FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 2000
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--64,380,413 shares as of October 16,
2000.
Class B Common Stock, no par value, with a stated value of
$70 per share--3,070 shares as October 16, 2000.
The common stock is the only class of stock the Registrant is presently
authorized to issue.
1
<PAGE>
INDEX
ERIE INDEMNITY COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Position--September 30, 2000 and
December 31, 1999
Consolidated Statements of Operations--Three and nine months ended
September 30, 2000 and 1999
Consolidated Statements of Comprehensive Income--Three and nine
months ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows--Nine months ended
September 30, 2000 and 1999
Notes to Consolidated Financial Statements--September 30, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Item 11. Statement Regarding Computation of Per Share Earnings
SIGNATURES
2
<PAGE>
PART I. FINANCIAL INFORMATION
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(In thousands)
September 30, December 31,
ASSETS 2000 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
INVESTMENTS
Fixed maturities at fair value
(amortized cost of $520,580 and
$489,394, respectively) $ 521,510 $ 485,522
Equity securities at fair value (cost of $184,984
and $171,495, respectively) 218,178 215,383
Real estate mortgage loans 6,617 8,230
Limited partnerships 66,308 39,116
---------- ----------
Total investments $ 812,613 $ 748,251
Cash and cash equivalents 34,392 24,214
Accrued investment income 10,099 7,998
Premiums receivable from Policyholders 163,208 140,868
Prepaid federal income tax 0 2,975
Reinsurance recoverable from Erie Insurance
Exchange 397,969 365,217
Note receivable from Erie Family Life
Insurance Company 15,000 15,000
Other receivables from Erie Insurance
Exchange and affiliates 128,008 105,752
Reinsurance recoverable non-affiliates 846 912
Deferred policy acquisition costs 13,043 11,405
Property and equipment 14,003 15,261
Equity in Erie Family Life Insurance Company 42,096 37,007
Other assets 45,024 43,934
---------- ----------
Total assets $1,676,301 $1,518,794
========== ==========
(Continued)
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
3
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(In thousands)
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
-------------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES
Unpaid losses and loss adjustment expenses $ 464,282 $ 432,895
Unearned premiums 270,552 237,452
Commissions payable and accrued 97,504 92,874
Accounts payable and accrued expenses 30,368 24,187
Federal income tax payable 1,102 0
Deferred income taxes 12,605 11,805
Dividends payable 8,771 8,853
Employee benefit obligations 15,024 13,129
---------- ----------
Total liabilities $ 900,208 $ 821,195
---------- ----------
SHAREHOLDERS' EQUITY
Capital Stock
Class A common, stated value $.0292 per
share; authorized 74,996,930 shares;
67,032,000 shares issued; 64,402,613 and
65,131,501 shares outstanding in 2000 and 1999,
respectively $ 1,955 $ 1,955
Class B common, stated value $70 per
share; authorized 3,070 shares;
3,070 shares issued and outstanding 215 215
Additional paid-in capital 7,830 7,830
Accumulated other comprehensive income 33,380 26,581
Retained earnings 808,879 715,348
---------- ----------
Total contributed capital and retained earnings $ 852,259 $ 751,929
Treasury stock, at cost - 2,629,387 shares repurchased through
September 30, 2000 and 1,900,499 shares repurchased through
December 31, 1999 ( 76,166) ( 54,330)
---------- ----------
Total shareholders' equity $ 776,093 $ 697,599
---------- ----------
Total liabilities and shareholder's equity $1,676,301 $1,518,794
========== ==========
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
4
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2000 1999 2000 1999
(In thousands, except per share data)
<S> <C> <C> <C> <C>
MANAGEMENT OPERATIONS:
Management fee revenue $ 145,719 $ 135,797 $ 421,992 $ 395,134
Service agreement revenue 6,553 3,792 16,722 11,226
------------ ----------- ----------- -----------
Total revenue from management operations 152,272 139,589 438,714 406,360
Cost of management operations 107,855 97,643 314,369 289,461
------------ ----------- ----------- -----------
Net revenue from
management operations $ 44,417 $ 41,946 $ 124,345 $ 116,899
------------ ----------- ----------- -----------
INSURANCE UNDERWRITING OPERATIONS:
Premiums earned $ 31,194 $ 29,449 $ 91,762 $ 87,573
Losses and loss adjustment expenses incurred 25,216 22,375 73,180 63,896
Policy acquisition and other underwriting
expenses 8,720 8,654 26,117 24,751
------------ ----------- ----------- -----------
Total losses and expenses 33,936 31,029 99,297 88,647
------------ ----------- ----------- -----------
Underwriting loss ($ 2,742) ($ 1,580) ($ 7,535) ($ 1,074)
------------ ----------- ----------- -----------
INVESTMENT OPERATIONS:
Equity in earnings of Erie Family
Life Insurance Company $ 1,304 $ 1,456 $ 3,983 $ 3,784
Equity in earnings of limited partnerships 1,722 158 4,139 316
Net investment income 12,016 10,747 35,652 31,987
Net realized gain on investments 3,944 4,089 15,385 11,310
------------ ----------- ----------- -----------
Net revenue from investment operations 18,986 16,450 59,159 47,397
------------ ----------- ----------- -----------
Income before income taxes 60,661 56,816 175,969 163,222
Provision for income taxes 19,469 18,391 56,073 52,165
------------ ----------- ----------- -----------
Net income $ 41,192 $ 38,425 $ 119,896 $ 111,057
============ =========== =========== ===========
Net income per share $ 0.57 $ 0.52 $ 1.66 $ 1.51
============ =========== =========== ===========
Weighted average shares outstanding (Note B) 71,871 73,322 72,092 73,781
============ =========== =========== ===========
Dividends declared per share:
Class A non-voting common $ .135 $ 0.12 $ .405 $ 0.36
------------ ----------- ----------- -----------
Class B common $ 20.25 $ 18.00 $ 60.75 $ 54.00
------------ ----------- ----------- -----------
<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 Nine Months Ended
September 30 September 30
------------------------- -------------------------
2000 1999 2000 1999
(In thousands)
<S> <C> <C> <C> <C>
Net Income $ 41,192 $ 38,425 $ 119,896 $ 111,057
---------- ----------- ---------- -----------
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period 4,518 ( 14,571) 25,845 ( 20,514)
Less: reclassification adjustment for
gains included in net income 3,944 4,089 15,385 11,310
---------- ----------- ---------- -----------
Net unrealized holding gains (losses)
arising during period $ 574 ($ 18,660) $ 10,460 ($ 31,824)
Income tax (expense) benefit related to
unrealized gains or losses ( 201) 6,532 ( 3,661) 11,139
---------- ----------- ---------- -----------
Other comprehensive income (loss), net of tax $ 373 ($ 12,128) $ 6,799 ($ 20,685)
---------- ----------- ---------- -----------
Comprehensive income $ 41,565 $ 26,297 $ 126,695 $ 90,372
========== =========== ========== ===========
</TABLE>
6
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, September 30
2000 , 1999
---------------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 119,896 $ 111,057
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,007 1,361
Deferred income tax benefit ( 1,674) ( 649)
Amortization of deferred policy acquisition costs 15,059 16,758
Realized gain on investments ( 15,385) ( 11,310)
Net amortization of bond (discount) premium ( 7) 83
Undistributed earnings of Erie Family Life ( 2,879) ( 2,772)
Deferred compensation 783 584
Increase in accrued investment income ( 2,101) ( 1,712)
Increase in receivables ( 77,281) ( 33,904)
Policy acquisition costs deferred ( 16,697) ( 17,722)
Increase in prepaid expenses and other assets ( 1,132) ( 3,735)
Increase in accounts payable and
accrued expenses 7,293 5,428
Increase in commissions payable and accrued 4,630 5,510
Increase in income taxes payable 4,077 3,755
Increase in loss reserves 31,387 15,682
Increase in unearned premiums 33,100 17,552
----------- ----------
Net cash provided by operating activities $ 101,076 $ 105,966
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchase of investments (Note C) ( 41,906) ( 58,373)
Purchase of property and equipment ( 17) ( 338)
Purchase of computer software ( 733) ( 3,885)
Loans to agents ( 1,252) ( 2,350)
Collections on agent loans 1,293 2,184
----------- ----------
Net cash used in investing activities ($ 42,615) ($ 62,762)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders ($ 26,447) ($ 24,129)
Treasury stock ( 21,836) ( 39,710)
------------ ----------
Net cash used in financing activities ($ 48,283) ($ 63,839)
------------ ----------
Net increase (decrease) in cash and cash equivalents 10,178 ( 20,635)
Cash and cash equivalents at beginning of period 24,214 53,580
----------- ----------
Cash and cash equivalents at end of period $ 34,392 $ 32,945
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the nine months ended September 30, 2000 and 1999 for income
taxes was $53,668 and $46,475 respectively.
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
7
<PAGE>
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
All amounts are in thousands of dollars except per share data and
policy count information
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
nine-month period ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000. 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,
1999.
In December 1999, the Securities and Exchange Commission issued Statement of
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements"
and amended it in March and June 2000 with respect to effective dates. This SAB
defines when revenue is realized or realizable and earned. The Company evaluated
its revenue recognition practices and found them to be in compliance with the
provisions of this SAB.
NOTE B -- EARNINGS PER SHARE
Earnings per share is based on the weighted average number of Class A shares
outstanding (64,723,967 and 66,412,876 at September 30, 2000 and 1999,
respectively), giving effect to the conversion of the weighted average number of
Class B shares outstanding (3,070 in 2000 and 1999) at a rate of 2,400 Class A
shares for one Class B share as set out in the Articles of Incorporation.
Weighted average equivalent shares outstanding totaled 71,870,951 for the
quarter ended September 30, 2000 and 73,322,329 for the comparable period a year
ago. For the nine months ended September 30, 2000 weighted average equivalent
shares outstanding were 72,091,967 compared to 73,780,876 for the nine months
ended September 30, 1999.
NOTE C -- INVESTMENTS
Management considers all fixed maturities and marketable equity securities
available-for-sale. Marketable equity securities consist primarily of common and
non-redeemable preferred stocks while fixed maturities consist of bonds, notes
and redeemable preferred stock. Available-for-sale securities are stated at fair
value, with the unrealized gains and losses, net of tax, reported as a separate
component of comprehensive income and 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)
NOTE C -- INVESTMENTS (Continued)
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
September 30, 2000
Fixed maturities:
----------------
U.S. treasuries & government
agencies $ 11,218 $ 239 $ 49 $ 11,408
States & political subdivisions 48,182 1,202 239 49,145
Special revenue 117,657 3,089 301 120,445
Public utilities 23,260 304 584 22,980
U.S. industrial & miscellaneous 259,858 2,771 6,914 255,715
Foreign 31,078 180 727 30,531
-------------- ------------ ------------- -------------
Total bonds $ 491,253 $ 7,785 $ 8,814 $ 490,224
Redeemable preferred stock 29,327 2,582 623 31,286
-------------- ------------ ------------- -------------
Total fixed maturities $ 520,580 $ 10,367 $ 9,437 $ 521,510
-------------- ------------ ------------- -------------
Equity securities:
-----------------
Common stock:
U.S. banks, trusts &
insurance companies $ 3,180 $ 170 $ 260 $ 3,090
U.S. industrial &
miscellaneous 57,921 44,664 7,838 94,747
Foreign 7,830 1,241 774 8,297
Non-redeemable
preferred stock:
U.S. banks, trusts &
insurance companies 23,694 89 1,814 21,969
U.S. industrial &
miscellaneous 64,558 2,257 3,862 62,953
Foreign 27,801 263 942 27,122
-------------- ------------ ------------- -------------
Total equity securities $ 184,984 $ 48,684 $ 15,490 $ 218,178
-------------- ------------ ------------- -------------
Total available-for-sale
securities $ 705,564 $ 59,051 $ 24,927 $ 739,688
============== ============ ============= =============
</TABLE>
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE C -- INVESTMENTS (Continued)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
December 31, 1999
Fixed Maturities:
----------------
U.S. treasuries & government
agencies $ 11,029 $ 136 $ 114 $ 11,051
States & political subdivisions 52,064 1,477 423 53,118
Special revenue 120,170 2,487 561 122,096
Public utilities 20,909 17 608 20,318
U.S. industrial & miscellaneous 232,458 1,644 6,926 227,176
Foreign 21,593 83 933 20,743
------------- ------------ ------------- -------------
Total bonds $ 458,223 $ 5,844 $ 9,565 $ 454,502
Redeemable preferred stock 31,171 657 808 31,020
------------- ------------ ------------- -------------
Total fixed maturities $ 489,394 $ 6,501 $ 10,373 $ 485,522
------------- ------------ ------------- -------------
Equity securities:
-----------------
Common stock:
U.S. banks, trusts &
insurance companies $ 3,887 $ 3,631 $ 362 $ 7,156
U.S. industrial &
miscellaneous 56,035 51,194 4,097 103,132
Foreign industrial &
miscellaneous 4,948 1,000 437 5,511
Non-redeemable
preferred stock:
U.S. banks, trusts &
insurance companies 38,708 615 2,629 36,694
U.S. industrial &
miscellaneous 61,109 894 5,341 56,662
Foreign industrial &
miscellaneous 6,808 25 605 6,228
------------- ------------ ------------- -------------
Total equity securities $ 171,495 $ 57,359 $ 13,471 $ 215,383
------------- ------------ ------------- -------------
Total available-for-sale
securities $ 660,889 $ 63,860 $ 23,844 $ 700,905
============= ============ ============= =============
</TABLE>
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE C -- INVESTMENTS (Continued)
The Company participates in a securities lending program whereby certain
securities from its portfolio are loaned to other institutions for short periods
of time. A fee is paid to the Company by the borrower. Collateral that exceeds
the market value of the loaned securities is maintained by the lending agent.
The Company's policy is to require collateral equal to 102 percent of the market
value of the loaned securities. The Company has an indemnification agreement
with the lending agents in the event a borrower becomes insolvent or fails to
return securities. At September 30, 2000, the Company had loaned securities with
a market value of $18.8 million and secured collateral of $19.3 million.
Mortgage loans on commercial real estate are recorded at unpaid balances,
adjusted for amortization of premium or discount. A valuation allowance would be
provided for impairment in net realizable value based on periodic valuations.
Limited partnerships include U.S. domestic and foreign private equity, real
estate and fixed income investments. The private equity limited partnerships
invest in small-to medium-sized companies. The private equity limited
partnerships are carried at estimated market value with unrealized gains and
losses reflected in shareholder's equity in accumulated other comprehensive
income. Investment income or loss is recognized on the sale of the equity
investment. Real estate and fixed income limited partnerships are recorded using
the equity method, which approximates the Company's share of the carrying value
of the partnership. The components of equity in earnings (loss) of limited
partnerships are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Limited Partnerships - Private Equity $ 1,045 ($ 141) $ 977 ($ 352)
LimitedPartnerships - Real Estate 228 257 1,783 661
Limited Partnerships - Fixed Income 449 42 1,379 7
--------- -------- ---------- --------
$ 1,722 $ 158 $ 4,139 $ 316
========= ======== ========== ========
</TABLE>
<TABLE>
<CAPTION>
The following is the detail of net purchase of investments as presented in the Consolidated Statements of Cash Flows:
Nine Months Ended Nine Months Ended
September 30, September 30,
2000 1999
--------------- ----------------
<S> <C> <C>
Purchase of investments:
Fixed maturities ($ 118,335) ($ 122,197)
Equity securities ( 46,441) ( 48,472)
Mortgage loans 0 ( 66)
Limited partnerships ( 19,892) ( 13,220)
------------ ------------
Total purchases ($ 184,668) ($ 183,955)
------------ ------------
Sales/maturities of investments:
Sales of fixed maturities 47,634 30,301
Calls of fixed maturities 40,830 44,560
Equity securities 46,938 49,849
Mortgage loans 1,614 88
Limited partnerships 5,746 784
------------ ------------
Total sales/maturities $ 142,762 $ 125,582
------------ ------------
Net purchase of investments ($ 41,906) ($ 58,373)
============ ============
</TABLE>
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 of accounting.
The following is summarized financial statement information for EFL:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, September 30,
2000 1999
--------------- ----------------
<S> <C> <C>
Revenues $ 87,208 $ 77,915
Benefits and expenses 59,054 51,693
------------ ------------
Income before income taxes 28,154 26,222
Income taxes 9,741 8,729
------------ ------------
Net income $ 18,413 $ 17,493
============ ============
Comprehensive income (loss) $ 28,631 ($ 11,078)
============ ============
Dividends paid to shareholders $ 4,961 $ 4,536
============ ============
Net unrealized appreciation (depreciation) on investment
securities at September 30, net of deferred taxes $ 7,874 ($ 2,400)
============ ============
</TABLE>
NOTE E -- NOTE RECEIVABLE FROM ERIE FAMILY LIFE INSURANCE COMPANY
In 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 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 interest of
$484 to the Company in the third quarter of 2000 and 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. At its regular quarterly meeting on March 7, 2000,
the Board announced expanded authorization for share repurchases up to an
additional $50 million of its outstanding Class A common stock through December
31, 2002. Treasury shares are recorded on the Consolidated Statements of
Financial Position at cost.
NOTE G -- RECLASSIFICATIONS
Certain amounts previously reported in the 1999 financial statements have been
reclassified to conform to the current period's presentation.
NOTE H -- SEGMENT INFORMATION
The Company operates its business as three reportable segments - management
operations, property/casualty insurance operations and life insurance
operations. The Company's principal operations consist of serving as
attorney-in-fact for the Erie Insurance Exchange (Exchange) which constitutes
its management operations. The Company's property/casualty insurance operations
arise by virtue of a pooling arrangement between the Company's insurance
subsidiaries and the Exchange. The Company also has a 21.63% equity interest in
EFL which comprises its life insurance operations segment.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE H -- SEGMENT INFORMATION (Continued)
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 Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
------------- -------------- -------------- -------------
Revenue:
<S> <C> <C> <C> <C>
Management operations $ 165,443 $ 150,459 $ 480,194 $ 437,419
Property/casualty insurance operations 35,705 33,572 105,458 100,127
Life insurance operations 1,304 1,456 3,983 3,784
------------- -------------- -------------- -------------
Total revenue $ 202,452 $ 185,487 $ 589,635 $ 541,330
============= ============== ============== =============
Income before income taxes:
Management operations $ 57,588 $ 52,817 $ 165,825 $ 147,959
Property/casualty insurance operations 1,769 2,543 6,161 11,479
Life insurance operations 1,304 1,456 3,983 3,784
------------- -------------- -------------- -------------
Total income before income taxes $ 60,661 $ 56,816 $ 175,969 $ 163,222
============= ============== ============== =============
Net income:
Management operations $ 38,615 $ 35,323 $ 111,167 $ 99,316
Property/casualty insurance operations 1,416 1,724 5,025 8,151
Life insurance operations 1,161 1,378 3,704 3,590
------------- -------------- -------------- -------------
Net income $ 41,192 $ 38,425 $ 119,896 $ 111,057
============= ============== ============== =============
</TABLE>
<TABLE>
<CAPTION>
As of As of
September 30, 2000 December 31, 1999
----------------- ----------------
<S> <C> <C>
Assets:
Management operations $ 794,691 $ 723,377
Property/casualty insurance operations 839,514 758,410
Life insurance operations 42,096 37,007
---------------- --------------
Total assets $ 1,676,301 $ 1,518,794
================ ==============
</TABLE>
The Company is the attorney-in-fact for the Exchange, a reciprocal insurance
exchange. The Company earns a management fee for administrative and underwriting
services provided to the Exchange and its affiliates. The management fee charged
to the Exchange was 25% of the affiliated assumed and direct premiums written by
the Exchange for the nine months ended September 30, 2000 and 1999.
The following is the Company's management fee revenue on the Consolidated
Statements of Operations presented by line of business:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Private Passenger Auto $ 83,667 $ 81,631 $240,517 $234,699
Commercial Auto 10,697 9,412 33,174 30,191
Homeowner 25,349 23,102 67,265 60,687
Commercial Multi-Peril 12,309 10,242 37,987 32,371
Worker's Compensation 9,643 7,812 30,948 26,298
All Other Lines of Business 4,054 3,598 12,101 10,888
-------- -------- -------- --------
Total $145,719 $135,797 $421,992 $395,134
======== ======== ======== ========
</TABLE>
13
<PAGE>
The following is the detail for growth in policy counts and retention rates for
the Erie Insurance Group's property/casualty operations:
<TABLE>
<CAPTION>
Private All other
Policy Passenger CML* CML* Worker's Lines of
Counts Auto Auto Homeowner Multi-Peril Comp. Business Total
-------- ----------- ------ ---------- ------------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/99 1,274,869 82,760 917,902 174,085 43,508 196,725 2,689,849
03/31/00 1,287,868 83,534 931,971 178,191 44,235 199,580 2,725,379
06/30/00 1,305,888 85,089 952,325 184,913 45,408 204,412 2,778,035
09/30/00 1,324,104 86,592 971,213 190,120 46,529 208,832 2,827,390
Retention
Rates
--------
12/31/99 91.58% 89.27% 90.47% 87.42% 87.59% 86.85% 90.35%
03/31/00 91.83 89.52 90.66 88.08 88.52 87.23 90.45
06/30/00 92.03 89.53 90.89 88.19 88.62 87.57 90.72
09/30/00 92.19 89.90 90.88 88.38 88.67 87.75 91.03
*CML = Commercial
</TABLE>
NOTE I -- GEOGRAPHIC EXPANSION
On March 7, 2000 the Company announced the Erie Insurance Group's intention to
expand its marketing territory into Wisconsin. Wisconsin will be the eleventh
state served by the Group, in addition to the District of Colombia. In
Wisconsin, the Group intends to write all lines of insurance it currently
offers, including auto, home, business, life and annuities.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the historical
financial information and the notes thereto included in Item 1 of this Quarterly
Report on Form 10-Q and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in our Annual Report on Form 10-K
for the year ended December 31, 1999 as filed with the Securities and Exchange
Commission on March 23, 2000.
OPERATING RESULTS
Financial Overview
Consolidated net income increased by 7.2% for the third quarter of 2000 to
$41,192,193, or $.57 per share, from $38,424,589 or $.52 per share, for the
third quarter of 1999. Earnings per share, which were positively impacted by the
Company's share repurchase program, rose by 9.4% for the third quarter of 2000.
For the nine months ended September 30, 2000, earnings per share increased 10.5%
to $1.66 per share, from $1.51 per share reported for the same period in 1999.
Improved management and investment operating segments were somewhat offset by
increased losses experienced in the Company's insurance underwriting operations.
RESULTS OF OPERATIONS
Analysis of Management Operations
Management fee revenue derived from the management operations of the Company,
serving as attorney-in-fact for the Erie Insurance Exchange (the Exchange),
increased 7.3% to $145,719,261 for the three months ended September 30, 2000
from $135,796,427 for the three months ended September 30, 1999. Management fee
revenue increased 6.8% to $421,991,451 in the first nine months of 2000 compared
to $395,133,491 for the same period in 1999 (see Note H, "Segment information")
The management fee rate charged to the Exchange was 25% for all periods
presented. 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%.
The direct and affiliated assumed premiums written of the Exchange, grew by
$39,691,335, or 7.3%, to $582,877,042 for the third quarter of 2000 from
$543,185,707 in the third quarter of 1999. For the first nine months of 2000
premiums written increased 6.8% to $1,687,965,795 compared to $1,580,533,960
written for the first nine months of 1999.
Policy growth for 2000 for the Erie Insurance Group was strong as policy
retention rates and new policy growth improved. Policies in force increased 6.3%
to 2,827,390 at September 30, 2000 from 2,659,174 at September 30, 1999. Policy
retention (the percentage of current Policyholders who have renewed their
policies) was 91.0% and 90.3% for the quarters ended September 30, 2000 and
1999, respectively, for all lines of business (see Note H, "Segment
information")
Service agreement revenue grew by $2,760,583 to $6,552,886 in the third quarter
of 2000 from $3,792,303 for the same period in 1999. Included in service
agreement revenue are service charges the Company collects from Policyholders
for providing extended payment terms on policies written by the Group. Such
service charges amounted to $3,828,807 and $1,623,263 for the quarters ended
September 30, 2000 and 1999 respectively. During the second quarter of 2000,
this charge increased from $2 to $3 per month for policies renewing in most
states which accounts for a large portion of the quarterly increase. Also
included in service agreement revenue is service income received from the
Exchange as compensation for the management and administration of voluntary
assumed reinsurance from non-affiliated insurers. The Company receives a service
fee of 7.0 percent of non-affiliated assumed reinsurance premiums.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Service fees totaled $2.7 million and $2.2 million for the three months ended
September 30, 2000 and 1999 respectively, on net voluntary assumed reinsurance
premiums of $38.9 million and $31.0 million for the third quarters of 2000 and
1999, respectively.
For the nine months ended September 30, 2000 service agreement revenue increased
49.0% to $16,722,381 from $11,225,977. Service charges increased $3,981,616 to
$9,050,269 in 2000 while service agreement income rose by 24.6% to $7,672,112 in
2000.
The cost of management operations increased 10.5% for the third quarter of 2000
to $107,854,662 from $97,643,292 during the third quarter of 1999. For the nine
months ended September 30, 2000 the cost of management operations grew by 8.6%
to $314,368,727 compared to $289,460,747 for the same period in 1999.
Commissions to independent Agents are the largest component of the cost of
management operations. Included in commission expenses are the cost of scheduled
commissions to independent Agents on premiums written as well as promotional
incentives for Agents and Agent contingency awards. Agent contingency awards are
based upon a three-year average of the underwriting profitability of the direct
business written and serviced by the independent Agent within the Erie Insurance
Group of companies. Commission costs totaled $74,825,430 for the third quarter
of 2000, a 9.1% increase over the $68,592,632 reported in the third quarter of
1999. Commissions grew by 8.9% to $216,264,816 from $198,660,015 recorded for
the first nine months of 1999. Commission costs grew faster than the rate of
growth in written premiums due to increased provisions for agent contingency
awards, changes in the mix of business written and increased costs from special
commission contracts used primarily to assist new ERIE agencies get established.
The cost of management operations excluding commission costs increased 13.7% for
the quarter ended September 30, 2000 to $33,029,232 primarily due to increased
information technology expenditures and field sales employee incentive
compensation. For the first nine months of 2000, the cost of operations
excluding commission costs increased 8.0% to $98,103,911 from $90,800,732
recorded for the same period in 1999.
Net revenue from the Company's management operations increased 5.9% to
$44,417,485 for the three months ended September 30, 2000 from $41,945,438 for
the same period in 1999. For the nine months ended September 30, 2000 net
revenue from management operations totaled $124,345,105, an increase of 6.4%
when compared to the first nine months of 1999. The gross margin from management
operations (net revenue divided by total revenue), of 29.2% in the third quarter
of 2000, was slightly less than the gross margin of 30.0% reported in the third
quarter of 1999.
Analysis of Insurance Underwriting Operations
The insurance underwriting operation results of the Company's property/casualty
insurance subsidiaries, Erie Insurance Company and Erie Insurance Company of New
York, which together assume a 5.5 percent share of the underwriting results of
the Erie Insurance Group under an intercompany pooling arrangement, declined
during the third quarter of 2000 when compared to the same period in 1999.
Earned premiums increased 5.9% to $31,194,440 for the third quarter of 2000
compared to earned premiums of $29,449,004 for the same period in 1999. Total
losses and expenses increased 9.4% from $31,028,462 in the third quarter of 1999
to $33,936,508 in the third quarter of 2000.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The result of the growth in premiums earned combined with the increase in loss
and related expenses generated an underwriting loss of $2,742,068 for the third
quarter of 2000 compared to a loss of $1,579,458 for the third quarter of 1999.
The underwriting loss resulted from higher loss ratios experienced in private
passenger automobile and in commercial lines, principally worker's compensation
and commercial auto lines of business. Catastrophe losses were $316,000 for the
third quarter of 2000 compared to $1,342,000 for the same period in 1999.
The Company had an underwriting loss of $7,535,065 for the first nine months of
2000 compared to an underwriting loss of $1,073,850 for the same period in 1999.
Additional development on losses from catastrophic storms that devastated Europe
in December 1999 contributed about $1.7 million in assumed reinsurance losses in
the first nine months of 2000.
The GAAP combined ratio for the Company's property/casualty insurance operations
was 108.8% for the three months ended September 30, 2000 compared to a ratio of
105.4% for the same period in 1999. The GAAP combined ratio increased to 108.2%
for the nine months ended September 30, 2000 compared to a ratio of 101.2% for
the same period in 1999. The GAAP combined ratio represents the ratio of loss,
loss adjustment, acquisition, and other underwriting expenses incurred to
premiums earned.
Analysis of Investment Operations
Net revenue from investment operations for the third quarter of 2000 increased
15.4% to $18,986,285 from $16,449,582 in the third quarter of 1999. This growth
was primarily the result of a $1,565,336 increase in equity in earnings of
limited partnerships combined with a $1,269,220 increase in net investment
income. Earnings recognized from the Company's 21.6% ownership of Erie Family
Life Insurance Company declined slightly to $1,303,442 in the third quarter of
2000 from $1,456,208 recorded in the third quarter of 1999.
Net revenue from investment operations for the nine months ended September 30,
2000 increased 24.8% to $59,159,393 from $47,397,211 for the same period in
1999. This increase resulted from a $3,665,001 increase in net investment
income, a $4,074,858 increase in net realized gains on investments and a
$3,823,349 increase in equity in earnings of limited partnerships.
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
September 30, 2000, the Company's investment portfolio of investment-grade
bonds, common stock and preferred stock, all of which are readily marketable,
totaled $723 million, or 43.2%, of total assets. These investments provide the
liquidity the Company requires to meet demands on its funds.
At September 30, 2000, 91.0% of total investments consist of fixed maturities
and equity securities, while mortgage loans and limited partnerships,
represented 9.0% of total investments at that date.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Mortgage loans on real estate and limited partnerships have the potential for
higher returns, but also carry more risk, including less liquidity and greater
uncertainty in the rate of return. The Company has not held or issued derivative
financial instruments.
The Company's investments are subject to certain risks, including interest rate
and price risk. The Company monitors exposure to interest rate risk through
periodic reviews of asset and liability positions.
Estimates of cash flows and the impact of interest rate fluctuations relating to
the investment portfolio are monitored regularly. Price risk is defined as the
potential loss in estimated fair value resulting from an adverse change in
prices. The Company's objective is to earn competitive relative returns by
investing in a diverse portfolio of high-quality, liquid securities. Portfolio
characteristics are analyzed regularly and market risk is actively managed
through a variety of techniques. Portfolio holdings are diversified across
industries and concentrations in any one company or industry are limited by
parameters established by management and the Company's Board of Directors.
At September 30, 2000, the Company's five largest investments in corporate debt
securities totaled $25.5 million, none of which individually exceeded $5.5
million. These investments had a market value of $25.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company's ability to secure enough cash to meet
its contractual obligations and operating needs. 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.
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 nine months ended
September 30, 2000 and 1999, were $101,075,731 and $105,966,170, respectively.
Dividends declared and paid to shareholders for the quarter ended September 30,
2000 and 1999, totaled $8,787,056 and $7,919,212, respectively. Dividends
declared and paid for the nine months ended September 30, 2000 were $26,447,305
compared to $24,129,363 for the same period ended in 1999. 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 September 30, 2000 of
$12,605,207 and at December 31, 1999 of $11,805,286. The primary reason for the
increase in the deferred tax liability is an increase in unrealized gains in
2000 of $8.1 million resulting in an increased deferred tax liability of $2.8
million.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, 1999, the Exchange, its subsidiary
Flagship City Insurance Company and the Company's property/casualty insurance
subsidiaries' all had Risk Based Capital levels substantially in excess of
levels that would require regulatory action.
At September 30, 2000 and December 31, 1999, the Company's receivables from its
affiliates totaled $525,976,885 and $470,968,903, respectively. These
receivables, primarily due from the Exchange, as a result of the management fee,
expense reimbursements and the intercompany reinsurance pool, represent a
significant concentration of credit risk.
Factors That May Effect Future Results
On August 10, 2000 the Erie Insurance Group filed for a rate increase in it's
private passenger auto insurance rates in Pennsylvania beginning January 1,
2001. This increase was requested to offset increasing loss costs in
Pennsylvania private passenger automobile. The overall effect of this filing is
an estimated $10.2 million, or 1.2% increase in premium in 2001. This rate
increase will provide an additional $2.5 million in annual gross revenue from
management operations, assuming no change in the current management fee rate.
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) $10 million and (2) 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 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. In
September 2000 the Company received notice that a qualifying estate wishes to
exercise its redemption rights pursuant to the Company's Redemption Plan. In
accordance with the terms of the Redemption Plan, the Company is currently
preparing a fair market valuation of the block of stock presented to the Company
by the estate. The Company estimates the repurchase of shares from the estate,
pursuant to the redemption plan, will amount to approximately $30 million. Any
payment in redemption of the shares will reduce the redemption amount. As of
September 30, 2000, 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. At its regular quarterly meeting on
March 7, 2000, the Board announced expanded authorization for share repurchases
up to an additional $50 million of its outstanding Class A common stock through
December 31, 2002. During the third quarter of 2000, 226,181 shares were
repurchased at a total cost of $6,867,918 or an average price of $30.36. The
Company repurchased 728,888 shares at a total cost of $21,835,828 or an average
price of $29.96 during 2000.
19
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk is primarily related to fluctuations in
prices and interest rates. Quantitative and qualitative disclosures about market
risk resulting from changes in prices and interest rates are included in Item
7A. in the Company's 1999 Annual Report on Form 10-K. There have been no
material changes in such risks or the Company's periodic reviews of asset and
liability positions during the nine months ended September 30, 2000. The
information contained in the Investments section of Management's Discussion and
Analysis of Financial Condition and Results of Operations is incorporated herein
by reference.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995: Certain forward-looking statements contained herein involve risks and
uncertainties. Many factors could cause future results to differ materially from
those discussed. Examples of such factors include variations in catastrophe
losses due to changes in weather patterns or other natural causes; changes in
insurance regulations or legislation that disadvantage the members of the Group
in the marketplace and recession, economic conditions or stock market changes
affecting pricing or demand for insurance products or ability to generate
investment income. Growth and profitability have been and will be potentially
materially affected by these and other factors.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 24, 2000, the Court issued a preliminary injunction allowing the
nominations of candidates for director in addition to those recommended by the
Nominating Committee. Reference is made to Item 4 of the Company's Form 10-Q
Report for the quarter ended June 30, 2000 for the names of the persons elected
as directors. Reference is made to the description contained under this caption
in the Company's Form 10-Q Report for the quarter ended June 30, 2000. There
have been no material developments in the legal proceedings since the grant of
the preliminary injunction.
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 exhibits or reports on Form 8-K during the three
month period ended September 30, 2000.
Item 11. Statement Regarding Computation of Per Share Earnings:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- -----------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Class A weighed average common shares
outstanding (stated value $.0292) 64,502,951 65,954,329 64,723,967 66,412,876
Conversion of Class B shares to class A
shares (One share of Class B for
2,400 shares of Class A) 7,368,000 7,368,000 7,368,000 7,368,000
------------ ------------ ------------ ------------
Total weighted average shares 71,870,951 73,322,329 72,091,967 73,780,876
============ ============ ============ ============
Net income $ 41,192,193 $ 38,424,589 $119,895,654 $111,057,129
============ ============ ============ ============
Net income per share $ .57 $ .52 $ 1.66 $ 1.51
============ ============ ============ ============
</TABLE>
21
<PAGE>
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: October 19, 2000
\s\ Stephen A. Milne
Stephen A. Milne, President & CEO
\s\ Philip A. Garcia
Philip A. Garcia,
Executive Vice President & CFO
