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 September 30, 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
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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-- 63,862,123 shares as of October 10, 2001.
Class B Common Stock, no par value, with a stated value of
$70 per share-- 3,070 shares as October 10, 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--September 30, 2001 and
December 31, 2000
Consolidated Statements of Operations--Three and nine months ended
September 30, 2001 and 2000
Consolidated Statements of Comprehensive Income--Three and nine
months ended September 30, 2001 and 2000
Consolidated Statements of Cash Flows--Nine months ended September 30,
2001 and 2000
Notes to Consolidated Financial Statements--September 30, 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 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)
September 30, December 31,
ASSETS 2001 2000
------------- -------------
(Unaudited)
INVESTMENTS
Fixed maturities at fair value
(amortized cost of $524,929 and
$524,172, respectively) $ 545,700 $ 531,546
Equity securities at fair value (cost of $205,668
and $184,968, respectively) 209,666 204,446
Limited partnerships (cost of $76,725 and
$60,661,respectively) 77,546 68,242
Real estate mortgage loans 5,731 6,581
---------- ----------
Total investments $ 838,643 $ 810,815
Cash and cash equivalents 57,454 38,778
Accrued investment income 10,319 9,087
Premiums receivable from Policyholders 186,964 156,269
Prepaid federal income tax 0 3,604
Reinsurance recoverable from Erie Insurance
Exchange 470,934 412,050
Note receivable from Erie Family Life
Insurance Company 15,000 15,000
Other receivables from Erie Insurance
Exchange and affiliates 179,157 119,959
Reinsurance recoverable non-affiliates 279 712
Deferred policy acquisition costs 16,633 13,202
Property and equipment 14,190 13,856
Equity in Erie Family Life Insurance Company 45,956 42,331
Other assets 61,548 44,936
---------- ----------
Total assets $1,897,077 $1,680,599
========== ==========
(Continued)
<FN>
See Notes to Consolidated Financial Statements.
</FN>
3
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in thousands)
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
--------------- -----------
(Unaudited)
LIABILITIES
Unpaid losses and loss adjustment expenses $ 532,262 $ 477,879
Unearned premiums 312,186 263,855
Commissions payable and accrued 108,626 96,823
Accounts payable and accrued expenses 36,111 30,476
Federal income tax payable 18,709 0
Deferred income taxes 7,886 7,161
Dividends payable 9,809 9,839
Employee benefit obligations 15,733 15,551
---------- ----------
Total liabilities $1,041,322 $ 901,584
---------- ----------
SHAREHOLDERS' EQUITY
Capital Stock
Class A common, stated value $.0292 per share;
authorized 74,996,930 shares; 67,032,000 shares
issued; 63,862,123 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 19,740 23,182
Retained earnings 918,421 831,552
---------- ----------
Total contributed capital and retained earnings $ 948,161 $ 864,734
Treasury stock, at cost 3,169,877 shares
in 2001 and 2,975,677 shares in 2000 ( 92,406) ( 85,719)
---------- ----------
Total shareholders' equity $ 855,755 $ 779,015
---------- ----------
Total liabilities and shareholders' equity $1,897,077 $1,680,599
========== ==========
<FN>
See Notes to Consolidated Financial Statements.
</FN>
4
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- ----------------------
2001 2000 2001 2000
(Amounts in thousands, except per share data)
MANAGEMENT OPERATIONS:
Management fee revenue $ 167,308 $ 145,719 $ 480,805 $ 421,992
Service agreement revenue 7,089 6,553 20,339 16,722
---------- ---------- ---------- ----------
Total revenue from management operations 174,397 152,272 501,144 438,714
Cost of management operations 119,353 107,855 349,796 314,369
---------- ---------- ---------- ----------
Net revenue from
management operations $ 55,044 $ 44,417 $ 151,348 $ 124,345
---------- ---------- ---------- ----------
INSURANCE UNDERWRITING OPERATIONS:
Premiums earned $ 34,766 $ 31,194 $ 100,857 $ 91,762
Losses and loss adjustment expenses incurred 35,017 25,216 88,074 73,180
Policy acquisition and other underwriting
expenses 10,338 8,720 28,696 26,117
---------- ---------- --------- ----------
Total losses and expenses 45,355 33,936 116,770 99,297
---------- ---------- ---------- ----------
Underwriting loss ($ 10,589) ($ 2,742) ($ 15,913) ($ 7,535)
---------- ---------- ---------- ----------
INVESTMENT OPERATIONS:
Net investment income $ 12,347 $ 12,016 $ 36,855 $ 35,652
Net realized (loss) gain on investments ( 5,451) 3,944 ( 2,726) 15,385
Equity in earnings of Erie Family
Life Insurance Company 327 1,304 2,513 3,983
Equity in (losses) earnings of limited
partnerships ( 229) 1,722 1,279 4,139
---------- ---------- ---------- ----------
Net revenue from investment operations $ 6,994 $ 18,986 $ 37,921 $ 59,159
---------- ---------- ---------- ----------
Income before income taxes $ 51,449 $ 60,661 $ 173,356 $ 175,969
Provision for income taxes 17,019 19,469 57,011 56,073
---------- ---------- ---------- ----------
Net income $ 34,430 $ 41,192 $ 116,345 $ 119,896
========== ========== ========== ==========
Net income per share (b) $ 0.48 $ 0.57 $ 1.63 $ 1.66
========== ========== ========== ==========
Operating income (a) $ 37,973 $ 38,629 $ 118,117 $ 109,896
========== ========== ========== ==========
Operating income per share (b) $ 0.53 $ 0.54 $ 1.65 $ 1.52
========== ========== ========== ==========
Weighted average shares outstanding 71,346 71,871 71,380 72,092
========== ========== ========== ==========
<FN>
(a) Operating income excludes net realized gain/loss 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 Nine Months Ended
September 30 September 30
------------------------ ------------------------
2001 2000 2001 2000
(In thousands)
Net income $ 34,430 $ 41,192 $ 116,345 $ 119,896
---------- ---------- ---------- ----------
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising
during period ( 10,602) 4,518 ( 8,021) 25,845
Reclassification adjustment for (losses)
gains included in net income 5,451 ( 3,944) 2,726 ( 15,385)
----------- --------- ----------- ---------
Net unrealized holding (losses) gains
arising during period ($ 5,151) $ 574 ($ 5,295) $ 10,460
Income tax benefit (expense) related to
unrealized gains or losses 1,802 ( 201) 1,853 ( 3,661)
---------- ---------- ---------- ----------
Other comprehensive (loss) income, net of tax ($ 3,349) $ 373 ($ 3,442) $ 6,799
---------- ---------- ---------- ----------
Comprehensive income $ 31,081 $ 41,565 $ 112,903 $ 126,695
========== ========== ========== ==========
<FN>
See Notes to Consolidated Financial Statements.
</FN>
6
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
------------------ ------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 116,345 $ 119,896
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,306 2,007
Deferred income tax expense (benefit) 3,820 ( 1,674)
Amortization of deferred policy acquisition costs 17,852 17,181
Realized loss (gain) on investments 2,726 ( 15,385)
Equity in earnings of limited partnerships ( 1,279) ( 4,139)
Net amortization of bond discount ( 156) ( 7)
Undistributed earnings of Erie Family Life ( 1,317) ( 2,879)
Deferred compensation 119 783
Increase in accrued investment income ( 1,231) ( 2,101)
Increase in receivables ( 148,346) ( 77,281)
Policy acquisition costs deferred ( 21,283) ( 18,819)
Increase in prepaid expenses and other assets ( 11,497) ( 1,132)
Increase in accounts payable and accrued expenses 5,698 7,293
Increase in commissions payable and accrued 11,803 4,630
Increase in income taxes payable 22,313 4,077
Increase in loss reserves 54,383 31,387
Increase in unearned premiums 48,331 33,100
----------- -----------
Net cash provided by operating activities $ 100,587 $ 96,937
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchase of investments (Note C) ($ 23,162) ($ 27,760)
Sales or distributions of limited partnerships 5,687 5,746
Investments in limited partnerships ( 20,488) ( 15,753)
Purchase of property and equipment ( 1,821) ( 17)
Purchase of computer software ( 818) ( 733)
Loans to agents ( 6,903) ( 1,252)
Collections on agent loans 1,788 1,293
----------- -----------
Net cash used in investing activities ($ 45,717) ($ 38,476)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders ($ 29,507) ($ 26,447)
Treasury stock ( 6,687) ( 21,836)
----------- -----------
Net cash used in financing activities ($ 36,194) ($ 48,283)
----------- -----------
Net increase in cash and cash equivalents 18,676 10,178
Cash and cash equivalents at beginning of period 38,778 24,214
----------- -----------
Cash and cash equivalents at end of period $ 57,454 $ 34,392
=========== ===========
Supplemental disclosures of cash flow information:
Income tax payments $ 31,571 $ 53,668
Dividends declared per share:
----------------------------
Class A non-voting common $ 0.458 $ 0.405
----------- -----------
Class B common $ 68.63 $ 60.75
----------- -----------
<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 nine-month period ended September 30, 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 as filed with the Securities and Exchange
Commission on March 23, 2001.
NOTE B -- EARNINGS PER SHARE
Earnings per share is based on the weighted average number of Class A shares
outstanding (63,977,939 and 64,502,951 at the quarters ended September 30, 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 71,345,939 for the quarter ended September 30, 2001 and
71,870,951 for the same period a year ago. For the nine months ended September
30, 2001 weighted average equivalent shares outstanding were 71,379,614 compared
to 72,091,967 for the nine months ended September 30, 2000.
NOTE C - INVESTMENTS
Management considers all fixed maturities and marketable equity securities
available-for-sale. Marketable equity securities consist primarily of common and
non redeemable preferred stocks while fixed maturities consist of bonds, notes
and redeemable preferred stock. 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 comprehensive income and
shareholders' equity. Investments 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 security basis and are recorded as a component of net realized
gains/losses on investments in the Consolidated Statements of Operations.
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
----------- ----------- ----------- ----------
September 30, 2001
Fixed maturities:
----------------
U.S. treasuries & government
agencies $ 11,211 $ 633 $ 0 $ 11,844
States & political subdivisions 38,511 2,290 0 40,801
Special revenue 110,046 4,347 0 114,393
Public utilities 27,286 1,346 292 28,340
U.S. industrial & miscellaneous 292,729 12,466 2,052 303,143
Foreign 27,584 1,002 7 28,579
-------- -------- -------- --------
Total bonds $507,367 $ 22,084 $ 2,351 $527,100
Redeemable preferred stock 17,562 1,055 17 18,600
-------- -------- -------- --------
Total fixed maturities $524,929 $ 23,139 $ 2,368 $545,700
-------- -------- -------- --------
Equity securities:
------------------
Common stock:
U.S. banks, trusts &
insurance companies $ 3,651 $ 838 $ 44 $ 4,445
U.S. industrial &
miscellaneous 65,206 24,932 21,292 68,846
Foreign 4,936 366 1,609 3,693
Non redeemable
preferred stock:
U.S. banks, trusts &
insurance companies 15,684 797 85 16,396
U.S. industrial &
miscellaneous 91,593 3,296 4,097 90,792
Foreign 24,598 1,260 364 25,494
-------- -------- -------- --------
Total equity securities $205,668 $ 31,489 $ 27,491 $209,666
-------- -------- -------- --------
Total available-for-sale
securities $730,597 $ 54,628 $ 29,859 $755,366
======== ======== ======== ========
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
======== ======== ======== ========
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. 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. The Company had loaned securities with a market value of $34,600 and
$18,800 secured by collateral of $35,600 and $19,300 at September 30, 2001 and
2000, respectively. 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)
The components of net realized (loss) gain on investments as reported on the
Consolidated Statements of Operations are included below. The securities that
were written down during the third quarter of 2001 were in the internet,
telecommunication equipment, semi-conductor and software development industry
segments.
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- --------------------
2001 2000 2001 2000
Fixed maturities:
----------------
Gross realized gains $ 1,056 $ 462 $ 3,697 $ 1,551
Gross realized losses ( 316) ( 16) ( 503) ( 206)
------- ------- ------- -------
Net realized gain $ 740 $ 446 $ 3,194 $ 1,345
------- ------- ------- -------
Equity securities:
-----------------
Gross realized gains $ 190 $ 4,568 $ 4,045 $16,143
Gross realized losses ( 645) ( 1,070) ( 4,229) ( 2,103)
Write downs ( 5,736) 0 ( 5,736) 0
-------- ------- ------- -------
Net realized (loss) gain ($ 6,191) $ 3,498 ($ 5,920) $14,040
------- ------- ------- -------
Net realized (loss) gain on
investments ($ 5,451) $ 3,944 ($ 2,726) $15,385
======= ======= ======= =======
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE C -- INVESTMENTS (Continued)
Limited partnerships include U.S. and foreign private equity, real estate and
fixed income investments. The private equity limited partnerships invest in
small-to medium-sized companies. The private equity limited partnerships are
carried at estimated market value with unrealized gains and losses, net of
deferred taxes, reflected in shareholders' equity in accumulated other
comprehensive income. Limited partnerships that have declined in value below
cost and for which the decline is considered to be "other than temporary" by
management are written down to realizable value. Such write downs are made
directly on an individual limited partnership basis and are recorded as a
component of net realized gains/losses on investments in the Consolidated
Statement of Operations. Investment income or loss is recognized on the sale of
the equity investment. Real estate and fixed income limited partnerships are
recorded using the equity method, which approximates the Company's share of the
carrying value of the partnership. The components of equity in (losses) earnings
of limited partnerships as reported on the Consolidated Statements of Operations
are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- ------------------
2001 2000 2001 2000
Private equity ($ 961) $ 1,045 ($ 373) $ 977
Real estate 456 228 1,318 1,783
Fixed income 276 449 334 1,379
------- ------- ------- -------
Total equity in (losses) earnings of
limited partnerships ($ 229) $ 1,722 $ 1,279 $ 4,139
====== ======= ======= =======
The Company began using forward currency contracts to hedge the risks related to
investments in partnerships in 2001. The Company recognized a gain on these
contracts of $96 during the quarter ended September 30, 2001. For the nine
months ended 2001 gains on these contracts totaled $50 and are included in the
Consolidated Statements of Operations.
Mortgage loans on commercial real estate are recorded at unpaid balances,
adjusted for amortization of premium or discount. A valuation allowance would be
provided for impairment in net realizable value based on periodic valuations as
needed.
Net purchases of investments as presented in the Consolidated Statements of Cash
Flows consist of the following:
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
------------------- ---------------------
Purchase of investments:
Fixed maturities ($ 161,360) ($ 118,335)
Equity securities ( 43,267) ( 46,441)
--------- ---------
Total purchases ($ 204,627) ($ 164,776)
--------- ---------
Sales/maturities of investments:
Sales of fixed maturities $ 79,485 $ 47,634
Calls of fixed maturities 61,249 40,830
Equity securities 39,881 46,938
Mortgage loans 850 1,614
--------- ---------
Total sales/maturities $ 181,465 $ 137,016
--------- ---------
Net purchase of investments ($ 23,162) ($ 27,760)
========= =========
12
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:
Nine Months Ended September 30,
-------------------------------
2001 2000
Revenues $ 79,066 $ 87,208
Benefits and expenses 61,302 59,054
--------- ---------
Income before income taxes 17,764 28,154
Income taxes 6,147 9,741
--------- ---------
Net income $ 11,617 $ 18,413
========= =========
Comprehensive income $ 22,285 $ 28,631
========= =========
Dividends paid to shareholders $ 5,387 $ 4,961
========= =========
Net unrealized appreciation on investment
securities at September 30, net of deferred taxes $ 14,355 $ 7,874
========= =========
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 interest of
$242 in the third quarters of 2001 and 2000 which is payable 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 September 30, 2001 the Company had repurchased
$92.4 million in stock. Treasury shares are recorded on the Consolidated
Statements of Financial Position at cost.
NOTE G -- eCOMMERCE PROGRAM AND RELATED INFORMATION TECHNOLOGY INFRASTRUCTURE
During March 2001, the Company and the insurance Companies of the Erie Insurance
Group entered into the Cost Sharing Agreement For Information Technology
Development ("Agreement"). The Agreement describes how member companies of The
Erie Insurance Group will share the costs to be incurred for the development of
new property/casualty policy administration and customer relationship management
systems. The Agreement further specifies how related enabling technology costs,
such as technical development and architectural tools will be shared among the
group. The Agreement provides that such costs will be shared among the
property/casualty insurance companies in a manner consistent with the sharing of
insurance transactions under an existing intercompany pooling agreement. These
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE G -- eCOMMERCE PROGRAM AND RELATED INFORMATION TECHNOLOGY INFRASTRUCTURE
(Continued)
costs are included in the Policy Acquisition and Other Underwriting Costs in the
Consolidated Statements of Operations. The Company's share of these costs,
incurred by the insurance subsidiaries of the Company, amounted to $410 during
the third quarter of 2001. For the nine months ended September 30, 2001 the
Company's share of these costs incurred totaled $602.
Certain other costs of the eCommerce Program are related to Information
Technology Infrastructure and are not included under the Agreement. These costs
are included in the Cost of Management Operations in the Consolidated Statements
of Operations. The Company's share of the expenses amounted to $355 during the
third quarter 2001. For the nine months ended September 30, 2001, total
infrastructure costs were $486.
NOTE H -- 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, commercial lines and
reinsurance is evaluated based upon the underwriting results as determined under
statutory accounting practices (SAP) for the total pooled business of the Group.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE H - SEGMENT INFORMATION (Continued)
Summarized financial information for these operations is presented below:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
2001 2000 2001 2000
Management Operations:
----------------------
Revenue:
Management fee revenue $ 167,308 $ 145,719 $ 480,805 $ 421,992
Service agreement revenue 7,089 6,553 20,339 16,722
------------ ------------ ------------ ------------
Total revenue from management
operations 174,397 152,272 501,144 438,714
Net revenue from investment
operations 1,785 14,475 22,987 45,463
------------ ------------ ------------ ------------
Total revenue $ 176,182 $ 166,747 $ 524,131 $ 484,177
============ ============ ============ ============
Income before taxes $ 56,829 $ 58,892 $ 174,335 $ 169,808
============ ============ ============ ============
Net income $ 38,400 $ 39,776 $ 116,923 $ 114,871
============ ============ ============ ============
Property/Casualty Operations:
-----------------------------
Revenue:
Premiums earned:
Commercial lines $ 9,042 $ 7,351 $ 25,627 $ 20,980
Personal lines 24,778 22,664 72,137 67,031
Reinsurance 2,208 2,100 6,474 6,088
------------ ------------ ------------ ------------
Total premiums earned (SAP) 36,028 32,115 104,238 94,099
GAAP adjustments ( 1,262) ( 921) ( 3,381) ( 2,337)
------------ ------------ ------------ ------------
Total premiums earned (GAAP) 34,766 31,194 100,857 91,762
Net revenue from investment
operations 5,209 4,511 14,934 13,696
------------ ------------ ------------ ------------
Total revenue $ 39,975 $ 35,705 $ 115,791 $ 105,458
============ ============ ============ ============
Expense:
Losses and expenses:
Commercial lines $ 10,089 $ 7,726 $ 28,554 $ 23,591
Personal lines 28,132 24,467 79,434 68,812
Reinsurance 8,355 2,715 12,213 8,532
------------ ------------ ------------ -----------
Total losses and loss expenses
(SAP) 46,576 34,908 120,201 100,935
GAAP adjustments ( 1,221) ( 972) ( 3,431) ( 1,638)
------------ ------------ ------------ ------------
Total losses and loss expenses
(GAAP) $ 45,355 $ 33,936 $ 116,770 $ 99,297
============ ============ ============ ============
(Loss) Income before taxes ($ 5,380) $ 1,769 ($ 979) $ 6,161
============ ============ ============ ============
Net (loss) income ($ 3,970) $ 1,416 ($ 578) $ 5,025
============ ============ ============ ============
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE H - 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 Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
2001 2000 2001 2000
Private Passenger Auto $ 92,807 $ 83,667 $ 262,901 $ 240,517
Commercial Auto 13,007 10,697 39,963 33,174
Homeowner 28,916 25,349 76,373 67,265
Commercial Multi-Peril 16,087 12,309 48,569 37,987
Workers' Compensation 11,678 9,643 38,829 30,948
All Other Lines of Business 4,813 4,054 14,170 12,101
------------ ------------ ------------ ------------
Total $ 167,308 $ 145,719 $ 480,805 $ 421,992
============ ============ ============ ============
Policy counts for Erie Insurance Group property/casualty operations:
Private All other
Passenger CML* CML* Workers' 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
06/30/01 1,382,419 91,794 1,029,339 208,388 49,711 221,993 2,983,644
09/30/01 1,408,092 94,204 1,053,014 215,039 50,984 227,467 3,048,800
Retention rates for Erie Insurance Group property/casualty operations:
Private All other
Passenger CML* CML* Workers' 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
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
<FN>
*CML = Commercial
</FN>
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE I -- RECLASSIFICATIONS
Certain amounts previously reported in the 2000 financial statements have been
reclassified to conform to the current period's presentation.
17
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
Consolidated net income for the third quarter of 2001 decreased 16.4% to
$34,430,497 or $.48 per share, from $41,192,193 or $.57 per share during the
third quarter of 2000. Net income was negatively impacted by the September 11th
terrorist attacks on the World Trade Center combined with realized capital
losses on investments during the third quarter of 2001. For the nine months
ended September 30, 2001 consolidated net income was $116,345,198, a 3.0%
decrease from the $119,895,654 earned in 2000 for the same period. Net income
per share decreased 2.0% to $1.63 per share in the first nine months of 2001
compared to $1.66 per share recorded a year earlier. Improved earnings from
management operations resulting from a 13.9% increase in management fees were
offset by increased losses experienced in the Company's insurance underwriting
operations as well as decreased revenue from investment operations for the nine
months ended September 30, 2001 when compared to the same period in 2000.
Operating income (net income excluding realized gains/losses and related federal
income taxes) decreased slightly to $37,973,228 for the quarter ended September
30, 2001 from $38,628,694 for the same period in 2000. Operating income per
share for the third quarter of 2001 was $.53 per share, down 1.0% from $.54 per
share for the same period one year ago. For the nine months ended September 30,
2001, operating income increased 7.5% to $118,116,936 from $109,895,527 reported
for the same period in 2000. Operating income per share increased 8.6% to $1.65
per share in the first nine months of 2001 from $1.52 per share for the same
period in 2000.
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 14.8% to $167,307,976
for the three months ended September 30, 2001 from $145,719,261 for the three
months ended September 30, 2000. Management fee revenue increased to
$480,804,743 in the first nine months of 2001 compared to $421,991,451 for the
same period in 2000 (see also Note H, "Segment Information" which displays
management fee revenue by line of business). The management fee rate charged the
Exchange was 25% for all periods presented. The Company's Board of Directors has
the authority to change the management fee rate at its discretion, but the rate
cannot exceed 25%.
The property/casualty direct written premium of the Erie Insurance Group, upon
which management fee revenue of the Company is calculated, grew 14.8% to
$669,231,901 in the third quarter of 2001 from $582,877,042 for the same period
in 2000.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
For the nine months ended September 30, 2001, written premiums increased 13.9%
to $1,923,218,968 compared to $1,687,965,795 written for the first nine months
of 2000.
Continued improvement in new policy growth drove the gains experienced in the
Group's direct written premium. Policies in force increased an annualized 7.8%
to 3,048,800 at September 30, 2001 from 2,827,390 at September 30, 2000. Policy
retention (the percentage of current Policyholders who have renewed their
policies) was 90.89% and 91.03% for the periods ended September 30, 2001 and
2000, respectively, for all lines of business combined. (see also Note H,
"Segment Information" which contains retention rates by line of business).
Service agreement revenue grew by 8.2% to $7,088,812 for the three months ended
September 30, 2001 from $6,552,886 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 $4,299,884 and $3,828,806 for the
quarters ended September 30, 2001 and 2000, respectively. Also included in
service agreement revenue is service income received from the Exchange as
compensation for the management and administration of voluntary assumed
reinsurance from non-affiliated insurers. The Company receives a service fee of
7.0% of non-affiliated assumed reinsurance premiums. These fees totaled
$2,788,928 and $2,724,080 for the three months ended September 30, 2001 and 2000
respectively, on net voluntary assumed reinsurance premiums.
For the nine months ended September 30, 2001 service agreement revenue increased
21.6% to $20,339,426 from $16,722,381. Service charges increased 33.0% to
$12,032,061 from $9,050,269. Impacting this increase was service charge
increases from $2 to $3 per installment for policies renewing in most states
beginning June of 2000.
The cost of management operations increased 10.7% for the third quarter of 2001
to $119,353,171 from $107,854,662 during the third quarter of 2000. For the nine
months ended September 30, 2001, the cost of management operations grew by 11.3%
to $349,796,546 compared to $314,368,727 for the same period in 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
$84,910,266 for the third quarter of 2001, a 13.3% increase over the $74,975,430
reported in the third quarter of 2000. Commission costs grew more slowly than
the growth in direct premium written in the third quarter 2001 due to lower
accruals for agent contingency awards relative to the third quarter 2000. The
provision for Agent contingency awards totaled $3,825,272 and $4,854,089 for the
quarters ended September 30, 2001 and 2000, respectively. Commissions grew by
12.8% to $244,147,299 from $216,459,163 recorded for the nine months ended
September 30, 2000.
The cost of management operations excluding commission costs, increased 4.8% for
the three months ended September 30, 2001 to $34,442,905 from $32,879,232
recorded in the third quarter of 2000.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Included in these costs are amounts related to the Company's share of
information technology infrastructure expenditures related to the Company's
eCommerce initiative launched earlier this year which totaled $354,748 for the
third quarter 2001. For the nine months ended September 30, 2001, these
infrastructure costs totaled $486,378. These expenditures will continue to be
incurred over the next three years (see "Factors That May Effect Future Results"
section herein).
The gross margin from management operations (net revenue divided by total
revenue) increased to 31.6% in the third quarter of 2001, compared to the gross
margin of 29.2% reported in the third quarter of 2000. For the nine months ended
September 30, 2001, the gross margin from management operations increased to
30.2% from 28.3% for the same period in 2000.
Analysis of Insurance Underwriting Operations
The underwriting loss from the insurance operations of 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, increased during the third quarter of 2001 when
compared to the same period in 2000. The Company's insurance underwriting
operations recorded underwriting losses of $10,588,452 and $2,742,068 in the
third quarters of 2001 and 2000, respectively. The third quarter 2001 loss
includes the Company's 5.5% share of the Erie Insurance Group's estimated
incurred losses from the September 11th terrorist attacks on the World Trade
Center. These losses, net of recoveries under the excess of loss reinsurance
agreement with the Erie Insurance Exchange, totaled $5.8 million before taxes.
After taxes, these losses totaled about $.06 a share.
The Company had an underwriting loss of $15,912,690 for the first nine months of
2001 compared to an underwriting loss of $7,535,065 for the same period in 2000.
Included in the Company's underwriting expenses are the Company's share of
eCommerce initiative expenses totaling $410,443 for the quarter ended September
30, 2001. For the nine months ended September 30, 2001 eCommerce underwriting
expenses were $601,981 (See "Factors That May Effect Future Results" section,
herein). These shared costs will continue to increase as the program develops.
The Erie Insurance Group's reinsurance business has incurred losses estimated at
$150 million due to the September 11th attacks on the World Trade Center. With
respect to the direct business of the Erie Insurance Group, the initial claim
volume is minor with incurred losses amounting to less than $250,000.
The Company's share of these losses, resulting from EIC and EINY's participation
in the intercompany pooling agreement with the Exchange totaled $8,250,000 for
the quarter ended September 30, 2001, before consideration of excess of loss
reinsurance recoveries discussed below.
EIC and ENY 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. This reinsurance treaty is excluded from
the intercompany pooling agreement. The premium paid to the Exchange for the
agreement totaled $1,449,617 and $1,198,522 for the nine months ended September
30, 2001 and 2000 respectively. Recoveries during the third quarter 2001
amounted to $3,058,718, of which $2,410,555 relates directly to the events of
September 11th. The balance of recoveries recorded in the third quarter 2001
relate to the 1999 accident year under the agreement. No amounts were recovered
under this reinsurance agreement for the year 2000.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Loss and loss adjustment expenses were $35,017,107 for the three months ended
September 30, 2001. Excluding the net impact of the September 11th events,
losses and loss adjustment expenses would have increased to $29,177,662 for the
third quarter 2001 compared to $25,216,190 for the third quarter 2000.
The GAAP combined ratio for the Company's property/casualty insurance operations
was 130.5% and 108.8% for the three months ended September 30, 2001 and 2000,
respectively. The GAAP combined ratio increased to 115.8% for the nine months
ended September 30, 2001 compared to a ratio of 108.2% 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. The
higher ratios in 2001 reflect the impact of the September 11th events, as well
as increased losses from the direct business of the Company's property/casualty
subsidiaries, primarily in private passenger automobile, homeowners and
commercial insurance. There were no weather-related catastrophe losses on direct
business of the Erie Insurance Group for the quarter ended September 30, 2001.
Catastrophe losses were $383,387 for the quarter ended September 30, 2000.
Catastrophe losses were $114,023 and $1,137,145 for the nine months ended
September 30, 2001 and 2000, respectively.
Analysis of Investment Operations
Net revenue from investment operations for the third quarter of 2001 decreased
$11,992,259 to $6,994,026. The Company realized net losses on investments in the
third quarter of 2001 of $5,450,356 compared to realized gains on investments of
$3,943,844 in the third quarter of 2000. During the third quarter of 2001 the
equity markets continued to decline sharply. The decline in equity markets was
further exacerbated by the September 11th terrorist attacks. As a result, the
Company took a charge in the third quarter of 2001 to recognize impairment of
certain equity securities during the quarter where the decline in market value
was considered to be other than temporary. The Company's analysis of investments
considers various factors such as the underlying financial condition and future
growth and earnings prospects of the issuer. Management also considers market
conditions and their effect on specific industries. During the third quarter of
2001, certain segments of the technology sector suffered setbacks causing
management to believe declines in the market value of certain holdings in this
segment was other than temporary. Once declines in value are determined to be
other than temporary by management, the security is sold or written down to its
realizable value. Realized losses related to the impairment in market value of
equity securities totaled $5,736,463 for the quarter ended September 30, 2001.
Third quarter impairments were partially offset by $286,107 of realized gains on
securities in the third quarter of 2001.
Equity in earnings of Erie Family Life Insurance Company (EFL) totaled $326,953
in the third quarter 2001 compared to $1,303,442 in the third quarter 2000. This
decline in value of the Company's 21.6 percent share of EFL is related to
similar write downs to investments taken in the third quarter 2001 on EFL's
Statement of Operations.
Net revenue from investment operations for the nine months ended September 30,
2001 declined to $37,921,163 from $59,159,393 for the same period in 2000. This
decrease resulted from the write downs of securities discussed above as well as
a decrease in the equity in earnings of limited partnerships.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Private equity and fixed income limited partnerships realized losses of $39,058
for the nine months ended September 30, 2001 compared to earnings of $2,356,169
for the same period of 2000. Real estate limited partnerships reflected earnings
of $1,317,645 for the nine months ended September 30, 2001 compared to earnings
of $1,783,232 for the same period of 2000.
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
September 30, 2001, the Company's investment portfolio of investment-grade
bonds, common stock, preferred stock and cash and cash equivalents totaled $792
million, or 41.7%, of total assets. These investments provide the liquidity the
Company requires to meet the demands on its funds.
At September 30, 2001, 90.1% of total investments consist of fixed maturities
and equity securities. Mortgage loans and limited partnerships, represented 9.9%
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 September 30, 2001, which
comprise 31.8% of the total limited partnerships, produce a predictable earnings
stream while private equity limited partnerships, which comprise 68.2% of the
total limited partnerships at September 30, 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 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.
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
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
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 due from the Exchange to the Company at September 30, 2001
was $17.6 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. Net cash flows provided by operating activities for the nine months
ended September 30, 2001 and 2000, were $100,586,985 and $96,936,330,
respectively.
Dividends declared and paid to shareholders for the quarters ended September 30,
2001 and 2000, totaled $9,832,321 and $8,787,056, respectively. For the nine
months ended September 30, 2001 dividends declared and paid were $29,506,890
compared to $26,447,305 for the same period ended in 2000. 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 September 30, 2001 of
$7,885,800 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 and limited partnerships in 2001.
At September 30, 2001 and December 31, 2000, the Company's receivables from its
affiliates totaled $650,091,584 and $532,008,287, respectively. These
receivables, primarily due from the Exchange, as a result of the management fee,
expense reimbursements and the intercompany pooling agreement, 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 third quarter of 2001, 151,600
shares were repurchased at a total cost of $5,475,999 or an average price of
$36.12. The Company repurchased 226,181 shares at a total cost of $6,867,918 or
an average price of $30.36 in the third quarter of 2000. During the first nine
months of 2001, 194,200 shares were repurchased at a total cost of $6,686,588 or
an average price of $34.43 compared to 728,888 shares repurchased for the same
period in 2000 at a total cost of $21,835,828 or an average price of $29.26. 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.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
FACTORS THAT MAY EFFECT FUTURE RESULTS
Rate Increases
The Erie Insurance Group has filed for rate increases in the following lines of
business in the following states:
Private passenger auto - Pennsylvania, Maryland, Indiana, North
Carolina, Ohio, Virginia and West Virginia
Commercial auto - Pennsylvania
Workers compensation - Pennsylvania and Maryland
Home protector - Pennsylvania, Indiana, North Carolina and Virginia
The increases were sought to offset growing loss costs in these lines of
business. Rates approved by state regulators will result in an estimated $11.8
million increase in direct written premiums of the Group for the last three
months of 2001 as well as an estimated $22.9 million increase in written premium
for 2002. Rates filed with state regulators currently pending approval could
result in an additional estimated $39.6 million increase in direct written
premiums of the Group for 2002.
Terrorist Actions
The insurance companies owned and managed by the Company are exposed to both
direct 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 reinsurance pooling agreement with the Exchange. The Company's
exposure is somewhat limited because of the excess of loss agreement that is in
place with the Exchange. 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.
Additionally, current and future proposed federal measures might affect the way
the property/casualty industry handles losses from potential future terrorist
actions. These proposals may include the establishment of a federal reinsurance
program for losses from terrorist actions and possible changes to the tax laws
governing the taxation of insurance companies. The insurance companies owned and
managed by the Company have possible exclusions that would arise from future
potential terrorist actions.
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.
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 includes
initiatives to replace property/casualty policy administration systems as well
as customer interaction systems. The program also includes significant
information technology infrastructure expenditures. It is intended to improve
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
service and efficiency, as well as result in increased sales. Total three-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. It is estimated that the after-tax effect on net
income of the Company will be a reduction in earnings per share between $0.07
and $0.09 for 2001, between $0.09 and $0.11 per share in 2002 and between $0.04
and $0.06 per share in 2003.
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 nine months ended September 30, 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, 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.
25
PART II. OTHER INFORMATION
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 September 30, 2001.
Item 11. Statement Regarding Computation of Per Share Earnings:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ------------------------------------
2001 2000 2001 2000
Class A weighted average common shares
outstanding (stated value $.0292) 63,977,939 64,502,951 64,011,614 64,723,967
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 71,345,939 71,870,951 71,379,614 72,091,967
=============== ================= ================== =================
Net income $ 34,430,497 $ 41,192,193 $ 116,345,198 $ 119,895,654
=============== ================= ================== =================
Net income per share $ 0.48 $ 0.57 $ 1.63 $ 1.66
=============== ================= ================== =================
26
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: October 24, 2001 /s/ Stephen A. Milne
--------------------
Stephen A. Milne, President & CEO
/s/ Philip A. Garcia
--------------------
Philip A. Garcia,
Executive Vice President & CFO
27