Erie Indemnity (ERIE) 10-Q 2002 Q2 Quarterly report

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, 2002

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 —
          63,646,296 shares as of July 17, 2002.

Class B Common Stock, no par value, with a stated value of $70 per share —
          3,070 shares as of July 17, 2002.

The common stock is the only class of stock the Registrant is presently authorized to issue.

1

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
	ITEM 11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
SIGNATURES

INDEX

ERIE INDEMNITY COMPANY

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Position—June 30, 2002 and December 31, 2001
	Consolidated Statements of Operations—Three and six months ended June 30, 2002 and 2001
	Consolidated Statements of Comprehensive Income—Three and six months ended June 30, 2002 and 2001
	Consolidated Statements of Cash Flows—Six months ended June 30, 2002 and 2001
	Notes to Consolidated Financial Statements—June 30, 2002
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
Item 6.	Exhibits and Reports on Form 8-K
Item 11.	Statement Regarding Computation of Per Share Earnings
SIGNATURES

2

PART I. FINANCIAL INFORMATION

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

			(Dollars in thousands)
			June 30,		December 31,
ASSETS			2002		2001
			(Unaudited)
INVESTMENTS
	Fixed maturities at fair value (amortized cost of $622,297 and $543,423, respectively)		$	634,205	$	559,873
	Equity securities at fair value (cost of $166,221 and $159,727, respectively)			188,577		193,798
	Limited partnerships (cost of $87,160 and $79,668, respectively)			86,883		81,596
	Real estate mortgage loans			5,634		5,700
		Total investments	$	915,299	$	840,967
	Cash and cash equivalents			34,367		88,213
	Accrued investment income			10,628		9,138
	Premiums receivable from Policyholders			224,505		186,175
	Prepaid federal income tax			0		14,056
	Reinsurance recoverable from Erie Insurance Exchange			535,540		491,055
	Note receivable from Erie Family Life Insurance Company			15,000		15,000
	Other receivables from Erie Insurance Exchange and affiliates			191,068		149,600
	Reinsurance recoverable non-affiliates			366		372
	Deferred policy acquisition costs			20,115		17,018
	Property and equipment			14,308		14,635
	Equity in Erie Family Life Insurance Company			44,075		44,683
	Other assets			83,058		64,654
		Total assets	$	2,088,329	$	1,935,566
					(Continued)

See Notes to Consolidated Financial Statements.

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ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

					(Dollars in thousands)
					June 30,			December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY					2002			2001
					(Unaudited)
LIABILITIES
	Unpaid losses and loss adjustment expenses				$	599,143		$	557,278
	Unearned premiums					363,611			311,969
	Commissions payable and accrued					126,550			110,121
	Accounts payable and accrued expenses					41,492			46,164
	Federal income tax payable					5,123			0
	Deferred income taxes					6,028			12,945
	Dividends payable					10,906			10,930
	Employee benefit obligations					15,834			20,904
			Total liabilities		$	1,168,687		$	1,070,311
SHAREHOLDERS’ EQUITY
	Capital Stock
		Class A common, stated value $.0292 per share; authorized 74,996,930 shares; 67,032,000 shares issued; 63,694,299 and 63,836,323 shares outstanding in 2002 and 2001, 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					25,286			35,222
	Retained earnings					983,600			913,406
				Total contributed capital and retained earnings	$	1,018,886		$	958,628
	Treasury stock, at cost 3,337,701 shares in 2002 and 3,195,677 shares in 2001					(99,244	)		(93,373	)
			Total shareholders’ equity		$	919,642		$	865,255
			Total liabilities and shareholders’ equity		$	2,088,329		$	1,935,566

See Notes to Consolidated Financial Statements.

4

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

			Three Months Ended						Six Months Ended
			June 30						June 30
			2002			2001			2002			2001
			(Amounts in thousands, except per share data)
MANAGEMENT OPERATIONS:
	Management fee revenue		$	206,575		$	167,828		$	384,827		$	313,497
	Service agreement revenue			7,776			6,838			15,118			13,250
		Total revenue from management operations	$	214,351		$	174,666		$	399,945		$	326,747
	Cost of management operations			147,504			121,562			276,296			230,443
		Net revenue from management operations	$	66,847		$	53,104		$	123,649		$	96,304
INSURANCE UNDERWRITING OPERATIONS:
	Premiums earned		$	40,434		$	33,917		$	77,653		$	66,091
	Losses and loss adjustment expenses incurred			34,050			26,096			63,387			53,057
	Policy acquisition and other underwriting expenses			12,430			9,607			23,927			18,358
		Total losses and expenses		46,480			35,703			87,314			71,415
		Underwriting loss	$	(6,046	)	$	(1,786	)	$	(9,661	)	$	(5,324	)
INVESTMENT OPERATIONS:
	Net investment income		$	14,133		$	12,365		$	26,837		$	24,508
	Net realized (loss) gain on investments			(5,801	)		2,013			(4,581	)		2,725
	Equity in earnings of Erie Family Life Insurance Company			218			1,442			986			2,186
	Equity in earnings of limited partnerships			2,221			2,911			307			1,508
		Net revenue from investment operations	$	10,771		$	18,731		$	23,549		$	30,927
		Income before income taxes	$	71,572		$	70,049		$	137,537		$	121,907
	Provision for income taxes			23,746			22,920			45,510			39,992
		Net income	$	47,826		$	47,129		$	92,027		$	81,915
		Net income per share	$	0.67		$	0.66		$	1.29		$	1.15
		Weighted average shares outstanding		71,144			71,388			71,162			71,402
	Dividends declared per share:
		Class A	$	0.17		$	0.1525		$	0.34		$	0.305
		Class B		25.50			22.875			51.00			45.75

See Notes to Consolidated Financial Statements.

5

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

				Three Months Ended						Six Months Ended
				June 30						June 30
				2002			2001			2002			2001
				(Dollars in thousands)
Net Income				$	47,826		$	47,129		$	92,027		$	81,915
	Unrealized losses on securities:
		Unrealized holding (losses) gains arising during period			(10,591	)		(625	)		(24,182	)		2,582
		Less: Losses (gains) included in net income			5,801			(2,013	)		4,581			(2,725	)
			Net unrealized holding losses arising during period		(4,790	)		(2,638	)		(19,601	)		(143	)
	Income tax benefit related to unrealized losses				1,676			923			6,860			50
	Net depreciation of investments				(3,114	)		(1,715	)		(12,741	)		(93	)
	Minimum pension liability adjustment				0			0			4,315			0
	Less: Tax asset related to pension liability adjustment				(0	)		0			(1,510	)		0
	Net pension liability adjustment				0			0			2,805			0
Other comprehensive loss, net of tax					(3,114	)		(1,715	)		(9,936	)		(93	)
Comprehensive income				$	44,712		$	45,414		$	82,091		$	81,822

See Notes to Consolidated Financial Statements.

6

ERIE INDEMNITY COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

					Six Months Ended			Six Months Ended
					June 30, 2002			June 30, 2001
					(Amounts in thousands, except per share data)
		CASH FLOWS FROM OPERATING ACTIVITIES
			Net income		$	92,027		$	81,915
			Adjustments to reconcile net income to net cash provided by operating activities:
				Depreciation and amortization		1,921			1,533
				Deferred income tax (benefit) expense		(1,966	)		2,425
				Amortization of deferred policy acquisition costs		13,832			11,680
				Equity in income of limited partnerships		(307	)		(1,508	)
				Realized loss (gain) on investments		4,581			(2,725	)
				Net amortization of bond discount		(288	)		(109	)
				Undistributed earnings of Erie Family Life Insurance Company		(127	)		(1,389	)
				Deferred compensation		456			261
			(Increase) decrease in accrued investment income			(1,490	)		172
			Increase in receivables			(124,278	)		(92,250	)
			Policy acquisition costs deferred			(16,929	)		(13,890	)
			Increase in prepaid expenses and other assets			(18,064	)		(11,407	)
			(Decrease) increase in accounts payable and accrued expenses			(5,883	)		5,312
			Increase in commissions payable and accrued			16,428			5,080
			Increase in income taxes payable			19,180			6,655
			Increase in loss reserves			41,865			23,186
			Increase in unearned premiums			51,641			29,512
				Net cash provided by operating activities	$	72,599		$	44,453
		CASH FLOWS FROM INVESTING ACTIVITIES
			Purchase of investments:
				Fixed maturities	$	(175,188	)	$	(99,975	)
				Equity securities		(34,308	)		(29,466	)
				Limited partnership investments		(22,138	)		(13,267	)
			Sales/maturities of investments:
				Fixed maturity sales		51,937			51,170
				Fixed maturity calls/maturities		42,120			46,152
				Equity securities		25,779			22,029
				Mortgage loans		66			819
				Limited partnership sales or distributions		14,953			2,348
			Purchase of property and equipment			(1,272	)		(1,640	)
			Purchase of computer software			(322	)		(484	)
			Loans to agents			(1,672	)		(1,356	)
			Collections on agent loans			1,328			1,230
				Net cash used in investing activities	$	(98,717	)	$	(22,440	)
		CASH FLOWS FROM FINANCING ACTIVITIES
			Dividends paid to shareholders		$	(21,857	)	$	(19,675	)
			Purchase of treasury stock			(5,871	)		(1,210	)
				Net cash used in financing activities	$	(27,728	)	$	(20,885	)
			Net (decrease) increase in cash and cash equivalents			(53,846	)		1,128
			Cash and cash equivalents at beginning of period			88,213			38,778
				Cash and cash equivalents at end of period	$	34,367		$	39,906
Supplemental disclosures of cash flow information:
	Income tax payments				$	38,867		$	31,552

See Notes to Consolidated Financial Statements.

7

ERIE INDEMNITY COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
All dollar amounts are in thousands 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 (EIC), Erie Insurance Company of New York (EINY) and Erie Insurance Property & Casualty Company, have been prepared in accordance with accounting principles generally accepted in the United States of America 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 (GAAP) 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, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. 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, 2001 as filed with the Securities and Exchange Commission on March 12, 2002.

NOTE B — RECLASSIFICATIONS

Certain amounts previously reported in the 2001 financial statements have been reclassified to conform to the current period’s presentation. Such reclassifications were minor in nature and did not impact earnings.

NOTE C — EARNINGS PER SHARE

Earnings per share is based on the weighted average number of Class A shares outstanding (63,794,175 and 64,034,046 at June 30, 2002 and 2001, respectively), giving effect to the conversion of the weighted average number of Class B shares outstanding (3,070 in 2002 and 2001) at a rate of 2,400 Class A shares for one Class B share. Weighted average equivalent shares outstanding totaled 71,143,580 for the quarter ended June 30, 2002 and 71,388,014 for the same period one year ago. For the six months ended June 30, 2002 weighted average equivalent shares outstanding were 71,162,175 compared to 71,402,046 for the six months ended June 30, 2001.

NOTE D — 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. 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. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of deferred tax, reported as a separate component of accumulated other comprehensive income in shareholders’ equity. When a decline in the value of investments is considered to be other than temporary by management, the investments are written down to their realizable value. Such write downs are made directly on an individual security basis and are considered a realized loss on investments in the Consolidated Statements of Operations. In the second quarter of 2002 the Company recognized impairment charges totaling $10,693 relating to long term fixed maturities and non redeemable preferred stock.

8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE D — INVESTMENTS (Continued)

The following is a summary of available-for-sale securities:

					Gross		Gross		Estimated
			Amortized		Unrealized		Unrealized		Fair
			Cost		Gains		Losses		Value
June 30, 2002
Fixed maturities:
U.S. treasuries & government agencies			$	11,254	$	494	$	0	$	11,748
States & political subdivisions				44,559		2,273		0		46,832
Special revenue				107,790		4,042		32		111,800
Public utilities				37,870		879		684		38,065
U.S. industrial & miscellaneous				361,616		11,232		5,305		367,543
Foreign				44,904		740		2,165		43,479
		Total bonds	$	607,993	$	19,660	$	8,186	$	619,467
Redeemable preferred stock				14,304		434		0		14,738
		Total fixed maturities	$	622,297	$	20,094	$	8,186	$	634,205
Equity securities:
Common stock:
	U.S. banks, trusts & insurance companies		$	1,791	$	751	$	165	$	2,377
	U.S. industrial & miscellaneous			19,391		19,722		324		38,789
	Foreign			417		339		0		756
Non redeemable preferred stock:
	Public utilities			9,051		59		77		9,033
	U.S. banks, trusts & insurance companies			24,226		1,057		186		25,097
	U.S. industrial & miscellaneous			90,870		3,030		2,930		90,970
	Foreign			20,475		1,147		67		21,555
		Total equity securities	$	166,221	$	26,105	$	3,749	$	188,577
		Total available-for-sale securities	$	788,518	$	46,199	$	11,935	$	822,782

9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE D — INVESTMENTS (Continued)

					Gross		Gross		Estimated
			Amortized		Unrealized		Unrealized		Fair
			Cost		Gains		Losses		Value
December 31, 2001
Fixed maturities:
U.S. treasuries & government agencies			$	11,211	$	502	$	0	$	11,713
States & political subdivisions				42,392		1,817		88		44,121
Special revenue				110,267		3,496		345		113,418
Public utilities				25,150		1,156		36		26,270
U.S. industrial & miscellaneous				311,757		8,989		1,438		319,308
Foreign				26,634		859		17		27,476
		Total bonds	$	527,411	$	16,819	$	1,924	$	542,306
Redeemable preferred stock				16,012		1,555		0		17,567
		Total fixed maturities	$	543,423	$	18,374	$	1,924	$	559,873
Equity securities:
Common stock:
	U.S. banks, trusts & insurance companies		$	3,284	$	814	$	16	$	4,082
	U.S. industrial & miscellaneous			28,718		31,570		579		59,709
Nonredeemable preferred stock:
	Public utilities			2,370		12		3		2,379
	U.S. banks, trusts & insurance companies			14,685		938		58		15,565
	U.S. industrial & miscellaneous			91,185		2,573		2,111		91,647
	Foreign			19,485		1,039		108		20,416
		Total equity securities	$	159,727	$	36,946	$	2,875	$	193,798
		Total available-for-sale securities	$	703,150	$	55,320	$	4,799	$	753,671

The Company participates in a securities lending program whereby certain securities from its portfolio are loaned to other institutions for short periods of time through a lending agent. The Company maintains control over the securities. A fee is paid to the Company by the borrower. Collateral, comprised of cash and government securities, that exceeds the market value of the loaned securities is maintained by the lending agent. The Company has an indemnification agreement with the lending agent in the event a borrower becomes insolvent or fails to return securities. The Company had loaned securities with a market value of $17,400 and $44,900 secured by collateral of $18,002 and $45,900 at June 30, 2002 and 2001, respectively. The borrower of the securities is not permitted to sell or replace the security on loan. The Company maintains the loaned securities on its Consolidated Statements of Financial Position as part of its

10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE D — INVESTMENTS (Continued)

invested assets. The Company has incurred no losses on the loan program since the program’s inception.

The components of net realized (loss) gain on investments as reported on the Consolidated Statements of Operations are included below. The securities that were recognized as impaired during the second quarter of 2002 were in the telecommunications industry segment.

		Three Months Ended						Six Months Ended
		June 30						June 30
		2002			2001			2002			2001
Fixed maturities:
Gross realized gains		$	2,460		$	1,877		$	2,873		$	2,640
Gross realized losses			(45	)		(107	)		(53	)		(187	)
Impairment charge			(8,366	)		0			(8,366	)		0
	Net realized (loss) gain	$	(5,951	)	$	1,770		$	(5,546	)	$	2,453
Equity securities:
Gross realized gains		$	6,688		$	3,307		$	7,570		$	3,857
Gross realized losses			(4,211	)		(3,064	)		(4,278	)		(3,585	)
Impairment charge			(2,327	)		0			(2,327	)		0
	Net realized gain	$	150		$	243		$	965		$	272
	Net realized (loss) gain on investments	$	(5,801	)	$	2,013		$	(4,581	)	$	2,725

Limited partnerships include U.S. and foreign private equity, real estate and fixed income investments. The private equity limited partnerships invest in small-to medium-sized companies. Limited partnerships are recorded using the equity method, which approximates the Company’s share of the carrying value of the partnership. Unrealized gains and losses on private equity limited partnerships are reflected in shareholders’ equity in accumulated other comprehensive income, net of deferred taxes. The Company has not guaranteed any of the partnership liabilities.

Limited partnerships that have declined in value below cost and for which the decline is considered to be other than temporary by management are written down to realizable value. Such write downs are made directly on an individual limited partnership basis and are considered a loss in the Equity in Earnings of Limited Partnerships on the Consolidated Statement of Operations. The components of Equity in Earnings of Limited Partnerships as reported on the Consolidated Statements of Operations are included below. Impairment charges recognized in the second quarter of 2002 totaling $176 resulted from one private equity partnership. For the year 2002 impairment charges related to limited partnerships were $1,381.

	Three Months Ended					Six Months Ended
	June 30					June 30
	2002			2001		2002			2001
Private equity	$	(332	)	$	2,261	$	(3,257	)	$	588
Real estate		2,470			601		3,480			862
Fixed income		83			49		84			58
Total equity in earnings of limited partnerships	$	2,221		$	2,911	$	307		$	1,508

11

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE D — INVESTMENTS (Continued)

During 2001, the Company entered into several foreign currency forward contracts which are by definition derivatives. The purpose of these contracts is to partially hedge future capital calls related to the Company’s limited partnership commitments. However, under accounting rules, these contracts are not considered hedges. The forward contracts have no cash requirements at the inception of the arrangement. At June 30, 2002, the notional amount of the contracts outstanding totaled $1,659. For the quarter ended June 30, 2002 changes in value totaling $89 were recognized currently in earnings as realized gains in the Consolidated Statements of Operations. For the six months, gains on these contracts totaled $99 for 2002 and $46 in 2001.

NOTE E — SUMMARIZED FINANCIAL STATEMENT INFORMATION OF AFFILIATE

The Company owns 21.6% of Erie Family Life Insurance Company (EFL) common shares outstanding and accounts for this investment using the equity method of accounting. EFL is a Pennsylvania domiciled life insurance company operating in 10 states and the District of Columbia. Dividends paid to the Company for the six months ended June 30, 2002 and 2001 totaled $828 and $766, respectively.

The following represents unaudited condensed financial statement information for EFL on a GAAP basis:

	Six Months Ended		Six Months Ended
	June 30, 2002		June 30, 2001
Revenues	$	55,714	$	54,130
Benefits and expenses		47,470		40,227
Income before income taxes		8,244		13,903
Income taxes		2,852		4,805
Net income	$	5,392	$	9,098
Comprehensive income	$	1,992	$	16,431
Dividends paid to shareholders	$	3,827	$	3,544
Net unrealized appreciation on investment securities at June 30, net of deferred taxes	$	14,959	$	11,020

NOTE F — NOTE RECEIVABLE FROM ERIE FAMILY LIFE INSURANCE COMPANY

The Company is due $15,000 from EFL in the form of a surplus note. The note bears an annual interest rate of 6.45% and all payments of interest and principal on the note may be repaid only out of unassigned surplus of EFL and are subject to prior approval by 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 2002 and 2001 to the Company.

NOTE G — TREASURY STOCK

The Company has in place a stock repurchase plan, under which the Company may repurchase as much as $120 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.

12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE H — COMMITMENTS

The Company has outstanding commitments to invest up to $110,232 in limited partnerships at June 30, 2002. These commitments will be funded as required through the end of the respective investment periods, which typically span 3 to 5 years expiring in 2005. At June 30, 2002, the total commitment to fund limited partnerships that invest in private equity securities is $82,026, real estate activities $16,272 and fixed income securities $11,934. At June 30, 2002, no one partnership commitment exceeded $7.5 million, or 6.8%, of the outstanding commitment amount.

During 2001, the Company entered into several contracts for services related to the eCommerce program with various external vendors. The total outstanding commitment for these contracts at June 30, 2002, was $12.5 million, of which approximately $9.0 million will be reimbursed to the Company by the Erie Insurance Exchange (Exchange). The majority of these committed services are expected to be performed in 2002.

NOTE I — STOCK COMPENSATION PLAN

In June, 2002, the Company’s Board of Directors, at the recommendation of the Executive Compensation Committee, approved a stock compensation plan for its outside directors. The purpose of this plan is to further align the interests of directors with shareholders by providing for a portion of annual compensation for the directors’ services in shares of the Company’s Class A common stock. Each director vests in the grant 25% every three months over the course of a year. The Company accounts for the fair value of its grants under those plans in accordance with Financial Accounting Standards (FAS) Statement No. 123, “Accounting for Stock-Based Compensation.” The annual charge to the Company related to this plan totals $165.

NOTE J — SEGMENT INFORMATION

The Company operates its business as two reportable segments — management operations and property/casualty insurance operations. Accounting policies for segments are the same as described in the summary of significant accounting policies Note 2, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission on March 12, 2002. 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 through direct business of its subsidiaries and by virtue of the intercompany pooling agreement between its subsidiaries and the Exchange which includes assumed reinsurance from non-affiliated domestic and foreign sources.

Insurance provided in the property/casualty insurance operations consist of personal and commercial lines and is sold by independent agents. The performance of the personal and commercial lines is evaluated based upon the underwriting results as determined under statutory accounting practices (SAP) for the total pooled business of the Erie Insurance Group. Assets are not allocated to segments and are reviewed in total by management for purposes of decision making. No single customer or agent provides 10% or more of revenues for the Erie Insurance Group.

13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE J — SEGMENT INFORMATION (Continued)

Summarized financial information for these operations is presented below:

				Three Months Ended						Six Months Ended
				June 30						June 30
				2002			2001			2002			2001
Management operations:
Revenue:
	Management fee revenue			$	206,575		$	167,828		$	384,827		$	313,497
	Service agreement revenue				7,776			6,838			15,118			13,250
			Total revenue from management operations		214,351			174,666			399,945			326,747
	Net revenue from investment operations				10,056			13,498			18,238			21,201
Total revenue				$	224,407		$	188,164		$	418,183		$	347,948
Income before taxes				$	76,903		$	66,602		$	141,887		$	117,505
Net income				$	50,942		$	44,459		$	94,383		$	78,523
Property/casualty insurance operations:
Revenue:
	Premiums earned:
		Commercial lines		$	11,399		$	8,651		$	21,981		$	16,585
		Personal lines			28,054			24,263			54,012			47,359
		Reinsurance			2,445			1,980			3,757			3,357
			Total premiums earned (SAP)		41,898			34,894			79,750			67,301
		GAAP adjustments			(1,464	)		(977	)		(2,097	)		(1,210	)
			Total premiums earned (GAAP)		40,434			33,917			77,653			66,091
	Net revenue from investment operations				715			5,233			5,311			9,726
Total revenue				$	41,149		$	39,150		$	82,964		$	75,817
Expense:
	Losses and expenses:
		Commercial lines		$	12,713		$	9,199		$	24,903		$	18,465
		Personal lines			33,942			25,940			62,592			51,302
		Reinsurance			1,789			2,092			2,916			3,858
			Total losses and expenses (SAP)		48,444			37,231			90,411			73,625
		GAAP adjustments			(1,964	)		(1,528	)		(3,097	)		(2,210	)
			Total losses and expenses (GAAP)	$	46,480		$	35,703		$	87,314		$	71,415
(Loss) income before taxes				$	(5,331	)	$	3,447		$	(4,350	)	$	4,402
Net (loss) income				$	(3,116	)	$	2,670		$	(2,356	)	$	3,392

14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE J — SEGMENT INFORMATION (Continued)

The following table presents the management fee revenue by line of business:

	Three Months Ended				%			Six Months Ended				%
	June 30				Change			June 30				Change
	2002		2001					2002		2001
Private passenger auto	$	107,330	$	90,125		19.1	%	$	201,844	$	170,094		18.7	%
Commercial auto		17,718		13,847		28.0			34,185		26,956		26.8
Homeowner		33,541		28,276		18.6			56,313		47,457		18.7
Commercial multi-peril		24,036		16,927		42.0			45,372		32,482		39.7
Workers’ compensation		17,674		13,448		31.4			35,778		27,151		31.8
All other lines of business		6,276		5,205		20.6			11,335		9,357		21.1
Total	$	206,575	$	167,828		23.1	%	$	384,827	$	313,497		22.8	%

15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE J — SEGMENT INFORMATION (Continued)

The growth rate of policies in force and policy retention trends (the percentage of current Policyholders who have renewed their policies) directly impact the Company’s management and property/casualty insurance operating segments. Below is a summary of each by line of business for the Erie Insurance Group’s property/casualty insurance business.

Growth rate of policies in force for Erie Insurance Group property/casualty insurance operations:

	Private		12-mth.					12-mth.			All other		12-mth.			Total
	passenger		growth					growth			personal lines		growth			Personal
Date	auto		rate			Homeowner		rate			of business		rate			Lines
12/31/2000		1,337,280		4.9	%		986,654		7.5	%		146,682		7.9	%		2,470,616
03/31/2001		1,356,651		5.3			1,003,517		7.7			149,438		8.1			2,509,606
06/30/2001		1,382,419		5.9			1,029,339		8.1			154,029		8.5			2,565,787
09/30/2001		1,408,092		6.3			1,053,014		8.4			157,419		8.9			2,618,525
12/31/2001		1,432,747		7.1			1,075,816		9.0			159,702		8.9			2,668,265
03/31/2002		1,469,617		8.3			1,104,806		10.1			163,560		9.5			2,737,983
06/30/2002		1,512,335		9.4			1,146,639		11.4			169,952		10.3			2,828,926

			12-mth.					12-mth.					12-mth.			All other		12-mth.			Total
	CML*		growth			CML*		growth			Workers'		growth			CML* lines		growth			Commercial
Date	auto		rate			multi-peril		rate			comp.		rate			of business		rate			Lines
12/31/2000		87,567		5.8	%		195,137		12.1	%		47,156		8.4	%		65,077		7.1	%		394,937
03/31/2001		89,388		7.0			200,671		12.6			48,104		8.7			66,309		8.0			404,472
06/30/2001		91,794		7.9			208,388		12.7			49,711		9.5			67,964		8.9			417,857
09/30/2001		94,204		8.8			215,039		13.1			50,984		9.6			70,048		9.0			430,275
12/31/2001		96,100		9.7			221,635		13.6			52,033		10.3			71,539		9.9			441,307
03/31/2002		98,926		10.7			229,784		14.5			53,320		10.8			73,392		10.7			455,422
06/30/2002		102,447		11.6			241,760		16.0			55,607		11.9			75,884		11.7			475,698

Policy retention trends for Erie Insurance Group property/casualty insurance operations:

	Private															All other
	passenger			CML*						CML*			Workers'			lines of
Date	auto			auto			Homeowner			multi-peril			comp.			business			Total
12/31/00		92.31	%		89.80	%		90.75	%		88.14	%		88.48	%		87.64	%		91.01	%
03/31/01		92.24			90.29			90.71			88.59			89.06			87.75			91.03
06/30/01		92.25			90.35			90.68			88.44			88.76			88.00			91.01
09/30/01		92.22			90.16			90.43			88.35			88.53			87.95			90.89
12/31/01		92.24			90.53			90.29			88.04			88.43			88.07			90.85
03/31/02		92.26			90.86			90.24			88.50			89.34			88.21			90.80
06/30/02		92.35			91.12			90.35			88.69			89.46			88.39			90.92

*CML = Commercial

16

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following information should be read in conjunction with the historical financial information and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission on March 12, 2002.

OPERATING RESULTS

Financial Overview

Consolidated net income for the second quarter of 2002 increased 1.5% to $47,825,511, from $47,129,396 during the second quarter of 2001. Net revenue from management operations grew as a result of a 23.1% increase in direct written premiums. Results of the insurance underwriting operations declined in the second quarter of 2002 compared to the same period in 2001 as a result of storm-related catastrophe losses and increased technology spending related to the eCommerce initiative. Additionally, charges were taken for impaired investments contributing to net realized losses on investments in the second quarter of 2002. For the six months ended June 30, 2002 consolidated net income was $92,027,092, a 12.3% increase from the $81,914,701 earned in 2001 for the same period.

Operating income (net income excluding net realized (losses) gains and related federal income taxes) increased 12.6% to $51,596,067 for the quarter ended June 30, 2002 from $45,820,927 for the same period in 2001. Operating income per share for the second quarter of 2002 was $.73 per share, up from $.64 per share for the same period one year ago, an increase of 13.0%. For the six months ended June 30, 2002, operating income increased 18.5% to $95,004,622 from $80,143,708 reported for the same period in 2001. Operating income per share increased to $1.34 per share in the first half of 2002 from $1.12 per share for the same period in 2001, an increase of 18.9%.

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 (Exchange), increased 23.1% to $206,575,062 for the three months ended June 30, 2002 from $167,827,662 for the same period in 2001. Management fee revenue for the first six months of 2002 increased 22.8% to $384,826,783, (see also Note J, “Segment Information” which details management fee revenue by line of business).

The property/casualty direct written premium of the Erie Insurance Group (Group), upon which management fee revenue of the Company is calculated, grew 23.1% to $826,300,248 in the second quarter of 2002 from $671,310,649 for the same period in 2001. For the year, direct premiums written increased 22.8% to $1,539,307,137 compared to $1,253,987,067 written for the first six months of 2001. Direct written premiums of the Group grew 19.9% on a rolling twelve-month basis with personal lines growing 16.2% while commercial lines grew 30.4%. Increases in average premium per policy, improvements in new policy growth and continuing favorable policy retention rates were all contributing factors in the growth of direct written premium.

17

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

The average premium per policy increased 8.4% to $855 for the six months ended June 30, 2002 from $789 for the same period in 2001. In private passenger auto (which accounted for 52.2% of the direct written premiums of the Group and over 1.5 million policies in force), the average premium per policy increased 5.7% to $1,000 for the first six months of 2002 from $946 during the same period one year ago.

Continued growth in new policies also drove the gains experienced in the Group’s direct written premium. Personal lines new business premium grew 43.2% for the second quarter of 2002 while commercial lines new premium grew 54.3% during the same period. For the six months ended June 30, 2002 new business premium grew 45.4% and 58.3% for personal and commercial lines, respectively. Policies in force increased at an annualized rate of 10.8% to 3,304,624 at June 30, 2002 from 2,983,644 at June 30, 2001.

Policy retention has remained stable at 90.9% and 91.0% for the periods ended June 30, 2002 and 2001, respectively, for all lines of business combined (see also Note J, “Segment Information” which contains policies in force and policy retention trends by line of business).

Service agreement revenue grew by 13.7% to $7,776,211 for the three months ended June 30, 2002 from $6,838,265 for the same period in 2001. 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 $4,802,707 and $4,069,932 for the quarters ended June 30, 2002 and 2001, 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. These fees totaled $2,973,504 and $2,768,333 for the three months ended June 30, 2002 and 2001 respectively, on net voluntary assumed reinsurance premiums. During the 2002 reinsurance renewal season, the Exchange has been obtaining significant price increases on treaties it is renewing. However, the Exchange is reducing its aggregate exposure in non-affiliated assumed voluntary reinsurance by non-renewing unprofitable business, generally excluding terrorism coverage, and restricting exposure on certain types of risks. This impacts the level of service income received from the Exchange because the fee is based on a percentage of non-affiliated assumed reinsurance premiums.

The cost of management operations increased 21.3% for the second quarter of 2002 to $147,504,518 from $121,562,179 during the second quarter of 2001. For the six months ended June 30, 2002 the cost of management operations grew by 19.9% to $276,295,698 compared to $230,443,375 for the same period in 2001.

Commissions to independent Agents, which are the largest component of the Cost of Management Operations, include scheduled commissions earned by independent Agents on premiums written, as well as promotional incentives for Agents and Agent contingency awards. Agent contingency awards are based upon a three-year average of the underwriting profitability of the direct business written and serviced by the independent Agent. Commission costs totaled $106,422,127 for the second quarter of 2002, a 24.3% increase over the $85,644,046 reported in the second quarter of 2001. Growth in commission costs was slightly greater than the growth in direct premium written in the second quarter 2002 primarily due to increased accelerated commissions as well as an accrual for a promotional incentive contest for Agents which will run through 2002. Accelerated commissions are offered to newly recruited Agents in addition to normal commission schedules. During the three month period ended June 30, 2002, additional charges incurred for accelerated commissions

18

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

increased $702,348 to $2,351,918. The accrual established for the sales incentive contest for the quarter ended June 30, 2002 was $600,000. Excluding the accelerated commissions and the sales incentive contest, commission costs increased 23.2% in the second quarter of 2002. For the six months ended June 30, 2002 additional charges for accelerated commission costs totaled $4,432,065 compared to $3,255,678 for the same period one year ago. For the six months ended June 30, 2002 the accrual recorded for the sales incentive contest was $1,200,000. Commissions grew by 23.5% to $196,726,302 in 2002 from $159,237,033 recorded for the first six months of 2001.

The cost of management operations excluding commission costs, increased 14.4% for the three months ended June 30, 2002 to $41,082,391 from $35,918,133 recorded in the second quarter of 2001. Included in these costs are amounts related to information technology hardware and infrastructure from the Company’s eCommerce initiative launched in June 2001 which totaled $603,513 for the second quarter 2002 compared to $131,630 from the same period one year ago. For the first half of 2002 these costs totaled $2,316,353. These expenditures will continue to be incurred in future periods as the program develops (see “Factors That May Affect Future Results” section herein). As part of this initiative, a significant portion of the Company’s information technology resources have been deployed to work on the eCommerce program. As such, certain overhead expenses of these employees are currently being allocated to the property/casualty insurance operations of the Group as part of the eCommerce project. However, once the eCommerce program is completed some of these overhead costs will again be recognized by the Company in its cost of management operations.

Personnel costs also increased as employment grew by 7.0% driven by strong policy sales growth. Additionally, temporary labor costs were incurred to assist with a company-wide rollout of personal computers. As a result, salaries, wages and benefits for the second quarter of 2002 increased 10.9%. Personnel costs for the three months ended June 30, 2002 amounted to $22,603,611 compared to $20,379,172 for the same period in 2001.

The gross margin from management operations (net revenue divided by total revenue) increased to 31.2% in the second quarter of 2002, compared to the gross margin of 30.4% reported in the second quarter of 2001. Gross margins were 30.9% and 29.5% for the first six months of 2002 and 2001, respectively.

Analysis of Insurance Underwriting Operations

The underwriting loss from the insurance operations of the Company’s property/casualty insurance subsidiaries, Erie Insurance Company (EIC) and Erie Insurance Company of New York (EINY), which together assume a 5.5% share of the underwriting results of the Group under an intercompany pooling agreement, increased to $6,045,640 during the second quarter of 2002 compared to underwriting losses of $1,786,331 during the same period in 2001. Losses resulting from spring storm-related catastrophes, as defined by Erie Insurance Group, of $3,474,001 were partly responsible for the increased underwriting losses for the three months ended June 30, 2002. The per share impact, after federal income taxes, was about $.03 per share for the second quarter of 2002. The catastrophe losses reported by the Company in its May 22, 2002 press release for spring storms continued to develop in the second quarter and further catastrophe losses were incurred in May and June. The underwriting results in the second quarter of 2002 also reflect increased underwriting expenses related to the eCommerce technology program and assigned risk buyout program costs. The Company had an underwriting loss of

19

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

$9,660,698 for the first six months of 2002 compared to an underwriting loss of $5,324,238 for the same period in 2001.

The Company’s property/casualty insurance subsidiaries’ share of the Group’s direct business generated net underwriting losses of $6,701,029 and $1,674,548 for the second quarters of 2002 and 2001, respectively. The firming of auto pricing in 2001 by the industry in response to deteriorating loss cost trends allowed the Group to begin raising auto insurance prices in order to improve underwriting profitability. Rate increases generally take twenty-four months to be fully reflected in earned premium and will positively impact the underwriting results of the Company. For the six months ended June 30, 2002 net underwriting losses from the Company’s property/casualty insurance subsidiaries was $10,501,632 compared to $4,823,034 in 2001.

Catastrophes are an inherent risk of the property/casualty insurance business and can have a material impact on the Company’s insurance underwriting results. In addressing this risk, the Company employs what it believes are reasonable underwriting standards and monitors its exposure by geographic region. Additionally, EIC and EINY have in effect an all-lines aggregate excess of loss agreement with the Exchange (discussed below), which should substantially mitigate the effect of catastrophe losses on the Company’s financial position. The Company’s share of catastrophe losses were $3,474,001 and $43,953 for the three months ended June 30, 2002 and 2001, respectively. Catastrophe losses were $3,948,190 and $114,023 for the first half of 2002 and 2001, respectively.

The Company’s property/casualty insurance subsidiaries’ unaffiliated net assumed reinsurance business generated net underwriting income of $655,389 and a net underwriting loss of $111,783 in the second quarters of 2002 and 2001, respectively. There was no additional reserve development in 2002 relating to the Company’s 5.5% share of the Group’s estimated incurred reinsurance losses of $150 million from the September 11, 2001 terrorist attack on the World Trade Center. Through June 30, 2002 loss payments made by the Group related to the attack have totaled $28,818,068 with an additional $121,181,932 set up as reserves for case and incurred but not reported claims. Net underwriting income from the Company’s property/casualty unaffiliated voluntary assumed reinsurance business totaled $840,934 for the six months ended June 30, 2002 compared to an underwriting loss of $501,204 for the same period one year ago.

EIC and EINY’s aggregate excess of loss reinsurance agreement with the Exchange limits their net retained share of ultimate net losses in any applicable accident year. Under the agreement, the Exchange assumes losses that exceed 72.5% of the Company’s earned premium for each accident year. The Exchange is liable for 95.0% of the amount of such excess up to, but not exceeding, 15.0% of the Company’s earned premium. EIC and EINY are liable for amounts in excess of the coverage in the excess of loss agreement. This reinsurance treaty is excluded from the intercompany pooling agreement. EIC and EINY pay a premium equal to 1.01% of their net premium earned to the Exchange for this coverage. No premium payments were made in the second quarter of 2002 or 2001. The premium paid to the Exchange for the agreement totaled $883,226 and $909,617 for the six months ended June 30, 2002 and 2001, respectively. Recoveries during the second quarter 2002 amounted to $918,280, compared to recoveries of $201,301 for the same period one year ago. Recoveries recorded during the second quarter of 2002 totaled $268,485 for accident year 2001, $195,548 for 2000, and $454,247 for 1999.

20

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Recoveries totaled $1,570,511 for the first six months of 2002 compared to $553,580 for the same period one year ago. No cash payments have been made between companies in 2002 for recoveries under this agreement.

Included in the Company’s underwriting expenses are the Company’s share of eCommerce initiative expenses covered under a cost sharing agreement totaling $1,025,239 and $191,538 for the quarters ended June 30, 2002 and 2001, respectively. For the six months ended June 30, 2002 eCommerce cost sharing agreement expenses totaled $2,055,910. These shared costs will continue to be incurred in future periods as the program develops (see “Factors That May Affect Future Results” section, herein).

The Company experienced an increase in costs associated with their assigned risk buyout programs in 2002. The second quarter costs in 2002 were $288,804 compared to $36,064 for the same period in 2001. The buyout programs include Limited Assignment Distribution (LAD), which covers personal automobile risks, and Commercial Limited Assignment Distribution (CLAD), pertaining to commercial automobile risks. The Group has a CLAD program in Pennsylvania and both LAD and CLAD programs in New York, Illinois, Virginia, West Virginia and Tennessee. These programs provide that a servicing carrier perform all administrative functions relative to the assigned risk policies, including collecting premiums and making payments for losses and loss adjustment expenses. The Group makes payments to the servicing carrier, which includes an administrative fee, as well as a fee for rate inadequacy costs above the collected premium.

The increase in LAD/CLAD expense is principally attributable to the state of New York, which had costs of $280,408 compared to $35,601 during the second quarters of 2002 and 2001, respectively. The rise in costs in New York is the result of significant increases in both the population of assigned risk policies and the deteriorating rate adequacy of the New York residual market. Additionally, the Group’s market share in the state has increased, resulting in more assigned risk policies being allocated to the Group.

The GAAP combined ratio for the Company’s property/casualty insurance operations was 115.0% and 105.3% for the three months ended June 30, 2002 and 2001, respectively. The GAAP combined ratio represents the ratio of loss, loss adjustment, acquisition, and other underwriting expenses incurred to premiums earned. This ratio was impacted by 2.5 combined ratio points related to eCommerce expenses and by 8.6 combined ratio point related to catastrophe losses in the second quarter of 2002. The GAAP combined ratio, excluding eCommerce and catastrophe losses, was 103.9% on quarter ended June 30, 2002. For the first half of 2002 and 2001, the GAAP combined ratio was 112.4% and 108.1%, respectively.

Analysis of Investment Operations

Net revenue from investment operations for the second quarter of 2002 decreased to $10,770,474 from $18,731,053 in the second quarter of 2001. As a result of impairment charges taken in the second quarter of 2002 the Company realized net losses on investments of $5,800,855 compared to realized gains of $2,013,029 in the second quarter of 2001. The impairment charges were for fixed maturity and non redeemable preferred stock investments, which totaled $10,692,820. Included in the net realized losses are impairment charges related to the WorldCom Group securities totaling $5,746,638. For the six months ended June 30, 2002 net revenue from investment operations declined 23.9% to $23,548,899 from $30,927,137 for the same period in 2001. This decrease resulted from a $7,305,421 decline in net realized gains on investments.

21

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Net investment income rose 14.3% to $14,132,726 for the quarter ended June 30, 2002. The growth in net investment income was affected by cash outflows used by the Company to repurchase its shares. Increases in investments in taxable bonds contributed to the growth in net investment income for the quarter. For the six months ended June 30, 2002 net investment income increased 9.5% to $26,836,955 compared to $24,508,569 for the same period one year ago.

Equity in earnings of limited partnerships was $2,221,063 for the quarter ended June 30, 2002 compared to earnings of $2,910,696 for the same period in 2001. Private equity and fixed income limited partnerships realized losses of $248,778 for the three months ended June 30, 2002 compared to earnings of $2,310,305 for the same period of 2001. Real estate limited partnerships reflected earnings of $2,469,841 for the three months ended June 30, 2002 compared to earnings of $600,391 for the same period of 2001. Included in the 2002 second quarter earnings are impairment charges totaling $175,788 in private equity limited partnerships where declines in value were considered by Company management to be other-than-temporary. Equity in earnings of limited partnerships totaled $306,936 and $1,508,051 for the first six months of June 30, 2002 and 2001, respectively.

The Company’s 2002 second quarter earnings from its 21.6 percent ownership of Erie Family Life Insurance Company (EFL) totaled $217,540, down from the $1,441,701 recorded in the second quarter of 2001. The decrease in the level of earnings from the Company’s investment in EFL is related to impairment charges recorded on investments totaling $8,974,830 which resulted in net realized losses on EFL’s Statement of Operations. Earnings in EFL were $985,824 and $2,185,912 for the six months ended June 30, 2002 and 2001, respectively. The investment in EFL is accounted for under the equity method of accounting.

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, 2002, the Company’s investment portfolio of investment-grade bonds, common stock, preferred stock and cash and cash equivalents totaled $843 million, or 40.4%, of total assets. These investments provide the liquidity the Company requires to meet the demands on its funds.

The Company reviews the investment portfolio to evaluate positions that have incurred other-than-temporary declines in value. For all investment holdings, general economic conditions and/or conditions specifically affecting the underlying issuer or its industry are considered in evaluating impairment in value. In addition to specific factors, the primary factors considered in the Company’s review of investment valuation are the length of time the market value is below cost and the amount the market value is below cost.

For common equity securities (including private equity limited partnerships) where the decline in market value is more than 20% below cost for a period exceeding six months, there is a strong indication of other-than-temporary impairment. Under these circumstances the Company considers market conditions, industry characteristics and the fundamental operating results of the issuer before

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

deciding whether to sell the investment at a loss, to recognize an impairment charge to operations or to do neither. For common equity securities that have declined more than 20% below cost for a period exceeding twelve months, the position is presumed impaired and is either sold or recognized as impaired in the Consolidated Statements of Operations. In the second quarter of 2002 $175,788 of private equity limited partnership values were written down as well as $2,326,980 of non redeemable preferred stock (See “Analysis of Investment Operations” section). There were no impairments recognized during the six month period of 2001 for equity securities.

For fixed maturity investments, the Company individually analyzes all positions whose market value have declined more than 20% below cost. The Company considers market conditions, industry characteristics and the fundamental operating results of the issuer to determine if the decline is due to changes in interest rates, changes relating to a decline in credit quality, or other issues affecting the investment. Positions that have incurred market price decline of over 20% for a period greater than six months where the creditworthiness of the issuer or other factors indicate a decline that is other-than-temporary are either sold or recognized as impaired and reflected as a charge to the Company’s operations. Impairments recognized in the second quarter of 2002 related to fixed maturity investments totaled $8,365,840 (See “Analysis of Investment Operations” section). There were no impairments recognized during the six month period of 2001 for fixed maturity investments.

If the Company’s policy for determining the recognition of impaired positions were different, the Company’s Consolidated Statements of Financial Position and Results of Operations could be significantly impacted. Management believes its investment valuation philosophy and accounting practices result in appropriate and timely measurement of value and recognition of impairment.

The Company’s investments are subject to certain risks, including interest rate and price risk. The Company monitors exposure to interest rate risk through periodic reviews of asset and liability positions. Estimates of cash flows and the impact of interest rate fluctuations relating to the investment portfolio are monitored regularly. Generally, the Company does not hedge its exposure to interest rate risk, as it has the ability to hold its fixed maturity investments to maturity.

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, the risk of 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.

Liabilities

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.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

At June 30, 2002, the property/casualty insurance companies managed by the Company estimated total loss exposure related to the events of September 11th to be $150 million. Only a portion of that amount to date has been paid on losses related to September 11th, which adds greater uncertainty to the loss estimates. Additionally, disputes concerning whether the September 11th attack on the World Trade Centers should be considered one or two insurable events are currently being litigated. The Company’s $150 million loss estimate anticipates that the events of September 11th is considered one event. If the attack comes to be considered as two events, the total potential exposure for the Erie Insurance Group, the Company believes, would increase between $50 million and $75 million. The effect on the Company, as a result, would be additional losses between $2.7 million and $4.1 million. The net losses, after taking into consideration the excess of loss reinsurance agreement, would be minimal to the Company.

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. Operating cash flows are generated from management operations as the attorney-in-fact for the Exchange, the net cash flow from the EIC’s 5% and the EINY’s .5% participation in the underwriting results of the intercompany pooling agreement 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 other receivable from the Exchange and affiliates represents the management fee receivable from premiums written but not yet collected as well as the management fee receivable on premiums collected in the current month, net of operating expenses paid by the Exchange. The Company pays commissions on premiums collected rather than written premiums. 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 aggregate.

At June 30, 2002 and December 31, 2001, the Company’s receivables from its affiliates totaled $726,608,047 and $640,655,330, respectively. These receivables are generally collected within a year and are primarily due from the Exchange as a result of the management fee, expense reimbursements and the intercompany pooling agreement. As such, they represent a concentration of credit risk.

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, equity securities and short-term investments. Net cash flows provided by operating activities for the six months ended June 30, 2002 was $72,599,208.

Dividends declared and paid to shareholders for the quarters ended June 30, 2002 and 2001, totaled $10,926,584 and $9,835,752, respectively. Dividends declared and paid for the six months ended June 30, 2002 were $21,857,044 compared to $19,674,569 for the same period in 2001. 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 flows.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Cash flows from financing activities include the purchase of treasury stock. During the first six months of 2002, 142,024 shares were repurchased at a total cost of $5,870,646 or an average price of $41.34 compared to 42,600 shares repurchased for the same period in 2001 at a total cost of $1,210,589 or an average price of $28.42. 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.

Company management continues to plan for space needs to accommodate increased personnel in its Home Office complex. The Company is in the design phase to build additional office and parking facilities on to its current Home Office complex in Erie, Pennsylvania. The current estimate to build these facilities is between $40 million and $50 million.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Management Fees

The management fee paid to the Company as attorney-in-fact for the Exchange is determined by the Company’s Board of Directors. The rate may be changed periodically by the Board at its discretion but may not exceed 25%. The Company’s Board of Directors also acts in a fiduciary capacity with respect to the operation of the Exchange. The Board considers several factors in determining the management fee rate, including the relative financial strength 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, which ultimately benefits the entire Group. 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 maintain its financial condition and its ability to continue to offer competitive insurance products in the marketplace. The management fee rate charged the Exchange was 25% for all periods presented herein. If the Board were to decrease the management fee rate 1% (from 25% to 24%) for the six months ended June 30, 2002 it would have resulted in a $15,393,071 reduction to the management fee revenue as reported on the Consolidated Statements of Operations. The per share impact, after federal income taxes, would be approximately $.14 per share.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

The relative financial condition of the Company and that of the Exchange are the principal areas evaluated at least annually by the Company’s Board of Directors in their determination of the management fee rate. Presented below are condensed statements of financial position and statements of income for the Exchange. These statements are presented on the statutory basis of accounting.

	Six months ended
	June 30,			June 30,
(In thousands)	2002			2001
	(Unaudited)
Premiums earned	$	1,386,306		$	1,172,885
Loss and loss adjustment expenses	$	1,117,656		$	921,690
Insurance underwriting and other expenses		466,009			353,411
Net underwriting loss	$	(197,359	)	$	(102,216	)
Investment income, net	$	39,165		$	130,562
Federal income tax benefit		( 36,184	)		( 1,838	)
Net (loss) income	$	(122,010	)	$	30,184

	As of
	June 30,		Dec. 31,
(In thousands)	2002		2001
	(Unaudited)
Cash and invested assets	$	5,686,009	$	5,990,511
Total assets		6,558,977		6,995,024
Claims and unearned premium reserves		3,481,631		3,201,510
Total liabilities		4,046,149		3,949,473
Policyholders’ surplus	$	2,512,828	$	3,045,551

Reinsurance Risk

The property/casualty insurers managed by the Company do not maintain any ceded reinsurance treaties for catastrophic losses with unaffiliated insurers due to their strong surplus position, the cost of reinsurance and low ratio of the premium writings to surplus. Subject to internal retention limits the Exchange buys facultative reinsurance to mitigate the potential for excessive loss exposure. The Company evaluates the need for ceded reinsurance treaties annually. 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.

The Company’s reinsurance agreement in effect with the Exchange mitigates catastrophe loss exposure risk to the Company’s property/casualty insurance subsidiaries, but does not mitigate the exposure of the Exchange.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Insurance Premium Rate Increases

Rate increases filed by the Group for certain lines of business in various states were sought to offset growing loss costs in those lines. The Company continually evaluates pricing levels balancing competitive conditions and the need to maintain the solid financial condition of the insurers it manages. Pricing actions contemplated or taken by the insurers of the Group are subject to various regulatory requirements of the states in which the insurers operate. Premium increases anticipated due to pricing actions approved through June 30, 2002 could amount to approximately $108 million in premium for the Group in 2002 and $29 million in premium for the Group in 2003. There is also the potential for an additional $15 million in premium for 2002 and $83 million in premium for the Group in 2003 resulting from pricing actions contemplated or filed and awaiting approval. The majority of the anticipated increase stems from the private passenger and commercial auto lines of business as well as the homeowners line of business. Further rate actions continue to be contemplated for 2002 and 2003.

Geographic Expansion

On December 6, 2001, the Company announced the Group’s intention to expand its operations into Minnesota. Minnesota will be the 12th state served by the Group, in addition to the District of Columbia. Beginning in the third quarter of 2004, the Group intends to write all lines of insurance it currently offers, including auto, home, business, life and annuities in Minnesota.

Insurance Company Insolvencies

The insurance companies owned and managed by the Company pay assessments under the solvency or guaranty laws of the various states in which they are licensed. Pennsylvania-based PHICO Insurance Company, which became insolvent in late 2001, could impact future underwriting results of the Company. The impact of this insolvency on the Company’s financial results cannot be reasonably estimated at this time, thus no liability has been established by the Company to date. However, a charge to the Company’s insurance underwriting operations is likely to be made as more information becomes available.

Terrorism

The insurance companies owned and managed by the Company are exposed to both direct insurance and reinsurance losses arising from possible future terrorist actions. The Company is exposed to such losses by virtue of its 5.5% participation in the intercompany pooling agreement with the Exchange. The Company’s exposure is limited by the terms of an excess of loss agreement that is in place with the Exchange.

The tragic September 11th attacks resulted in staggering losses for the insurance industry and have caused uncertainty in the insurance and reinsurance market. The industry has been compelled to re-examine policy language and to address the potential for future threats of terrorist events and losses. The Group’s personal and commercial property and casualty insurance policies were not intended to cover the risk of terrorist events and losses such as those suffered in the September 11th attacks. It is difficult to predict and measure the risks associated with possible future terrorist attacks.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

To address the industry’s terrorism exposure, insurers have been working with Congress, the White House and other interested parties to enact legislation that would help spread the risk of future terrorist losses. On June 19, 2002 the Senate passed Senate Bill 2600, the Terrorism Reinsurance Act, which provides for shared public and private compensation for insured losses resulting from acts of terrorism. The Senate Bill includes a participating company deductible based on a percentage of market share. The federal government would assume liability for 80% of the portion of covered terrorism-related losses in 2002 that exceed participating companies’ deductibles, but do not exceed $10 billion in total and 90% of the losses in excess of the deductible when the total loss exceeds $10 billion. In 2003, the level would increase to $15 billion if renewed. The bill creates a federal cause of action for damages resulting from terrorism. Punitive damages are not restricted and will not be paid by the federal government. The Senate Bill now moves to committee to resolve differences between it and the House version, which provides for financial assistance through a loan-payback procedure and includes additional protections against lawsuits, such as a restriction on punitive damages. The tort reform measures have been one of the major areas of disagreement and passage of a compromise bill remains uncertain.

Regulators in the states in which the Group does business, with the exception of New York, have approved limited optional terrorism exclusion endorsements for use only on commercial property and liability lines within the framework developed by ISO (Insurance Services Office, Inc.). These endorsements exclude claims for terrorist acts involving the release of biological, chemical, nuclear or radioactive materials. In other incidents of terrorism, thresholds must be met before the exclusion will apply. For both property and liability coverage, insured property damage must exceed $25 million. For liability coverage, the exclusion will also apply if more than 50 people sustain serious physical injury. When the threshold is met, there is no coverage. The Group has made the necessary filings to obtain approval for use of these optional exclusions where deemed necessary.

The National Association of Insurance Commissioners (NAIC) has recently announced a resolution to deny terrorism exclusions on personal lines policies. NAIC action is advisory and states have approval authority; however, it is likely that many states will follow the NAIC resolution. Through its trade organizations and grassroots efforts, the Group continues to work toward a federal solution.

The Company’s substantial portfolio of equity and fixed income investments could also be affected by potential future terrorist actions which may affect the level of economic activity as well as investor confidence in the U.S. capital markets.

Exposure Losses for Mold

The industry continues to work to understand mold and toxic mold and control exposures and losses involving property damage and personal injuries, arguably related to mold. Due to media coverage and heightened awareness, the Group is seeing an increase in the number of mold related claims from both first party and third party coverages in personal and commercial lines. While the level of activity has not reached significant proportions, this trend is expected to continue. The costs associated with these losses, both investigative and remedial, will continue to rise. The opinions of state insurance departments regarding mold coverages and exclusions continue to be unpredictable. The Company, has recommended changes to policy language that would limit our exposure in personal lines policies in the future. Mold exclusions and limitations for commercial lines are currently under review. Exclusions and limitations in personal lines policies will be filed in our various states for implementation in 2003.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Information Technology Costs

In 2001, the Company began a comprehensive program of eCommerce initiatives in support of the Erie Insurance Group’s business model of distributing insurance products exclusively through independent Agents. The eCommerce program is intended to improve service and efficiency, as well as result in increased sales. The Company has completed the first major component (network and desktop hardware deployment) of the program during the second quarter of 2002. Also, the Company expects to complete the release of the new web interface to a limited number of Agents and employees late in July 2002. Subsequent eCommerce releases however are presenting issues of program cost and scope. While some elements of the program are well defined, certain aspects with regards to the timing, scope and level of spending for the program are now less certain. Management of the program is challenging the eCommerce teams to aggressively manage the scope and the cost of the program. Estimates previously reported for the cost of the program, as well as the after tax per share impact on the Company may be altered as a result.

Contingencies

In February, 2000 a civil class action lawsuit was filed against EIC and the Exchange in Philadelphia, Pennsylvania. The Exchange issued an automobile insurance policy to the Plaintiff. The class action complaint alleges that the Plaintiff was involved in an accident and that her insured vehicle was damaged in the accident. The Complaint alleges that the Exchange acted improperly when it used non-original equipment manufacturer (non-OEM) parts in repairing the damage to the Plaintiff’s vehicle. In March, 2002, the courts granted the Plaintiff’s motion to move this suit to Class Certification.

The Exchange and EIC are seeking to appeal the certification of the class. In addition, the Erie Insurance Group has joined, as additional defendants in the class action lawsuit, other non-OEM manufacturers and distributors of crash parts. Although it is too early to assess the probable outcome or the amount of damages of this civil class action lawsuit, the Company believes the Exchange and EIC have meritorious legal and factual defenses to this lawsuit and these defenses will be vigorously pursued. As such, no liability has been established by the Company or any of the companies in the Group to date for this lawsuit. The Company’s exposure to liability arising from this litigation is limited to the 5.5% share of the Group’s underwriting results under the intercompany pooling agreement. See also Part II – Item 1. “Legal Proceedings”.

Like other members of the insurance industry, the Company is the target of an increasing number of class action lawsuits like the one described above as well as other types of litigation. This litigation is based on a variety of issues including insurance and claim settlement practices. The Company assesses the likelihood of any adverse outcomes to these matters as well as potential ranges of probable losses. There can be no assurance that actual outcomes will not differ from those assessments.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s exposure to market risk is primarily related to fluctuations in prices and interest rates. Quantitative and qualitative disclosures about market risk resulting from changes in prices and interest rates are included in Item 7A. in the Company’s 2001 Annual Report on Form 10-K. There have been no material changes in such risks or the Company’s periodic reviews of asset and liability positions during the six months ended June 30, 2002. The information contained in the investments section of Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995:Certain forward-looking statements contained herein involve risks and uncertainties. Many factors could cause future results to differ materially from those discussed. Examples of such factors include variations in catastrophe losses due to changes in weather patterns, other natural causes or terrorist actions; 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 and returns. Growth and profitability have been and will be potentially materially affected by these and other factors.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Brenda L. Foultz v. Erie Insurance Exchange and Erie Insurance Company

This civil class action lawsuit was filed in February of 2000 in the Court of Common Pleas of Philadelphia County, Pennsylvania. The Erie Insurance Exchange (Exchange) issued an automobile insurance policy to the Plaintiff. The Class Action Complaint alleges that the Plaintiff was involved in an accident and that her insured vehicle was damaged in the accident. The Complaint alleges that the Exchange acted improperly when it prepared estimates using non-OEM parts in repairing the damage to the Plaintiff’s vehicle. In repairing the Plaintiff’s vehicle, two “non-OEM parts” were used. The two non-OEM parts used in repairing the Plaintiff’s vehicle were the left and right front lens and housing assemblies. The Plaintiff’s Complaint asserts that all non-OEM crash parts are inferior, defective and substandard, and do not return a damaged vehicle to its condition prior to the accident.

The Complaint, as amended, contains four counts. In the Count I, Plaintiff alleges that the Exchange’s conduct constitutes a breach of contract under its insurance policy. Count II of the Complaint alleges that the Exchange’s conduct violates the Pennsylvania Unfair Trade Practices and Consumer Protection law. Count III alleges that the Exchange’s conduct violates the Pennsylvania bad faith statute. In Count IV of the Complaint Plaintiff requested declaratory relief and an injunction prohibiting the Exchange from using non-OEM parts. The Plaintiff later voluntarily dismissed Count IV. The Exchange answered the Complaint and denied liability on all of the counts. The Exchange also filed a Joinder Complaint in January of 2001 against the manufacturer and distributor of the non-OEM parts alleged by the Plaintiff to be defective. The Court issued an Order permitting the Exchange’s joinder of TYC Brother Industrial Co. Ltd., the manufacturer of the parts at issue, and Genera Corporation, the distributor of the parts. TYC Brother Industrial Co. Ltd. and Genera have also denied any and all liability.

On March 13, 2002, the Court of Common Pleas of Philadelphia County granted the Plaintiff’s Revised Motion for Class Certification. The Court certified the following class:

All persons in the United States (1) who have been insured by an automobile policy issued by Erie Insurance Company or any other member of the Exchange; (2) who have made a claim at any time on or after February 2, 1994 for vehicle repairs pursuant to their Erie Insurance policies; and (3) have had non-OEM crash parts specified for their repairs. Excluded from the Class are officers, directors and employees of Erie Insurance Company, Exchange, and their subsidiaries.

The Exchange and Erie Insurance Company are seeking to appeal the certification of the class. In addition, the Erie Insurance Group has joined, as additional Defendants in the class action lawsuit, other non-OEM manufacturers and distributors of crash parts. The Company believes the Exchange and Erie Insurance Company have meritorious legal and factual defenses to this lawsuit and these defenses will be vigorously pursued. In the event an adverse verdict is rendered against the Exchange and Erie Insurance Company, both Erie Insurance Group companies will vigorously pursue any claims they may have against the non-OEM manufacturers and suppliers.

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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 30, 2002.

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 matters were 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 Malin, Bergquist & Company, LLP as independent public accountants to perform the annual audit of the Company financial statements for the year ending December 31, 2002. This proposal received 2,998 affirmative votes with no negative votes or abstentions.
	The proposal to approve the continuation of the Company’s Long-Term Incentive Plan for the purpose of maintaining it’s qualification under Section 162(m) of the Internal Revenue Code. This proposal received 2,989 affirmative votes and 9 negative votes or abstentions.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

On May 8, 2002, the Company filed a report on Form 8-K, reporting under Item 7, that Jeffrey A. Ludrof was named the Company’s sixth President and Chief Executive Officer. He replaces Stephen A. Milne who retired on January 18, 2002.

ITEM 11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS

	Three Months Ended				Six Months Ended
	June 30				June 30
	2002		2001		2002		2001
Class A weighted average common shares outstanding (stated value $.0292)		63,775,580		64,020,014		63,794,175		64,034,046
Class B common shares outstanding (stated value $70) Conversion of Class B shares to Class A shares (one share of Class B For 2,400 shares of Class A)		7,368,000		7,368,000		7,368,000		7,368,000
Total weighted average shares outstanding		71,143,580		71,388,014		71,162,175		71,402,046
Net income	$	47,825,511	$	47,129,396	$	92,027,092	$	81,914,701
Net income per share	$	0.67	$	0.66	$	1.29	$	1.15

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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 23, 2002	/s/ Jeffrey A. Ludrof Jeffrey A. Ludrof, President & CEO
		/s/ Philip A. Garcia Philip A. Garcia, Executive Vice President & CFO

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