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 March 31, 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-- 64,778,751 shares as of April 19,
2000.
Class B Common Stock, no par value, with a stated value of
$70 per share-- 3,070 shares as April 19, 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--March 31, 2000 and
December 31, 1999
Consolidated Statements of Operations--Three months ended March 31,
2000 and 1999
Consolidated Statements of Comprehensive Income--Three months ended
March 31, 2000 and 1999
Consolidated Statements of Cash Flows--Three months ended March 31,
2000 and 1999
Notes to Consolidated Financial Statements--March 31, 2000
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>
(In thousands)
March 31, December 31,
ASSETS 2000 1999
----------------------- ----------------------
(Unaudited)
<S> <C> <C>
INVESTMENTS
Fixed maturities at fair value
(amortized cost of $500,850 and
$489,394, respectively) $ 499,481 $ 485,522
Equity securities (cost of $174,014 and
$171,495, respectively) 222,331 215,383
Real estate mortgage loans 6,694 8,230
Other invested assets 49,225 39,116
---------------------- ----------------------
Total investments $ 777,731 $ 748,251
Cash and cash equivalents 24,437 24,214
Accrued investment income 9,660 7,998
Premiums receivable from Policyholders 140,306 139,941
Prepaid federal income tax 0 2,975
Reinsurance recoverable from Erie Insurance
Exchange 383,713 365,217
Note receivable from Erie Family Life
Insurance Company 15,000 15,000
Other receivables from Erie Insurance
Exchange and affiliates 117,777 105,752
Reinsurance recoverable non-affiliates 834 912
Deferred policy acquisition costs 11,486 11,405
Property and equipment 14,721 15,261
Equity in Erie Family Life Insurance Company 40,879 37,007
Other assets 43,403 43,934
---------------------- ----------------------
Total assets $ 1,579,947 $ 1,517,867
====================== ======================
(Continued)
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
3
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(In thousands)
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
---------------------- ----------------------
(Unaudited)
<S> <C> <C>
LIABILITIES
Unpaid losses and loss adjustment expenses $ 453,775 $ 432,895
Unearned premiums 237,997 236,525
Commissions payable and accrued 82,656 92,874
Accounts payable and accrued expenses 23,440 24,187
Deferred income taxes 17,491 11,805
Federal income taxes payable 13,961 0
Dividends payable 8,807 8,853
Employee benefit obligations 13,650 13,129
---------------------- ----------------------
Total liabilities $ 851,777 $ 820,268
---------------------- ----------------------
SHAREHOLDERS' EQUITY
Capital Stock
Class A common, stated value $.0292 per share;
authorized 74,996,930 shares; 67,032,000 shares
issued and 64,778,751 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 40,433 26,581
Retained earnings 742,726 715,348
---------------------- ----------------------
Total contributed capital and retained earnings $ 793,159 $ 751,929
Treasury stock, at cost - 2,253,249 shares repurchased
through March 31, 2000 and 1,900,499 shares repurchased
through December 31, 1999 ( 64,989) ( 54,330)
--------------------- ---------------------
Total shareholders' equity $ 728,170 $ 697,599
---------------------- ----------------------
Total liabilities and
shareholders' equity $ 1,579,947 $ 1,517,867
====================== ======================
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
4
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------------ ------------------------
(In thousands, except per share data)
<S> <C> <C>
MANAGEMENT OPERATIONS:
Management fee revenue $ 129,099 $ 121,834
Service agreement revenue 5,233 3,730
------------------------ ------------------------
Total revenue from management operations 134,332 125,564
Cost of management operations 97,714 91,197
------------------------ ------------------------
Net revenue from
management operations $ 36,618 $ 34,367
------------------------ ------------------------
INSURANCE UNDERWRITING OPERATIONS:
Premiums earned $ 29,891 $ 28,607
Losses and loss adjustment expenses incurred 24,663 21,391
Policy acquisition and other underwriting
expenses 8,431 7,823
------------------------ ------------------------
Total losses and expenses 33,094 29,214
------------------------ ------------------------
Underwriting loss ($ 3,203) ($ 607)
------------------------ ------------------------
INVESTMENT OPERATIONS:
Equity in earnings of Erie Family
Life Insurance Company $ 1,407 $ 1,056
Net investment income 12,603 10,465
Net realized gain on investments 5,505 3,249
------------------------ ------------------------
Net revenue from investment operations 19,515 14,770
------------------------ ------------------------
Income before income taxes 52,930 48,530
Provision for income taxes 16,745 15,122
------------------------ ------------------------
Net income $ 36,185 $ 33,408
======================== ========================
Net income per share $ .50 $ 0.45
======================== ========================
Weighted average shares outstanding (Note B) 72,300 74,353
Dividends declared per share:
Class A non-voting common $ .135 $ 0.12
------------------------ ------------------------
Class B common $ 20.25 $ 18.00
------------------------ ------------------------
<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 Three Months Ended
March 31, 2000 March 31, 1999
----------------------- ------------------------
(In thousands)
<S> <C> <C>
Net income $ 36,185 $ 33,408
------------------------ ------------------------
Unrealized gains (losses) on securities:
Unrealized holding gains arising during period 26,815 924
Less: reclassification adjustment for
gains included in net income 5,505 3,249
------------------------ ------------------------
Net unrealized holding gains (losses)
arising during period $ 21,310 ($ 2,325)
Income tax (expense) benefit related to
unrealized gains or losses ( 7,459) 814
------------------------ ------------------------
Other comprehensive income (loss), net of tax $ 13,851 ($ 1,511)
------------------------ ------------------------
Comprehensive income $ 50,036 $ 31,897
======================== ========================
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
6
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 36,185 $ 33,408
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 579 524
Deferred income tax (benefit) expense ( 244) 454
Amortization of deferred policy acquisition costs 5,701 5,491
Realized gain on investments ( 5,505) ( 3,249)
Net amortization of bond premium 6 32
Undistributed earnings of Erie Family Life ( 1,039) ( 749)
Deferred compensation 332 170
Increase in accrued investment income ( 1,662) ( 1,831)
Increase in receivables ( 30,808) ( 16,489)
Policy acquisition costs deferred ( 5,782) ( 5,487)
Decrease (increase) in prepaid expenses and other assets 520 ( 3,983)
(Increase) decrease in accounts payable and
accrued expenses ( 558) 11,816
Decrease in commissions payable and accrued ( 10,218) ( 6,586)
Increase in income taxes payable 16,936 14,604
Increase in loss reserves 20,880 14,884
Increase (decrease) in unearned premiums 1,472 ( 4,256)
------------------ -----------------
Net cash provided by operating activities $ 26,795 $ 38,753
CASH FLOWS FROM INVESTING ACTIVITIES
Net prchase of investments (Note C) ( 7,032) ( 34,536)
Purchase of property and equipment 0 ( 295)
Purchase of computer software ( 39) ( 1,000)
Loans to agents ( 419) 1,265
Collections on agent loans 430 ( 700)
------------------ ----------------
Net cash used in investing activities ($ 7,060) ($ 35,266)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders ($ 8,853) ($ 8,099)
Treasury stock ( 10,659) ( 12,782)
------------------- ------------------
Net cash used in financing activities ($ 19,512) ($ 20,881)
------------------- ------------------
Net increase (decrease) in cash and cash equivalents 223 ( 17,394)
Cash and cash equivalents at beginning of period 24,214 53,580
------------------- ------------------
Cash and cash equivalents at end of period $ 24,437 $ 36,186
=================== ==================
Supplemental disclosures of cash flow information:
Cash paid during the three months ended March 31, 2000 and 1999 for income taxes
was $48 and $61 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.
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
three-month period ended March 31, 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.
NOTE B -- EARNINGS PER SHARE
Earnings per share is based on the weighted average number of Class A shares
outstanding (64,932,010 in 2000, 66,985,142 in 1999), 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 72,300,010 for the quarter ended March 31, 2000 and
74,353,142 for the same period a year ago.
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) (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>
March 31, 2000
Fixed maturities:
- ----------------
U.S. treasuries & government
agencies $ 11,219 $ 193 $ 119 $ 11,293
States & political subdivisions 54,107 1,520 496 55,131
Special revenue 123,138 2,805 640 125,303
Public utilities 19,363 0 820 18,543
U.S. industrial & miscellaneous 245,058 1,944 6,248 240,754
Foreign 23,593 128 865 22,856
------------- ------------ ------------- -------------
Total bonds $ 476,478 $ 6,590 $ 9,188 $ 473,880
Redeemable preferred stock 24,372 1,680 451 25,601
------------- ------------ ------------- -------------
Total fixed maturities $ 500,850 $ 8,270 $ 9,639 $ 499,481
-------------- ------------ ------------- -------------
Equity securities:
- -----------------
Common stock:
U.S. banks, trusts &
insurance companies $ 3,056 $ 28 $ 242 $ 2,842
U.S. industrial &
miscellaneous 58,186 58,071 3,859 112,398
Foreign industrial &
miscellaneous 4,911 801 820 4,892
Non-redeemable
preferred stock:
U.S. banks, trusts &
insurance companies 24,231 104 1,688 22,647
U.S. industrial &
miscellaneous 54,175 1,304 3,918 51,561
Foreign industrial &
miscellaneous 29,455 191 1,655 27,991
------------- ------------ ------------- -------------
Total equity securities $ 174,014 $ 60,499 $ 12,182 $ 222,331
-------------- ------------ ------------- -------------
Total available-for-sale
securities $ 674,864 $ 68,769 $ 21,821 $ 721,812
============== ============ ============= =============
</TABLE>
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (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) (Continued)
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.
Other invested assets include investments in U.S. domestic and foreign private
equity and real estate limited partnerships. The private equity limited
partnerships are carried at estimated market values. Real estate limited
partnerships are recorded using the equity method, which approximates the
Company's share of the carrying value of the real estate investments held by the
partnerships.
The following is detail of net purchase of investments as presented in the
Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
---------------------- ------------------
<S> <C> <C>
Purchase of investments:
Fixed maturities ($ 38,598) ($ 46,247)
Equity securities ( 10,517) ( 19,727)
Mortgage loans 0 ( 66)
Other invested assets ( 1,166) ( 1,960)
---------------- ----------------
Total purchases ($ 50,281) ($ 68,000)
---------------- ----------------
Sales/maturities of investments:
Sales of maturities 13,426 13,452
Calls of maturities 14,147 6,405
Equity securities 12,988 13,360
Mortgage loans 1,537 28
Other invested assets 1,151 219
---------------- ----------------
Total sales/maturities $ 43,249 $ 33,464
---------------- ----------------
Net purchase of investments ($ 7,032) ($ 34,536)
================ ================
</TABLE>
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 represents summarized financial statement information for EFL:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
-------------------------- ---------------------------
<S> <C> <C>
Revenues $ 28,760 $ 24,276
Benefits and expenses 18,812 16,843
-------------------------- ---------------------------
Income before income taxes 9,948 7,433
Income taxes 3,442 2,551
-------------------------- ---------------------------
Net income $ 6,506 $ 4,882
========================== ===========================
Comprehensive income (loss) $ 19,606 ($ 2,086)
========================== ===========================
Dividends paid to shareholders $ 1,559 $ 1,418
========================== ===========================
Net unrealized appreciation on investment
securities at March 31, net of deferred taxes $ 10,755 $ 19,204
========================== ===========================
</TABLE>
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
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 accrued $242 in the
first quarters of 2000 and 1999 to be paid to the Company.
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. 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.
NOTE G -- RECLASSIFICATIONS
Certain amounts as 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 Exchange which constitutes its management operations.
The Company's property/casualty insurance operations arise by virtue of a
pooling arrangement between its subsidiaries and the Exchange. The Company also
has a 21.63% equity interest in EFL which comprises its life insurance
operations segment. Summarized financial information for these operations is
presented below. Income amounts include each industry segment's share of
investment income and realized gain or loss on investments which are reported in
the investment operations segment on the Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
<S> <C> <C>
Revenue:
Management operations $ 148,335 $ 135,470
Property/casualty insurance operations 34,189 32,752
Life insurance operations 1,407 1,056
--------------- --------------
Total revenue $ 183,931 $ 169,278
=============== ==============
Income before income taxes:
Management operations $ 50,428 $ 43,936
Property/casualty insurance operations 1,095 3,538
Life insurance operations 1,407 1,056
--------------- --------------
Total income before income taxes $ 52,930 $ 48,530
=============== ==============
Net income:
Management operations $ 33,694 $ 29,779
Property/casualty insurance operations 1,157 2,625
Life insurance operations 1,334 1,004
--------------- --------------
Net income $ 36,185 $ 33,408
=============== ==============
</TABLE>
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
As of As of
March 31, 2000 December 31, 1999
<S> <C> <C>
Assets:
Management operations $ 759,485 $ 723,377
Property/casualty insurance operations 779,583 757,483
Life insurance operations 40,879 37,007
--------------- --------------
Total assets $ 1,579,947 $ 1,517,867
=============== ==============
</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 is the eleventh state
that will be served by the Group, in addition to the District of Colombia. In
Wisconsin, the Group will be writing all lines of insurance it currently offers,
including auto, home, business, life and annuities.
13
<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 13, since they
contain important information that is helpful in evaluating the Company's
operating results and financial condition.
OPERATING RESULTS
Financial Overview
Consolidated net income increased by 8.3% for the first quarter of 2000 to
$36,184,976, or $.50 per share, from $33,407,558 or $.45 per share, for the
first quarter of 1999. Earnings per share, which were positively impacted by the
Company's stock repurchase program, rose by 11.1% for the first quarter of 2000.
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 6.0% to $129,098,508 for the three months ended March 31, 2000 from
$121,834,206 for the three months ended March 31, 1999. The management fee rate
charged in the first quarters of 2000 and 1999 was 25%. 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, upon which
management fee is based, grew by $29,057,200, or 6.0%, to $516,394,026 for the
first quarter of 2000 from $487,336,826 in the first quarter of 1999. Policy
growth for 2000 is strong as policy retention rates and new policy growth
improve.
Policies in force increased 5.5 percent to 2,725,379 at March 31, 2000 from
2,582,765 at March 31, 1999. Policy retention (the percentage of current
Policyholders who have renewed their policies) was 91.8 percent and 90.8 percent
for the quarters ended March 31, 2000 and 1999, respectively, for private
passenger automobile and 90.4 percent and 89.7 percent for the quarters ended
March 31, 2000 and 1999, respectively, overall for all lines of business.
Service agreement revenue grew by $1,503,810 to $5,232,919 in the first quarter
of 2000 from $3,729,109 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 $2,303,055 and $1,699,171 for the quarters ended
March 31, 2000 and 1999 respectively. 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 7.0 percent service fee based on premiums from
this business. These fees totaled $2,929,864 and $2,029,938 for the three months
ended March 31, 2000 and 1999 respectively, on net voluntary assumed reinsurance
premiums of $41,855,200 and $28,999,111 for the first quarters of 2000 and 1999,
respectively.
The cost of management operations increased 7.1% for the first quarter of 2000
to $97,713,545 from $91,196,741 during the first quarter of 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 paid to independent Agents on premiums collected 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
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
direct business written and serviced by the independent Agent within the Erie
Insurance Group of companies.
Commission costs totaled $65,816,070 for the first quarter of 2000, an 8.5%
increase over the $60,634,972 reported in the first quarter of 1999. Commission
costs grew faster than the rate of growth in written premiums due to increased
provisions for agent contingency awards and an increase in the average
commission rate.
The cost of management operations excluding commission costs, increased 4.4% for
the three months ended March 31, 2000 to $31,897,475 from $30,561,769 recorded
in the first quarter of 1999. Personnel costs, including salaries, employee
benefits, and payroll taxes, are the second largest component in cost of
operations. The Company's personnel costs totaled $19,478,249 for the three
month period ended March 31, 2000, compared to $17,370,497 for the same period
in 1999, an increase of 12.1%. Personnel costs increased in the first quarter
2000 due to staffing increases, employee pay rate increases, combined with
increases in both medical and pharmaceutical employee benefit costs from
increased claims experience and enrollment levels when compared with the same
period in 1999.
Net revenue from the Company's management operations increased 6.6% to
$36,617,882 for the three months ended March 31, 2000 from $34,366,574 for the
same period in 1999. The gross margin from management operations (net revenue
divided by total revenue), of 27.3% in the first quarter of 2000, was slightly
less than the gross margin of 27.4% reported in the first quarter of 1999.
Analysis of Insurance Underwriting Operations
The insurance underwriting operations on 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 first quarter of 2000 when compared to the same period in 1999.
Premiums earned increased 4.5 percent to $29,891,067 for the first quarter of
2000 compared to earned premiums of $28,606,923 for the same period in 1999.
Total losses and expenses increased 13.3 percent from $29,214,269 in the first
quarter of 1999 to $33,093,981 in the first quarter of 2000. The result of the
growth in premiums earned combined with the increase in loss and related
expenses generated an underwriting loss of $3,202,914 for the first quarter of
2000 compared to a loss of $607,346 for the first quarter of 1999. Additional
development of losses from catastrophic storms that devastated Europe late in
December added about $1.5 million in losses in the first quarter of 2000. These
losses were attributable to the Erie Insurance Group's reinsurance operations.
The GAAP combined ratio for the Company's property/casualty insurance operations
was 110.7% for the three months ended March 31, 2000 compared to a ratio of
102.1% 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 first quarter of 2000 increased
32.1% to $19,514,795 from $14,770,346 in the first quarter of 1999. This growth
was primarily the result of a $2,255,660 increase in net realized capital gains
on investments combined with a $2,137,356 increase in net investment income.
Earnings recognized from the Company's 21.6% ownership of Erie Family Life
Insurance Company increased to $1,407,340 in the first quarter of 2000 from
$1,055,907 recorded in the first quarter of 1999.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FINANCIAL CONDITION
Investments
The Company's investment strategy takes a long-term perspective emphasizing
investment quality, diversification and superior investment returns. Investments
are managed on a total return approach that focuses on current income and
capital appreciation. The Company's investment strategy also provides for
liquidity to meet the short- and long-term commitments of the Company. At March
31, 2000, the Company's investment portfolio of investment-grade bonds, common
stock and preferred stock, all of which are readily marketable, totaled $722
million, or 45.7%, of total assets. These investments provide the liquidity the
Company requires to meet demands on its funds.
At March 31, 2000, 92.8% of total investments consist of fixed maturities and
equity securities. Mortgage loans and other invested assets, including real
estate and private equity limited partnerships, represented 7.2% of total
investments at that date. Mortgage loans on real estate and other invested
assets 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 March 31, 2000, the Company's five largest investments in corporate debt
securities totaled $24.6 million, none of which individually exceeded $5.4
million. These investments had a market value of $24.1 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 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 three months ended March
31, 2000 and 1999, were $26,795,000 and $38,753,000, respectively.
Dividends declared and paid to shareholders in the three months ended March 31,
2000 and 1999, totaled $8,852,950 and $8,099,101, respectively. There are no
regulatory restrictions on the payment
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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.
Property and equipment at March 31, 2000 includes $4.1 million of capitalized
software expenditures related to the development of a new agency interface
system for independent Agents who represent the Company. A final decision has
not been made to date as to whether the Company will ultimately deploy this
software. Further testing and analysis taking place in the first half of 2000
will enable management to determine whether the deployment of this software will
achieve management's desired objectives. Additional costs, if the option to
deploy is selected, would be charged directly to operations. Such costs are
estimated at approximately $4 million.
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 March 31, 2000 of
$17,491,575 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 from
available-for-sale securities in 2000 of $16.9 million resulting in an increased
deferred tax liability of $5.9 million.
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 March 31, 2000 and December 31, 1999, the Company's receivables from its
affiliates totaled $501,489,989 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
concentration of credit risk.
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 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 28, 1998, the Board
approved an increase in the redemption amount of $17,791,624 to $58,797,036. On
April 27, 1999 the Board approved an increase in the redemption amount of
$19,190,347 to $77,987,383.
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
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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 first
quarter of 2000, 352,750 shares were repurchased at a total cost of $10,658,695
or an average price of $30.22. The Company repurchased 468,095 shares at a total
cost of $12,781,866 or an average price of $27.31 through the first quarter of
1999.
"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.
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. During the commencement
of legal proceedings, the trustees of the H.O. Hirt Trusts were F. William Hirt,
Chairman of the Board of the Company, 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 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, Mrs. Hagen, a director, filed duplicate petitions in the Court
seeking the removal of Mellon Bank N.A. ("Mellon") as a co-trustee of the H.O.
Hirt Trusts. The principal basis asserted by Mrs. Hagen at that time for the
removal of Mellon was the allegation that Mellon, as the owner of an insurance
agency, was a competitor of the Company. Among the relief requested by Mrs.
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. On the same date, the Court denied Mrs. 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 Mrs. 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, Mrs. 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 Mrs. Hagen's motion to quash the
Company's appeal. On October 19, 1998, the Superior Court of Pennsylvania denied
without prejudice Mrs. 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.
During June and July 1998, substantial discovery took place involving Mrs.
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 Mrs. 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
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<PAGE>
procedures pursuant to which a successor trustee would be appointed by the Court
or by agreement of Mrs. 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 matter 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, Mrs. 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
Mrs. Hagen.
In response to an interrogatory addressed to F. William Hirt as part of the
Mellon removal litigation, F. William Hirt indicated that he and his wife had
made a series of gifts of Class A Common Stock between 1994 and 1997 aggregating
$10.3 million (market value at time of gift) to certain Company personnel,
various other friends and a series of charitable institutions, in addition to
gifts to each of their two daughters. The recipients of the gifts who were
directors of the Company were:
<TABLE>
<CAPTION>
Market Value
Name Positions with the Company At Date of Gifts
---- -------------------------- ----------------
<S> <C> <C>
Seth E. Schofield Director (until October 22, 1998) $209,483
Stephen A. Milne President, Chief Executive Officer and a Director $340,097
John M. Petersen Retired Chief Executive Officer, Consultant and a Director $169,438
Jan R. Van Gorder Senior Executive Vice President, Secretary and General $ 84,719
Counsel and a Director
</TABLE>
On October 16, 1998, Mrs. Hagen, without any authorization from the Company or
the Board of Directors to do so, wrote to each of these recipients accusing them
of violating the Company's conflict of interest policies. Mrs. Hagen demanded
their resignation as directors of the Company not later than October 23, 1998
and threatened them with litigation and adverse publicity.
The following events thereafter occurred:
(i) Seth Schofield resigned as a director of the Company on October 22,
1998 and in his letter of resignation advised the remaining members of the Board
of Directors that his resignation was tendered not because he believed Mrs.
Hagen's allegations were meritorious, but because he believed he had become a
20
<PAGE>
lightning rod for certain actions undertaken by Mrs. Hagen and that his
resignation might provide a foundation for more harmonious Board interaction;
(ii) The other three directors retained individual counsel (David H.
Pittinsky of Ballard, Spahr, Andrews & Ingersoll LLP) who advised Mrs. Hagen's
counsel that her demands were unjustified, baseless and rejected; and
(iii) The Company held a special meeting of its Board of Directors on
October 27, 1998.
At the October 27, 1998 special meeting and at the December 16, 1998 regular
meeting, the Board of Directors took the following actions:
(i) Appointed a special committee (the "Special Committee") of the Board of
Directors (consisting of Harry H. Weil, Peter B. Bartlett, Samuel P. Black, III,
J. Ralph Borneman, Jr., Patricia A. Goldman and Edmund J. Mehl, who constituted
all of the members of the Board of Directors other than Mrs. Hagen, F. William
Hirt and the three remaining directors who received gifts) to investigate the
circumstances of the gifts, to determine whether the gifts violated any
applicable law, breached any applicable fiduciary duty, violated any
applicable policy of the Company, were consistent with generally accepted
principles of corporate governance, constituted significant improper payment
to such recipients and to determine, in the business judgment of the Special
Committee, whether any action should have been taken by the Company;
(ii) Ratified the action of the Company under the BCL and the Company's
Bylaws and upon receipt of appropriate undertakings, which were received, in
paying expenses incurred by the three individuals in retaining counsel to advise
them in connection with Mrs. Hagen's October 16, 1998 letter and in defending
any resulting legal proceedings; and
(iii) Constituted the members of the Special Committee as the Nominating
Committee of the Board of Directors for the purpose of nominating candidates for
director for election by the shareholders at the 1999 Annual Meeting.
At both the October 27, 1998 and the December 16, 1998 Board of Directors
meetings, Mrs. Hagen voted against each of the actions taken and stated her
opinion, for unspecified reasons, that none of the members of the Special
Committee was independent.
The Special Committee, consistent with Pennsylvania law and good corporate
governance, retained Covington & Burling, Washington, D.C., as independent legal
counsel and undertook a comprehensive investigation of the circumstances
involving the gifts. At a March 9, 1999 meeting of the Board of Directors, the
Special Committee presented its unanimous report, which contained both
conclusions and recommendations. The report concluded in summary that F. William
Hirt's gifts did not influence the recipients' actions with respect to matters
affecting the Company and that the evidence overwhelmingly established F.
William Hirt's and the gift recipients' integrity and good faith.
The Special Committee reached the following conclusions with respect to the
gifts made by Mr. and Mrs. Hirt to Stephen A. Milne, John M. Petersen, Jan R.
Van Gorder and Seth E. Schofield:
1. With the advice of counsel, the Special Committee concluded that it was
disinterested and capable of objective judgment under Pennsylvania law with
respect to the conclusions reached in the report of the Special Committee.
2. No violation of criminal law occurred.
3. No director had breached his fiduciary duty.
4. No Company policy or principle of corporate governance had been
violated.
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<PAGE>
5. F. William Hirt's intent in giving the gifts was generosity toward
particular friends. The Special Committee found no evidence that influencing
directors on any Board issue or vote was any part of Mr. Hirt's intent.
6. The intent of the directors who received gifts was entirely to accept a
gift they believed to be appropriate. The Special Committee found no evidence
that their (the directors who received gifts) votes on any issue were affected
by the gifts.
7. The Special Committee found no evidence to cast doubt on the integrity
or good faith of the directors who accepted gifts. Rather, the evidence showed
that all times the recipients believed their actions were in the best interests
of the Company and its shareholders.
The Special Committee stated its belief that the current discord on the Board of
Directors is destructive and that actions that are entirely innocent may appear
otherwise in such an atmosphere. The Special Committee also stated its belief
that the Board of Directors should maintain control over compensation for
directors and senior management, and that there is potential for very large
shareholders to affect that compensation in a company such as the Company. The
Special Committee, therefore, recommended that a Bylaw be adopted by the Board
of Directors that would prohibit a director or officer from accepting gifts of
other than nominal or insignificant value from, among others, other directors or
officers, requiring certain notification to the Board of Directors relating to
gifts and excluding gifts among members of an individual's family from the
proscription of the proposed Bylaw. After extensive discussion, the Board of
Directors at its March 9, 1999 meeting adopted without dissent the new Bylaw
proposed by the Special Committee.
On March 10, 1999, the Company filed the report of the Special Committee with
the Court. On March 11, 1999, the Court conducted a hearing on Mrs. Hagen's
petition following which, on March 17, 1999, Mrs. Hagen withdrew her petition.
On May 6, 1999, Bankers Trust filed a Petition For A Citation to Show Cause Why
Declaratory Relief Should Not Be Granted (the "Declaratory Judgment Petition").
The Declaratory Judgment Petition sought a determination whether Section
1405(c)(4) of the Pennsylvania Insurance Company Law provides the exclusive
means by which persons may be nominated and elected to the Company's Board of
Directors or whether shareholders independently have the power to nominate and
elect to the Board of Directors persons other than those nominated by the
Nominating Committee of the Board of Directors.
On May 25, 1999, the Company and F. William Hirt filed preliminary objections to
the Declaratory Judgment Petition, seeking its dismissal. On May 25, 1999, Mrs.
Hagen joined in support of the Declaratory Judgment Petition.
On June 16, 1999, Mrs. Hagen filed a motion seeking leave to amend her prior
response supporting the Declaratory Judgment Petition, so as to assert a claim
against the Company in the nature of a request for an injunction against certain
bylaw amendments adopted by the Company effective June 15, 1999 relative to the
nomination and election of directors.
On June 29, 1999, the Court conducted a hearing on the matter of the Declaratory
Judgment Petition. On July 15, 1999, the Court sustained the preliminary
objections which had been filed by the Company and by F. William Hirt and the
Court dismissed the Declaratory Judgment Petition and also dismissed Mrs.
Hagen's petition to amend.
On March 3, 1999, Bankers Trust filed with the Court its Petition to Accept
Resignation of Trustee (the "Bankers Trust Petition"), by which Bankers Trust
requested that the Court accept its resignation as corporate co-trustee of the
H.O. Hirt Trusts.
On May 7, 1999, the Court conducted a hearing on the Bankers Trust Petition, at
which time the Court issued an Order accepting the resignation of Bankers Trust
22
<PAGE>
pending the appointment by the Court of a successor corporate co-trustee.
On December 15, 1999 and on January 27, 2000, the Court conducted hearings on
the selection of a successor corporate trustee, including the presentation of
testimony by two successor trustee candidates.
On February 23, 2000, the Court entered an Order directing F. William Hirt and
Mrs. Hagen to finalize certain matters relating to a so-called "funding plan"
for the payment of a successor corporate co-trustee and to make application to
the Internal Revenue Service for a private letter ruling on the tax treatment of
the finalized "funding plan." Under its Order of February 23, 2000, the Court
indicated that upon the receipt of the private letter ruling from the Internal
Revenue Service, the Court would then select the successor corporate co-trustee.
On March 6, 2000, the Company filed a motion for reconsideration and/or
clarification of the Court's February 23, 2000 Order. The motion requested that
the Court (i) reconsider its schedule for designating a successor corporate
co-trustee due to the March 3, 1999 resignation and make that designation
presently and (ii) reconsider and/or clarify the Court's prohibition on the
Company's involvement in a finalized funding plan for payment of the corporate
co-trustees fees because several of the proposed funding alternatives could only
be implemented through actions to be undertaken by the Company. On March 8,
2000, F. William Hirt also filed a motion for reconsideration. On March 15,
2000, the Court denied the Company's and F. William Hirt's motions. On March 24,
2000, the Company and F. William Hirt filed appeals to the Superior Court of the
Court's February 23, 2000 Order.
On March 9, 2000, Mrs. Hagen delivered a complaint, a motion for a preliminary
injunction and a memorandum of law to the President Judge of the Court. On March
14, 2000, the President Judge established a hearing date of April 3, 2000 for
Mrs. Hagen's motion for a preliminary injunction and the hearing was held as
scheduled on April 3, 2000. The outcome of this litigation will determine
whether or not the Company will permit the nomination of the Hagen Nominees at
the Annual Meeting. If the Court either denies Mrs. Hagen's request for a
preliminary injunction or renders no decision as to Mrs. Hagen's request for a
preliminary injunction prior to the Annual Meeting, the Company will not permit
the nomination of the Hagen Nominees at the Annual Meeting, and the Company will
permit the nomination of the Hagen Nominees at the Annual Meeting only if the
Court grants Mrs. Hagen's request for a preliminary injunction prior to the
Annual Meeting. The Company will in any event permit Mrs. Hagen to make her
other proposals.
Mrs. Hagen's complaint seeks declaratory relief in the form of an order that (i)
the Nominating Committee of the Company's Board of Directors does not have the
exclusive right to nominate candidates for election as directors of the Company
by shareholders, (ii) any holder of Class B Common Stock may nominate candidates
for election as directors of the Company by shareholders and vote on those
nominees and (iii) Mrs. Hagen has the right to submit the Hagen Nominees to a
vote of Class B shareholders at the Annual Meeting.
Mrs. Hagen's motion for a preliminary injunction seeks a preliminary injunction
enjoining the Company from taking any action to prevent, delay or otherwise
hinder Mrs. Hagen from submitting the Hagen Nominees to a vote of Class B
shareholders at the Annual Meeting. Bankers Trust has joined in Mrs. Hagen's
complaint and motion.
On March 30, 2000, the Company filed responses to Mrs. Hagen's complaint and
motion for preliminary injunction as well as a memorandum of law in opposition
to Mrs. Hagen's motion for preliminary injunction. The responses set forth the
Company's belief that the facts and legal theories on which Mrs. Hagen's motion
for preliminary injunction and complaint are based are in error.
The Court held a hearing on Mrs. Hagen's motion on April 3, 2000. During the
cross-examination of Mrs. Hagen, Mrs. Hagen responded, inter alia, that she
could not remember who in addition to her lawyers, had assisted her in the
selection of the Hagen Nominees and that she did not personally know a majority
of the Hagen Nominees.
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<PAGE>
In a letter dated December 29, 1999, Mrs. Hagen submitted to the Company a
notice, purported by her to be in accordance with the requirements of Sections
2.07(a) and (b) of the Company's Bylaws, of three shareholder proposals in
respect of the Annual Meeting. Mrs. Hagen's letter identified her proposals as
follows:
"(1) I propose the following persons (the "Hagen Nominees") for
consideration by the Nominating Committee of the Company as part of its
slate of directors for election to the Board of Directors of the Company
(the "Board") at the Annual Meeting:
Kenneth B. Frank
Patricia Garrison-Corbin
Susan Hirt Hagen
Samuel P. Katz
Claude C. Lilly, III, Ph.D.; CLU, CPCU
Henry N. Nassau
Mitchell S. Rosenthal, M.D.
Perry M. Smith, Ph.D.; Major General, USAF (Ret.)
Charles D. Snelling
William H. Starbuck, Ph.D.
James M. Trapp
I believe the Hagen Nominees are appropriate candidates for election at the
Annual Meeting. Each Hagen Nominees (including myself) has agreed to be
included in the Nominating Committee's slate or any other slate only so
long as all the Hagen Nominees are included in such slate, and only so long
as the Hagen Nominees, if elected, would constitute a majority of the
Board.
"(2) If the Nominating Committee does not include the Hagen Nominees in its
slate of directors for election to the Board at the Annual Meeting, this
Notice constitutes my proposal to nominate the Hagen Nominees for election
as directors of the Company at the Annual Meeting. I will appear at the
Annual Meeting to nominate the Hagen Nominees for election to the Board.
"(3) If I am not permitted to nominate the Hagen Nominees for election at
the Annual Meeting, this Notice constitutes my proposal for submission to
the shareholders of the Company at the Annual Meeting (a) to remove all
directors elected at the Annual Meeting immediately following their
election; (b) to amend the Bylaws by deleting the first sentence of Section
3.02 and replacing it with a new first sentence, which shall read as
follows:
The Board of Directors shall consist of not less than seven (7), nor more
than sixteen (16), Directors (the exact number to be fixed from time by
resolution of the Board or by vote of the Shareholders at any duly
organized annual or special meeting of Shareholders), the majority of whom
shall be citizens and residents of the United States, each of whom shall be
at least eighteen (18) years of age, elected at the Annual Meeting of
Shareholders, to serve until the ensuing Annual Meeting and until a
successor is elected and qualified or until his or her earlier death,
resignation or removal.
"(c) to reduce and fix the number of directors on the Board to
eleven (11) directors; and
"(d) to nominate the Hagen Nominees for election as directors of
the Company to fill the vacancies on the Board. I will appear at
the Annual Meeting to present this proposal."
On March 9, 2000, Mrs. Hagen filed preliminary proxy materials with the SEC
regarding her proposed solicitation of proxies to vote for the Hagen Nominees
for director at the Annual Meeting in opposition to the candidates for director
nominated by the Nominating Committee. On March 15, 2000 and March 24, 2000,
Mrs. Hagen filed revised preliminary proxy material with the SEC.
24
<PAGE>
Mrs. Hagen's revised preliminary proxy material, in addition to describing the
Hagen Nominees for whom she proposes to solicit proxies for election as
director, describes her proposed solicitation of proxies for the following other
proposals in the event the Court has not reached a decision in favor of Mrs.
Hagen prior to the Annual Meeting: (i) removal of all of the directors of the
Company immediately following their election at the Annual Meeting; (ii)
amendment of the Company's Bylaws to allow the shareholders to fix the number of
members constituting the Company's Board of Directors; (iii) reduction of the
size of the Company's Board of Directors to 11 persons and (iv) nomination of
the Hagen Nominees for election as directors of the Company to fill the
vacancies that would exist in the Board of Directors if the Company's
shareholders were to vote to remove the directors they had just elected.
The Board of Directors intends to instruct its proxy holders to use their
discretionary authority to withhold authority for the election of the Hagen
Nominees, in the event it is judicially determined that the nomination of the
Hagen Nominees at the Annual Meeting is legally valid, and, in any event, to
vote against Mrs. Hagen's other proposals if she presents her other proposals at
the Annual Meeting. Each member of the Company's Board of Directors, with the
exception of Mrs. Hagen, individually recommends that shareholders vote against
the election of the Hagen Nominees, in the event it is judicially determined
that the nomination of the Hagen Nominees at the Annual Meeting is legally
valid, and, in any event, each of the other proposals of Mrs. Hagen for the
following reasons:
(i) The Nominating Committee, composed entirely of independent directors,
unanimously determined not to nominate any candidate proposed by Mrs. Hagen for
the reasons set forth under "Election of Directors," including the refusal of
Mrs. Hagen's proposed candidates to agree to interviews with the Nominating
Committee and the lack of independence of Mrs. Hagen's proposed candidates.
(ii) None of the director candidates proposed by Mrs. Hagen, other than
herself, has any experience as a director of an insurance company.
(iii) Several of the director candidates proposed by Mrs. Hagen would be
shortly ineligible to serve under the age limits established by the Company's
Bylaws.
(iv) The director candidates proposed by Mrs. Hagen are ineligible to serve
under the applicable Pennsylvania law because only candidates duly nominated by
the Nominating Committee are eligible for election as directors at the Annual
Meeting.
(v) The wholesale replacement of the existing members of the Company's
Board of Directors, under which the Company has achieved record results year
after year is likely to have a material adverse effect on the Company and
therefore adversely effect the value of the Company's Class A Common Stock and
Class B Common Stock and have a destablizing effect on the Company's management,
employees and agents.
(vi) The election of a Board of Directors beholden to a single person (Mrs.
Hagen) is likely to impact negatively the Company's competitive position and
make more difficult the retention of a number of the Company's important
relationships with employees, agents and policyholders.
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 March 31, 2000.
25
<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: April 19, 2000 \s\ Stephen A. Milne
Stephen A. Milne, President & CEO
\s\ Philip A. Garcia
Philip A. Garcia, Executive Vice President & CFO
26
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS FDS CONTAINS INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF
THE ERIE INDEMNITY COMPANY FOR THE QUARTER ENDED MARCH 31, 2000 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-31-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 499,481
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 222,331
<MORTGAGE> 6,694
<REAL-ESTATE> 0
<TOTAL-INVEST> 777,731
<CASH> 24,437
<RECOVER-REINSURE> 834
<DEFERRED-ACQUISITION> 11,486
<TOTAL-ASSETS> 1,579,947
<POLICY-LOSSES> 453,775
<UNEARNED-PREMIUMS> 237,997
<POLICY-OTHER> 0
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0
0
<COMMON> 2,170
<OTHER-SE> 790,989
<TOTAL-LIABILITY-AND-EQUITY> 1,579,947
29,891
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<EPS-BASIC> .50
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