FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
(NO FEE REQUIRED)
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[NO FEE REQUIRED]
For the transition period from to
Commission File Number 0-24000
ERIE INDEMNITY COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0466020
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 Erie Insurance Place, Erie, Pennsylvania 16530
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (814) 870-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, stated value $.0292 per share
Class B Common Stock, stated value $70.00 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock of nonaffiliates: There is no active
market for the Class B voting stock and no Class B voting stock has been sold in
the last year upon which a price could be established.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 64,847,751 Class A shares and
3,070 Class B shares of Common Stock outstanding on February 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1999 (the "Annual Report") are incorporated by
reference into Parts I, II and IV of this Form 10-K Report.
2. Portions of the Registrant's Proxy Statement relating to the Annual
Meeting of Shareholders to be held April 25, 2000 are incorporated by
reference into Parts I and III of this Form 10-K Report.
1
<PAGE>
INDEX
PART ITEM NUMBER AND CAPTION PAGE
-------- ----------------------- ----
I Item 1. Business 3
I Item 2. Properties 14
I Item 3. Legal Proceedings 14
I Item 4. Submission of Matters to a
Vote of Security Holders 14
II Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters 15
II Item 6. Selected Consolidated Financial Data 15
II Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16
II Item 7a. Quantitative and Qualitative Disclosure
about Market Risk 16
II Item 8. Financial Statements and Supplementary
Data 16
II Item 9. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosures 16
III Item 10. Directors and Executive Officers
of the Registrant 17
III Item 11. Executive Compensation 18
III Item 12. Security Ownership of Certain
Beneficial Owners and Management 18
III Item 13. Certain Relationships and Related
Transactions 19
IV Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 21
2
<PAGE>
PART I
Item 1. Business
Erie Indemnity Company (the "Company") is a Pennsylvania
corporation formed in 1925 to be the attorney-in-fact for Erie Insurance
Exchange (the "Exchange"), a Pennsylvania-domiciled reciprocal insurance
exchange. The Company's principal business activity consists of management of
the affairs of the Exchange with fees from the Exchange accounting for
approximately 74% of the Company's consolidated revenues. The Company also
participates in the property/casualty insurance business through its three
wholly owned subsidiaries, Erie Insurance Company ("Erie Insurance Co."), Erie
Insurance Company of New York ("Erie NY") and Erie Insurance Property and
Casualty Company ("Erie P&C") and through its management of the Flagship City
Insurance Company ("Flagship"), a subsidiary of the Exchange. The Company and
Exchange also own a 21.6% and 53.2% common stock interest, respectively, in Erie
Family Life Insurance Company ("EFL"), an affiliated life insurance company.
Together with the Exchange, the Company and its subsidiaries and affiliates
operate collectively under the name Erie Insurance Group(The ERIE).
The ERIE is a regional insurance group that underwrites a broad
line of personal and commercial coverages. Insurance products are marketed
primarily in the Mid-Atlantic and Northeast regions through approximately 6,100
independent agents comprising approximately 1,300 insurance agencies. The
property/casualty insurers managed by the Company are licensed to do business in
fifteen states and in the District of Columbia and at December 31, 1999,
operated in ten states and the District of Columbia. Branch offices are
maintained throughout the ten contiguous states in which the Company does
business.
As of December 31, 1999, the Company had 3,282 full-time
employees, of which 1,584 provide claims specific services exclusively for the
property/casualty insurance companies of The ERIE and 107 perform general
services exclusively for EFL. Both the Exchange and EFL reimburse the Company
monthly for the cost of these services. None of the Company's employees is
covered by a collective bargaining agreement. The Company believes that its
relationship with its employees is good.
History of The ERIE
The Exchange, which commenced operations in 1925, underwrites a
broad line of personal and commercial property and casualty insurance coverages.
The Erie Insurance Co. was organized in 1972 as a property/casualty insurance
company to supplement the lines of business of the Exchange. On December 3,
1991, the Company acquired the Erie Insurance Co. from the Exchange. Flagship
was organized in 1992 as a property/casualty insurance company to conduct the
Exchange's residual automobile market business. Erie P&C was organized in 1993
to conduct The ERIE's business in West Virginia and to write workers'
compensation insurance in Pennsylvania. Erie NY was purchased in 1994 to conduct
The ERIE's business in New York State together with Erie Insurance Co.
The Company's wholly-owned subsidiaries, Erie Insurance Company
and Erie Insurance Company of New York, participate in an intercompany pooling
arrangement with the Exchange. The pooling arrangement provides for the Exchange
to assume all premiums and losses, including related asset and liability
amounts, from all property/casualty affiliates of The ERIE. This pooling
arrangement further provides for Erie Insurance Company and Erie Insurance
Company of New York to share proportionately in the results of all of The ERIE's
property/casualty insurance operations. Erie Insurance Company's and Erie
Insurance Company of New York's proportionate share of the reinsurance pool is
5.0 percent and 0.5 percent, respectively.
3
<PAGE>
Information About Industry Segments
Reference is made to Note 14 of the Notes to the Consolidated
Financial Statements included in the Annual Report, page 48 for information as
to revenues, net income and identifiable assets attributable to the three
business segments (management operations, property/casualty insurance operations
and life insurance operations) in which the Company is engaged.
Management Operations
For services performed in its role as attorney-in-fact for the
Policyholders of the Exchange, the Company charges the Exchange a management fee
computed as a percentage of the affiliated assumed(Erie Insurance Co., Erie NY,
Erie P&C and Flagship) and direct premiums written by the Exchange. The
management fee is compensation for: (a) acting as attorney-in-fact for the
Exchange, (b) managing the business and affairs of the Exchange, and (c) paying
certain general administrative expenses, including sales commissions, salaries,
Employee benefits, taxes, rent, depreciation, data processing expenses and other
expenses not part of the settlement of losses or the management of investments.
The Company's Board of Directors may change the management fee at
its discretion. However, the maximum fee level which can be charged the
Exchange, is limited by the agreement between the Exchange and the Company (or
its property/casualty affiliates), to 25 percent of the affiliated assumed and
direct written premium. The Board considers several factors in determining the
management fee rate, including the relative financial position of the Exchange
and the Company and the long-term capital needs of the Exchange in order to
foster growth, competitiveness, and maintain its superior financial strength.
The management fee rate charged the Exchange was set at the
following rates:
January 1, 1997 to December 31, 1997 24.00 percent
January 1, 1998 to December 31, 1998 24.25 percent
January 1, 1999 to December 31, 1999 25.00 percent
The Board voted to maintain the 25 percent management fee rate for all of 2000.
All premiums collected, less the management fee paid to the
Company, are retained by the Exchange for the purpose of paying losses, loss
adjustment expenses, investment expenses and other miscellaneous expenses
including taxes, licenses and fees. The Company pays certain loss adjustment and
investment expenses on behalf of the Exchange and is reimbursed fully for these
expenses by the Exchange.
The Company receives a service agreement fee from the Exchange as
compensation for the management and administration of voluntary assumed
reinsurance business from non-affiliated insurers. The fee of 7% of voluntary
reinsurance premiums assumed from non-affiliated insurers is compensation for
accounting and operating expenses in connection with the administration of this
business.
The Company collects service charges from policyholders as
reimbursement for the costs incurred by the Company in providing extended
payment terms on policies written by the insurers managed by the Company. These
charges are included in service agreement revenue in the Consolidated Statements
of Operations.
4
<PAGE>
Property/Casualty Insurance Operations
Industry
One of the distinguishing features of the property/casualty
insurance industry in general is that its products are priced before its costs
are known, as premium rates are generally determined before losses are reported.
Current prices must be established from forecasts of the ultimate costs expected
to arise from exposures underwritten during the coverage period when the rates
are applied. This unique pricing environment affects the financial statements
primarily through the loss reserves. Changes in statutory, "regulatory" and case
law can significantly affect the liabilities associated with known risks after
the insurance contract is in place. Property/casualty insurance companies'
ability to increase prices in response to declines in profitability are limited
by the large number of competitors and the similarity of products offered, as
well as regulatory constraints.
The profitability of the property/casualty insurance business can
be influenced by many external factors some of which include rate competition,
the severity and frequency of claims, natural disasters, state regulation of
premium rates, and other areas of competition defaults of reinsurers, investment
market conditions, general business conditions, court decisions that define and
may expand the extent of coverage and the amount of compensation due for
injuries and losses.
Lines of Business
The property/casualty insurers managed by the Company underwrite a
broad range of insurance for risks of all sizes. In 1999, personal lines
comprised 76.1% of direct and affiliated assumed premium revenue while
commercial lines constituted the remaining 23.9%. The core products in the
personal lines are private passenger automobile (78.2%) and homeowners (20.6%)
while the core commercial lines consist principally of automobile (30.7%),
multi-peril (34.7%) and workers compensation (27.2%).
See "Selected Market and Geographic Information" contained on page
31 of the Annual Report for the Company's 5.5% share of direct and affiliated
assumed premiums written by jurisdiction and line of business in addition to
statutory loss and loss adjustment expense ratios by line of business for the
Company's wholly-owned subsidiaries.
Reinsurance
Reference is made to Note 12 of the Notes to Consolidated Financial
Statements contained in the Annual Report for the year ended December 31, 1999
pages 46 to 47 incorporated herein by reference for a complete discussion of
reinsurance transactions.
5
<PAGE>
Combined Ratios
The combined ratio is a standard industry measurement of the
results of property/casualty insurance underwriting operations. The statutory
combined ratio is the sum of the ratio of incurred losses and loss adjustment
expenses to net premiums earned ("loss ratio"), the ratio of underwriting
expenses incurred to net premiums written ("expense ratio") and, the ratio of
dividends to policyholders to net premiums earned ("dividend ratio"). The
generally accepted accounting principles ("GAAP") combined ratio is calculated
in the same manner except that it is based on GAAP reported amounts and the
denominator for each component is net premiums earned. A combined ratio under
100% generally indicates an underwriting profit; a combined ratio over 100%
generally indicates an underwriting loss. Investment income, federal income
taxes and other non-underwriting income or expense are not reflected in the
combined ratio. The profitability of The ERIE is a function of income and
expense from both its underwriting and investment operations.
The ratios shown in the table below for the Company's
property/casualty insurance subsidiaries Erie Insurance Co. and Erie NY, are
prepared in accordance with GAAP and with statutory accounting practices ("SAP")
prescribed or permitted by state insurance authorities.
<TABLE>
<CAPTION>
Combined Ratios
Year Ended December 31,
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
GAAP Combined Ratio 103.0% 99.5% 102.1%
===== ==== =====
Statutory operating ratios:
Loss ratio 74.6 70.4 74.1
Expense and dividend ratio 28.2 28.6 27.5
----- ----- -----
Statutory Combined Ratio 102.8% 99.0% 101.6%
===== ===== =====
</TABLE>
Catastrophe losses incurred from wind storms in Denmark and France through the
Company's reinsurance business, as well as losses incurred from Hurricane Floyd
through the Company's direct writings, contributed to the increased combined
ratio in 1999 compared to 1998. Loss cost severity-management programs
introduced by the Company, combined with mild weather conditions and a generally
favorable claims environment, led to the improved combined ratio in 1998, when
compared to 1997.
Seasonal Factors
The Company's management fee is earned when premiums are written.
Historically, due to policy renewal and sales patterns, writings are strongest
in the second and third quarters of the calendar year. While loss and loss
adjustment expenses are not entirely predictable, historically such costs have
been greater during the third and fourth quarters, influenced by the weather in
the geographic regions where the Company and affiliated property/casualty
insurers operate.
6
<PAGE>
Investment Operations
The Company's investment strategy takes a long-term perspective
emphasizing investment quality, diversification and superior investment returns
while also providing for liquidity to meet the short and long-term commitments
of the Company. Investments are managed on a total return approach that focuses
on current income and capital appreciation. The Company's investment portfolio,
at market value, increased to $748,250,917 at December 31, 1999, which
represents 49.3% of total assets. Investment income is affected by shifts in the
types of investments in the portfolio, changes in interest rates and other
factors. Net investment income, including net realized gains on investments, was
$58,730,615 in 1999, compared to $45,769,884 in 1998 and $38,747,247 in 1997.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations, on pages 22 through page 24 of the Annual Report for the year ended
December 31,1999 for additional discussion.
The Company's property/casualty insurance subsidiaries' investment
portfolio must comply with applicable laws and regulations which prescribe the
kind, quality and concentration of investments.
Included in investments is a 21.6% common stock interest in EFL
which is accounted for under the equity method of accounting. EFL, which was
organized in 1967 as a Pennsylvania-domiciled life insurance company, has an
A.M. Best rating of A+ (Superior). EFL is primarily engaged in the business of
underwriting and selling non-participating individual and group life insurance
policies, including universal life and individual and group annuity products in
nine states and the District of Columbia. At December 31, 1999, on a Generally
Accepted Accounting Principles (GAAP) basis, EFL had assets of $955 million and
shareholders' equity of $171 million. At December 31, 1999, of EFL's total
liabilities of $784 million, insurance and annuity reserves accounted for $741
million and a note payable to the Company amounted to $15 million. Of EFL's
investment portfolio of $817 million at December 31, 1999, available-for-sale
securities accounted for $771 million, real estate was $1 million, policy loans
were $7 million, mortgage loans accounted for $10 million and other invested
assets were $28 million.
Financial Ratings
Insurance companies are rated by rating agencies to provide
insurance consumers and investors with meaningful information on specific
insurance companies. Higher ratings generally indicate financial stability and a
strong ability to pay claims. The ratings are generally based upon factors
relevant to policyholders and are not directed toward return to investors.
The Exchange, Flagship, Erie Insurance Co., Erie P&C and Erie NY
all have current ratings of A++ (Superior) from A.M. Best with respect to their
financial strength and claims-paying ability. In evaluating an insurer's
financial and operating performance, A.M. Best reviews the insurer's
profitability, leverage and liquidity as well as the insurer's book of business,
the adequacy and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its loss reserves and the experience and
competency of its management. Management believes that this A.M. Best rating of
A++ (Superior) is an important factor in marketing The ERIE's property/casualty
insurance to its agents and customers.
7
<PAGE>
Competition
The property/casualty markets in which the Company operates are
highly competitive. Property/casualty insurers generally compete on the basis of
customer service, price, brand recognition, coverages offered, claim handling
ability, financial stability and geographic coverage. In addition, because the
insurance products of The ERIE are marketed exclusively through independent
insurance agents, most of which represent more than one company, The ERIE faces
competition to retain qualified independent agencies and commonly competes for
business within each agency.
Market competition bears directly on the price charged for
insurance products and services provided within the insurance regulatory
framework. Growth is driven by a company's ability to provide insurance services
at a price that is reasonable and acceptable to the customer. In addition, the
marketplace is affected by available capacity of the insurance industry. Surplus
expands and contracts primarily in conjunction with profit levels generated by
the industry. Growth is evaluated based on a company's ability to retain
existing customers and to attract new customers as well as movement in the
average premium charged by the Company.
Although the 1999 market cycle continued to be soft (a period of
heightened premium rate competition and depressed underwriting performance) the
industry remains strongly capitalized.
The Company, in managing the property/casualty insurers of The
ERIE, has followed several strategies which the management of the Company
believes have resulted in underwriting results which exceed those of the
property/casualty industry in general. First, the Company employs an
underwriting philosophy and product mix targeted to produce an Erie Insurance
Group-wide underwriting profit, i.e., a combined ratio of less than 100%,
through careful risk selection, adequate pricing and prompt fair claims
settlement practices. The careful selection of risks allows for lower claims
frequency and loss severity, thereby enabling insurance to be offered at
favorable prices. During 1998, pricing actions were initiated by The ERIE that
reduced private passenger automobile rates with general across-the-board
reductions as well as a new discount program for drivers with favorable
experience. The intent of the program was to help retain profitable automobile
customers who deserve a price break and enhance the attractiveness of The ERIE's
products to new customers. During 1999, the property/casualty insurers of The
Group experienced modest premium growth. The 1998 rate reductions resulted in a
decrease in premiums, which was offset by new policy growth and an increase in
policy retention rates. Policy growth in 1999 when compared to the same period
in 1998 was strong as policy retention rates and new policy growth improved.
Policies in force increased 5.1% to 2,689,849 at December 31, 1999 from
2,588,730 policies in force at December 31, 1998. Policy retention (the
percentage of current policyholders that have renewed their policy) was 91.6%
and 90.7% for the years ended December 31, 1999 and 1998, respectively, for
private passenger automobile policies. The overall policy retention rate for The
ERIE was 90.1% and 89.4% for the years ended December 31, 1999 and 1998,
respectively. On October 1, 1999, additional rate reductions of approximately
$25 million in private passenger automobile insurance became effective in
several jurisdictions. These reductions will be realized as policies renew in
the next 12 months.
Second, management focuses on consistently providing superior
service to policyholders and agents in both underwriting and claims handling.
8
<PAGE>
Third, the Company maintains a business model designed to provide
the advantages of localized marketing and claims servicing with the economies of
scale from centralized accounting, administrative, underwriting, investment,
information management and other support services.
Finally, a careful agent selection process exists in which The
ERIE seeks to be the lead underwriter with its agents in order to enhance the
agency relationship and the likelihood of receiving the most desirable
underwriting opportunities from its agents. The Company has ongoing, direct
communications with its agency force. An Agents Advisory Council forum shares
ideas, concerns and suggestions with the senior management of the ERIE annually
with the goal of improving communications and service. These efforts have
resulted in outstanding agency penetration and the ability to sustain long-term
agency partnerships.
Reserves
Loss reserves are established to account for the estimated
ultimate costs of loss and loss adjustment expenses for claims that have been
reported but not yet settled and claims that have been incurred but not yet
reported. The estimated loss reserve for reported claims is based primarily upon
a case-by-case evaluation of the type of risk involved and knowledge of the
circumstances surrounding each claim and the insurance policy provisions
relating to the type of loss. Estimates of reserves for unreported claims and
loss settlement expenses are determined on the basis of historical information
by line of insurance as adjusted to current conditions. Inflation is implicitly
provided for in the reserving function through analysis of costs, trends and
reviews of historical reserving results.
The process of estimating the liability for unpaid losses and loss
expenses is inherently judgmental and can be influenced by factors subject to
variation. Possible sources of variation include claim frequency and severity,
changing rates of inflation as well as changes in other economic conditions,
judicial trends and legislative changes. It is unlikely that future losses and
loss expenses will develop exactly as projected. The Company continually refines
reserves as experience develops and new information becomes known. The Company
reflects adjustments to reserves in the results of operations in the periods in
which the estimates are changed. With the exception of reserves relating to
certain workers compensation cases, which have been discounted at 2.5%, loss
reserves are not discounted.
For a reconciliation of beginning and ending property/casualty
unpaid losses and loss adjustment expense reserves for each of the last three
years, see Note 9 of the Notes to Consolidated Financial Statements contained in
the Annual Report page 45. Differences between reserves reported in the
Company's financial statements prepared on the basis of GAAP and financial
statements prepared on the basis of SAP are not material.
9
<PAGE>
The following table sets forth the development of net reserves for
unpaid losses and loss adjustment expenses from 1995 through 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Reserve for unpaid
losses and loss
adjustment expense................... $ 432,895 $ 426,165 $ 413,409 $ 389,425 $ 357,334
===========
Liability as of:
One year later....................... 414,348 412,189 395,308 351,684
------------
Two years later...................... 398,442 399,337 363,273
------------
Three years later.................... 389,107 374,050
------------
Four years later..................... 368,758
-------------
Cumulative (excess)
deficiency ........................ ( 11,817) ( 14,967) ( 318) 11,424
======== ========= ===== ========
Cumulative amount of liability paid through:
One year later...................... $ 145,385 $ 136,940 $ 142,425 $ 132,649
============ ============ ============ =============
Two years later..................... $ 211,522 $ 213,252 $ 200,171
============ ============ =============
Three years later................... $ 251,135 $ 236,758
============ =============
Four years later.................... $ 256,981
=============
</TABLE>
The top line shows the estimated liability that was recorded at the end of each
of the indicated years for all current and prior year unpaid losses and loss
expenses. The upper portion of the table shows re-estimations of the original
recorded reserve as of the end of each successive year. The estimate is
increased or decreased as payments are made and more information becomes known
about the severity of remaining unpaid claims. The lower portion of the table
shows the cumulative amount paid in succeeding years for losses incurred prior
to the Statement of Financial Position date. The cumulative deficiency or
redundancy represents the aggregate amount by which original estimates of
reserves as of that year-end have changed in subsequent years. A redundancy in
reserves means that reserves established in prior years exceeded actual losses
and loss adjustment expenses or were reevaluated at less than the originally
reserved amount. A deficiency in reserves means that the reserves established in
prior years were less than actual losses and loss adjustment expenses or were
reevaluated at more than the originally reserved amount.
Government Regulation
The property/casualty insurers managed by the Company are subject
to supervision and regulation in the states in which they transact business. The
primary purpose of such supervision and regulation is the protection of
policyholders. The extent of such regulation varies, but generally derives from
state statutes which delegate regulatory, supervisory and administrative
authority to state insurance departments. Accordingly, the authority of the
state insurance departments includes the establishment of standards of solvency
which must be met and maintained by insurers, the licensing to do business of
insurers and agents, the nature of the limitations on investments, the approval
of premium rates for property/casualty insurance, the provisions which insurers
must make for current losses and future liabilities, the deposit of securities
for the benefit of policyholders, the approval of policy forms, notice
requirements for the cancellation of policies and the approval of certain
changes in control. In addition, many states have enacted variations of
competitive rate-making laws which allow insurers to set certain premium rates
for certain classes of insurance without having to obtain the prior approval of
the state insurance
10
<PAGE>
department. State insurance departments also conduct periodic examinations of
the affairs of insurance companies and require the filing of annual and other
reports relating to the financial condition of insurance companies.
The Company's property/casualty insurance subsidiaries may be
required, under the solvency or guarantee laws of the various states in which
they are licensed, to pay assessments to fund policyholder losses or liabilities
of insolvent insurance companies. Depending on state law, insurers can be
assessed an amount that is generally equal to between 1% and 2% of premiums
written for the relevant lines of insurance in that state each year to pay the
claims of an insolvent insurer. Certain states permit these assessments, or a
portion thereof, to be recorded as an offset to future premium taxes. The
property/casualty insurers managed by the Company have made accruals for their
portion of assessments related to such insolvencies based upon the most current
information furnished by the guaranty associations. Reflected in the
Consolidated Statements of Operations were $30,915, $1,222,958 and $171,557 for
these insolvencies for the years ended December 31, 1999, 1998 and 1997,
respectively. Assessments in 1998 were affected by two large insurer
insolvencies in Pennsylvania and Ohio.
The Company's property/casualty insurers are also required to
participate in various involuntary insurance programs for automobile insurance,
as well as other property and casualty lines, in states in which such companies
operate. These involuntary programs provide various insurance coverages to
individuals or other entities that otherwise are unable to purchase such
coverage in the voluntary market. These programs include joint underwriting
associations, assigned risk plans, fair access to insurance requirements
("FAIR") plans, reinsurance facilities and windstorm plans. Legislation
establishing these programs generally provides for participation in proportion
to voluntary writings of related lines of business in that state. Generally,
state law requires participation in such programs as a condition to doing
business in that state. The loss ratio on insurance written under involuntary
programs has traditionally been greater than the loss ratio on insurance in the
voluntary market; however, the impact of these involuntary programs on the
property/casualty insurers managed by the Company has been immaterial.
Pennsylvania regulations limit the amount of dividends EFL can pay
its shareholders and limit the amount of dividends the Company's
property/casualty insurance subsidiaries can pay to the Company. The limitations
are fully described and reference is made herein to Note 13 of the Notes to
Consolidated Financial Statements contained in pages 47 to 48 in the Annual
Report for the year ended December 31, 1999, incorporated by reference.
11
<PAGE>
Financial Regulation
The Company's property/casualty insurance subsidiaries are
required to file financial statements prepared using SAP with state regulatory
authorities. The adjustments necessary to reconcile the Company's
property/casualty insurance subsidiaries' net income and shareholders' equity
prepared in accordance with SAP to net income and shareholders' equity prepared
in accordance with GAAP are as follows:
<TABLE>
<CAPTION>
Net Income
--------------------------------------------
Year Ended
--------------------------------------------
December 31,
1999 1998
------------- -------------
(in thousands)
<S> <C> <C>
SAP amounts.................................... $ 9,546 $ 14,663
Adjustments:
Deferred policy acquisition
costs....................................... 542 580
Deferred income taxes........................ 226 ( 1,855)
Federal alternative minimum
tax credit recoverable...................... 0 795
Salvage and subrogation...................... 158 12
Incurred premium adjustment.................. ( 542) ( 580)
Other........................................ ( 59) ( 3)
------------ ------------
GAAP amounts................................... $ 9,871 $ 13,612
============ ============
</TABLE>
<TABLE>
<CAPTION>
Shareholders' Equity
-------------------------------------------
As of December 31,
-------------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
SAP amounts.................................... $ 81,709 $ 74,348 $ 60,628
Adjustments:
Deferred policy acquisition
costs....................................... 11,405 10,863 10,284
Deferred income taxes........................ 3,350 4,143 5,998
Salvage and subrogation...................... 3,128 2,970 2,957
Statutory reserves........................... 2,656 2,619 1,823
Incurred premium adjustment.................. ( 11,405) ( 10,863) ( 10,284)
Unrealized gains net of
deferred taxes.............................. 38 7,653 6,697
Federal alternative minimum
tax credit recoverable...................... 0 ( 1,020) ( 1,815)
Other........................................ ( 3) 0 8
------------ ------------ ------------
GAAP amounts................................... $ 90,878 $ 90,713 $ 76,296
============ ============ ============
</TABLE>
12
<PAGE>
The National Association of Insurance Commissioners has adopted
risk-based capital (RBC) standards that require insurance companies to calculate
and, report statutory capital and surplus needs based on a formula measuring
underwriting, investment and other business risks inherent in an individual
company's operations. These RBC standards have not affected the operation of the
Company as each of the property/casualty insurance subsidiaries has statutory
capital and surplus in excess of RBC requirements.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995: Statements contained herein expressing the beliefs of management and, such
as those contained in the section titled "Investment Operations" and elsewhere
herein, the other statements which are not historical facts contained in this
report, are forward-looking statements that involve risks and uncertainties.
These risks and uncertainties include but are not limited to: pricing, product
development, geographic spread of risk, weather and weather-related events,
other types of catastrophic events, and technological difficulties and
advancements.
13
<PAGE>
Item 2. Properties
The Company and its subsidiaries, the Exchange and its subsidiary
and EFL share a corporate home office complex in Erie, Pennsylvania which
contains 358,202 square feet and is owned by the Exchange. At December 31, 1999
in addition to the Erie branch office, the Company also operated 20 additional
field offices in 10 states. Of these sites, 16 provide both agency support and
claims services and are referred to as "Branch Offices", while the remaining 4
provide only claims services and are considered "Claims Offices".
The Company owns three of its field offices. Three field offices
are owned by and leased from the Exchange. The annual rent expense incurred by
the Company for the field offices and home office complex totaled $10,319,616 in
1999. One office is owned by and leased from EFL at an annual rental in 1999 of
$302,676. The remaining 13 offices are leased from various unaffiliated parties
at an aggregate annual rental in 1999 of approximately $1,537,884. The Company
is reimbursed by its affiliates for a percentage of the rent and expenses for
office space used by its affiliates, which was approximately $670,000 in 1999.
Item 3. Legal Proceedings
Reference is made to "Legal Proceedings" on pages 31 through 41 of
the Company's proxy statement, incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
14
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Reference is made to "Market Price of and Dividends on the Common
Equity and Related Shareholder Matters" on page 51 of the Annual Report for the
year ended December 31, 1999, incorporated herein by reference, for information
regarding the high and low sales prices for the Company's stock and additional
information regarding such stock of the Company.
As of February 29, 2000, there were approximately 1,236 beneficial
shareholders of record of the Company's Class A non-voting common stock and 27
beneficial shareholders of record of the Company's Class B voting common stock.
Of the 64,847,751 shares of the Company's Class A common stock
outstanding as of February 29, 2000, approximately 22,682,956 shares are freely
transferable without restriction or further registration under the Securities
Act of 1933 (the Act), as amended unless purchased by affiliates of the Company
as that terms is defined in Rule 144 under the Act. The 42,164,795 remaining
outstanding shares of Class A common stock (the Restricted Shares) are held by
the Company's directors, executive officers and their affiliates and are
restricted securities that are eligible to be sold publicly pursuant to an
effective registration statement under the Act or in accordance with the
applicable exemption, including Rule 144, from the registration requirements
under the Act. The Company is unable to estimate the amount of Restricted Shares
that may be sold under Rule 144 since this amount will depend in part on the
price for the Class A common stock, the personal circumstances of the sellers
and other factors. Sales of a substantial number of Restricted Shares in the
public market, or the availability of such shares, could adversely affect the
price of the Class A common stock.
In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated for purposes of Rule 144) who beneficially
has owned Restricted Shares for at least two years, including affiliates of the
Company, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of: (1) one percent of the number of shares of
Class A common stock then outstanding, or (2) the average weekly trading volume
of the Class A common stock in The NASDAQ Stock MarketSM during the four
calendar weeks preceding the date on which notice of sale is filed with the SEC.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. However, a person (or persons whose shares are aggregated for purposes
of Rule 144) who is deemed not to have been an affiliate of the Company at any
time during the 90 days preceding a sale, and who beneficially has owned the
Restricted Shares for at least three years at the time of sale, would be
entitled to sell such shares under Rule 144(k) without regard to the aforesaid
limitations.
Item 6. Selected Consolidated Financial Data
Reference is made to "Selected Consolidated Financial Data" on
page 17 of the Annual Report for the year ended December 31, 1999, incorporated
herein by reference.
15
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 18 through 29 of the
Annual Report for the year ended December 31, 1999, incorporated herein by
reference.
Item 7a. Quantitative and Qualitative Disclosure about Market Risk
Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 24 of the Annual Report
for the year ended December 31, 1999, incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
Reference is made to the "Consolidated Financial Statements"
included on pages 33 through 36 and to the "Quarterly Results of Operations"
contained in the "Notes to Consolidated Financial Statements" on page 49 of the
Annual Report for the year ended December 31, 1999, incorporated herein by
reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosures
None.
16
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) The answer to this item, with respect to directors of the
Registrant, is incorporated by reference to pages 9 through 17 of the Company's
Proxy Statement relating to the Annual Meeting of Shareholders to be held on
April 25, 2000.
(b) Certain information as to the executive officers of the
Company is as follows:
<TABLE>
<CAPTION>
Age Principal Occupation for Past
as of Five Years and Positions with
Name 12/31/99 Erie Insurance Group
- --------------------------------------------------------------------------------
<S> <C> <C>
President & Chief Executive Officer
Stephen A. Milne 51 President, Chief Executive Officer and a Director of the Company, EFL and
Erie Insurance Co. since 1996 and President and Chief Executive Officer of
Flagship, Erie P&C and Erie NY since 1996; Executive Vice President - Insurance
Operations of the Company, Erie Insurance Co., Flagship, Erie P&C and
Erie NY 1994 - 1996. Director Flagship and Erie P&C 1996 - present; Director,
Erie NY 1994 - present.
Executive Vice Presidents
Jan R. Van Gorder, Esq. 52 Senior Executive Vice President, Secretary and General Counsel of the Company,
EFL and Erie Insurance Co. since 1990, and of Flagship and Erie P&C since
1992 and 1993, respectively, and of Erie NY since April 1994; Senior Vice
President, Secretary and General Counsel of the Company, EFL and Erie Insurance
Co. for more than five years prior thereto; Director, the Company, EFL, Erie
Insurance Co., Erie NY, Flagship and Erie P&C.
Philip A. Garcia 43 Executive Vice President and Chief Financial Officer since 1997; Senior
Vice President and Controller 1993 - 1997. Director, the Erie NY, Flagship and
Erie P&C.
Jeffrey A. Ludrof 40 Executive Vice President since June 16, 1999; Senior Vice President 1994 - 1999;
Regional Vice President 1993 - 1994.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Age Principal Occupation for Past
as of Five Years and Positions with
Name 12/31/99 Erie Insurance Group
- --------------------------------------------------------------------------------
<S> <C> <C>
Senior Vice Presidents
Eugene C. Connell 45 Senior Vice President since 1990.
Michael J. Krahe 46 Senior Vice President since 1999; Vice President 1994 - 1999.
Elaine A. Lamm 61 Senior Vice President since 1990.
George R. Lucore 49 Senior Vice President since March 1995;Regional Vice President 1993 - March 1995.
David B. Miller 45 Senior Vice President since August 1996; Independent Insurance Agent 1991 - 1996.
Timothy G. NeCastro 39 Senior Vice President and Controller since November 1997; Department Manager -
Internal Audit November 1996 - 1997.
James R. Roehm 51 Senior Vice President since 1991.
Barry P. Stiles 50 Senior Vice President since 1999; Vice President 1993 - 1999.
Michael S. Zavasky 47 Senior Vice President since April 1998; Vice President and Managing Director of
Reinsurance 1990 - April 1998.
Douglas F. Ziegler 49 Senior Vice President, Treasurer and Chief Investment Officer since 1993.
Regional Vice Presidents
B. Crawford Banks 63 Regional Vice President since 1993.
Douglas N. Fitzgerald 43 Regional Vice President since 1993.
Terry L. Hamman 45 Regional Vice President since May 1995; Assistant Vice President 1993 - May 1995.
</TABLE>
18
<PAGE>
Item 11. Executive Compensation
The answer to this item is incorporated by reference to pages 18
through 28 of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held on April 25, 2000, except for the Performance Graph,
which has not been incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The answer to this item is incorporated by reference to pages 4
through 8 of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held on April 25, 2000.
19
<PAGE>
Item 13. Certain Relationships and Related Transactions
Since the formation of the Company and the Exchange in 1925, the
Company, as the attorney-in-fact appointed by the policyholders of the Exchange,
has managed the property/casualty insurance operations of the Exchange. The
Company's operations are interrelated with the operations of the Exchange, and
the Company's results of operations are largely dependent on the success of the
Exchange.
The Company believes that its various transactions with the
Exchange and EFL, which are summarized herein, are fair and reasonable and have
been on terms no less favorable to the Company than the terms that approximate
those which could have been negotiated with an independent third party.
Pursuant to the Subscribers Agreement by which the Company serves
as attorney-in-fact for the Exchange, the Company's Board of Directors
establishes periodically an annual management fee for the Company's services as
attorney-in-fact which may not exceed 25% of the direct and affiliated assumed
written premiums of the Exchange. The Company's Board of Directors has the
ability to establish the percentage charged at its discretion within these
parameters. The management fee rate was 24% for all of 1997. Beginning January
1, 1998 through December 31, 1998, the management fee charged the Exchange was
24.25%. The Company's Board of Directors elected to change the management fee
rate to 25% beginning January 1, 1999 through December 31, 1999. The Board
elected to maintain the 25% management fee rate for all of 2000. The activities
performed by the Company as attorney-in-fact for the Exchange include insurance
underwriting, policy issuance, policy exchange and cancellation, processing of
invoices for premiums, oversight of reinsurance transactions, payment of
insurance commissions to insurance agents, compliance with rules and regulations
of supervisory authorities and monitoring of legal affairs. The Company is
obligated to conduct these activities at its own expense, and realizes profits
or losses depending upon whether its costs of providing such services is less
than the amount it receives from the Exchange, in which case the Company has a
profit from acting as attorney-in-fact, or greater, in which case the Company
has a loss from such activities. The Exchange, however, bears the financial
responsibility for the payment of insurance losses, loss adjustment expenses,
investment expenses, legal expenses, assessments, damages, licenses, fees,
establishment of reserves and taxes. For the three years ended December 31,
1999, 1998 and 1997, the management fees were $513,375,281, $489,147,394 and
$467,602,283, respectively.
Service agreement revenue totaled $15,440,862, $13,878,922 and
$7,026,373 for the years ended December 31, 1999, 1998 and 1997, respectively.
Service agreement revenue is derived from two sources. First, the Company
receives service charges from Policyholders for providing extended payment terms
on policies written by The ERIE. Service charges totaled $7,282,621, $7,163,895
and $2,011,181 for the years ended December 31, 1998, 1998 and 1997,
respectively. Second, service income is received from the Exchange as
compensation for the management and administration of voluntary assumed
reinsurance from non-affiliated insurers. The Company receives a 7.0% service
fee on the premiums from the business. These fees totaled $8,158,241, $6,715,026
and $5,015,192, respectively, on net voluntary assumed reinsurance premiums of
$116,546,294, $95,928,945 and $71,645,599 for the years ended December 31, 1999,
1998 and 1997, respectively.
The Company's subsidiaries, Erie Insurance Co. and Erie NY,
participate in a reinsurance pooling arrangement with the Exchange. Erie P&C and
Flagship reinsure 100% of their property/casualty insurance business with the
Exchange under the terms of quota share reinsurance treaties with the Exchange.
20
<PAGE>
The Company and the Exchange periodically purchase annuities from
EFL for use in connection with the structured settlement of insurance claims.
The Company's share of such purchases, through its subsidiaries, Erie Insurance
Co. and Erie NY, amounted to $1,282,172, $983,574 and $977,932 for the years
ended December 31, 1999, 1998 and 1997, respectively, and the reserves held by
EFL at December 31, 1999 for such annuities were approximately $8,245,620. In
addition, the Erie Insurance Group Retirement Plan for Employees has, from time
to time, purchased individual annuities from EFL for each retired vested
employee or beneficiary receiving benefits. Such purchases amounted to
$5,321,738, $6,413,460 and $1,992,060 for the years ended December 31, 1999,
1998 and 1997, respectively. The reserves held by EFL for all such annuities
were approximately $42,130,596 at December 31, 1999.
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 the prior approval of the Pennsylvania Insurance Commissioner.
Interest on the surplus note is scheduled to be paid semi-annually. The note
will be payable on demand on or after December 31, 2005. Payment of principal
and/or interest is subordinated to payment of all other liabilities of EFL.
During 1999, 1998 and 1997, EFL paid the Company interest totaling $967,500 each
year.
Information with respect to certain relationships with Company
directors is incorporated by reference to pages 30 through 31 of the Company's
Proxy Statement relating to the Annual Meeting of Shareholders to be held on
April 25, 2000.
21
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial statements, financial statement schedules and exhibits
filed:
(1) Consolidated Financial Statements
Page*
----
Erie Indemnity Company and Subsidiaries:
Independent Auditors' Report on the
Consolidated Financial Statements............................. 32
Consolidated Statements of Operations
for the three years ended
December 31, 1999, 1998 and 1997.............................. 33
Consolidated Statements of Financial
Position as of December 31, 1999
and 1998 ................................................... 34
Consolidated Statements of Cash Flows
for the three years ended
December 31, 1999, 1998 and 1997.............................. 35
Consolidated Statements of Shareholders'
Equity for the three years ended
December 31, 1999, 1998 and 1997.............................. 36
Notes to Consolidated Financial Statements...................... 37
(2) Financial Statement Schedules
Page
----
Erie Indemnity Company and Subsidiaries:
Report of Independent Auditors on Schedules....................
Schedule I. Summary of Investments - Other
than Investments in Related
Parties...................................... 28
Schedule IV. Reinsurance...................................... 29
Schedule VI. Supplemental Information
Concerning Property/Casualty
Insurance Operations......................... 30
All other schedules have been omitted since they are not required, not
applicable or the information is included in the financial statements or notes
thereto.
* Refers to the respective page of Erie Indemnity Company's 1999 Annual Report
to Shareholders. The Consolidated Financial Statements and Notes to Consolidated
Financial Statements and Auditors' Report thereon on pages 32 to 49 are
incorporated by reference. With the exception of the portions of such Annual
Report specifically incorporated by reference in this Item and Items 1, 5, 6, 7,
7a and 8, such Annual Report shall not be deemed filed as part of this Form 10-K
Report or otherwise subject to the liabilities of Section 18 of the Securities
Exchange Act of 1934.
22
<PAGE>
(3) Exhibits
Exhibit
Number Description of Exhibit
3.1* Articles of Incorporation of Registrant
3.2** Amended and Restated By-laws of Registrant
3.3## Amended and Restated By-laws of Registrant
dated March 9, 1999
4A* Form of Registrant's Class A Common
Stock certificate
4B* Form of Registrant's Class B Common
Stock certificate
10.1*** Retirement Plan for Employees of Erie
Insurance Group, effective as of
December 31, 1989
10.2*** Restatement of Supplemental Retirement
Plan for Certain Members of the Erie
Insurance Group Retirement Plan for
Employees, effective as of January 1,
1990
10.3*** Deferred Compensation Plan of
Registrant
10.4*** Retirement Plan for Outside Directors
of Registrant, effective as of
January 1, 1991
10.5*** Employee Savings Plan of Erie Insurance
Group, effective as of April 1, 1992
10.6*** Amendment to Employee Savings Plan of
Erie Insurance Group
10.7*** Supplemental 401(k) Plan of Erie Insurance
Group effective as of January 1, 1994
10.8*** Service Agreement dated January 1, 1989
between Registrant and Erie Insurance
Company
10.9*** Service Agreement dated June 21, 1993
between Registrant and Erie Insurance
Property & Casualty Company
10.10*** Service Agreement dated June 21, 1993
between Registrant and Flagship City
Insurance Company
10.11*** Reinsurance Pooling Agreement dated
January 1, 1992 between Erie Insurance
Company and Erie Insurance Exchange
23
<PAGE>
Exhibit
Number Description of Exhibit
10.12*** Form of Subscriber's Agreement whereby
policyholders of Erie Insurance Exchange
appoint Registrant as their
Attorney-in-Fact
10.13* Stock Redemption Plan of Registrant dated
December 14, 1989
10.14* Stock Purchase Agreement dated December 20,
1991, between Registrant and Erie Insurance
Exchange relating to the capital stock of
Erie Insurance Company
10.15** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1,
1994 between Erie Insurance Exchange
and Erie Insurance Co.
10.16**** Stock Redemption Plan of Registrant as
restated December 12, 1995
10.17**** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1, 1995
between Erie Insurance Exchange and Erie
Insurance Company of New York
10.18**** Service Agreement dated January 1, 1995
between Registrant and Erie Insurance
Company of New York
10.19***** Consulting Agreement for Investing Services
dated January 2, 1996 between Erie Indemnity
Company and John M. Petersen
10.20***** Agreement dated April 29, 1994 between Erie
Indemnity Company and Thomas M. Sider
10.21****** Aggregate Excess of Loss Reinsurance Agreement effective
January 1, 1997 between Erie Insurance Exchange, by and
through its Attorney-in-Fact, Erie Indemnity Company and Erie
Insurance Company and its wholly-owned subsidiary Erie
Insurance Company of New York
10.22# 1997 Annual Incentive Plan of Erie Indemnity
Company
10.23# Erie Indemnity Company Long-Term Incentive Plan
10.24# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Stephen A.
Milne
10.25# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Jan R. Van
Gorder
24
<PAGE>
Exhibit
Number Description of Exhibit
10.26# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Philip A.
Garcia
10.27# Employment Agreement effective December 16, 1997 by
and between Erie Indemnity Company and John J.
Brinling, Jr.
10.28 Employment Agreement effective June 30, 1999 by
and between Erie Indemnity Company and Jeffrey A.
Ludrof
10.29 Employment Agreement effective December 15, 1999 by
and between Erie Indemnity Company and Douglas F.
Ziegler
10.30 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and Stephen A. Milne
10.31 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and Jan R. Van Gorder
10.32 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and Philip A. Garcia
10.33 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and John J. Brinling
10.34 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and Jeffrey A. Ludrof
11 Statement re computation of per share
earnings
13 1999 Annual Report to Shareholders.
Reference is made to the Annual Report
furnished to the Commission, herewith.
21 Subsidiaries of Registrant
27 Financial Data Schedule
99.1## Report of the Special Committee to the
Board of Directors
* Such exhibit is incorporated by reference to the like numbered
exhibit in Registrant's Form 10 Registration Statement
Number 0-24000 filed with the Securities and Exchange Commission on
May 2, 1994.
** Such exhibit is incorporated by reference to the like numbered
exhibit in Registrant's Form 10/A Registration Statement Number
0-24000 filed with the Securities and Exchange Commission on August
3, 1994.
25
<PAGE>
*** Such exhibit is incorporated by reference to the like titled but
renumbered exhibit in Registrant's Form 10 Registration Statement
Number 0-24000 filed with the Securities and Exchange Commission on
May 2, 1994.
**** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1995 that was filed with the Commission on March 25,
1996.
***** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K/A amended annual report for the year
ended December 31, 1995 that was filed with the Commission on April
25, 1996.
****** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1996 that was filed with the Commission on March 21,
1997.
# Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1997 that was filed with the Commission on March 25,
1998.
## Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1998 that was filed with the Commission on March 30,
1999.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1999, The Company did not file any
reports on Form 8-K.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 7, 2000 ERIE INDEMNITY COMPANY
(Registrant)
Principal Officers
/s/ Stephen A. Milne
Stephen A. Milne, President and CEO
/s/ Jan R. Van Gorder
Jan R. Van Gorder, Executive Vice President, Secretary & General Counsel
/s/ Philip A. Garcia
Philip A. Garcia, Executive Vice President & CFO
/s/ Timothy G. NeCastro
Timothy G. NeCastro, Senior Vice President & Controller
Board of Directors
/s/ Peter B. Bartlett /s/ Martin J. Lippert
Peter B. Bartlett Martin J. Lippert
/s/ Samuel P. Black, III /s/ Stephen A. Milne
Samuel P. Black, III Stephen A. Milne
/s/ J. Ralph Borneman /s/ John M. Petersen
J. Ralph Borneman John M. Petersen
/s/ Patricia A. Goldman /s/ Jan R. Van Gorder
Patricia A. Goldman Jan R. Van Gorder
/s/ Harry H. Weil
Susan Hirt Hagen Harry H. Weil
/s/ F. William Hirt /s/ Robert C. Wilburn
F. William Hirt Robert C. Wilburn
/s/ Gwendolyn S. King
Gwendolyn S. King
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders
Erie Indemnity Company
We have audited the consolidated statements of financial position of Erie
Indemnity Company and subsidiaries (Company) as of December 31, 1999 and 1998
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1999, as
contained in the 1999 annual report, incorporated by reference in the annual
report on Form 10-K for the year ended December 31, 1999. In connection with our
audits of the financial statements, we also have audited the financial statement
schedules, as listed in the accompanying index. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Erie Indemnity
Company and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ Brown Schwab Bergquist & Co.
Erie, Pennsylvania
February 11, 2000
28
<PAGE>
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
<TABLE>
<CAPTION>
DECEMBER 31, 1999
Cost or Amount at which
Amortized Fair Shown in the
Type of Investment Cost Value Balance Sheet
- --------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Available-for-sale securities
Fixed maturities:
U.S. treasuries & government agencies $ 11,029 $ 11,051 $ 11,051
States & political subdivisions 52,064 53,118 53,118
Special revenues 120,170 122,096 122,096
Public utilities 20,909 20,318 20,318
U.S. industrial & miscellaneous 232,458 227,176 227,176
Foreign 21,593 20,743 20,743
Redeemable Preferred Stocks 31,171 31,020 31,020
Equity securities:
Common stock:
U.S. banks, trusts & insurance
companies $ 3,887 $ 7,156 $ 7,156
U.S. industrial & miscellaneous 56,035 103,132 103,132
Foreign industrial & miscellaneous 4,948 5,511 5,511
Non-redeemable preferred stock:
U.S. banks, trusts & insurance
companies 38,708 36,694 36,694
U.S. industrial & miscellaneous 61,109 56,662 56,662
Foreign industrial & miscellaneous 6,808 6,228 6,228
--------- --------- ---------
Total Available-for-Sale
Securities $660,889 $ 700,905 $ 700,905
-------- --------- ---------
Real Estate Mortgage Loans $ 8,230 $ 8,230 $ 8,230
Other Invested Assets $ 37,398 $ 39,116 $ 39,116
-------- --------- ---------
Total Investments $706,517 $ 748,251 $ 748,251
======== ========= =========
</TABLE>
29
<PAGE>
SCHEDULE IV - REINSURANCE
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of amount
Other from Other Net Assumed
Direct Companies Companies Amount to Net
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31,1999
Premiums for the year
Property and Liability Insurance $351,227,872 $356,608,390 $122,604,391 $117,223,873 104.6%
--------------------------------------------------------------------------------------------------
December 31,1998
Premiums for the year
Property and Liability Insurance $338,162,409 $343,051,100 $117,828,137 $112,939,446 104.3%
--------------------------------------------------------------------------------------------------
December 31,1997
Premiums for the year
Property and Liability Insurance $334,771,551 $340,165,100 $112,743,217 $107,349,668 105.0%
--------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VI - SUPPLMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
(in thousands)
Deferred
Policy Reserves for Discount, if
Acquisition Unpaid Loss & LAE any deducted Unearned
Costs Expenses from reserves Premiums
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
@ 12/31/99
Consolidated P&C Entities $ 11,405 $432,895 $ 1,377 $236,525
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $ 11,405 $432,895 $ 1,377 $236,525
---------------------------------------------------------------------------------
@ 12/31/98
Consolidated P&C Entities $ 10,863 $426,165 $ 1,562 $229,057
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $ 10,863 $426,165 $ 1,562 $229,057
---------------------------------------------------------------------------------
@ 12/31/97
Consolidated P&C Entities $ 10,283 $413,409 $ 0 $219,211
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $ 10,283 $413,409 $ 0 $219,211
---------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (CONTINUED)
(in thousands)
Loss and Loss Adjustment Expenses
Net Incurred Related to
Earned Investment (1) (2)
Premiums Income Current Year Prior Years
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
@ 12/31/99
Consolidated P&C Entities $117,224 $ 16,765 $ 88,422 $ (703)
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $117,224 $ 16,765 $ 88,422 $ (703)
---------------------------------------------------------------------------------
@ 12/31/98
Consolidated P&C Entities $112,939 $ 16,887 $ 80,637 $ (746)
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $112,939 $ 16,887 $ 80,637 $ (746)
---------------------------------------------------------------------------------
@ 12/31/97
Consolidated P&C Entities $107,350 $ 13,569 $ 77,345 $ 2,625
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $107,350 $ 13,569 $ 77,345 $ 2,625
---------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE VI - SUPPLEMETAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (CONTINUED)
(in thousands)
Amortization
of Deferred Net
Policy Loss & LAE Premiums
Acquisition Costs Paid Written
------------------------------------------------------
<S> <C> <C> <C>
@ 12/31/99
Consolidated P&C Entities $ 22,507 $ 84,192 $118,426
Unconsolidated P&C Entities 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0
------------------------------------------------------
Total $ 22,507 $ 84,192 $118,426
------------------------------------------------------
@ 12/31/98
Consolidated P&C Entities $ 21,357 $ 77,933 $115,094
Unconsolidated P&C Entities 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0
------------------------------------------------------
Total $ 21,357 $ 77,933 $115,094
------------------------------------------------------
@ 12/31/97
Consolidated P&C Entities $ 20,103 $ 75,343 $110,282
Unconsolidated P&C Entities 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0
------------------------------------------------------
Total $ 20,103 $ 75,343 $110,282
------------------------------------------------------
</TABLE>
33
<PAGE>
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
3.1* Articles of Incorporation of Registrant
3.2** Amended and Restated By-laws of Registrant
3.3## Amended and Restated By-laws of Registrant
dated March 9, 1999
4A* Form of Registrant's Class A Common
Stock certificate
4B* Form of Registrant's Class B Common
Stock certificate
10.1*** Retirement Plan for Employees of Erie
Insurance Group, effective as of
December 31, 1989
10.2*** Restatement of Supplemental Retirement
Plan for Certain Members of the Erie
Insurance Group Retirement Plan for
Employees, effective as of January 1,
1990
10.3*** Deferred Compensation Plan of
Registrant
10.4*** Retirement Plan for Outside Directors
of Registrant, effective as of
January 1, 1991
10.5*** Employee Savings Plan of Erie Insurance
Group, effective as of April 1, 1992
10.6*** Amendment to Employee Savings Plan of
Erie Insurance Group
10.7*** Supplemental 401(k) Plan of Erie Insurance
Group effective as of Janaury 1, 1994
10.8*** Service Agreement dated January 1, 1989
between Registrant and Erie Insurance
Company
10.9*** Service Agreement dated June 21, 1993
between Registrant and Erie Insurance
Property & Casualty Company
10.10*** Service Agreement dated June 21, 1993
between Registrant and Flagship City
Insurance Company
10.11*** Reinsurance Pooling Agreement dated
January 1, 1992 between Erie Insurance
Company and Erie Insurance Exchange
34
<PAGE>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
10.12*** Form of Subscriber's Agreement whereby
policyholders of Erie Insurance Exchange
appoint Registrant as their
Attorney-in-Fact
10.13* Stock Redemption Plan of Registrant dated
December 14, 1989
10.14* Stock Purchase Agreement dated December 20,
1991, between Registrant and Erie Insurance
Exchange relating to the capital stock of
Erie Insurance Company
10.15** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1,
1994 between Erie Insurance Exchange
and Erie Insurance Co.
10.16**** Stock Redemption Plan of Registrant
restated as of December 12, 1995
10.17**** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1, 1995
between Erie Insurance Exchange and Erie
Insurance Company of New York
10.18**** Service Agreement dated January 1, 1995
between Registrant and Erie Insurance
Company of New York
10.19***** Consulting Agreement for Investing Services
dated January 2, 1996 between Erie Indemnity
Company and John M. Petersen
10.20***** Agreement dated April 29, 1994 between Erie
Indemnity Company and Thomas M. Sider
10.21****** Aggregate Excess of Loss Reinsurance Agreement effective
January 1, 1997 between Erie Insurance Exchange, by and
through its Attorney-in-Fact, Erie Indemnity Company and Erie
Insurance Company and its wholly-owned subsidiary Erie
Insurance Company of New York
10.22# 1997 Annual Incentive Plan of Erie Indemnity
Company
10.23# Erie Indemnity Company Long-Term Incentive Plan
10.24# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Stephen A.
Milne
10.25# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Jan R. Van
Gorder
35
<PAGE>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
10.26# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Philip A.
Garcia
10.27# Employment Agreement effective December 16, 1997 by
and between Erie Indemnity Company and John J.
Brinling, Jr.
10.28 Employment Agreement effective June 30, 1999 by
and between Erie Indemnity Company and Jeffrey A.
Ludrof 38
10.29 Employment Agreement effective December 15, 1999 by
and between Erie Indemnity Company and Douglas F.
Ziegler 53
10.30 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and Stephen A. Milne 69
10.31 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and Jan R. Van Gorder 70
10.32 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and Philip A. Garcia 71
10.33 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and John J. Brinling 72
10.34 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and Jeffrey A. Ludrof 73
11 Statement re computation of per share
earnings 74
13 1999 Annual Report to Shareholders.
Reference is made to the Annual Report
furnished to the Commission, herewith. 75-123
21 Subsidiaries of Registrant 124
27 Financial Data Schedule 125
99.1## Report of the Special Committee to the
Board of Directors
* Such exhibit is incorporated by reference to the like numbered
exhibit in Registrant's Form 10 Registration Statement
Number 0-24000 filed with the Securities and Exchange Commission on
May 2, 1994.
** Such exhibit is incorporated by reference to the like numbered
exhibit in Registrant's Form 10/A Registration Statement Number
0-24000 filed with the Securities and Exchange Commission on August
3, 1994.
36
<PAGE>
*** Such exhibit is incorporated by reference to the like titled but
renumbered exhibit in Registrant's Form 10 Registration Statement
Number 0-24000 filed with the Securities and Exchange Commission on
May 2, 1994.
**** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1995 that was filed with the Commission on March 25,
1996.
***** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K/A amended annual report for the year
ended December 31, 1995 that was filed with the Commission on April
25, 1996.
****** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1996 that was filed with the Commission on March 21,
1997.
# Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1997 that was filed with the Commission on March 25,
1998.
## Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1998 that was filed with the Commission on March 30,
1999.
37
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") made effective as of the 30th
day of June, 1999 (the "Effective Date") by and between ERIE INDEMNITY COMPANY,
a Pennsylvania corporation with its principal place of business at Erie,
Pennsylvania (the "Company"), and JEFFREY A. LUDROF (the "Executive");
WITNESSETH:
WHEREAS, the Company has determined that it is in the best
interests of the Company and its shareholders to secure the continued employment
of the Executive on the terms and subject to the conditions set forth in this
Agreement; and
WHEREAS, the Executive desires and is willing to accept
employment with the Company on the terms and subject to the conditions set forth
herein;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Term. The Company hereby agrees to continue the employment
of the Executive and the Executive hereby agrees to continue to serve the
Company pursuant to the terms and conditions of this Agreement as Executive Vice
President of the Company, or in such other position with the Company of at least
commensurate responsibility and authority in all material respects, for a term
commencing on the Effective Date hereof and expiring on December 15, 2000,
unless earlier terminated pursuant to Section 5 hereof. Notwithstanding the
foregoing, the Executive shall serve in said office(s) at the pleasure of the
Company's Board of Directors (the "Board of Directors") and the Executive may be
removed from said office(s) at any time with or without Cause, as hereinafter
defined, pursuant to Sections 5(b) or 5(d) hereof; provided that any such
removal shall be without prejudice to any contract rights the Executive may have
hereunder. Subject to Section 8(a)(6) and Section 8(b) hereof, this Agreement
shall expire by its terms on December 15, 2000.
2. Duties and Responsibilities. The Executive's duties
hereunder shall be those which shall be prescribed by the Company's Bylaws, as
amended from time to time, and by the Board of Directors or any committee
thereof from time to time and shall include such executive authority, duties,
powers and responsibilities as customarily attend the office as Executive Vice
President of a company comparable to the Company. The Executive shall discharge
such duties consistent with sound business practices and in accordance with law
and the Company's general employment policies, in each case, as in effect from
time to time, in all material respects and the Executive shall use best efforts
to promote the best interests of the Company. During the term of this Agreement,
the Executive's position (including the Executive's status and reporting
requirements), authority, duties, powers and responsibilities shall at all times
be at least commensurate in all material respects with the most significant of
those held, exercised or assigned to the Executive as of the Effective Date. The
Executive shall devote the Executive's knowledge, skill and all of the
38
<PAGE>
Executive's professional time, attention and energies (reasonable absences for
vacations and illness excepted), to the business of the Company in order to
perform such assigned duties faithfully, competently and diligently. It is
understood and agreed between the parties that the Executive may (i) engage in
charitable and community activities, including serving on boards of directors or
trustees of and holding other leadership positions in non-profit organizations
unless the objectives and requirements of such positions are determined by the
Board of Directors to be inconsistent with the performance of the Executive's
duties hereunder, and, (ii) manage personal investments, so long as such
activities do not interfere or conflict with the Executive's performance of
responsibilities and obligations hereunder. It is expressly agreed that any such
activities engaged in by the Executive as of the Effective Date shall not
thereafter be deemed to interfere with the Executive's obligations and
responsibilities hereunder. The Executive agrees that the approval of the Board
of Directors or a committee thereof shall be required before the Executive first
accepts a position as director of any for-profit corporation after the date
hereof.
3. Compensation. During the term of this Agreement, the
Executive shall receive, for all services rendered to the Company hereunder,
the following (hereinafter referred to collectively as "Compensation"):
(a) Salary. The Executive shall be paid an annual
base salary at an annual rate at least equal to the annual
rate being paid or payable to the Executive by the Company in
the month in which the Effective Date occurs, with such
increases thereafter as shall be determined from time to time
to be fair and reasonable by the Board of Directors or by the
Executive Compensation Committee of the Board of Directors
(the "Committee") in its discretion after taking into account,
among other things, the authority, duties, powers and
responsibilities of the Executive's position, the Executive's
performance, the Company's performance, the compensation of
persons in comparable positions at the Company and at other
comparable companies, and the effect of inflation. The
Executive's annual base salary shall not be reduced after any
such increase. The Executive's annual base salary shall be
payable in equal installments in accordance with the Company's
general salary payment policies, but no less frequently than
bi-weekly.
(b) Incentive Compensation. The Executive shall be
eligible for awards under the Company's incentive compensation
plans, if any, applicable to senior executive officers of the
Company or to key employees of the Company or its
subsidiaries, including, but not limited to, management
incentive plans and stock option plans, in accordance with and
subject to the terms thereof (including any provisions
providing for changes in the level of or termination of
benefits thereunder), on a basis commensurate with the
Executive's position and authorities, duties, powers and
responsibilities.
(c) Employee Benefit Plans. The Executive and the
Executive's "dependents," as that term may be defined under
the applicable employee benefit plan(s) of the Company, shall
be included, to the extent eligible thereunder and subject to
the terms of the plans (including any provisions for changing
the level of or termination of benefits thereunder), in all
39
<PAGE>
plans, programs and policies which provide benefits for
Company employees and their dependents on a basis commensurate
with the Executive's position and authorities, duties, powers
and responsibilities including, without limitation, health
care insurance, health and welfare plans, pension and
retirement plans, group life insurance plans, split dollar
life insurance plans, short and long-term disability plans,
survivors' benefits, executive supplemental benefits, holidays
and other similar or comparable benefits made available to the
Company's employees and senior executive officers
(hereinafter, such plans, programs and policies shall be
collectively referred to as the "Erie Benefit Plans"). Such
plans, programs and policies shall include, but are not
limited to, the Erie Insurance Group Retirement Plan for
Employees, the Erie Insurance Group Employee Savings Plan, the
Erie Insurance Group Deferred Compensation Plan, the Erie
Insurance Group Split Dollar Life Insurance Plan, the Erie
Insurance Group Supplemental Executive Retirement Plan, and
the Erie Insurance Group Health Protection, Prescription Drug,
Dental Assistance and Vision Care Plans.
(d) Perquisites. The Executive shall be entitled to
all perquisites which the Company from time to time makes
available to senior executive officers of the Company. Such
perquisites shall include, but are not limited to, parking,
club dues, tax preparation assistance, and an annual physical
examination.
(e) Expenses and Working Facilities. The Executive is
hereby authorized to incur, and shall be reimbursed by the
Company for, any and all reasonable and necessary business
related expenses, including, but not limited to, expenses for
business travel, entertainment, gifts and similar matters,
which expenses are incurred by the Executive on behalf of the
Company or any of its subsidiaries, upon presentation of
itemized accounts of such expenses in accordance with Company
policies. The Executive shall be furnished during the term of
this Agreement with offices and other working facilities in
the Company's principal executive offices located in Erie,
Pennsylvania (or other location of the principal executive
offices within the Erie metropolitan area) and secretarial and
other assistance suitable to the Executive's position and
adequate for the performance of duties hereunder.
(f) Performance Appraisal. The Executive's
performance may be evaluated by the Board of Directors or the
Committee from time to time. The Executive shall be entitled
to such additional remuneration, including but not limited to
annual bonuses based on performance, as the Board of Directors
or the Committee may, in its discretion, determine from time
to time.
4. Absences. The Executive shall be entitled to
vacations in accordance with the Company's vacation policy in effect from
time to time (but in no event shall the Executive be entitled to fewer vacation
days than under the Company's vacation policy as in effect on the Effective
Date) and to absences because of illness or other incapacity, and shall also be
entitled to such other absences, whether for holiday, personal time,
conventions, or for any other purpose, as are granted to
40
<PAGE>
the Company's other senior executive officers or as are approved by the Board of
Directors or the Committee, which approval shall not be unreasonably withheld.
5. Termination. The Executive's employment hereunder
may be terminated only as follows:
(a) Expiration of Term of Office. Upon the expiration
of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof, the
Board of Directors may (i) determine that the Executive should
not continue in such office(s) or (ii) that the Executive
should not be elected or appointed to an office with duties,
authorities, powers and responsibilities that are at least
commensurate with those of said office(s), in either case, for
reasons other than for Cause (if the reasons for such
noncontinuance, nonreelection or nonreappointment constitute
Cause, then Section 5(d) hereof will apply).
(b) By the Company Without Cause. The Company may at
any time terminate the Executive's employment hereunder
without Cause only by the affirmative vote of a majority of
the entire Board of Directors, and upon no less than thirty
(30) days' prior written notice to the Executive.
(c) By the Executive Without Good Reason. The
Executive may at any time terminate employment hereunder for
any reason upon no less than thirty (30) days' written notice
to the Company. Section 5(e) shall apply to any termination of
employment by the Executive for Good Reason.
(d) By the Company For Cause. The Company may
terminate the Executive's employment hereunder for Cause. In
such event, the Company shall give to the Executive prompt
written notice (in addition to any notice which may be
required by Section 5(d)(1) hereof) specifying in reasonable
detail the basis for such termination. For purposes of this
Agreement, "Cause" shall mean any of the following conduct by
the Executive:
(1) The deliberate and intentional
breach of any material provision of
this Agreement, which breach
Executive shall have failed to cure
within thirty (30) days after
Executive's receipt of written
notice from the Company specifying
the specific nature of the
Executive's breach;
(2) The deliberate and intentional
engaging by Executive in gross
misconduct that is materially and
demonstrably inimical to the best
interests, monetary or otherwise, of
the Company; or
41
<PAGE>
(3) Conviction of a felony or conviction
of any crime involving moral
turpitude, fraud or deceit.
For purposes of this definition, no act, or failure to act, on the Executive's
part shall be considered "deliberate and intentional" unless done, or omitted to
be done, by the Executive not in good faith and without reasonable belief that
such action or omission was in the best interest of the Company.
(e) By the Executive for Good Reason. The Executive
may terminate employment hereunder for Good Reason upon
providing thirty (30) days written notice to the Company after
the Executive reasonably becomes aware of the circumstances
giving rise to such Good Reason. For purposes of this
Agreement, "Good Reason" means the following conduct of the
Company, unless the Executive shall have consented thereto in
writing:
(1) Material breach of any material
provision of this Agreement by the
Company, which breach shall not have
been cured by the Company within
thirty (30) days after Company's
receipt from the Executive or the
Executive's agent of written notice
specifying in reasonable detail the
nature of the Company's breach;
(2) The assignment to the Executive of
any duties inconsistent in any
material respect with the
Executive's position (including any
reduction of the Executive's status
and reporting requirements),
authority, duties, powers or
responsibilities with the Company as
contemplated by Section 2 of this
Agreement, or any other action by
the Company, including the removal
of the Executive from or any failure
to reelect or reappoint the
Executive to the office(s) specified
in Section 2 or a commensurate
office(s) (other than for Cause),
which results in a diminution of the
Executive's authority, duties,
position, responsibilities or
status, excluding for this purpose
any isolated, insubstantial and
inadvertent action respecting the
Executive not taken in bad faith and
which is remedied by the Company
within thirty (30) days after
receipt of written notice from the
Executive to the Company;
(3) The Company's relocation of the
Executive out of the Company's
principal executive offices or the
relocation of the Company's
principal executive offices to a
location outside the Erie,
Pennsylvania metropolitan area,
except for required short-term
travel on the Company's behalf to
the extent necessary for the
Executive to carry out his normal
duties in the ordinary course of
business;
42
<PAGE>
(4) The failure of the Company to obtain
the assumption in writing of its
obligations to perform this
Agreement by any successor as
provided in Section 14 hereof not
less than five days prior to a
merger, consolidation or sale as
contemplated in Section 14; or
(5) A reduction in the overall level of
compensation of the Executive. For
purposes of this subsection 5, the
following shall not constitute a
reduction in the overall level of
compensation of the Executive: (i)
changes in the cash/stock mix of
compensation payable to the
Executive; (ii) a reduction in the
overall level of compensation of the
Executive resulting from the failure
to achieve corporate, business unit
and/or individual performance goals
established for purposes of
incentive compensation for any year
or other period; provided that the
aggregate short-term incentive
opportunity, when combined with the
Executive's base salary, provides,
in the aggregate, an opportunity for
the Executive to realize at least
the same overall level of
compensation as was paid in the
immediately prior year or period at
target performance levels; and
provided, further, that such target
performance levels are reasonable at
all times during the measurement
period, taking into account the fact
that one of the purposes of such
compensation is to incent the
Executive; (iii) reductions in
compensation resulting from changes
to any Erie Benefit Plan (provided
that such changes are generally
applicable to all participants in
such Erie Benefit Plan); and (iv)
any combination of the foregoing.
(f) Disability. In the event that the Executive shall
be unable to perform the Executive's duties hereunder on a
full time basis for a period of one hundred-eighty (180)
consecutive calendar days by reason of incapacity due to
illness, accident or other physical or mental disability, then
the Company may, at its discretion, terminate the Executive's
employment hereunder if the Executive, within ten (10) days
after receipt of written notice of termination (which notice
may be given before or after the end of the entire 180 day
period), shall not have returned to the performance of all of
his duties hereunder on a full-time basis.
(g) Death. The Executive's employment under
this Agreement shall terminate upon the Executive's death.
(h) Mutual Written Agreement. This Agreement
and the Executive's employment hereunder may be terminated
at any time by the mutual written agreement of the Executive
and the Company.
43
<PAGE>
6. Compensation in the Event of Termination. In the event that the
Executive's employment hereunder terminates prior to the expiration of this
Agreement for any reason provided in Section 5 hereof, the Company shall pay the
Executive, compensation and provide the Executive and the Executive's eligible
dependents with benefits as follows:
(a) Executive's Nonreelection to Office; Termination
By Company Without Cause; Termination By Executive for Good
Reason. In the event that the Executive's employment hereunder
is terminated: (i) because the Executive does not continue in
office pursuant to Section 5(a) hereof; or (ii) by the Company
without Cause pursuant to Section 5(b) hereof; or (iii) by the
Executive for Good Reason pursuant to Section 5(e) hereof,
then in any such event the Company shall pay or provide, as
applicable, the following compensation and benefits to the
Executive:
(1) Three (3) times the following: (A)
the highest annual base salary paid
or payable to the Executive in the
then current year or any one (1) of
the three (3) calendar years
preceding Executive's termination of
employment hereunder; plus (B) an
amount equal to the sum of the
Executive's highest award(s) under
the Company's Annual Incentive Plans
for any one (1) of the three (3)
calendar years preceding the date of
the termination of Executive's
employment hereunder (such total is
referred to herein as "Covered
Compensation"). Such payment to the
Executive by the Company shall be
paid in a lump sum unless the
Executive elects, and so notifies
the Company in writing prior to the
termination of the Executive's
employment hereunder, to receive
such payment in three (3) equal
annual installments. The lump sum or
first payment, as the case may be,
shall be paid within sixty (60) days
after the date of the termination of
the Executive's employment
hereunder;
(2) Any awards or other compensation to
which the Executive is entitled
under any of the Company's
compensation plans or Erie Benefit
Plans to the extent not covered in
subsection (1) hereof;
(3) Any award to which the Executive
would be entitled under the
Company's Long-Term Incentive Plan
as in effect on December 16, 1997,
calculated under the provision of
that Plan as if the Executive ceases
to be an Employee of the Company by
reason of death, disability or
normal retirement;
44
<PAGE>
(4) Continuing coverage for all purposes
(including eligibility, coverage,
vesting and benefit accruals, as
applicable), for a period of three
(3) years after the date of the
termination of Executive's
employment hereunder, to the extent
not prohibited by law, for the
Executive and the Executive's
eligible dependents under all of the
Erie Benefit Plans in effect and
applicable to Executive and the
Executive's eligible dependents as
of the date of termination. In the
event that the Executive and/or the
Executive's eligible dependents,
because of the Executive's
terminated status, cannot be covered
or fully covered under any or all of
the Erie Benefit Plans, the Company
shall continue to provide the
Executive and/or the Executive's
eligible dependents with the same
level of such coverage in effect
prior to termination, payable from
the general assets of the Company if
necessary. Notwithstanding the
foregoing, the Executive may elect
(by giving written notice to the
Company prior to the termination of
employment hereunder), on a benefit
by benefit basis, to receive in lieu
of continuing coverage, cash in an
amount equal to the present value
(using a 6.5% discount rate over
three years) of the projected cost
to the Company of providing such
benefit for such three year period.
The aggregate amount of cash to
which the Executive is entitled
pursuant to the preceding sentence
shall be payable by the Company to
the Executive within sixty (60) days
after the date of the termination of
Executive's employment hereunder;
and
(5) For a period of three (3) years
after the date of the termination of
Executive's employment hereunder,
such perquisites as are made
available to the Executive as of the
date of the termination of
Executive's employment hereunder.
The Executive's subsequent death, disability or attainment of age 65 or any
other age shall in no way affect or limit the Company's obligations under this
Section 6(a).
(b) Termination By the Company for Cause. In the
event that the Company shall terminate the Executive's
employment hereunder for Cause pursuant to Section 5(d), this
Agreement shall forthwith terminate and the obligations of the
parties hereto shall be as set forth in Section 8 hereof.
(c) Termination by the Executive Without Good Reason.
In the event that the Executive shall terminate employment
hereunder other than for Good Reason pursuant to Section 5(c),
this Agreement shall forthwith terminate and the obligations
of the parties hereto shall be as set forth in Section 8
hereof.
45
<PAGE>
(d) Disability. In the event that the Company elects
to terminate the Executive's employment hereunder pursuant to
Section 5(f), the Executive shall continue to receive from the
date of such termination through the expiration date of this
Agreement, sixty percent (60%) of the then current annual base
salary to which the Executive was entitled pursuant to Section
3(a) hereof immediately preceding such termination, in
accordance with the payroll practices of the Company for
senior executive officers, reduced, however, by the amount of
any proceeds from Social Security and disability insurance
policies provided by and at the expense of the Company.
(e) Death. In the event of the death of the Executive
during the term of this Agreement, the then current annual
base salary to which the Executive was entitled pursuant to
Section 3(a) hereof immediately preceding the Executive's
death shall be paid, in twelve (12) equal monthly installments
following the date of death, to the last beneficiary
designated by the Executive under the Company's group life
insurance policy maintained by the Company or such other
written designation expressly provided to the Company for the
purposes hereof or, failing either such designation, to the
Executive's estate.
(f) Mutual Written Consent. In the event that the
Executive and the Company shall terminate the Executive's
employment by mutual written agreement, the Company shall pay
such compensation and provide such benefits, if any, as the
parties may mutually agree upon in writing.
The Executive shall not be required to mitigate the amount of any payment
provided for in this Section 6 by seeking employment or otherwise, nor shall any
amounts received from employment or otherwise by the Executive offset in any
manner the obligations of the Company hereunder except as specifically provided
in Section 6(d) hereof.
7. Certain Additional Payments by the Company. Notwithstanding
anything in this Agreement to the contrary, in the event it is determined that
any payment or distribution by the Company to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (a "Payment"), is subject to the excise
tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), or any successor provision, on excess parachute payments, as that
term is used and defined in Sections 4999 and 280G of the Code, then the
Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount equal to the then current rate of tax under said Section
4999 multiplied by the total of the amounts so paid or payable, including the
Gross-Up Payment, which are deemed to be a part of an excess parachute payment.
8. Effect of Expiration of Agreement or Termination of
Executive's Employment. Upon the expiration of this Agreement by its terms or
the termination of the Executive's employment hereunder, neither the Company nor
the Executive shall have any remaining duties or obligations hereunder except
that:
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(a) The Company shall:
(1) Pay the Executive's accrued salary
and any other accrued benefits under
Sections 3(a), (b), and (c) hereof;
(2) Reimburse the Executive for expenses
already incurred in accordance with
Section 3(e) hereof;
(3) Pay or otherwise provide for any
benefits, payments or continuation
or conversion rights in accordance
with the provisions of any Erie
Benefit Plan of which the Executive
or any of the Executive's dependents
is or was a participant or as
otherwise required by law;
(4) Pay the Executive and the
Executive's beneficiaries any
compensation and/or provide the
Executive or the Executive's
eligible dependents any benefits, as
the case may be, due pursuant to
Section 6 or Section 7 hereof; and
(5) Unless the employment of the
Executive is terminated by the
Company for Cause, pay the Executive
or the Executive's beneficiaries the
full amount or amounts accrued under
the Supplemental Executive
Retirement Plan of the Company (the
"SERP") as in effect on the
Effective Date (or as such benefits
may be enhanced by subsequent
amendments or supplements to such
SERP), as though, solely for
purposes of determining any
otherwise applicable actuarial
reduction factors, the event of the
termination of Executive's
employment hereunder or expiration
of this Agreement occurred on the
Executive's Normal Retirement Date
as defined in such SERP. Accrued
benefits under the SERP shall be
fully vested and nonforfeitable upon
such termination (including
termination on account of the
Executive's death) or expiration.
Any reductions in SERP benefits that
would otherwise apply pursuant to
Section 10.1 of the Company's
Retirement Plan for Employees (or
pursuant to any successor provision
of such plan or any successor plan)
relating to Section 415(b) of the
Code shall not be applicable for
purposes hereof. No further approval
by the Board of Directors or the
Committee with respect to payments
under the SERP in accordance with
the preceding sentences shall be
required. Unreduced payments may
begin at age 55, but in no event
would payments be made under this
Section 8(a)(5) before the Executive
reaches age fifty-five (55). The
Company shall purchase for the
Executive, naming the Executive
and/or the Executive's designee the
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owner, a paid up annuity, from an
insurer reasonably acceptable to the
Executive but in any event having an
A.M. Best rating of A+ or better (or
other comparable rating), that will
pay to the Executive an amount equal
to the benefit to which the
Executive would otherwise be
entitled under the SERP and payable
at the times such SERP benefit would
be payable in accordance with the
provisions hereof. Upon the purchase
and delivery to the Executive of
such an annuity, the Executive shall
release the Company from any further
obligation under the SERP. The
Company further agrees to pay the
Executive immediately upon
termination, a cash payment (the
"Tax Gross-up") equal to the sum of
the following: (i) all taxes
(federal, state, local, and payroll
taxes) incurred and due and owing by
the Executive, arising from the cost
of the annuity purchased by the
Company to meet the requirements of
this Section 8(a)(5), and (ii) any
such taxes incurred and due and
owing with respect to the amount
paid in (i).
(6) Continue to remain bound by the
terms of Section 12 hereof.
(b) The Executive shall remain bound by the terms of
Sections 9 and 13 hereof for a period of thirty six (36)
months after the expiration of the Agreement by its terms;
provided, that the Executive shall not be bound by the terms
of Section 9(b) after the termination of employment (other
than a termination of the Executive by the Company for Cause)
if such termination occurs after the expiration of this
Agreement by its terms.
9. Covenants as to Confidential Information and Competitive
Conduct. The Executive hereby acknowledges and agrees as follows: (i) this
Section 9 is necessary for the protection of the legitimate business interests
of the Company, (ii) the restrictions contained in this Section 9 with regard to
geographical scope, length of term and types of restricted activities are
reasonable; (iii) the Executive has received adequate and valuable new
consideration for entering into this Agreement, and (iv) the Executive's
expertise and capabilities are such that this obligation hereunder and the
enforcement hereof by injunction or otherwise will not adversely affect the
Executive's ability to earn a livelihood.
(a) Confidentiality of Information and Nondisclosure.
The Executive acknowledges and agrees that the Executive's
employment by the Company under this Agreement necessarily
involves knowledge of and access to confidential and
proprietary information pertaining to the business of the
Company and its subsidiaries. Accordingly, the Executive
agrees that at all times during the term of this Agreement and
at any time thereafter, the Executive will not, directly or
indirectly, without the express written approval of the
Company, unless directed by applicable legal authority
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(including any court of competent jurisdiction, governmental
agency having supervisory authority over the business of the
Company or the subsidiaries, or any legislative or
administrative body having supervisory authority over the
business of the Company or its subsidiaries) having
jurisdiction over the Executive, disclose to or use, or
knowingly permit to be so disclosed or used, for the benefit
of himself, any person, corporation or other entity other than
the Company, (i) any information concerning any financial
matters, customer relationships, competitive status, supplier
matters, internal organizational matters, current or future
plans, or other business affairs of or relating to the Company
or its subsidiaries, (ii) any management, operational, trade,
technical or other secrets or any other proprietary
information or other data of the Company or its subsidiaries,
or (iii) any other information related to the Company or its
subsidiaries or which the Executive should reasonably believe
will be damaging to the Company or its subsidiaries which has
not been published and is not generally known outside of the
Company. The Executive acknowledges that all of the foregoing
constitutes confidential and proprietary information, which is
the exclusive property of the Company.
(b) Restrictive Covenant. During the term of, and for
a period of one (1) year (the "Restrictive Period") after the
termination of the Executive's employment hereunder for any
reason (other than a termination of the Executive hereunder
pursuant to Section 5(a), 5(b) or 5(e), hereof), the Executive
shall not render, directly, or indirectly, services to any
person, firm, corporation, association or other entity which
conducts the same or similar business as the Company or its
subsidiaries at the date of the Executive's termination of
employment hereunder within the states in which the Company or
any of its subsidiaries is then licensed and doing business at
the date of the Executive's termination of employment
hereunder without the prior written consent of the Board of
Directors, which may be withheld in its discretion. In the
event the Executive violates any of the provisions contained
in this Section 9(b) hereof, the Restrictive Period shall be
increased by the period of time from the commencement by the
Executive of any violation until such violation has been cured
to the satisfaction of the Company. The Executive further
agrees that at no time during the Restrictive Period will the
Executive attempt to directly or indirectly solicit or hire
employees of Company or its subsidiaries or induce any of them
to terminate their employment with the Company or any of the
subsidiaries. Notwithstanding the foregoing, the performance
by the Executive of rights and duties under an agency
agreement with the Company shall not constitute a breach of
this Section 9(b).
(c) Company Remedies. The Executive acknowledges and
agrees that any breach of this Section 9 will result in
immediate and irreparable harm to the Company, and that the
Company cannot be reasonably or adequately compensated by
damages in an action at law. In the event of a breach by the
Executive of the provisions of this Section 9, the Company
shall be entitled, to the extent permitted by law, immediately
to cease to pay or provide the Executive or the Executive's
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dependents any compensation or benefit being, or to be, paid
or provided to the Executive pursuant to Section 3, Section 6
or Section 8 of this Agreement, and also to obtain immediate
injunctive relief restraining the Executive from conduct in
breach of the covenants contained in this Section 9. Nothing
herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for such breach,
including the recovery of damages from the Executive.
10. Resolution of Differences Over Breaches of Agreement.
Except as otherwise provided herein, in the event of any controversy, dispute or
claim arising out of, or relating to, this Agreement, or the breach thereof, or
arising out of any other matter relating to the Executive's employment with the
Company, the parties may seek recourse only for temporary or preliminary
injunctive relief to the courts having jurisdiction thereof and if any relief
other than injunctive relief is sought, the Company and the Executive agree that
such underlying controversy, dispute or claim shall be settled by arbitration
conducted in Erie, Pennsylvania in accordance with this Section 10 and the
Commercial Arbitration Rules of the American Arbitration Association ("AAA").
The matter shall be heard and decided, and awards rendered by a panel of three
(3) arbitrators (the "Arbitration Panel"). The Company and the Executive shall
each select one arbitrator from the AAA National Panel of Commercial Arbitrators
(the "Commercial Panel") and AAA shall select a third arbitrator from the
Commercial Panel. The award rendered by the Arbitration Panel shall be final and
binding as between the parties hereto and their heirs, executors,
administrators, successors and assigns, and judgment on the award may be entered
by any court having jurisdiction thereof. Except as provided in Section 11
hereof, each party shall bear sole responsibility for all expenses and costs
incurred by such party in connection with the resolution of any controversy,
dispute or claim in accordance with this Section 10.
11. Payment of Executive's Legal Fees. If the Executive is
required to bring any action to enforce rights or to collect moneys due under
this Agreement, the Company shall pay to the Executive the fees and expenses
incurred by the Executive in bringing and pursuing such action if the Executive
is successful, in whole or in part, on the merits or otherwise (including by way
of a settlement involving a payment of money by the Company to the Executive),
in such action. The Company shall pay such fees and expenses in advance of the
final disposition of such action upon receipt of an undertaking from the
Executive to repay to the Company such advances if the Executive is not
ultimately successful, in whole or in part, on the merits or otherwise, in such
action.
12. Severance Pay upon Termination of Employment after
Expiration of the Agreement. Notwithstanding the expiration of this Agreement by
its terms and notwithstanding the terms of any corporate severance policy then
in effect and applicable to the Executive, if the employment of the Executive is
terminated without Cause by the Company, by the Executive for Good Reason or
upon the expiration of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof (for reasons other than
for Cause), in any case, within thirty-six (36) months after the expiration of
this Agreement by its terms, then (i) the Company shall pay to the Executive
severance compensation in an amount equal to two (2) times the Executive's
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Covered Compensation as determined on the date of such termination, and (ii) the
Executive and the Executive's eligible dependents shall be entitled to
continuing coverage under the Company's then-existing group health plans
(including medical, dental, prescription drug and vision plans, if any) for a
period of two (2) years after the date of the termination of the Executive's
employment, to the extent not prohibited by law and subject to the terms of such
plans including provisions as to deductibles and copayments and changes in
levels of coverage that are generally applicable to employees. The payment to
the Executive by the Company pursuant to subsection (i) of the preceding
sentence shall be paid in a lump sum unless the Executive elects, and so
notifies the Company in writing prior to the Executive's termination of
employment, to receive such payment in two (2) equal annual installments. The
lump sum or first payment, as the case may be, shall be paid within thirty (30)
days after the date of termination of the Executive's employment.
13. Release. The Executive hereby acknowledges and agrees that
neither the Company nor any of its representatives or agents will be obligated
to pay any compensation or benefit which the Executive has a right to be paid or
provided to the Executive or the Executive's dependents pursuant to Section 6,
Section 8 or Section 12 of this Agreement, unless the Executive, if requested by
the Company in its sole discretion, executes a release in a form reasonably
acceptable to the Company, which releases any and all claims the Executive has
or may have against the Company or its subsidiaries, agents, officers,
directors, successors or assigns.
14. Waiver. The waiver by a party hereto of any breach
by the other party hereto of any provision of this Agreement shall not operate
or be construed as a waiver of any other or subsequent breach by a party hereto.
15. Assignment. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the Company, and the Company
shall be obligated to require any successor to expressly acknowledge and assume
its obligations hereunder. This Agreement shall inure to the extent provided
hereunder to the benefit of and be enforceable by the Executive or the
Executive's legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. The Executive may not delegate any of the
Executive's duties, responsibilities, obligations or positions hereunder to any
person and any such purported delegation shall be void and of no force and
effect.
16. Notices. Any notices required or permitted to be given
under this Agreement shall be sufficient if in writing, and if personally
delivered or when sent by first class certified or registered mail, postage
prepaid, return receipt requested--in the case of the Executive, to his
residence address as set forth below, and in the case of the Company, to the
address of its principal place of business as set forth below, to the attention
of the Chairman of the Board, or in case the Executive is the Chairman of the
Board, to the Chairman of the Compensation Committee of the Board -- or to such
other person or at such other address with respect to each party as such party
shall notify the other in writing.
17. Construction of Agreement.
(a) Governing Law. This Agreement shall be governed
by and construed under the laws of the Commonwealth of
Pennsylvania.
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(b) Severability. In the event that any one or more
of the provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, the validity, legality or
enforceability of the remaining provisions shall not in any
way be affected or impaired thereby.
(c) Headings. The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience of
reference only and shall not constitute a part of this
Agreement.
18. Entire Agreement. This Agreement contains the entire
agreement of the parties concerning the Executive's employment and all promises,
representations, understandings, arrangements and prior agreements on such
subject are merged herein and superseded hereby. The provisions of this
Agreement may not be amended, modified, repealed, waived, extended or discharged
except by an agreement in writing signed by the party against whom enforcement
of any amendment, modification, repeal, waiver, extension or discharge is
sought. No person acting other than pursuant to a resolution of the Board of
Directors or the Committee shall have authority on behalf of the Company to
agree to amend, modify, repeal, waive, extend or discharge any provision of this
Agreement or anything in reference thereto or to exercise any of the Company's
rights to terminate or to fail to extend this Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
officers thereunto duly authorized, and the Executive has hereunto set his hand
all as of the day and year first above written.
ATTEST: ERIE INDEMNITY COMPANY
/s/ J. R. Van Gorder By: /s/ F. William Hirt
J. R. Van Gorder F. William Hirt
Secretary Chairman of the Board
WITNESS:
/s/ Deborah Miller /s/ Jeffrey A. Ludrof
Deborah Miller Jeffrey A. Ludrof
Executive Secretary 170 Gateway Drive
Fairview, PA 16415
52
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") made effective as of the 15th
day of December, 1999 (the "Effective Date") by and between ERIE INDEMNITY
COMPANY, a Pennsylvania corporation with its principal place of business at
Erie, Pennsylvania (the "Company"), and DOUGLAS F. ZIEGLER (the "Executive");
WITNESSETH:
WHEREAS, the Company has determined that it is in the best
interests of the Company and its shareholders to secure the continued employment
of the Executive on the terms and subject to the conditions set forth in this
Agreement; and
WHEREAS, the Executive desires and is willing to accept
employment with the Company on the terms and subject to the conditions set forth
herein;
NOW THEREFORE, in consideration of the premises and mutual
covenants contained herein, and intending to be legally bound hereby, the
parties hereto agree as follows:
1. Term. The Company hereby agrees to continue the employment
of the Executive and the Executive hereby agrees to continue to serve the
Company pursuant to the terms and conditions of this Agreement as Senior Vice
President of the Company, or in such other position with the Company of at least
commensurate responsibility and authority in all material respects, for a term
commencing on the Effective Date hereof and expiring on December 15, 2001,
unless earlier terminated pursuant to Section 5 hereof. Notwithstanding the
foregoing, the Executive shall serve in said office(s) at the pleasure of the
Company's Board of Directors (the "Board of Directors") and the Executive may be
removed from said office(s) at any time with or without Cause, as hereinafter
defined, pursuant to Sections 5(b) or 5(d) hereof; provided that any such
removal shall be without prejudice to any contract rights the Executive may have
hereunder. Subject to Section 8(a)(6) and Section 8(b) hereof, this Agreement
shall expire by its terms on December 15, 2001.
2. Duties and Responsibilities. The Executive's duties
hereunder shall be those which shall be prescribed by the Company's Bylaws, as
amended from time to time, and by the Board of Directors or any committee
thereof from time to time and shall include such executive authority, duties,
powers and responsibilities as customarily attend the office as Executive Vice
President of a company comparable to the Company. The Executive shall discharge
such duties consistent with sound business practices and in accordance with law
and the Company's general employment policies, in each case, as in effect from
time to time, in all material respects and the Executive shall use best efforts
to promote the best interests of the Company. During the term of this Agreement,
the Executive's position (including the Executive's status and reporting
requirements), authority, duties, powers and responsibilities shall at all times
be at least commensurate in all material respects with the most significant of
those held, exercised or assigned to the Executive as of the Effective Date. The
Executive shall devote the Executive's knowledge, skill and all of the
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Executive's professional time, attention and energies (reasonable absences for
vacations and illness excepted), to the business of the Company in order to
perform such assigned duties faithfully, competently and diligently. It is
understood and agreed between the parties that the Executive may (i) engage in
charitable and community activities, including serving on boards of directors or
trustees of and holding other leadership positions in non-profit organizations
unless the objectives and requirements of such positions are determined by the
Board of Directors to be inconsistent with the performance of the Executive's
duties hereunder, and, (ii) manage personal investments, so long as such
activities do not interfere or conflict with the Executive's performance of
responsibilities and obligations hereunder. It is expressly agreed that any such
activities engaged in by the Executive as of the Effective Date shall not
thereafter be deemed to interfere with the Executive's obligations and
responsibilities hereunder. The Executive agrees that the approval of the Board
of Directors or a committee thereof shall be required before the Executive first
accepts a position as director of any for-profit corporation after the date
hereof.
3. Compensation. During the term of this Agreement, the
Executive shall receive, for all services rendered to the Company hereunder, the
following (hereinafter referred to collectively as "Compensation"):
(a) Salary. The Executive shall be paid an annual
base salary at an annual rate at least equal to the annual
rate being paid or payable to the Executive by the Company in
the month in which the Effective Date occurs, with such
increases thereafter as shall be determined from time to time
to be fair and reasonable by the Board of Directors or by the
Executive Compensation Committee of the Board of Directors
(the "Committee") in its discretion after taking into account,
among other things, the authority, duties, powers and
responsibilities of the Executive's position, the Executive's
performance, the Company's performance, the compensation of
persons in comparable positions at the Company and at other
comparable companies, and the effect of inflation. The
Executive's annual base salary shall not be reduced after any
such increase. The Executive's annual base salary shall be
payable in equal installments in accordance with the Company's
general salary payment policies, but no less frequently than
bi-weekly.
(b) Incentive Compensation. The Executive shall be
eligible for awards under the Company's incentive compensation
plans, if any, applicable to senior executive officers of the
Company or to key employees of the Company or its
subsidiaries, including, but not limited to, management
incentive plans and stock option plans, in accordance with and
subject to the terms thereof (including any provisions
providing for changes in the level of or termination of
benefits thereunder), on a basis commensurate with the
Executive's position and authorities, duties, powers and
responsibilities.
(c) Employee Benefit Plans. The Executive and the
Executive's "dependents," as that term may be defined under
the applicable employee benefit plan(s) of the Company, shall
be included, to the extent eligible thereunder and subject to
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the terms of the plans (including any provisions for changing
the level of or termination of benefits thereunder), in all
plans, programs and policies which provide benefits for
Company employees and their dependents on a basis commensurate
with the Executive's position and authorities, duties, powers
and responsibilities including, without limitation, health
care insurance, health and welfare plans, pension and
retirement plans, group life insurance plans, split dollar
life insurance plans, short and long-term disability plans,
survivors' benefits, executive supplemental benefits, holidays
and other similar or comparable benefits made available to the
Company's employees and senior executive officers
(hereinafter, such plans, programs and policies shall be
collectively referred to as the "Erie Benefit Plans"). Such
plans, programs and policies shall include, but are not
limited to, the Erie Insurance Group Retirement Plan for
Employees, the Erie Insurance Group Employee Savings Plan, the
Erie Insurance Group Deferred Compensation Plan, the Erie
Insurance Group Split Dollar Life Insurance Plan, the Erie
Insurance Group Supplemental Executive Retirement Plan, and
the Erie Insurance Group Health Protection, Prescription Drug,
Dental Assistance and Vision Care Plans.
(d) Perquisites. The Executive shall be entitled to
all perquisites which the Company from time to time makes
available to senior executive officers of the Company. Such
perquisites shall include, but are not limited to, parking,
club dues, tax preparation assistance, and an annual physical
examination.
(e) Expenses and Working Facilities. The Executive is
hereby authorized to incur, and shall be reimbursed by the
Company for, any and all reasonable and necessary business
related expenses, including, but not limited to, expenses for
business travel, entertainment, gifts and similar matters,
which expenses are incurred by the Executive on behalf of the
Company or any of its subsidiaries, upon presentation of
itemized accounts of such expenses in accordance with Company
policies. The Executive shall be furnished during the term of
this Agreement with offices and other working facilities in
the Company's principal executive offices located in Erie,
Pennsylvania (or other location of the principal executive
offices within the Erie metropolitan area) and secretarial and
other assistance suitable to the Executive's position and
adequate for the performance of duties hereunder.
(f) Performance Appraisal. The Executive's
performance may be evaluated by the Board of Directors or the
Committee from time to time. The Executive shall be entitled
to such additional remuneration, including but not limited to
annual bonuses based on performance, as the Board of Directors
or the Committee may, in its discretion, determine from time
to time.
4. Absences. The Executive shall be entitled to vacations in
accordance with the Company's vacation policy in effect from time to time (but
in no event shall the Executive be entitled to fewer vacation days than under
the Company's vacation policy as in effect on the Effective Date) and to
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absences because of illness or other incapacity, and shall also be entitled to
such other absences, whether for holiday, personal time, conventions, or for any
other purpose, as are granted to the Company's other senior executive officers
or as are approved by the Board of Directors or the Committee, which approval
shall not be unreasonably withheld.
5. Termination. The Executive's employment hereunder
may be terminated only as follows:
(a) Expiration of Term of Office. Upon the expiration
of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof, the
Board of Directors may (i) determine that the Executive should
not continue in such office(s) or (ii) that the Executive
should not be elected or appointed to an office with duties,
authorities, powers and responsibilities that are at least
commensurate with those of said office(s), in either case, for
reasons other than for Cause (if the reasons for such
noncontinuance, nonreelection or nonreappointment constitute
Cause, then Section 5(d) hereof will apply).
(b) By the Company Without Cause. The Company may at
any time terminate the Executive's employment hereunder
without Cause only by the affirmative vote of a majority of
the entire Board of Directors, and upon no less than thirty
(30) days' prior written notice to the Executive.
(c) By the Executive Without Good Reason. The
Executive may at any time terminate employment hereunder for
any reason upon no less than thirty (30) days' written notice
to the Company. Section 5(e) shall apply to any termination of
employment by the Executive for Good Reason.
(d) By the Company For Cause. The Company may
terminate the Executive's employment hereunder for Cause. In
such event, the Company shall give to the Executive prompt
written notice (in addition to any notice which may be
required by Section 5(d)(1) hereof) specifying in reasonable
detail the basis for such termination. For purposes of this
Agreement, "Cause" shall mean any of the following conduct by
the Executive:
(1) The deliberate and intentional
breach of any material provision of
this Agreement, which breach
Executive shall have failed to cure
within thirty (30) days after
Executive's receipt of written
notice from the Company specifying
the specific nature of the
Executive's breach;
(2) The deliberate and intentional
engaging by Executive in gross
misconduct that is materially and
demonstrably inimical to the best
interests, monetary or otherwise, of
the Company; or
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(3) Conviction of a felony or conviction
of any crime involving moral
turpitude, fraud or deceit.
For purposes of this definition, no act, or failure to act, on the Executive's
part shall be considered "deliberate and intentional" unless done, or omitted to
be done, by the Executive not in good faith and without reasonable belief that
such action or omission was in the best interest of the Company.
(e) By the Executive for Good Reason. The Executive
may terminate employment hereunder for Good Reason upon
providing thirty (30) days written notice to the Company after
the Executive reasonably becomes aware of the circumstances
giving rise to such Good Reason. For purposes of this
Agreement, "Good Reason" means the following conduct of the
Company, unless the Executive shall have consented thereto in
writing:
(1) Material breach of any material
provision of this Agreement by the
Company, which breach shall not have
been cured by the Company within
thirty (30) days after Company's
receipt from the Executive or the
Executive's agent of written notice
specifying in reasonable detail the
nature of the Company's breach;
(2) The assignment to the Executive of
any duties inconsistent in any
material respect with the
Executive's position (including any
reduction of the Executive's status
and reporting requirements),
authority, duties, powers or
responsibilities with the Company as
contemplated by Section 2 of this
Agreement, or any other action by
the Company, including the removal
of the Executive from or any failure
to reelect or reappoint the
Executive to the office(s) specified
in Section 2 or a commensurate
office(s) (other than for Cause),
which results in a diminution of the
Executive's authority, duties,
position, responsibilities or
status, excluding for this purpose
any isolated, insubstantial and
inadvertent action respecting the
Executive not taken in bad faith and
which is remedied by the Company
within thirty (30) days after
receipt of written notice from the
Executive to the Company;
(3) The Company's relocation of the
Executive out of the Company's
principal executive offices or the
relocation of the Company's
principal executive offices to a
location outside the Erie,
Pennsylvania metropolitan area,
except for required short-term
travel on the Company's behalf to
the extent necessary for the
Executive to carry out his normal
duties in the ordinary course of
business;
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(4) The failure of the Company to obtain
the assumption in writing of its
obligations to perform this
Agreement by any successor as
provided in Section 14 hereof not
less than five days prior to a
merger, consolidation or sale as
contemplated in Section 14; or
(5) A reduction in the overall level of
compensation of the Executive. For
purposes of this subsection 5, the
following shall not constitute a
reduction in the overall level of
compensation of the Executive: (i)
changes in the cash/stock mix of
compensation payable to the
Executive; (ii) a reduction in the
overall level of compensation of the
Executive resulting from the failure
to achieve corporate, business unit
and/or individual performance goals
established for purposes of
incentive compensation for any year
or other period; provided that the
aggregate short-term incentive
opportunity, when combined with the
Executive's base salary, provides,
in the aggregate, an opportunity for
the Executive to realize at least
the same overall level of
compensation as was paid in the
immediately prior year or period at
target performance levels; and
provided, further, that such target
performance levels are reasonable at
all times during the measurement
period, taking into account the fact
that one of the purposes of such
compensation is to incent the
Executive; (iii) reductions in
compensation resulting from changes
to any Erie Benefit Plan (provided
that such changes are generally
applicable to all participants in
such Erie Benefit Plan); and (iv)
any combination of the foregoing.
(f) Disability. In the event that the Executive shall
be unable to perform the Executive's duties hereunder on a
full time basis for a period of one hundred-eighty (180)
consecutive calendar days by reason of incapacity due to
illness, accident or other physical or mental disability, then
the Company may, at its discretion, terminate the Executive's
employment hereunder if the Executive, within ten (10) days
after receipt of written notice of termination (which notice
may be given before or after the end of the entire 180 day
period), shall not have returned to the performance of all of
his duties hereunder on a full-time basis.
(g) Death. The Executive's employment under
this Agreement shall terminate upon the Executive's death.
(h) Mutual Written Agreement. This Agreement
and the Executive's employment hereunder may be terminated at any time by
the mutual written agreement of the Executive and the Company.
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6. Compensation in the Event of Termination. In the event that the
Executive's employment hereunder terminates prior to the expiration of this
Agreement for any reason provided in Section 5 hereof, the Company shall pay the
Executive, compensation and provide the Executive and the Executive's eligible
dependents with benefits as follows:
(a) Executive's Nonreelection to Office; Termination
By Company Without Cause; Termination By Executive for Good
Reason. In the event that the Executive's employment hereunder
is terminated: (i) because the Executive does not continue in
office pursuant to Section 5(a) hereof; or (ii) by the Company
without Cause pursuant to Section 5(b) hereof; or (iii) by the
Executive for Good Reason pursuant to Section 5(e) hereof,
then in any such event the Company shall pay or provide, as
applicable, the following compensation and benefits to the
Executive:
(1) Three (3) times the following: (A)
the highest annual base salary paid
or payable to the Executive in the
then current year or any one (1) of
the three (3) calendar years
preceding Executive's termination of
employment hereunder; plus (B) an
amount equal to the sum of the
Executive's highest award(s) under
the Company's Annual Incentive Plans
for any one (1) of the three (3)
calendar years preceding the date of
the termination of Executive's
employment hereunder (such total is
referred to herein as "Covered
Compensation"). Such payment to the
Executive by the Company shall be
paid in a lump sum unless the
Executive elects, and so notifies
the Company in writing prior to the
termination of the Executive's
employment hereunder, to receive
such payment in three (3) equal
annual installments. The lump sum or
first payment, as the case may be,
shall be paid within sixty (60) days
after the date of the termination of
the Executive's employment
hereunder;
(2) Any awards or other compensation to
which the Executive is entitled
under any of the Company's
compensation plans or Erie Benefit
Plans to the extent not covered in
subsection (1) hereof;
(3) Any award to which the Executive
would be entitled under the
Company's Long-Term Incentive Plan
as in effect on December 16, 1997,
calculated under the provision of
that Plan as if the Executive ceases
to be an Employee of the Company by
reason of death, disability or
normal retirement;
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(4) Continuing coverage for all purposes
(including eligibility, coverage,
vesting and benefit accruals, as
applicable), for a period of three
(3) years after the date of the
termination of Executive's
employment hereunder, to the extent
not prohibited by law, for the
Executive and the Executive's
eligible dependents under all of the
Erie Benefit Plans in effect and
applicable to Executive and the
Executive's eligible dependents as
of the date of termination. In the
event that the Executive and/or the
Executive's eligible dependents,
because of the Executive's
terminated status, cannot be covered
or fully covered under any or all of
the Erie Benefit Plans, the Company
shall continue to provide the
Executive and/or the Executive's
eligible dependents with the same
level of such coverage in effect
prior to termination, payable from
the general assets of the Company if
necessary. Notwithstanding the
foregoing, the Executive may elect
(by giving written notice to the
Company prior to the termination of
employment hereunder), on a benefit
by benefit basis, to receive in lieu
of continuing coverage, cash in an
amount equal to the present value
(using a 6.5% discount rate over
three years) of the projected cost
to the Company of providing such
benefit for such three year period.
The aggregate amount of cash to
which the Executive is entitled
pursuant to the preceding sentence
shall be payable by the Company to
the Executive within sixty (60) days
after the date of the termination of
Executive's employment hereunder;
and
(5) For a period of three (3) years
after the date of the termination of
Executive's employment hereunder,
such perquisites as are made
available to the Executive as of the
date of the termination of
Executive's employment hereunder.
The Executive's subsequent death, disability or attainment of age 65 or any
other age shall in no way affect or limit the Company's obligations under this
Section 6(a).
(b) Termination By the Company for Cause. In the
event that the Company shall terminate the Executive's
employment hereunder for Cause pursuant to Section 5(d), this
Agreement shall forthwith terminate and the obligations of the
parties hereto shall be as set forth in Section 8 hereof.
(c) Termination by the Executive Without Good Reason.
In the event that the Executive shall terminate employment
hereunder other than for Good Reason pursuant to Section 5(c),
this Agreement shall forthwith terminate and the obligations
of the parties hereto shall be as set forth in Section 8
hereof.
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(d) Disability. In the event that the Company elects
to terminate the Executive's employment hereunder pursuant to
Section 5(f), the Executive shall continue to receive from the
date of such termination through the expiration date of this
Agreement, sixty percent (60%) of the then current annual base
salary to which the Executive was entitled pursuant to Section
3(a) hereof immediately preceding such termination, in
accordance with the payroll practices of the Company for
senior executive officers, reduced, however, by the amount of
any proceeds from Social Security and disability insurance
policies provided by and at the expense of the Company.
(e) Death. In the event of the death of the Executive
during the term of this Agreement, the then current annual
base salary to which the Executive was entitled pursuant to
Section 3(a) hereof immediately preceding the Executive's
death shall be paid, in twelve (12) equal monthly installments
following the date of death, to the last beneficiary
designated by the Executive under the Company's group life
insurance policy maintained by the Company or such other
written designation expressly provided to the Company for the
purposes hereof or, failing either such designation, to the
Executive's estate.
(f) Mutual Written Consent. In the event that the
Executive and the Company shall terminate the Executive's
employment by mutual written agreement, the Company shall pay
such compensation and provide such benefits, if any, as the
parties may mutually agree upon in writing.
The Executive shall not be required to mitigate the amount of any payment
provided for in this Section 6 by seeking employment or otherwise, nor shall any
amounts received from employment or otherwise by the Executive offset in any
manner the obligations of the Company hereunder except as specifically provided
in Section 6(d) hereof.
7. Certain Additional Payments by the Company. Notwithstanding
anything in this Agreement to the contrary, in the event it is determined that
any payment or distribution by the Company to or for the benefit of the
Executive, whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise (a "Payment"), is subject to the excise
tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended
(the "Code"), or any successor provision, on excess parachute payments, as that
term is used and defined in Sections 4999 and 280G of the Code, then the
Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount equal to the then current rate of tax under said Section
4999 multiplied by the total of the amounts so paid or payable, including the
Gross-Up Payment, which are deemed to be a part of an excess parachute payment.
8. Effect of Expiration of Agreement or Termination of
Executive's Employment. Upon the expiration of this Agreement by its terms or
the termination of the Executive's employment hereunder, neither the Company nor
the Executive shall have any remaining duties or obligations hereunder except
that:
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(a) The Company shall:
(1) Pay the Executive's accrued salary
and any other accrued benefits under
Sections 3(a), (b), and (c) hereof;
(2) Reimburse the Executive for expenses
already incurred in accordance with
Section 3(e) hereof;
(3) Pay or otherwise provide for any
benefits, payments or continuation
or conversion rights in accordance
with the provisions of any Erie
Benefit Plan of which the Executive
or any of the Executive's dependents
is or was a participant or as
otherwise required by law;
(4) Pay the Executive and the
Executive's beneficiaries any
compensation and/or provide the
Executive or the Executive's
eligible dependents any benefits, as
the case may be, due pursuant to
Section 6 or Section 7 hereof; and
(5) Unless the employment of the
Executive is terminated by the
Company for Cause, pay the Executive
or the Executive's beneficiaries the
full amount or amounts accrued under
the Supplemental Executive
Retirement Plan of the Company (the
"SERP") as in effect on the
Effective Date (or as such benefits
may be enhanced by subsequent
amendments or supplements to such
SERP), as though, solely for
purposes of determining any
otherwise applicable actuarial
reduction factors, the event of the
termination of Executive's
employment hereunder or expiration
of this Agreement occurred on the
Executive's Normal Retirement Date
as defined in such SERP. Accrued
benefits under the SERP shall be
fully vested and nonforfeitable upon
such termination (including
termination on account of the
Executive's death) or expiration.
Any reductions in SERP benefits that
would otherwise apply pursuant to
Section 10.1 of the Company's
Retirement Plan for Employees (or
pursuant to any successor provision
of such plan or any successor plan)
relating to Section 415(b) of the
Code shall not be applicable for
purposes hereof. No further approval
by the Board of Directors or the
Committee with respect to payments
under the SERP in accordance with
the preceding sentences shall be
required. Unreduced payments may
begin at age 55, but in no event
would payments be made under this
Section 8(a)(5) before the Executive
reaches age fifty-five (55). The
Company shall purchase for the
Executive, naming the Executive
and/or the Executive's designee the
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owner, a paid up annuity, from an
insurer reasonably acceptable to the
Executive but in any event having an
A.M. Best rating of A+ or better (or
other comparable rating), that will
pay to the Executive an amount equal
to the benefit to which the
Executive would otherwise be
entitled under the SERP and payable
at the times such SERP benefit would
be payable in accordance with the
provisions hereof. Upon the purchase
and delivery to the Executive of
such an annuity, the Executive shall
release the Company from any further
obligation under the SERP. The
Company further agrees to pay the
Executive immediately upon
termination, a cash payment (the
"Tax Gross-up") equal to the sum of
the following: (i) all taxes
(federal, state, local, and payroll
taxes) incurred and due and owing by
the Executive, arising from the cost
of the annuity purchased by the
Company to meet the requirements of
this Section 8(a)(5), and (ii) any
such taxes incurred and due and
owing with respect to the amount
paid in (i).
(6) Continue to remain bound by the
terms of Section 12 hereof.
(b) The Executive shall remain bound by the terms of
Sections 9 and 13 hereof for a period of thirty six (36)
months after the expiration of the Agreement by its terms;
provided, that the Executive shall not be bound by the terms
of Section 9(b) after the termination of employment (other
than a termination of the Executive by the Company for Cause)
if such termination occurs after the expiration of this
Agreement by its terms.
9. Covenants as to Confidential Information and Competitive
Conduct. The Executive hereby acknowledges and agrees as follows: (i) this
Section 9 is necessary for the protection of the legitimate business interests
of the Company, (ii) the restrictions contained in this Section 9 with regard to
geographical scope, length of term and types of restricted activities are
reasonable; (iii) the Executive has received adequate and valuable new
consideration for entering into this Agreement, and (iv) the Executive's
expertise and capabilities are such that this obligation hereunder and the
enforcement hereof by injunction or otherwise will not adversely affect the
Executive's ability to earn a livelihood.
(a) Confidentiality of Information and Nondisclosure.
The Executive acknowledges and agrees that the Executive's
employment by the Company under this Agreement necessarily
involves knowledge of and access to confidential and
proprietary information pertaining to the business of the
Company and its subsidiaries. Accordingly, the Executive
agrees that at all times during the term of this Agreement and
at any time thereafter, the Executive will not, directly or
indirectly, without the express written approval of the
Company, unless directed by applicable legal authority
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(including any court of competent jurisdiction, governmental
agency having supervisory authority over the business of the
Company or the subsidiaries, or any legislative or
administrative body having supervisory authority over the
business of the Company or its subsidiaries) having
jurisdiction over the Executive, disclose to or use, or
knowingly permit to be so disclosed or used, for the benefit
of himself, any person, corporation or other entity other than
the Company, (i) any information concerning any financial
matters, customer relationships, competitive status, supplier
matters, internal organizational matters, current or future
plans, or other business affairs of or relating to the Company
or its subsidiaries, (ii) any management, operational, trade,
technical or other secrets or any other proprietary
information or other data of the Company or its subsidiaries,
or (iii) any other information related to the Company or its
subsidiaries or which the Executive should reasonably believe
will be damaging to the Company or its subsidiaries which has
not been published and is not generally known outside of the
Company. The Executive acknowledges that all of the foregoing
constitutes confidential and proprietary information, which is
the exclusive property of the Company.
(b) Restrictive Covenant. During the term of, and for
a period of one (1) year (the "Restrictive Period") after the
termination of the Executive's employment hereunder for any
reason (other than a termination of the Executive hereunder
pursuant to Section 5(a), 5(b) or 5(e), hereof), the Executive
shall not render, directly, or indirectly, services to any
person, firm, corporation, association or other entity which
conducts the same or similar business as the Company or its
subsidiaries at the date of the Executive's termination of
employment hereunder within the states in which the Company or
any of its subsidiaries is then licensed and doing business at
the date of the Executive's termination of employment
hereunder without the prior written consent of the Board of
Directors, which may be withheld in its discretion. In the
event the Executive violates any of the provisions contained
in this Section 9(b) hereof, the Restrictive Period shall be
increased by the period of time from the commencement by the
Executive of any violation until such violation has been cured
to the satisfaction of the Company. The Executive further
agrees that at no time during the Restrictive Period will the
Executive attempt to directly or indirectly solicit or hire
employees of Company or its subsidiaries or induce any of them
to terminate their employment with the Company or any of the
subsidiaries. Notwithstanding the foregoing, the performance
by the Executive of rights and duties under an agency
agreement with the Company shall not constitute a breach of
this Section 9(b).
(c) Company Remedies. The Executive acknowledges and
agrees that any breach of this Section 9 will result in
immediate and irreparable harm to the Company, and that the
Company cannot be reasonably or adequately compensated by
damages in an action at law. In the event of a breach by the
Executive of the provisions of this Section 9, the Company
shall be entitled, to the extent permitted by law, immediately
to cease to pay or provide the Executive or the Executive's
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dependents any compensation or benefit being, or to be, paid
or provided to the Executive pursuant to Section 3, Section 6
or Section 8 of this Agreement, and also to obtain immediate
injunctive relief restraining the Executive from conduct in
breach of the covenants contained in this Section 9. Nothing
herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for such breach,
including the recovery of damages from the Executive.
10. Resolution of Differences Over Breaches of Agreement.
Except as otherwise provided herein, in the event of any controversy, dispute or
claim arising out of, or relating to, this Agreement, or the breach thereof, or
arising out of any other matter relating to the Executive's employment with the
Company, the parties may seek recourse only for temporary or preliminary
injunctive relief to the courts having jurisdiction thereof and if any relief
other than injunctive relief is sought, the Company and the Executive agree that
such underlying controversy, dispute or claim shall be settled by arbitration
conducted in Erie, Pennsylvania in accordance with this Section 10 and the
Commercial Arbitration Rules of the American Arbitration Association ("AAA").
The matter shall be heard and decided, and awards rendered by a panel of three
(3) arbitrators (the "Arbitration Panel"). The Company and the Executive shall
each select one arbitrator from the AAA National Panel of Commercial Arbitrators
(the "Commercial Panel") and AAA shall select a third arbitrator from the
Commercial Panel. The award rendered by the Arbitration Panel shall be final and
binding as between the parties hereto and their heirs, executors,
administrators, successors and assigns, and judgment on the award may be entered
by any court having jurisdiction thereof. Except as provided in Section 11
hereof, each party shall bear sole responsibility for all expenses and costs
incurred by such party in connection with the resolution of any controversy,
dispute or claim in accordance with this Section 10.
11. Payment of Executive's Legal Fees. If the Executive is
required to bring any action to enforce rights or to collect moneys due under
this Agreement, the Company shall pay to the Executive the fees and expenses
incurred by the Executive in bringing and pursuing such action if the Executive
is successful, in whole or in part, on the merits or otherwise (including by way
of a settlement involving a payment of money by the Company to the Executive),
in such action. The Company shall pay such fees and expenses in advance of the
final disposition of such action upon receipt of an undertaking from the
Executive to repay to the Company such advances if the Executive is not
ultimately successful, in whole or in part, on the merits or otherwise, in such
action.
12. Severance Pay upon Termination of Employment after
Expiration of the Agreement. Notwithstanding the expiration of this Agreement by
its terms and notwithstanding the terms of any corporate severance policy then
in effect and applicable to the Executive, if the employment of the Executive is
terminated without Cause by the Company, by the Executive for Good Reason or
upon the expiration of the term of the office(s) to which the Executive has been
elected or appointed as set forth in Section 1 hereof (for reasons other than
for Cause), in any case, within thirty-six (36) months after the expiration of
this Agreement by its terms, then (i) the Company shall pay to the Executive
severance compensation in an amount equal to two (2) times the Executive's
Covered Compensation as determined on the date of such termination, and (ii) the
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Executive and the Executive's eligible dependents shall be entitled to
continuing coverage under the Company's then-existing group health plans
(including medical, dental, prescription drug and vision plans, if any) for a
period of two (2) years after the date of the termination of the Executive's
employment, to the extent not prohibited by law and subject to the terms of such
plans including provisions as to deductibles and copayments and changes in
levels of coverage that are generally applicable to employees. The payment to
the Executive by the Company pursuant to subsection (i) of the preceding
sentence shall be paid in a lump sum unless the Executive elects, and so
notifies the Company in writing prior to the Executive's termination of
employment, to receive such payment in two (2) equal annual installments. The
lump sum or first payment, as the case may be, shall be paid within thirty (30)
days after the date of termination of the Executive's employment.
13. Release. The Executive hereby acknowledges and agrees that
neither the Company nor any of its representatives or agents will be obligated
to pay any compensation or benefit which the Executive has a right to be paid or
provided to the Executive or the Executive's dependents pursuant to Section 6,
Section 8 or Section 12 of this Agreement, unless the Executive, if requested by
the Company in its sole discretion, executes a release in a form reasonably
acceptable to the Company, which releases any and all claims the Executive has
or may have against the Company or its subsidiaries, agents, officers,
directors, successors or assigns.
14. Waiver. The waiver by a party hereto of any breach
by the other party hereto of any provision of this Agreement shall not operate
or be construed as a waiver of any other or subsequent breach by a party hereto.
15. Assignment. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the Company, and the Company
shall be obligated to require any successor to expressly acknowledge and assume
its obligations hereunder. This Agreement shall inure to the extent provided
hereunder to the benefit of and be enforceable by the Executive or the
Executive's legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. The Executive may not delegate any of the
Executive's duties, responsibilities, obligations or positions hereunder to any
person and any such purported delegation shall be void and of no force and
effect.
16. Notices. Any notices required or permitted to be given
under this Agreement shall be sufficient if in writing, and if personally
delivered or when sent by first class certified or registered mail, postage
prepaid, return receipt requested--in the case of the Executive, to his
residence address as set forth below, and in the case of the Company, to the
address of its principal place of business as set forth below, to the attention
of the Chairman of the Board, or in case the Executive is the Chairman of the
Board, to the Chairman of the Compensation Committee of the Board -- or to such
other person or at such other address with respect to each party as such party
shall notify the other in writing.
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17. Construction of Agreement.
(a) Governing Law. This Agreement shall be
governed by and construed under the laws of the Commonwealth
of Pennsylvania.
(b) Severability. In the event that any one or more
of the provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, the validity, legality or
enforceability of the remaining provisions shall not in any
way be affected or impaired thereby.
(c) Headings. The descriptive headings of the several
paragraphs of this Agreement are inserted for convenience of
reference only and shall not constitute a part of this
Agreement.
18. Entire Agreement. This Agreement contains the entire
agreement of the parties concerning the Executive's employment and all promises,
representations, understandings, arrangements and prior agreements on such
subject are merged herein and superseded hereby. The provisions of this
Agreement may not be amended, modified, repealed, waived, extended or discharged
except by an agreement in writing signed by the party against whom enforcement
of any amendment, modification, repeal, waiver, extension or discharge is
sought. No person acting other than pursuant to a resolution of the Board of
Directors or the Committee shall have authority on behalf of the Company to
agree to amend, modify, repeal, waive, extend or discharge any provision of this
Agreement or anything in reference thereto or to exercise any of the Company's
rights to terminate or to fail to extend this Agreement.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
officers thereunto duly authorized, and the Executive has hereunto set his hand
all as of the day and year first above written.
ATTEST: ERIE INDEMNITY COMPANY
/s/ J. R. Van Gorder By: /s/ F. William Hirt
J. R. Van Gorder F. William Hirt
Secretary Chairman of the Board
WITNESS:
/s/ Charlotte F. Drobniewski /s/ Douglas F. Ziegler
Charlotte F. Drobniewski Douglas F. Ziegler
Executive Secretary 378 Ridgeview Drive
Erie, PA 16505
68
ADDENDUM TO EMPLOYMENT AGREEMENT
This Addendum (the "Addendum") is made effective as of the 15th day of
December, 1999 and is intended to amend a certain Employment Agreement (the
"Agreement") by and between Erie Indemnity Company and Stephen A. Milne
effective as of December 16, 1997.
WHEREAS, the Company has determined that it is in the best interest of
the Company and its Shareholders to secure the continued employment of the
Executive in accordance with the terms of the Agreement; and
WHEREAS, the Board of Directors of the Company at its meeting of March
9, 1999 agreed to extend the term of the Agreement for a period of one (1)
additional year which extended the term of the Agreement to expire on December
15, 2002 instead of December 15, 2001; and
WHEREAS, the Board of Directors of the Company at its meeting of
December 14, 1999 has again agreed to extend the term of the Agreement for a
period of one (1) additional year as contained herein; and
WHEREAS, the Executive is agreeable to the extension of the Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties agree
as follows:
1. Paragraph 1 of the Agreement with respect to the Term is hereby
amended by extending the Term to expire on December 15, 2003.
2. All other terms and conditions of the Agreement remain in full force
and effect.
ATTEST: ERIE INDEMNITY COMPANY
/s/ Mark T. Torok By: /s/ F. William Hirt
Mark T. Torok F. William Hirt
Assistant Secretary Chairman of the Board
WITNESS:
/s/ Charlotte F. Drobniewski /s/ Stephen A. Milne
Charlotte F. Drobniewski Stephen A. Milne
Executive Secretary 6200 Ruhl Road
Fairview, PA 16415
69
ADDENDUM TO EMPLOYMENT AGREEMENT
This Addendum (the "Addendum") is made effective as of the 15th day of
December, 1999 and is intended to amend a certain Employment Agreement (the
"Agreement") by and between Erie Indemnity Company and Jan R. Van Gorder
effective as of December 16, 1997.
WHEREAS, the Company has determined that it is in the best interest of
the Company and its Shareholders to secure the continued employment of the
Executive in accordance with the terms of the Agreement; and
WHEREAS, the Board of Directors of the Company at its meeting of March
9, 1999 agreed to extend the term of the Agreement for a period of one (1)
additional year which extended the term of the Agreement to expire on December
15, 2000 instead of December 15, 1999; and
WHEREAS, the Board of Directors of the Company at its meeting of
December 14, 1999 has again agreed to extend the term of the Agreement for a
period of one (1) additional year as contained herein; and
WHEREAS, the Executive is agreeable to the extension of the Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties agree
as follows:
1. Paragraph 1 of the Agreement with respect to the Term is hereby
amended by extending the Term to expire on December 15, 2001.
2. All other terms and conditions of the Agreement remain in full force
and effect.
ATTEST: ERIE INDEMNITY COMPANY
/s/ Mark T. Torok By: /s/ F.William Hirt
Mark T. Torok F. William Hirt
Assistant Secretary Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ Jan R. Van Gorder
Sheila M. Hirsch Jan R. Van Gorder
Executive Secretary 6796 Manchester Beach Rd.
Fairview, PA 16415
70
ADDENDUM TO EMPLOYMENT AGREEMENT
This Addendum (the "Addendum") is made effective as of the 15th day of
December, 1999 and is intended to amend a certain Employment Agreement (the
"Agreement") by and between Erie Indemnity Company and Philip A. Garcia
effective as of December 16, 1997.
WHEREAS, the Company has determined that it is in the best interest of
the Company and its Shareholders to secure the continued employment of the
Executive in accordance with the terms of the Agreement; and
WHEREAS, the Board of Directors of the Company at its meeting of March
9, 1999 agreed to extend the term of the Agreement for a period of one (1)
additional year which extended the term of the Agreement to expire on December
15, 2000 instead of December 15, 1999; and
WHEREAS, the Board of Directors of the Company at its meeting of
December 14, 1999 has again agreed to extend the term of the Agreement for a
period of one (1) additional year as contained herein; and
WHEREAS, the Executive is agreeable to the extension of the Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties agree
as follows:
1. Paragraph 1 of the Agreement with respect to the Term is hereby
amended by extending the Term to expire on December 15, 2001.
2. All other terms and conditions of the Agreement remain in full force
and effect.
ATTEST: ERIE INDEMNITY COMPANY
/s/ Mark T. Torok By: /s/ F. William Hirt
Mark T. Torok F. William Hirt
Assistant Secretary Chairman of the Board
WITNESS:
/s/ Cori Coccarelli /s/ Philip A. Garcia
Cori Coccarelli Philip A. Garcia
786 Stockbridge Drive
Erie, PA 16505
71
ADDENDUM TO EMPLOYMENT AGREEMENT
This Addendum (the "Addendum") is made effective as of the 15th day of
December, 1999 and is intended to amend a certain Employment Agreement (the
"Agreement") by and between Erie Indemnity Company and John J. Brinling, Jr.
effective as of December 16, 1997.
WHEREAS, the Company has determined that it is in the best interest of
the Company and its Shareholders to secure the continued employment of the
Executive in accordance with the terms of the Agreement; and
WHEREAS, the Board of Directors of the Company at its meeting of March
9, 1999 agreed to extend the term of the Agreement for a period of one (1)
additional year which extended the term of the Agreement to expire on December
15, 2000 instead of December 15, 1999; and
WHEREAS, the Board of Directors of the Company at its meeting of
December 14, 1999 has again agreed to extend the term of the Agreement for a
period of one (1) additional year as contained herein; and
WHEREAS, the Executive is agreeable to the extension of the Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties agree
as follows:
1. Paragraph 1 of the Agreement with respect to the Term is hereby
amended by extending the Term to expire on December 15, 2001.
2. All other terms and conditions of the Agreement remain in full force
and effect.
ATTEST: ERIE INDEMNITY COMPANY
/s/ Mark T. Torok By: /s/ F. William Hirt
Mark T. Torok F. William Hirt
Assistant Secretary Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ John J. Brinling
Sheila M. Hirsch John J. Brinling, Jr.
Executive Secretary 5691 Culpepper Drive
Erie, PA 16506
72
ADDENDUM TO EMPLOYMENT AGREEMENT
This Addendum (the "Addendum") is made effective as of the 15th day of
December, 1999 and is intended to amend a certain Employment Agreement (the
"Agreement") by and between Erie Indemnity Company and Jeffrey A. Ludrof
effective as of June 30, 1999.
WHEREAS, the Company has determined that it is in the best interest of
the Company and its Shareholders to secure the continued employment of the
Executive in accordance with the terms of the Agreement; and
WHEREAS, the Board of Directors of the Company at its meeting of
December 14, 1999 has again agreed to extend the term of the Agreement for a
period of one (1) additional year as contained herein; and
WHEREAS, the Executive is agreeable to the extension of the Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties agree
as follows:
1. Paragraph 1 of the Agreement with respect to the Term is hereby
amended by extending the Term to expire on December 15, 2001.
2. All other terms and conditions of the Agreement remain in full force
and effect.
ATTEST: ERIE INDEMNITY COMPANY
/s/ Mark T. Torok By: /s/ F. William Hirt
Mark T. Torok F. William Hirt
Assistant Secretary Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ Jeffrey A. Ludrof
Sheila M. Hirsch Jeffrey A. Ludrof
Executive Secretary 170 Gateway Drive
Fairview, PA 16415
73
<TABLE>
<CAPTION>
EXHIBIT 11. - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
1999 1998 1997
------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Class A common shares outstanding
(stated value $.0292) $ 66,118,572 $ 67,032,000 $ 67,032,000
Class B common shares outstanding
(stated value $70) 3,070 3,070 3,070
Conversion of Class B shares to shares
(One share of Class B for 2,400 shares of Class A) 7,368,000 7,368,000 7,368,000
------------ ------------ ------------
Total 73,486,572 74,400,000 74,400,000
============ ============ ============
Net income $143,1O5,956 $134,551,494 $118,581,190
============ ============ ============
Per-share amount $1.95 $1.81 $1.59
===== ===== =====
</TABLE>
Note: 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 by privately
negotiated transactions, depending on prevailing market conditions and
alternative uses of the Company's capital. In 1999 there were 1,900,499 shares
repurchased at a total cost of $54,330,131 or an average price per share of
$28.59. The board, at its regular quarterly meting on March 7, 2000, announced
expanded authorization for share repurchases for as much as an additional
$50 million of its outstanding Class A common stock through December 31, 2002.
74
INCORPORATED BY REFERENCE, PAGE 17 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Years ended December 31
1999 1998 1997 1996 1995
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net revenue from management operations $ 148,518 $ 145,243 $ 134,201 $ 127,320 $ 111,276
Underwriting (loss) gain (3,539) 567 (2,259) (11,579) (3,738)
Total revenue from investment operations 63,776 50,547 42,978 36,307 30,473
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 208,755 196,357 174,920 152,048 138,011
Provision for income taxes 65,649 61,806 56,339 46,916 44,460
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 143,106 $ 134,551 $ 118,581 $ 105,132 $ 93,551
====================================================================================================================================
PER SHARE:
Net income per share $ 1.95 $ 1.81 $ 1.59 $ 1.41 $ 1.26
Dividends declared per Class A share (1) 0.4950 $ 0.4425 $ 0.3925 $ 0.345 $ 0.28
Dividends declared per Class B share $ 74.250 $ 66.375 $ 58.875 $ 51.75 $ 41.75
Weighted average shares 73,487 74,400 74,400 74,400 74,400
FINANCIAL POSITION:
Investments (2) $ 785,258 $ 709,417 $ 620,162 $ 484,784 $ 360,555
Receivables from Exchange and affiliates 470,969 467,794 469,708 478,304 451,778
Total assets 1,517,867 1,453,432 1,293,440 1,150,639 1,022,432
Shareholders' equity 697,599 655,223 539,383 435,759 354,064
Book value per share (1) $ 9.62 $ 8.81 $ 7.25 $ 5.86 $ 4.76
Shares repurchased 1,900 0 0 0 0
<FN>
(1) All per share data has been adjusted to reflect the three-for-one stock split of Class A Common Stock effective May 2, 1996.
(2) Includes investment in Erie Family Life Insurance Company.
</FN>
</TABLE>
75
<PAGE>
INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
Selected Market & Geographic Information
The Company's 5.5 percent share of direct premiums written by the Erie Insurance
Exchange and affiliated insurers, under the intercompany reinsurance pooling
agreement, through its subsidiaries, Erie Insurance Company and Erie Insurance
Company of New York for each of the three years ended December 31, were as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
Premiums Written:
District of Columbia $ 262 $ 242 $ 240
Illinois 262 - -
Indiana 4,435 4,203 3,959
Maryland 13,390 13,025 12,905
New York 2,453 1,503 860
North Carolina 4,641 3,629 2,852
Ohio 8,906 8,381 7,937
Pennsylvania 62,775 64,473 63,488
Tennessee 1,485 1,311 1,113
Virginia 9,136 8,975 8,898
West Virginia 5,197 5,199 4,907
- --------------------------------------------------------------------------------------------------------------
Total Premiums Written $ 112,942 $ 110,941 $ 107,159
- --------------------------------------------------------------------------------------------------------------
Reinsurance Assumed Premiums - Unaffiliated 7,558 5,762 4,452
Reinsurance Ceded Premiums - Unaffiliated (2,074) (1,608) (1,329)
- --------------------------------------------------------------------------------------------------------------
Net Premiums Written $ 118,426 $ 115,095 $ 110,282
==============================================================================================================
</TABLE>
The following table sets forth the premiums written and loss and loss adjustment
expense ratios by line of insurance for the Company's insurance subsidiaries
prepared in accordance with statutory accounting practices prescribed or
permitted by state insurance authorities, for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
Premiums Written:
Commercial:
Automobile $ 8,286 $ 7,611 $ 7,516
Workers' Compensation 7,340 7,124 7,541
Commercial multi-peril 9,382 8,187 7,186
Other 2,017 2,227 2,414
- -------------------------------------------------------------------------------------------------------------
Total Commercial $ 27,025 $ 25,149 $ 24,657
- -------------------------------------------------------------------------------------------------------------
Personal:
Automobile $ 67,176 $ 68,954 $ 67,701
Homeowners 17,683 15,841 13,851
Other 1,058 997 950
- -------------------------------------------------------------------------------------------------------------
Total Personal $ 85,917 $ 85,792 $ 82,502
- -------------------------------------------------------------------------------------------------------------
Total Premiums Written $ 112,942 $ 110,941 $ 107,159
=============================================================================================================
Statutory Loss and Loss Adjustment Expense Ratios:
Commercial:
Automobile 72.72% 65.6% 77.0%
Workers' Compensation 78.14 56.0 52.1
Commercial multi-peril 77.21 68.4 65.6
Other 50.25 25.2 15.5
- --------------------------------------------------------------------------------------------------------------
Commercial Loss Ratios 74.00% 59.8% 59.7%
- --------------------------------------------------------------------------------------------------------------
Personal:
Automobile 75.12% 72.3% 81.0%
Homeowners 61.81 67.3 65.3
Other 49.47 54.2 48.2
- --------------------------------------------------------------------------------------------------------------
Personal Loss Ratios 74.14% 71.2% 78.0%
- --------------------------------------------------------------------------------------------------------------
Total Loss Ratios (Excluding Unaffiliated Reinsurance) 74.11% 68.6% 73.7%
==============================================================================================================
</TABLE>
76
<PAGE>
INCORPORATED BY REFERENCE, PAGE 18 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis should be read in conjunction with
the audited financial statements and related notes found on pages 32 to 49 as
they contain important information helpful in evaluating the Company's operating
results and financial condition. (Note: A glossary of certain terms used in this
discussion can be found on page 30. Defined terms are italicized the first time
they appear in the text.)
Overview
Erie Indemnity Company (the Company) is a Pennsylvania business corporation
formed in 1925 to be the attorney-in-fact for Erie Insurance Exchange (the
Exchange), a Pennsylvania-domiciled reciprocal insurance exchange. The Company's
principal business activity consists of management of the affairs of the
Exchange. Management fees received from the Exchange account for the majority of
the Company's consolidated revenues. The Company also is engaged in the
property/casualty insurance business through its wholly-owned subsidiaries, Erie
Insurance Company, Erie Insurance Property & Casualty Company, and Erie
Insurance Company of New York and through its management of Flagship City
Insurance Company (Flagship), a subsidiary of the Exchange. The Company also has
investments in both affiliated and unaffiliated entities, including a 21.63
percent common stock interest in Erie Family Life Insurance Company (EFL), an
affiliated life insurance company. Together with the Exchange, the Company and
its subsidiaries and affiliates operate collectively under the name Erie
Insurance Group.
In its role as attorney-in-fact for the Policyholders of the Exchange, the
Company may charge a management fee up to 25.0 percent of the affiliated assumed
and direct premiums written by the Exchange. The Company's Board of Directors
has the authority to change the management fee at its discretion. The management
fee is compensation for: (a) acting as attorney-in-fact for the Exchange, (b)
managing the business and affairs of the Exchange, and (c) paying certain
general administrative expenses, including sales commissions, salaries, Employee
benefits, taxes, rent, depreciation, data processing, and other expenses not
part of the settlement of losses or the management of investments. All premiums
collected, less the management fee paid to the Company, are retained by the
Exchange for the purpose of paying losses, loss adjustment expenses, investment
expenses and other miscellaneous expenses including insurance-related taxes,
licenses and fees. The Company pays certain loss adjustment and investment
expenses on behalf of the Exchange and is reimbursed fully for these expenses by
the Exchange. The management fee rate charged the Exchange was set at the
following rates:
January 1, 1997 to December 31, 1997 24.00 percent
January 1, 1998 to December 31, 1998 24.25 percent
January 1, 1999 to December 31, 1999 25.00 percent
The Board can change the management fee rate at its discretion. In
determining the management fee rate, the Company's Board of Directors reviews
the relative financial positions of the Exchange and the Company and considers
the long-term needs of the Exchange to ensure its continued growth,
competitiveness and superior financial strength, which ultimately benefits the
Company. The Board voted to maintain the 25 percent management fee rate for all
of 2000.
The Company's wholly-owned subsidiaries, Erie Insurance Company and Erie
Insurance Company of New York, participate in an intercompany pooling
arrangement with the Exchange. This pooling arrangement provides for Erie
Insurance Company and Erie Insurance Company of New York to share
proportionately in the results of all property/casualty insurance operations of
the Exchange and the Company's subsidiaries. Erie Insurance Company's and Erie
Insurance Company of New York's proportionate share of the reinsurance pool is
5.0 percent and 0.5 percent, respectively.
The results of the Company's insurance operations are affected by the
conditions that affect all property/casualty insurance companies, such as
increased competition, catastrophic events, changes in the regulatory and
legislative environments and changes in general economic and investment
conditions.
77
<PAGE>
INCORPORATED BY REFERENCE, PAGE 19 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
Result of Operations
Overview
Consolidated net income in 1999 was a record $143,105,956, which exceeded
the 1998 net income of $134,551,494 by 6.4 percent. Earnings per share for 1999
increased 7.7 percent to $1.95 per share from $1.81 per share in 1998, as the
Company's stock repurchase program contributed positively to earnings per share
results. Gains made in the Company's management operations and its investment
operations were partially offset by losses experienced in the Company's
insurance underwriting operations. Management operations improved in both 1999
and 1998 as the Exchange continued to experience net written premium growth
rates that exceeded industry growth rates. The underwriting results of the
Company's property/ casualty insurance subsidiaries incurred losses related to
Hurricane Floyd in the third quarter of 1999 and losses related to reinsurance
activity in the fourth quarter of 1999. Insurance underwriting operations
results in 1998, when compared to 1997, improved as a result of loss cost
severity-management programs introduced by the Company combined with a
generally-favorable claims environment and mild weather conditions.
Revenue from investment operations improved significantly in 1999 when
compared to 1998 as the Company's excess cash flows were reinvested for higher
returns and the Company earned realized capital gains.
Analysis of Management Operations
Net revenues from management operations rose 2.3 percent to $148,517,964 in
1999 from $145,243,209 in 1998 and 8.2 percent in 1998 from $134,200,893 in
1997.
78
<PAGE>
INCORPORATED BY REFERENCE, PAGE 20 OF THE COMPANY'S ANNUAL REPORT TO
SHAREHOLDERS
Gross margins from management operations declined to 28.0 percent in 1999
compared to gross margins of 28.8 percent in 1998 and 28.2 percent in 1997.
Total revenues from management operations rose $25,516,407 to $530,083,022
for the year ended December 31, 1999, an increase of 5.1 percent. Management fee
revenue derived from the direct and affiliated assumed premiums of the Exchange
rose $24,227,887, or 5.0 percent, to $513,375,281 in 1999 from $489,147,394 in
1998. The direct and affiliated assumed premiums written of the Exchange grew
1.8 percent in 1999 to $2,053,501,124 from $2,017,102,661 in 1998. The rate of
growth in management fee revenue was greater than the rate of growth in direct
and affiliated assumed premium of the Exchange because the management fee rate
charged the Exchange in 1999 was 25 percent compared to 24.25 percent in 1998.
Premium growth continues to be modest due to previously announced pricing
actions in the private passenger automobile line of insurance in our major
markets. However, policy growth for 1999 was strong as policy retention rates
and new policy growth improved. Policies in force increased 5.1 percent to
2,689,849 for the year ended December 31, 1999 from 2,558,730 at December 31,
1998. Policy retention (the percentage of current Policyholders who have renewed
their policies) was 91.6 percent and 90.7 percent for the years ended December
31, 1999 and 1998, respectively, for private passenger automobile and 90.1
percent and 89.4 percent for the years ended December 31, 1999 and 1998,
respectively, overall for all lines of business.
Total revenues from management operations for the year ended December 31,
1998 grew 6.0 percent, or $28,574,661, to $504,566,615 from $475,991,954 in
1997. Decreases in the involuntary assigned risk premiums of the Exchange, rate
reductions in Pennsylvania workers' compensation insurance driven by legislative
reform, as well as rate pressures in the personal lines automobile market,
influenced the growth in premiums written by the Exchange in 1998 when compared
to 1997.
Service agreement revenue grew 11.3 percent to $15,440,862 in 1999 from
$13,878,922 in 1998. 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 $7,282,621 and
$7,163,895 in 1999 and 1998, 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 $8,158,241 and $6,715,027 for
1999 and 1998, respectively, on net voluntary assumed reinsurance premiums of
$116,546,295 and $95,928,945 for 1999 and 1998, respectively.
Service agreement revenue grew $6,852,549, or 97.5 percent, to $13,878,922
in 1998 from $7,026,373 in 1997. This growth was a result of initiating the
reimbursement from the Exchange for service charges on extended payment terms
beginning September 1, 1997. The service charge income increased by $5,152,714
to $7,163,895 in 1998.
The cost of management operations rose $22,241,652, or 6.2 percent, to
$381,565,058 in 1999 from $359,323,406 in 1998. Commissions to independent
Agents are the largest component of the cost of management operations. Included
in commission expense are the cost of scheduled commissions paid 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 direct business written and
serviced by the independent Agent within the Erie Insurance Group of companies.
Commission costs rose $18,216,870, or 7.4 percent, to $263,112,139 in 1999 from
$244,895,269 in 1998 and 6.2 percent in 1998 from $230,659,805 in 1997.
Commission costs grew faster than the rate of growth in direct written premiums
in 1999 due to increased provisions for Agent contingency and incentive awards
and an increase in the average commission rate. The provision for Agent
contingency awards increased $9,263,589 to $19,871,036 in 1999 from $10,607,447
in 1998 as a result of excellent insurance underwriting results on direct
business experienced in the past three years. The average commission rate
increased due to a slight shift in the insurance product mix to more commercial
and personal property lines of business from private passenger automobile
insurance.
The cost of management operations, excluding commission costs, increased
3.5 percent in 1999 to $118,452,919 from $114,428,137 in 1998. The Company's
79
<PAGE>
INCORPORATED BY REFERENCE, PAGE 21 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
personnel costs, net of reimbursement from affiliates, totaled $69,718,332,
$67,467,067, and $66,410,377 in 1999, 1998 and 1997, respectively. Personnel
costs are the second largest cost component in the cost of management operations
after commissions. Employee pay rate increases, combined with current year
increases in both medical and pharmaceutical Employee benefit costs due to
increased 1999 claims experience, account for the majority of the increase in
personnel costs.
Analysis of Insurance Underwriting Operations
The Company recorded an underwriting loss of $3,538,884 in 1999 compared to
an underwriting gain of $567,275 in 1998 and an underwriting loss of $2,259,425
in 1997. The growth in loss and loss adjustment expenses outpaced the growth in
premiums earned for 1999 when compared with 1998.
Premiums earned increased $4,284,427, or 3.8 percent, to $117,223,873 in
1999 while losses and loss adjustment expenses incurred increased $7,838,599, or
9.8 percent, to $87,719,264 in 1999. Included in the losses and loss adjustment
expenses incurred are catastrophe losses from our direct business of $4,059,190,
$2,893,626 and $701,414 in 1999, 1998 and 1997, respectively. Losses from
Hurricane Floyd accounted for $1.4 million in 1999, or $.01 per share, after
federal income taxes.
The Company's property/casualty insurance subsidiaries' voluntary assumed
reinsurance business generated a net underwriting loss of $2,591,959 and
$1,250,515 in 1999 and 1998, respectively. Catastrophes that affected Denmark
and France during the fourth quarter of 1999 were largely responsible for the
adverse results in the assumed reinsurance business for the year.
Catastrophes are an inherent risk of the property/ casualty insurance
business and can have a material impact on the Company's insurance underwriting
operating results. In addressing this risk, the Company employs what it believes
are reasonable underwriting standards and monitors its exposure by geographic
region. Additionally, the Company's property/casualty insurance subsidiaries
have in effect a reinsurance agreement with the Exchange that would
substantially mitigate the effect of catastrophe losses on the Company's
financial position.
Policy acquisition and other underwriting expenses amounted to $33,043,493,
$32,491,506 and $29,638,991 in 1999, 1998 and 1997, respectively. Included in
the other underwriting expenses are assessments made by the state insurance
guaranty associations. These assessments are mandated by statute and are used by
the various state
<TABLE>
<CAPTION>
Management Fee Revenue
By State and Line of Business
For the Year Ended December 31, 1999
(Dollars in thousands)
Private Workers' Commercial Commercial All Other Lines Total
State Passenger Auto Homeowners Compensation Auto Multi Peril of Business by State
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
District of Columbia $ 375 $ 184 $ 287 $ 49 $ 235 $ 61 $ 1,191
Illinois 582 155 108 86 225 34 1,190
Indiana 11,307 3,868 1,377 1,257 1,766 585 20,160
Maryland 35,452 10,332 3,655 5,110 4,240 2,074 60,863
New York 6,314 1,573 682 857 1,462 261 11,149
North Carolina 7,972 3,417 2,526 3,191 3,069 919 21,094
Ohio 24,742 7,665 --- 2,778 4,145 1,152 40,482
Pennsylvania 180,003 42,989 18,786 17,232 19,867 6,466 285,343
Tennessee 2,586 928 860 902 1,206 270 6,752
Virginia 20,314 5,892 5,082 4,203 4,533 1,502 41,526
West Virginia 15,699 3,374 --- 1,998 1,898 656 23,625
- ------------------------------------------------------------------------------------------------------------------------------------
Total by line of business $305,346 $ 80,377 $ 33,363 $ 37,663 $ 42,646 $ 13,980 $513,375
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
80
<PAGE>
INCORPORATED BY REFERENCE, PAGE 22 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
insurance guaranty associations to guarantee the property/casualty policies of
the companies that have become insolvent. These mandatory assess- ments totaled
$30,915, $1,222,958 and $171,557 in 1999, 1998 and 1997, respectively.
Assessments in 1998 were affected by two large insurer insolvencies in
Pennsylvania and Ohio.
The 1999 combined ratio for the Company's property/casualty insurance
operations calculated under Generally Accepted Accounting Principles (GAAP) was
103.0 compared to a ratio of 99.5 in 1998 and 102.1 in 1997. The GAAP combined
ratio for 1999, 1998 and 1997, excluding catastrophe losses on direct business,
was 99.6, 96.9 and 101.5, respectively.
Analysis of Investment Operations
Total revenue from investment operations was $63,775,746 in 1999 compared
to $50,546,973 in 1998 and $42,978,156 in 1997, increases of 26.2 percent and
17.6 percent, respectively. Net investment income rose $5,379,103, or 13.9
percent, for the year ended December 31, 1999 and $5,674,117, or 17.2 percent,
for the year ended December 31, 1998.
The Company's earnings from its 21.63 percent ownership of EFL totaled
$5,045,131 in 1999, up from $4,777,089 in 1998 and $4,230,909 in 1997. This
investment is accounted for under the equity method of accounting. Consequently,
the Company's investment earnings in 1999, 1998 and 1997 were a direct result of
the Company's share of EFL's net income of $23,324,697, $22,085,479 and
$19,560,368, respectively.
The 5.6 percent increase in EFL's net income in 1999 was the result of a
9.0 percent increase in policy revenue and a 7.4 percent increase in net
investment income, offset by an increase in Policyholder-related expenses of 8.9
percent. The 12.9 percent increase in EFL's net income in 1998 was the result of
an 8.7 percent increase in policy revenues as well as a 23.9 percent decrease in
death claims.
The Company's realized capital gains increased $7,581,628 in 1999 to
$14,745,334. During 1998 and 1997, the Company had capital gains of $7,163,706
and $5,815,186, respectively.
Financial Condition
Investments
The Company's investment strategy takes a long-term perspective emphasizing
investment quality, diversification and superior investment returns. Investments
are managed on a total return approach that focuses on current income and
capital appreciation. The Company's investment strategy also provides for
liquidity to meet the short-and long-term commitments of the Company. At
December 31, 1999 and 1998, the Company's investment portfolio of investment-
grade bonds, common stock and preferred stock, all of which are readily
marketable, represents 46.2 percent and 44.3 percent, respectively, of total
assets. These investments provide the liquidity the Company requires to meet the
demands on its funds.
Mortgage loans and other invested assets, including real estate and private
equity 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.
81
<PAGE>
INCORPORATED BY REFERENCE, PAGE 23 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
Fixed Maturities
The Company's investment strategy includes maintain- ing a fixed maturities
portfolio that is of very high quality and well diversified within each market
sector. The fixed maturities portfolio is managed with the goal of achieving
reasonable returns while limiting exposure to risk. At December 31, 1999, the
carrying value of fixed maturity investments represented 64.9 percent of total
invested assets.
The Company invests in both taxable and tax-exempt securities as part of
its strategy to maximize after-tax income. This strategy considers, among other
factors, the impact of the alternative minimum tax.
The Company's fixed maturity investments consist 97.9 percent of
high-quality, marketable bonds all of which were rated at investment-grade
levels (above Ba/BB) at December 31, 1999. Included in this investment-grade
category are $225.7 million, or 46.5 percent, of the highest quality bonds rated
Aaa/AAA or Aa/AA or bonds issued by the United States government. Generally, the
fixed maturities in the CompanyOs portfolio are rated by external rating
agencies. If such bonds are not rated externally, they are rated by the Company
on a basis consistent with that used by the rating agencies.
Management classifies all fixed maturities as available-for-sale
securities, allowing the Company to meet its liquidity needs and provide greater
flexibility for its investment managers to restructure the Company's investments
in response to changes in market conditions or strategic direction. Securities
classified as available-for-sale are carried at market value with unrealized
gains and losses included in shareholdersO equity. At December 31, 1999, the net
unrealized loss on fixed maturities, net of deferred taxes, amounted to
$2,517,000 compared to a net unrealized gain of $13,164,000 in 1998.
The Company attempts to achieve a balanced maturity schedule in order to
stabilize investment income in the event of interest rate reductions in a year
in which a large amount of securities could mature.
Equity Securities
Equity securities are carried on the Consolidated Statements of Financial
Position at market value. At December 31, 1999 and 1998, equity securities held
by the Company include net unrealized gains of $28,527,000 and $21,338,000,
respectively, net of deferred taxes. Investment characteristics of common and
preferred stocks differ substantially from one another. The Company's
preferred stock portfolio provides a source of highly predictable current income
that is competitive with investment-grade bonds. The preferred stocks are of
very high quality and marketable. Common stock provides capital appreciation
potential within the portfolio. Common stock investments inherently provide no
assurance of producing income because dividends are not guaranteed. Preferred
stocks generally provide for fixed rates of return that, while not guaranteed,
resemble fixed income securities.
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INCORPORATED BY REFERENCE, PAGE 24 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
Investment in EFL
The Company owns 21.63 percent of the outstanding common stock of EFL, a
member company of the Erie Insurance Group. EFL markets various life insurance
products, principally non-participating individual and group life policies,
including universal life and individual and group annuity products, in ten
jurisdictions. The Company's investment in EFL is accounted for under the equity
method of accounting; consequently, the Company's carrying value of $37,007,058
represents 21.63 percent of the shareholders' equity of EFL at December 31,
1999.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates is
concentrated in the investment portfolio. The Company monitors this exposure
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.
Principal cash flows and related weighted-average interest rates by
expected maturity dates for financial instruments sensitive to interest rates
are as follows:
Weighted-
December 31,1999 Principal Average
(Dollars in thousands) Cash Flows Interest Rate
- -----------------------------------------------------------------------
Fixed maturities and short-term bonds:
2000 $ 19,994 6.4%
2001 35,690 6.1%
2002 51,669 6.5%
2003 47,880 6.6%
2004 39,542 6.6%
Thereafter 312,262 6.9%
- -----------------------------------------------------------------------
Total $ 507,037
- -----------------------------------------------------------------------
Market Value $ 485,522
- -----------------------------------------------------------------------
Weighted-
December 31,1998 Principal Average
(Dollars in thousands) Cash Flows Interest Rate
- -----------------------------------------------------------------------
Fixed maturities and short-term bonds:
1999 $ 57,547 5.8%
2000 14,823 6.2%
2001 32,344 5.9%
2002 43,050 6.6%
2003 40,295 6.4%
Thereafter 272,877 6.3%
- -----------------------------------------------------------------------
Total $ 460,936
- -----------------------------------------------------------------------
Market Value $ 465,165
- -----------------------------------------------------------------------
Actual cash flows may differ from those stated as a result of calls and
prepayments.
Equity Price Risk
The Company's portfolio of marketable equity securities, which is carried
on the Consolidated Statements of Financial Position at estimated fair value,
has exposure to price risk. This 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; concentrations
in any one company or industry are limited by parameters established by
management and the Company's Board of Directors.
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INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
Liquidity and Capital Resources
Liquidity is a measure of an entity's ability to secure enough cash to meet
its contractual obligations and operating needs. The Company's major sources of
funds from opera- tions are the net cash flow generated from management
operations, the net cash flow from Erie Insurance CompanyOs and Erie Insurance
Company of New York's 5.5 percent participation in the underwriting results of
the reinsurance pool with the Exchange, and investment income from affiliated
and non-affiliated investments. Cash outflows are variable because of the
fluctuations in settlement dates for liabilities for unpaid losses and because
of the potential for large losses, either individually or in the aggregate.
The Company generates sufficient net positive cash flow from its operations
to fund its commitments and to build its investment portfolio, thereby
increasing future investment returns. The Company maintains a high degree of
liquidity in its investment portfolio in the form of readily marketable fixed
maturities, equity securities, and short- term investments. The Company
purchased investments totaling $255,780,000 in 1999 compared with purchases of
$235,568,000 in 1998, an increase of 8.6 percent. Company sales and maturities
of investments totaled $180,699,000 in 1999 compared to $119,569,000 in 1998, an
increase of 51.1 percent. Included in this total in 1999 are sales of fixed
maturities of $31,937,000 and calls and maturities of $63,084,000.
The net decrease in cash of $29,366,338 in 1999 included the $54,330,131
purchase of treasury stock. Effective January 1, 1999 through December 31, 2001,
the Company may repurchase as much as $70 million of its outstanding Class A
common stock. The Company may purchase the shares from time to time in the open
market or by privately negotiated transactions, depending on prevailing market
conditions and alternative uses of the Company's capital. In 1999, 1,900,499
shares were repurchased at an average price of $28.59.
The Company pays substantially all general and administrative expenses on
behalf of the Exchange and other affiliated companies. The Exchange generally
reimburses the Company for these expenses on a paid basis each month. Because
the Exchange traditionally has not paid management fees to the Company until the
premiums from Policyholders are collected, the change in the premium receivable
balance is used in determining the actual monthly amount transferred.
Management fee and expense reimbursements due at December 31 from the
Exchange were $104,264,179 and $106,986,856 in 1999 and 1998, respectively. A
receivable from EFL for expense reimbursements totaled $1,487,985 at December
31, 1999 compared to $1,625,408 at December 31, 1998. The Company also has a
receivable due from the Exchange for reinsurance recoverable from losses and
unearned premium balances ceded to the intercompany reinsurance pool. Such
amounts totaled $365,216,739 and $359,181,553, respectively, in 1999 and 1998.
The Company has a Stock Redemption Plan that 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. Limits
of redemption amount to an aggregation of: (1) $10 million and (2) an annual
amount, as determined by the Board in its sole discretion, not to exceed 20.0
percent of the CompanyOs 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 20.0
percent of the CompanyOs retained earnings determined as of the close of the
prior year. In addition, the restated Plan limits the repurchase from any single
shareholderOs estate to 33.0 percent of total share holdings of such
shareholder. At the Board of Directors meeting 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. There were no shares of stock redeemed under this
Plan to date.
Dividends declared to shareholders totaled $32,802,428, $29,865,438, and
$26,490,811 in 1999, 1998, and 1997, respectively. There are no regulatory
restrictions on the payment of dividends to the Company's shareholders, although
there are state law restrictions on the payment of dividends from the CompanyOs
subsidiaries to the Company. Dividends from subsidiaries are not material to the
Company's cash flows.
Property and equipment at December 31, 1999 includes $4.7 million of
capitalized software expenditures related to the development of a new agency
interface system for independent Agents who represent the Company. As of
year-end, a final decision had not been made as to whether the Company will
ultimately deploy this software. Further testing and analysis planned for the
first half of 2000 should enable management to determine whether the deployment
of this software will achieve managementOs desired objectives. Additional
deployment costs, which would be charged to operations, are estimated at
approximately $4 million.
84
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INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
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 December 31, 1999 and
1998 of $11,805,286 and $17,121,777, respectively. The primary reason for the
decrease in the deferred tax liability is a decrease in unrealized gains from
available-for-sale securities in 1999 of $11,302,500, resulting in a decrease in
deferred tax liability of $3,955,875. Management believes it is likely that the
Company will have sufficient taxable income in future years to realize the
benefits of the gross deferred tax assets.
Financial Ratings
The following table summarizes the current A. M. Best Company ratings for
the insurers managed by the Company:
Erie Insurance Exchange A++
Erie Insurance Company A++
Erie Insurance Property & Casualty Company A++
Erie Insurance Company of New York A++
Flagship City Insurance Company A++
Erie Family Life Insurance Company A+
According to A. M. Best, a superior rating (A++ or A+) is assigned to those
companies which, in A. M. Best's opinion, have achieved superior overall
performance when compared to the standards established by A. M. Best and have a
very strong ability to meet their obligations to policyholders over the long
term. Financial strength ratings have become increasingly important to the
insurers managed by the Company and to the industry in marketing insurance
products.
Regulatory Risk-Based Capital
The NAIC standard for measuring the solvency of insurance companies,
referred to as Risk-Based Capital (RBC), is a method of measuring the minimum
amount of capital appropriate for an insurance company to support its overall
business operations in consideration of its size and risk profile. The RBC
formula is used by state insurance regulators as an early warning tool to
identify, for the purpose of initiating regulatory action, insurance companies
that potentially are inadequately capitalized. In addition, the formula defines
minimum capital standards that will supplement the current system of low fixed
minimum capital and surplus requirements on a state-by-state basis. At December
31, 1999, the Company's property/casualty insurance subsidiaries' RBC levels are
all substantially in excess of levels that would require regulatory action.
Reinsurance
The property/casualty insurers managed by the Company discontinued all
ceded reinsurance treaties, other than with affiliated insurers, due to the
strong surplus position of the insurers managed by the Company, the cost of
reinsurance, and the low ratio of the premium writings of the insurers managed
by the Company to their surplus. The Company does not believe this
discontinuance of reinsurance treaties will have a material adverse effect, over
the long term, on the results of operations of the insurance companies managed
by the Company. However, the absence of such treaties could have an adverse
effect on the results of operations of the insurance companies managed by the
Company in a given year if the frequency or severity of claims were
substantially higher than historical averages because of an unusual event or
series of events.
Effective January 1, 1997, Erie Insurance Company and Erie Insurance
Company of New York placed in effect an all lines aggregate excess of loss
reinsurance agreement with the Exchange that supersedes the prior catastrophe
excess of loss reinsurance agreement between the parties. Under the new
agreement, Erie Insurance Company and Erie Insurance Company of New York
reinsure their net retained share of the intercompany reinsurance pool such
that, once Erie Insurance Company and Erie Insurance Company of New York have
sustained ultimate net losses that exceed an amount equal to 72.5 percent of
Erie Insurance Company and Erie Insurance Company of New York's net premiums
earned, the Exchange will be liable for 95.0 percent of the amount of such
excess up to, but not exceeding, an amount equal to 95.0 percent of 15.0 percent
of Erie Insurance Company's and Erie Insurance Company of New York's net
premiums earned. Erie Insurance Company and Erie Insurance Company of New York
retain losses equal to 5.0 percent of the ultimate net loss in excess of the
retention under the contract. The annual premium for this reinsurance treaty is
subject to a minimum premium of $800,000. The annual premium for this agreement
with the Exchange was $900,000 in 1999 compared to $1,158,245 in 1998, a 22.3
percent decrease. There were no loss recoveries by Erie Insurance Company or
Erie Insurance
85
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INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
Company of New York under this agreement for 1999 or 1998. This reinsurance
treaty is excluded from the inter-company reinsurance pooling agreement
described earlier.
Property/Casualty Loss Reserves
General
Loss reserves are established to account for the estimated ultimate costs
of loss and loss adjustment expenses for claims that have been reported but not
yet settled and claims that have been incurred but not reported. The estimated
loss reserve for reported claims is based primarily upon a case-by-case
evaluation of the type of risk involved and knowledge of the circumstances
surrounding each claim and the insurance policy provisions relating to the type
of loss. Estimates of reserves for unreported claims and loss settlement
expenses are determined on the basis of historical information by line of
insurance as adjusted to current conditions. Inflation is implicitly provided
for in the reserving function through analysis of costs, trends and reviews of
historical reserving results.
The process of estimating the liability for unpaid losses and loss expenses
is inherently judgmental and can be influenced by factors subject to variation.
Possible sources of variation include claim frequency and severity, changing
rates of inflation as well as changes in other economic conditions, judicial
trends and legislative changes. It is unlikely that future losses and loss
adjustment expenses will develop exactly as projected. The Company continually
refines reserves as experience develops and new information becomes known. The
Company reflects adjustments to reserves in the results of operations in the
periods in which the estimates are changed.
Environmental-Related Claims
In establishing the liability for unpaid losses and loss adjustment
expenses related to environmental claims, management considers facts currently
known and the current state of the law and coverage litigation. Establishing
reserves for these types of claims is subject to uncertainties that are
generally greater than those represented by other types of claims. Factors
contributing to those uncertainties include a lack of historical data, long
reporting delays, uncertainty as to the number and identity of insureds with
potential exposure, unresolved legal issues regarding policy coverage, and the
extent and timing of any such contractual liability. Courts have reached
different and sometimes inconsistent conclusions as to when the loss occurred
and what policies provide coverage, what claims are covered, whether there is an
insured obligation to defend, how policy limits are determined, how policy
exclusions are applied and interpreted, and whether cleanup costs represent
insured property damage. Further, even if and when the courts rule definitively
on the various legal issues, many cases will still present complicated factual
questions affecting coverage that must be resolved.
The insurers managed by the Company have incurred few environmental claims
and, as a result, have made few indemnity payments to date. The Company's
property/ casualty subsidiaries have established reserves for these exposures in
amounts they believe to be adequate based on current information. Management
does not believe that these claims will have a material impact on the Company's
liquidity, results of operations, cash flows or financial condition.
Factors That May Affect Future Results
Management Operations
Management Fee Rate. The management fee paid to the Company as
attorney-in-fact for the Exchange is subject to approval by the Company's Board
of Directors. The rate may be changed periodically by the Board at its
discretion but may not exceed 25.0 percent. The Board considers several factors
in determining the management fee rate, including the relative financial
position of the Exchange and the Company and the long-term capital needs of the
Exchange in order to foster growth and competitiveness as well as maintain its
superior financial strength. Because the management fee revenue from the
Exchange provides the majority of the Company's revenue, the income of the
Company is dependent upon the ability of the Exchange to offer competitive
insurance products in the marketplace.
Competition. Intense price competition in private passenger automobile
insurance, the Group's largest line of business, has affected the premium growth
rate of the insurers managed by the Company and, as a consequence, the growth in
the Company's management fee revenue. Favorable underwriting trends for personal
automobile writers, along with strong investment returns, have facilitated
significant decreases in personal automobile rate levels. To maintain the
competitive position of the insurers
86
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INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
managed by the Company in the private passenger automobile insurance
marketplace, additional rate actions that reduce written premiums are possible
in 2000.
Pennsylvania's deregulation of rates and forms for certain commercial
insureds is another factor promoting increased competition. Insurers are no
longer required to file rates and forms for approval with the Pennsylvania
Insurance Department for larger commercial risks [defined as commercial entities
generating an aggregate annual premium of $25,000 or more (exclusive of workers'
compensation) or which have twenty-five employees and an insurance manager,
consultant or buyer]. Risks that are smaller than large commercial risks are now
rated under a flex band (+ or -D 10%) from the filed rates. The law allows
greater flexibility in the rating of commercial risks and a faster response to
changing market conditions than under the prior system. The new law could impact
all insurance companies operating in Pennsylvania, either negatively or
positively, depending on the market and the aggressiveness of the insurer in
retaining and/or writing new commercial risks in Pennsylvania. The Company
believes that commercial deregulation will result in lower rather than higher
premium rate levels overall.
Insurance Operations
Geographic Expansion. The Company continues to seek quality growth by
expanding its operating territories domestically for direct business and
globally for the reinsurance assumed business. The expansion into new operating
territories offers the opportunity for growth in property/casualty premiums of
the Exchange upon which management and service fee revenue of the Company is
based. Over the last several years, geographic expansion has made a significant
contribution to the property/casualty premium growth rate of The ERIE. In 1999,
the Company began operations in the state of Illinois and expanded its operating
territory westward in the state of Tennessee. The Company anticipates that such
expansion will continue to contribute positively to the growth rate and
profitability of The ERIE.
Underwriting Risk. The insurers managed by the Company, including its
wholly-owned subsidiaries, are subject to the risk of losses due to catastrophic
events. In addressing this risk, the Company employs what it believes are
reasonable underwriting standards and monitors its exposures by geographic
region. The Company also evaluates other means available to insurers to
effectively manage risk. Catastrophic events are a perpetual factor that could
impact future results of the industry as a whole as well as the Company. The
current aggregate excess of loss reinsurance agreement between the Company's
property/casualty insurance subsidiaries and the Exchange substantially lessens
the effect of catastrophe losses on the Company.
Regulatory
Financial Services Reform. Federal legislative initiatives on financial
services reform, begun in 1997, culminated in the enactment in 1999 of Senate
Bill 900, the Financial Modernization Reform Act, which significantly changes
the way insurance companies, banks and securities firms are regulated. The
elimination of some regulatory barriers to banks entering the insurance market,
privacy initiatives concerning the consumer data held by financial institutions
and the interjection of federal government agencies into the traditionally state
regulated insurance industry may materially change the ground rules under which
insurance products are marketed.
Additionally, current and future proposed federal measures may affect the
way the property/casualty and the life insurance industries distribute, price,
and service their products. These proposals may include possible changes to the
tax laws governing the taxation of insurance companies, proposals regarding
natural disaster protection and insurance, tort reform and the use of credit
history, the Auto Choice Reform Act (see below), urban insurance issues (see
below) and the enforcement of territorial underwriting in personal lines of
business are other regulatory issues facing the insurance industry.
Urban Insurance Issues. Federal regulators have heightened their scrutiny
of the property/casualty insurance industry, particularly its underwriting and
marketing practices relative to homeowners insurance. Assertions have been made
and complaints filed against various insurers for an alleged practice called
"redlining," a term used to describe an insurer's illegal and unfair
discrimination against minority communities that are typically located in
economically depressed inner cities. The Department of Housing and Urban
Development has initiated much of the action at the
87
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INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
federal level, with enforcement by the United States Department of Justice. A
number of complaints have culminated in consent decrees under which insurers
have agreed to pay substantial sums of money.
Auto-Choice Reform Act. Currently pending before Congress, the Auto Choice
Reform Act is one of the more recent attempts at insurance regulation by the
federal government. The bill offers consumers a choice between traditional
automobile insurance (i.e., a tort liability system) or coverage at a reduced
premium under a personal protection policy that allows insureds to recover
economic damages from their insurer but requires them to relinquish their right
to sue or be sued for noneconomic damages. States could Oopt outO of such a
system by passing legislation to do so. Federal legislation that mandates
automobile premium rate reductions would adversely affect the manage- ment fee
revenue of the Company and could affect its insurance underwriting
profitability.
Year 2000
The computer systems of the Company and the property/casualty operations it
manages successfully made the transition to the Year 2000. The Company's
internal operating systems (hardware and software), infrastructure elements,
communications systems, and personal computer hardware and software continued to
function properly into the Year 2000. No external vendor or business partner
experienced century change disruptions that materially affected the Company. The
Company did not experience any business interruptions related to the Year 2000.
The Company's total cost of testing, contingency planning and administrative
support, including cost of personnel involved, cost to construct the technical
test environment and cost of consulting resources, totaled $1.5 million and $1.0
million for the years ended December 31, 1999 and 1998, respectively. All Year
2000 related costs have been expensed as incurred. The related costs incurred in
2000 are not expected to be material.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act
of 1995: Statements contained herein expressing the beliefs of management such
as those contained in the "Analysis of Management Operations," "Analysis of
Insurance Underwriting Operations," "Financial Condition," "Quantitative and
Qualitative Disclosures About Market Risk," "Liquidity and Capital Resources,"
"Reinsurance," "Environmental-Related Claims," "Factors That May Affect Future
Results" and "Year 2000" sections hereof, and the other statements which are not
historical facts contained in this report are forward-looking statements that
involve risks and uncertainties. These risks and uncertainties include but are
not limited to: legislative and regulatory changes, the impact of competitive
products and pricing, product development, geographic spread of risk, weather
and weather-related events, other types of catastrophic events, and
technological difficulties and advancements.
88
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INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
Glossary of Selected Insurance Terms
o Assume:
To receive from an insurer or a reinsurer all or part of the insurance
or reinsurance written by an insurance or reinsurance entity.
o Attorney-in-fact:
Legal entity (Erie Indemnity Company, a corporate attorney-in-fact)
which is legally appointed by another (subscribers of the Exchange) to
transact business on its behalf.
o Cede:
To transfer to an insurer or a reinsurer all or part of the insurance
or reinsurance written by an insurance or reinsurance entity.
o Direct premiums written:
Premiums on policies written by an insurer, excluding premiums for
reinsurance assumed or ceded by an insurer.
o GAAP combined ratio:
Ratio of acquisition and underwriting expenses, losses and loss
adjustment expenses incurred to premiums earned.
o Gross margins from management operations:
Net revenues from management operations divided by total revenues from
management operations.
o Incurred but not reported:
Estimated liabilities established by an insurer to reflect the losses
estimated to have occurred but which are not yet known by the insurer.
o Losses:
An occurrence that is the basis for submission of a claim. Losses may
be covered, limited or excluded from coverage, depending on the terms
of the policy. "Loss" also refers to the amount of the insurer's
liability arising out of the occurrence.
o Loss adjustment expenses (LAE):
The expenses of settling claims, including legal and other fees and
expenses, and the portion of general expenses allocated to claim
settlement costs.
o Loss reserves:
Estimated liabilities established by an insurer to reflect the
estimated cost of claims payments and the related expenses that
ultimately will be incurred in respect of insurance it has written.
o NAIC:
The National Association of Insurance Commissioners, an association of
the top regulatory officials of all 50 states and the District of
Columbia organized to promote consistency of regulatory practices and
statutory accounting practices throughout the United States.
o Property/Casualty insurance:
Casualty insurance indemnifies an insured against legal liability
imposed for losses caused by injuries to third persons (i.e. not the
policyholder). It includes, but is not limited to, employers'
liability, workers' compensation, public liability, automobile
liability and personal liability. Property insurance indemnifies a
person with an insurable interest in tangible property for his property
loss, damage or loss of use.
89
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INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
o Reciprocal insurance exchange:
An unincorporated group of persons known as subscribers who, under a
common name, exchange insurance contracts with each other for the
purpose of providing indemnity among themselves from losses through a
common attorney-in-fact. Each subscriber gives a power of attorney
under which the attorney-in-fact represents each subscriber in
exchanging insurance contracts with the other subscribers.
o Reinsurance:
An instrument under which an insurer cedes to another insurer all or a
portion of the risk insured and conveys/pays to that other insurer a
portion of the premium received from the insured. Reinsurance makes the
assuming reinsurer liable to the extent of the coverage ceded. However,
in the event the reinsurer is unable to pay the assumed portion of the
loss, the ceding insurer would be responsible for the entire loss.
90
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INCORPORATED BY REFERENCE, PAGE 51 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
Market Price of and Dividends on the Common Equity and Related Shareholder
Matters
Common Stock Prices:
The Class A non-voting common stock of the Company trades on The NASDAQ
Stock Market(sm) under the symbol "ERIE." The following sets forth the range of
high and low trading prices by quarter as reported by The NASDAQ Stock Market.
<TABLE>
<CAPTION>
Class A Trading Price
1999 1998
Low High Low High
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter 26 7/8 32 3/4 26 1/2 32 3/4
Second Quarter 26 3/8 28 1/2 28 1/4 34
Third Quarter 26 1/4 33 25 1/2 32 15/16
Fourth Quarter 29 1/2 34 20 1/2 31 1/4
</TABLE>
No established trading market exists for the Class B voting common stock.
On February 18, 1997, The Executive Committee of the Board of Directors
approved an enhancement to the Company's 401(K) plan for Employees which permits
participants to invest a portion of the Company's contributions to the Plan in
shares of Erie Indemnity Class A common stock. The Plan's Trustee was authorized
to buy Erie Indemnity Company Class A common stock on behalf of 401(K) plan
participants beginning May 8, 1997.
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. For the year, 1,900,499 shares were
repurchased at a total cost of $54,330,131 or an average price of $28.59.
Common Stock Dividends:
The Company historically has declared and paid cash dividends on a
quarterly basis at the discretion of the Board of Directors. The payment and
amount of future dividends on the common stock will be determined by the Board
of Directors and will depend on, among other things, earnings, financial
condition and cash requirements of the Company at the time such payment is
considered, and on the ability of the Company to receive dividends from its
subsidiaries, the amount of which is subject to regulatory limitations.
Dividends declared for each class of stock during 1999 and 1998 are as follows:
Dividends Declared
1999: Class A Share Class B Share
----------------------------------------------------------------------
First Quarter $ .1200 $ 18.000
Second Quarter .1200 18.000
Third Quarter .1200 18.000
Fourth Quarter .1350 20.250
----- ------
$ .4950 $ 74.250
===== ======
1998: Class A Share Class B Share
----------------------------------------------------------------------
First Quarter $ .1075 $ 16.125
Second Quarter .1075 16.125
Third Quarter .1075 16.125
Fourth Quarter .1200 18.000
----- ------
$ .4425 $ 66.375
===== ======
American Stock Transfer & Trust Company serves as the Company's transfer
agent and registrar.
91
<PAGE>
Index to Graphs included in the
Management's Discussion and Analysis
Graph #1 ERIE INSURANCE GROUP
Organizational Structure/Major Business Units
Pooling
Property/Casualty Insurance Participation
Erie Insurance Exchange 94.5%
Erie Insurance Company*** 5.0%
Erie Insurance Company of New York** 0.5%
Erie Insurance Property & Casualty Company*** 0.0%
Flagship City Insurance Company* 0.0%
*Wholly-owned by Erie Insurance Exchange
**Wholly-owned by Erie Insurance Company
***Wholly-owned by Erie Indemnity Company
Management Operations
Erie Indemnity Company is the Attorney-in-Fact for the Erie
Insurance Exchange (A Reciprocal Insurance Exchange)
Life Insurance Operations
Erie Family Life Insurance Company
53.2% ownership by Erie Insurance Exchange
21.6% ownership by Erie Indemnity Company
Graph #2 NET REVENUES FROM MANAGEMENT
OPERATIONS AND GROSS MARGINS
(In millions of Dollars, except ratios)
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Net Revenues from Management Operations $134.2 $145.2 $148.2
Gross Margin from Management Operations 28.2% 28.8% 28.0%
</TABLE>
Graph #3 PREMIUMS EARNED AND GAAP
COMBINED RATIO EXCLUDING CATASTROPHES
(In millions of Dollars, except ratios)
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Premiums Earned for Year Ended December 31 $107.3 $112.9 $117.2
GAAP Combined Ratio Excluding Catastrophes 101.5 96.9 99.6
</TABLE>
92
<PAGE>
Index to Graphs included in the
Management's Discussion and Analysis
(Continued)
Graph #4 REVENUE FROM INVESTMENT OPERATIONS
(In millions of dollars)
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Net Realized Gain on Investments $ 5.8 $ 7.2 $14.7
Equity in Earnings of EFL $ 4.2 $ 4.8 $ 5.0
Net Investment Income $32.9 $38.6 $44.0
</TABLE>
Graph #5 DIVERSIFICATION OF FIXED MATURITIES
at December 31, 1999 - Carrying Value
U.S. Industrial & Misc. 47%
Special Revenue 25%
State & Political Subdivisions 11%
Other 11%
Redeemable Preferred Stock 6%
Graph #6 QUALITY* OF FIXED MATURITIES
at December 31, 1999 - Carrying Value
Aaa/AAA 32%
Baa/BBB 29%
A 22%
Aa/AA 15%
Ba/BB 2%
* As rated by Standard & Poor's or Moody's Investor's Service, Inc.
Graph #7 TERM TO MATURITY OF FIXED MATURITIES
Subsequent to 2010 35%
2001-2005 36%
2006-2010 25%
2000 4%
Graph #8 DIVERSIFICATION OF EQUITY SECURITIES
At December 31, 1999 - Carrying Value
(1) U.S. Industrial & Misc. 48%
(2) U.S. Industrial & Misc. 26%
(2) Banks, Trusts & Insurance 17%
(2) Foreign Industrial & Misc. 3%
(1) Foreign Industrial & Misc. 3%
(1) Banks, Trusts & Insurance 3%
(1) Common Stocks
(2) Preferred Stocks
93
<PAGE>
INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
INDEPENDENT AUDITORS' REPORT
ON THE CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors and Shareholders
Erie Indemnity Company
Erie, Pennsylvania
We have audited the accompanying consolidated statements of financial
position of Erie Indemnity Company and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Erie
Indemnity Company and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ Brown, Schwab, Bergquist & Co.
Erie, Pennsylvania
February 11, 2000
94
<PAGE>
INCORPORATED BY REFERENCE, PAGE 34 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As of December 31, 1999 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1999 1998
----------------- -------------------
<S> <C> <C>
Investments:
Fixed maturities at fair value
(amortized cost of $489,394
and $421,102, respectively) $ 485,522 $ 441,353
Equity securities at fair value
(cost of $171,495 and $169,977, respectively) 215,383 202,804
Real estate mortgage loans 8,230 8,287
Other invested assets 39,116 17,494
----------------- ------------------
Total investments $ 748,251 $ 669,938
Cash and cash equivalents 24,214 53,580
Accrued investment income 7,998 7,252
Premiums receivable from policyholders 139,941 136,815
Prepaid federal income taxes 2,975 2,509
Reinsurance recoverable from Erie Insurance Exchange 365,217 359,182
Note receivable from Erie Family Life Insurance Company 15,000 15,000
Other receivables from Erie Insurance Exchange and affiliates 105,752 108,612
Reinsurance recoverable non-affiliates 912 939
Deferred policy acquisition costs 11,405 10,863
Property and equipment 15,261 12,389
Equity in Erie Family Life Insurance Company 37,007 39,479
Other assets 43,934 36,874
----------------- ------------------
Total assets $ 1,517,867 $ 1,453,432
================== ==================
</TABLE>
95
<PAGE>
INCORPORATED BY REFERENCE, PAGE 34 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
----------------- ------------------
<S> <C> <C>
LIABILITIES
Unpaid losses and loss adjustment expenses $ 432,895 $ 426,165
Unearned premiums 236,525 229,056
Commissions payable and accrued 92,874 85,006
Accounts payable and accrued expenses 24,187 20,253
Deferred income taxes 11,805 17,122
Dividends payable 8,853 8,099
Employee benefit obligations 13,129 12,508
----------------- ------------------
Total liabilities $ 820,268 $ 798,209
----------------- ------------------
SHAREHOLDERS' EQUITY
Capital stock
Class A common, stated value $.0292 per share;
authorized 74,996,930 shares; 67,032,000 shares
issued and 65,131,501 shares outstanding in 1999
and 67,032,000 in 1998 $ 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 26,581 40,178
Retained earnings 715,348 605,045
---------------- ------------------
Total contributed capital and retained earnings $ 751,929 $ 655,223
Treasury stock, at cost, 1,900,499 shares repurchased in 1999) ( 54,330) 0
---------------- ------------------
Total shareholders' equity $ 697,599 $ 655,223
----------------- ------------------
Total liabilities and shareholders' equity $ 1,517,867 $ 1,453,432
================= ==================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
96
<PAGE>
INCORPORATED BY REFERENCE, PAGE 33 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
MANAGEMENT OPERATIONS:
Management fee revenue $ 513,375 $ 489,147 $ 467,603
Service agreement revenue 15,441 13,879 7,026
Other operating revenue 1,267 1,541 1,363
-------------- --------------- ---------------
Total revenue from management operations $ 530,083 $ 504,567 $ 475,992
Cost of management operations 381,565 359,324 341,791
-------------- --------------- ---------------
Net revenue from management operations $ 148,518 $ 145,243 $ 134,201
-------------- --------------- ---------------
INSURANCE UNDERWRITING OPERATIONS:
Premiums earned $ 117,224 $ 112,939 $ 107,350
-------------- --------------- ---------------
Losses and loss adjustment expenses incurred $ 87,719 $ 79,881 $ 79,970
Policy acquisition and other underwriting expenses 33,044 32,491 29,639
-------------- --------------- ---------------
Total losses and expenses $ 120,763 $ 112,372 $ 109,609
-------------- --------------- ---------------
Underwriting (loss) gain ($ 3,539) $ 567 ($ 2,259)
-------------- --------------- --------------
INVESTMENT OPERATIONS:
Equity in earnings of Erie Family Life Insurance
Company $ 5,045 $ 4,777 $ 4,231
Net investment income 43,985 38,606 32,932
Net realized gain on investments 14,746 7,164 5,815
-------------- --------------- ---------------
Total revenue from investment operations $ 63,776 $ 50,547 $ 42,978
-------------- --------------- ---------------
Income before income taxes $ 208,755 $ 196,357 $ 174,920
Provision for income taxes 65,649 61,806 56,339
-------------- --------------- ---------------
NET INCOME $ 143,106 $ 134,551 $ 118,581
============== =============== ===============
Net income per share $ 1.95 $ 1.81 $ 1.59
============== =============== ===============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
97
<PAGE>
INCORPORATED BY REFERENCE, PAGE 36 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
Total Other
Shareholders' Comprehensive Retained Comprehensive
Equity Income Earnings Income
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ 435,759 $ $ 408,269 $ 17,490
Comprehensive income
Net income 118,581 $ 118,581 118,581
Other comprehensive income,
net of tax 11,534 11,534 11,534
--------------
Comprehensive income $ 130,115
===============
Dividends:
Class A $.3925 per share ( 26,310) ( 26,310)
Class B $58.875 per share ( 181) ( 181)
-------------- ---------------
Balance, December 31, 1997 $ 539,383 $ 500,359 $ 29,024
-------------- --------------- ---------------
Comprehensive income
Net income 134,551 $ 134,551 134,551
Other comprehensive income,
net of tax 11,154 11,154 11,154
--------------
Comprehensive income $ 145,705
==============
Dividends:
Class A $.4425 per share ( 29,662) ( 29,662)
Class B $66.375 per share ( 203) ( 203)
-------------- ---------------
Balance, December 31, 1998 $ 655,223 $ 605,045 $ 40,178
-------------- --------------- ---------------
Comprehensive income
Net income 143,106 $ 143,106 143,106
Other comprehensive loss,
net of tax ( 13,597) ( 13,597) ( 13,597)
--------------
Comprehensive income $ 129,509
==============
Purchase of treasury stock ( 54,330)
Dividends:
Class A $.495 per share ( 32,575) ( 32,575)
Class B $74.25 per share ( 228) ( 228)
-------------- ---------------
Balance, December 31, 1999 $ 697,599 $ 715,348 $ 26,581
============== =============== ===============
</TABLE>
98
<PAGE>
INCORPORATED BY REFERENCE, PAGE 36 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Class A Class B Additional Treasury
Common Common Paid-in-Capital Stock
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ 1,955 $ 215 $ 7,830 $ 0
Comprehensive income
Net income
Other comprehensive income,
net of tax
Comprehensive income
Dividends:
Class A $.3925 per share
Class B $58.875 per share
Balance, December 31, 1997 $ 1,955 $ 215 $ 7,830 $ 0
--------------- --------------- ---------------- --------------
Comprehensive income
Net income
Other comprehensive income,
net of tax
Comprehensive income
Dividends:
Class A $.4425 per share
Class B $66.375 per share
Balance, December 31, 1998 $ 1,955 $ 215 $ 7,830 $ 0
--------------- --------------- ---------------- --------------
Comprehensive income
Net income
Other comprehensive income,
net of tax
Comprehensive income
Purchase of treasury stock ( 54,330)
Dividends:
Class A $.495 per share
Class B $74.25 per share
Balance, December 31, 1999 $ 1,955 $ 215 $ 7,830 ($ 54,330)
=============== =============== ================ ==============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
99
<PAGE>
INCORPORATED BY REFERENCE, PAGE 35 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 143,106 $ 134,551 $ 118,581
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,766 2,001 1,889
Deferred income tax (benefit) expense ( 1,311) 4,677 441
Amortization of deferred policy acquisition costs 22,507 21,357 20,103
Realized gain on investments ( 14,746) ( 7,164) ( 5,815)
Net amortization of bond premium (discount) 80 ( 89) ( 158)
Undistributed earnings of Erie Family Life ( 3,696) ( 3,551) ( 3,127)
Deferred compensation 1,212 1,081 345
Increase in accrued investment income ( 745) ( 1,124) ( 559)
Increase in receivables ( 6,274) ( 1,387) ( 21,846)
Policy acquisition costs deferred ( 23,049) ( 21,936) ( 20,845)
Increase in prepaid expenses and other assets ( 6,185) ( 10,194) ( 4,503)
Increase (decrease) in accounts payable and
accrued expenses 3,343 6,646 ( 2,864)
Increase in commissions payable and accrued 7,868 3,855 5,632
(Decrease) increase in income taxes payable ( 466) ( 827) 2,375
Increase in loss reserves 6,730 12,756 26,984
Increase in unearned premiums 7,469 9,846 2,273
-------------- -------------- ---------------
Net cash provided by operating activities $ 137,609 $ 150,498 $ 118,906
-------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities ($ 162,769) ($ 132,217) ($ 69,647)
Equity securities ( 71,637) ( 90,404) ( 73,953)
Mortgage loans ( 66) ( 160) ( 1,223)
Other invested assets ( 21,308) ( 12,787) ( 1,571)
Sales/maturities of investments:
Fixed maturities 95,021 45,148 37,996
Equity securities 84,187 70,848 51,483
Mortgage loans 123 265 124
Other invested assets 1,368 3,308 648
Purchase of property and equipment ( 444) ( 394) ( 559)
Purchase of computer software ( 4,194) ( 3,865) ( 1,619)
Loans to agents ( 3,459) ( 2,431) ( 1,729)
Collections on agent loans 2,582 1,644 1,220
-------------- --------------- ----------------
Net cash used in investing activities ($ 80,596) ($ 121,045) ($ 58,830)
-------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders ($ 32,049) ($ 29,021) ($ 25,648)
Purchase of treasury stock ( 54,330) 0 0
-------------- --------------- ----------------
Net cash used in financing activities ($ 86,379) ($ 29,021) ($ 25,648)
-------------- -------------- ---------------
Net (decrease) increase in cash and cash equivalents ($ 29,366) $ 432 $ 34,428
Cash and cash equivalents at beginning of year 53,580 53,148 18,720
-------------- -------------- ---------------
Cash and cash equivalents at end of year $ 24,214 $ 53,580 $ 53,148
============== ============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the years ended December 31, 1999, 1998 and 1997 for income
taxes was $67,495, $57,929 and $55,166, respectively.
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
100
<PAGE>
INCORPORATED BY REFERENCE, PAGE 37 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts are in thousands of dollars except per share data
NOTE 1. NATURE OF BUSINESS
Erie Indemnity Company (Company) is the attorney-in-fact for
the Erie Insurance Exchange (Exchange), a reciprocal insurance
exchange. The Company earns a management fee for administrative
and underwriting services provided to the Exchange and its
affiliates. The Exchange is a property/casualty insurer rated
A++ Superior by A. M. Best. See also Note 10.
The Company's property/casualty insurance subsidiaries share
proportionately in the results of all property/casualty
insurance underwriting operations of the Exchange. The Exchange,
Erie Insurance Company (EIC), a wholly-owned subsidiary of the
Company and the Erie Insurance Company of New York (EINY), a
wholly-owned subsidiary of the EIC, are part of an intercompany
pooling agreement. Under this agreement, EIC and EINY cede 100%
of their property/casualty insurance business, including
property/casualty insurance operations assets and liabilities,
to the Exchange. The Exchange retrocedes to EIC and EINY a
specified percentage (5% for EIC and .5% for EINY during 1999,
1998 and 1997) of all pooled property/casualty insurance
business, including insurance operations assets and liabilities.
Insurance ceded by EIC and EINY to the Exchange does not relieve
EIC and EINY from their primary liability as the original
insurers. See also Note 12.
The property/casualty insurers operate in ten states and the
District of Columbia. Business consists, to a large extent, of
private passenger and commercial automobile, homeowners and
workers' compensation insurance in Pennsylvania, Ohio, West
Virginia, Maryland and Virginia.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles that differ from statutory accounting practices
prescribed or permitted for insurance companies by
regulatory authorities.
Principles of consolidation
The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Reclassifications
Certain amounts reported in prior years have been
reclassified to conform to the current year's financial
statement presentation.
101
<PAGE>
INCORPORATED BY REFERENCE, PAGES 37 AND 38 OF THE COMPANY'S 1999 ANNUAL REPORT
TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Investments and cash equivalents
Fixed maturities determined by management not to be
held-to-maturity and marketable equity securities are
classified as available-for-sale. Equity securities consist
primarily of common and nonredeemable preferred stocks while
fixed maturities consist of bonds, 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. There are no securities
classified as "trading" or "held-to-maturity."
Realized gains and losses on sales of investments, including
losses from declines in value of specific securities
determined by management to be other-than-temporary, are
recognized in income on the specific identification method.
Interest and dividend income is recorded as earned.
Other invested assets include investments in U.S. domestic
and foreign private equity and real estate limited
partnerships. The private equity limited partnerships invest
in small- to medium-sized companies. The private equity
limited partnerships are carried at their 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.
Cash equivalents include, primarily, investments in bank
money market funds.
Fair value of financial instruments
Fair values of available-for-sale securities are based on
quoted market prices, where available, or dealer quotations.
The carrying amounts reported in the Consolidated Statements
of Financial Position approximate fair value. The
carrying value of receivables and liabilities arising in
the ordinary course of business approximates their fair
values.
Recognition of premium revenues and losses
Property and liability premiums are generally recognized as
revenue on a pro rata basis over the policy term. Unearned
premiums are established for the unexpired portion of
premiums written. Losses and loss adjustment expenses are
recorded as incurred. Premiums earned and losses and loss
adjustment expenses incurred are reflected in the
Consolidated Statements of Operations net of amounts
ceded to the Exchange. See also Note 12.
102
<PAGE>
INCORPORATED BY REFERENCE, PAGE 38 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred policy acquisition costs
Commissions and other costs of acquiring insurance that vary
with,and are primarily related, to the production of new and
renewal business are deferred and amortized over the terms
of the policies or reinsurance treaties to which they
relate. The amount of costs to be deferred would be reduced
to the extent future policy premiums and anticipated
investment income would not exceed related losses, expenses
and Policyholder dividends. Amortization expense equaled
$22,507, $21,357 and $20,103 in 1999, 1998 and 1997,
respectively.
Insurance liabilities
Losses refer to amounts paid or expected to be paid for
events which have occurred. The cost of investigating,
resolving and processing these claims are referred to as
loss adjustment expenses. A liability is established for the
total unpaid cost of losses and loss adjustment expenses,
which covers events occurring in current and prior years.
The liability for losses and loss adjustment expenses
includes an amount determined from loss reports and
individual cases and an amount, based on past experience,
for losses incurred but not reported. Inflation is provided
for in the reserving function through analysis of costs,
trends and reviews of historical reserving results. Such
liabilities are necessarily based on estimates and, while
management believes the amount is appropriate, the ultimate
liability may differ from the amounts provided. The methods
for making such estimates and for establishing the resulting
liability are continually reviewed, and any adjustments are
reflected in current earnings. Loss reserves, as permitted
by insurance department statute, are set at full expected
cost except for loss reserves for workers' compensation
which have been discounted at 2.5%. Unpaid losses and loss
adjustment expenses in the Consolidated Statements of
Financial Position were reduced by $1,377 and $1,562 at
December 31, 1999 and 1998, respectively, due to
discounting. The reserves for losses and loss adjustment
expenses is reported net of receivables for salvage and
subrogation of $3,128 and $2,970 at December 31, 1999 and
1998, respectively.
Environmental-related claims
In establishing the liability for unpaid losses and loss
adjustment expenses related to environmental claims,
management considers facts currently known and the current
state of the law and coverage litigation. Liabilities are
recognized for known claims (including the cost of related
litigation) when sufficient information has been developed
to indicate the involvement of a specific insurance policy,
and management can reasonably estimate its liability. In
addition, liabilities have been established to cover
additional exposures on both known and unasserted claims.
Estimates of the liabilities are reviewed and updated
continually. The total amount of the Company's
property/casualty subsidiaries share of paid losses and loss
reserves pertaining to environmental-related claims is
immaterial.
103
<PAGE>
INCORPORATED BY REFERENCE, PAGES 38 AND 39 OF THE COMPANY'S 1999 ANNUAL REPORT
TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Liability for guaranty fund and other assessments
The Company's property/casualty insurance subsidiaries may
be required, under the solvency or guaranty laws of the
various states in which they are licensed, to pay
assessments up to prescribed limits to fund Policyholder
losses or liabilities of insolvent insurance companies.
Certain states permit these assessments, or a portion
thereof, to be recovered as an offset to future premium
taxes. Assessments are recognized when they are imposed or
information indicates it is probable one will be imposed, or
an event obligating the Company has occurred and the amount
can be reasonably estimated. When the assessment is subject
to credit against future premium taxes and judged to be
recoverable, the payments made may be deferred and amortized
on a consistent basis with the credits to be realized under
applicable state law. The estimated liability for guaranty
fund and other assessments at December 31, 1999 and 1998
totaled $867 and $1,189, respectively.
Reinsurance
The Consolidated Statements of Operations are presented net
of reinsurance activities. Gross losses and expenses
incurred are reduced for amounts expected to be recovered
under reinsurance agreements. Reinsurance transactions are
recorded "gross" on the Consolidated Statements of Financial
Position. Estimated reinsurance recoverables and receivables
for ceded unearned premiums are recorded as assets with
liabilities recorded for related unpaid losses and expenses
and unearned premiums.
Income taxes
Provisions for income taxes include deferred taxes resulting
from changes in cumulative temporary differences between the
tax bases and financial statement bases of assets and
liabilities. Deferred taxes are provided on a liability
method whereby, deferred tax assets are recognized for
deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary
differences. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on
the date of enactment.
Property and equipment
Property and equipment are stated at cost. Improvements and
replacements are capitalized, while expenditures for
maintenance and repairs are charged to expense as incurred.
Depreciation of property and equipment is computed using
straight line and accelerated methods over the estimated
useful lives of the assets. The costs and accumulated
depreciation and amortization of property sold or retired
are removed from the accounts and gains or losses, if any,
are reflected in earnings for the year.
104
<PAGE>
INCORPORATED BY REFERENCE, PAGE 39 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Software development costs, primarily salaries and benefits,
totaling $8,254 and $3,639 are capitalized at December 31,
1999 and 1998, respectively, and included in property and
equipment. These costs will be amortized on a straight
line basis over the expected life of the products once the
software is ready for intended use.
Property and equipment as of December 31 is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Land $ 737 $ 737
Buildings 5,861 5,858
Leasehold improvements 303 251
Computer software 16,691 12,497
Computer equipment 3,419 3,030
Transportation equipment 450 450
--------- ---------
$ 27,461 $ 22,823
Less accumulated depreciation 12,200 10,434
--------- ---------
$ 15,261 $ 12,389
========= =========
</TABLE>
Earnings per share
Earnings per share is based on the weighted average number
of Class A shares outstanding, giving effect to the
conversion of the weighted average number of Class B shares
outstanding at a rate of 2,400 Class A shares for one Class
B share. The total weighted average number of Class A
equivalent shares outstanding (including conversion of Class
B shares) was 73,486,572 during 1999 and 74,400,000 during
1998.
105
<PAGE>
INCORPORATED BY REFERENCE, PAGE 40 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS
The following tables summarize the cost and market value of
available-for-sale securities at December 31, 1999 and 1998.
<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 governments 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>
106
<PAGE>
INCORPORATED BY REFERENCE, PAGE 40 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1998
Fixed Maturities:
-----------------
U.S. treasuries &
government agencies $ 13,018 $ 689 $ 0 $ 13,707
States & political subdivisions 48,307 3,293 0 51,600
Special revenue 132,025 7,215 5 139,235
Public utilities 13,116 300 0 13,416
U. S. industrial &
miscellaneous 195,296 9,028 629 203,695
Foreign 7,149 165 267 7,047
----------- ----------- ----------- -----------
Total bonds $ 408,911 $ 20,690 $ 901 $ 428,700
Redeemable preferred stock 12,191 577 115 12,653
----------- ----------- ----------- -----------
Total fixed maturities $ 421,102 $ 21,267 $ 1,016 $ 441,353
----------- ----------- ----------- -----------
Equity Securities:
Common stock:
U. S. banks, trusts &
insurance companies $ 3,522 $ 197 $ 231 $ 3,488
U. S. industrial &
miscellaneous 53,914 37,158 7,509 83,563
Foreign industrial &
miscellaneous 3,186 271 278 3,179
Non-redeemable
preferred stock:
U. S. banks, trusts &
insurance companies 42,807 2,561 30 45,338
U. S. industrial &
miscellaneous 59,858 2,024 1,419 60,463
Foreign industrial &
miscellaneous 6,690 228 145 6,773
----------- ----------- ----------- -----------
Total equity securities $ 169,977 $ 42,439 $ 9,612 $ 202,804
----------- ----------- ----------- -----------
Total available-for-sale
securities $ 591,079 $ 63,706 $ 10,628 $ 644,157
=========== =========== =========== ===========
</TABLE>
107
<PAGE>
INCORPORATED BY REFERENCE, PAGE 41 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturities
at December 31, 1999, by remaining contractual term to maturity,
are shown below.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
----------- -----------
<S> <C> <C>
Due in one year or less $ 17,674 $ 17,673
Due after one year through five years 177,506 175,344
Due after five years through ten years 124,116 122,251
Due after ten years 170,098 170,254
----------- -----------
$ 489,394 $ 485,522
=========== ===========
</TABLE>
Changes in unrealized gains consist of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Equity securities $ 11,061 $ 11,818 $ 5,462
Fixed maturities ( 24,123) 3,415 7,754
Other 1,616 32 63
Equity in unrealized (losses)
gains of Erie Family Life
Insurance Company ( 9,473) 1,895 4,466
Deferred federal income taxes 7,322 ( 6,006) ( 6,211)
---------- ---------- ----------
(Decrease) increase in unrealized gains ($ 13,597) $ 11,154 $ 11,534
========= ========== ==========
</TABLE>
Sources of net investment income follow for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturities $ 30,547 $ 25,562 $ 21,929
Equity securities 10,104 8,227 7,059
Other 3,863 5,256 4,237
--------- --------- ---------
Total investment income $ 44,514 $ 39,045 $ 33,225
Investment expense 529 439 293
--------- --------- ---------
Net investment income $ 43,985 $ 38,606 $ 32,932
========= ========= =========
</TABLE>
108
<PAGE>
INCORPORATED BY REFERENCE, PAGE 41 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (CONTINUED)
Realized gains and losses on investments reflected in operations
are summarized below for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Realized gains:
Fixed maturities $ 712 $ 809 $ 252
Equity securities 18,437 9,663 6,613
Other invested assets 0 688 0
--------- --------- ---------
Total gains $ 19,149 $ 11,160 $ 6,865
--------- --------- ---------
Realized losses:
Fixed maturities $ 87 $ 1 $ 19
Equity securities 4,316 3,397 1,031
Other invested assets 0 598 0
--------- --------- ---------
Total losses $ 4,403 $ 3,996 $ 1,050
--------- --------- ---------
Net realized gain on investments $ 14,746 $ 7,164 $ 5,815
========= ========= =========
</TABLE>
NOTE 4. COMPREHENSIVE INCOME
The Company adopted the provisions of the Statement of Financial
Accounting Standards (FAS) No. 130, "Reporting Comprehensive
Income," in 1998. Comprehensive income is defined as any change
in equity from transactions and other events originating from
nonowner sources. The components of other comprehensive income
follow for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- ------------
<S> <C> <C> <C>
Unrealized holding (losses) gains arising during period ($ 6,173) $ 24,324 $ 23,560
Less: reclassification adjustment for gains included in
net income ( 14,746) ( 7,164) ( 5,815)
------------ ------------ ------------
Net unrealized holdings (losses) gains arising
during period ($ 20,919) $ 17,160 $ 17,745
------------ ------------ ------------
Income tax benefit (expense) related to unrealized gains
or losses $ 7,322 ($ 6,006) ($ 6,211)
------------ ------------ ------------
Other comprehensive (loss) income, net of tax ($ 13,597) $ 11,154 $ 11,534
------------ ------------ ------------
</TABLE>
109
<PAGE>
INCORPORATED BY REFERENCE, PAGES 41 AND 42 OF THE COMPANY'S 1999 ANNUAL REPORT
TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. EQUITY IN ERIE FAMILY LIFE INSURANCE COMPANY
The Company owns 21.63% of Erie Family Life Insurance Company's
(EFL) common shares outstanding, which is accounted for using
the equity method of accounting. EFL is a Pennsylvania-domiciled
life insurance company operating in nine states and the District
of Columbia.
The following represents condensed financial information for
EFL:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Investments $ 817,460 $ 774,882 $ 703,033
Total assets 954,532 917,606 832,534
Liabilities 783,429 735,075 672,155
Shareholders' equity 171,103 182,531 160,379
Revenues 102,924 96,210 91,037
Net income 23,325 22,085 19,560
Comprehensive (loss) income ( 5,191) 27,821 32,852
Dividends paid to shareholders 6,096 5,529 5,008
</TABLE>
The Company's share of EFL's net unrealized (losses) or gains on
securities is reflected in shareholders' equity [($502), $5,656
and $4,425 at December 31, 1999, 1998 and 1997, respectively.]
The 1999 change in net unrealized losses on securities was
$6,158. In 1998 and 1997, changes in the net unrealized gain on
securities was $1,232 and $2,880, respectively.
Deferred federal income taxes have not been provided on the
Company's equity in undistributed earnings of EFL. It is
management's current intent to reinvest undistributed earnings
indefinitely and not liquidate its investment in EFL. The
estimated deferred tax liability unrecognized at December 31,
1999, 1998 and 1997 is $2,564, $2,737 and $2,401, respectively.
NOTE 6. BENEFIT PLANS
Pension plan for Employees
The Company has a non-contributory defined benefit pension
plan covering substantially all Employees of the Company.
Information about this plan follows for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net periodic benefit cost:
Service cost $ 6,518 $ 5,119
Interest cost 6,627 6,214
Expected return on plan assets ( 10,862) ( 9,419)
Amortization of prior service cost 530 448
Recognized actuarial gain ( 1,035) ( 1,252)
Amortization of unrecognized initial net obligation ( 234) ( 234)
---------- ----------
Net periodic benefit cost $ 1,544 $ 876
========== ==========
</TABLE>
110
<PAGE>
INCORPORATED BY REFERENCE, PAGE 42 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Fair Value of Plan Assets:
Fair value of plan assets at January 1 $ 133,377 $ 117,644
Actual return on plan assets 25,732 12,330
Employer contributions 3,000 6,491
Benefits paid ( 1,724) ( 3,088)
---------- ----------
Fair value of plan assets at December 31 $ 160,385 $ 133,377
========== ==========
Projected benefit obligation:
Benefit obligation at January 1 $ 100,281 $ 83,575
Service cost 6,518 5,119
Interest cost 6,627 6,214
Amendments 1,231 0
Actuarial (gain) loss ( 18,373) 8,461
Benefits paid ( 1,724) ( 3,088)
---------- ----------
Projected benefit obligation at December 31 $ 94,560 $ 100,281
========== ===========
Funded status:
Funded status at December 31 $ 65,825 $ 33,096
Unrecognized net actuarial gain ( 55,280) ( 23,073)
Unrecognized prior service cost 3,630 2,929
Unrecognized initial net obligation ( 935) ( 1,168)
---------- ----------
Net asset recognized on Consolidated
Statements of Financial Position $ 13,240 $ 11,784
=========== ===========
</TABLE>
The plan assets include cash, treasury bonds, corporate
bonds, common and preferred stocks and mortgages.
The amendment amount relates to an increase in monthly
benefits to retired employees.
Assumptions used in accounting for the pension plan were as
follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Weighted average discount rate used to
measure projected benefit obligation 7.50% 6.75%
Weighted average rate of compensation
increase used to measure projected
benefit obligation 5.00% 5.00%
Weighted average expected long-term
rate of return on plan assets 8.25% 8.25%
</TABLE>
The Company's funding policy is to contribute amounts
sufficient to meet ERISA funding requirements plus such
additional amounts as may be determined to be
appropriate.
The pension plan purchases individual annuities periodically
from EFL to settle retiree benefit payments. Such purchases
equaled $5,322, $6,413 and $1,992 in 1999, 1998 and 1997,
respectively. These are non-participating annuity contracts
under which EFL has unconditionally contracted to provide
specified benefits to beneficiaries in return for a fixed
premium from the plan. However, the plan remains the primary
obligor to the beneficiaries and a contingent liability
exists
111
<PAGE>
INCORPORATED BY REFERENCE, PAGES 42 AND 43 OF THE COMPANY'S 1999 ANNUAL REPORT
TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. BENEFIT PLANS (CONTINUED)
in the event EFL could not honor the annuity contracts. The
benefit obligation has been reduced for these annuities
purchased for retirees.
The accumulated benefit obligation was $57,824 and $59,537,
respectively, as of December 31, 1999 and 1998.
Pension plans for senior and executive officers and outside
directors
The Company has an unfunded supplemental pension plan for
its senior and executive officers and an unfunded pension
plan for its outside directors. Information about the plans
follow for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Net periodic benefit cost:
Service cost $ 448 $ 363
Interest cost 715 628
Amortization of prior service cost 527 528
Recognized actuarial loss 454 364
-------- ---------
Net periodic benefit cost $ 2,144 $ 1,883
======== =========
Benefit obligation:
Benefit obligation at January 1 $ 10,101 $ 5,049
Service cost 448 363
Interest cost 715 628
Amendments 0 3,138
Actuarial (gain) loss ( 736) 993
Benefits paid ( 500) ( 70)
-------- --------
Benefit obligation at December 31 $ 10,028 $ 10,101
======== ========
Funded status:
Funded status at December 31 $ 10,028 $ 10,101
Unrecognized net actuarial gain ( 3,086) ( 3,423)
Unrecognized prior service cost ( 2,772) ( 3,299)
-------- --------
Net liability recognized on Consolidated
Statements of Financial Position $ 4,170 $ 3,379
======== ========
Amounts recognized in the Consolidated
Statements of Financial Position consist of:
Employee benefit obligation $ 6,794 $ 6,678
Other assets ( 2,624) ( 3,299)
-------- --------
Net amount recognized $ 4,170 $ 3,379
======== ========
</TABLE>
The weighted average discount rate used for purposes of
determining the projected benefit obligation of the
officers' supplemental pension plan was 7.50% and 6.75% in
1999 and 1998, respectively. The weighted average rate of
compensation increase used to measure the projected benefit
obligation of the officers' supplemental pension plan was
5.0% in 1999 and 1998.
112
<PAGE>
INCORPORATED BY REFERENCE, PAGE 43 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. BENEFIT PLANS (CONTINUED)
The accumulated benefit obligation was $6,794 and $6,678,
respectively, as of December 31, 1999 and 1998.
Post-retirement benefits other than pensions
The Company provides post-retirement medical coverage for
eligible retired Employees and eligible dependents. The
Company pays the obligation when due. Actuarially determined
costs are recognized over the period the Employee provides
service to the Company. Information about this plan follows
for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Net periodic benefit cost:
Service cost $ 383 $ 333
Interest cost 311 319
Amortization of prior service cost ( 37) ( 37)
Recognized actuarial gain ( 31) ( 40)
-------- --------
Net periodic benefit cost $ 626 $ 575
======== ========
Change in benefit obligation:
Benefit obligation at January 1 $ 5,034 $ 4,071
Service cost 383 333
Interest cost 311 319
Actuarial (gain) loss ( 862) 423
Benefits paid ( 121) ( 112)
-------- --------
Benefit obligation at December 31 $ 4,745 $ 5,034
======== ========
Funded status:
Funded status at December 31 $ 4,745 $ 5,034
Unrecognized net actuarial loss 1,187 356
Unrecognized initial net obligation 403 440
-------- ---------
Net amount recognized $ 6,335 $ 5,830
======== ========
</TABLE>
The cash payments for such benefits were $121, $112 and $176
in 1999, 1998 and 1997, respectively.
The weighted average discount rate used to measure the
accumulated post-retirement benefit obligation was 7.50% and
6.75% in 1999 and 1998, respectively. The December 31, 1999
accumulated benefit obligation was based on a 8.5% increase
in the cost of covered health care benefits during 1999. The
expected health care cost trend rate assumption for 2000 is
8.0%. This rate is assumed to decrease gradually to 5% per
year in 2006 and to remain at that level thereafter.
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Effect on total of service and interest cost components:
1% Increase $ 119 $ 113
1% Decrease ( 99) ( 94)
Effect on post-retirement benefit obligation:
1% Increase $ 688 $ 766
1% Decrease ( 584) ( 647)
</TABLE>
113
<PAGE>
INCORPORATED BY REFERENCE, PAGE 44 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. BENEFIT PLANS (CONTINUED)
Employee savings plan
The Company has an Employee Savings Plan for its Employees.
Eligible participants are permitted to make contributions of
1% to 8% of compensation to the plan on a pre-tax salary
reduction basis in accordance with provisions of Section
401(k) of the Internal Revenue Code. The Company matches
one-half of the participant contributions up to 6% of
compensation. All full-time Employees are eligible to
participate in the plan. The Company's matching
contributions to the plan in 1999, 1998 and 1997 were
$3,245, $3,069 and $2,892, respectively. Effective May 1997,
Employees were permitted to invest a portion of employer
contributions in the Class A common stock of the Company.
The plan will acquire shares in the open market necessary to
meet the obligations of the plan.
Deferred compensation and incentive plans
Certain eligible Employees of the Company and its affiliates
participate in a deferred compensation plan. These same
individuals receive compensation under executive incentive
plans. Benefits charged to operations under the deferred
compensation plan, as well as the incentive plans, totaled
$3,352, $2,817 and $1,347 during 1999, 1998 and 1997,
respectively.
Health and dental benefits
The Company has self-funded health and dental care plans for
all of its Employees and eligible dependents. Estimated
unpaid claims incurred are accrued as a liability at
December 31, 1999 and 1998. Operations were charged $14,756,
$13,057 and $12,646 in 1999, 1998 and 1997, respectively,
for the cost of health and dental care provided under these
plans.
all of the above mentioned benefit plan expenses are
presented gross, prior to reimbursement from the Exchange
and EFL. See also Note 10.
NOTE 7. INCOME TAXES
The provision for income taxes consists of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal
Current $ 66,960 $ 57,129 $ 55,897
Deferred ( 1,311) 4,677 442
---------- ----------- -----------
$ 65,649 $ 61,806 $ 56,339
========== =========== ===========
</TABLE>
A reconciliation of the provision for income taxes with amounts
determined by applying the statutory federal income tax rates to
pre-tax income is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income tax at statutory rates $ 73,051 $ 68,725 $ 61,222
Deduct:
Undistributed earnings of affiliate ( 1,280) ( 1,242) ( 1,095)
Tax-exempt interest ( 3,229) ( 3,192) ( 3,009)
Dividends received deduction ( 2,064) ( 1,782) ( 1,628)
Other ( 829) ( 703) 849
---------- ---------- ----------
Provision for income taxes $ 65,649 $ 61,806 $ 56,339
========== ========== ==========
</TABLE>
114
<PAGE>
INCORPORATED BY REFERENCE, PAGE 44 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. INCOME TAXES (CONTINUED)
Temporary differences and carryforwards, which give rise to
deferred tax assets and liabilities, are as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Loss reserve discount $ 3,602 $ 3,497
Unearned premiums 3,968 3,884
Alternative minimum tax paid 262 1,108
Employee benefit plan obligations 3,445 2,526
Other 360 275
--------- ---------
Total deferred tax assets $ 11,637 $ 11,290
========= =========
Deferred tax liabilities:
Deferred policy acquisition costs $ 3,992 $ 3,802
Unrealized gains 14,633 18,590
Pension and other benefits 2,376 3,469
Capitalized salaries and benefits 950 589
Accrual of discount 577 988
Property and equipment 269 547
Other 645 427
--------- ---------
Total deferred tax liabilities $ 23,442 $ 28,412
--------- ---------
Net deferred tax liability $ 11,805 $ 17,122
========= =========
</TABLE>
The Company, as a corporate attorney-in-fact for a reciprocal
insurer, is not subject to state corporate taxes.
115
<PAGE>
INCORPORATED BY REFERENCE, PAGES 44 AND 45 OF THE COMPANY'S 1999 ANNUAL REPORT
TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. CAPITAL STOCK
Class A and B shares
Holders of Class B shares may, at their option, convert
their shares into Class A shares at the rate of 2,400 Class
A shares for each Class B share. There is no provision for
conversion of Class A shares to Class B shares and Class B
shares surrendered for conversion cannot be reissued. Each
share of Class A common stock outstanding at the time of the
declaration of any dividend upon shares of Class B common
stock shall be entitled to a dividend payable at the same
time, at the same record date, and in an amount at least
equal to 2/3 of 1% of any dividend declared on each share of
Class B common stock. The Company may declare and pay a
dividend in respect of Class A common stock without any
requirement that any dividend be declared and paid in
respect of Class B common stock. Sole voting power is vested
in Class B common stock except insofar as any applicable law
shall permit Class A common stock to vote as a class in
regards to any changes in the rights, preferences and
privileges attaching to Class A common stock.
Redemption provisions
The Erie Indemnity Company Stock Redemption Plan entitles
heirs of shareholders to cause the Company to redeem shares
of stock of the Company at a price equal to the fair market
value of the stock as determined by the Board's sole
discretion after consideration of certain factors at time of
redemption. The redemption amount is limited to an
aggregation of: (1)$10 million as of December 31, 1995 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 shareholdings of
such shareholder. On April 28, 1998, the Board approved an
increase in the redemption amount of $17,792 to $58,797. On
April 27, 1999 the Board approved an increase in the
redemption amount of $19,190 to $77,987. There were no
shares of stock redeemed during 1999, 1998 or 1997.
Stock repurchase plan
In December 1998, the Board of Directors of the Company
approved a stock repurchase plan beginning January 1, 1999,
under which the Company may repurchase as much as $70
million of its outstanding Class A common stock through
December 31, 2001. The Company may purchase the shares from
time to time in the open market or through privately
negotiated transactions, depending on prevailing market
conditions and alternative uses of the Company's capital. In
1999 there were 1,900,499 shares repurchased at a total cost
of $54,330, or an average price per share of $28.59.
116
<PAGE>
INCORPORATED BY REFERENCE, PAGE 45 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of beginning and
ending liability balances for 1999, 1998 and 1997 for the
Company's wholly-owned property/casualty insurance subsidiaries.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Total unpaid losses and loss
adjustment expenses at January 1, gross $ 426,165 $ 413,409 $ 386,425
Less reinsurance recoverables 334,708 323,910 301,553
---------- ---------- -----------
Net balance at January 1 91,457 89,499 84,872
Incurred related to:
Current year 88,422 80,627 77,345
Prior years ( 703) ( 746) 2,625
---------- ---------- -----------
Total incurred 87,719 79,881 79,970
Paid related to:
Current year 50,560 46,645 42,792
Prior years 33,632 31,278 32,551
---------- ---------- -----------
Total paid 84,192 77,923 75,343
---------- ---------- -----------
Net balance at December 31 94,984 91,457 89,499
Plus reinsurance recoverables 337,911 334,708 323,910
---------- ---------- -----------
Total unpaid losses and loss adjustment
expenses at December 31, gross $ 432,895 $ 426,165 $ 413,409
========== ========== ===========
</TABLE>
NOTE 10. RELATED PARTY TRANSACTIONS
Management fee
A management fee is charged to the Exchange for
administrative and underwriting services. The fee is
recorded as revenue and computed monthly as a percentage of
Exchange direct and affiliated assumed premiums written. The
percentage rate is adjusted periodically within specified
limits by the Company's Board of Directors. The management
fee was charged to the Exchange at the following rates:
January 1, 1997 to December 31, 1997 24%
January 1, 1998 to December 31, 1998 24.25%
January 1, 1999 to December 31, 1999 25%
The Board elected to maintain the 25% management fee rate
for all of 2000. The Company's Board of Directors may change
the management fee rate at its discretion, but it may not
exceed 25%.
117
<PAGE>
INCORPORATED BY REFERENCE, PAGE 46 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. RELATED PARTY TRANSACTIONS (CONTINUED)
Service agreement revenue
A service agreement fee is charged to the Exchange to
compensate the Company for its management of non-affiliated
assumed reinsurance business on behalf of the Exchange. The
Company receives a fee of 7% of voluntary reinsurance
premiums assumed from non-affiliated insurers and is
responsible for accounting and operating expenses in
connection with the administration of this business.
Also included in service agreement revenue are service
charges collected from Policyholders as reimbursement for
the costs incurred by the Company in providing extended
payment terms on policies written by the insurers managed by
the Company. Service charge revenue amounted to $7,283,
$7,164 and $2,011 in 1999, 1998 and 1997, respectively.
Expense reimbursements
The Company pays for and is reimbursed by the Exchange for
expenses incurred in connection with adjustment of claims
and administrative services and by EFL for administrative
expenses. Reimbursements are made to the Company from these
affiliates monthly. The amounts of such expense
reimbursements were as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Erie Insurance Exchange $ 136,045 $ 123,577 $ 109,076
Erie Family Life 14,740 14,305 13,038
----------- ----------- -----------
$ 150,785 $ 137,882 $ 122,114
=========== =========== ===========
</TABLE>
Office leases
The Company occupies certain office facilities owned by the
Exchange and EFL. The Company leases office space on a
year-to-year basis from the Exchange. Rent expenses under
these leases totaled $10,320, $11,344 and $11,288 in 1999,
1998 and 1997, respectively. The Company has a lease
commitment of nine remaining years with EFL for a branch
office. Rentals paid to EFL under this lease totaled $303 in
1999, $343 in 1998 and $423 in 1997.
Note receivable from EFL
EFL issued a surplus note to the Company for $15,000. The
note bears an annual interest rate of 6.45% and all payments
of interest and principal of the note may be repaid only out
of unassigned surplus of EFL and are subject to prior
approval of the Pennsylvania Insurance Commissioner.
Interest on the surplus note is scheduled to be paid
semi-annually. The note will be payable on demand on or
after December 31, 2005. During 1999, 1998 and 1997, EFL
paid interest to the Company totaling $968 each year.
Structured settlements with EFL
The Company and Exchange periodically purchase annuities
from EFL in connection with the structured settlement of
claims. The Company's pro-rata share (5.5%) of such
annuities purchased equaled $1,282, $984 and $978 in 1999,
1998 and 1997, respectively.
118
<PAGE>
INCORPORATED BY REFERENCE, PAGES 46 AND 47 OF THE COMPANY'S 1999 ANNUAL REPORT
TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. RECEIVABLES FROM ERIE INSURANCE EXCHANGE AND CONCENTRATIONS OF
CREDIT RISK
Financial instruments, which potentially expose the Company to
concentrations of credit risk, include unsecured receivables
from the Exchange. A significant amount of the Company's revenue
and receivables are from the Exchange and affiliates.
Management fee and expense reimbursements due from the Exchange
were $104,264 and $106,987 in 1999 and 1998, respectively. A
receivable from EFL for expense reimbursements totaled $1,488 at
December 31, 1999 compared to $1,625 at December 31, 1998. The
Company also has a receivable due from the Exchange for
reinsurance recoverable from losses and unearned premium
balances ceded to the pool. Such amounts totaled $365,217 and
$359,182 in 1999 and 1998, respectively.
Premiums receivable from Policyholders at December 31, 1999 and
1998 equaled $139,941 and $136,815, respectively. A significant
amount of these receivables are ceded to the Exchange as part of
the intercompany pooling arrangement.
NOTE 12. REINSURANCE
EIC and EINY have a pooling arrangement with the Exchange,
whereby EIC and EINY cede all of their direct property/casualty
insurance to the Exchange, except for the annual premium under
the all lines aggregate excess of loss reinsurance agreement
discussed below. EIC and EINY then assume 5% and 0.5%,
respectively, of the total of the Exchange's insurance business
(including the business assumed from EIC and EINY). The
companies settle accounts between them by payment of such
amounts within 30 days after the end of each quarterly
accounting period. Amounts not settled within 30 days will
accrue interest until such payments are made.
Effective January 1, 1997, EIC and EINY placed in effect an all
lines aggregate excess of loss reinsurance agreement with the
Exchange. Under this agreement, EIC and EINY reinsure their net
retained share of the intercompany reinsurance pool such that
once EIC and EINY have sustained ultimate net losses that exceed
an amount equal to 72.5% of EIC and EINY's net premiums earned,
the Exchange will be liable for 95% of the amount of such
excess, up to but not exceeding, an amount equal to 95% of 15%
of EIC and EINY's net premium earned. Losses equal to 5% of the
net ultimate net loss in excess of the retention under the
contract are retained net by EIC and EINY. The annual premium
is subject to a minimum premium of $800. This reinsurance
treaty is excluded from the intercompany pooling agreement. The
annual premium paid to the Exchange for the agreement totaled
$900 in 1999 and $1,158 in 1998. There were no loss recoveries
by EIC or EINY under the agreement for 1999 or 1998.
119
<PAGE>
INCORPORATED BY REFERENCE, PAGE 47 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. REINSURANCE (CONTINUED)
To the extent the Exchange assumes reinsurance business from
affiliated and non-affiliated sources, the Company participates
because of its pooling arrangement with the Exchange. Similarly,
the Company also participates in the business ceded from the
Exchange. Reinsurance premiums, commissions, expense
reimbursements and reserves related to reinsurance business are
accounted for on bases consistent with those used in accounting
for the original policies issued and the terms of the
reinsurance contracts. Premiums ceded to the Exchange have been
reported as a reduction of premium income. The Company's
property and liability reinsurance assumed from foreign
insurance companies is accounted for using the periodic method,
whereby premiums are recognized as revenue over the policy term,
and claims, including an estimate of claims incurred but not
reported, are recognized as they occur. The amount of
reinsurance business assumed from foreign insurance companies is
not significant.
Reinsurance contracts do not relieve the Company from its
primary obligations to Policyholders. A contingent liability
exists with respect to reinsurance receivables in the event
reinsurers are unable to meet their obligations under the
reinsurance agreements.
The following summarizes insurance and reinsurance activities
for the Company:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Premiums Earned:
Direct $ 351,228 $ 338,162 $ 334,772
Assumed-non-affiliates 5,380 4,889 5,393
Ceded to Erie Insurance Exchange ( 356,608) ( 343,051) ( 340,165)
Assumed from Erie Insurance Exchange 117,224 112,939 107,350
---------- ---------- ----------
Net $ 117,224 $ 112,939 $ 107,350
========== ========== ==========
Losses and Loss Adjustment Expenses Incurred:
Direct $ 264,177 $ 269,710 $ 265,678
Assumed-non-affiliates 6,512 3,912 5,896
Ceded to Erie Insurance Exchange ( 270,689) ( 273,622) ( 271,574)
Assumed from Erie Insurance Exchange 87,719 79,881 79,970
---------- ---------- ----------
Net $ 87,719 $ 79,881 $ 79,970
========== ========== ==========
</TABLE>
120
<PAGE>
INCORPORATED BY REFERENCE, PAGES 47 AND 48 OF THE COMPANY'S 1999 ANNUAL REPORT
TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. STATUTORY INFORMATION
The Company's insurance subsidiaries are required to file
statutory financial statements with state insurance regulatory
authorities. Accounting principles used to prepare statutory
financial statements differ from financial statements prepared
on the basis of generally accepted accounting principles.
Consolidated balances including amounts reported by the
consolidated and unconsolidated insurance subsidiaries on the
statutory basis would be as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Shareholders' equity at December 31, $ 688,802 $ 638,859 $ 523,715
Net income for the year ended December 31, 142,615 135,603 118,970
</TABLE>
The amount of dividends the Company's Pennsylvania-domiciled
property/casualty subsidiaries, EIC and Erie Insurance Property
& Casualty Company, can pay without the prior approval of the
Pennsylvania Insurance Commissioner is limited by Pennsylvania
regulation to not more than the greater of: (a) 10% of its
statutory surplus as reported on its last annual statement, or
(b) the net income as reported on its last annual statement. The
amount of dividends that the Erie Insurance Company's New
York-domiciled property/casualty subsidiary, EINY, can pay
without the prior approval of the New York Superintendent of
Insurance is limited to the lesser of (a) 10% of its statutory
surplus as reported on its last annual statement, or (b) 100% of
its adjusted net investment income during such period. At
December 31, 1999, the maximum dividend the Company could
receive from its property/casualty insurance subsidiaries was
$9,814. No dividends were paid to the Company from its
property/casualty insurance subsidiaries in 1999 or 1998.
The amount of dividends EFL, a Pennsylvania-domiciled life
insurer, can pay to its shareholders without the prior approval
of the Pennsylvania Insurance Commissioner is limited by statute
to the greater of: (a) 10% of its statutory surplus as regards
Policyholders as shown on its last annual statement on file with
the commissioner, or (b) the net income as reported for the
period covered by such annual statement, but shall not include
pro rata distribution of any class of the insurer's own
securities. Accordingly, the Company's share of the maximum
dividend payout which may be made in 2000 without prior
Pennsylvania Commissioner approval is $3,109. Dividends to the
Company totaled $1,349 in 1999 and $1,226 in 1998.
121
<PAGE>
INCORPORATED BY REFERENCE, PAGE 48 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. 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>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Management operations $ 572,049 $ 533,449 $ 501,171
Property/casualty insurance operations 133,989 129,827 120,918
Life insurance operations 5,045 4,777 4,231
------------- ------------- -------------
Total revenue $ 711,083 $ 668,053 $ 626,320
============= ============= =============
Income before income taxes:
Management operations $ 190,483 $ 174,126 $ 159,380
Property/casualty insurance operations 13,227 17,454 11,309
Life insurance operations 5,045 4,777 4,231
------------- ------------- -------------
Total income before income taxes $ 208,755 $ 196,357 $ 174,920
============= ============= =============
Net income:
Management operations $ 128,448 $ 116,411 $ 106,513
Property/casualty insurance operations 9,871 13,612 8,056
Life insurance operations 4,787 4,528 4,012
------------- ------------- -------------
Net income $ 143,106 $ 134,551 $ 118,581
============= ============= =============
Assets:
Management operations $ 723,377 $ 666,781 $ 550,748
Property/casualty insurance operations 757,483 747,172 707,108
Life insurance operations 37,007 39,479 34,688
------------- ------------- -------------
Total assets $ 1,517,867 $ 1,453,432 $ 1,292,544
============= ============= =============
</TABLE>
122
<PAGE>
INCORPORATED BY REFERENCE, PAGE 49 OF THE COMPANY'S 1999 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1999
Net revenue from management operations $ 34,367 $ 40,587 $ 41,945 $ 31,619
Underwriting (loss) gain ( 607) 1,113 ( 1,580) ( 2,465)
Total revenue from investment operations 14,770 16,177 16,450 16,379
---------- ---------- ---------- ----------
Net income $ 33,407 $ 39,225 $ 38,425 $ 32,049
========== ========== ========== ==========
Net income per share $ 0.45 $ 0.53 $ 0.52 $ 0.45
========== ========== ========== ==========
Comprehensive income $ 31,897 $ 32,180 $ 26,295 $ 39,137
========== ========== ========== ==========
1998
Net revenue from management operations $ 33,761 $ 39,065 $ 40,047 $ 32,370
Underwriting gain (loss) 1,428 ( 307) ( 97) ( 457)
Total revenue from investment operations 11,317 13,554 11,847 13,829
---------- ----------- ----------- -----------
Net income $ 31,699 $ 35,470 $ 35,697 $ 31,685
========== ========== ========== ==========
Net income per share $ 0.43 $ 0.47 $ 0.48 $ 0.43
========== ========== ========== ==========
Comprehensive income $ 40,641 $ 35,165 $ 23,990 $ 45,909
========== ========== ========== ==========
1997
Net revenue from management operations $ 31,754 $ 35,363 $ 36,541 $ 30,543
Underwriting loss ( 48) ( 783) ( 299) ( 1,129)
Total revenue from investment operations 9,636 10,138 11,750 11,454
---------- ---------- ----------- -----------
Net income $ 28,211 $ 30,444 $ 32,128 $ 27,798
========== ========== ========== ==========
Net income per share $ 0.38 $ 0.41 $ 0.43 $ 0.37
========== ========== ========== ==========
Comprehensive income $ 22,106 $ 41,442 $ 41,208 $ 25,359
========== ========== ========== ==========
</TABLE>
123
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Registrant owns 100% of the outstanding stock of the following
companies:
Name State of Formation
Erie Insurance Property
& Casualty Company Pennsylvania
Erie Insurance Company Pennsylvania
EI Holding Corp. Delaware
EI Service Corp. Pennsylvania
Erie Insurance Company of New York -
Wholly-owned by Erie Insurance Company New York
124
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1999 FORM 10-K AND RESTATED SUMMARY INFORMATION FOR THE YEARS ENDED DECEMBER
31,1998 AND 1997 FOR THE ERIE INDEMNITY COMPANY AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10-K
</LEGEND>
<CIK> 0000922621
<NAME> ERIE INDEMNITY COMPANY
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<DEBT-HELD-FOR-SALE> 485,522 441,353 349,973
<DEBT-CARRYING-VALUE> 0 0 0
<DEBT-MARKET-VALUE> 0 0 0
<EQUITIES> 215,383 202,804 165,133
<MORTGAGE> 8,230 8,287 8,393
<REAL-ESTATE> 0 0 0
<TOTAL-INVEST> 748,251 669,938 531,430
<CASH> 24,214 53,581 53,148
<RECOVER-REINSURE> 912 939 242
<DEFERRED-ACQUISITION> 11,405 10,863 10,283
<TOTAL-ASSETS> 1,517,867 1,453,432 1,292,544
<POLICY-LOSSES> 432,895 426,165 413,408
<UNEARNED-PREMIUMS> 236,525 229,057 219,211
<POLICY-OTHER> 0 0 0
<POLICY-HOLDER-FUNDS> 0 0 0
<NOTES-PAYABLE> 0 0 0
0 0 0
0 0 0
<COMMON> 2,170 2,170 2,170
<OTHER-SE> 749,759 653,053 537,213
<TOTAL-LIABILITY-AND-EQUITY> 1,517,867 1,453,432 1,292,544
117,224 112,939 107,350
<INVESTMENT-INCOME> 49,030 43,383 37,163<F1>
<INVESTMENT-GAINS> 14,745 7,164 5,815
<OTHER-INCOME> 0 0 0
<BENEFITS> 87,719 79,881 79,970
<UNDERWRITING-AMORTIZATION> 33,043 32,492 29,639
<UNDERWRITING-OTHER> 0 0 0
<INCOME-PRETAX> 208,755 196,357 174,920
<INCOME-TAX> 65,649 61,806 56,338
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 143,106 134,551 118,581
<EPS-BASIC> 1.95 1.81 1.59
<EPS-DILUTED> 1.95 1.81 1.59
<RESERVE-OPEN> 426,165 413,409 386,425
<PROVISION-CURRENT> 86,282 80,627 77,345
<PROVISION-PRIOR> 1,437 (746) 2,625
<PAYMENTS-CURRENT> 50,560 46,645 42,792
<PAYMENTS-PRIOR> 33,632 31,278 32,551
<RESERVE-CLOSE> 432,895 426,165 413,409
<CUMULATIVE-DEFICIENCY> (11,817) (1,220) 8,883
<FN>
<F1> Investment income has been restated to reflect the reclassification of investment expenses to current year classifications.
</FN>
</TABLE>
