FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 1997
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-- 67,032,000 shares as of August 1,
1997.
Class B Common Stock, no par value, with a stated value of
$70.00 per share-- 3,070 shares as of August 1, 1997.
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--June 30, 1997 and
December 31, 1996
Consolidated Statements of Operations--Three months ended June 30, 1997
and 1996
Consolidated Statements of Cash Flows--Three months ended June 30, 1997
and 1996
Notes to Consolidated Financial Statements--June 30, 1997
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30, December 31,
ASSETS 1997 1996
------------------- -------------
(Unaudited)
INVESTMENTS
Fixed Maturities:
Available-for-Sale (amortized cost of
$309,231,038 and $301,093,212,
respectively) $ 317,742,756 $ 310,175,864
Equity Securities (cost of $136,005,284 and
$116,070,434, respectively) 159,055,657 131,618,139
Real Estate Mortgage Loans 8,314,293 7,293,651
Other Invested Assets 7,531,216 7,010,019
------------------ -----------------
Total Investments $ 492,643,922 $ 456,097,673
Cash and Cash Equivalents 18,094,288 18,719,624
Equity in Erie Family Life
Insurance Company 30,535,687 28,686,137
Accrued Interest and Dividends 5,555,156 5,570,033
Premiums Receivable from Policyholders 103,490,247 103,847,320
Reinsurance Recoverable, Non-affiliates 190,995 163,691
Deferred Policy Acquisition Costs 10,210,873 9,540,998
Receivables from Erie Insurance Exchange
and Affiliates 524,431,358 478,304,267
Note Receivable from Erie Family
Life Insurance Company 15,000,000 15,000,000
Agent Loans 8,126,384 7,945,946
Prepaid Expenses 12,024,275 6,957,026
Property and Equipment 9,640,476 9,841,538
Prepaid Federal Income Taxes 2,050,949 4,056,974
Other Assets 6,255,654 5,907,978
--------------------- ---------------------
Total Assets $ 1,238,250,264 $ 1,150,639,205
===================== =====================
(Continued)
See Notes to Consolidated Financial Statements.
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------------- --------------
(Unaudited)
LIABILITIES
Unpaid Losses and Loss Adjustment Expenses $ 405,531,523 $ 386,425,019
Unearned Premiums 224,150,780 216,938,069
Accounts Payable 6,686,581 6,034,486
Accrued Commissions 81,365,441 75,518,593
Accrued Payroll and Payroll Taxes 6,436,870 5,268,275
Accrued Vacation and Sick Pay 7,516,936 7,435,360
Deferred Compensation 1,756,907 1,587,570
Deferred Income Taxes 4,769,595 2,035,054
Dividends Payable 6,411,787 6,411,788
Benefit Plans Liability 7,140,538 7,226,300
--------------------- ---------------------
Total Liabilities $ 751,766,958 $ 714,880,514
--------------------- ---------------------
SHAREHOLDERS' EQUITY
Capital Stock
Class A Common, stated value $.0292
per share; authorized 74,996,930 shares;
issued and outstanding 67,032,000 shares 1,955,100 1,955,100
Class B Common, stated value $70.00
per share; authorized 3,070 shares;
Issued and outstanding 3,070 shares 214,900 214,900
Additional Paid-In Capital 7,830,000 7,830,000
Net Unrealized Gain on Available-for-Sale
Securities (net of deferred taxes) 22,384,117 17,490,491
Retained Earnings 454,099,189 408,268,200
--------------------- ---------------------
Total Shareholders' Equity $ 486,483,306 $ 435,758,691
--------------------- ---------------------
Total Liabilities and
Shareholders' Equity $ 1,238,250,264 $ 1,150,639,205
===================== =====================
See Notes to Consolidated Financial Statements.
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
-----------------------------------------------------------------------------
MANAGEMENT OPERATIONS: 1997 1996 1997 1996
Management Fee Revenue $ 123,993,772 $ 117,422,334 $ 237,248,101 $ 225,711,056
Service Agreement Revenue 1,056,494 1,165,928 2,328,285 2,431,445
Other Operating Revenue 452,258 308,964 1,061,232 619,331
------------------ ------------------ ----------------- -----------------
Total Revenues from Management Operations 125,502,524 118,897,226 240,637,618 228,761,832
Cost of Management Operations 90,124,134 85,452,651 173,585,669 164,629,301
------------------ ------------------ ----------------- -----------------
Net Revenues From
Management Operations 35,378,390 33,444,575 67,051,949 64,132,531
------------------ ------------------ ----------------- -----------------
INSURANCE UNDERWRITING OPERATIONS:
Premiums Earned 26,888,265 25,007,216 52,738,839 49,559,413
Losses and Loss Adjustment Expenses Incurred 20,327,478 19,242,498 39,225,257 42,813,941
Policy Acquisition and Other
Underwriting Expenses 7,343,702 7,021,831 14,344,410 13,819,741
------------------ ------------------ ----------------- -----------------
Total Losses and Expenses 27,671,180 26,264,329 53,569,667 56,633,682
------------------ ------------------ ----------------- -----------------
Underwriting Loss (782,915) (1,257,113) (830,828 ) (7,074,269)
------------------ ------------------ ----------------- -----------------
INVESTMENT OPERATIONS:
Equity in Earnings of Erie Family
Life Insurance Company 997,955 954,122 1,949,799 1,533,509
Interest and Dividends 7,764,965 5,927,799 15,392,724 11,934,014
Realized Gain on Investments 1,359,760 601,233 2,497,084 1,084,161
------------------ ------------------ ----------------- -----------------
Revenue from Investment Operations 10,122,680 7,483,154 19,839,607 14,551,684
------------------ ------------------ ----------------- -----------------
Income Before Income Taxes 44,718,155 39,670,616 86,060,728 71,609,946
Provision for Income Taxes 14,274,386 13,204,272 27,406,165 21,645,525
------------------ ------------------ ----------------- -----------------
Net Income $ 30,443,769 $ 26,466,344 $ 58,654,563 $ 49,964,421
================== ================== ================= =================
Net Income per Share $ 0.41 $ 0.36 $ 0.79 $ 0.67
================== ================== ================= =================
Dividends Declared per Share:
Class A non-voting Common $ .095 $ 0.0833 $ .19 $ 0.1666
------------------ ------------------ ----------------- -----------------
Class B Common $ 14.25 $ 12.50 $ 28.50 $ 25.00
------------------ ------------------ ----------------- -----------------
See Notes to Consolidated Financial Statements.
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
-------------------- ------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 58,654,563 $ 49,964,421
Adjustment to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 910,963 595,043
Deferred income tax expense 207,211 552,189
Realized gain on investments (2,497,084) (1,084,161 )
Amortization of bond discount (60,032) (127,110 )
Undistributed earnings of Erie Family Life (1,397,946) (766,939 )
Increase (decrease) in deferred compensation 169,337 (333,621 )
Decrease (increase) in accrued interest and dividends 14,877 (643,265 )
Increase in receivables (45,797,322) (8,348,451 )
Increase in policy acquisition costs (669,875) (593,021 )
Decrease (increase) in prepaid expenses and
other assets 254,252 (1,289,452 )
Increase (decrease) in accounts payable and
accrued expenses 1,816,505 (2,660,536 )
Decrease (increase) in prepaid federal income taxes 2,006,025 (861,984 )
Increase in prepaid pension (5,599,520) 0
Increase in accrued commissions 5,846,848 2,930,728
Increase in loss reserves 19,106,504 5,034,142
Increase in unearned premiums 7,212,711 13,433,345
------------------ -----------------
Net cash provided by operating
activities $ 40,178,017 $ 55,801,328
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities (26,360,043) (64,349,206 )
Equity securities (40,312,355) (25,963,817 )
Mortgage loans (1,086,241) (1,968,775 )
Other invested assets (662,382) (2,780,390 )
Sales/maturities of investments:
Fixed maturities 18,325,584 18,566,901
Equity securities 22,808,428 8,595,623
Mortgage loans 65,725 22,481
Other invested assets 0 1,055,491
Net gain on other invested assets 131,846 0
Purchase of property and equipment (39,558) (886,009 )
Purchase of computer software (670,343) (264,164 )
Loans to Agents (744,905) (553,772 )
Collections on Agent loans 564,467 535,675
------------------ -----------------
Net cash used in investing activities $ (27,979,777) $ (67,989,962 )
(Continued)
See Notes to Consolidated Financial Statements.
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
-------------------- ------------------
CASH FLOW FROM FINANCING ACTIVITIES
Dividends paid to shareholders $ (12,823,576) $ (11,248,750 )
--------------------- ---------------------
Net cash used in financing activities (12,823,576) (11,248,750 )
--------------------- ---------------------
Net decrease in cash and cash equivalents (625,336) (23,437,384 )
Cash and cash equivalents at beginning of period 18,719,624 56,856,983
--------------------- --------------------
Cash and cash equivalents at end of period $ 18,094,288 $ 33,419,599
===================== ====================
Supplemental disclosures of cash flow information:
Cash paid during the six months ended June 30, 1997 and 1996 for income taxes
was $25,638,127 and $23,980,834, respectively.
See Notes to Consolidated Financial Statements.
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. For further information, refer to the financial
statements and footnotes thereto included in the Company's Form 10-K for the
year ended December 31, 1996.
NOTE B -- EARNINGS PER SHARE
Earnings per share is based on the weighted average number of Class A shares
outstanding (67,032,000 as retroactively stated in 1996), plus giving effect to
the conversion of the weighted average number of Class B shares outstanding
(3,070 in 1997 and 1996) at a rate of 2,400 Class A shares for one Class B share
as set out in the Articles of Incorporation. Equivalent shares outstanding total
74,400,000.
NOTE C -- INVESTMENTS
Fixed maturities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost. The amortized cost of fixed maturities
classified as held-to-maturity is adjusted for amortization of premiums and
accretion of discounts to maturity. The Company currently holds no
held-to-maturity securities.
Fixed maturities determined by management not to be held-to-maturity and
marketable equity securities are classified as available-for-sale. Marketable
equity securities consist primarily of common and nonredeemable preferred stocks
while fixed maturities consist of bonds and notes. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of tax,
reported as a separate component of 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following is a summary of available-for-sale securities:
Available-for-Sale Securities
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
June 30, 1997
U.S. Government $ 12,000 $ 174 $ 95 $ 12,078
Foreign Governments 1,988 0 17 1,972
Obligations of States
and Political Subdivisions 33,220 1,660 54 34,825
Special Revenue 126,605 5,235 31 131,808
Public Utilities 8,732 124 8 8,849
Industrial and Miscellaneous 126,686 2,388 864 128,211
------------- ------------ ----------- -------------
Total Fixed Maturities $ 309,231 $ 9,581 $ 1,069 $ 317,743
------------- ------------ ----------- -------------
Common Stock $ 48,851 $ 21,813 $ 2,823 $ 67,841
Preferred Stock 87,154 4,129 68 91,215
------------- ------------ ----------- -------------
Total Equity Securities $ 136,005 $ 25,942 $ 2,891 $ 159,056
------------- ------------ ----------- -------------
$ 445,236 $ 35,523 $ 3,960 $ 476,799
============= ============ =========== =============
Available-for-Sale Securities
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
December 31, 1996
U.S. Government $ 12,000 $ 212 $ 72 $ 12,140
Foreign Governments 1,988 25 5 2,007
Obligations of States and
Political Subdivisions 28,127 1,321 40 29,408
Special Revenue 136,950 5,349 90 142,209
Public Utilities 7,238 141 7,380
Industrial and Miscellaneous 114,790 2,835 593 117,032
------------- ------------ ----------- -------------
Total Fixed Maturities $ 301,093 $ 9,883 $ 800 $ 310,176
------------- ------------ ----------- -------------
Common Stock $ 37,003 $ 14,567 $ 1,525 $ 50,045
Preferred Stock 79,067 2,539 33 81,573
------------- ------------ ----------- -------------
Total Equity Securities $ 116,070 $ 17,106 $ 1,558 $ 131,618
------------- ------------ ----------- -------------
$ 417,163 $ 26,989 $ 2,358 $ 441,794
============= ============ =========== =============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
Deferred income taxes increased by $2,527,000 at June 30, 1997 and increased by
$965,000 at December 31, 1996 related to the change in unrealized gains (losses)
on available-for-sale securities.
Mortgage loans on real estate are recorded at unpaid balances, adjusted for
amortization of premium or discount. A valuation allowance is provided for
impairment in net realizable value based on periodic valuations. The change in
the allowance is reflected on the income statement in realized gain (loss) on
investments.
NOTE D -- SUMMARIZED INCOME STATEMENT INFORMATION OF AFFILIATE
The Company has a 21.6% investment in Erie Family Life Insurance Company (EFL)
and accounts for this investment using the equity method. The following
represents summarized income statement information for EFL:
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
------------------- ------------------
Revenues $ 43,588,648 $ 38,951,148
Benefits and expenses 30,005,293 27,734,545
------------------ ------------------
Income before income taxes 13,583,355 11,216,603
Income taxes 4,569,028 4,126,404
------------------ ------------------
Net income $ 9,014,327 $ 7,090,199
================== ==================
Dividends paid to shareholders $ 2,457,004 $ 2,252,252
================== ==================
Net unrealized (depreciation)
appreciation on investment
securities, net of deferred
taxes $ 7,483,409 $ (286,717)
================== ==================
NOTE E -- NOTE RECEIVABLE FROM EFL
On December 29, 1995, EFL issued a surplus note to the Company in return for
cash of $15 million. The note bears an annual interest rate of 6.45% and all
payments of interest and principal of the note may be repaid only out of
unassigned surplus of EFL and are subject to prior approval of the Pennsylvania
Insurance Commissioner. At June 30, 1997, EFL paid the Company interest in the
amount of $483,750.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and related notes found on pages 3 through 10, since they
contain important information that is helpful in evaluating the Company's
operating results and financial condition.
OPERATING RESULTS
Financial Overview
Consolidated net income rose by 15% for the second quarter of 1997 to
$30,443,769, or $.41 per share, from $26,466,344 or $.36 per share, for the
second quarter of 1996. The growth in second quarter net income was driven by
improvement in all the Company's principle operating segments. Gains made in the
Company's management and investment operations were further supported by a
reduction in underwriting losses during the second quarter.
For the six months ended June 30, 1997, consolidated net income increased 17.4%
to $58,654,563 or $.79 per share, from $49,964,421 or $.67 per share earned in
the same period in 1996. Management operations improved as management fee
revenue continued to grow. Insurance underwriting operations improved
considerably from the storm-influenced results experienced in the first half of
1996. Revenue from investment operations also grew at a healthy pace, as the
Company's cash flow was invested for higher returns and increased non-recurring
realized capital gains were recognized during the first half of the year.
RESULTS OF OPERATIONS
Analysis of Management Operations
For the second quarter 1997 management fee revenue derived from the management
operations of the Company, which serves as attorney-in-fact for the Erie
Insurance Exchange (the Exchange), rose 5.6% to $123,993,772 in the three months
ended June 30, 1997 from $117,422,334 for the second quarter 1996. Management
fee revenue increased 5.1% to $237,248,101 in the first six months of 1997
compared to $225,711,056 for the same period in 1996.
The rate of growth in the management fee revenue was the same as the rate of
growth in the direct and affiliated assumed premium written of the Exchange on
which the management fee revenue is based, as the management fee rate charged in
the second quarter of 1997 and 1996 was 24%. The direct and affiliated assumed
premium in the Exchange's core lines of insurance, with the exception of
workers' compensation, grew by 8.1% for the second quarter 1997 versus the same
period in 1996. The Exchange's overall premium growth was negatively influenced
by the rate reduction in Pennsylvania workers' compensation insurance driven by
recent Pennsylvania workers' compensation legislative reforms.
The cost of management operations increased 5.5% to $90,124,134 for the three
months ended June 30, 1997 from $85,452,651 for the same period in 1996. The
cost of management operations excluding commission costs, fell .2% for the three
months ended June 30, 1997 to $29,063,138 from $29,126,159 recorded in the
second quarter of 1996, as management continues to carefully control operating
expenses.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The Company is responsible for the payment of commissions to the independent
Agents who sell insurance products for the Company's subsidiaries and the
Exchange, and its subsidiary, Flagship City Insurance Company, as enumerated in
the subscriber's agreement with the Exchange. The Agents receive commissions
based on fixed percentage fee schedules with different commission rates by line
of insurance. Also included in commission expense are the costs of promotional
incentives for Agents and Agent profit-sharing bonuses. Agent profit-sharing
bonuses are based upon the underwriting profitability of the insurance written
and serviced by the Agent within the Erie Insurance Group of companies.
Commissions are the largest component of the cost of management operations.
The Company's commission costs increased 8.4% to $61,060,995 for the second
quarter of 1997, compared to $56,326,492 in the second quarter of 1996. For the
six months ended June 30, 1997, commission costs increased 8.5% to $116,526,996
from $107,427,883. Commission costs grew faster than the rate of growth in
direct and affiliated assumed written premiums of the Exchange due to increased
provisions for agent bonuses resulting from improved underwriting profitability
in the second quarter of 1997 versus the second quarter of 1996. The growth in
premiums written on a quarterly and year-to-date basis were 5.6% and 6.2%,
respectively.
Personnel costs, including salaries, employee benefits, and payroll taxes, are
the second largest component in cost of operations, after commissions. The
Company's personnel costs, net of those reimbursed by affiliated companies,
totaled $17,578,293 for the three month period ended June 30, 1997, compared to
$17,381,218 for the same period in 1996, an increase of 1.1%. Personnel costs
fell 1.7% to $34,626,735 for the six months ended June 30, 1997 from $35,239,025
for the respective period in 1996.
Net revenues from the Company's management operations rose 5.8% to $35,378,390
for the three months ended June 30, 1997 compared to $33,444,575 for the same
period in 1996. This continued growth in quarterly results contributed to the
4.6% increase in net revenues from management operations for the six months
ended June 30, 1997. The gross margin from management operations (net revenue
divided by total revenue), of 28.2% in the second quarter of 1997, was
consistent with the gross margin reported in the second quarter of 1996.
Analysis of Insurance Operations
The insurance underwriting operations of the Company's wholly-owned
subsidiaries, Erie Insurance Company and Erie Insurance Company of New York,
which share proportionally in the property/ casualty underwriting results of the
Erie Insurance Group, improved during the second quarter of 1997 versus the same
period in 1996. In the second quarter of 1997, premiums earned for the Company's
property/casualty insurance subsidiaries grew 7.5% to $26,888,265 compared to
$25,007,216 for the same period in 1996. Losses, loss adjustment expenses and
other underwriting expenses incurred increased at a lesser rate than premiums
earned; up 5.4% for the second quarter of 1997 amounting to $27,671,180 compared
to $26,264,329 for the prior year's second quarter. The second quarter 1997
underwriting profitability was reduced by the return of first quarter recoveries
under the aggregate excess of loss reinsurance arrangement with the Exchange,
which amounted to $1,262,112. As a result, the underwriting loss reported in the
second quarter of 1997 amounted to $782,915 compared to a loss of $1,257,113
experienced in the second quarter of 1996.
For the six months ended June 30, 1997, the Erie Insurance Company and Erie
Insurance Company of New York's underwriting loss was $830,828 compared to a
loss of $7,074,269 for the same period in 1996. The severe winter weather in the
eastern United States during the first quarter of 1996 was primarily responsible
for the increased level of losses in 1996 relative to 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The GAAP combined ratio for the Company's property/casualty insurance operations
improved to 101.6% for the six months ended June 30, 1997 compared to a ratio of
114.3% for the same period in 1996. There was also improvement in the GAAP
combined ratio during the second quarter of 1997 which was 102.9% down from 105%
for the second quarter of 1996. The GAAP combined ratio is the ratio of loss,
loss adjustment, acquisition, and other underwriting expenses incurred to
premiums earned.
Catastrophes are an inherent risk of the property/casualty insurance business,
which can have a material impact on year-to-year fluctuations in the Company's
property/casualty insurance underwriting operating results. The Company
experienced two such catastrophes during 1996, with the severe winter weather in
the first quarter and Hurricane Fran in the third quarter accounting for $8.1
million of underwriting losses and expenses or approximately $.07 per share,
after federal income taxes. No weather-related catastrophes, that were material
to the financial position of the Company, occurred in the first six months of
1997. The Company continually reviews its methods for estimating its liability
for losses and loss adjustment expenses, which includes an estimate for losses
incurred but not reported. Such liabilities are necessarily based on estimates
and, while management believes the amount is adequate, the ultimate liability
may be in excess of or less than amounts provided.
Analysis of Investment Operations
Revenue from investment operations for the second quarter of 1997 increased by
35.3% to $10,122,680 from $7,483,154 posted in the second quarter of 1996. A 31%
increase in dividend and interest income, $1.4 million of non-recurring realized
capital gains on investments and increased income from Erie Family Life, fueled
the growth in revenues from investment operations in the second quarter of 1997.
Revenue from investment operations for the six months ended June 30, 1997
increased 36.3% to $19,839,607 from $14,551,684 for the same period in 1996. The
Company benefited from its 21.6% investment in an affiliated life insurer, Erie
Family Life Insurance Company (EFL). This investment is accounted for under the
equity method of accounting. Consequently, the Company's investment earnings
were a direct result of EFL's net income of $9,014,327 and $7,090,199 at June
30, 1997 and 1996, respectively. The earnings recognized from the investment in
EFL increased to $1,949,799 for the six months ended June 30, 1997 from
$1,533,509 for the same period in 1996.
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 investments are also liquid in order to meet
the short- and long-term commitments of the Company. At June 30, 1997, the
Company's investment portfolio of investment-grade bonds, common stock and
preferred stock, all of which are readily marketable, and cash and short-term
investments, totaled $495 million, or 40%, of total assets. These resources
provide the liquidity the Company requires to meet demands on its funds.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The total investments of the Company consist of investments in fixed maturities,
common stock, preferred stock, real estate mortgage loans and other invested
assets. At June 30, 1997, 96.8% of total investments were invested in fixed
maturities and equity securities. Mortgage loans and other invested assets
represented only 3.2% of total investments at that date. Mortgage loans and real
estate investments have the potential for higher returns, but also carry more
risk, including less liquidity and greater uncertainty in the rate of return.
Consequently, these investments have been kept to a minimum by the Company.
The Company's investments are subject to certain risks, including interest rate
and reinvestment risk. Fixed maturity and preferred stock security values
generally fluctuate inversely with movements in interest rates. The Company's
corporate and municipal bond investments may contain call and sinking fund
features which may result in early redemptions. Declines in interest rates could
cause early redemptions or prepayments which could require the Company to
reinvest at lower rates.
At June 30, 1997, the Company's five largest investments in corporate debt
securities totaled $19.1 million, none of which individually exceeded $5
million. These investments had a market value of $20 million.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company's ability to secure enough cash to meet
its contractual obligations and operating needs. The Company's major sources of
funds from operations are the net cash flow generated from management operations
as the attorney-in-fact for the Exchange, the net cash flow from the Erie
Insurance Company's 5% and the Erie Insurance Company of New York's .5%
participation in the underwriting results of the reinsurance pool with the
Exchange, and the Company's investment income from affiliated and non-affiliated
investments. With respect to the management fee cash flow, funds are generally
released from the Exchange to the Company on a premiums collected basis, as the
Company incurs commission expense on premiums collected rather than written
premiums. The Company generates sufficient net positive cash flow from its
operations which is used to fund its commitments and to build its investment
portfolio, thereby increasing future investment returns. The Company also
maintains a high degree of liquidity in its investment portfolio in the form of
readily marketable fixed maturities, common stocks and short-term investments.
The Company's consolidated statements of cash flows indicate that net cash flows
provided by operating activities for the six months ended June 30, 1997 and
1996, were $40,178,017 and $55,801,328 respectively. Those statements also
classify the other sources and uses of cash by investing activities and
financing activities.
Dividends declared to shareholders in the three months ended June 30, 1997 and
1996, totaled $6,411,787 and $5,622,141, respectively. There are state law
restrictions on the payment of dividends from the insurance subsidiaries to the
Company. No dividends were paid to the Company from its property/casualty
insurance subsidiaries during the first or second quarter of 1997.
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to deferred tax assets and
liabilities resulted in net deferred tax liabilities at June 30, 1997 of
$4,769,595 and at December 31, 1996 of $2,035,054.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The Company's property/casualty insurance subsidiaries enjoy a strong capital
position which is demonstrated in their risk-based capital ratios calculated
using the National Association of Insurance Commissioners (NAIC) formula at
December 31, 1996. Such calculations indicated that the Company's
property/casualty insurance subsidiaries' Total Adjusted Capital was
substantially above the Authorized Control Level Risk-Based Capital requirements
of the NAIC since their ratios are all in excess of three to one (3:1) at
December 31, 1996.
At June 30, 1997 and December 31, 1996, the Company's receivables from its
affiliates totaled $524,431,358 and $478,304,267, respectively. These
receivables, primarily due from the Exchange, are a result of the
attorney-in-fact management fee, expense reimbursements and the intercompany
reinsurance pool and potentially expose the Company to concentrations of credit
risk.
OTHER MATTERS
Retirement of Chief Financial Officer
Thomas M. Sider, executive vice president and chief financial officer of the
Erie Insurance Group retired from the Company effective June 30, 1997 after 29
years of service. Mr. Sider leaves the company in a position of superior
financial strength and will continue on as an advisor to the Company until his
replacement is named.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995: Statements contained herein expressing the beliefs of management such as
those contained in the "Results of Operations - Analysis of Insurance
Operations", "Financial Condition - Investments", and the "Liquidity and Capital
Resources" sections hereof, and the other statements which are not historical
facts contained in this report are forward looking statements that involve risks
and uncertainties. These risks and uncertainties include but are not limited to:
legislative, judicial, and regulatory changes, the impact of competitive
products and pricing, product development, geographic spread of risk, weather
and weather-related events, other types of catastrophic events, fluctuations of
securities markets, and technological difficulties and advancements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months ended
June 30, 1997.
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: August 6, 1997 /s/ Stephen A. Milne
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Stephen A. Milne, President & CEO
/s/ Philip A. Garcia
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Philip A. Garcia, Senior Vice
President & Controller