FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended March 31, 2001
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-- 71,399,223 shares as of April 19,
2001.
Class B Common Stock, no par value, with a stated value of
$70 per share-- 3,070 shares as April 19, 2001.
The common stock is the only class of stock the Registrant is presently
authorized to issue.
INDEX
ERIE INDEMNITY COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Position--March 31, 2001 and
December 31, 2000
Consolidated Statements of Operations--Three months ended March 31,
2001 and 2000
Consolidated Statements of Comprehensive Income--Three months ended
March 31, 2001 and 2000
Consolidated Statements of Cash Flows--Three months ended March 31,
2001 and 2000
Notes to Consolidated Financial Statements--March 31, 2001
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Item 11. Statement Regarding Computation of Per Share Earnings
SIGNATURES
2
PART I. FINANCIAL INFORMATION
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands)
March 31, December 31,
ASSETS 2001 2000
----------- -----------
(Unaudited)
INVESTMENTS
Fixed maturities at fair value
(amortized cost of $507,249 and
$524,172, respectively) $ 521,614 $ 531,546
Equity securities at fair value (cost of $212,273
and $184,968, respectively) 224,327 204,446
Limited partnerships (cost of $65,859 and
$60,661,respectively) 74,475 68,242
Real estate mortgage loans 6,542 6,581
---------- ----------
Total investments $ 826,958 $ 810,815
Cash and cash equivalents 7,261 38,778
Accrued investment income 10,360 9,087
Premiums receivable from Policyholders 158,956 156,269
Prepaid federal income tax 0 3,604
Reinsurance recoverable from Erie Insurance
Exchange 427,514 412,050
Note receivable from Erie Family Life
Insurance Company 15,000 15,000
Other receivables from Erie Insurance
Exchange and affiliates 156,683 119,959
Reinsurance recoverable non-affiliates 275 712
Deferred policy acquisition costs 13,885 13,202
Property and equipment 14,147 13,856
Equity in Erie Family Life Insurance Company 43,909 42,331
Other assets 50,683 44,936
---------- ----------
Total assets $1,725,631 $1,680,599
========== ==========
(Continued)
<FN>
See Notes to Consolidated Financial Statements.
</FN>
3
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands)
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
----------- -----------
(Unaudited)
LIABILITIES
Unpaid losses and loss adjustment expenses $ 485,866 $ 477,879
Unearned premiums 270,412 263,855
Commissions payable and accrued 90,075 96,823
Accounts payable and accrued expenses 28,605 30,476
Federal income tax payable 12,380 0
Deferred income taxes 8,416 7,161
Dividends payable 9,836 9,839
Employee benefit obligations 14,931 15,551
---------- ----------
Total liabilities $ 920,521 $ 901,584
---------- ----------
SHAREHOLDERS' EQUITY
Capital Stock
Class A common, stated value $.0292 per share;
authorized 74,996,930 shares; 67,032,000 shares
issued; 64,039,223 and 64,056,323 shares
outstanding in 2001 and 2000, 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 24,804 23,182
Retained earnings 856,502 831,552
---------- ----------
Total contributed capital and retained earnings $ 891,306 $ 864,734
Treasury stock, at cost 2,992,777 shares
in 2001 and 2,975,677 in 2000 ( 86,196) ( 85,719)
---------- ----------
Total shareholders' equity $ 805,110 $ 779,015
---------- ----------
Total liabilities and shareholder's equity $1,725,631 $1,680,599
========== ==========
<FN>
See Notes to Consolidated Financial Statements.
</FN>
4
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31,
2001 2000
---------- ---------
(Amounts in thousands, except per share data)
MANAGEMENT OPERATIONS:
Management fee revenue $ 145,669 $ 129,099
Service agreement revenue 6,412 5,233
--------- ---------
Total revenue from management operations $ 152,081 $ 134,332
Cost of management operations 108,881 97,714
--------- ---------
Net revenue from
management operations $ 43,200 $ 36,618
--------- ---------
INSURANCE UNDERWRITING OPERATIONS:
Premiums earned $ 32,174 $ 29,891
Losses and loss adjustment expenses incurred 26,961 24,663
Policy acquisition and other underwriting
expenses 8,751 8,431
--------- ---------
Total losses and expenses 35,712 33,094
--------- ---------
Underwriting loss ($ 3,538) ($ 3,203)
---------- ---------
INVESTMENT OPERATIONS:
Net investment income $ 12,143 $ 11,611
Net realized gain on investments 712 5,505
Equity in earnings of Erie Family
Life Insurance Company 744 1,407
Equity in (losses) earnings of limited partnerships ( 1,403) 992
--------- ---------
Net revenue from investment operations $ 12,196 $ 19,515
-------- ---------
Income before income taxes $ 51,858 $ 52,930
Provision for income taxes 17,073 16,745
--------- ---------
Net income $ 34,785 $ 36,185
========= =========
Net income per share (b) $ .49 $ .50
========= =========
Operating income (a) $ 34,323 $ 32,607
========= =========
Operating income per share (b) $ .48 $ .45
========= =========
Weighted average shares outstanding (Note B) 71,416 72,300
<FN>
(a) Operating income excludes net realized gain on investments and related federal income taxes.
(b) Based on weighted average shares outstanding.
See Notes to Consolidated Financial Statements.
</FN>
5
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 31,
2001 2000
------------------------
(In thousands)
Net income $ 34,785 $ 36,185
--------- ---------
Unrealized gains on securities:
Unrealized holding gains arising during period 3,207 26,815
Less: reclassification adjustment for
gains included in net income 712 5,505
--------- ---------
Net unrealized holding gains
arising during period $ 2,495 $ 21,310
Income tax expense related to
unrealized gains ( 873) ( 7,459)
--------- ---------
Other comprehensive income, net of tax $ 1,622 $ 13,851
--------- ---------
Comprehensive income $ 36,407 $ 50,036
========= =========
<FN>
See Notes to Consolidated Financial Statements.
</FN>
6
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
2001 2000
---------- -----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 34,785 $ 36,185
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 747 579
Deferred income tax expense (benefit) 1,044 ( 244)
Amortization of deferred policy acquisition costs 5,787 5,701
Realized gain on investments ( 712) ( 5,505)
Net amortization of bond (discount) premium ( 62) 6
Undistributed earnings of Erie Family Life ( 346) ( 1,039)
Deferred compensation 52 332
Increase in accrued investment income ( 1,272) ( 1,662)
Increase in receivables ( 54,439) ( 30,808)
Policy acquisition costs deferred ( 6,470) ( 5,782)
(Increase) decrease in prepaid expenses and other assets ( 5,657) 520
Decrease in accounts payable and accrued expenses ( 2,543) ( 558)
Decrease in commissions payable and accrued ( 6,748) ( 10,218)
Increase in income taxes payable 15,985 16,936
Increase in loss reserves 7,987 20,880
Increase in unearned premiums 6,557 1,472
----------- -----------
Net cash (used in) provided by operating activities ($ 5,305) $ 26,795
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchase of investments (Note C) ($ 14,770) ($ 7,032)
Purchase of property and equipment ( 810) 0
Purchase of computer software ( 228) ( 39)
Loans to agents ( 687) ( 419)
Collections on agent loans 598 430
----------- -----------
Net cash used in investing activities ($ 15,897) ($ 7,060)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders ($ 9,838) ($ 8,853)
Purchase of treasury stock ( 477) ( 10,659)
----------- -----------
Net cash used in financing activities ($ 10,315) ($ 19,512)
----------- -----------
Net (decrease) increase in cash and cash equivalents ( 31,517) 223
Cash and cash equivalents at beginning of period 38,778 24,214
----------- -----------
Cash and cash equivalents at end of period $ 7,261 $ 24,437
=========== ===========
Supplemental disclosures of cash flow information:
- --------------------------------------------------
Income tax payments $ 40 $ 48
Dividends declared per share:
----------------------------
Class A non-voting common 0.153 0.135
Class B common 22.88 20.25
<FN>
See Notes to Consolidated Financial Statements.
</FN>
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
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 (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 three-month period ended March 31, 2001 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. 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, 2000.
NOTE B -- EARNINGS PER SHARE
Earnings per share is based on the weighted average number of Class A shares
outstanding (64,048,234 and 64,932,010 at March 31, 2001 and 2000,
respectively), giving effect to the conversion of the weighted average number of
Class B shares outstanding (3,070 in 2001 and 2000) at a rate of 2,400 Class A
shares for one Class B share. Weighted average equivalent shares outstanding
totaled 71,416,234 for the quarter ended March 31, 2001 and 72,300,010 for the
same period a year ago.
NOTE C -- INVESTMENTS
Management considers all fixed maturities and marketable equity securities
available-for-sale. Marketable equity securities consist primarily of common and
nonredeemable preferred stocks while fixed maturities consist of bonds, notes
and redeemable preferred stock. Available-for-sale securities are stated at fair
value, with the unrealized gains and losses, net of deferred 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE C -- INVESTMENTS (Continued)
The following is a summary of available-for-sale securities:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------- ----------- -------------
March 31, 2001
Fixed Maturities:
- ----------------
U.S. treasuries & government
agencies $ 11,215 $ 514 $ 9 $ 11,720
States & political subdivisions 45,147 2,139 0 47,286
Special revenue 111,768 4,356 0 116,124
Public utilities 21,136 504 61 21,579
U.S. industrial & miscellaneous 276,584 8,318 3,078 281,824
Foreign 30,082 274 183 30,173
------------- ------------ ------------- -------------
Total bonds $ 495,932 $ 16,105 $ 3,331 $ 508,706
Redeemable preferred stock 11,317 1,591 0 12,908
------------- ------------ ------------- -------------
Total fixed maturities $ 507,249 $ 17,696 $ 3,331 $ 521,614
------------- ------------ ------------- -------------
Equity securities:
- -----------------
Common stock:
U.S. banks, trusts &
insurance companies $ 3,651 $ 564 $ 195 $ 4,020
U.S. industrial &
miscellaneous 65,911 31,807 17,817 79,901
Foreign 6,892 539 2,838 4,593
Nonredeemable
preferred stock:
U.S. banks, trusts &
insurance companies 23,020 444 166 23,298
U.S. industrial &
miscellaneous 85,352 2,785 3,589 84,548
Foreign 27,447 899 379 27,967
------------- ------------ ------------- -------------
Total equity securities $ 212,273 $ 37,038 $ 24,984 $ 224,327
------------- ------------ ------------- -------------
Total available-for-sale
securities $ 719,522 $ 54,734 $ 28,315 $ 745,941
============= ============ ============= =============
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE C -- INVESTMENTS (Continued)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- ------------- ----------- -------------
December 31, 2000
Fixed maturities:
- ----------------
U.S. treasuries & government
agencies $ 11,216 $ 420 $ 24 $ 11,612
States & political subdivisions 50,337 1,656 34 51,959
Special revenue 110,855 3,779 68 114,566
Public utilities 23,221 550 207 23,564
U.S. industrial & miscellaneous 267,231 4,770 5,940 266,061
Foreign 30,082 238 406 29,914
------------- ------------ ------------- -------------
Total bonds $ 492,942 $ 11,413 $ 6,679 $ 497,676
Redeemable preferred stock 31,230 3,341 701 33,870
------------- ------------ ------------- -------------
Total fixed maturities $ 524,172 $ 14,754 $ 7,380 $ 531,546
-------------- ------------ ------------- -------------
Equity securities:
- -----------------
Common stock:
U.S. banks, trusts &
insurance companies $ 3,651 $ 422 $ 275 $ 3,798
U.S. industrial &
miscellaneous 63,662 38,286 15,343 86,605
Foreign 7,100 581 2,719 4,962
Nonredeemable
preferred stock:
U.S. banks, trusts &
insurance companies 22,094 97 66 22,125
U.S. industrial &
miscellaneous 62,266 1,987 3,119 61,134
Foreign 26,195 217 590 25,822
------------- ------------ ------------- -------------
Total equity securities $ 184,968 $ 41,590 $ 22,112 $ 204,446
-------------- ------------ ------------- -------------
Total available-for-sale
securities $ 709,140 $ 56,344 $ 29,492 $ 735,992
============== ============ ============= =============
In the third quarter 2000, the Company began participating 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. A fee is
paid to the Company by the borrower. Collateral that exceeds the market value of
the loaned securities is maintained by the lending agent. The Company has an
indemnification agreement with the lending agents in the event a borrower
becomes insolvent or fails to return securities. At March 31, 2001, the Company
had loaned securities with a market value of $26.9 million secured by collateral
of $28.1 million. The borrower of the securities is not permitted to sell or
replace the security on loan.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE C -- INVESTMENTS (Continued)
Limited partnerships include U.S. and foreign private equity, real estate and
fixed income investments. The private equity limited partnerships invest in
small-to medium-sized companies. The private equity limited partnerships are
carried at estimated market value with unrealized gains and losses, net of
deferred taxes, reflected in shareholders' equity in accumulated other
comprehensive income. Investment income or loss is recognized on the sale of the
equity investment. Real estate and fixed income limited partnerships are
recorded using the equity method, which approximates the Company's share of the
carrying value of the partnership. The components of equity in (losses) earnings
of limited partnerships as reported on the Consolidated Statements of Operations
are as follows:
Three Months Ended March 31,
2001 2000
-------- -------
Private equity ($ 1,673) $ 83
Real estate 262 209
Fixed income 8 700
-------- -------
Total equity in (losses) earnings of
limited partnerships ($ 1,403) $ 992
========= =======
The Company began using forward currency contracts to hedge the risks related to
investments in partnerships in 2001. The Company recognized a loss on these
contracts of $26 during 2001 which is included in the Consolidated Statements of
Operations.
Mortgage loans on commercial real estate are recorded at unpaid balances,
adjusted for amortization of premium or discount. A valuation allowance would be
provided for impairment in net realizable value based on periodic valuations as
needed.
Net purchases of investments as presented in the Consolidated Statements of Cash
Flows consist of the following:
Three Months Ended March 31,
2001 2000
------------ -----------
Purchase of investments:
Fixed maturities ($ 38,218) ($ 38,598)
Equity securities ( 15,322) ( 10,517)
Limited partnerships ( 7,415) ( 1,166)
------------ -----------
Total purchases ($ 60,955) ($ 50,281)
------------ -----------
Sales/maturities of investments:
Sales of fixed maturities $ 7,871 $ 13,426
Calls of fixed maturities 24,652 14,147
Equity securities 11,408 12,988
Mortgage loans 39 1,537
Limited partnerships 2,215 1,151
----------- -----------
Total sales/maturities $ 46,185 $ 43,249
------------ -----------
Net purchase of investments ($ 14,770) ($ 7,032)
============= ===========
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE D -- SUMMARIZED FINANCIAL STATEMENT INFORMATION OF AFFILIATE
The Company has a 21.63% investment in Erie Family Life Insurance Company (EFL)
and accounts for this investment using the equity method of accounting.
The following represents condensed financial statement information for EFL on a
GAAP basis:
Three Months Ended March 31,
2001 2000
------- -------
Revenues $25,526 $28,760
Benefits and expenses 20,265 18,812
------- -------
Income before income taxes 5,261 9,948
Income taxes 1,820 3,442
------- -------
Net income $ 3,441 $ 6,506
======= =======
Comprehensive income $ 9,136 $19,605
======= =======
Dividends paid to shareholders $ 1,701 $ 1,559
======= =======
Net unrealized appreciation on investment
securities at March 31, net of deferred taxes $ 9,382 $10,755
======= =======
NOTE E -- NOTE RECEIVABLE FROM ERIE FAMILY LIFE INSURANCE COMPANY
The Company is due $15 million 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 of the note may be repaid only out of unassigned surplus of EFL and
are subject to prior approval of the Pennsylvania Insurance Commissioner.
Interest on the surplus note is scheduled to be paid semi-annually. The note
will be payable on demand on or after December 31, 2005. EFL accrued $242 in the
first quarters of 2001 and 2000 to be paid to the Company.
NOTE F -- TREASURY STOCK
In December 1998 the Board of Directors of the Company approved a stock
repurchase plan beginning January 1, 1999, under which the Company may
repurchase as much as $120 million of its outstanding Class A common stock
through December 31, 2002. At March 31, 2001 the Company had repurchased $86
million in stock. Treasury shares are recorded on the Consolidated Statements of
Financial Position at cost.
NOTE G -- SEGMENT INFORMATION
The Company operates its business as two reportable segments - management
operations and property/casualty 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 through direct business of its
subsidiaries and by virtue of a pooling agreement between its subsidiaries and
the Exchange. The performance of the personal lines and commercial lines is
evaluated based upon the underwriting results as determined under statutory
accounting practices (SAP) for the total pooled business of the Group.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE G - SEGMENT INFORMATION (CONTINUED)
Summarized financial information for these operations is presented below:
Three Months Ended March 31,
2001 2000
---------- ----------
Management Operations:
Revenue:
Management fee revenue $ 145,669 $ 129,099
Service agreement revenue 6,412 5,233
---------- ----------
Total revenue from management operations 152,081 134,332
Net revenue from investment operations 7,703 15,217
---------- ----------
Total revenue $ 159,784 $ 149,549
========== ==========
Income before taxes $ 50,903 $ 51,835
========== ==========
Net income $ 34,064 $ 35,028
========== ==========
Property/Casualty Operations:
Revenue:
Premiums earned:
Commercial lines $ 7,934 $ 6,592
Personal lines 23,096 21,856
Reinsurance 2,286 2,273
---------- ----------
Total premiums earned (SAP) 33,316 30,721
GAAP adjustments ( 1,142) ( 830)
---------- ----------
Total premiums earned (GAAP) 32,174 29,891
Net revenue from investment operations 4,493 4,298
---------- ----------
Total revenue $ 36,667 $ 34,189
========== ==========
Losses and expenses:
Commercial lines $ 9,266 $ 8,010
Personal lines 25,362 21,395
Reinsurance 1,766 3,770
---------- ----------
Total losses and loss expenses (SAP) 36,394 33,175
GAAP adjustments ( 682) ( 81)
---------- ----------
Total losses and loss expenses (GAAP) $ 35,712 $ 33,094
========== ==========
Income before taxes $ 955 $ 1,095
========== ==========
Net income $ 721 $ 1,157
========== ==========
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE G - SEGMENT INFORMATION (CONTINUED)
The following information further describes the financial results of the Company
by segment, as presented on the previous page.
Management fee revenue by line of business:
Three Months Ended March 31,
2001 2000
--------- ---------
Private Passenger Auto $ 79,969 $ 74,528
Commercial Auto 13,108 11,041
Homeowner 19,181 16,987
Commercial Multi-Peril 15,555 12,353
Worker's Compensation 13,703 10,649
All Other Lines of Business 4,153 3,541
--------- ---------
Total $ 145,669 $ 129,099
========= =========
Policy counts for Erie Insurance Group property/casualty operations:
Private All other
Passenger CML* CML* Worker's Lines of
Date Auto Auto Homeowner Multi-Peril Comp. Business Total
----------- --------- ----------- ----------- ----------- ------------- ---------- ----------
12/31/99 1,274,869 82,760 917,902 174,085 43,508 196,725 2,689,849
03/31/00 1,287,868 83,534 931,971 178,191 44,235 199,580 2,725,379
06/30/00 1,305,888 85,089 952,325 184,913 45,408 204,412 2,778,035
09/30/00 1,324,104 86,592 971,213 190,120 46,529 208,832 2,827,390
12/31/00 1,337,280 87,567 986,654 195,137 47,156 211,759 2,865,553
03/31/01 1,356,651 89,388 1,003,517 200,671 48,104 215,747 2,914,078
Retention rates for Erie Insurance Group property/casualty operations:
Private All other
Passenger CML* CML* Worker's Lines of
Date Auto Auto Homeowner Multi-Peril Comp. Business Total
----------- ----------- ----------- --------- ------------ ------------- --------- -----------
12/31/99 91.58% 89.27% 90.47% 87.42% 87.59% 86.85% 90.45%
03/31/00 91.83 89.52 90.66 88.08 88.52 87.23 90.72
06/30/00 92.03 89.53 90.89 88.19 88.62 87.57 90.92
09/30/00 92.19 89.90 90.88 88.38 88.67 87.75 91.03
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
<FN>
*CML = Commercial
</FN>
NOTE H -- RECLASSIFICATIONS
Certain amounts previously reported in the 2000 financial statements have been
reclassified to conform to the current period's presentation.
14
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, 2000 as filed with the Securities and Exchange
Commission on March 23, 2001.
OPERATING RESULTS
Financial Overview
Operating income (net income less realized gains or losses net of related
federal income taxes) increased 5.3%, or $1,715,737, to $34,322,780 in 2001 from
$32,607,043 in 2000. Operating income per share increased 6.6% to $.48 per share
from $.45 for the same period one year ago. Net income declined slightly as a
result of decreased earnings from investments and decreased realized gains on
investments. Management operations grew as a result of a 12.8% increase in
direct written premiums. Insurance underwriting operations declined in the first
quarter of 2001 compared to the same period in 2000 primarily as a result of
increased losses in the Company's direct personal lines of business. Revenue
from investment operations decreased as the result of a decline in realized
gains caused by adverse market conditions as well as losses generated from
private equity limited partnerships in 2001.
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 Exchange, increased 12.8% to $145,669,105
for the three months ended March 31, 2001 from $129,098,508 for the three months
ended March 31, 2000 (see also Note G, "Segment Information" which displays
management fee revenue by line of business). The management fee rate charged the
Exchange in the first quarters of 2001 and 2000 was 25%. The Company's Board of
Directors has the authority to change the management fee rate at its discretion,
but cannot exceed a rate of 25%.
The property/casualty direct premium written by the Erie Insurance Group, upon
which management fee revenue is based, grew 12.8% to $582,676,418 in the first
quarter of 2001 from $516,394,026 for the same period in 2000. Continued
improvement in policy retention rates and new policy growth drove the gains
experienced in the Group's direct written premium.
Policies in force increased an annualized 6.9% to 2,914,078 at March 31, 2001
from 2,725,379 at March 31, 2000. Policy retention (the percentage of current
Policyholders who have renewed their policies) was 91.03% and 90.72% for the
quarters ended March 31, 2001 and 2000, respectively, for all lines of business
(see also Note G, "Segment Information" which contains additional rates by line
of business).
Service agreement revenue grew by 22.5% to $6,412,349 in the first quarter of
2001 from $5,232,919 for the same period in 2000. Included in service agreement
revenue are service charges the Company collects from Policyholders for
providing extended payment terms on policies written by the Group. Such service
charges amounted to $3,662,245 and $2,303,055 for the quarters ended March 31,
2001 and 2000, respectively. During the second quarter 2000, this charge
increased from $2 to $3 per installment for policies renewing in most states.
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% of non-affiliated assumed reinsurancepremiums. These fees totaled
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
$2,750,104 and $2,929,864 for the three months ended March 31, 2001 and 2000
respectively, on net voluntary assumed reinsurance premiums of $39,287,202 and
$41,855,200 for the first quarters of 2001 and 2000, respectively.
The cost of management operations increased 11.4% for the first quarter of 2001
to $108,881,196 from $97,713,545 during the first quarter of 2000. Commissions
to independent Agents are the largest component of the cost of management
operations. Included in commission expenses are the cost of 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 within the Erie Insurance Group of companies. Commission costs totaled
$73,592,987 for the first quarter of 2001, an 11.8% increase over the
$65,816,070 reported in the first quarter of 2000. The provision for Agent
contingency awards totaled $3,675,000 and $4,850,000 in 2001 and 2000,
respectively. Commission costs grew more slowly than the growth in direct
premium written in the first quarter 2001 due to lower accruals for agent
contingency awards relative to the first quarter 2001.
The cost of management operations excluding commission costs, increased 10.6%
for the three months ended March 31, 2001 to $35,288,209 from $31,897,475
recorded in the first quarter of 2000. Personnel costs, including salaries,
employee benefits, and payroll taxes, are the second largest component in cost
of operations. The Company's personnel costs totaled $21,165,209 for the three
month period ended March 31, 2001, compared to $19,478,249 for the same period
in 2000, an increase of 8.7%. Personnel costs increased in the first quarter
2001 due to staffing increases and employee pay rate increases. Also driving the
increase were increases in both health plan employee benefit costs from
increased claims experience when compared to the same period in 2000. The
remaining increase in the cost of management operations during 2001 related
primarily to information technology consulting expenditures increasing from the
same period in 2000.
Net revenue from the Company's management operations increased 18.0% to
$43,200,258 for the three months ended March 31, 2001 from $36,617,882 for the
same period in 2000. The gross margin from management operations (net revenue
divided by total revenue) increased to 28.4% in the first quarter of 2001,
compared to the gross margin of 27.3% reported in the first quarter of 2000.
Analysis of Insurance Underwriting Operations
The insurance underwriting operations on the Company's property/casualty
insurance subsidiaries, EIC and EINY, which together assume a 5.5% share of the
underwriting results of the Erie Insurance Group under an intercompany pooling
agreement, declined during the first quarter of 2001 when compared to the same
period in 2000.
The Company's insurance underwriting operations recorded underwriting losses of
$3,537,907 and $3,202,914 in the first quarter of 2001 and 2000, respectively.
The Company recognized premiums earned of $32,173,914 for the quarter ended
March 31, 2001, a 7.6 percent increase over the $29,891,067 reported in the
first quarter of 2000. The 2001 underwriting loss resulted from increased losses
in the direct business of the Company's property/casualty subsidiaries,
primarily in private passenger automobile and homeowners insurance and continued
losses in commercial insurance.
EIC and EINY have in effect an all-lines aggregate excess of loss reinsurance
agreement with the Exchange to limit their net retained share of ultimate net
losses in any applicable accident year.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
This reinsurance treaty is excluded from the intercompany pooling agreement. The
annual premium paid to the Exchange for the agreement totaled $909,617 and
$748,523 for the quarter ended March 31, 2001 and 2000, respectively. During the
first quarter 2001, the Company's property/casualty insurance subsidiaries
recorded loss recoveries through this excess of loss agreement with the Exchange
amounting to $352,179. No amounts were recovered under this agreement for the
year 2000.
The GAAP combined ratio for the Company's property/casualty insurance operations
was 111.0% for the three months ended March 31, 2001 compared to a ratio of
110.7% for the same period in 2000. The GAAP combined ratio represents the ratio
of loss, loss adjustment, acquisition, and other underwriting expenses incurred
to premiums earned.
Analysis of Investment Operations
Net revenue from investment operations for the first quarter of 2001 decreased
37.5% to $12,196,084 from $19,514,795 in the first quarter of 2000. Realized
gains on investments decreased $4,792,936 to $711,576 in 2001 primarily as the
result of the Company taking advantage of favorable stock market conditions in
the first quarter of 2000. Equity in earnings of limited partnerships decreased
$2,395,019 in the first quarter of 2001 when compared with the same period in
2000 as a result of partnership losses in private equity limited partnerships.
FINANCIAL CONDITION
Investments
The Company's investment strategy takes a long-term perspective emphasizing
investment quality, diversification and superior investment returns. Investments
are managed on a total return approach that focuses on current income and
capital appreciation. The Company's investment strategy also provides for
liquidity to meet the short- and long-term commitments of the Company. At March
31, 2001, the Company's investment portfolio of investment-grade bonds, common
stock, preferred stock and cash and cash equivalents totaled $732.2 million, or
42.4%, of total assets. These investments provide the liquidity the Company
requires to meet the demands on its funds.
At March 31, 2001, 90.2% of total investments consist of fixed maturities and
equity securities. Mortgage loans and limited partnerships, represented 9.8% of
total investments at that date. Mortgage loans on real estate and limited
partnerships have the potential for higher returns, but also carry more risk,
including less liquidity and greater uncertainty in the rate of return. Fixed
income and real estate limited partnerships at March 31, 2001, which comprise
29.8% of the total limited partnerships, produce a predictable earnings stream
while private equity limited partnerships, which comprise 70.2% of the total
limited partnerships at March 31, 2001, tend to provide a less predictable
earnings stream.
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.
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.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure 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 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 other receivable from Erie Insurance 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 amount
of this receivable payable from the Exchange to the Company at March 31, 2001
was $17 million. 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.
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.
Dividends declared and paid to shareholders in the three months ended March 31,
2001 and 2000, totaled $9,838,817 and $8,852,950, respectively. There are no
regulatory restrictions on the payment of dividends to the Company's
shareholders, although there are state law restrictions on the payment of
dividends from the Company's insurance subsidiaries to the Company. Dividends
from subsidiaries are not material to the Company's cash flows.
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to deferred tax assets and
liabilities resulted in net deferred tax liabilities at March 31, 2001 of
$8,415,668 and at December 31, 2000 of $7,161,544. The primary reason for the
increase in the deferred tax liability is an increase in unrealized gains from
available-for-sale securities resulting in an increased deferred tax liability
in 2001.
At March 31, 2001 and December 31, 2000, the Company's receivables from its
affiliates totaled $584,197,412 and $532,008,287, 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 REPURCHASE PLAN
Beginning in 1999, the Company established a stock repurchase program. The
Company may repurchase as much as $120 million of its outstanding Class A common
stock through December 31, 2002. During the first quarter of 2001, 17,100 shares
were repurchased at a total cost of $476,294 or an average price of $27.85. The
Company repurchased 352,750 shares at a total cost of $10,658,695 or an average
price of $30.22 during the first quarter of 2000. 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.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
STOCK REDEMPTION PLAN
On March 13, 2001, the Board of Directors approved the recommendation of the
Executive Committee to terminate the Stock Redemption Plan. The Plan had
entitled 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 the time of redemption, subject to certain limitations. No shares were ever
redeemed by the Company under the Plan.
FACTORS THAT MAY EFFECT FUTURE RESULTS
Rate Increases
In 2000, the Erie Insurance Group filed for rate increases in its private
passenger auto, commercial auto and workers' compensation insurance lines of
business in Pennsylvania, Maryland and Indiana. These increases were sought to
offset growing loss costs in these lines of business as discussed earlier. The
requests will result in an estimated $18.9 million increase in written premium
for 2001 for the Group, if they are approved by state regulators. These
increases, if approved, will result in an additional $4.7 million in annual
gross revenue from management operations, assuming no change in the current
management fee rate.
Information Technology Costs
In 2001, the Company began the development of several eCommerce initiatives in
support of the Erie Insurance Group's business model of distributing insurance
products exclusively through independent agents. The eCommerce program includes
initiatives to replace property/casualty policy administration, rating and
underwriting systems as well as customer interaction systems. The eCommerce
program also includes significant information technology infrastructure
expenditures. The program is intended to improve service and efficiency, as well
as result in increased sales. Total five-year expenditures for the program are
estimated at $150 to $175 million. The cost of these initiatives will be shared
among several companies of the Erie Insurance Group, including the Company.
Based on preliminary estimates, the after-tax effect on net income of the
Company is estimated to reduce earnings per share between $0.08 and $0.12 for
2001 and between $0.05 and $0.07 per share for each of the next four years of
the program.
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 2000 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 three months ended March 31, 2001. The
information contained in the Investments section of Management's Discussion and
Analysis of Financial Condition and Results of Operations is incorporated herein
by reference.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995: Certain forward-looking statements contained herein involve risks and
uncertainties. Many factors could cause future results to differ materially from
those discussed. Examples of such factors include variations in catastrophe
losses due to changes in weather patterns or other natural causes; changes in
insurance regulations or legislation that disadvantage the members of the Group
in the marketplace and recession, economic conditions or stock market changes
affecting pricing or demand for insurance products or ability to generate
investment income. Growth and profitability have been and will be potentially
materially affected by these and other factors.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information concerning the legal proceedings of the Company is incorporated by
reference to pages 20 through 22 in the section "Legal Proceedings" in the
Company's definitive Proxy Statement with respect to the Company's Annual
Meeting of Shareholders to be held on April 24, 2001 filed with the Securities
and Exchange Commission on March 28, 2001.
On April 5, 2001, a Stipulation among Mrs. Hagen, Bankers Trust, and the Company
was filed with the Court whereby these three parties agreed to accept the April
24th Ruling as a final adjudication of this matter. As a consequence of this
Stipulation agreement, Mrs. Hagen withdrew her Motion for Judgment on the
Pleadings. The Company's execution of the Stipulation did not bind any other
parties other than the signatories to the Stipulation. As a result of the
Stipulation, the hearing scheduled for April 10, 2001 was ordered cancelled by
the Court.
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any exhibits or reports on Form 8-K during the three
month period ended March 31, 2001.
Item 11. Statement Regarding Computation of Per Share Earnings:
Three Months Ended March 31,
2001 2000
------------ -------------
Class A weighted average common shares
outstanding (stated value $.0292) 64,048,234 64,932,010
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
------------- -------------
Total weighted average shares outstanding 71,416,234 72,300,010
============= =============
Net income $ 34,785,305 $ 36,184,976
============= =============
Net income per share $ .49 $ .50
============= =============
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Erie Indemnity Company
----------------------
(Registrant)
Date: April 19, 2001
\s\ Stephen A. Milne
Stephen A. Milne, President & CEO
\s\ Philip A. Garcia
Philip A. Garcia, Executive Vice President & CFO
21