FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 2000
Commission file number 0-24000
ERIE INDEMNITY COMPANY
------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0466020
-------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Erie Insurance Place, Erie, Pennsylvania 16530
-------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
(814) 870-2000
-----------------------------------------------------------
Registrant's telephone number, including area code
Not applicable
-----------------------------------------------------------
Former name,former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Class A Common Stock, no par value, with a stated value of
$.0292 per share--64,570,613 shares as of July 17, 2000.
Class B Common Stock, no par value, with a stated value of
$70 per share-- 3,070 shares as July 17, 2000.
The common stock is the only class of stock the Registrant is presently
authorized to issue.
1
<PAGE>
INDEX
ERIE INDEMNITY COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Position--June 30, 2000 and
December 31, 1999
Consolidated Statements of Operations--Three and six months ended
June 30, 2000 and 1999
Consolidated Statements of Comprehensive Income--Three and six months
ended June 30, 2000 and 1999
Consolidated Statements of Cash Flows--Six months ended
June 30, 2000 and 1999
Notes to Consolidated Financial Statements--June 30, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
PART I. FINANCIAL INFORMATION
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(In thousands)
June 30, December 31,
ASSETS 2000 1999
-------------- ---------------
(Unaudited)
<S> <C> <C>
INVESTMENTS
Fixed maturities at fair value
(amortized cost of $499,253 and
$489,394, respectively) $ 494,030 $ 485,522
Equity securities (cost of $184,123 and
$171,495, respectively) 221,148 215,383
Real estate mortgage loans 6,657 8,230
Other invested assets 59,346 39,116
-------------- -------------
Total investments $ 781,181 $ 748,251
Cash and cash equivalents 37,846 24,214
Accrued investment income 8,549 7,998
Premiums receivable from Policyholders 152,697 139,941
Prepaid federal income tax 18 2,975
Reinsurance recoverable from Erie Insurance
Exchange 389,518 365,217
Note receivable from Erie Family Life
Insurance Company 15,000 15,000
Other receivables from Erie Insurance
Exchange and affiliates 123,139 105,752
Reinsurance recoverable non-affiliates 843 912
Deferred policy acquisition costs 12,071 11,405
Property and equipment 14,479 15,261
Equity in Erie Family Life Insurance Company 40,542 37,007
Other assets 42,686 43,934
-------------- ---------------
Total assets $ 1,618,569 $ 1,517,867
============== ===============
(Continued)
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
3
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(In thousands)
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
LIABILITIES
Unpaid losses and loss adjustment expenses $ 455,348 $ 432,895
Unearned premiums 256,879 236,525
Commissions payable and accrued 91,281 92,874
Accounts payable and accrued expenses 27,531 24,187
Deferred income taxes 14,231 11,805
Dividends payable 8,787 8,853
Employee benefit obligations 14,337 13,129
-------------- ---------------
Total liabilities $ 868,394 $ 820,268
-------------- ---------------
SHAREHOLDERS' EQUITY
Capital Stock
Class A common, stated value $.0292 per
share; authorized 74,996,930 shares;
67,032,000 shares issued;64,628,794 and
65,131,501 shares outstanding in 2000 and 1999,
respectively $ 1,955 $ 1,955
Class B common, stated value $70 per
share; authorized 3,070 shares;
3,070 shares issued and outstanding 215 215
Additional paid-in capital 7,830 7,830
Accumulated other comprehensive income 33,007 26,581
Retained earnings 776,457 715,348
-------------- ---------------
Total contributed capital and retained earnings $ 819,464 $ 751,929
Treasury stock, at cost - 2,403,206 shares repurchased through
June 30, 2000 and 1,900,499 shares repurchased through
December 31, 1999 ( 69,289) ( 54,330)
-------------- ---------------
Total shareholders' equity $ 750,175 $ 697,599
-------------- ---------------
Total liabilities and
shareholders' equity $ 1,618,569 $ 1,517,867
============== ===============
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
4
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------- ------------------------------
2000 1999 2000 1999
(In thousands, except per share data)
<S> <C> <C> <C> <C>
MANAGEMENT OPERATIONS:
Management fee revenue $ 147,174 $ 137,503 $ 276,272 $ 259,337
Service agreement revenue 4,936 3,704 10,170 7,434
------------- ------------- ------------- -------------
Total revenue from management operations 152,110 141,207 286,442 266,771
Cost of management operations 108,800 100,621 206,514 191,818
------------- ------------- ------------- -------------
Net revenue from
management operations $ 43,310 $ 40,586 $ 79,928 $ 74,953
------------- ------------ ------------- -------------
INSURANCE UNDERWRITING OPERATIONS:
Premiums earned $ 30,677 $ 29,517 $ 60,568 $ 58,124
Losses and loss adjustment expenses incurred 23,301 20,130 47,964 41,521
Policy acquisition and other underwriting
expenses 8,966 8,274 17,397 16,097
------------- ------------- ------------- -------------
Total losses and expenses 32,267 28,404 65,361 57,618
------------- ------------- ------------- -------------
Underwriting (loss) gain ($ 1,590) $ 1,113 ($ 4,793) $ 506
------------- ------------- ------------- -------------
INVESTMENT OPERATIONS:
Equity in earnings of Erie Family
Life Insurance Company $ 1,272 $ 1,272 $ 2,679 $ 2,328
Net investment income 13,450 10,934 26,053 21,399
Net realized gain on investments 5,936 3,972 11,441 7,221
------------- ------------- ------------- -------------
Net revenue from investment operations 20,658 16,178 40,173 30,948
------------- ------------- ------------- -------------
Income before income taxes 62,378 57,877 115,308 106,407
Provision for income taxes 19,860 18,652 36,605 33,774
------------- ------------- ------------- -------------
Net income $ 42,518 $ 39,225 $ 78,703 $ 72,633
============= ============= ============= =============
Net income per share $ 0.59 $ 0.53 $ 1.09 $ 0.98
============= ============= ============= =============
Weighted average shares outstanding (Note B) 72,107 73,678 72,204 74,014
============= ============= ============= =============
Dividends declared per share:
Class A non-voting common $ 0.135 $ 0.12 $ 0.27 $ 0.24
------------- ------------- ------------- -------------
Class B common $ 20.25 $ 18.00 $ 40.50 $ 36.00
------------- ------------- ------------- -------------
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
5
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------- ------------------------------
2000 1999 2000 1999
(In thousands)
<S> <C> <C> <C> <C>
Net Income $ 42,518 $ 39,225 $ 78,703 $ 72,633
------------- ------------- ------------- ------------
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising
during period ( 5,488) ( 6,867) 21,327 ( 5,943)
Less: reclassification adjustment for
gains included in net income 5,936 3,972 11,441 7,221
------------- ------------- ------------- ------------
Net unrealized holding (losses) gains
arising during period ($ 11,424) ($ 10,839) $ 9,886 ($ 13,164)
Income tax benefit (expense) related to
unrealized gains or losses 3,999 3,793 ( 3,460) 4,607
------------- ------------- ------------- ------------
Other comprehensive (loss) income, net of tax ($ 7,425) ($ 7,046) $ 6,426 ($ 8,557)
-------------- -------------- ------------- ------------
Comprehensive income $ 35,093 $ 32,179 $ 85,129 $ 64,076
============== ============== ============== =============
</TABLE>
6
<PAGE>
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
------------------- -------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 78,703 $ 72,633
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,280 1,021
Deferred income tax (benefit) expense ( 182) 610
Amortization of deferred policy acquisition costs 11,678 11,080
Realized gain on investments ( 11,441) ( 7,221)
Net amortization of bond premium 8 75
Undistributed earnings of Erie Family Life ( 1,943) ( 1,653)
Deferred compensation 328 398
Increase in accrued investment income ( 551) ( 637)
Increase in receivables ( 54,375) ( 39,264)
Policy acquisition costs deferred ( 12,344) ( 11,651)
Decrease (increase) in prepaid expenses and other assets 1,221 ( 3,892)
Increase in accounts payable and
accrued expenses 4,224 5,014
(Decrease) increase in commissions payable and accrued ( 1,592) 819
Increase in income taxes payable 2,956 3,292
Increase in loss reserves 22,453 11,424
Increase in unearned premiums 20,354 7,086
------------------ ------------------
Net cash provided by operating activities $ 60,777 $ 49,134
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchase of investments (Note C) ( 14,057) ( 42,238)
Purchase of property and equipment ( 1) ( 338)
Purchase of computer software ( 496) ( 2,435)
Loans to agents ( 861) ( 1,177)
Collections on agent loans 889 1,744
------------------ -----------------
Net cash used in investing activities ($ 14,526) ($ 44,444)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders ($ 17,660) ($ 16,142)
Treasury stock ( 14,959) ( 25,427)
------------------- ------------------
Net cash used in financing activities ($ 32,619) ($ 41,569)
------------------- ------------------
Net increase (decrease) in cash and cash equivalents 13,632 ( 36,879)
Cash and cash equivalents at beginning of period 24,214 53,580
------------------- ------------------
Cash and cash equivalents at end of period $ 37,846 $ 16,701
=================== ==================
Supplemental disclosures of cash flow information:
Cash paid during the six months ended June 30, 2000 and 1999 for income taxes
was $33,822 and $29,865 respectively.
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
7
<PAGE>
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
All amounts are in thousands of dollars except per share data
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, which include the
accounts of the Erie Indemnity Company and its' wholly owned subsidiaries Erie
Insurance Company, Erie Insurance Company of New York and Erie Insurance
Property & Casualty Company, have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
six-month period ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-K for the year ended December 31,
1999.
NOTE B -- EARNINGS PER SHARE
Earnings per share is based on the weighted average number of Class A shares
outstanding (64,835,690 and 66,645,951 at June 30,2000 and 1999, respectively),
giving effect to the conversion of the weighted average number of Class B shares
outstanding (3,070 in 2000 and 1999) at a rate of 2,400 Class A shares for one
Class B share as set out in the Articles of Incorporation. Weighted average
equivalent shares outstanding totaled 72,107,369 for the quarter ended
June 30, 2000 and 73,678,486 for the same period a year ago. For the six
months ended June 30, 2000 weighted average equivalent shares outstanding were
72,203,690 compared to 74,013,951 for the six months ended June 30, 1999.
NOTE C -- INVESTMENTS
Management considers all fixed maturities and marketable equity securities
available-for-sale. Marketable equity securities consist primarily of common and
non-redeemable preferred stocks while fixed maturities consist of bonds, notes
and redeemable preferred stock. Available-for-sale securities are stated at fair
value, with the unrealized gains and losses, net of tax, reported as a separate
component of comprehensive income and shareholders' equity. Management
determines the appropriate classification of fixed maturities at the time of
purchase and reevaluates such designation as of each statement of financial
position date.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note C--INVESTMENTS (Continued)
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
June 30, 2000
Fixed maturities:
----------------
U.S. treasuries & government
agencies $ 11,218 $ 203 $ 104 $ 11,317
States & political subdivisions 50,095 1,178 405 50,868
Special revenue 118,167 2,537 545 120,159
Public utilities 15,345 0 857 14,488
U.S. industrial & miscellaneous 248,508 1,449 9,118 240,839
Foreign 26,593 20 922 25,691
------------- ------------ ------------- -------------
Total bonds $ 469,926 $ 5,387 $ 11,951 $ 463,362
Redeemable preferred stock 29,327 2,047 706 30,668
------------- ------------ ------------- -------------
Total fixed maturities $ 499,253 $ 7,434 $ 12,657 $ 494,030
-------------- ------------ ------------- -------------
Equity securities:
-----------------
Common stock:
U.S. banks, trusts &
insurance companies $ 3,180 $ 11 $ 305 $ 2,886
U.S. industrial &
miscellaneous 60,677 50,223 6,105 104,795
Foreign industrial &
miscellaneous 6,108 736 923 5,921
Non-redeemable
preferred stock:
U.S. banks, trusts &
insurance companies 25,920 129 1,913 24,136
U.S. industrial &
miscellaneous 58,463 1,738 5,052 55,149
Foreign industrial &
miscellaneous 29,775 150 1,664 28,261
------------- ------------ ------------- -------------
Total equity securities $ 184,123 $ 52,987 $ 15,962 $ 221,148
-------------- ------------ ------------- -------------
Total available-for-sale
securities $ 683,376 $ 60,421 $ 28,619 $ 715,178
============== ============ ============= =============
</TABLE>
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note C--INVESTMENTS (Continued)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
December 31, 1999
Fixed Maturities:
----------------
U.S. treasuries & government
agencies $ 11,029 $ 136 $ 114 $ 11,051
States & political subdivisions 52,064 1,477 423 53,118
Special revenue 120,170 2,487 561 122,096
Public utilities 20,909 17 608 20,318
U.S. industrial & miscellaneous 232,458 1,644 6,926 227,176
Foreign 21,593 83 933 20,743
------------- ------------ ------------- -------------
Total bonds $ 458,223 $ 5,844 $ 9,565 $ 454,502
Redeemable preferred stock 31,171 657 808 31,020
------------- ------------ ------------- -------------
Total fixed maturities $ 489,394 $ 6,501 $ 10,373 $ 485,522
------------- ------------ ------------- -------------
Equity securities:
-----------------
Common stock:
U.S. banks, trusts &
insurance companies $ 3,887 $ 3,631 $ 362 $ 7,156
U.S. industrial &
miscellaneous 56,035 51,194 4,097 103,132
Foreign industrial &
miscellaneous 4,948 1,000 437 5,511
Non-redeemable
preferred stock:
U.S. banks, trusts &
insurance companies 38,708 615 2,629 36,694
U.S. industrial &
miscellaneous 61,109 894 5,341 56,662
Foreign industrial &
miscellaneous 6,808 25 605 6,228
------------- ------------ ------------- -------------
Total equity securities $ 171,495 $ 57,359 $ 13,471 $ 215,383
------------- ------------ ------------- -------------
Total available-for-sale
securities $ 660,889 $ 63,860 $ 23,844 $ 700,905
============= ============ ============= =============
</TABLE>
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note C--INVESTMENTS (Continued)
Mortgage loans on commercial real estate are recorded at unpaid balances,
adjusted for amortization of premium or discount. A valuation allowance would be
provided for impairment in net realizable value based on periodic valuations.
Other invested assets include investments in U.S. domestic and foreign private
equity and real estate limited partnerships. The private equity limited
partnerships are carried at estimated market values. Real estate limited
partnerships are recorded using the equity method, which approximates the
Company's share of the carrying value of the real estate investments held by the
partnerships.
The following is the detail of net purchase of investments as presented in the
Consolidated Statements of Cash Flows:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
---------------------- ----------------------
<S> <C> <C>
Purchase of investments:
Fixed maturities ($ 75,307) ($ 86,581)
Equity securities ( 31,676) ( 32,419)
Mortgage loans 0 ( 66)
Other invested assets ( 7,573) ( 3,645)
--------------------- ---------------------
Total purchases ($ 114,556) ($ 122,711)
--------------------- ---------------------
Sales/maturities of investments:
Sales of maturities 38,175 24,774
Calls of maturities 28,126 25,081
Equity securities 29,470 29,963
Mortgage loans 1,573 55
Other invested assets 3,155 600
--------------------- ---------------------
Total sales/maturities $ 100,499 $ 80,473
--------------------- ---------------------
Net purchase of investments ($ 14,057) ($ 42,238)
===================== =====================
</TABLE>
NOTE D -- SUMMARIZED FINANCIAL STATEMENT INFORMATION OF AFFILIATE
The Company has a 21.63% investment in Erie Family Life Insurance Company (EFL)
and accounts for this investment using the equity method of accounting. The
following is summarized financial statement information for EFL:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
---------------------- ----------------------
<S> <C> <C>
Revenues $ 58,582 $ 51,145
Benefits and expenses 39,642 34,373
---------------------- ----------------------
Income before income taxes 18,940 16,772
Income taxes 6,553 6,012
---------------------- ----------------------
Net income $ 12,387 $ 10,760
====================== ======================
Comprehensive income (loss) $ 19,745 ($ 6,917)
====================== ======================
Dividends paid to shareholders $ 3,260 $ 2,977
====================== ======================
Net unrealized appreciation on investment
securities at June 30, net of deferred taxes $ 5,014 $ 8,495
====================== ======================
</TABLE>
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE E -- NOTE RECEIVABLE FROM ERIE FAMILY LIFE INSURANCE COMPANY
In 1995, EFL issued a surplus note to the Company for $15 million. The note
bears an annual interest rate of 6.45% and all payments of interest and
principal of the note may be repaid only out of unassigned surplus of EFL and
are subject to prior approval of the Pennsylvania Insurance Commissioner.
Interest on the surplus note is scheduled to be paid semi-annually. The note
will be payable on demand on or after December 31, 2005. EFL paid $484 in the
second quarters of 2000 and 1999 to the Company.
NOTE F -- TREASURY STOCK
In December 1998, the Board of Directors of the Company authorized the
repurchase of up to $70 million of its Class A common stock from January 1, 1999
through December 31, 2001. At its regular quarterly meeting on March 7, 2000,
the Board announced expanded authorization for share repurchases up to an
additional $50 million of its outstanding Class A common stock through December
31, 2002. Treasury shares are recorded on the Consolidated Statements of
Financial Position at cost.
NOTE G -- RECLASSIFICATIONS
Certain amounts as previously reported in the 1999 financial statements have
been reclassified to conform to the current period's presentation.
NOTE H -- SEGMENT INFORMATION
The Company operates its business as three reportable segments - management
operations, property/casualty insurance operations and life insurance
operations. The Company's principal operations consist of serving as
attorney-in-fact for the Erie Insurance Exchange(Exchange) which constitutes its
management operations. The Company's property/casualty insurance operations
arise by virtue of a pooling arrangement between the Company's insurance
subsidiaries and the Exchange. The Company also has a 21.63% equity interest
in EFL which comprises its life insurance operations segment. Summarized
financial information for these operations is presented below. Income amounts
include each industry segment's share of investment income and realized gain
or loss on investments which are reported in the investment operations segment
on the Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
-------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Management operations $ 166,610 $ 151,827 $ 314,751 $ 286,960
Property/casualty insurance operations 35,563 33,803 69,753 66,555
Life insurance operations 1,272 1,272 2,679 2,328
------------- -------------- -------------- -------------
Total revenue $ 203,445 $ 186,902 $ 387,183 355,843
============= ============== ============== =============
Income before income taxes:
Management operations $ 57,809 $ 51,207 $ 108,237 $ 95,143
Property/casualty insurance operations 3,297 5,398 4,392 8,936
Life insurance operations 1,272 1,272 2,679 2,328
------------- -------------- -------------- -------------
Total income before income taxes $ 62,378 $ 57,877 $ 115,308 $ 106,407
============= ============== ============== =============
Net income:
Management operations $ 38,858 $ 34,215 $ 72,551 $ 63,994
Property/casualty insurance operations 2,452 3,802 3,609 6,427
Life insurance operations 1,208 1,208 2,543 2,212
------------- -------------- -------------- -------------
Net income $ 42,518 $ 39,225 $ 78,703 72,633
============= ============== ============== =============
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note H--SEGMENT INFORMATION (Continued)
As of As of
June 30, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Assets:
Management operations $ 766,040 $ 723,377
Property/casualty insurance operations 811,987 757,483
Life insurance operations 40,542 37,007
------------ ------------
Total income before income taxes $ 1,618,569 $ 1,517,867
============= ============
</TABLE>
NOTE I -- GEOGRAPHIC EXPANSION
On March 7, 2000 the Company announced the Erie Insurance Group's intention to
expand its marketing territory into Wisconsin. Wisconsin will be the eleventh
state served by the Group, in addition to the District of Colombia. In
Wisconsin, the Group intends to write all lines of insurance it currently
offers, including auto, home, business, life and annuities.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and related notes found on pages 3 through 13, since they
contain important information that is helpful in evaluating the Company's
operating results and financial condition.
OPERATING RESULTS
Financial Overview
Consolidated net income increased by 8.4% for the second quarter of 2000 to
$42,518,485, or $.59 per share, from $39,224,982 or $.53 per share, for the
second quarter of 1999. Earnings per share, which were positively impacted by
the Company's share repurchase program, rose by 11.2% for the second quarter of
2000. Improved management and investment operating segments were somewhat offset
by increased losses experienced in the Company's insurance underwriting
operations. For the six months ended June 30, 2000, earnings per share increased
11.1% to $1.09 per share, from $.98 per share reported for the same period in
1999.
RESULTS OF OPERATIONS
Analysis of Management Operations
Management fee revenue derived from the management operations of the Company,
serving as attorney-in-fact for the Erie Insurance Exchange (the Exchange),
increased 7.0% to $147,173,682 for the three months ended June 30, 2000 from
$137,502,858 for the three months ended June 30, 1999. Management fee revenue
increased 6.5% to $276,272,190 in the first six months of 2000 compared to
$259,337,064 for the same period in 1999. The management fee rate charged was
25% for all periods presented. The Company's Board of Directors has the
authority to change the management fee rate at its discretion, but cannot exceed
a rate of 25%.
The direct and affiliated assumed premiums written of the Exchange, upon which
management fee is based, grew by $38,683,300, or 7.0%, to $588,694,727 for the
second quarter of 2000 from $550,011,427 in the second quarter of 1999. For the
year, premiums written increased 6.5% to $1,105,088,753 compared to
$1,037,348,253 written for the first six months of 1999.
Policy growth for 2000 is strong as policy retention rates and new policy growth
improved. Policies in force increased 5.9% to 2,778,035 at June 30, 2000 from
2,622,735 at June 30, 1999. Policy retention (the percentage of current
Policyholders who have renewed their policies) was 92.0% and 91.0% for the
quarters ended June 30, 2000 and 1999, respectively, for private passenger
automobile and 90.7% and 89.8% for the quarters ended June 30, 2000 and 1999,
respectively, for all lines of business.
Service agreement revenue grew by $1,232,011 to $4,936,576 in the second quarter
of 2000 from $3,704,565 for the same period in 1999. Included in service
agreement revenue are service charges the Company collects from Policyholders
for providing extended payment terms on policies written by the Group. Such
service charges amounted to $2,918,407 and $1,746,219 for the quarters ended
June 30, 2000 and 1999 respectively. Also included in service agreement revenue
is service income received from the Exchange as compensation for the management
and administration of voluntary assumed reinsurance from non-affiliated
insurers. The Company receives a service fee of 7.0 percent of non-affiliated
assumed reinsurance premiums. Service fees totaled $2,018,169 and $1,958,346 for
the three months ended June 30, 2000 and 1999 respectively, on net voluntary
assumed reinsurance premiums of $28,830,982 and $27,976,382 for the second
quarters of 2000 and 1999, respectively.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For the six months ended June 30, 2000 service agreement revenue increased 36.8%
to $10,169,495 from $7,433,674. Service charges increased 51.6% to $5,221,462
from $3,445,390, while service agreement income rose by 24.1% to $4,948,033. Net
voluntary assumed reinsurance premiums, upon which the service agreement revenue
is based, totaled $70,686,179 and $56,975,494 for the first six months of 2000
and 1999, respectively.
The cost of management operations increased 8.1% for the second quarter of 2000
to $108,800,520 from $100,620,714 during the second quarter of 1999. For the six
months ended June 30, 2000 the cost of management operations grew by 7.7% to
$206,514,065 compared to $191,817,455 for the same period in 1999.
Commissions to independent Agents are the largest component of the cost of
management operations. Included in commission expenses are the cost of scheduled
commissions paid to independent Agents on premiums collected as well as
promotional incentives for Agents and Agent contingency awards. Agent
contingency awards are based upon a three-year average of the underwriting
profitability of the direct business written and serviced by the independent
Agent within the Erie Insurance Group of companies. Commission costs totaled
$75,623,316 for the second quarter of 2000, an 8.9% increase over the
$69,432,412 reported in the second quarter of 1999. Commissions grew by 8.7% to
$141,439,386 from $130,067,383 recorded for the first six months of 1999.
Commission costs grew faster than the rate of growth in written premiums due to
increased provisions for agent contingency awards and changes in the mix of
business written to higher commissioned lines.
The cost of management operations excluding commission costs increased 6.4% for
the quarter ended June 30, 2000 to $33,177,204 from $31,188,302 recorded in the
second quarter of 1999. For the first six months of 2000, the cost of operations
excluding commission costs increased 5.4% to $65,074,679 from $61,750,072
recorded for the same period in 1999. Personnel costs, including salaries,
employee benefits, and payroll taxes, are the second largest component in cost
of operations. The Company's personnel costs totaled $19,721,821 for the three
month period ended June 30, 2000, compared to $18,073,887 for the same period in
1999, an increase of 9.1%. Personnel costs increased in the second quarter 2000
due to staffing increases and employee pay rate increases.
Net revenue from the Company's management operations increased 6.7% to
$43,309,738 for the three months ended June 30, 2000 from $40,586,709 for the
same period in 1999. For the six months ended June 30, 2000 net revenue from
management operations totaled $79,927,620, an increase of 6.6% when compared to
the first six months of 1999. The gross margin from management operations (net
revenue divided by total revenue), of 28.5% in the second quarter of 2000, was
slightly less than the gross margin of 28.7% reported in the second quarter of
1999.
Analysis of Insurance Underwriting Operations
The insurance underwriting operation results of the Company's property/casualty
insurance subsidiaries, Erie Insurance Company and Erie Insurance Company of New
York, which together assume a 5.5 percent share of the underwriting results of
the Erie Insurance Group under an intercompany pooling arrangement, declined
during the second quarter of 2000 when compared to the same period in 1999.
Earned premiums increased 3.9 percent to $30,676,646 for the second quarter of
2000 compared to earned premiums of $29,517,142 for the same period in 1999.
Total losses and expenses increased 13.6% from $28,404,188 in the second quarter
of 1999 to $32,266,729 in the second quarter of 2000. The result of the growth
in premiums earned combined with the increase in loss and related expenses
generated an underwriting loss of $1,590,083 for the second quarter of 2000
compared to a gain of $1,112,954 for the second quarter of 1999.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The underwriting loss resulted from higher loss ratios experienced in private
passenger automobile and in commercial lines, principally worker's compensation
and commercial auto lines of business. Catastrophe losses were relatively
consistent at $930,000 for the second quarter of 2000 compared to $960,000 for
the same period in 1999.
The Company had an underwriting loss of $4,792,997 for the first six months of
2000 compared to an underwriting profit of $505,608 for the same period in 1999.
Additional development on losses from catastrophic storms that devastated Europe
in December 1999 contributed about $1.6 million in assumed reinsurance losses in
the first half of 2000.
The GAAP combined ratio for the Company's property/casualty insurance operations
was 105.2% for the three months ended June 30, 2000 compared to a ratio of 96.2%
for the same period in 1999. The GAAP combined ratio increased to 107.9% for the
six months ended June 30, 2000 compared to a ratio of 99.1% for the same period
in 1999. The GAAP combined ratio represents the ratio of loss, loss
adjustment, acquisition, and other underwriting expenses incurred to premiums
earned.
Analysis of Investment Operations
Net revenue from investment operations for the second quarter of 2000 increased
27.7% to $20,658,313 from $16,177,283 in the second quarter of 1999. This growth
was primarily the result of a $1,964,285 increase in net realized capital gains
on investments combined with a $2,516,438 increase in net investment income.
Earnings recognized from the Company's 21.6% ownership of Erie Family Life
Insurance Company remained steady at $1,271,867 in the second quarter of 2000
from $1,271,560 recorded in the second quarter of 1999.
Net revenue from investment operations for the six months ended June 30, 2000
increased 29.8% to $40,173,108 from $30,947,629 for the same period in 1999.
This increase resulted from a $4,653,794 increase in net investment income and a
$4,219,945 increase in net realized gains on investments.
FINANCIAL CONDITION
Investments
The Company's investment strategy takes a long-term perspective emphasizing
investment quality, diversification and superior investment returns. Investments
are managed on a total return approach that focuses on current income and
capital appreciation. The Company's investment strategy also provides for
liquidity to meet the short- and long-term commitments of the Company. At June
30, 2000, the Company's investment portfolio of investment-grade bonds, common
stock and preferred stock, all of which are readily marketable, totaled $701
million, or 43.3%, of total assets. These investments provide the liquidity the
Company requires to meet demands on its funds.
At June 30, 2000, 91.6% of total investments consist of fixed maturities and
equity securities. Mortgage loans and other invested assets, including real
estate and private equity limited partnerships, represented 8.4% of total
investments at that date. Mortgage loans on real estate and other invested
assets have the potential for higher returns, but also carry more risk,
including less liquidity and greater uncertainty in the rate of return. The
Company has not held or issued derivative financial instruments.
The Company's investments are subject to certain risks, including interest rate
and price risk. The Company monitors exposure to interest rate risk through
periodic reviews of asset and liability positions.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Estimates of cash flows and the impact of interest rate fluctuations relating to
the investment portfolio are monitored regularly. Price risk is defined as the
potential loss in estimated fair value resulting from an adverse change in
prices. The Company's objective is to earn competitive relative returns by
investing in a diverse portfolio of high-quality, liquid securities. Portfolio
characteristics are analyzed regularly and market risk is actively managed
through a variety of techniques. Portfolio holdings are diversified across
industries and concentrations in any one company or industry are limited by
parameters established by management and the Company's Board of Directors.
At June 30, 2000, the Company's five largest investments in corporate debt
securities totaled $24.1 million, none of which individually exceeded $5.0
million. These investments had a market value of $24.1 million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company's ability to secure enough cash to meet
its contractual obligations and operating needs. Operating cash flows are
generated from management operations as the attorney-in-fact for the Exchange,
the net cash flow from the Erie Insurance Company's 5% and the Erie Insurance
Company of New York's .5% participation in the underwriting results of the
reinsurance pool with the Exchange, and the Company's investment income from
affiliated and non-affiliated investments. With respect to the management fee,
funds are generally received from the Exchange on a premiums collected basis.
The Company pays commissions on premiums collected.
The Company generates sufficient net positive cash flow from its operations to
fund its commitments, repurchase its common stock, and build its investment
portfolio, thereby increasing future investment returns. The Company also
maintains a high degree of liquidity in its investment portfolio in the form of
readily marketable fixed maturities, common stocks and short-term investments.
Net cash flows provided by operating activities for the six months ended June
30, 2000 and 1999, were $60,776,981 and $49,134,376, respectively.
Dividends declared and paid to shareholders for the quarter ended June 30, 2000
and 1999, totaled $8,807,299 and $8,043,169, respectively. Dividends declared
and paid for the six months ended June 30, 2000 were $17,660,249 compared to
$16,142,270 for the same period ended in 1999. There are no regulatory
restrictions on the payment of dividends to the Company's shareholders, although
there are state law restrictions on the payment of dividends from the Company's
insurance subsidiaries to the Company. Dividends from subsidiaries are not
material to the Company's cash flow.
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to deferred tax assets and
liabilities resulted in net deferred tax liabilities at June 30, 2000 of
$14,230,648 and at December 31, 1999 of $11,805,286. The primary reason for the
increase in the deferred tax liability is an increase in unrealized gains from
available-for-sale securities in 2000 of $7.6 million resulting in an increased
deferred tax liability of $2.6 million.
The National Association of Insurance Commissioners (NAIC) standard for
measuring the solvency of insurance companies, referred to as Risk Based Capital
(RBC), is a method of measuring the minimum amount of capital appropriate for an
insurance company to support its overall business operations in consideration of
its size and risk profile. The RBC formula is used by state insurance regulators
as an early warning tool to identify, for the purpose of initiating regulatory
action, insurance companies that potentially are inadequately capitalized. In
addition, the formula defines minimum capital standards that will supplement the
current system of low fixed minimum capital and surplus requirements on a
state-by-state basis. At December 31, 1999, the Exchange, its subsidiary
Flagship City Insurance Company and the Company's property/casualty insurance
subsidiaries' all had Risk Based Capital levels substantially in excess of
levels that would require regulatory action.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
At June 30, 2000 and December 31, 1999, the Company's receivables from its
affiliates totaled $512,657,540 and $470,968,903, respectively. These
receivables, primarily due from the Exchange, as a result of the management fee,
expense reimbursements and the intercompany reinsurance pool, represent a
concentration of credit risk.
Stock Redemption Plan
The Erie Indemnity Company Stock Redemption Plan entitles estates of qualified
shareholders to cause the Company to redeem shares of stock of the Company at a
price equal to the fair market value of the stock at time of redemption. The
redemption amount is limited to an aggregation of: (1) $10 million and (2) an
additional annual amount as determined by the Board is its sole discretion, not
to exceed 20% of the Company's net income from management operations during the
prior fiscal year. This aggregate amount is reduced by redemption amounts paid.
However, at no time shall the aggregate redemption limitation exceed 20% of the
Company's retained earnings determined as of the close of the prior year. In
addition, the plan limits the repurchase from any single shareholder's estate to
33% of total share holdings of such shareholder. On April 27, 1999 the Board
approved an increase in the redemption amount of $19,190,347 to $77,987,383. As
of June 30, 2000, no shares have been redeemed under the Stock Redemption Plan.
Stock Repurchase Plan
At the December 16, 1998 regular meeting of the Board of Directors of the Erie
Indemnity Company, the board approved a stock repurchase plan beginning January
1, 1999, under which the Company may repurchase as much as $70 million of its
outstanding Class A common stock through December 31, 2001. The Company may
purchase the shares from time to time in the open market or through privately
negotiated transactions, depending on prevailing market conditions and
alternative uses of the Company's capital. At its regular quarterly meeting on
March 7, 2000, the Board announced expanded authorization for share repurchases
up to an additional $50 million of its outstanding Class A common stock through
December 31, 2002. During the second quarter of 2000, 149,957 shares were
repurchased at a total cost of $4,300,216 or an average price of $28.68. The
Company repurchased 465,300 shares at a total cost of $12,645,449 or an average
price of $27.18 through the second quarter of 1999. During the first six months
of 2000, 502,707 shares were repurchased at a total cost of $14,958,910 or an
average price of $29.76 compared to 933,395 shares repurchased for the same
period in 1999 at a total cost of $25,427,315 or an average price of $27.24.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995: Certain forward-looking statements contained herein involve risks and
uncertainties. Many factors could cause future results to differ materially from
those discussed. Examples of such factors include variations in catastrophe
losses due to changes in weather patterns or other natural causes; changes in
insurance regulations or legislation that disadvantage the members of the Group
in the marketplace and recession, economic conditions or stock market changes
affecting pricing or demand for insurance products or ability to generate
investment income. Growth and profitability have been and will be potentially
materially affected by these and other factors.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The H.O. Hirt Trusts collectively own 2,340 shares of the Company's Class B
Common Stock, which has the exclusive right to vote in the election of directors
of the Company. Since such shares represent 76.22% of the outstanding share of
the Company Class B Common Stock, the vote of the H.O. Hirt Trusts is sufficient
to determine the outcome of any election of directors. During the commencement
of legal proceedings, the trustees of the H.O. Hirt Trusts were F. William Hirt,
Chairman of the Board of the Company, a director of the Company, a beneficial
owner of more than 10% of the Company's outstanding Class A Common Stock and a
beneficiary of one of the two H.O. Hirt Trusts; his sister, Susan Hirt Hagen, a
director of the Company, a beneficial owner of more than 10% of the Company's
outstanding Class A Common Stock and a beneficiary of the other H.O. Hirt Trust
and Mellon Bank, N.A. Under the provisions of the H.O. Hirt Trusts, the shares
of the company's Class B Common Stock held by the H.O. Hirt Trusts are to be
voted as directed by a majority of the three trustees.
Under the Pennsylvania Insurance Company Law and the Company's By-laws, the
candidates for the election as directors of the Company are to be nominated by a
committee consisting solely of persons who are not officers or employees of the
Company or of any entity controlling, controlled by or under common control with
the Company and who are not beneficial owners of a controlling interest in the
voting securities of the Company. On March 11, 1998, the Nominating Committee of
the Company's Board of Directors nominated 12 persons as candidates for election
as directors of the Company at the Company's April 28, 1998 annual meeting of
shareholders. The 12 persons nominated did not include Thomas B. Hagen, the
husband of Susan Hirt Hagen, as a candidate for election as a director of the
Company at such annual meeting. Thomas B. Hagen had served as a director of the
Company since 1979.
On April 2, 1998, Mrs. Hagen, a director, filed duplicate petitions in the Court
seeking the removal of Mellon Bank N.A. ("Mellon") as a co-trustee of the H.O.
Hirt Trusts. The principal basis asserted by Mrs. Hagen at that time for the
removal of Mellon was the allegation that Mellon, as the owner of an insurance
agency, was a competitor of the Company. Among the relief requested by Mrs.
Hagen in the petitions was the grant of a preliminary injunction against Mellon
from voting the Class B Common Stock held by the H.O. Hirt Trusts for the
purpose of the election of directors at the Company's April 28, 1998 Annual
Meeting of Shareholders. Because of the potential substantial harm to the
Company if the preliminary injunction was granted, the Company filed a petition
to intervene in the preliminary injunction proceedings which the Court granted
on April 21, 1998. On the same date, the Court denied Mrs. Hagen's request for a
preliminary injunction. On April 28, 1998, the Company's 1998 Annual Meeting of
Shareholders was held as scheduled and each of the candidates for election as a
director of the Company named in the Company's April 1, 1998 proxy statement was
elected as a director of the Company with the affirmative votes of Mellon and F.
William Hirt as a majority of the trustees of the H.O. Hirt Trusts.
On June 3, 1998, the Company, because of its substantial interest in the outcome
of any matter involving a change in Mellon's status as a co-trustee of the H.O.
Hirt Trusts, petitioned the Court to intervene in the trial of the issues
remaining under Mrs. Hagen's petitions to remove Mellon as a co-trustee. On June
24, 1998, the Court denied the Company's petition, and, on July 13, 1998, the
Company appealed the Court's denial to the Superior Court of Pennsylvania. On
August 5, 1998, Mrs. Hagen, a director of the Company, filed a motion with the
Superior Court of Pennsylvania to quash the Company's appeal. On August 17,
1998, the Company filed its response to Mrs. Hagen's motion to quash the
Company's appeal. On October 19, 1998, the Superior Court of Pennsylvania denied
without prejudice Mrs. Hagen's motion to quash the Company's appeal, and the
Superior Court of Pennsylvania established a schedule for the submission of
briefs on the merits of the Company's appeal.
During June and July 1998, substantial discovery took place involving Mrs.
Hagen's petitions to remove Mellon as co-trustee. Preceding the scheduled trial
date of July 30, 1998, discussions took place between counsel for Mellon and
counsel for Mrs. Hagen concerning a possible basis for settlement of the pending
litigation. These discussions involved the circumstances under which Mellon
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<PAGE>
might resign as co-trustee of the H.O. Hirt Trusts and the establishment of
procedures pursuant to which a successor trustee would be appointed by the Court
or by agreement of Mrs. Hagen and F. William Hirt. After a hearing conducted on
July 30, 1998, the Court by letter advised counsel for all parties that the
Court would not approve the settlement proposal that had been presented during
the July 30, 1998 hearing, and that Mellon was to advise the Court on or before
August 21, 1998 whether a revised settlement proposal would be submitted or
whether the matter should be scheduled for trial by the Court for some later
unspecified date.
On August 4, 1998, the Company filed a further petition with the Court seeking
the right to intervene in the proceedings insofar as the proceedings would
entail the possible approval of any settlement of the petitions to remove Mellon
as co-trustee or the appointment of a successor trustee to Mellon. On October
21, 1998, Mellon submitted to the Court a Petition to Resign Pursuant to and
upon the Fulfillment of Certain Conditions Precedent (the "Mellon Petition"). On
October 29, 1998, the Court conducted a hearing at which time, among other
things, the Court heard testimony from two potential successor corporate
trustees to Mellon, each of which potential successors (either Bankers Trust or
Bank Boston), the Court was advised, had the approval of Mellon, Mrs. Hagen and
F. William Hirt. During that same hearing, the Court indicated that it would
accept the Mellon Petition and would in the future enter an order providing for
the granting of the Mellon Petition, in conjunction with a further hearing on
the matter of the appointment of a successor corporate co-trustee and the final
Court approval thereof. On November 2, 1998, the Court scheduled such a further
hearing for January 6, 1999.
On January 6, 1999, with the concurrence of all parties, the Court accepted
the resignation of Mellon as co-trustee of the H.O. Trusts and released
Mellon from all further obligations with respect to the H.O. Hirt Trusts. On
the same date, the Court appointed Bankers Trust as the successor co-trustee
of the H.O. Hirt Trusts. On January 26, 1999, the Court assessed $637,500
in costs incurred by Mellon in connection with the removal litigation against
Mrs. Hagen.
In response to an interrogatory addressed to F. William Hirt as part of the
Mellon removal litigation, F. William Hirt indicated that he and his wife had
made a series of gifts of Class A Common Stock between 1994 and 1997 aggregating
$10.3 million (market value at time of gift) to certain Company personnel,
various other friends and a series of charitable institutions, in addition to
gifts to each of their two daughters. The recipients of the gifts who were
directors of the Company were:
<TABLE>
<CAPTION>
Market Value
Name Positions with the Company At Date of Gifts
<S> <C> <C>
Seth E. Schofield Director (until October 22, 1998) $209,483
Stephen A. Milne President, Chief Executive Officer and a Director $340,097
John M. Petersen Retired Chief Executive Officer, Consultant and a Director $169,438
Jan R. Van Gorder Senior Executive Vice President, Secretary and General $ 84,719
Counsel and a Director
</TABLE>
On October 16, 1998, Mrs. Hagen, without any authorization from the Company or
the Board of Directors to do so, wrote to each of these recipients accusing them
of violating the Company's conflict of interest policies. Mrs. Hagen demanded
their resignation as directors of the Company not later than October 23, 1998
and threatened them with litigation and adverse publicity.
The following events thereafter occurred:
(i) Seth Schofield resigned as a director of the Company on October 22,
1998 and in his letter of resignation advised the remaining members of the Board
of Directors that his resignation was tendered not because he believed Mrs.
Hagen's allegations were meritorious, but because he believed he had become a
20
<PAGE>
lightning rod for certain actions undertaken by Mrs. Hagen and that his
resignation might provide a foundation for more harmonious Board interaction;
(ii) The other three directors retained individual counsel (David H.
Pittinsky of Ballard, Spahr, Andrews & Ingersoll LLP) who advised Mrs. Hagen's
counsel that her demands were unjustified, baseless and rejected; and
(iii) The Company held a special meeting of its Board of Directors on
October 27, 1998.
At the October 27, 1998 special meeting and at the December 16, 1998 regular
meeting, the Board of Directors took the following actions:
(i) Appointed a special committee (the "Special Committee") of the Board
of Directors (consisting of Harry H. Weil, Peter B. Bartlett, Samuel P.
Black, III, J. Ralph Borneman, Jr., Patricia A. Goldman and Edmund J. Mehl, who
constituted all of the members of the Board of Directors other than Mrs. Hagen,
F. William Hirt and the three remaining directors who received gifts) to
investigate the circumstances of the gifts, to determine whether the gifts
violated any applicable law, breached any applicable fiduciary duty, violated
any applicable policy of the Company, were consistent with generally
accepted principles of corporate governance, constituted significant improper
payment to such recipients and to determine, in the business judgment of the
Special Committee, whether any action should have been taken by the Company;
(ii) Ratified the action of the Company under the BCL and the Company's
Bylaws and upon receipt of appropriate undertakings, which were received, in
paying expenses incurred by the three individuals in retaining counsel to advise
them in connection with Mrs. Hagen's October 16, 1998 letter and in defending
any resulting legal proceedings; and
(iii) Constituted the members of the Special Committee as the Nominating
Committee of the Board of Directors for the purpose of nominating candidates for
director for election by the shareholders at the 1999 Annual Meeting.
At both the October 27, 1998 and the December 16, 1998 Board of Directors
meetings, Mrs. Hagen voted against each of the actions taken and stated her
opinion, for unspecified reasons, that none of the members of the Special
Committee was independent.
The Special Committee, consistent with Pennsylvania law and good corporate
governance, retained Covington & Burling, Washington, D.C., as independent legal
counsel and undertook a comprehensive investigation of the circumstances
involving the gifts. At a March 9, 1999 meeting of the Board of Directors, the
Special Committee presented its unanimous report, which contained both
conclusions and recommendations. The report concluded in summary that F. William
Hirt's gifts did not influence the recipients' actions with respect to matters
affecting the Company and that the evidence overwhelmingly established F.
William Hirt's and the gift recipients' integrity and good faith.
The Special Committee reached the following conclusions with respect to the
gifts made by Mr. and Mrs. Hirt to Stephen A. Milne, John M. Petersen, Jan R.
Van Gorder and Seth E. Schofield:
1. With the advice of counsel, the Special Committee concluded that it was
disinterested and capable of objective judgment under Pennsylvania law with
respect to the conclusions reached in the report of the Special Committee.
2. No violation of criminal law occurred.
3. No director had breached his fiduciary duty.
4. No Company policy or principle of corporate governance had been
violated.
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<PAGE>
5. F. William Hirt's intent in giving the gifts was generosity toward
particular friends. The Special Committee found no evidence that influencing
directors on any Board issue or vote was any part of Mr. Hirt's intent.
6. The intent of the directors who received gifts was entirely to accept a
gift they believed to be appropriate. The Special Committee found no evidence
that their (the directors who received gifts) votes on any issue were affected
by the gifts.
7. The Special Committee found no evidence to cast doubt on the integrity
or good faith of the directors who accepted gifts. Rather, the evidence showed
that all times the recipients believed their actions were in the best interests
of the Company and its shareholders.
The Special Committee stated its belief that the current discord on the Board of
Directors is destructive and that actions that are entirely innocent may appear
otherwise in such an atmosphere. The Special Committee also stated its belief
that the Board of Directors should maintain control over compensation for
directors and senior management, and that there is potential for very large
shareholders to affect that compensation in a company such as the Company. The
Special Committee, therefore, recommended that a Bylaw be adopted by the Board
of Directors that would prohibit a director or officer from accepting gifts of
other than nominal or insignificant value from, among others, other directors or
officers, requiring certain notification to the Board of Directors relating to
gifts and excluding gifts among members of an individual's family from the
proscription of the proposed Bylaw. After extensive discussion, the Board of
Directors at its March 9, 1999 meeting adopted without dissent the new Bylaw
proposed by the Special Committee.
On March 10, 1999, the Company filed the report of the Special Committee with
the Court. On March 11, 1999, the Court conducted a hearing on Mrs. Hagen's
petition following which, on March 17, 1999, Mrs. Hagen withdrew her petition.
On May 6, 1999, Bankers Trust filed a Petition For A Citation to Show Cause Why
Declaratory Relief Should Not Be Granted (the "Declaratory Judgment Petition").
The Declaratory Judgment Petition sought a determination whether Section
1405(c)(4) of the Pennsylvania Insurance Company Law provides the exclusive
means by which persons may be nominated and elected to the Company's Board of
Directors or whether shareholders independently have the power to nominate and
elect to the Board of Directors persons other than those nominated by the
Nominating Committee of the Board of Directors.
On May 25, 1999, the Company and F. William Hirt filed preliminary objections to
the Declaratory Judgment Petition, seeking its dismissal. On May 25, 1999, Mrs.
Hagen joined in support of the Declaratory Judgment Petition.
On June 16, 1999, Mrs. Hagen filed a motion seeking leave to amend her prior
response supporting the Declaratory Judgment Petition, so as to assert a claim
against the Company in the nature of a request for an injunction against certain
bylaw amendments adopted by the Company effective June 15, 1999 relative to the
nomination and election of directors.
On June 29, 1999, the Court conducted a hearing on the matter of the Declaratory
Judgment Petition. On July 15, 1999, the Court sustained the preliminary
objections which had been filed by the Company and by F. William Hirt and the
Court dismissed the Declaratory Judgment Petition and also dismissed Mrs.
Hagen's petition to amend.
On March 3, 1999, Bankers Trust filed with the Court its Petition to Accept
Resignation of Trustee (the "Bankers Trust Petition"), by which Bankers Trust
requested that the Court accept its resignation as corporate co-trustee of the
H.O. Hirt Trusts.
On May 7, 1999, the Court conducted a hearing on the Bankers Trust Petition, at
which time the Court issued an Order accepting the resignation of Bankers Trust
pending the appointment by the Court of a successor corporate co-trustee.
22
<PAGE>
On December 15, 1999 and on January 27, 2000, the Court conducted hearings on
the selection of a successor corporate trustee, including the presentation of
testimony by two successor trustee candidates.
On February 23, 2000, the Court entered an Order directing F. William Hirt and
Mrs. Hagen to finalize certain matters relating to a so-called "funding plan"
for the payment of a successor corporate co-trustee and to make application to
the Internal Revenue Service for a private letter ruling on the tax treatment of
the finalized "funding plan." Under its Order of February 23, 2000, the Court
indicated that upon the receipt of the private letter ruling from the Internal
Revenue Service, the Court would then select the successor corporate co-trustee.
On March 6, 2000, the Company filed a motion for reconsideration and/or
clarification of the Court's February 23, 2000 Order. The motion requested that
the Court (i) reconsider its schedule for designating a successor corporate
co-trustee due to the March 3, 1999 resignation and make that designation
presently and (ii) reconsider and/or clarify the Court's prohibition on the
Company's involvement in a finalized funding plan for payment of the corporate
co-trustees fees because several of the proposed funding alternatives could only
be implemented through actions to be undertaken by the Company. On March 8,
2000, F. William Hirt also filed a motion for reconsideration. On March 15,
2000, the Court denied the Company's and F. William Hirt's motions. On March 24,
2000, the Company and F. William Hirt filed appeals to the Superior Court of the
Court's February 23, 2000 Order.
On March 9, 2000, Mrs. Hagen delivered a complaint, a motion for a preliminary
injunction and a memorandum of law to the President Judge of the Court. On March
14, 2000, the President Judge established a hearing date of April 3, 2000 for
Mrs. Hagen's motion for a preliminary injunction and the hearing was held as
scheduled on April 3, 2000. The outcome of this litigation will determine
whether or not the Company will permit the nomination of the Hagen Nominees at
the Annual Meeting. If the Court either denies Mrs. Hagen's request for a
preliminary injunction or renders no decision as to Mrs. Hagen's request for a
preliminary injunction prior to the Annual Meeting, the Company will not permit
the nomination of the Hagen Nominees at the Annual Meeting, and the Company will
permit the nomination of the Hagen Nominees at the Annual Meeting only if the
Court grants Mrs. Hagen's request for a preliminary injunction prior to the
Annual Meeting. The Company will in any event permit Mrs. Hagen to make her
other proposals.
Mrs. Hagen's complaint seeks declaratory relief in the form of an order that (i)
the Nominating Committee of the Company's Board of Directors does not have the
exclusive right to nominate candidates for election as directors of the Company
by shareholders, (ii) any holder of Class B Common Stock may nominate candidates
for election as directors of the Company by shareholders and vote on those
nominees and (iii) Mrs. Hagen has the right to submit the Hagen Nominees to a
vote of Class B shareholders at the Annual Meeting.
Mrs. Hagen's motion for a preliminary injunction seeks a preliminary injunction
enjoining the Company from taking any action to prevent, delay or otherwise
hinder Mrs. Hagen from submitting the Hagen Nominees to a vote of Class B
shareholders at the Annual Meeting. Bankers Trust has joined in Mrs. Hagen's
complaint and motion.
On March 30, 2000, the Company filed responses to Mrs. Hagen's complaint and
motion for preliminary injunction as well as a memorandum of law in opposition
to Mrs. Hagen's motion for preliminary injunction. The responses set forth the
Company's belief that the facts and legal theories on which Mrs. Hagen's motion
for preliminary injunction and complaint are based are in error.
The Court held a hearing on Mrs. Hagen's motion on April 3, 2000. During the
cross-examination of Mrs. Hagen, Mrs. Hagen responded, inter alia, that she
could not remember who in addition to her lawyers, had assisted her in the
selection of the Hagen Nominees and that she did not personally know a majority
of the Hagen Nominees.
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In a letter dated December 29, 1999, Mrs. Hagen submitted to the Company a
notice, purported by her to be in accordance with the requirements of Sections
2.07(a) and (b) of the Company's Bylaws, of three shareholder proposals in
respect of the Annual Meeting. Mrs. Hagen's letter identified her proposals as
follows:
"(1) I propose the following persons (the "Hagen Nominees") for
consideration by the Nominating Committee of the Company as part of its
slate of directors for election to the Board of Directors of the Company
(the "Board") at the Annual Meeting:
Kenneth B. Frank
Patricia Garrison-Corbin
Susan Hirt Hagen
Samuel P. Katz
Claude C. Lilly, III, Ph.D.; CLU, CPCU
Henry N. Nassau
Mitchell S. Rosenthal, M.D.
Perry M. Smith, Ph.D.; Major General, USAF (Ret.)
Charles D. Snelling
William H. Starbuck, Ph.D.
James M. Trapp
I believe the Hagen Nominees are appropriate candidates for election at the
Annual Meeting. Each Hagen Nominees (including myself) has agreed to be
included in the Nominating Committee's slate or any other slate only so
long as all the Hagen Nominees are included in such slate, and only so long
as the Hagen Nominees, if elected, would constitute a majority of the
Board.
"(2) If the Nominating Committee does not include the Hagen Nominees in its
slate of directors for election to the Board at the Annual Meeting, this
Notice constitutes my proposal to nominate the Hagen Nominees for election
as directors of the Company at the Annual Meeting. I will appear at the
Annual Meeting to nominate the Hagen Nominees for election to the Board.
"(3) If I am not permitted to nominate the Hagen Nominees for election at
the Annual Meeting, this Notice constitutes my proposal for submission to
the shareholders of the Company at the Annual Meeting (a) to remove all
directors elected at the Annual Meeting immediately following their
election; (b) to amend the Bylaws by deleting the second sentence of
Section 3.02 and replacing it with a new second sentence, which shall read
as follows:
The Board of Directors shall consist of not less than seven (7), nor more
than sixteen (16), Directors (the exact number to be fixed from time by
resolution of the Board or by vote of the Shareholders at any duly
organized annual or special meeting of Shareholders), the majority of whom
shall be citizens and residents of the United States, each of whom shall be
at least eighteen (18) years of age, elected at the Annual Meeting of
Shareholders, to serve until the ensuing Annual Meeting and until a
successor is elected and qualified or until his or her earlier death,
resignation or removal.
"(c) to reduce and fix the number of directors on the Board to
eleven (11) directors; and
"(d) to nominate the Hagen Nominees for election as directors of
the Company to fill the vacancies on the Board. I will appear at
the Annual Meeting to present this proposal."
On March 9, 2000, Mrs. Hagen filed preliminary proxy materials with the SEC
regarding her proposed solicitation of proxies to vote for the Hagen Nominees
for director at the Annual Meeting in opposition to the candidates for director
nominated by the Nominating Committee. On March 15, 2000 and March 24, 2000,
Mrs. Hagen filed revised preliminary proxy material with the SEC.
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Mrs. Hagen's revised preliminary proxy material, in addition to describing the
Hagen Nominees for whom she proposes to solicit proxies for election as
director, describes her proposed solicitation of proxies for the following other
proposals in the event the Court has not reached a decision in favor of Mrs.
Hagen prior to the Annual Meeting: (i) removal of all of the directors of the
Company immediately following their election at the Annual Meeting; (ii)
amendment of the Company's Bylaws to allow the shareholders to fix the number of
members constituting the Company's Board of Directors; (iii) reduction of the
size of the Company's Board of Directors to 11 persons and (iv) nomination of
the Hagen Nominees for election as directors of the Company to fill the
vacancies that would exist in the Board of Directors if the Company's
shareholders were to vote to remove the directors they had just elected.
The Board of Directors intends to instruct its proxy holders to use their
discretionary authority to withhold authority for the election of the Hagen
Nominees, in the event it is judicially determined that the nomination of the
Hagen Nominees at the Annual Meeting is legally valid, and, in any event, to
vote against Mrs. Hagen's other proposals if she presents her other proposals at
the Annual Meeting. Each member of the Company's Board of Directors, with the
exception of Mrs. Hagen, individually recommends that shareholders vote against
the election of the Hagen Nominees, in the event it is judicially determined
that the nomination of the Hagen Nominees at the Annual Meeting is legally
valid, and, in any event, each of the other proposals of Mrs. Hagen for the
following reasons:
(i) The Nominating Committee, composed entirely of independent directors,
unanimously determined not to nominate any candidate proposed by Mrs. Hagen for
the reasons set forth under "Election of Directors," including the refusal of
Mrs. Hagen's proposed candidates to agree to interviews with the Nominating
Committee and the lack of independence of Mrs. Hagen's proposed candidates.
(ii) None of the director candidates proposed by Mrs. Hagen, other than
herself, has any experience as a director of an insurance company.
(iii) Several of the director candidates proposed by Mrs. Hagen would be
shortly ineligible to serve under the age limits established by the Company's
Bylaws.
(iv) The director candidates proposed by Mrs. Hagen are ineligible to serve
under the applicable Pennsylvania law because only candidates duly nominated by
the Nominating Committee are eligible for election as directors at the Annual
Meeting.
(v) The wholesale replacement of the existing members of the Company's
Board of Directors, under which the Company has achieved record results year
after year is likely to have a material adverse effect on the Company and
therefore adversely effect the value of the Company's Class A Common Stock and
Class B Common Stock and have a destablizing effect on the Company's management,
employees and agents.
(vi) The election of a Board of Directors beholden to a single person (Mrs.
Hagen) is likely to impact negatively the Company's competitive position and
make more difficult the retention of a number of the Company's important
relationships with employees, agents and policyholders.
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Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
The Company's Annual Meeting of Shareholders was held April 25, 2000.
a. The following directors were elected at the Annual Meeting of
Shareholders for a one-year term and until a successor is
elected and qualified:
Samuel P. Black, III Claude C. Lilly, III
J. Ralph Borneman, Jr. Stephen A. Milne
Patricia Garrison-Corbin Henry N. Nassau
Susan Hirt Hagen John M. Petersen
F. William Hirt Jan R. Van Gorder
Samuel P. Katz Robert C. Wilburn
b. The following other matter was voted upon at the meeting and the
following number of affirmative votes were cast with respect to
such matter:
The proposal to ratify the selection of Brown, Schwab, Bergquist
& Company as independent public accountants to perform the
annual audit of the Company financial statements for the year
ending December 31, 2000. This proposal received 3,002
affirmative votes with no negative votes or abstentions.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
All other exhibits for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are applicable, and therefore, have been omitted.
The Company did not file any reports on Form 8-K during the three-month period
ended June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Erie Indemnity Company
----------------------
(Registrant)
Date: July 19, 2000
\s\ Stephen A. Milne
Stephen A. Milne, President & CEO
\s\ Philip A. Garcia
Philip A. Garcia,
Executive Vice President & CFO
27
