FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 1999
Commission file number 0-24000
ERIE INDEMNITY COMPANY
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0466020
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Erie Insurance Place, Erie, Pennsylvania 16530
(Address of principal executive offices) (Zip Code)
(814) 870-2000
Registrant's telephone number, including area code
Not applicable
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Class A Common Stock, no par value, with a stated value of
$.0292 per share-- 66,098,605 shares as of July 19,
1999.
Class B Common Stock, no par value, with a stated value of
$70.00 per share-- 3,070 shares as of July 19, 1999.
The common stock is the only class of stock the Registrant is presently
authorized to issue.
1
<PAGE>
INDEX
ERIE INDEMNITY COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Position--June 30, 1999 and
December 31, 1998
Consolidated Statements of Operations--Three and six months ended
June 30, 1999 and 1998
Consolidated Statements of Comprehensive Income--Three and six months
ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows--Six months ended June 30, 1999
and 1998
Notes to Consolidated Financial Statements--June 30, 1999
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
PART I. FINANCIAL INFORMATION
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
--------------- ---------------
(Unaudited)
<S> <C> <C>
INVESTMENTS
Fixed Maturities Available-for-Sale at fair value
(amortized cost of $458,150,530 and
$421,101,561, respectively) $ 464,663,878 $ 441,353,427
Equity Securities (cost of $178,874,790 and
$169,976,774, respectively) 218,564,698 202,804,068
Real Estate Mortgage Loans 8,298,469 8,287,129
Other Invested Assets 20,507,914 17,493,496
--------------- ---------------
Total Investments $ 712,034,959 $ 669,938,120
Cash and Cash Equivalents 16,700,819 53,580,043
Accrued Investment Income 7,889,028 7,252,439
Note Receivable from Erie Family
Life Insurance Company 15,000,000 15,000,000
Premiums Receivable from Policyholders 116,790,157 114,695,231
Prepaid Federal Income Tax 0 2,508,908
Reinsurance Recoverables from Erie Insurance
Exchange 396,496,310 381,301,722
Other Receivables from Erie Insurance
Exchange and Affiliates 130,631,954 108,612,264
Reinsurance Recoverable Non-affiliates 893,898 938,894
Deferred Policy Acquisition Costs 11,434,482 10,863,107
Property and Equipment 14,140,351 12,388,650
Equity in Erie Family Life Insurance Company 37,308,329 39,478,746
Other Assets 40,199,239 36,873,922
--------------- ---------------
Total Assets $ 1,499,519,526 $ 1,453,432,046
=============== ===============
(Continued)
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
3
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
---------------- ---------------
(Unaudited)
<S> <C> <C>
LIABILITIES
Unpaid Losses and Loss Adjustment Expenses $ 437,588,428 $ 426,164,578
Unearned Premiums 236,142,915 229,056,597
Accrued Commissions 85,824,971 85,005,699
Accounts Payable and Accrued Expenses 24,577,785 20,252,904
Deferred Income Taxes 15,178,671 17,121,777
Federal Income Tax Payable 782,685 0
Dividends Payable 7,998,891 8,099,100
Employee Benefit Obligations 13,595,027 12,508,130
---------------- ---------------
Total Liabilities $ 821,689,373 $ 798,208,785
---------------- ---------------
SHAREHOLDERS' EQUITY
Capital Stock
Class A Common, stated value $.0292 per share;
authorized 74,996,930 shares; issued 67,032,000 shares;
outstanding 66,098,605 shares $ 1,955,100 $ 1,955,100
Class B Common, stated value $70.00
per share; authorized 3,070 shares;
issued and outstanding 3,070 shares 214,900 214,900
Additional Paid-In Capital 7,830,000 7,830,000
Accumulated Other Comprehensive Income 31,622,358 40,178,626
Retained Earnings 661,635,110 605,044,635
---------------- ---------------
Total Contributed Capital and Retained Earnings $ 703,257,468 $ 655,223,261
Treasury Stock (933,395 shares repurchased in 1999) 25,427,315 0
---------------- ---------------
Total Shareholders' Equity $ 677,830,153 $ 655,223,261
---------------- ---------------
Total Liabilities and
Shareholders' Equity $ 1,499,519,526 $ 1,453,432,046
================ ===============
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
4
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------- ----------------------------------
MANAGEMENT OPERATIONS: 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Management Fee Revenue $ 137,502,858 $ 130,184,972 $ 259,337,064 $ 247,508,627
Service Agreement Revenue 3,704,565 2,942,924 7,433,674 5,942,245
Other Operating Revenue 311,125 373,829 647,908 747,790
-------------- --------------- --------------- ---------------
Total Revenue from Management Operations 141,518,548 133,501,725 267,418,646 254,198,662
Cost of Management Operations 100,931,839 94,437,016 192,465,363 181,373,102
-------------- --------------- --------------- ---------------
Net Revenue From
Management Operations $ 40,586,709 $ 39,064,709 $ 74,953,283 $ 72,825,560
-------------- --------------- --------------- ---------------
INSURANCE UNDERWRITING OPERATIONS:
Premiums Earned $ 29,517,142 $ 28,146,565 $ 58,124,065 $ 55,607,627
Losses and Loss Adjustment Expenses Incurred 20,130,338 20,453,563 41,521,508 38,950,953
Policy Acquisition and Other Underwriting
Expenses 8,273,850 7,999,725 16,096,949 15,535,916
-------------- --------------- --------------- ---------------
Total Losses and Expenses 28,404,188 28,453,288 57,618,457 54,486,869
-------------- --------------- --------------- ---------------
Underwriting Gain (Loss) $ 1,112,954 $ (306,723) $ 505,608 $ 1,120,758
-------------- --------------- --------------- ---------------
INVESTMENT OPERATIONS:
Equity in Earnings of Erie Family
Life Insurance Company $ 1,271,560 $ 1,203,568 $ 2,327,467 $ 2,609,044
Net Investment Income 10,933,553 9,160,614 21,399,140 18,075,277
Net Realized Gain on Investments 3,972,170 3,189,588 7,221,022 4,186,366
-------------- --------------- --------------- ---------------
Total Revenue from Investment Operations 16,177,283 13,553,770 30,947,629 24,870,687
-------------- --------------- --------------- ---------------
Income Before Income Taxes 57,876,946 52,311,756 106,406,520 98,817,005
Provision for Income Taxes 18,651,964 16,841,275 33,773,980 31,647,465
-------------- --------------- --------------- ---------------
Net Income $ 39,224,982 $ 35,470,481 $ 72,632,540 $ 67,169,540
============== =============== =============== ===============
Net Income per Share $ 0.53 $ 0.48 $ 0.98 $ 0.90
============== =============== =============== ===============
Weighted Average Shares Outstanding 73,678,486 74,400,000 74,013,951 74,400,000
============== =============== =============== ===============
Dividends Declared per Share:
Class A non-voting Common $ 0.12 $ 0.1075 $ 0.24 $ 0.215
-------------- --------------- --------------- ---------------
Class B Common $ 18.00 $ 16.125 $ 36.00 $ 32.25
-------------- --------------- --------------- ---------------
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
5
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------- ---------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net Income $ 39,224,982 $ 35,470,481 $ 72,632,540 $ 67,169,540
-------------- --------------- -------------- --------------
Unrealized (Losses) Gains on Securities:
Unrealized Holding (Losses) Gains Arising
During Period (6,866,848) 2,719,010 (5,942,467) 17,473,855
Less: Reclassification Adjustment for
Gains Included in Net Income 3,972,170 3,189,589 7,221,022 4,186,366
-------------- --------------- -------------- --------------
Net Unrealized Holding (Losses) Gains
Arising During Period $ (10,839,018) $ (470,579) $ (13,163,489) $ 13,287,489
Income Tax Benefit (Expense) Related to
Unrealized Gains or Losses 3,793,657 164,703 4,607,221 (4,650,621)
-------------- --------------- -------------- --------------
Other Comprehensive (Loss) Income, Net of Tax $ (7,045,361) $ (305,876) $ (8,556,268) $ 8,636,868
-------------- --------------- -------------- --------------
Comprehensive Income $ 32,179,621 $ 35,164,605 $ 64,076,272 $ 75,806,408
============== =============== ============== ==============
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
6
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 72,632,540 $ 67,169,540
Adjustment to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,021,138 992,036
Deferred income tax expense 610,164 974,895
Amortization of deferred policy acquisition costs 11,080,179 10,504,487
Realized gain on investments (7,221,022) (4,186,366)
Net amortization of bond discount 75,686 (88,703)
Undistributed earnings of Erie Family Life (1,652,981) (1,995,874)
Deferred compensation 398,015 721,957
Increase in accrued investment income (636,589) (447,892)
Increase in receivables (39,264,207) (28,562,521)
Policy acquisition costs deferred (11,651,556) (11,085,056)
Increase in prepaid expenses and other assets (3,891,789) (5,740,002)
Increase in accounts payable and accrued expenses 5,013,765 4,142,361
Increase in accrued commissions 819,272 2,450,461
Increase in income taxes payable 3,291,593 2,751,373
Increase in loss reserves 11,423,849 19,875,401
Increase in unearned premiums 7,086,319 9,687,984
-------------- --------------
Net cash provided by operating activities $ 49,134,376 $ 67,164,081
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities (86,580,523) (52,491,656)
Equity securities (32,419,130) (35,906,487)
Mortgage loans (66,286) 0
Other invested assets (3,644,781) (9,768,461)
Sales/maturities of investments:
Fixed maturities 49,854,609 21,264,251
Equity securities 29,963,355 24,734,685
Mortgage loans 55,076 61,335
Other invested assets 600,011 632,882
Purchase of property and equipment (337,762) (346,947)
Purchase of computer software (2,435,077) (1,714,556)
Loans to Agents (1,177,218) (983,013)
Collections on Agent loans 1,743,711 744,557
-------------- --------------
Net cash used in investing activities $ (44,444,015) $ (53,773,410)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders $ (16,142,270) $ (14,510,889)
Treasury stock (25,427,315) 0
-------------- --------------
Net cash used in financing activities $ (41,569,585) $ (14,510,889)
-------------- --------------
Net decrease in cash and cash equivalents (36,879,224) (1,120,218)
Cash and cash equivalents at beginning of period 53,580,043 53,148,495
-------------- --------------
Cash and cash equivalents at end of period $ 16,700,819 $ 52,028,277
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the six months ended June 30, 1999 and 1998 for income taxes
was $29,864,633 and $28,221,547 respectively.
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
7
<PAGE>
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, which include the
accounts of the Erie Indemnity Company and its' wholly owned subsidiaries Erie
Insurance Company, Erie Insurance Company of New York and Erie Insurance
Property & Casualty Company, have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
six-month period ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-K for the year ended December 31,
1998.
NOTE B -- 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 as set out in the Company's Articles of Incorporation. Weighted average
equivalent shares outstanding totaled 73,678,486 for the three months ended
June 30, 1999 and 74,013,951 for the six months ended June 30, 1999. For the
three and six month periods ended June 30, 1998 the weighted average
equivalent shares outstanding totaled 74,400,000.
NOTE C -- INVESTMENTS
Management considers all fixed maturities and marketable equity securities
available-for-sale. Marketable equity securities consist primarily of common and
nonredeemable preferred stocks while fixed maturities consist of bonds and
notes. Available-for-sale securities are stated at fair value, with the
unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity. Management determines the appropriate classification of
fixed maturities at the time of purchase and reevaluates such designation as of
each statement of financial position date.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
June 30, 1999
Fixed Maturities:
U.S. Treasuries & Government
Agencies $ 11,817 $ 316 $ 29 $ 12,104
States & Political Subdivisions 49,607 2,162 210 51,559
Special Revenue 125,022 4,429 359 129,092
Public Utilities 18,213 70 505 17,778
U. S. Industrial & Miscellaneous 222,927 2,825 2,183 223,569
Foreign Industrial & Miscellaneous 11,654 75 454 11,275
Foreign Governments-Agency 1,991 0 91 1,900
------------- ------------ ------------- -------------
Total Bonds $ 441,231 $ 9,877 $ 3,831 $ 447,277
Redeemable Preferred Stock 16,920 1,009 542 17,387
------------- ------------ ------------- -------------
Total Fixed Maturities $ 458,151 $ 10,886 $ 4,373 $ 464,664
------------- ------------ ------------- -------------
Equity Securities:
Common Stock $ 64,719 $ 43,709 $ 6,351 $ 102,077
Non-Redeemable Preferred Stock 114,156 4,214 1,882 116,488
------------- ------------ ------------- -------------
Total Equity Securities $ 178,875 $ 47,923 $ 8,233 $ 218,565
------------- ------------ ------------- -------------
Total Available-for-Sale Securities $ 637,026 $ 58,809 $ 12,606 $ 683,229
============= ============ ============= =============
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
------------- ------------ ------------- -------------
December 31, 1998
Fixed Maturities:
U.S. Treasuries & Government
Agencies $ 13,018 $ 689 $ 0 $ 13,707
States & Political Subdivisions 48,307 3,293 0 51,600
Special Revenue 132,025 7,215 5 139,235
Public Utilities 13,116 300 0 13,416
U.S. Industrial & Miscellaneous 195,296 9,028 629 203,695
Foreign Industrial & Miscellaneous 5,159 165 86 5,238
Foreign Governments-Agency 1,990 0 181 1,809
------------- ------------ ------------- -------------
Total Bonds $ 408,911 $ 20,690 $ 901 $ 428,700
Redeemable Preferred Stock 12,191 577 115 12,653
------------- ------------ ------------- -------------
Total Fixed Maturities $ 421,102 $ 21,267 $ 1,016 $ 441,353
------------- ------------ ------------- -------------
Equity Securities:
Common Stock $ 60,622 $ 37,626 $ 8,018 $ 90,230
Non-Redeemable Preferred Stock 109,355 4,813 1,594 112,574
------------- ------------ ------------- -------------
Total Equity Securities $ 169,977 $ 42,439 $ 9,612 $ 202,804
------------- ------------ ------------- -------------
Total Available-for-Sale Securities $ 591,079 $ 63,706 $ 10,628 $ 644,157
============= ============ ============= =============
</TABLE>
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Deferred income taxes decreased by $2,553,275 at June 30, 1999 compared to a
$5,342,948 increase at December 31, 1998 related to the change in unrealized
gains (losses) on available-for-sale securities.
Mortgage loans on real estate are recorded at unpaid balances, adjusted for
amortization of premium or discount. A valuation allowance is provided for
impairment in net realizable value based on periodic valuations. The change in
the allowance is reflected on the income statement in realized gain (loss) on
investments.
Other invested assets (primarily investments in real estate and private equity
limited partnerships) are recorded under the equity method of accounting.
NOTE D -- SUMMARIZED FINANCIAL STATEMENT INFORMATION OF AFFILIATE
The Company has a 21.63% investment in Erie Family Life Insurance Company (EFL)
and accounts for this investment using the equity method. The following
represents summarized financial statement information for EFL:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
----------------- -----------------
<S> <C> <C>
Revenues $ 51,144,570 $ 47,691,941
Benefits and expenses 34,372,686 29,057,962
----------------- -----------------
Income before income taxes 16,771,884 18,633,979
Income taxes 6,011,516 6,571,824
----------------- -----------------
Net income $ 10,760,368 $ 12,062,155
================= =================
Dividends paid to shareholders $ 2,976,752 $ 2,693,252
================= =================
Net unrealized appreciation on investment
securities at June 30, net of deferred
taxes $ 8,494,788 $ 25,004,334
================= =================
</TABLE>
NOTE E -- NOTE RECEIVABLE FROM ERIE FAMILY LIFE INSURANCE COMPANY
On December 29, 1995, EFL issued a surplus note to the Company in return for
cash of $15 million. The note bears an annual interest rate of 6.45% and all
payments of interest and principal of the note may be repaid only out of
unassigned surplus of EFL and are subject to prior approval of the Pennsylvania
Insurance Commissioner. 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.
EFL paid the Company $483,750 for interest in the second quarter of 1999.
NOTE F -- TREASURY STOCK
In December 1998, the Board of Directors of the Company authorized the
repurchase of up to $70 million of its Class A common stock from January 1, 1999
through December 31, 2001. The Company's repurchase of shares of common stock
are recorded as "Treasury Stock" and result in a reduction of "Shareholders'
Equity." Treasury shares are recorded on the Consolidated Statements of
Financial Position at cost. In the second quarter of 1999, 465,300 shares were
repurchased at a total cost of $12,654,449 or an average price of $27.18.
During the first six months of 1999, 933,395 shares were repurchased at a total
cost of $25,427,315 or an average price of $27.24.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and related notes found on pages 3 through 10, since they
contain important information that is helpful in evaluating the Company's
operating results and financial condition.
RESULTS OF OPERATIONS
Overview
Consolidated net income increased by 10.6% for the second quarter of 1999 to
$39,224,982, or $.53 per share, from $35,470,481 or $.48 per share, for the
second quarter of 1998. The increase in net income for the quarter was driven by
improved results in all three of the Company's operating segments. For the six
months ended June 30, 1999, net income increased 8.1% to $72,632,540 or $.98 per
share, from $67,169,540 or $.90 per share reported for the same period in 1998.
Operating income increased 9.3% to $36,386,730, or $.49 per share for the three
months ended June 30, 1999 from $33,275,647, or $.45 per share for the three
months ended June 30, 1998. For the six months ended June 30, 1999, operating
income increased 5.5% to $67,566,725, or $.91 per share, from $64,069,002, or
$.86 per share, for the same period in 1998.
Analysis of Management Operations
Net revenue from the Company's management operations increased 3.9% to
$40,586,709 for the three months ended June 30, 1999 from $39,064,709 for the
same period in 1998. The gross margin from management operations (net revenue
divided by total revenue), of 28.7% in the second quarter of 1999, was slightly
less than the gross margin of 29.3% reported in the second quarter of 1998. For
the six months ended June 30, 1999 net revenue from management operations
totaled $74,953,283, an increase of 2.9% when compared to the first six months
of 1998.
Management fee revenue derived from the management operations of the Company,
which serves as attorney-in-fact for the Erie Insurance Exchange (the Exchange),
increased 5.6% to $137,502,858 for the three months ended June 30, 1999 from
$130,184,972 for the three months ended June 30, 1998. Management fee revenue
increased 4.8% to $259,337,064 in the first six months of 1999 compared to
$247,508,627 for the same period in 1998.
The direct and affiliated assumed premiums of the Exchange, upon which
management fee is based, increased by 2.5 % to $550,011,427 in the second
quarter of 1999 compared to $536,825,827 in the second quarter of 1998. The rate
of growth in management fee revenue was greater than the rate of growth in
direct and affiliated assumed premium of the Exchange because the management fee
rate charged the Exchange beginning January 1, 1999 was 25% compared to a rate
of 24.25% charged in the second quarter of 1998. The Company's Board of
Directors has the authority to change the management fee rate at its discretion,
but cannot exceed a rate of 25%. For the year, premiums written increased 1.6%
to $1,037,348,253 compared to $1,020,634,719 written for the first six months of
1998. Premium growth was adversely influenced by previously announced pricing
actions in the Private Passenger Auto line of insurance. However, policy growth
for the first six months of 1999 when compared to the same period in 1998 was
strong as policy retention rates and new policy growth improved. Policies in
force increased 4.4% to 2,622,735 for the period ended June 30, 1999 from
2,512,172 policies in force at June 30, 1998. Policy retention (the percentage
of current policyholders that have renewed their policy) was 91.0% and 90.7% for
the period ended June 30, 1999 and 1998, respectively for private passenger auto
and 89.8% and 89.4% for the six months ended June 30, 1999 and 1998,
respectively overall for all lines combined.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Service agreement revenue totaled $3,704,565 and $2,942,924 for the quarter
ended June 30, 1999 and 1998, respectively. Service agreement revenue is derived
from two sources. First, the Company is reimbursed by the Exchange for a portion
of service charges collected by the property/casualty insurers of the Group from
Policyholders for the costs incurred by the Company in providing extended
payment terms on policies written by the Group. Service charges totaled
$1,746,219 for the three months ended June 30, 1999 compared to $1,508,081
during the same period in 1998. Second, service income is received from the
Exchange as compensation for the management and administration of voluntary
assumed reinsurance from non-affiliated insurers. The Company receives a 7.0%
service fee on the premiums from this business. These fees totaled $1,958,346
and $1,434,843 for the three months ended June 30, 1999 and 1998, respectively
on net voluntary assumed reinsurance premiums of $27,976,382 and $20,497,760 in
the second quarter of 1999 and 1998, respectively.
For the six months ended June 30, 1999 service agreement revenue increased 25.1%
to $7,433,674 from $5,942,245. Service charges increased 14.2% to $3,445,390
from $3,016,162, while service agreement income rose by 36.3% to $3,988,284. Net
voluntary assumed reinsurance premiums totaled $56,975,494 and $41,801,183 for
the first six months of 1999 and 1998, respectively.
The cost of management operations increased 6.9% for the second quarter of 1999
to $100,931,839 from $94,437,016 during the second quarter of 1998. For the six
months ended June 30, 1999 the cost of management operations grew by 6.1% to
$192,465,363 compared to $181,373,102 for the same period in 1998.
Commissions are the largest component of the cost of management operations. The
Company is responsible for the payment of commissions to the independent Agents
who sell insurance products for the Company's subsidiaries and the Exchange, and
its subsidiary, Flagship City Insurance Company. The Agents receive commissions
based on fixed percentage fee schedules with different commission rates by
product line of insurance. Also included in commission expense are the costs of
promotional incentives for Agents and Agent contingency awards. Agent
contingency awards are based upon the underwriting profitability of the
insurance written and serviced by the Agent within the Erie Insurance Group of
companies.
Commission costs totaled $69,432,411 for the second quarter of 1999, a 6.8%
increase over the $65,015,264 reported in the second quarter of 1998.
Commissions grew by 5.7% to $130,067,383 from $123,057,643 recorded for the
first six months of 1998. Commission costs grew faster than the rate of growth
in written premiums due to increased provisions for agent contingency and
incentive awards and an increase in the average commission rate.
The cost of management operations excluding commission costs, increased 7.1% for
the three months ended June 30, 1999 to $31,499,428 from $29,421,752 recorded in
the second quarter of 1998. Personnel costs, including salaries, employee
benefits, and payroll taxes, are the second largest component in cost of
operations, after commissions. The Company's personnel costs totaled $18,073,887
for the three month period ended June 30, 1999, compared to $17,406,012 for the
same period in 1998, an increase of 3.8%.
The cost of management operations was also affected by information technology
consulting and corporate litigation costs incurred during the second quarter of
1999. Such costs amounted to about $1,250,837 during the quarter.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Analysis of Insurance Underwriting Operations
Insurance underwriting results are produced from the Company's property and
casualty insurance subsidiaries, Erie Insurance Company and Erie Insurance
Company of New York, which together assume a 5.5% share of the underwriting
results of the Erie Insurance Group under an intercompany reinsurance pooling
arrangement. These operations generated a gain of $1,112,954 in the second
quarter of 1999 compared to a loss of $306,723 in the second quarter of 1998. In
the second quarter of 1999, premiums earned increased 4.9% to $29,517,142
compared to $28,146,565 for the same period in 1998. Losses, loss adjustment
expenses and other underwriting expenses incurred decreased 0.2% for the second
quarter of 1999 to $28,404,188 compared to $28,453,288 for the prior year's
second quarter. Catastrophe losses in the second quarter of 1999 were $960,483
compared to the 1998 second quarter total of $2,262,739.
The GAAP combined ratio for the Company's property and casualty insurance
operations increased slightly to 99.1% for the six months ended June 30, 1999
compared to a ratio of 98.0% for the same period in 1998. The GAAP combined
ratio represents the ratio of loss, loss adjustment, acquisition, and other
underwriting expenses incurred to premiums earned.
Analysis of Investment Operations
Total revenue from investment operations for the second quarter of 1999
increased to $16,177,283 from $13,553,770 in the second quarter of 1998. This
increase was driven by a $782,582 increase in non-recurring realized gains on
investments combined with a $1,772,939 increase in net investment income. Also
contributing to the increase was an increase in the earnings recognized from the
Company's 21.63% ownership of Erie Family Life Insurance Company to $1,271,560
in the second quarter of 1999 from $1,203,568 recorded in the second quarter of
1998. Total revenue from investment operations for the six months ended June 30,
1999 increased 24.4% to $30,947,629 from $24,870,687 for the same period in
1998. This increase resulted from a $3,323,863 increase in net investment income
and a $3,034,656 increase in net realized gains on investments.
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 June
30, 1999, the Company's investment portfolio of investment-grade bonds, common
stock and preferred stock, all of which are readily marketable, and cash and
short-term investments, totaled $700 million, or 47%, of total assets. These
resources provide the liquidity the Company requires to meet demands on its
funds.
At June 30, 1999, 96.0% of total investments consist of fixed maturities and
equity securities. Mortgage loans and other invested assets represented only
4.0% of total investments at that date. Mortgage loans and real estate
investments have the potential for higher returns, but also carry more risk,
including less liquidity and greater uncertainty in the rate of return.
The Company's investments are subject to certain risks, including interest rate
and reinvestment risk. Fixed maturity and preferred stock security values
generally fluctuate inversely with movements in interest rates. The Company's
corporate and municipal bond investments may contain call and sinking fund
features which
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company's ability to secure enough cash to meet
its contractual obligations and operating needs. Operating cash flows are
generated from management operations as the attorney-in-fact for the Exchange,
the net cash flow from the Erie Insurance Company's 5% and the Erie Insurance
Company of New York's .5% participation in the underwriting results of the
reinsurance pool with the Exchange, and the Company's investment income from
affiliated and non-affiliated investments. With respect to the management fee,
funds are generally received from the Exchange on a premiums collected basis.
The Company pays commissions on premiums collected rather than written premiums.
The Company generates sufficient net positive cash flow from its operations to
fund its commitments, repurchase its common stock, and build its investment
portfolio, thereby increasing future investment returns. The Company also
maintains a high degree of liquidity in its investment portfolio in the form of
readily marketable fixed maturities, common stocks and short-term investments.
Net cash flows provided by operating activities for the six months ended June
30, 1999 and 1998, were $49,134,376 and $67,164,081, respectively.
Dividends declared and paid to shareholders in the three months ended June 30,
1999 and 1998, totaled $8,043,169 and $7,255,444, 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 insurance subsidiaries to the Company. Dividends
from subsidiaries are not material to the Company's cash flow.
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to deferred tax assets and
liabilities resulted in net deferred tax liabilities at June 30, 1999 of
$15,178,671 and at December 31, 1998 of $17,121,777.
The National Association of Insurance Commissioners (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, 1998, the Exchange, its subsidiary
Flagship City Insurance Company and 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.
At June 30, 1999 and December 31, 1998, the Company's receivables from its
affiliates totaled $527,128,264 and $489,913,986, respectively. These
receivables, primarily due from the Exchange, as a result of the management fee,
expense reimbursements and the intercompany reinsurance pool, represent a
concentration of credit risk.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
STOCK REDEMPTION PLAN
The Erie Indemnity Company Stock Redemption 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. 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 is 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 share holdings of such shareholder.
On April 27, 1999 the Board approved an increase in the redemption amount of
$19,190,347 to $77,987,383. As of June 30, 1999, no shares have been redeemed
under the Stock Redemption Plan.
STOCK REPURCHASE PLAN
At the December 16, 1998 regular meeting of the Board of Directors of the Erie
Indemnity Company, the board approved a stock repurchase plan beginning January
1, 1999, under which the Company may repurchase as much as $70 million of its
outstanding Class A common stock through December 31, 2001. The Company may
purchase the shares from time to time in the open market or through privately
negotiated transactions, depending on prevailing market conditions and
alternative uses of the Company's capital. In the second quarter of 1999,
465,300 shares were repurchased at a total cost of $12,645,449 or an average
price of $27.18. During the first six months of 1999, 933,395 shares were
repurchased at a total cost of $25,427,315 or an average price of $27.24.
YEAR 2000 READINESS DISCLOSURE
Erie Indemnity Company and the property/casualty insurance companies it manages
are dependent on electronic processing and information systems to conduct
business. Like all companies with such dependencies, the Company is continually
faced with significant decisions and technology challenges. Among these
challenges is the so-called "Year 2000 Issue," the inability of many computer
systems to recognize dates beginning with the year 2000 and beyond. The Year
2000 Issue is perhaps more pervasive than any previous risk management issue
faced by businesses of all types. To effectively manage the risks associated
with the Year 2000 Issue, management has taken measures over the past six years
designed to reduce the Company's potential for business interruption. References
to the Company in the description below, including cost information, pertain to
the Company and the property/casualty insurance companies under its management.
The effect of the Year 2000 Issue cannot be measured exactly with certainty; any
forecasts about the effect of the Year 2000 Issue and remediation projections
are necessarily forward-looking statements and are subject to the risks and
uncertainties noted on page 18.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Company's State of Readiness
Exposure to systems failure is a risk faced by the Company every day. Unlike
these every day risks, the date change to the Year 2000 is predictable. Efforts
to mitigate The ERIE's exposure through effective identification, remediation,
testing and contingency planning are organized and being conducted on all major
business processes to minimize the risks.
To assure that the Company effectively addresses this risk, management has in
place a structure that provides oversight of Year 2000 project activities, which
are being conducted within the major business units of the Company. Oversight by
Executive and Senior Management is being facilitated through a dedicated project
office. This office, (the Y2K Office) is working in consultation with each
business unit to assure consistency and adequacy of risk management activities
and to collect companywide project status and cost information.
Within each business unit, each key business process has been evaluated to
assure that underlying systems and components exposed to potential Year 2000
failure are appropriately identified and addressed. Underlying system components
include internal operating systems (hardware and software), infrastructure
elements including non-information technology components and systems,
communications systems and devices, internally developed mainframe applications,
personal computer hardware and software, external parties and providers and
peripheral devices.
Each underlying component supporting key business processes was identified and
mission critical business processes were prioritized during 1998. Priority was
assigned based on the relative importance of the component to the business
process and based on the importance of the business process relative to other
business processes.
Efforts to remediate non-compliant internal components (principally mainframe
applications) began in the mid-1990's as a routine part of systems development
and maintenance. Remediation of the Company's mainframe applications was
completed and component testing was conducted during the first quarter of 1999.
To supplement component testing and to provide a greater degree of assurance
that business functions will be uninterrupted, Year 2000 simulation testing on
the full insurance operations system was performed during March and April of
1999 and was completed April 30, 1999. Full systems testing included
simultaneous testing of underlying components necessary to the support of key
insurance operations business processes. Testing environments that closely
approximate operating environments for mainframe and LAN-based PC applications
were developed for use during this testing. The results of testing did not
indicate that key business processing applications will encounter any material
problems in the year 2000 due to the inability to recognize dates in the year
2000.
Certain administrative systems (non-insurance operations) which operate in LAN
based PC environments are also undergoing Year 2000 simulation testing which
began in May, 1999 and is scheduled for completion by the end of July, 1999.
While these systems are vendor certified as compliant, management believes the
presence of certain customizations makes testing prudent. Test results through
June 30, 1999 indicate no material problems.
The Y2K Office conducts ongoing monitoring of key external parties including
utility suppliers, voice and data communications providers and financial
institutions. Where possible and practicable, focused testing has been
accomplished with these parties. No matter has come to our attention concerning
the state of readiness of these key third parties that causes management to
believe any of these parties will be unable to provide continuous service to the
Company.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
During the second quarter of 1999, each business unit developed contingency
plans designed to respond to potential component or total systems failure. The
plans incorporate a variety of back up processes some of which are automated,
some manual. The plans provide that several operating areas accelerate work into
1999 or postpone work into later January 2000, where possible. Provisions for
back up capabilities on services provided by key third parties are also included
in the plans where feasible.
With the approval of the plans by Executive Management in July, 1999, the
Company is beginning to execute the steps necessary to carry out the back up
plans which are planned for completion during the third quarter. These steps
include the orientation and training of employees integral to the plan as well
as the procurement of supplies and equipment necessary to conduct business in
the back up environment, should that become necessary.
Cost to Address Year 2000 Issues
Prior to 1998, the Company did not establish a specific budget to address the
Year 2000 Issue. By including Year 2000 changes in the scope of each system
development and maintenance project, the Year 2000 Issue became an extension of
all system projects. It is estimated that through June 30, 1999 costs incurred
for specific Y2K activities including programming, testing, integrated test
planning, and administrative efforts approximate $2.3 million. This estimate
includes the cost of our internal efforts based on rates for personnel engaged
in these activities. Future costs will be incurred as contingency plan testing
continues during 1999. In addition, the cost of consulting resources engaged
during the first six months of 1999 amounted to $122,000.
Management believes that the cost of testing and administrative support will
approximate $175,000 during the remaining six months of 1999 based on the
project plans for these activities. This estimate includes the cost of personnel
involved in testing and the cost to maintain the technical test environment.
Costs incurred to replace non-compliant software and hardware during 1999 have
not been and are not expected to be significant.
In addition to these costs, the Company will incur internal personnel costs and
certain other planned expenditures for items which will enable business
continuity plans to be executed. Costs for the development and testing of
contingency plans during 1999 approximate $125,000 with $50,000 being incurred
through June 30, 1999 and approximately $75,000 estimated for the remainder of
1999.
Risk of the Company's Year 2000 Issues
The proper functioning of the Company's computer systems and applications is
critical to the continued operations of the Company. By addressing the Year 2000
Issue over several years in the ordinary course of business, the costs and
uncertainty associated with it have been reduced significantly. Management does
not believe that critical business operations of the Company will be adversely
affected to any significant degree by the Year 2000 Issue.
It is possible that certain key external parties will certify their systems as
year 2000 compliant when in fact they are not. The inability of the Company to
respond to uncontrollable circumstances remains a concern. For example, if
numerous key third parties are unable to support the operations of the Company,
operations could be adversely affected. The Company, as part of overall risk
management, has prepared contingency plans to respond, where feasible, to the
possibility of key third party failure(s). Management does not believe that
these scenarios have a greater than remote possibility of occurrence.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Company's Contingency Plans if a Vendor or the Company Fail to Address Year 2000
Issues
This risk described above has been addressed through contingency planning. The
level of contingency planning is commensurate with the relative importance of
the external party to the operations of the Company and the relative risk that
the party will be unable to operate satisfactorily in 2000. Such contingency
plans have been developed and will be tested during the final six months of
1999.
The statements containing the beliefs of management about the Company's state of
readiness for Year 2000 Issues are necessarily forward-looking statements that
involve risks and uncertainties. These risks and uncertainties include but are
not limited to: human or mechanical errors in correcting Year 2000 Issues;
incorrect or improper (intentional or otherwise) representations by third
parties as to their compliance or remediation efforts; the failure of third
parties to follow through on their remediation efforts; and the inability to
identify and/or locate processing chips that are subject to Year 2000 problems.
"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 "Financial Condition - Investments", and the "Liquidity
and Capital Resources" sections hereof, and the other statements which are not
historical facts contained in this report are forward looking statements that
involve risks and uncertainties. These risks and uncertainties include but are
not limited to: legislative, judicial and regulatory changes, the impact of
competitive products and pricing, product development, geographic spread of
risk, weather and weather-related events, other types of catastrophic events,
securities markets fluctuations, and technological difficulties and
advancements.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The H.O. Hirt Trusts collectively own 2,340 shares of the Company's Class B
Common Stock, which has the exclusive right to vote in the election of directors
of the Company. Since such shares represent 76.22% of the outstanding share of
the Company Class B Common Stock, the vote of the H.O. Hirt Trusts is sufficient
to determine the outcome of any election of directors. The trustees of the H.O.
Hirt Trusts are F. William Hirt, Chairman of the Board of the Company, a
director of the Company, a beneficial owner of more that 10% of the Company's
outstanding Class A Common Stock and a beneficiary of one of the two H.O. Hirt
Trusts; his sister, Susan Hirt Hagen, a director of the Company, a beneficial
owner of more than 10% of the Company's outstanding Class A Common Stock and a
beneficiary of the other H.O. Hirt Trust and Mellon Bank, N.A. Under the
provisions of the H.O. Hirt Trusts, the shares of the company's Class B Common
Stock held by the H.O. Hirt Trusts are to be voted as directed by a majority of
the three trustees.
Under the Pennsylvania Insurance Company Law and the Company's By-laws, the
candidates for the election as directors of the Company are to be nominated by a
committee consisting solely of persons who are not officers or employees of the
Company or of any entity controlling, controlled by or under common control with
the Company and who are not beneficial owners of a controlling interest in the
voting securities of the Company. On March 11, 1998, the Nominating Committee of
the Company's Board of Directors nominated 12 persons as candidates for election
as directors of the Company at the Company's April 28, 1998 annual meeting of
shareholders. The 12 persons nominated did not include Thomas B. Hagen, the
husband of Susan Hirt Hagen, as a candidate for election as a director of the
Company at such annual meeting. Thomas B. Hagen had served as a director of the
Company since 1979.
On April 2, 1998, Susan Hirt Hagen, a director, filed duplicate petitions in the
Orphans' Court Division of the Court of Common Pleas of Erie County,
Pennsylvania (the "Court") seeking the removal of Mellon Bank N.A. ("Mellon") as
a co-trustee of the H.O. Hirt Trusts. The principal basis for the alleged relief
was the allegation that Mellon, as the owner of an insurance agency, was a
competitor of the Company. Among the relief requested by Susan Hirt Hagen in the
petitions was the grant of a preliminary injunction against Mellon from voting
the Class B Common Stock held by the H.O. Hirt Trusts for the purpose of the
election of directors at the Company's April 28, 1998 Annual Meeting of
Shareholders. Because of the potential substantial harm to the Company if the
preliminary injunction was granted, the Company filed a petition to intervene in
the preliminary injunction proceedings which the Court granted on April 21, 1998
and an order denying Susan Hirt Hagen's request for a preliminary injunction. On
April 28, 1998, the Company's 1998 Annual Meeting of Shareholders was held as
scheduled and each of the candidates for election as a director of the Company
named in the Company's April 1, 1998 proxy statement was elected as a director
of the Company with the affirmative votes of Mellon and F.
William Hirt as a majority of the trustees of the H.O. Hirt Trusts.
On June 3, 1998, the Company, because of its substantial interest in the outcome
of any matter involving a change in Mellon's status as a co-trustee of the H.O.
Hirt Trusts, petitioned the Court to intervene in the trial of the issues
remaining under Susan Hirt Hagen's petitions to remove Mellon as a co-trustee.
On June 24, 1998, the Court denied the Company's petition, and, on July 13,
1998, the Company appealed the Court's denial to the Superior Court of
Pennsylvania. On August 5, 1998, Susan Hirt Hagen, a director of the Company,
filed a motion with the Superior Court of Pennsylvania to quash the Company's
appeal. On August 17, 1998, the Company filed its response to Susan Hirt Hagen's
motion to quash the Company's appeal. On October 19, 1998, the Superior Court of
Pennsylvania denied without prejudice Susan Hirt Hagen's motion to quash the
Company's appeal, and the Superior Court of Pennsylvania established a schedule
for the submission of briefs on the merits of the Company's appeal.
19
<PAGE>
Item 1. Legal Proceedings (Continued)
During June and July 1998, substantial discovery took place involving Susan Hirt
Hagen's petitions to remove Mellon as co-trustee. Preceding the scheduled trial
date of July 30, 1998, discussions took place between counsel for Mellon and
counsel for Susan Hirt Hagen concerning a possible basis for settlement of the
pending litigation. These discussions involved the circumstances under which
Mellon might resign as co-trustee of the H.O. Hirt Trusts and the establishment
of procedures pursuant to which a successor trustee would be appointed by the
Court or by agreement of Susan Hirt Hagen and F. William Hirt. After a hearing
conducted on July 30, 1998, the Court by letter advised counsel for all parties
that the Court would not approve the settlement proposal that had been presented
during the July 30, 1998 hearing, and that Mellon was to advise the Court on or
before August 21, 1998 whether a revised settlement proposal would be submitted
or whether the petitions to remove Mellon as co-trustee should be scheduled for
trial by the Court for some later unspecified date.
On August 4, 1998, the Company filed a further petition with the Court seeking
the right to intervene in the proceedings insofar as the proceedings would
entail the possible approval of any settlement of the petitions to remove Mellon
as co-trustee or the appointment of a successor trustee to Mellon. On October
21, 1998, Mellon submitted to the Court a Petition to Resign Pursuant to and
upon the Fulfillment of Certain Conditions Precedent (the "Mellon Petition"). On
October 29, 1998, the Court conducted a hearing at which time, among other
things, the Court heard testimony from two potential successor corporate
trustees to Mellon, each of which potential successors (either Bankers Trust or
Bank Boston), the Court was advised, had the approval of Mellon, Susan Hirt
Hagen and F. William Hirt. During that same hearing, the Court indicated that it
would accept the Mellon Petition and would in the future enter an order
providing for the granting of the Mellon Petition, in conjunction with a further
hearing on the matter of the appointment of a successor corporate co-trustee and
the final Court approval thereof. On November 2, 1998, the Court scheduled such
a further hearing for January 6, 1999.
On January 6, 1999, with the concurrence of all parties, the Court accepted the
resignation of Mellon as co-trustee of the H.O. Trusts and released Mellon from
all further obligations with respect to the H.O. Hirt Trusts. On the same date,
the Court appointed Bankers Trust as the successor co-trustee of the H.O. Hirt
Trusts. On January 26, 1999, the Court assessed $637,500 in costs incurred by
Mellon in connection with the removal litigation against Susan Hirt Hagen.
On March 3, 1999 Bankers Trust filed with the Court a Petition to Accept
Resignation of Trustee (the "Bankers Trust Petition") in which Bankers Trust
requested the Court that its resignation as corporate Co-Trustee of the H. O.
Hirt Trusts be accepted and a successor corporate Trustee be appointed. On March
4, 1999 the Court appointed Judge William R. Cunningham to serve in the Orphans'
Court to preside over the matter of the Bankers Trust Petition, and a hearing
was fixed for May 7, 1999. On or about May 6, 1999 Bankers Trust filed a
petition for Citation to Show Cause why Declaratory Relief Should not be Granted
("Bankers Trust Declaratory Action Petition"). The Bankers Trust Declaratory
Action Petition seeks a determination by the Court whether a provision of the
Pennsylvania Insurance Company Law, Section 40 P.S. ss.991.1405(c)(4) provides
the exclusive means by which persons may be nominated and elected to the Board,
or whether the Trustees have the power to nominate and elect to the Board
persons other than those designated by the Nominating Committee.
On May 7, 1999 the Court issued an Order approving the resignation of Bankers
Trust Company as the corporate Trustee effective upon the entry of an Order
appointing a successor corporate Trustee. Also on May 7, 1999 the Court issued
an Order setting a schedule for the filing and determination of objections to
the Bankers Trust Declaratory Action Petition, indicating that any objections to
the Petition must be filed on or before May 25, 1999; responses to the
objections must be filed on or before June 15, 1999; and the Court set Oral
Argument on any objections and responses on June 29, 1999. Thereafter, if
necessary, a Hearing on the merits of the Declaratory Action Petition would be
held on July 28, 1999.
On June 16, 1999, Susan Hirt Hagen filed with the Court a motion for leave to
amend the response she had filed to the Petition, so as to assert a claim
against the Company in the nature of a request for a permanent injunction
against certain Bylaw amendments adopted by the Company effective June 15, 1999.
On June 29, 1999, the Court heard oral argument on the objections which the
Company and F. William Hirt filed to the Petition. On July 15, 1999, the Court
entered its Order and Opinion which sustained the objections to the Petition and
dismissed without prejudice the Petition, and also dismissed without prejudice
Susan Hirt Hagen's Motion to Amend.
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
All other exhibits for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are applicable, and therefore, have been omitted.
The Company did not file any reports on Form 8-K during the three-month period
ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Erie Indemnity Company
(Registrant)
Date: July 19, 1999
\s\ Stephen A. Milne
(Stephen A. Milne, President & CEO)
\s\ Philip A. Garcia
(Philip A. Garcia, Executive Vice President & CFO)
21
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS FDS CONTAINS INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF
THE ERIE INDEMNITY COMPANY FOR THE QUARTER ENDED JUNE 30, 1999 AND IS
QUALIFIED IN REFERENCE TO THE COMPANY'S FORM 10-Q
</LEGEND>
<CIK> 0000922621
<NAME> ERIE INDEMNITY COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 464,664
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 218,565
<MORTGAGE> 8,298
<REAL-ESTATE> 0
<TOTAL-INVEST> 712,035
<CASH> 16,701
<RECOVER-REINSURE> 894
<DEFERRED-ACQUISITION> 11,434
<TOTAL-ASSETS> 1,499,520
<POLICY-LOSSES> 437,588
<UNEARNED-PREMIUMS> 236,143
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,170
<OTHER-SE> 675,660
<TOTAL-LIABILITY-AND-EQUITY> 1,499,520
29,517
<INVESTMENT-INCOME> 12,205
<INVESTMENT-GAINS> 3,972
<OTHER-INCOME> 0
<BENEFITS> 20,130
<UNDERWRITING-AMORTIZATION> 8,274
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 57,877
<INCOME-TAX> 18,652
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,225
<EPS-BASIC> .53
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
