitled
pursuant to the preceding sentence
shall be payable by the Company to
the Executive within sixty (60) days
after the date of the termination of
Executive's employment hereunder;
and
(5) For a period of three (3) years
after the date of the termination of
Executive's employment hereunder,
such perquisites as are made
available to the Executive as of the
date of the termination of
Executive's employment hereunder.
The Executive's subsequent death, disability or attainment of age 65 or any
other age shall in no way affect or limit the Company's obligations under this
Section 6(a).
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(b) Termination By the Company for Cause. In the
event that the Company shall terminate the Executive's
employment hereunder for Cause pursuant to Section 5(d), this
Agreement shall forthwith terminate and the obligations of the
parties hereto shall be as set forth in Section 8 hereof.
(c) Termination by the Executive Without Good Reason.
In the event that the Executive shall terminate employment
hereunder other than for Good Reason pursuant to Section 5(c),
this Agreement shall forthwith terminate and the obligations
of the parties hereto shall be as set forth in Section 8
hereof.
(d) Disability. In the event that the Company elects
to terminate the Executive's employment hereunder pursuant to
Section 5(f), the Executive shall continue to receive from the
date of such termination through the expiration date of this
Agreement, sixty percent (60%) of the then current annual base
salary to which the Executive was entitled pursuant to Section
3(a) hereof immediately preceding such termination, in
accordance with the payroll practices of the Company for
senior executive officers, reduced, however, by the amount of
any proceeds from Social Security and disability insurance
policies provided by and at the expense of the Company.
(e) Death. In the event of the death of the Executive
during the term of this Agreement, the then current annual
base salary to which the Executive was entitled pursuant to
Section 3(a) hereof immediately preceding the Executive's
death shall be paid, in twelve (12) equal monthly installments
following the date of death, to the last beneficiary
designated by the Executive under the Company's group life
insurance policy maintained by the Company or such other
written designation expressly provided to the Company for the
purposes hereof or, failing either such designation, to the
Executive's estate.
(f) Mutual Written Consent. In the event that the
Executive and the Company shall terminate the Executive's
employment by mutual written agreement, the Company shall pay
such compensation and provide such benefits, if any, as the
parties may mutually agree upon in writing.
The Executive shall not be required to mitigate the amount of any payment
provided for in this Section 6 by seeking employment or otherwise, nor shall any
amounts received from employment or otherwise by the Executive offset in any
manner the obligations of the Company hereunder except as specifically provided
in Section 6(d) hereof.
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7. Certain Additional Payments by the Company. Notwithstanding
anything in this Agreement to the contrary, in the event it is determined that
any payment or distribution by the Company to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (a "Payment"), is subject to the excise
tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), or any successor provision, on excess parachute payments, as that
term is used and defined in Sections 4999 and 280G of the Code, then the
Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount equal to the then current rate of tax under said Section
4999 multiplied by the total of the amounts so paid or payable, including the
Gross-Up Payment, which are deemed to be a part of an excess parachute payment.
8. Effect of Expiration of Agreement or Termination of
Executive's Employment. Upon the expiration of this Agreement by its terms or
the termination of the Executive's employment hereunder, neither the Company nor
the Executive shall have any remaining duties or obligations hereunder except
that:
(a) The Company shall:
(1) Pay the Executive's accrued salary
and any other accrued benefits under
Sections 3(a), (b), and (c) hereof;
(2) Reimburse the Executive for expenses
already incurred in accordance with
Section 3(e) hereof;
(3) Pay or otherwise provide for any
benefits, payments or continuation
or conversion rights in accordance
with the provisions of any Erie
Benefit Plan of which the Executive
or any of the Executive's dependents
is or was a participant or as
otherwise required by law;
(4) Pay the Executive and the
Executive's beneficiaries any
compensation and/or provide the
Executive or the Executive's
eligible dependents any benefits, as
the case may be, due pursuant to
Section 6 or Section 7 hereof; and
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(5) Unless the employment of the
Executive is terminated by the
Company for Cause, pay the Executive
or the Executive's beneficiaries the
full amount or amounts accrued under
the Supplemental Executive
Retirement Plan of the Company (the
"SERP") as in effect on the
Effective Date (or as such benefits
may be enhanced by subsequent
amendments or supplements to such
SERP), as though, solely for
purposes of determining any
otherwise applicable actuarial
reduction factors, the event of the
termination of Executive's
employment hereunder or expiration
of this Agreement occurred on the
Executive's Normal Retirement Date
as defined in such SERP. Accrued
benefits under the SERP shall be
fully vested and nonforfeitable upon
such termination (including
termination on account of the
Executive's death) or expiration.
Any reductions in SERP benefits that
would otherwise apply pursuant to
Section 10.1 of the Company's
Retirement Plan for Employees (or
pursuant to any successor provision
of such plan or any successor plan)
relating to Section 415(b) of the
Code shall not be applicable for
purposes hereof. No further approval
by the Board of Directors or the
Committee with respect to payments
under the SERP in accordance with
the preceding sentences shall be
required. Unreduced payments may
begin at age 55, but in no event
would payments be made under this
Section 8(a)(5) before the Executive
reaches age fifty-five (55). The
Company shall purchase for the
Executive, naming the Executive
and/or the Executive's designee the
owner, a paid up annuity, from an
insurer reasonably acceptable to the
Executive but in any event having an
A.M. Best rating of A+ or better (or
other comparable rating), that will
pay to the Executive an amount equal
to the benefit to which the
Executive would otherwise be
entitled under the SERP and payable
at the times such SERP benefit would
be payable in accordance with the
provisions hereof. Upon the purchase
and delivery to the Executive of
such an annuity, the Executive shall
release the Company from any further
obligation under the SERP. The
Company further agrees to pay the
Executive immediately upon
termination, a cash payment (the
"Tax Gross-up") equal to the sum of
the following: (i) all taxes
(federal, state, local, and payroll
taxes) incurred and due and owing by
the Executive, arising from the cost
of the annuity purchased by the
Company to meet the requirements of
this Section 8(a)(5), and (ii) any
such taxes incurred and due and
owing with respect to the
. amount paid in (i)
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(6) Continue to remain bound by the
terms of Section 12 hereof.
(b) The Executive shall remain bound by the terms of
Sections 9 and 13 hereof for a period of thirty six (36)
months after the expiration of the Agreement by its terms;
provided, that the Executive shall not be bound by the terms
of Section 9(b) after the termination of employment (other
than a termination of the Executive by the Company for Cause)
if such termination occurs after the expiration of this
Agreement by its terms.
9. Covenants as to Confidential Information and Competitive
Conduct. The Executive hereby acknowledges and agrees as follows: (i) this
Section 9 is necessary for the protection of the legitimate business interests
of the Company, (ii) the restrictions contained in this Section 9 with regard to
geographical scope, length of term and types of restricted activities are
reasonable; (iii) the Executive has received adequate and valuable new
consideration for entering into this Agreement, and (iv) the Executive's
expertise and capabilities are such that this obligation hereunder and the
enforcement hereof by injunction or otherwise will not adversely affect the
Executive's ability to earn a livelihood.
(a) Confidentiality of Information and Nondisclosure.
The Executive acknowledges and agrees that the Executive's
employment by the Company under this Agreement necessarily
involves knowledge of and access to confidential and
proprietary information pertaining to the business of the
Company and its subsidiaries. Accordingly, the Executive
agrees that at all times during the term of this Agreement and
at any time thereafter, the Executive will not, directly or
indirectly, without the express written approval of the
Company, unless directed by applicable legal authority
(including any court of competent jurisdiction, governmental
agency having supervisory authority over the business of the
Company or the subsidiaries, or any legislative or
administrative body having supervisory authority over the
business of the Company or its subsidiaries) having
jurisdiction over the Executive, disclose to or use, or
knowingly permit to be so disclosed or used, for the benefit
of himself, any person, corporation or other entity other than
the Company, (i) any information concerning any financial
matters, customer relationships, competitive status, supplier
matters, internal organizational matters, current or future
plans, or other business affairs of or relating to the Company
or its subsidiaries, (ii) any management, operational, trade,
technical or other secrets or any other proprietary
information or other data of the Company or its subsidiaries,
or (iii) any other information related to the Company or its
subsidiaries or which the Executive should reasonably believe
will be damaging to the Company or its subsidiaries which has
not been published and is not generally known outside of the
Company. The Executive acknowledges that all of the foregoing
constitutes confidential and proprietary information, which is
the exclusive property of the Company.
111
<PAGE>
(b) Restrictive Covenant. During the term of, and for
a period of one (1) year (the "Restrictive Period") after the
termination of the Executive's employment hereunder for any
reason (other than a termination of the Executive hereunder
pursuant to Section 5(a), 5(b) or 5(e), hereof), the Executive
shall not render, directly, or indirectly, services to any
person, firm, corporation, association or other entity which
conducts the same or similar business as the Company or its
subsidiaries at the date of the Executive's termination of
employment hereunder within the states in which the Company or
any of its subsidiaries is then licensed and doing business at
the date of the Executive's termination of employment
hereunder without the prior written consent of the Board of
Directors, which may be withheld in its discretion. In the
event the Executive violates any of the provisions contained
in this Section 9(b) hereof, the Restrictive Period shall be
increased by the period of time from the commencement by the
Executive of any violation until such violation has been cured
to the satisfaction of the Company. The Executive further
agrees that at no time during the Restrictive Period will the
Executive attempt to directly or indirectly solicit or hire
employees of Company or its subsidiaries or induce any of them
to terminate their employment with the Company or any of the
subsidiaries. Notwithstanding the foregoing, the performance
by the Executive of rights and duties under an agency
agreement with the Company shall not constitute a breach of
this Section 9(b).
(c) Company Remedies. The Executive acknowledges and
agrees that any breach of this Section 9 will result in
immediate and irreparable harm to the Company, and that the
Company cannot be reasonably or adequately compensated by
damages in an action at law. In the event of a breach by the
Executive of the provisions of this Section 9, the Company
shall be entitled, to the extent permitted by law, immediately
to cease to pay or provide the Executive or the Executive's
dependents any compensation or benefit being, or to be, paid
or provided to the Executive pursuant to Section 3, Section 6
or Section 8 of this Agreement, and also to obtain immediate
injunctive relief restraining the Executive from conduct in
breach of the covenants contained in this Section 9. Nothing
herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for such breach,
including the recovery of damages from the Executive.
112
<PAGE>
10. Resolution of Differences Over Breaches of Agreement.
Except as otherwise provided herein, in the event of any controversy, dispute or
claim arising out of, or relating to, this Agreement, or the breach thereof, or
arising out of any other matter relating to the Executive's employment with the
Company, the parties may seek recourse only for temporary or preliminary
injunctive relief to the courts having jurisdiction thereof and if any relief
other than injunctive relief is sought, the Company and the Executive agree that
such underlying controversy, dispute or claim shall be settled by arbitration
conducted in Erie, Pennsylvania in accordance with this Section 10 and the
Commercial Arbitration Rules of the American Arbitration Association ("AAA").
The matter shall be heard and decided, and awards rendered by a panel of three
(3) arbitrators (the "Arbitration Panel"). The Company and the Executive shall
each select one arbitrator from the AAA National Panel of Commercial Arbitrators
(the "Commercial Panel") and AAA shall select a third arbitrator from the
Commercial Panel. The award rendered by the Arbitration Panel shall be final and
binding as between the parties hereto and their heirs, executors,
administrators, successors and assigns, and judgment on the award may be entered
by any court having jurisdiction thereof. Except as provided in Section 11
hereof, each party shall bear sole responsibility for all expenses and costs
incurred by such party in connection with the resolution of any controversy,
dispute or claim in accordance with this Section 10.
11. Payment of Executive's Legal Fees. If the Executive is
required to bring any action to enforce rights or to collect moneys due under
this Agreement, the Company shall pay to the Executive the fees and expenses
incurred by the Executive in bringing and pursuing such action if the Executive
is successful, in whole or in part, on the merits or otherwise (including by way
of a settlement involving a payment of money by the Company to the Executive),
in such action. The Company shall pay such fees and expenses in advance of the
final disposition of such action upon receipt of an undertaking from the
Executive to repay to the Company such advances if the Executive is not
ultimately successful, in whole or in part, on the merits or otherwise, in such
action.
12. Severance Pay upon Termination of Employment after
Expiration of the Agreement. Notwithstanding the expiration of this Agreement by
its terms and notwithstanding the terms of any corporate severance policy then
in effect and applicable to the Executive, if the employment of the Executive is
terminated without Cause by the Company, by the Executive for Good Reason or
upon the expiration of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof (for reasons other than
for Cause), in any case, within thirty-six (36) months after the expiration of
this Agreement by its terms, then (i) the Company shall pay to the Executive
severance compensation in an amount equal to two (2) times the Executive's
Covered Compensation as determined on the date of such termination, and (ii) the
Executive and the Executive's eligible dependents shall be entitled to
continuing coverage under the Company's then-existing group health plans
(including medical, dental, prescription drug and vision plans, if any) for a
period of two (2) years after the date of the termination of the Executive's
employment, to the extent not prohibited by law and subject to the terms of such
plans including provisions as to deductibles and copayments and changes in
levels of coverage that are generally applicable to employees. The payment to
the Executive by the Company pursuant to subsection (i) of the preceding
sentence shall be paid in a lump sum unless the Executive elects, and so
notifies the Company in writing prior to the Executive's termination of
employment, to receive such payment in two (2) equal annual installments. The
lump sum or first payment, as the case may be, shall be paid within thirty (30)
days after the date of termination of the Executive's employment.
113
<PAGE>
13. Release. The Executive hereby acknowledges and agrees that
neither the Company nor any of its representatives or agents will be obligated
to pay any compensation or benefit which the Executive has a right to be paid or
provided to the Executive or the Executive's dependents pursuant to Section 6,
Section 8 or Section 12 of this Agreement, unless the Executive, if requested by
the Company in its sole discretion, executes a release in a form reasonably
acceptable to the Company, which releases any and all claims the Executive has
or may have against the Company or its subsidiaries, agents, officers,
directors, successors or assigns.
14. Waiver. The waiver by a party hereto of any breach by the
other party hereto of any provision of this Agreement shall not operate or be
construed as a waiver of any other or subsequent breach by a party hereto.
15. Assignment. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the Company, and the Company
shall be obligated to require any successor to expressly acknowledge and assume
its obligations hereunder. This Agreement shall inure to the extent provided
hereunder to the benefit of and be enforceable by the Executive or the
Executive's legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. The Executive may not delegate any of the
Executive's duties, responsibilities, obligations or positions hereunder to any
person and any such purported delegation shall be void and of no force and
effect.
16. Notices. Any notices required or permitted to be given
under this Agreement shall be sufficient if in writing, and if personally
delivered or when sent by first class certified or registered mail, postage
prepaid, return receipt requested--in the case of the Executive, to his
residence address as set forth below, and in the case of the Company, to the
address of its principal place of business as set forth below, to the attention
of the Chairman of the Board, or in case the Executive is the Chairman of the
Board, to the Chairman of the Compensation Committee of the Board -- or to such
other person or at such other address with respect to each party as such party
shall notify the other in writing.
17. Construction of Agreement.
(a) Governing Law. This Agreement shall be
governed by and construed under the laws of the Commonwealth
of Pennsylvania.
(b) Severability. In the event that any one or more
of the provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, the validity, legality or
enforceability of the remaining provisions shall not in any
way be affected or impaired thereby.
(c) Headings. The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience of
reference only and shall not constitute a part of this
Agreement.
114
<PAGE>
18. Entire Agreement. This Agreement contains the entire
agreement of the parties concerning the Executive's employment and all promises,
representations, understandings, arrangements and prior agreements on such
subject are merged herein and superseded hereby, including the Employment
Agreement effective November 20, 1995 which is expressly superseded hereby. The
provisions of this Agreement may not be amended, modified, repealed, waived,
extended or discharged except by an agreement in writing signed by the party
against whom enforcement of any amendment, modification, repeal, waiver,
extension or discharge is sought. No person acting other than pursuant to a
resolution of the Board of Directors or the Committee shall have authority on
behalf of the Company to agree to amend, modify, repeal, waive, extend or
discharge any provision of this Agreement or anything in reference thereto or to
exercise any of the Company's rights to terminate or to fail to extend this
Agreement.
115
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
officers thereunto duly authorized, and the Executive has hereunto set his hand
all as of the day and year first above written.
ATTEST: ERIE INDEMNITY COMPANY
/s J. R. Van Gorder /s/ F. William Hirt
____________________________ By:__________________________________
J. R. Van Gorder F. William Hirt
Secretary Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ John J. Brinling, Jr.
____________________________ _____________________________________(SEAL)
John J. Brinling, Jr.
5691 Culpepper Drive
Erie, PA 16506
116
<TABLE>
<CAPTION>
EXHIBIT 11. - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
1997 1996 1995
------------ ------------ ------------
<S> <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 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 $118,581,190 $105,132,359 $ 93,550,797
============ ============ ============
Per-share amount $1.59 $1.41 $1.26
===== ===== =====
</TABLE>
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 have been restated to reflect this
transaction.
117
INCORPORATED BY REFERENCE, PAGE 15 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Years ended December 31
1997 1996 1995 1994 1993
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net revenue from management operations $134,224 $127,429 $111,276 $96,328 $77,056
Underwriting loss (2,259) (11,579) (3,738) (8,250) (1,567)
Total revenue from investment operations 42,955 36,198 30,473 16,939 15,451
Income before income taxes and cumulative
effect of change in accounting principle 174,920 152,048 138,011 105,017 90,940
Income after taxes and before cumulative
effect of change in accounting principle 118,581 105,132 93,551 71,729 62,408
Net income $118,581 $105,132 $93,551 $71,729 $60,423
EARNINGS PER SHARE: (2)
Income before cumulative effect of change
in accounting principle $1.59 $1.41 $1.26 $0.96 $0.84
Cumulative effect on prior years of change
in accounting principle -- -- -- -- (0.03)
Net income per share $1.59 $1.41 $1.26 $0.96 $0.81
FINANCIAL POSITION:
Investments (1) $566,118 $484,784 $360,555 $255,449 $216,442
Receivables from Exchange and affiliates 495,861 478,304 451,778 433,109 468,463
Total assets 1,292,544 1,150,639 1,022,432 869,531 817,191
Shareholders' equity 539,383 435,759 354,064 260,934 210,188
Book value per share (2) 7.25 5.86 4.76 3.51 2.83
Dividends declared per Class A share (2) 0.3925 0.345 0.278 0.225 $0.17
Dividends declared per Class B share 58.875 51.75 41.75 33.75 $26.00
<FN>
(1) Includes investment in Erie Family Life Insurance Company.
(2) All per share information has been restated to reflect the three-for-one stock split of Class A Common Stock effective
May 2, 1996.
</FN>
</TABLE>
118
<PAGE>
INCORPORATED BY REFERENCE, PAGES 16 AND 17 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
Management's Discussion and
Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with the
audited financial statements and related notes found on pages 29 to 41 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 27, 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 Company's Board of Directors
has the authority to change the management fee at its discretion. 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 the 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 pays certain loss adjustment and
investment expenses on behalf of the Exchange and is reimbursed fully for these
expenses by the Exchange. The management fee rate charged the Exchange was set
at the following rates:
January 1, 1995 to March 31, 1995 25.0 percent
April 1, 1995 to March 31, 1996 24.5 percent
April 1, 1996 to December 31, 1997 24.0 percent
The management fee rate was set by the Board at 24.25 percent for the period
January 1, 1998 through December 31, 1998. In determining the management fee
rate, the Company's Board of Directors reviews the relative financial positions
of the Erie Insurance Exchange and the Company and considers the long-term needs
of the Exchange to ensure its continued growth, competitiveness, and superior
financial strength, which benefits the Company.
The Company's wholly-owned subsidiary, Erie Insurance Company, participates in
an intercompany reinsurance pooling arrangement with the Exchange. This
reinsurance pooling arrangement provides for Erie Insurance Company to share
proportionately in the results of all property/casualty insurance operations of
the Exchange and the Company's subsidiaries. Since the inception of this pooling
arrangement on January 1, 1992, Erie Insurance Company's proportionate share of
the reinsurance pool has been 5 percent.
119
<PAGE>
INCORPORATED BY REFERENCE, PAGES 17 AND 18 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
On January 1, 1995, the Exchange began retroceding to the Erie Insurance Company
of New York, a wholly-owned subsidiary of Erie Insurance Company, as part of the
existing intercompany reinsurance pooling arrangement, 0.5 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 0.5 percent
participation of the Erie Insurance Company of New York, results in a 5.5
percent participation level for the Company's affiliates since 1995.
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.
Result of Operations
Overview
Consolidated net income in 1997 was a record $118,581,190, or $1.59 per share,
which exceeded the 1996 net income of $105,132,359, or $1.41 per share, by 12.8
percent. The 1997 results, when compared with 1996's results, improved in all
operating segments. Increased revenue from management operations translated into
growth in net revenues as overall operating costs were controlled. Insurance
underwriting operations were favorable compared to 1996, a year which was
affected adversely by severe storm-related losses. Revenues from investment
operations improved significantly as the Company's excess cash flows were
reinvested. The 1996 net income exceeded the 1995 net income of $93,550,797, or
$1.26 per share, by 12.4 percent. The 1996 results, when compared with 1995's
results, were affected 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. The underwriting results of
the Company's property/casualty insurance subsidiaries were affected negatively
by severe winter weather in the first quarter of 1996 and losses related to
Hurricane Fran in the third quarter of 1996. Returns on average shareholders'
equity continued to be outstanding in 1997 at 24.3 percent, consistent with the
returns realized in 1996 and 1995 of 26.6 percent and 30.4 percent,
respectively.
Analysis of Management Operations
Net revenues from management operations rose 5.3 percent to $134,224,096 in 1997
versus $127,428,577 in 1996 and $111,276,227 in 1995. Gross margins from
management operations of 28.2 percent remained consistent in 1997 with gross
margins of 28.4 percent in 1996 and were improved from gross margins of 26.1
percent in 1995.
Total revenues from management operations rose $26,799,865 for the year ended
December 31, 1997, an increase of 6.0 percent. Management fee revenue derived
from the direct and affiliated assumed written premiums of the Exchange rose
$24,697,907, or 5.6 percent, for the year ended December 31, 1997. In 1997 the
Exchange continued to experience written premium growth rates that exceeded
industry growth rates. Affiliated assumed and direct premiums written of the
Exchange grew 6.1 percent in 1997. The Exchange's overall premium growth was
negatively influenced by the rate reduction in Pennsylvania workers'
compensation insurance driven by recent Pennsylvania legislative reforms. Total
direct written premiums, excluding workers' compensation, increased 8.2 percent
in 1997.
The management fee revenue derived by the Company by state and line of business
based on the direct and affiliated assumed written premiums of the
property/casualty insurance companies of the Erie Insurance Group are
presented in the chart below:
120
<PAGE>
INCORPORATED BY REFERENCE, PAGES 18 AND 19 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
Total revenues from management operations for the year ended December 31, 1996
grew $23,399,540 or 5.5 percent. The growth in affiliated assumed and direct
premiums written of 7.5 percent 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.
Service agreement revenue grew 38.6 percent to $7,026,373 in 1997 from
$5,069,140 in 1996. Service agreement revenue rose 15.2 percent in 1996 from the
$4,401,232 recorded 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. These fees totaled $5,015,192, $5,069,140 and $4,401,232 for 1997,
1996 and 1995, respectively. Also included in service agreement revenue for 1997
is a portion of service charges collected from Policyholders of the
property/casualty insurance companies, which amounted to $2,011,181. Beginning
September 1, 1997 the Company was reimbursed by the Exchange for a portion of
service charges collected by the property/casualty insurers of the Group from
Policyholders as reimbursement for the costs incurred by the Company in
providing extended payment terms on policies written by them.
The cost of management operations rose $20,004,346, or 6.2 percent, for the year
ended December 31, 1997 compared with the rate of growth in management fee
revenue of 5.6 percent. The largest component of the cost of management
operations, Agent commission expense, rose 10.0 percent to $230,659,805 in 1997
from $209,756,209 in 1996 and 4.3 percent in 1996 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 and Agent contingency bonuses. Agent contingency 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 reinsurance business rose 8.5 percent to $220,662,335 in 1997
from $203,367,469 in 1996, and rose 6.1 percent in 1996 from $191,621,427 in
1995.
<TABLE>
<CAPTION>
MANAGEMENT FEE REVENUE
BY STATE AND LINE OF BUSINESS
For the Year Ended December 31, 1997
(thousands)
Private Workers' Commercial Commercial All Other Lines Total
State Passenger Auto Homeowners Compensation Auto Multi-Peril of Business by State
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
District of Columbia $ 279 $ 136 $ 364 $ 34 $ 169 $ 63 $ 1,045
Indiana 10,272 2,762 1,223 1,066 1,376 579 17,278
Maryland 35,033 7,978 3,377 4,474 3,029 2,423 56,314
New York 1,986 470 294 393 485 125 3,753
North Carolina 4,369 1,722 1,787 2,121 1,751 695 12,445
Ohio 22,693 5,544 --- 2,416 2,874 1,107 34,634
Pennsylvania 183,516 34,119 20,262 15,881 16,346 6,914 277,038
Tennessee 1,877 552 795 685 728 219 4,856
Virginia 20,365 4,612 4,804 3,925 3,260 1,862 38,828
West Virginia 15,034 2,548 --- 1,801 1,366 662 21,411
- ------------------------------------------------------------------------------------------------------------------------------------
Total by line of business $295,424 $ 60,443 $ 32,906 $ 32,796 $ 31,384 $ 14,649 $467,602
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
121
<PAGE>
INCORPORATED BY REFERENCE, PAGE 19 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
Promotional incentive and Agent contingency bonus costs increased 56.5 percent
to $9,997,470 in 1997 from $6,388,740 in 1996 and declined 33 percent in 1996
from $9,534,149 in 1995. The increase in 1997 was due to the improved
underwriting profitability of the insurance operations of the Group which
resulted in higher contingency bonuses in 1997.
The cost of management operations, excluding commission costs, fell 1.0 percent
in 1997 to $111,108,053 from $112,007,304 in 1996. The Company's personnel
costs, net of reimbursement from affiliates, totaled $66,410,377, $68,949,232,
and $66,576,363 in 1997, 1996, and 1995, respectively. Personnel costs are the
second largest cost component in the cost of management operations after
commissions. Personnel costs fell 3.7 percent in 1997, compared to an increase
of 3.6 percent in 1996. The 1997 decline is the result of increased expense
reimbursements from the Exchange and a decrease in pension costs. As
attorney-in-fact for the Exchange, the Company pays almost all expenses of the
Group and allocates those costs to the respective Company responsible for them
in accordance with intercompany agreements. Increased reimbursements in 1997 to
the Company for personnel costs of the loss adjustment function resulted in part
from the refinement of the Company's expense allocations made possible with the
implementation of new financial systems. Additionally, as the percentage of loss
adjustment personnel to total personnel of the Group increases, a larger share
of staff department overhead is allocated to the loss adjustment function
resulting in higher reimbursements. Pension costs were reduced as a result of
the effects of positive investment returns and prior year funding levels.
The cost of management operations, excluding commissions and personnel costs,
increased 3.8 percent in 1997 to $44,697,676 compared to $43,058,071 in 1996 and
declined by 8.0 percent in 1996 from $46,784,383 in 1995. In 1997 the Company
continued to control other operating costs and kept its growth rate less than
the growth in management fee revenue. 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.
122
<PAGE>
INCORPORATED BY REFERENCE, PAGES 19 AND 20 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
Analysis of Insurance Underwriting Operations
The Company incurred underwriting losses from its insurance underwriting
operations of $2,259,425, $11,579,211, and $3,737,618, for the years 1997, 1996
and 1995, respectively. In 1997, insurance underwriting results were positively
affected by mild winter weather conditions and a lack of catastrophe losses in
the Company's operating territories. 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 conditions during 1995 resulted in
better underwriting results for the property/casualty companies of the Erie
Insurance Group when compared to 1996.
Catastrophes are an inherent risk of the property/casualty insurance business.
Catastrophes can have a material impact on the Company's property/casualty
insurance underwriting operating results. However, the Company has in effect a
reinsurance agreement with the Exchange that would cushion the effect of
catastrophe losses on the Company's operating results and financial position.
Premiums earned increased $5,839,909 or 5.8 percent, for the year ended December
31, 1997 and $8,635,458 or 9.3 percent for the year ended December 31, 1996. The
increase in premiums earned in 1997 is reflective of the growth in net premiums
written of the Erie Insurance Group, which was impacted negatively during 1997
by rate reductions in Pennsylvania workers' compensation as a result of
legislative reforms. Excluding workers' compensation, premiums written of the
Erie Insurance Group would have increased 8.2 percent. Premiums earned were also
lower due to $1,102,868 of premiums ceded to the Exchange for reinsurance
coverage under the aggregate excess of loss reinsurance agreement with the
Exchange.
Losses, loss adjustment expenses and underwriting expenses incurred fell
$3,479,877 or 3.1 percent, for the year ended December 31, 1997 compared to an
increase of $16,477,051 or 17.1 percent for the year ended December 31, 1996. In
1997 losses and loss adjustment expenses incurred fell 6.0 percent to
$79,970,102 due to the lack of catastrophe losses and milder weather conditions
in 1997 compared to 1996. In 1996 losses and loss adjustment expenses incurred
rose 19.9 percent to $85,070,861.
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 amounts reserved are adequate,
the ultimate liabilities may be in excess of or less than amounts provided.
The 1997 GAAP combined ratio for the Company's property/casualty operations was
102.1 compared to a ratio of 111.4 in 1996 and 104.0 in 1995. The GAAP combined
ratio for 1997, 1996 and 1995, excluding catastrophe losses, was 101.5, 103.4
and 102.8, respectively.
Analysis of Investment Operations
Total revenue from investment operations was $42,954,953 in 1997, compared to
$36,198,425 in 1996 and $30,472,840 in 1995, an increase of 18.7 percent and
18.8 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.
Interest and dividend income rose $7,114,598, or 27.6 percent, for the year
ended December 31, 1997 and $4,980,002, or 23.9 percent, for the year ended
December 31, 1996, which was consistent with the growth in the Company's cash,
cash equivalents and investments, which increased 23.1 percent in 1997 and 21.9
percent in 1996.
The Company's earnings from its 21.6 percent ownership of EFL totaled $4,230,909
in 1997, up from $3,820,957 in 1996 and $3,867,533 in 1995. This investment is
accounted for under the equity method of accounting. Consequently, the Company's
investment earnings in 1997,
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INCORPORATED BY REFERENCE, PAGES 20 AND 21 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
1996 and 1995 were a direct result of its share of EFL's net income of
$19,560,368, $17,666,250 and $17,881,592, respectively. The increase in EFL's
net income in 1997 was due to increased policy revenues (up 13.1 percent in 1997
compared to 1996) and to increased investment income of 8.6 percent. Investment
income totaled $49,914,292 in 1997 and $45,948,969 in 1996. 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
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 investment strategy also provides for
liquidity to meet the short- and long-term commitments of the Company. At
December 31, 1997 and 1996, the Company's investment portfolio of
investment-grade bonds, common stock, and preferred stock, all of which are
readily marketable, represent 40 percent and 38 percent, respectively, of total
assets, and provide the liquidity the Company requires to meet the demands on
its funds.
Distribution of Invested Assets
Carrying Value at December 31,
<TABLE>
<CAPTION>
(thousands)
1997 % 1996 %
<S> <C> <C> <C> <C>
Fixed maturities available-for-sale $349,973 66 $310,176 68
Equity securities:
Common stock 80,170 15 50,045 11
Preferred stock 84,963 16 81,573 18
Real estate mortgage loans 8,392 2 7,294 2
Other invested assets 7,932 1 7,010 1
Total invested assets $531,430 100% $456,098 100%
</TABLE>
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. Certain of the
Company's corporate and municipal bond investments 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. 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.
Fixed Maturities
The Company's investment strategy includes maintaining 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. At December 31,
1997, the carrying value of fixed maturity investments represented 66 percent of
total invested assets.
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 alternative minimum tax.
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REPORT TO SHAREHOLDERS
Diversification of Fixed Maturities
at December 31, 1997
<TABLE>
<CAPTION>
(thousands) Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U. S. government & agencies $ 12,771 $ 432 $ 3 $ 13,200
Foreign governments 1,989 418 1,571
Obligations of states
and political subdivisions 41,931 2,840 44,771
Special revenue 116,052 7,850 1 123,901
Public utilities 7,171 160 7,331
U. S. industrial & miscellaneous 150,666 6,317 401 156,582
Foreign industrial &
miscellaneous 2,556 61 2,617
--------- ---------- ---------- -----------
Total fixed maturities $ 333,136 $ 17,660 $ 823 $ 349,973
========= ========== ========== ===========
</TABLE>
The Company's fixed maturity investments consist of high-quality, marketable
bonds all of which were rated at investment-grade levels (Ba/BB or better) at
December 31, 1997. Included in this investment-grade category are $205.8
million, or 58.8 percent, of the highest quality bonds rated Aaa/AAA or Aa/AA or
bonds issued by the United States government. At December 31, 1997, 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.
Management classifies all fixed maturities as available-for-sale securities,
allowing 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 gains and losses
included in shareholders' equity. At December 31, 1997 and 1996, unrealized
gains on fixed maturities amounted to $10,944,000 and $5,904,000, respectively,
net of deferred taxes.
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 term to maturity graph which follows is based on contractual maturity date.
The distribution does not reflect expected future prepayments.
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Equity Securities
Diversification of Equity Securities
<TABLE>
<CAPTION>
at December 31, 1997
(thousands)
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Common stock:
U.S. banks, trusts and
insurance companies $ 3,138 $ 3,379 $ $ 6,517
U.S. industrial and
miscellaneous 58,415 19,650 6,874 71,191
Foreign industrial and
miscellaneous 3,209 53 800 2,462
Preferred stock:
Public utilities 2,619 27 2,646
U.S. banks, trusts and
insurance companies 46,901 3,347 50,248
U.S. industrial and
miscellaneous 25,909 2,006 1 27,914
Foreign industrial and
miscellaneous 3,932 223 4,155
--------- ---------- ---------- ---------
Total equity securities $ 144,123 $ 28,685 $ 7,675 $ 165,133
========= ========== ========== =========
</TABLE>
Equity securities consist of common stock and preferred stock which are carried
on the consolidated statements of financial position at market value. At
December 31, 1997 and 1996, equity securities held by the Company include
unrealized gains of $13,656,000 and $10,042,000, respectively, net of deferred
taxes. Investment characteristics of common and preferred stocks differ
substantially from one another. The Company's preferred stock portfolio provides
a source of highly predictable current income that is competitive with
investment-grade bonds. The preferred stock are of very high quality and
marketable. Common stock provide capital appreciation potential within the
portfolio. Common stock investments inherently provide no assurance of producing
income since dividends are not guaranteed. Preferred stocks generally provide
for fixed rates of return which, while not guaranteed, resemble fixed income
securities. As with all investments, the continuing value of common stock is
subject to change based on the underlying value of the issuer. Common stocks
also are subject to valuation fluctuations driven by investment market
conditions. The current appreciation in the value of the Company's equity
security investments is subject to these risks. Management addresses these risks
by providing for investment strategies which tend to balance investment holdings
along the lines of type of investment, maturity dates, industry and geographic
concentrations and income-producing characteristics.
Investment in EFL
The Company owns 21.6 percent of the outstanding common stock of EFL, a member
company of the Erie Insurance Group. EFL 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. The Company's investment in EFL is accounted for under the equity
method of accounting; consequently, the Company's carrying value of $34,687,640
represents 21.6 percent of the shareholders' equity of EFL at December 31, 1997.
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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 and other sources, 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 Company incurs substantially all general and administrative expenses on
behalf of the Exchange and other affiliated companies. The Exchange generally
reimburses the Company for these expenses on a paid basis when calculating the
management fee due for the month. Since management fees traditionally have not
been paid to the Company by the Exchange until the premiums from Policyholders
are collected, the change in the premium receivable balance is used in
determining the actual monthly amount transferred. During 1997 and 1996,
approximately $115.4 million and $65.5 million, respectively, were paid to the
Company from the Exchange. These funds have been invested by the Company and the
investment earnings are reflected in the investment operations of the Company.
At December 31, 1997 and 1996, the Company's receivables from its affiliates
totaled $495,861,158 and $478,304,267, 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.
Receivables from Erie Insurance Exchange and affiliates:
1997 1996
Exchange-Management fee and
expense reimbursements $111,577,074 $108,589,885
EFL-Expense reimbursements 1,153,057 1,049,007
Exchange-Reinsurance recoverable
from losses and unearned
premium balances ceded 383,131,027 368,665,375
------------ ------------
Total receivables from Erie Insurance
Exchange and affiliates $495,861,158 $478,304,267
============ ============
The Company generates sufficient net positive cash flow from its operations 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 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
1997, 1996 and 1995 were $118,905,654, $103,362,034 and $111,720,574,
respectively. Those statements also classify the other sources and uses of cash
by investing activities and financing activities.
In 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
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INCORPORATED BY REFERENCE, PAGES 23 AND 24 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
to 33 percent of total share holdings of such shareholder. At the Board of
Directors meeting on February 29, 1996, the Board approved an increase in the
redemption amount of $14,350,186. On March 11, 1997, the Board approved an
increase in the redemption amount of $16,655,226 to $41,005,412. There were no
shares of stock redeemed under this Plan during 1997 or 1996.
Dividends declared to shareholders totaled $26,490,811, $23,284,957 and
$18,785,419 in 1997, 1996 and 1995, 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 Company's
subsidiaries to the Company.
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 liabilities at December 31, 1997 and
1996 of $7,101,371 , $2,035,054, respectively. The primary reason for the
increase in the deferred tax liability is due to an increase in unrealized gains
from available-for-sale securities in 1997 and 1996. The deferred tax liability
generated from these unrealized gains amounted to $13,246,068 as of 1997, and
$8,620,624 as of 1996, an increase of $4,625,444. 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
The NAIC standard for measuring the solvency of insurance companies, referred to
as Risk Based Capital (RBC), 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 RBC formula is
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 minimum capital
standards that will supplement the current system of low fixed minimum capital
and surplus requirements on a state-by-state basis. At December 31, 1997, the
Company's property/casualty insurance subsidiaries' financial statements
prepared under Statutory Accounting Practices are all substantially in excess of
levels that would require regulatory action.
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 position of the companies, the cost savings to be
realized from the discontinuance of the reinsurance treaties and
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INCORPORATED BY REFERENCE, PAGES 24 AND 25 OF THE COMPANY'S 1997 ANNUAL
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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, the Company would not have recognized
any recoveries from these discontinued treaties had they been in effect during
that 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's and Erie
Insurance Company of New York's net premiums earned. Losses equal to 5 percent
of the ultimate net loss in excess of the retention under the contract are
retained 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. The annual
premium for this agreement with the Exchange was $1,102,868 in 1997. There were
no loss recoveries by Erie Insurance Company or Erie Insurance Company of New
York under this agreement for 1997. This reinsurance treaty is excluded from the
intercompany reinsurance pooling agreement and replaces the earlier reinsurance
agreements between the Company and Erie Insurance Company and Erie Insurance
Company of New York, which are described below.
During 1996 and 1995, Erie Insurance Company and Erie Insurance Company of New
York had in effect a Property Catastrophe Excess of Loss Reinsurance Treaty with
the Exchange. The coverage included in the treaty for Erie Insurance Company was
$25,000,000 in excess of $10,000,000 and was excluded from the aforementioned
pooling arrangement. The coverage included in the treaty for Erie Insurance
Company of New York was $2,250,000 in excess of $250,000 and also was excluded
from the aforementioned pooling arrangement. The annual premium for these
agreements to the Exchange was $424,170 and $641,250 in 1996 and 1995,
respectively.
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 fixed maturities and preferred stock. At December
31, 1997, the Company's investments totaled $531,430,296. Of this amount,
$434,934,522 was invested in interest rate sensitive bonds and preferred stock.
At December 31, 1997 the market value exceeded the book value of the Company's
interest rate sensitive bonds and preferred stock by $22,437,832.
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
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expenses incurred through December 31, 1997 and 1996. The reserves are
determined using adjusters' individual case estimates and statistical
projections. These projections are 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
The Company's property/casualty subsidiaries had 36 reported open claims
concerning environmental-related liabilities at December 31, 1997 and 31 and 47
such claims at December 31, 1996 and 1995, respectively. The Company's
property/casualty subsidiaries' share of direct losses paid related to
environmental-related claims was $1,621, $5,308 and $9,172, related to years
ended December 31, 1997, 1996 and 1995, respectively. The Company's
property/casualty subsidiaries' share of unpaid direct losses amounted to
$40,583, $42,194 and $53,512, related to years ended December 31, 1997, 1996 and
1995, respectively.
In establishing the liability for unpaid losses and loss adjustment expenses
related to environmental 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 insurers managed by the Company have incurred few environmental claims and
as a result have 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. Management
does not believe that these claims will have a material impact on the Company's
liquidity, results of operations, cash flows, or financial condition.
Impact of Recent Accounting Standards
Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (FAS) No. 130, "Reporting Comprehensive
Income." FAS 130 is effective for fiscal years beginning after December 31, 1997
and requires reporting of comprehensive income in a full set of general purpose
financial statements. Comprehensive income is defined in the Statement as all
changes in equity during a period except those resulting from investments by
owners and distributions to owners. The Company will begin reporting
comprehensive income beginning with the quarter ending March 31, 1998. The
standard increases disclosure but will not affect reported financial
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INCORPORATED BY REFERENCE, PAGES 25 AND 26 OF THE COMPANY'S 1997 ANNUAL
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position, results of operations or cash flows.
Disclosure about Segments of an Enterprise and Related Information
In June 1997, the FASB also issued FAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." FAS 131 is effective for fiscal years
beginning after December 31, 1997 and requires disclosure of segments under a
"management approach" whereby segments are reported publicly as they are
internally. The Company currently reports segment information consistent with
that of internal management reporting and, as a result, expects little effect on
interim and year-end reports.
Management Change
Philip A. Garcia was appointed Executive Vice President and Chief Financial
Officer of the Erie Insurance Group on October 2, 1997. Mr. Garcia replaced
Thomas M. Sider, who retired June 30, 1997 after 26 years of service to the Erie
Insurance Group. Mr. Garcia began his career with the Company in 1981 and has
held several positions in the life and property/casualty accounting operations
since that time. Immediately prior to his appointment, Mr. Garcia had served as
senior vice president and controller of the Company for the past four years.
The Company's former internal audit manager, Timothy G. NeCastro, was appointed
senior vice president and controller of the Erie Insurance Group on November 10,
1997.
Factors That May Affect Future Results
Management Operations
The management fee paid to the Company as attorney-in-fact for the Exchange is
subject to approval by the Company's Board of Directors. The rate may be changed
periodically by the Board at their discretion but may not exceed 25 percent. The
Board considers several factors in determining the management fee rate,
including the relative financial position of the Exchange and the Company and
the long-term capital needs of the Exchange in order to foster growth,
competitiveness, and maintain its superior financial strength. Because the
management fee revenue from the Exchange provides the majority of the Company's
revenue, the income of the Company is dependent upon the ability of the Exchange
to offer competitive insurance products in the marketplace.
Insurance Operations
Underwriting Exposure. The insurers managed by the Company, including its
wholly-owned subsidiaries, are subject to the risk of losses due to catastrophic
events. In addressing this risk, the Company employs conservative underwriting
standards and monitors its exposures by geographic region. The Company also
evaluates other means available to insurers, such as reinsurance, to effectively
manage this risk. Catastrophic events are a perpetual factor which could impact
future results of the industry as a whole as well as the Company. The risk of
significant impact on the Company is substantially mitigated by the current
aggregate excess of loss reinsurance agreement between the Company's
property/casualty insurance subsidiaries and the Exchange.
Geographic Expansion. In addition to its current operating territory, which
includes nine states and the District of Columbia, the Exchange and EFL are
licensed to do business in the State of Illinois. The Erie Insurance Group,
through these entities, will begin to market insurance in Illinois early in
1999. All lines of business currently being marketed in other states will be
written in Illinois, subject to the requirements of Illinois law. During 1997,
the Company continued preparation for this expansion by creating an entry plan,
analyzing system requirements and regulatory considerations and appointing a
branch manager. The expansion into a new operating territory offers the
opportunity for growth of direct and affiliated assumed written premiums of the
Exchange upon which management fee revenue of the Company is based and directly
through premium growth of EFL.
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Investment Operations
The Company's portfolio of fixed maturities and equity securities is subject to
the ongoing risks associated with fluctuations in interest rates and stock
market conditions in general. Current investment results may not be indicative
of performance in future periods.
Regulatory
Financial Services Reform. Federal action begun in 1997 could culminate in
significant changes in the way insurance companies, banks and securities firms
are regulated in the future. The elimination of some regulatory barriers to
banks entering the insurance market, and the interjection of Federal
governmental agencies into the traditionally state-regulated insurance industry,
could dramatically change the ground rules under which insurance products are
marketed. Further action and advancing technology will likely influence the way
the property/casualty and life insurance industries distribute, price and
service their products.
Urban Insurance Issues. Federal regulators have heightened their scrutiny of the
property/casualty insurance industry, particularly its underwriting and
marketing practices relative to homeowners insurance. Assertions have been made
and complaints filed against various insurers for an alleged practice called
redlining, a term used to describe an insurer's illegal and unfair
discrimination against minority communities, which are typically located in
economically depressed inner cities. Much of the action at the federal level has
been initiated by the Department of Housing and Urban Development, with
enforcement by the United States Department of Justice. A number of complaints
have culminated in consent decrees under which insurers have agreed to pay
substantial sums of money. This trend may continue unless and until
Congressional action or a Supreme Court decision makes clear that HUD has no
authority to regulate property insurance.
Auto-Choice Reform Act. Currently pending before Congress, the Auto Choice
Reform Act is one of the most recent attempts at insurance regulation by the
Federal government. The bill offers consumers a choice between traditional auto
insurance (i.e., a tort liability system) or coverage at a reduced premium under
a personal protection policy which allows insureds to recover economic damages
from their insurer, but requires them to relinquish their right to sue or be
sued for noneconomic damages. States could "opt out" of such a system by passing
legislation to do so. Federal legislation which mandates auto premium rate
reductions would adversely affect the management fee revenue of the Company and
affect its insurance underwriting profitability.
Year 2000
Financial services companies like the Erie Insurance Group are largely dependent
upon information technology in conducting their day-to-day operations. Like many
companies, Erie Insurance Group continually is faced with significant
information technology challenges. Among these challenges is the so-called "Year
2000 Issue," the inability of many computer systems to recognize the year 2000
and subsequent years.
The Erie Insurance Group has developed and substantially implemented solutions
to this problem in the normal course of meeting these technological challenges.
Work on correcting these systems began in the early 1990's and all projects
since then have incorporated corrections in them. As of year-end 1997,
approximately 80 percent of the Company's systems are Year 2000 compliant.
Completion of the remaining effort is expected by the fourth quarter of 1998.
In addition to those systems operated by the Erie Insurance Group, systems
resident with our major service providers are of a concern to maintaining
ongoing and uninterrupted service. The Erie Insurance Group's plans address
these external concerns by assessing the readiness of outside parties and
considering alternatives in situations in which any more than remote exposure
might exist. During 1998 the Erie Insurance Group is continuing its assessment
of the ability of external service providers such as banks and reporting bureaus
to provide mission critical services.
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Based upon known factors and the measures taken to date, management does not
anticipate significant future costs with addressing the Year 2000 Issue. Costs
which have been incurred to date have been charged to operations as incurred.
"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,"
"Financial Condition," "Reinsurance," "Environmental-Related Claims" 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.
133
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
Glossary of Selected Insurance Terms
o Affiliated assumed reinsurance business:
Voluntary reinsurance contracts entered into whereby the Exchange
assumes risks 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 margins 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 occurred but which are not yet known by the insurer.
134
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
o Losses:
An occurrence that is the basis for submission 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 reserves:
Estimated liabilities established by an insurer to reflect the
estimated cost of claims payments and the related expenses that
ultimately will be incurred in respect of insurance it has written.
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 Property/casualty insurance:
Casualty insurance indemnifies an insured against legal liability
imposed for losses caused by injuries to third persons (i.e. not the
policyholder). 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.
o Reinsurance:
An instrument under which 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 received from 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 the assumed portion of the
loss, the ceding insurer would be responsible for the entire loss.
135
<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
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):
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 under GAAP.
136
<PAGE>
INCORPORATED BY REFERENCE, PAGE 44 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
Market Price of and Dividends on the
Common Equity and Related Shareholder Matters
Common Stock Prices:
The Class A non-voting common stock of the Company trades on The NASDAQ Stock
Market(sm) under the symbol "ERIE." The following sets forth the range of high
and low trading prices by quarter as reported by The NASDAQ Stock Market.
<TABLE>
<CAPTION>
Class A Trading Price
1997 1996
Low High Low High
<S> <C> <C> <C> <C>
First Quarter 26 35 19 26 5/8
Second Quarter 26 1/2 39 1/4 24 1/2 42
Third Quarter 30 1/2 40 33 1/2 48 1/2
Fourth Quarter 28 1/8 34 1/2 25 37
</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.
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 permits
participants to invest a portion of the Company's contributions to the Plan in
shares of Erie Indemnity Class A common stock. The Plan's Trustee was authorized
to buy Erie Indemnity Company Class A common stock on behalf of 401(K) plan
participants beginning May 8, 1997.
Common Stock Dividends:
The Company historically has declared and 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 1997 and 1996 are as follows:
137
<PAGE>
INCORPORATED BY REFERENCE, PAGE 44 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
<TABLE>
<CAPTION>
Dividends Declared
Class A Share Class B Share
<S> <C> <C>
1997:
First Quarter $ .0950 $ 14.250
Second Quarter .0950 14.250
Third Quarter .0950 14.250
Fourth Quarter .1075 16.125
$ .3925 $ 58.875
1996:
First Quarter $ .083333 $ 12.50
Second Quarter .083333 12.50
Third Quarter .083334 12.50
Fourth Quarter .095000 14.25
$ .345000 $ 51.75
</TABLE>
As of February 27, 1998 there were approximately 1,349 shareholders of record of
the Company's Class A non-voting common stock and 27 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 27, 1998, approximately 24,492,470 shares are freely transferable
without restriction or further registration under the Securities Act of 1933
(the Act), as amended unless purchased by affiliates of the Company as that term
is defined in Rule 144 under the Act. The 42,539,530 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 adversely
affect 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 (1) one percent of the number of shares of Class A
common stock then outstanding or (2) the average weekly trading volume of the
Class A common stock in The NASDAQ Stock Market(sm) during the four calendar
weeks preceding the date on which notice of sale is filed with the SEC. Sales
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.
138
<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
(In millions of dollars)
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Net Income for Year Ended December 31 $93.6 $105.1 $118.6
</TABLE>
Graph #3 NET REVENUES FROM MANAGEMENT
OPERATIONS AND GROSS MARGINS
(In millions of Dollars, except ratios)
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Net Revenues from Management Operations $111.3 $127.4 $134.2
Gross Margin from Management Operations 26.1% 28.4% 28.2%
</TABLE>
Graph #4 PREMIUMS EARNED AND GAAP
COMBINED RATIO EXCLUDING CATASTROPHES
(In millions of Dollars, except ratios)
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Premiums Earned for Year Ended December 31 $ 92.9 $101.5 $107.3
GAAP Combined Ratio Excluding Catastrophes 102.8 103.4 101.5
</TABLE>
139
<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>
1995 1996 1997
<S> <C> <C> <C>
Realized Gain on Investments $ 5.8 $ 6.6 $ 5.8
Equity in Earnings of EFL $ 3.9 $ 3.8 $ 4.2
Interest and Dividends $20.8 $25.8 $32.9
</TABLE>
Graph #6 DIVERSIFICATION OF FIXED MATURITIES
at December 31, 1997
U.S. Industrial & Miscellaneous 45%
Special Revenue 35%
States & Political Subdivisions 13%
U.S. Government 4%
Public Utilities 2%
Foreign Governments, Industrial & Miscellaeous 1%
Graph #7 QUALITY* OF BOND PORTFOLIO
at December 31, 1997 - Carrying Value
Aaa/AAA 33%
A 28%
Aa/AA 21%
Baa/BBB 13%
U.S. Treasury & Agency Securities 4%
Ba/BB 1%
* As rated by Standard & Poor's or Moody's Investor's Service, Inc.
Graph #8 TERM TO MATURITY OF FIXED MATURITIES
Subsequent to 2008 52%
1999-2003 27%
2004-2008 20%
1998 1%
Graph #9 DIVERSIFICATION OF EQUITY SECURITIES
At December 31, 1997 - Carrying Value
(1) U.S. Industrial & Miscellaneous 43%
(2) U.S. Banks & Insurance 30%
(2) U.S. Industrial & Miscellaneous 17%
(1) U.S. Banks & Insurance 4%
(2) Foreign Industrial & Miscellaneous 3%
(2) Public Utilities 2%
(1) Foreign Industrial & Miscellaneous 1%
(1) Common Stocks
(2) Preferred Stocks
140
<PAGE>
INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 1997 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, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Brown, Schwab, Bergquist & Co.
Erie, Pennsylvania
February 17, 1998
141
<PAGE>
INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As of December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
-------------- -------------
<S> <C> <C>
INVESTMENTS
Fixed maturities available-for-sale,
at fair value (amortized cost of
$333,135,959 and $301,093,212,
respectively) $ 349,972,703 $ 310,175,864
Equity securities, at fair value
(cost of $144,123,112 and $116,070,434,
respectively) 165,132,504 131,618,139
Real estate mortgage loans 8,392,518 7,293,651
Other invested assets 7,932,571 7,010,019
-------------- --------------
Total investments $ 531,430,296 $ 456,097,673
Cash and cash equivalents 53,148,495 18,719,624
Accrued investment income 6,128,725 5,570,033
Note receivable from Erie Family Life
Insurance Company 15,000,000 15,000,000
Premiums receivable from policyholders 108,057,986 103,847,320
Prepaid federal income taxes 1,681,573 4,056,974
Receivables from Erie Insurance Exchange
and affiliates 495,861,158 478,304,267
Deferred policy acquisition costs 10,283,372 9,540,998
Property and equipment 10,130,230 9,841,538
Equity in Erie Family Life
Insurance Company 34,687,640 28,686,137
Other assets 26,134,306 20,974,641
-------------- --------------
Total assets $1,292,543,781 $1,150,639,205
============== ==============
</TABLE>
142
<PAGE>
INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
-------------- --------------
<S> <C> <C>
LIABILITIES
Unpaid losses and loss adjustment expenses $ 413,408,941 $ 386,425,019
Unearned premiums 219,210,522 216,938,069
Accrued commissions 81,150,931 75,518,593
Accounts payable and accrued expenses 17,041,120 20,325,691
Deferred income taxes 7,101,371 2,035,054
Dividends payable 7,255,444 6,411,788
Accrued benefit obligations 7,992,300 7,226,300
-------------- --------------
Total liabilities $ 753,160,629 $ 714,880,514
-------------- --------------
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) 29,024,573 17,490,491
Retained earnings 500,358,579 408,268,200
-------------- --------------
Total shareholders' equity $ 539,383,152 $ 435,758,691
-------------- --------------
Total liabilities and
shareholders' equity $1,292,543,781 $1,150,639,205
============== ==============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
143
<PAGE>
INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
MANAGEMENT OPERATIONS:
Management fee revenue $467,602,283 $442,904,376 $420,003,739
Service agreement revenue 7,026,373 5,069,140 4,401,232
Other operating revenue 1,363,298 1,218,573 1,387,578
------------ ------------ ------------
Total revenue from
management operations $475,991,954 $449,192,089 $425,792,549
Cost of management operations 341,767,858 321,763,512 314,516,322
------------ ------------ ------------
Net revenue from
management operations $134,224,096 $127,428,577 $111,276,227
------------ ------------ ------------
INSURANCE UNDERWRITING OPERATIONS:
Premiums earned $107,349,668 $101,509,759 $ 92,874,301
------------ ------------ ------------
Losses and loss adjustment
expenses incurred $ 79,970,102 $ 85,070,861 $ 70,934,755
Policy acquisition and
other underwriting expenses 29,638,991 28,018,109 25,677,164
------------ ------------ ------------
Total losses and
expenses $109,609,093 $113,088,970 $ 96,611,919
------------ ------------ ------------
Underwriting loss ($ 2,259,425) ($ 11,579,211) ($ 3,737,618)
------------ ------------ -----------
INVESTMENT OPERATIONS:
Equity in earnings of Erie
Family Life Insurance Company $ 4,230,909 $ 3,820,957 $ 3,867,533
Interest and dividends 32,908,858 25,794,260 20,814,258
Net realized gain on
investments 5,815,186 6,583,208 5,791,049
------------ ------------ ------------
Total revenue from
investment operations $ 42,954,953 $ 36,198,425 $ 30,472,840
------------ ------------ ------------
Income before income
taxes $174,919,624 $152,047,791 $138,011,449
Provision for income taxes 56,338,434 46,915,432 44,460,652
------------ ------------ ------------
NET INCOME $118,581,190 $105,132,359 $ 93,550,797
============ ============ ============
Net income per share $ 1.59 $ 1.41 $ 1.26
============ ============ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
144
<PAGE>
INCORPORATED BY REFERENCE, PAGE 33 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY Years Ended December 31, 1997, 1996
and 1995
<TABLE>
<CAPTION>
Class A Capital Stock Class B
Shares Class A Class B Shares
Outstanding Amount Amount Outstanding
<S> <C> <C> <C> <C>
Balance, January 1, 1995 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
Net income
Net unrealized gains on
available-for-sale
securities
Dividends:
Class A - $.3925 per
share
Class B - $58.875
per share
Balance, December 31, 1997 67,032,000 $1,955,100 $214,900 3,070
========== ========== ======== =====
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
145
<PAGE>
INCORPORATED BY REFERENCE, PAGE 33 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY Years Ended December 31, 1997, 1996
and 1995
<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, 1995 $7,830,000 ($ 721,470) $251,655,420 $260,933,950
Net income 93,550,797 93,550,797
Net unrealized losses 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
Net income 118,581,190 118,581,190
Net unrealized losses on
available-for-sale
securities 11,534,082 11,534,082
Dividends:
Class A - $.3925 per
share ( 26,310,064) ( 26,310,064)
Class B - $58.875
( 180,747) ( 180,747)
---------- ----------- ------------ ------------
Balance at December 31,1997 $7,830,000 $29,024,573 $500,358,579 $539,383,152
========== =========== ============ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
146
<PAGE>
INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income $118,581,190 $105,132,359 $ 93,550,797
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 1,888,660 1,428,376 1,019,784
Deferred income tax expense (benefit) 440,871 1,255,163 ( 49,439)
Realized gain on investments ( 5,815,186) ( 6,583,208) ( 5,791,049)
Amortization of bond discount ( 158,240) ( 19,640) ( 227,667)
Undistributed earnings of
Erie Family Life ( 3,127,202) ( 2,799,190) ( 2,982,739)
Deferred compensation 345,450 ( 151,646) 263,283
Increase in accrued investment
income ( 558,686) ( 589,879) ( 1,542,037)
Increase in receivables ( 21,845,530) ( 30,842,709) ( 30,929,496)
Policy acquisition costs deferred ( 20,845,360) ( 19,438,265) ( 18,385,333)
Amortization of deferred policy
acquisition costs 20,102,986 18,909,001 17,041,251
Increase in prepaid expenses
and other assets ( 4,503,392) ( 3,655,923) ( 1,042,119)
(Decrease) increase in accounts
payable and accrued expenses ( 2,864,021) ( 2,200,926) 2,887,942
Increase in accrued commissions 5,632,338 2,820,729 17,367,002
Increase (decrease) in income
taxes payable 2,375,401 ( 3,124,595) 2,525,058
Increase in loss reserves 26,983,922 29,090,892 12,510,419
Increase in unearned premiums 2,272,453 14,131,495 25,504,917
------------ ------------ ------------
Net cash provided by
operating activities $118,905,654 $103,362,034 $111,720,574
------------ ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities ($ 69,647,276) ($129,218,290) ($ 73,178,269)
Equity securities ( 73,953,554) ( 71,925,472) ( 47,294,618)
Mortgage loans ( 1,222,747) ( 2,933,110)
Other invested assets ( 1,571,223) ( 3,114,141) ( 2,460,336)
Sales/maturities of investments:
Fixed maturities 37,995,727 58,677,994 23,374,067
Equity securities 51,482,876 32,959,337 27,869,655
Mortgage loans 124,108 68,519 569,555
Other invested assets 648,453 1,422,557 561,956
Issuance of note receivable
to Erie Family Life
Insurance Company ( 15,000,000)
Purchase of property and equipment ( 558,824) ( 2,129,961) ( 98,249)
Purchase of computer software ( 1,618,530) ( 898,016) ( 1,491,911)
Loans to agents ( 1,729,022) ( 3,086,074) ( 3,268,595)
Collections on agent loans 1,220,381 1,174,808 990,733
------------ ------------ ------------
Net cash used in
investing activities ($ 58,829,631) ($119,001,849) ($ 89,426,012)
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITY
Dividends paid to
shareholders ($ 25,647,152) ($ 22,497,544) ($ 17,548,053)
------------ ------------ ------------
Net cash used in
financing activity ($ 25,647,152) ($ 22,497,544) ($ 17,548,053)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 34,428,871 ( 38,137,359) 4,746,509
Cash and cash equivalents at beginning
of year 18,719,624 56,856,983 52,110,474
------------ ------------ ------------
Cash and cash equivalents at end of year $ 53,148,495 $ 18,719,624 $ 56,856,983
============ ============ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
147
<PAGE>
INCORPORATED BY REFERENCE, PAGE 34 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. 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 its management fee
revenue 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 9.
The Company shares proportionately in the results of all
property/casualty insurance underwriting operations of the
Exchange. The Exchange, Erie Insurance Company (EIC), a
wholly-owned subsidiary of the Company, and the Erie Insurance
Company of New York (EINY), a wholly-owned subsidiary of the
EIC, are part of an intercompany reinsurance pooling agreement.
Under this agreement, EIC and EINY cede 100% of their
property/casualty insurance business, including
property/casualty insurance operations assets and liabilities,
to the Exchange. The Exchange retrocedes to EIC and EINY a
specified percentage (5% for EIC and .5% for EINY during 1997,
1996 and 1995) of all pooled property/casualty insurance
business, including insurance operations assets and
liabilities. Insurance ceded by EIC and EINY to the Exchange
does not relieve EIC and EINY from their primary liability as
the original insurers. See also Note 11.
The Company owns a 21.6% common stock interest in an affiliated
life insurance company, Erie Family Life Insurance Company
(EFL), 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 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 and
workers' compensation insurance in Pennsylvania, Ohio, West
Virginia, Maryland and Virginia.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
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.
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.
Reclassifications
Certain amounts reported in the 1996 and 1995 financial
statements have been reclassified to conform to the current
year's financial statement presentation.
148
<PAGE>
INCORPORATED BY REFERENCE, PAGE 34 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of estimates
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
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. There are no securities classified as
"trading" or "held-to-maturity".
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 Statement of Operations in net realized gain
on investments.
Other invested assets (primarily investments in real estate
limited partnerships) are recorded under the equity method of
accounting.
Financial instruments
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 Statements
of Financial Position approximate fair value due to the
short-term maturity of these investments.
149
<PAGE>
INCORPORATED BY REFERENCE, PAGE 34 AND 35 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 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 $20,103,000, $18,909,000, and $17,041,000
in 1997, 1996 and 1995, 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 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
appropriate, the ultimate liability may differ from 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 $2,957,000
and $2,863,000 at December 31, 1997 and 1996, respectively.
Environmental-related claims
In establishing the liability for unpaid losses and loss
adjustment expenses related to environmental claims, 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.
150
<PAGE>
INCORPORATED BY REFERENCE, PAGE 35 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Guarantee fund and other 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 incurred. The Company's estimated
liability for guarantee fund and other assessments at December
31, 1997 and 1996 totaled $489,000 and $302,000, respectively.
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
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.
151
<PAGE>
INCORPORATED BY REFERENCE, PAGE 35 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment as of December 31 is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
(In Thousands)
Land $ 737 $ 737
Buildings 5,857 5,834
Leasehold improvements 242 229
Computer software 8,632 7,013
Computer equipment 2,645 2,123
Transportation equipment 450 450
------- -------
$18,563 $16,386
Less accumulated depreciation 8,433 6,544
------- -------
$10,130 $ 9,842
======= =======
</TABLE>
Earnings per share
Earnings per share is based on the weighted average number of
Class A shares outstanding, 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. The total
weighted average number of Class A equivalent shares
outstanding (including conversion of Class B shares) is
74,400,000.
Recent accounting standards
In June 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (FAS) No.
130, "Reporting Comprehensive Income." FAS 130 is effective for
fiscal years beginning after December 31, 1997 and requires
reporting of comprehensive income in a full set of general
purpose financial statements. Comprehensive income is defined
in the Statement as all changes in equity during a period
except those resulting from investments by owners and
distributions to owners. The Company will continue to display
an amount for net income and, in addition, an amount for
comprehensive income beginning with the quarter ending March
31, 1998.
In June 1997, the FASB also issued FAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information." FAS
131 is effective for fiscal years beginning after December 31,
1997 and requires disclosure of segments under a "management
approach" whereby segments are reported publicly as they are
internally. The Company currently reports segment information
consistent with internal management reporting and expects
little effect of this new standard on interim and year-end
financial statements.
152
<PAGE>
INCORPORATED BY REFERENCE, PAGE 35 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS
The following tables summarize the cost and market value of
available-for-sale securities at December 31, 1997 and 1996 based
on current year classifications. Prior year data may have been
categorized differently to the extent of current year
classification changes.
<TABLE>
<CAPTION>
Available-for-Sale Securities
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
(In Thousands)
December 31, 1997
Fixed Maturities:
U. S. Treasuries &
government agencies $ 12,771 $ 432 $ 3 $ 13,200
Foreign governments-
agency 1,989 418 1,571
Obligations of states
& political
subdivisions 41,931 2,840 44,771
Special revenue 116,052 7,850 1 123,901
Public utilities 7,171 160 7,331
U. S. industrial &
miscellaneous 150,666 6,317 401 156,582
Foreign industrial &
miscellaneous 2,556 61 2,617
-------- ------- ------ --------
Total fixed
maturities $333,136 $17,660 $ 823 $349,973
-------- ------- ------ --------
Equity Securities:
Common stock:
Banks, trusts &
insurance companies $ 3,138 $ 3,379 $ 6,517
U. S. industrial &
miscellaneous 58,415 19,650 $6,874 71,191
Foreign industrial &
miscellaneous 3,209 53 800 2,462
Non-redeemable
preferred stock:
Public utilities 2,619 27 2,646
Banks, trusts &
insurance companies 46,901 3,347 50,248
U. S. industrial &
miscellaneous 25,909 2,006 1 27,914
Foreign industrial &
miscellaneous 3,932 223 4,155
-------- ------- ------ -------
Total equity
securities $144,123 $28,685 $7,675 $165,133
-------- ------- ------ --------
Total available-for-sale
securities $477,259 $46,345 $8,498 $515,106
======== ======= ====== ========
</TABLE>
153
<PAGE>
INCORPORATED BY REFERENCE, PAGE 36 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
Available-for-Sale Securities
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
(In Thousands)
December 31, 1996
Fixed Maturities:
U.S. Treasuries &
government agencies $ 14,284 $ 280 $ 73 $ 14,491
Foreign governments-
agency 1,988 25 5 2,008
Obligations of states
& political
subdivisions 33,402 1,840 76 35,166
Special revenue 131,675 4,830 54 136,451
Public utilities 5,681 124 5,805
U. S. industrial &
miscellaneous 112,505 2,763 588 114,680
Foreign industrial &
miscellaneous 1,558 17 1,575
-------- ------- ------ --------
Total fixed
maturities $301,093 $ 9,879 $ 796 $310,176
-------- ------- ------ --------
Equity Securities:
Common stock:
Banks, trusts &
insurance companies $ 3,039 $ 1,711 $ 4,750
U. S. industrial &
miscellaneous 33,964 12,856 $1,525 45,295
Non-redeemable
preferred stock:
Public utilities 8,660 138 27 8,771
Banks, trusts &
insurance companies 42,106 1,628 1 43,733
U. S. industrial &
miscellaneous 26,309 715 5 27,019
Foreign industrial &
miscellaneous 1,992 58 2,050
-------- ------- ------ --------
Total equity
securities $116,070 $17,106 $1,558 $131,618
-------- ------- ------ --------
Total available-for-sale
securities $417,163 $26,985 $2,354 $441,794
======== ======= ====== ========
</TABLE>
154
<PAGE>
INCORPORATED BY REFERENCE, PAGE 36 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (CONTINUED)
Realized gains and losses on investments reflected in operations are summarized
below for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -----
(In Thousands)
<S> <C> <C> <C>
Realized gains:
Fixed maturities available-for-sale $ 252 $1,015 $ 430
Equity securities 6,613 5,969 6,393
Other invested assets 299
------ ------ ------
Total gains $6,865 $7,283 $6,823
------ ------ ------
Realized losses:
Fixed maturities available-for-sale $ 19 $ 198 $ 52
Equity securities 1,031 378 960
Other invested assets 124 20
------ ------ ------
Total losses $1,050 $ 700 $1,032
------ ------ ------
Net realized gain on available-for-
sale securities $5,815 $6,583 $5,791
====== ====== ======
Changes in unrealized gains consist of the following for the years ended
December 31:
1997 1996 1995
------ ------ -------
(In Thousands)
Equity securities $ 5,462 $5,830 $ 5,926
Fixed maturities available-for-sale 7,754 ( 2,955) 10,868
Held-to-maturity securities
transferred to available-for-
sale securities 3,388
Other 63 ( 69)
Equity in unrealized gains
(losses) of EFL 2,880 ( 1,994) 5,289
Deferred federal income taxes ( 4,625) ( 965) ( 7,106)
------- ------ ------
Increase (decrease) in unrealized
gains on available-for-sale
securities $11,534 ($ 153) $18,365
======= ====== =======
</TABLE>
155
<PAGE>
INCORPORATED BY REFERENCE, PAGE 36 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1997, by remaining contractual term to
maturity, are shown below.
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
(In Thousands)
<S> <C> <C>
Due in one year or less $ 2,504 $ 2,506
Due after one year through five years 94,278 94,936
Due after five years through ten years 66,631 69,868
Due after ten years 169,723 182,663
-------- --------
$333,136 $349,973
======== ========
</TABLE>
NOTE 4. EQUITY IN ERIE FAMILY LIFE INSURANCE COMPANY
The following represents condensed financial information for EFL:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Investments $703,033 $653,917 $569,425
Total assets 832,534 740,651 673,794
Liabilities 672,155 608,020 544,889
Shareholders'
equity 160,379 132,630 128,905
Revenues 91,037 82,720 77,077
Net income 19,560 17,666 17,882
Dividends paid to
shareholders 5,009 4,615 4,158
</TABLE>
The Company's share of EFL's net unrealized gains or losses on
securities is reflected in shareholders' equity ($4,424,736,
$1,545,188, and $3,538,604 at December 31, 1997, 1996 and 1995,
respectively.) The 1997, 1996 and 1995 changes in this net
unrealized gain on securities were $2,879,548, ($1,993,416) and
$5,288,659, respectively.
156
<PAGE>
INCORPORATED BY REFERENCE, PAGE 36 AND 37 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. EQUITY IN ERIE FAMILY LIFE INSURANCE COMPANY (CONTINUED)
Deferred federal income taxes have not been provided on the
Company's equity in undistributed earnings of EFL. It is
management's current intent to reinvest undistributed earnings
indefinitely and not liquidate its investment in EFL. The
estimated deferred tax liability unrecognized at December 31,
1997, 1996 and 1995 is $2,401,000, $1,981,000 and $1,923,000,
respectively.
NOTE 5. BENEFIT PLANS
Pension plan for Employees
The Company has a non-contributory defined benefit pension plan
covering substantially all Employees of the Company. Pension
costs include the following components for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
(In Thousands)
<S> <C> <C> <C>
Service cost for
benefits earned
during the year $4,451 $4,303 $4,629
Interest cost on
projected benefit
obligation 5,550 5,128 5,442
Actual return on
plan assets (14,691) (12,401) (16,991)
Net amortization
and deferral 5,865 5,171 11,323
------ ------ -------
Net pension
expense $1,175 $2,201 $4,403
====== ====== ======
</TABLE>
Net amortization and deferral relates primarily to the
difference between the expected and actual return on plan
assets, and amortization of the initial transitional asset over
fifteen years.
Assumptions used in accounting for the pension plan were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Weighted average discount rate used to
measure projected benefit obligation 7.25% 7.50% 7.25%
Weighted average rate of compensation
increase used to measure projected
benefit obligation 5.00% 5.00% 5.00%
Weighted average expected long-term
rate of return on plan assets 8.25% 8.25% 8.25%
</TABLE>
157
<PAGE>
INCORPORATED BY REFERENCE, PAGE 37 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of the plan at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
(In Thousands)
<S> <C> <C>
Accumulated benefit obligation:
Vested $ 45,654 $39,254
Non-vested 4,636 4,190
-------- -------
Total $ 50,290 $43,444
======== =======
Fair value of plan assets $117,644 $98,761
Less projected benefit obligation 83,575 72,016
-------- -------
Plan assets in excess of projected
benefit obligation 34,069 26,745
Unrecognized net gain ( 29,875) ( 27,879)
Unrecognized net initial
transition asset ( 1,402) ( 1,636)
Unrecognized prior service cost 3,376 3,824
-------- -------
Prepaid asset $ 6,168 $ 1,054
======== =======
</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
equaled $1,992,060, $4,894,042 and $6,024,125 in 1997, 1996 and
1995, respectively. These are non-participating annuity
contracts under which EFL 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 EFL could not honor the annuity contracts.
The benefit obligation has been reduced for these annuities
purchased for retirees.
Pension plans for officers and outside directors
The Company has an unfunded supplemental pension plan for its
officers and an unfunded pension plan for its outside
directors. The pension plan for outside directors froze
accruals effective April 30, 1997. The benefits for all active
participants were settled effective July 31, 1997 through
participants' elections to transfer the lump sum values of
these benefits to a new deferred compensation plan for outside
directors. The effect of curtailments on the Company was not
significant. Total pension expense for these plans include the
following:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
(In Thousands)
<S> <C> <C> <C>
Service cost component $ 225 $ 152 $ 141
Interest cost on projected
benefit obligation 404 257 413
Net amortization and deferral 604 371 339
------ ------ ------
Net pension expense $1,233 $ 780 $ 893
Settlement expenses 3,577
------ ------ ------
Total pension expense $1,233 $ 780 $4,470
====== ====== ======
</TABLE>
158
<PAGE>
INCORPORATED BY REFERENCE, PAGE 37 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. BENEFIT PLANS (CONTINUED)
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 plans
at December 31:
<TABLE>
<CAPTION>
1997 1996
------ ------
(In Thousands)
<S> <C> <C>
Accumulated benefit obligation $2,690 $2,259
====== ======
Projected benefit obligation $5,049 $3,915
Unrecognized net loss (1,787) ( 2,895)
Unrecognized prior service cost ( 689) ( 895)
Benefit payments (1,294)
Accrued pension liability $1,279 $ 125
====== ======
</TABLE>
The additional pension liability recognized on the Statement of
Financial Position is as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
------ ------
(In Thousands)
<S> <C> <C>
Accumulated benefit obligation $2,690 $2,259
Less accrued cost 1,279 125
------ ------
Additional accrued pension liability $1,411 $2,134
====== ======
</TABLE>
The weighted average discount rate used for purposes of
determining the projected benefit obligation of the officers'
supplemental pension plan was 7.25%, 7.50% and 7.25% in 1997,
1996 and 1995, respectively. The weighted average rate of
compensation increase used to measure the projected benefit
obligation of the officers' supplemental pension plan was 5.0%
in 1997, 1996 and 1995, respectively.
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, 1997 and 1996 for these plans equals
$785,200 and $894,800, respectively.
Employee savings plan
The Company has an Employee Savings Plan for its Employees.
Eligible participants are permitted to make contributions of 1%
to 8% 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. The Company matches one-half of the
participant contributions up to 6% of compensation. All
Employees are eligible to participate in the plan. The
Company's matching contributions to the plan in 1997, 1996 and
1995 were $2,892,101, $2,687,907, and $2,227,221, respectively.
Effective May 1997, Employees were permitted to invest a
portion of employer contributions in the Class A common stock
of the Company. The plan will acquire shares necessary to meet
the obligations of the plan in the open market.
159
<PAGE>
INCORPORATED BY REFERENCE, PAGE 38 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. BENEFIT PLANS (CONTINUED)
Deferred compensation and incentive plans
The Company has deferred compensation and incentive plans for
certain eligible Employees of the Company and its affiliates.
Compensation deferred and charged to operations under these
plans amounted to $1,347,155, $258,857, and $224,280 during
1997, 1996 and 1995, respectively.
Health and dental benefits
The Company has self-funded health and dental care plans for
all of its employees and eligible dependents. Estimated unpaid
claims incurred are accrued as a liability at December 31, 1997
and 1996. Operations were charged $12,646,000, $9,899,000, and
$10,828,000 in 1997, 1996 and 1995, respectively, for the cost
of health and dental care provided under these plans.
Post-retirement benefits other than pensions
The Company provides post-retirement medical coverage for
eligible retired Employees and eligible dependents. The Company
pays the obligation when due. Actuarially determined costs are
recognized over the period the Employee provides service to the
Company.
The periodic expense for post-retirement benefits consists of
the following for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Service cost for benefits
earned during the year $287 $337 $353
Interest cost on accumulated
benefit obligation 290 320 322
Amortization of unrecognized
net loss ( 66)
---- ---- ----
Total expense $511 $657 $675
==== ==== ====
</TABLE>
The cash payments for such benefits were $176,400,
$213,500, and $184,900 in 1997, 1996 and 1995,
respectively.
The recorded liabilities for post-retirement health benefits,
none of which have been funded, at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(In Thousands)
<S> <C> <C>
Accumulated post-retirement
benefit obligation:
Retirees $ 172 $ 202
Fully eligible active
plan participants 815 889
Other active plan participants 3,084 3,384
Unrecognized gain 755 492
Unrecognized prior service cost 476
------ ------
Accrued post-retirement liability $5,302 $4,967
====== ======
</TABLE>
160
<PAGE>
INCORPORATED BY REFERENCE, PAGE 38 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. BENEFIT PLANS (CONTINUED)
The weighted average discount rate used to measure the
accumulated post-retirement benefit obligation was 7.25%, 7.50%
and 7.25% in 1997, 1996 and 1995, respectively. The December
31, 1997 accumulated benefit obligation was based on a 9.5%
increase in the cost of covered health care benefits during
1997. The expected health care cost trend rate for 1998 is
9.0%. This rate is assumed to decrease gradually to 5% per year
in 2006 and to remain at that level thereafter.
At December 31, 1997, the effect on the present value of the
accumulated benefit obligation of a 1% increase each year in
the health care cost trend rate used would increase the amount
of such obligation by $619,800, and the 1997 net periodic
expense would have increased by $100,100.
NOTE 6. INCOME TAXES
The provision (benefit) for income taxes consists of the following
for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Federal
Current $55,897 $45,660 $44,510
Deferred 441 1,255 ( 49)
------- ------- -------
$56,338 $46,915 $44,461
======= ======= =======
</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>
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Income tax at
statutory rates $61,222 $53,217 $48,304
(Deduct) add:
Undistributed earnings
of affiliate ( 1,095) ( 980) ( 1,029)
Tax-exempt interest ( 3,009) ( 3,338) ( 3,041)
Dividends received
deduction ( 1,628) ( 1,483) ( 1,004)
Other items 848 ( 501) 1,231
------- ------- -------
$56,338 $46,915 $44,461
======= ======= =======
</TABLE>
161
<PAGE>
INCORPORATED BY REFERENCE, PAGES 38 AND 39 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. INCOME TAXES (CONTINUED)
Temporary differences and carryforwards which give rise to
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
------- -------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Loss reserve discount $ 4,012 $ 4,143
Unearned premiums 3,733 3,528
Alternative minimum tax paid 2,305 610
Accrued Employee benefit plans 1,943 2,462
Other 15
------- -------
Total deferred tax assets $12,008 $10,743
======= =======
Deferred tax liabilities:
Deferred policy acquisition costs $ 3,599 $ 3,339
Unrealized gains 13,246 8,620
Pension and other benefits 1,472
Accrual of discount 792 756
Other 63
------- -------
Total deferred tax liabilities $19,109 $12,778
------- -------
Net deferred tax liability $ 7,101 $ 2,035
======= =======
</TABLE>
The Company paid income taxes totaling $55,166,001, $48,784,864
and $41,985,033 for 1997, 1996 and 1995, respectively.
Erie Indemnity Company, as a corporate attorney-in-fact for a
reciprocal insurer, is not subject to state corporate income
taxes.
NOTE 7. 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 except insofar
as any applicable law shall permit Class A common stock to vote
as a class in regards to any changes in the rights, preferences
and privileges attaching to Class A common stock.
162
<PAGE>
INCORPORATED BY REFERENCE, PAGE 39 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. CAPITAL STOCK (CONTINUED)
Redemption provisions
The Erie Indemnity Company Stock Redemption 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 as determined in the Board's sole discretion after
consideration of certain factors at time of redemption. The
redemption amount is limited 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 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. On March 11, 1997, the Board approved an increase
in the redemption amount of $16,655,226 to $41,005,412. There
were no shares of stock redeemed during 1997 or 1996.
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.
163
<PAGE>
INCORPORATED BY REFERENCE, PAGE 39 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE)
The following table provides a reconciliation of beginning
and ending liability balances for 1997, 1996 and 1995 for the
Company's wholly-owned property/casualty subsidiaries.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Total unpaid losses and loss adjustment
expenses at January 1, gross $386,425 $357,334 $344,824
Less reinsurance recoverables 301,553 278,325 275,923
-------- -------- --------
Net balance at January 1 84,872 79,009 68,901
Incurred related to:
Current year 77,345 85,311 73,145
Prior years 2,625 ( 240) ( 2,210)
-------- -------- --------
Total incurred 79,970 85,071 70,935
-------- -------- --------
Paid related to:
Current year 42,792 49,901 38,039
Prior years 32,551 29,307 22,788
-------- -------- --------
Total paid 75,343 79,208 60,827
-------- -------- --------
Net balance at December 31 89,499 84,872 79,009
Plus reinsurance recoverables 323,910 301,553 278,325
-------- -------- --------
Total unpaid losses and loss
adjustment expenses at
December 31, gross $413,409 $386,425 $357,334
======== ======== ========
</TABLE>
NOTE 9. 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 following rates:
January 1, 1995 to March 31, 1995 25%
April 1, 1995 to March 31, 1996 24.5%
April 1, 1996 to December 31, 1997 24%
Beginning January 1, 1998 through December 31, 1998, the
management fee rate charged the Exchange increased to 24.25%.
The Company's Board of Directors may change the management fee
rate at its discretion.
Service agreement revenue
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
164
<PAGE>
INCORPORATED BY REFERENCE, PAGE 39 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
Effective September 1, 1997 the Company was reimbursed by the
Exchange a portion of the service charges collected from
policyholders as reimbursement for the costs incurred by the
Company in providing extended payment terms on policies written
by the insurers managed by the Company.
Service charge revenue amounted to $2,011,000 in 1997.
Expense reimbursements
The Company pays for and is reimbursed by the Exchange for
expenses incurred in connection with adjustment of claims and
by EFL for administrative expenses. Reimbursements are made to
the Company from these affiliates monthly. The amounts of such
expense reimbursements were as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Erie Insurance Exchange $109,076 $ 95,820 $ 83,662
EFL 13,038 10,095 10,231
-------- -------- --------
$122,114 $105,915 $ 93,893
======== ======== ========
</TABLE>
Office leases
The Company occupies certain office facilities owned by the
Exchange and EFL. The Company leases office space on a
year-to-year basis from the Exchange. Rent expenses under these
leases totaled $11,288,000, $10,949,000, and $10,814,000 in
1997, 1996 and 1995, respectively. The Company has a lease
commitment in excess of one year with EFL for a branch office.
Rentals paid to EFL under this lease totaled $423,000 in 1997,
1996 and 1995.
Note receivable from EFL
EFL issued a surplus note to the Company for $15,000,000. 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 semi-annually. The note
will be payable on demand on or after December 31, 2005. During
1997 and 1996, EFL paid interest to the Company totaling
$967,500.
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
equaled $977,932, $742,772 and $1,235,722 in 1997, 1996 and
1995, respectively.
165
<PAGE>
INCORPORATED BY REFERENCE, PAGE 40 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. 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 $495,861,158 at December 31, 1997 and $478,304,267
at December 31, 1996, are from the Exchange and affiliates. The
carrying value of the receivable from the Exchange approximates
fair value.
Receivables from the Exchange and affiliates at December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
Exchange - Management fee
and expense reimbursements $111,577 $108,590
EFL - Expense reimbursements 1,153 1,049
Exchange - Reinsurance
recoverable from losses and
unearned premium balances
ceded to pool 383,131 368,665
-------- --------
$495,861 $478,304
======== ========
</TABLE>
Premiums receivable from Policyholders at December 31, 1997 and
1996 equaled $108,057,986 and $103,847,320, respectively. A
significant amount of these receivables are ceded to the Exchange
as part of the reinsurance pooling arrangement.
The property/casualty insurance business relates primarily to
private passenger and commercial automobile, homeowners,
commercial multi peril 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 11. REINSURANCE
EIC and EINY have a pooling arrangement with the Exchange, whereby
EIC and EINY cede all of their direct property/casualty insurance
to the Exchange, except for premium under the all lines aggregate
excess of loss reinsurance agreement discussed below. EIC and EINY
then assume 5% and 0.5%, respectively, of the total of the
Exchange's insurance business (including the business assumed from
EIC and EINY).
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%
of EIC and EINY's net premiums earned, the Exchange will be liable
for 95% of the amount of such excess, up to but not exceeding, an
amount equal to 95% of 15% of EIC and EINY's net premium earned.
Losses equal to 5% 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% of the net
premiums earned by EIC and EINY during the term of this agreement
subject to a minimum premium of $800,000. This reinsurance
166
<PAGE>
INCORPORATED BY REFERENCE, PAGE 40 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. REINSURANCE (CONTINUED)
treaty is excluded from the intercompany reinsurance pooling
agreement. The annual premium paid to the Exchange for the
agreement totaled $1,102,868 in 1997. There were no loss
recoveries by EIC or EINY under the agreement for 1997.
During 1996 and 1995, EIC and EINY had in effect a Property
Catastrophe Excess of Loss Reinsurance Treaty with the Exchange.
The coverage included in the treaty for EIC was $25 million in
excess of $10 million and was excluded from the aforementioned
pooling arrangement. The annual premium to the Exchange for the
treaty equaled $274,170 and $562,500 in 1996 and 1995,
respectively. The coverage included in the treaty for EINY was
$2,250,000 in excess of $250,000 and was also excluded from the
aforementioned pooling arrangement. The annual premium to the
Exchange for the treaty equaled $150,000 and $78,750 in 1996 and
1995, respectively.
To the extent that the Exchange assumes reinsurance business from
affiliated and non-affiliated sources, the Company participates
because of its pooling arrangement with the Exchange. Similarly,
the Company also participates in the business ceded 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.
The following summarizes insurance and reinsurance activities for
the Company:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Premiums Earned:
Direct $334,772 $321,736 $289,801
Assumed-nonaffiliates 5,393 2,882 3,331
Ceded to Erie Insurance Exchange ( 340,165) ( 324,618) ( 293,132)
Assumed from Erie Insurance
Exchange 107,350 101,510 92,874
-------- -------- -------
Net $107,350 $101,510 $ 92,874
======== ======== ========
Losses and Loss Adjustment
Expenses Incurred:
Direct $265,678 $261,097 $236,612
Assumed-nonaffiliates 5,896 2,511 3,024
Ceded to Erie Insurance Exchange ( 271,574) ( 263,608) ( 239,636)
Assumed from Erie Insurance
Exchange 79,970 85,071 70,935
-------- -------- -------
Net $ 79,970 $ 85,071 $ 70,935
======== ======== ========
</TABLE>
167
<PAGE>
INCORPORATED BY REFERENCE, PAGES 40 AND 41 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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>
1997 1996 1995
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Shareholders' equity
at December 31, $523,715 $414,674 $328,457
Net income for the
year ended
December 31, 118,970 104,007 91,550
</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 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, 1997, the maximum dividend the Company could
receive from its property/casualty insurance subsidiaries was
$8,613,652. No dividends were paid to the Company from its
property/casualty insurance subsidiaries in 1997 or 1996.
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 statute to
the greater of: (a) 10 percent of its statutory surplus as regards
Policyholders as shown on its last annual statement on file with
the commissioner, or (b) the net income as reported for the period
covered by such annual statement, but shall not include pro rata
distribution of any class of the insurer's own securities.
Accordingly, the Company's share of the maximum dividend payout
which may be made in 1998 without prior Pennsylvania commissioner
approval is $2,795,000. Dividends paid to the Company totaled
$1,103,706 in 1997 and $1,021,950 in 1996.
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, 1997 and 1996, 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.
168
<PAGE>
INCORPORATED BY REFERENCE, PAGE 41 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 between its subsidiaries
and the Exchange. The Company also has 21.6% equity interest in
EFL which comprises its life insurance operations segment.
Summarized financial information for these operations is presented
below. Income amounts include each industry segment's share of
investment income and realized gain or loss on investments which
are reported in the investment operations segment on the
Statements of Operations.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Revenue:
Management operations $ 501,148 $ 470,538 $ 442,055
Property/casualty
insurance operations 120,918 112,541 103,217
Life insurance operations 4,231 3,821 3,868
---------- ---------- ----------
Total revenue $ 626,297 $ 586,900 $ 549,140
========== ========== ==========
Income before income taxes:
Management operations $ 159,380 $ 148,774 $ 127,539
Property/casualty
insurance operations 11,309 ( 547) 6,605
Life insurance operations 4,231 3,821 3,867
---------- ---------- ----------
Total income before income
taxes $ 174,920 $ 152,048 $ 138,011
========== ========== ==========
Net income:
Management operations $ 106,513 $ 99,045 $ 84,431
Property/casualty
insurance operations 8,056 2,338 5,317
Life insurance operations 4,012 3,749 3,803
---------- ---------- ----------
Total net income $ 118,581 $ 105,132 $ 93,551
========== ========== ==========
Assets:
Management operations $ 550,748 $ 456,598 $ 369,600
Property/casualty
insurance operations 707,108 665,355 624,951
Life insurance operations 34,688 28,686 27,881
---------- ---------- ----------
Total assets $1,292,544 $1,150,639 $1,022,432
========== ========== ==========
</TABLE>
169
<PAGE>
INCORPORATED BY REFERENCE, PAGE 41 OF THE COMPANY'S 1997 ANNUAL
REPORT TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. QUARTERLY FINANCIAL DATA - UNAUDITED
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In Thousands, except per share data)
<S> <C> <C> <C> <C>
1997
Net revenue from
management
operations $31,674 $35,378 $36,463 $30,709
Underwriting loss ( 48) ( 783) ( 299) ( 1,129)
Revenue from
investment
operations 9,717 10,123 11,828 11,287
Net income 28,211 30,444 32,128 27,798
Per share data:
Net income per
Share $ .38 $ .41 $ .43 $ .37
======== ======== ======== ========
Dividends declared:
Class A Non-voting
Common $ .095 $ .095 $ .095 $ .1075
======== ======== ======== ========
Class B Common $ 14.25 $ 14.25 $ 14.25 $ 16.125
======== ======== ======== ========
1996
Net revenue from
management
operations $30,688 $33,445 $35,718 $27,578
Underwriting loss ( 5,817) ( 1,257) ( 2,718) ( 1,787)
Revenue from
investment
operations 7,069 7,483 9,813 11,833
Net income 23,498 26,466 29,187 25,981
Per share data:
Net income per
Share $ .32 $ .36 $ .39 $ .35
======== ======== ======== ========
Dividends declared:
Class A Non-voting
Common $ .0833 $ .0833 $ .0833 $ .095
======== ======== ======== ========
Class B Common $ 12.50 $ 12.50 $ 12.50 $ 14.25
======== ======== ======== ========
</TABLE>
170
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
171
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997 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>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 349,973
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 165,133
<MORTGAGE> 8,393
<REAL-ESTATE> 0
<TOTAL-INVEST> 531,430
<CASH> 53,148
<RECOVER-REINSURE> 242
<DEFERRED-ACQUISITION> 10,283
<TOTAL-ASSETS> 1,292,544
<POLICY-LOSSES> 413,408
<UNEARNED-PREMIUMS> 219,211
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,170
<OTHER-SE> 537,213
<TOTAL-LIABILITY-AND-EQUITY> 1,292,544
107,350
<INVESTMENT-INCOME> 37,140
<INVESTMENT-GAINS> 5,815
<OTHER-INCOME> 0
<BENEFITS> 79,970
<UNDERWRITING-AMORTIZATION> 29,639
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 174,920
<INCOME-TAX> 56,338
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 118,581
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.59
<RESERVE-OPEN> 386,425
<PROVISION-CURRENT> 77,345
<PROVISION-PRIOR> 2,625
<PAYMENTS-CURRENT> 42,792
<PAYMENTS-PRIOR> 32,551
<RESERVE-CLOSE> 413,409
<CUMULATIVE-DEFICIENCY> 8,883
</TABLE>
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 expense reserves reported on the Company's December 31, 1997
Consolidated Statements of Financial Position, contained in the Company's 1997
Annual Report, page 31, 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, 1997 Annual Statements.
Loss and loss adjustment expense reserves per Annual Statement:
Erie Insurance Company $ 84,050,919
Erie Insurance Property & Casualty Company 0
Erie Insurance Company of New York 8,405,092
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Subtotal - Loss and loss adjustment expense reserves,
net of reinsurance $ 92,456,011
SFAS113 Reinsurance gross-up adjustment:
Erie Insurance Company 269,625,123
Erie Insurance Property & Casualty Company 50,891,486
Erie Insurance Company of New York 436,321
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Loss and loss adjustment expense reserves per Erie
Indemnity Company Consolidated Financial Statements $413,408,941
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