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, 1999
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-- 65,366,736 shares as of
October 20, 1999.
Class B Common Stock, no par value, with a stated value of
$70.00 per share-- 3,070 shares as of October 20,
1999.
The common stock is the only class of stock the Registrant is presently
authorized to issue.
1
INDEX
ERIE INDEMNITY COMPANY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Financial Position--September 30, 1999 and
December 31, 1998
Consolidated Statements of Operations--Three and nine months ended
September 30, 1999 and 1998
Consolidated Statements of Comprehensive Income--Three and nine months
ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows--Nine months ended
September 30, 1999 and 1998
Notes to Consolidated Financial Statements--September 30, 1999
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
PART I. FINANCIAL INFORMATION
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
September 30, December 31,
ASSETS 1999 1998
----------------- -----------------
(Unaudited)
INVESTMENTS
Fixed Maturities Available-for-Sale at fair value
(amortized cost of $468,818,005 and
$421,101,561, respectively) $ 471,121,281 $ 441,353,427
Equity Securities (cost of $179,481,645 and
$169,976,774, respectively) 206,707,043 202,804,068
Real Estate Mortgage Loans 8,265,809 8,287,129
Other Invested Assets 30,919,610 17,493,496
----------------- -----------------
Total Investments $ 717,013,743 $ 669,938,120
Cash and Cash Equivalents 32,945,494 53,580,043
Accrued Investment Income 8,964,821 7,252,439
Note Receivable from Erie Family Life
Insurance Company 15,000,000 15,000,000
Premiums Receivable from Policyholders 118,288,376 114,695,231
Prepaid Federal Income Tax 0 2,508,908
Reinsurance Recoverables from Erie Insurance
Exchange 407,281,771 381,301,722
Other Receivables from Erie Insurance Exchange
and Affiliates 112,936,234 108,612,264
Reinsurance Recoverable Non-affiliates 945,546 938,894
Deferred Policy Acquisition Costs 11,826,911 10,863,107
Property and Equipment 15,250,185 12,388,650
Equity in Erie Family Life Insurance Company 36,151,686 39,478,746
Other Assets 40,775,193 36,873,922
----------------- -----------------
Total Assets $ 1,517,379,960 $ 1,453,432,046
================= =================
<FN>
See Notes to Consolidated Financial Statements.
</FN>
3
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
September 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
----------------- -----------------
(Unaudited)
LIABILITIES
Unpaid Losses and Loss Adjustment Expenses $ 441,846,800 $ 426,164,578
Unearned Premiums 246,608,685 229,056,597
Accrued Commissions 90,515,461 85,005,699
Accounts Payable and Accrued Expenses 25,084,369 20,252,904
Deferred Income Taxes 8,535,026 17,121,777
Federal Income Tax Payable 1,246,585 0
Dividends Payable 7,919,212 8,099,100
Employee Benefit Obligations 13,688,550 12,508,130
----------------- -----------------
Total Liabilities $ 835,444,688 $ 798,208,785
----------------- -----------------
SHAREHOLDERS' EQUITY
Capital Stock
Class A Common, stated value $.0292 per share;
authorized 74,996,930 shares; issued 67,032,000 shares ;
outstanding 65,595,136 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
Accumulated Other Comprehensive Income 19,493,063 40,178,626
Retained Earnings 692,152,287 605,044,635
----------------- -----------------
Total Contributed Capital and Retained Earnings $ 721,645,350 $ 655,223,261
----------------- -----------------
Treasury Stock (1,436,864 shares repurchased in 1999) 39,710,078 0
----------------- -----------------
Total Shareholders' Equity $ 681,935,272 $ 655,223,261
----------------- -----------------
Total Liabilities and Shareholders' Equity $ 1,517,379,960 $ 1,453,432,046
================= =================
<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
----------------------------------- -----------------------------------
MANAGEMENT OPERATIONS: 1999 1998 1999 1998
Management Fee Revenue $ 135,796,427 $ 129,046,712 $ 395,133,491 $ 376,555,339
Service Agreement Revenue 3,792,303 3,944,646 11,225,977 9,886,891
Other Operating Revenue 318,776 369,086 966,684 1,116,876
----------------- ---------------- ----------------- ----------------
Total Revenue from Management Operations 139,907,506 133,360,444 407,326,152 387,559,106
Cost of Management Operations 97,962,068 93,313,277 290,427,431 274,686,379
----------------- ---------------- ----------------- ----------------
Net Revenue From Management Operations $ 41,945,438 $ 40,047,167 $ 116,898,721 $ 112,872,727
----------------- ---------------- ----------------- ----------------
INSURANCE UNDERWRITING OPERATIONS:
Premiums Earned $ 29,449,004 $ 28,387,446 $ 87,573,069 $ 83,995,073
Losses and Loss Adjustment Expenses Incurred 22,374,731 19,653,955 63,896,239 58,604,908
Policy Acquisition and Other Underwriting
Expenses 8,653,731 8,830,200 24,750,680 24,366,116
----------------- ---------------- ----------------- ----------------
Total Losses and Expenses 31,028,462 28,484,155 88,646,919 82,971,024
----------------- ---------------- ----------------- ----------------
Underwriting (Loss) Gain $ (1,579,458) $ (96,709) $ (1,073,850) $ 1,024,049
----------------- ---------------- ----------------- ----------------
INVESTMENT OPERATIONS:
Equity in Earnings of Erie Family Life
Insurance Company $ 1,456,208 $ 792,289 $ 3,783,675 $ 3,401,333
Net Investment Income 10,904,443 9,824,865 32,303,583 27,900,142
Net Realized Gain on Investments 4,088,931 1,230,011 11,309,953 5,416,377
----------------- ---------------- ----------------- ----------------
Total Revenue from Investment Operations 16,449,582 11,847,165 47,397,211 36,717,852
----------------- ---------------- ----------------- ----------------
Income Before Income Taxes 56,815,562 51,797,623 163,222,082 150,614,628
Provision for Income Taxes 18,390,973 16,101,086 52,164,953 47,748,551
----------------- ---------------- ----------------- ----------------
Net Income $ 38,424,589 $ 35,696,537 $ 111,057,129 $ 102,866,077
================= ================ ================= ================
Net Income per Share $ 0.52 $ 0.48 $ 1.51 $ 1.38
================= ================ ================== ================
Weighted Average Shares Outstanding 73,322,329 74,400,000 73,780,876 74,400,000
================= ================ ================== ================
Dividends Declared per Share:
Class A non-voting Common $ 0.12 $ 0.1075 $ 0.36 $ 0.3225
----------------- ---------------- ------------------ ----------------
Class B Common $ 18.00 $ 16.125 $ 54.00 $ 48.375
----------------- ---------------- ----------------- ----------------
<FN>
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
--------------------------------- ----------------------------------
1999 1998 1999 1998
Net Income $ 38,424,589 $ 35,696,537 $ 111,057,129 $ 102,866,077
---------------- --------------- ---------------- ----------------
Unrealized (Losses) Gains on Securities:
Unrealized Holding (Losses) Gains Arising
During Period (14,571,524) (16,780,584) (20,513,991) 693,271
Less: Reclassification Adjustment for
Gains Included in Net Income 4,088,931 1,230,011 11,309,953 5,416,377
---------------- --------------- ---------------- ----------------
Net Unrealized Holding Losses
Arising During Period $ (18,660,455) $ (18,010,595) $ (31,823,944) $ (4,723,106)
Income Tax Benefit Related to
Unrealized Gains or Losses 6,531,160 6,303,708 11,138,381 1,653,087
---------------- --------------- ---------------- ----------------
Other Comprehensive Loss, Net of Tax $ (12,129,295) $ (11,706,887) $ (20,685,563) $ (3,070,019)
---------------- --------------- ---------------- ----------------
Comprehensive Income $ 26,295,294 $ 23,989,650 $ 90,371,566 $ 99,796,058
================ =============== ================ ================
<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, 1999 September 30, 1998
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 111,057,129 $ 102,866,077
Adjustment to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,361,111 1,512,252
Deferred income tax (benefit)expense (649,247) 1,973,432
Amortization of deferred policy acquisition costs 16,757,832 15,902,016
Realized gain on investments (11,309,953) (5,416,377)
Net amortization of bond premium (discount) 82,988 (100,054)
Undistributed earnings of Erie Family Life (2,771,945) (2,481,579)
Deferred compensation 584,390 462,203
Increase in accrued investment income (1,712,382) (1,918,871)
Increase in receivables (33,903,816) (39,159,997)
Policy acquisition costs deferred (17,721,637) (16,843,061)
Increase in prepaid expenses and other assets (3,735,362) (6,880,040)
Increase in accounts payable and accrued expenses 5,427,496 6,011,782
Increase in accrued commissions 5,509,763 5,903,638
Increase in income taxes payable 3,755,493 3,966,928
Increase in loss reserves 15,682,222 19,538,250
Increase in unearned premiums 17,552,088 20,066,258
------------------- -------------------
Net cash provided by operating activities $ 105,966,170 $ 105,402,857
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities (122,197,234) (68,532,043)
Equity securities (48,471,461) (63,385,866)
Mortgage loans (66,286) 0
Other invested assets (13,219,481) (9,847,958)
Sales/maturities of investments:
Fixed maturities
Maturities and calls 37,969,478 6,393,339
Sales 36,891,489 20,314,279
Equity securities 49,849,204 32,267,890
Mortgage loans 87,800 92,124
Other invested assets 783,778 3,087,762
Purchase of property and equipment (337,762) (340,834)
Purchase of computer software (3,884,884) (2,422,645)
Loans to Agents (2,349,831) (1,452,913)
Collections on Agent loans 2,183,912 1,071,634
------------------- -------------------
Net cash used in investing activities $ (62,761,278) $ (82,755,230)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders $ (24,129,363) $ (21,766,335)
Treasury stock (39,710,078) 0
------------------- -------------------
Net cash used in financing activities $ (63,839,441) $ (21,766,335)
------------------- -------------------
Net (decrease) increase in cash and cash equivalents (20,634,549) 881,292
Cash and cash equivalents at beginning of period 53,580,043 53,148,495
------------------- -------------------
Cash and cash equivalents at end of period $ 32,945,494 $ 54,029,787
=================== ===================
Supplemental disclosures of cash flow information:
Cash paid during the nine months ended September 30, 1999 and 1998 for income
taxes was $46,475,000 and $45,016,115 respectively.
<FN>
See Notes to Consolidated Financial Statements.
</FN>
7
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, which include the
accounts of the Erie Indemnity Company and its' wholly owned subsidiaries Erie
Insurance Company, Erie Insurance Company of New York and Erie Insurance
Property & Casualty Company, have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine-month period ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. 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,
1998.
NOTE B -- EARNINGS PER SHARE
Earnings per share is based on the weighted average number of Class A shares
outstanding giving effect to the conversion of the weighted average number of
Class B shares outstanding at a rate of 2,400 Class A shares for one Class B
share as set out in the Articles of Incorporation. Weighted average equivalent
shares outstanding totaled 73,322,329 for the three months ended September 30,
1999 and 73,780,876 for the nine months ended September 30, 1999. For the three
and nine month periods ended September 30, 1998 the weighted average equivalent
shares outstanding totaled 74,400,000.
NOTE C -- INVESTMENTS
Management considers all fixed maturities and marketable equity securities
available-for-sale. Marketable equity securities consist primarily of common and
nonredeemable preferred stocks while fixed maturities consist of bonds,
notes and redeemable preferred stock. Available-for-sale securities are stated
at fair value, with the unrealized gains and losses, net of 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.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The following is a summary of available-for-sale securities:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
------------- ------------ ------------- -------------
September 30, 1999
Fixed Maturities:
U.S. Treasuries & Government
Agencies $ 11,038 $ 248 $ 40 $ 11,246
States & Political Subdivisions 52,078 1,859 281 53,656
Special Revenue 122,288 3,496 414 125,370
Public Utilities 20,969 41 306 20,704
U.S. Industrial & Miscellaneous 226,885 1,925 4,353 224,457
Foreign Industrial & Miscellaneous 12,649 6 650 12,005
Foreign Governments-Agency 1,991 0 110 1,881
------------- ------------ ------------- -------------
Total Bonds $ 447,898 $ 7,575 $ 6,154 $ 449,319
Redeemable Preferred Stock 20,920 1,184 302 21,802
------------- ------------ ------------- -------------
Total Fixed Maturities $ 468,818 $ 8,759 $ 6,456 $ 471,121
------------- ------------ ------------- -------------
Equity Securities:
Common Stock $ 66,927 $ 39,106 $ 10,334 $ 95,699
Non-Redeemable Preferred Stock 112,555 2,643 4,190 111,008
------------- ------------ ------------- -------------
Total Equity Securities $ 179,482 $ 41,749 $ 14,524 $ 206,707
------------- ------------ ------------- -------------
Total Available-for-Sale Securities $ 648,300 $ 50,508 $ 20,980 $ 677,828
============= ============ ============= =============
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
------------- ------------ ------------- -------------
December 31, 1998
Fixed Maturities:
U.S. Treasuries & Government
Agencies $ 13,018 $ 689 $ 0 $ 13,707
States & Political Subdivisions 48,307 3,293 0 51,600
Special Revenue 132,025 7,215 5 139,235
Public Utilities 13,116 300 0 13,416
U.S. Industrial & Miscellaneous 195,296 9,028 629 203,695
Foreign Industrial & Miscellaneous 5,159 165 86 5,238
Foreign Governments-Agency 1,990 0 181 1,809
------------- ------------ ------------- -------------
Total Bonds $ 408,911 $ 20,690 $ 901 $ 428,700
Redeemable Preferred Stock 12,191 577 115 12,653
------------- ------------ ------------- -------------
Total Fixed Maturities $ 421,102 $ 21,267 $ 1,016 $ 441,353
------------- ------------ ------------- -------------
Equity Securities:
Common Stock $ 60,622 $ 37,626 $ 8,018 $ 90,230
Non-Redeemable Preferred Stock 109,355 4,813 1,594 112,574
------------- ------------ ------------- -------------
Total Equity Securities $ 169,977 $ 42,439 $ 9,612 $ 202,804
------------- ------------ ------------- -------------
Total Available-for-Sale Securities $ 591,079 $ 63,706 $ 10,628 $ 644,157
============= ============ ============= =============
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
The deferred income tax liability related to the change in unrealized gains
(losses) on available-for-sale securities decreased by $7,937,499 at
September 30, 1999 compared to a $5,342,948 increase at December 31, 1998.
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.
Other invested assets (primarily investments in real estate and
private equity limited partnerships) are recorded under the equity method of
accounting.
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. The following
represents summarized financial statement information for EFL:
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
Revenues $ 77,914,775 $ 70,773,994
Benefits and expenses 51,692,881 46,230,129
------------------ ------------------
Income before income taxes 26,221,894 24,543,865
Income taxes 8,729,171 8,818,793
------------------ ------------------
Net income $ 17,492,723 $ 15,725,072
================== ==================
Dividends declared to shareholders $ 6,237,000 $ 5,670,000
================== ==================
Net unrealized appreciation (depreciation) on
investment securities at September 30, net of
deferred taxes $ (2,399,545) $ 18,876,966
================== ==================
NOTE E -- NOTE RECEIVABLE FROM ERIE FAMILY LIFE INSURANCE COMPANY
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. 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.
The Company has accrued $483,750 for related interest in the third quarter
of 1999.
NOTE F -- TREASURY STOCK
In December 1998, the Board of Directors of the Company authorized the
repurchase of up to $70 million of its Class A common stock from January 1, 1999
through December 31, 2001. The Company's repurchase of shares of common stock
are recorded as "Treasury Stock" and result in a reduction of "Shareholders'
Equity." Treasury shares are recorded on the Consolidated Statements of
Financial Position at cost. In the third quarter of 1999, 503,469 shares were
repurchased at a total cost of $14,282,763 or an average price of $28.37. During
the first nine months of 1999, 1,436,864 shares were repurchased at a total cost
of $39,710,078 or an average price of $27.64.
10
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.
RESULTS OF OPERATIONS
Financial Overview
Consolidated net income increased by 7.6% for the third quarter of 1999 to
$38,424,589, or $.52 per share, from $35,696,537 or $.48 per share, for the
third quarter of 1998. Gains made in the Company's management operations and its
investment operations were partially offset by losses experienced in the
Company's insurance underwriting operations as a result of Hurricane Floyd. For
the nine months ended September 30, 1999, net income increased 8.0% to
$111,057,129 or $1.51 per share, from $102,866,077 or $1.38 per share reported
for the same period in 1998.
On an operating basis excluding capital gains and federal income taxes on these
gains, the net operating income increased 1.9% to $35,452,824, or $.48 per share
for the three months ended September 30, 1999 from $34,788,159, or $.47 per
share for the three months ended September 30, 1998. For the nine months ended
September 30, 1999, net operating income increased 4.2% to $103,019,549, or
$1.40 per share, from $98,857,161, or $1.33 per share, for the same period in
1998.
Analysis of Management Operations
Net revenue from the Company's management operations increased 4.7% to
$41,945,438 for the three months ended September 30, 1999 from $40,047,167 for
the same period in 1998. The gross margin from management operations (net
revenue divided by total revenue), was 30.0% in the third quarter of 1999 and
1998. For the nine months ended September 30, 1999 net revenue from management
operations totaled $116,898,721, an increase of 3.6% when compared to the first
nine months of 1998.
Management fee revenue derived from the management operations of the Company,
which serves as attorney-in-fact for the Erie Insurance Exchange (the Exchange),
increased 5.2% to $135,796,427 for the three months ended September 30, 1999
from $129,046,712 for the three months ended September 30, 1998. Management fee
revenue increased 4.9% to $395,133,491 in the first nine months of 1999 compared
to $376,555,339 for the same period in 1998.
The direct and affiliated assumed premiums of the Exchange, upon which
management fee is based, grew by 2.1% to $543,185,707 in the third quarter of
1999 compared to $532,170,808 in the third quarter of 1998. The rate of growth
in management fee revenue was greater than the rate of growth in direct and
affiliated assumed premium of the Exchange because the management fee rate
charged the Exchange beginning January 1, 1999 was 25% compared to a rate of
24.25% charged in the third quarter of 1998. The Company's Board of Directors
has the authority to change the management fee rate at its discretion, but
cannot exceed a rate of 25%. For the year to date period, premiums written
increased 1.8% to $1,580,533,960 compared to $1,552,805,527 written for the
first nine months of 1998. Premium growth continues to be modest due to
previously announced pricing actions in the private passenger auto line of
insurance. Policy growth for the first nine months of 1999 when compared to the
same period in 1998 was strong as policy retention rates and new policy growth
improved. Policies in force increased 4.7% to 2,659,174 for the period ended
September 30, 1999 from 2,539,444 policies in force at September 30, 1998.
Policy retention (the percentage of current policyholders that have renewed
their policy) was 91.3% and 90.6% for the period ended September 30, 1999 and
1998, respectively, for private passenger auto and 90.0% and 89.4% for the nine
months ended September 30, 1999 and 1998, respectively, overall for all lines
combined.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Service agreement revenue totaled $3,792,303 and $3,944,646 for the quarter
ended September 30, 1999 and 1998, respectively. Service agreement revenue is
derived from two sources. First, the Company is reimbursed by the Exchange for
providing extended payment terms on policies written by the Group.
Reimbursements totaled $1,623,263 for the three months ended September 30, 1999
compared to $2,143,513 during the same period in 1998. Second, service income is
received from the Exchange as compensation for the management and administration
of voluntary assumed reinsurance from non-affiliated insurers. The Company
receives a 7.0% service fee on the premiums from this business. These fees
totaled $2,169,040 and $1,801,133 for the three months ended September 30, 1999
and 1998, respectively on net voluntary assumed reinsurance premiums of
$30,986,280 and $25,730,479 in the third quarter of 1999 and 1998, respectively.
For the nine months ended September 30, 1999 service agreement revenue increased
13.5% to $11,225,977 from $9,886,891. Extended payment term reimbursements
decreased 1.8% to $5,068,653 from $5,159,675, while service agreement income
rose by 30.3% to $6,157,324. Net voluntary assumed reinsurance premiums totaled
$88,861,773 and $68,431,663 for the first nine months of 1999 and 1998,
respectively.
The cost of management operations increased 5.0% for the third quarter of 1999
to $97,962,068 from $93,313,277 during the third quarter of 1998. For the nine
months ended September 30, 1999 the cost of management operations grew by 5.7%
to $290,427,431 compared to $274,686,379 for the same period in 1998.
Commissions are the largest component of the cost of management operations. 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. The Agents receive commissions
based on fixed percentage fee schedules with different commission rates by
product line of insurance. Also included in commission expense are the costs of
promotional incentives for Agents and Agent contingency awards. Agent
contingency awards are based upon the underwriting profitability of the
insurance written and serviced by the Agent within the Erie Insurance Group of
companies.
Commission costs totaled $68,592,632 for the third quarter of 1999, a 6.0%
increase over the $64,704,256 reported in the third quarter of 1998. Commissions
grew by 5.8% to $198,660,015 from $187,761,899 recorded for the first nine
months of 1998. Commission costs grew faster than the rate of growth in written
premiums due to increased provisions for agent contingency awards and incentive
awards and an increase in the average commission rate. The provision for agent
contingency awards has increased due to excellent insurance underwriting results
experienced in the past several years while the average commission rate has
increased due to a slight shift in the insurance product mix to more commercial
and personal property lines of business from private passenger auto.
The cost of management operations excluding commission costs, increased $760,415
for the three months ended September 30, 1999 to $29,369,436. Personnel costs,
including salaries, employee benefits, and payroll taxes, are the second largest
component in the cost of operations, after commissions. The Company's personnel
costs totaled $17,730,694 for the three month period ended September 30, 1999,
an increase of $1,095,142 over the same period in 1998.
Analysis of Insurance Underwriting Operations
Insurance underwriting results are produced from the Company's property and
casualty insurance subsidiaries, Erie Insurance Company and Erie Insurance
Company of New York, which together assume a 5.5% share of the underwriting
results of the Erie Insurance Group under an intercompany reinsurance pooling
arrangement. Insurance underwriting operations incurred losses of $1,579,458 in
the third quarter of 1999 compared to a loss of $96,709 in the third quarter of
1998. In the third quarter of 1999, premiums earned increased 3.7% to
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
$29,449,004 compared to $28,387,446 for the same period in 1998. Losses, loss
adjustment expenses and other underwriting expenses incurred increased at a
greater rate than premiums earned, up 8.9% for the third quarter of 1999
amounting to $31,028,462 compared to $28,484,155 for the prior year's third
quarter. Catastrophe losses were $1,342,000 in the third quarter of 1999
compared to $659,000 in the third quarter of 1998. Losses resulting from
Hurricane Floyd were partly responsible for the increased underwriting loss for
the three months ended September 30, 1999. Losses from Hurricane Floyd amounted
to approximately $1.1 million at the end of the third quarter or about $.01 per
share, after federal income taxes. For the nine months ended September 30, 1999,
the Company posted an underwriting loss of $1,073,850 compared to an
underwriting gain of $1,024,049 for the same period in 1998.
The GAAP combined ratio for the Company's property and casualty insurance
operations increased to 105.4% for the three months ended September 30, 1999
compared to a ratio of 100.3% for the same period in 1998. The GAAP combined
ratio, excluding catastrophe losses was 99.7% for the third quarter 1999,
compared to 97.1% for the same period in 1998. On a year to date basis, the GAAP
combined ratio amounted to 101.2% and 98.8% at September 30, 1999 and 1998,
respectively. The GAAP combined ratio represents the ratio of loss, loss
adjustment, acquisition, and other underwriting expenses incurred to premiums
earned.
Analysis of Investment Operations
Total revenue from investment operations for the third quarter of 1999 improved
significantly to $16,449,582 from $11,847,165 in the third quarter of 1998. This
increase was driven by a $2,858,920 increase in realized gains on investments, a
$1,079,578 increase in net investment income and a $663,919 increase in the
earnings recognized from the Company's 21.63% ownership of Erie Family Life
Insurance Company. Total revenue from investment operations for the nine months
ended September 30, 1999 increased 29.1% to $47,397,211 from $36,717,852 for the
same period in 1998. This year to date increase resulted from a $5,893,576
increase in net realized gains on investments and a $4,403,441 increase in net
investment income.
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, 1999, 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 $702 million, or 46.3%, of total
assets. These resources provide the liquidity the Company requires to meet
demands on its funds.
At September 30, 1999, 94.5% of total investments consist of fixed maturities
and equity securities. Mortgage loans and other invested assets represented only
5.5% 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.
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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company's ability to secure enough cash to meet
its contractual obligations and operating needs. Operating cash flows are
generated from management operations as the attorney-in-fact for the Exchange,
the net cash flow from the Erie Insurance Company's 5% and the Erie Insurance
Company of New York's .5% participation in the underwriting results of the
reinsurance pool with the Exchange, and the Company's investment income from
affiliated and non-affiliated investments. With respect to the management fee,
funds are generally received from the Exchange on a premiums collected basis.
The Company pays commissions on premiums collected rather than written premiums.
The Company generates sufficient net positive cash flow from its operations to
fund its commitments, repurchase its common stock, and build its investment
portfolio, thereby increasing future investment returns. The Company also
maintains a high degree of liquidity in its investment portfolio in the form of
readily marketable fixed maturities, common stocks and short-term investments.
Net cash flows provided by operating activities for the nine months ended
September 30, 1999 and 1998, were $105,966,170 and $105,402,857, respectively.
Dividends declared and paid to shareholders in the three months ended September
30, 1999 and 1998, totaled $7,919,212 and $7,255,444, respectively. There are no
regulatory restrictions on the payment of dividends to the Company's
shareholders, although there are state law restrictions on the payment of
dividends from the insurance subsidiaries to the Company. Dividends from
subsidiaries are not material to the Company's cash flow.
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to deferred tax assets and
liabilities resulted in net deferred tax liabilities at September 30, 1999 of
$8,535,026 and at December 31, 1998 of $17,121,777.
The National Association of Insurance Commissioners (NAIC) standard for
measuring the solvency of insurance companies, referred to as Risk Based Capital
(RBC), is a method of measuring the minimum amount of capital appropriate for an
insurance company to support its overall business operations in consideration of
its size and risk profile. The RBC formula is used by state insurance regulators
as an early warning tool to identify, for the purpose of initiating regulatory
action, insurance companies that potentially are inadequately capitalized. In
addition, the formula defines minimum capital standards that will supplement the
current system of low fixed minimum capital and surplus requirements on a
state-by-state basis. At December 31, 1998, the Exchange, its subsidiary
Flagship City Insurance Company and the Company's property/casualty insurance
subsidiaries' financial statements prepared under Statutory Accounting Practices
are all substantially in excess of levels that would require regulatory action.
At September 30, 1999 and December 31, 1998, the Company's receivables from its
affiliates totaled $520,218,005 and $489,913,986, respectively. These
receivables, primarily due from the Exchange, as a result of the management fee,
expense reimbursements and the intercompany reinsurance pool, potentially expose
the Company to concentrations of credit risk.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
STOCK REDEMPTION PLAN
The Erie Indemnity Company Stock Redemption Plan entitles estates of qualified
shareholders to cause the Company to redeem shares of stock of the Company at a
price equal to the fair market value of the stock at time of redemption. The
redemption amount is limited to an aggregation of: (1) an initial amount of $10
million as of December 31, 1995 and (2) beginning in 1996 and annually
thereafter, an additional annual amount as determined by the Board is its sole
discretion, not to exceed 20% of the Company's net income from management
operations during the prior fiscal year. This aggregate amount is reduced by
redemption amounts paid. However, at no time shall the aggregate redemption
limitation exceed 20% of the Company's retained earnings determined as of the
close of the prior year. In addition, the plan limits the repurchase from any
single shareholder's estate to 33% of total share holdings of such shareholder.
On April 27, 1999 the Board approved an increase in the redemption amount of
$19,190,347 to $77,987,383. As of September 30, 1999, no shares have been
redeemed under the Stock Redemption Plan.
STOCK REPURCHASE PLAN
At the December 16, 1998 regular meeting of the Board of Directors of the Erie
Indemnity Company, the Board approved a stock repurchase plan beginning January
1, 1999, under which the Company may repurchase as much as $70 million of its
outstanding Class A common stock through December 31, 2001. The Company may
purchase the shares from time to time in the open market or through privately
negotiated transactions, depending on prevailing market conditions and
alternative uses of the Company's capital. In the third quarter of 1999, 503,469
shares were repurchased at a total cost of $14,282,763 or an average price of
$28.37. During the first nine months of 1999, 1,436,864 shares were repurchased
at a total cost of $39,710,078 or an average price of $27.64.
YEAR 2000 READINESS DISCLOSURE
Erie Indemnity Company and the property/casualty insurance companies it manages
are dependent on electronic processing and information systems, automation
technology and certain outside parties to conduct business. Like all companies
with such dependencies, the Company is continually faced with significant
decisions and technology challenges. Among these challenges is the so-called
"Year 2000 Issue," the inability of many computer systems to recognize dates
beginning with the year 2000 and beyond. The Year 2000 Issue is perhaps more
pervasive than any previous risk management issue faced by businesses of all
types. To effectively manage the risks associated with the Year 2000 Issue,
management has taken measures over the past six years designed to reduce the
Company's potential for business interruption. References to the Company in the
description below, including cost information, pertain to the Company and the
property/casualty insurance companies under its management.
The effect of the Year 2000 Issue cannot be measured exactly with certainty; any
forecasts about the effect of the Year 2000 Issue and remediation projections
are necessarily forward-looking statements and are subject to the risks and
uncertainties noted on page 18.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Company's State of Readiness
Exposure to systems failure is a risk faced by the Company every day. Unlike
these every day risks, the date change to the Year 2000 is predictable. Efforts
to mitigate the Company's exposure through effective identification,
remediation, testing and contingency planning are organized and have been
conducted on all major business processes to minimize the risks.
To assure that the Company effectively addressed this risk, management put in
place a structure that provides oversight of Year 2000 project activities, which
were conducted within the major business units of the Company. Oversight by
Executive and Senior Management was facilitated through a dedicated project
office. This office, (the Y2K Office) worked in consultation with each business
unit to assure consistency and adequacy of risk management activities and to
collect companywide project status and cost information.
Within each business unit, each key business process was evaluated to assure
that underlying systems and components exposed to potential Year 2000 failure
were appropriately identified and addressed. Underlying system components
include internal operating systems (hardware and software), infrastructure
elements including non-information technology components and systems,
communications systems and devices, internally developed mainframe applications,
personal computer hardware and software, external parties and providers and
peripheral devices.
Each underlying component supporting key business processes was identified and
mission critical business processes were prioritized during 1998. Priority was
assigned based on the relative importance of the component to the business
process and based on the importance of the business process relative to other
business processes.
Efforts to remediate non-compliant internal components (principally mainframe
applications) began in the mid-1990's as a routine part of systems development
and maintenance. Remediation of the Company's mainframe applications was
completed and component testing was conducted during the first quarter of 1999.
To supplement component testing and to provide a greater degree of assurance
that business functions will be uninterrupted, Year 2000 simulation testing on
the full insurance operations system was performed during March and April of
1999 and was completed April 30, 1999. Full systems testing included
simultaneous testing of underlying components necessary to the support of key
insurance operations business processes. Testing environments that closely
approximate operating environments for mainframe and LAN-based PC applications
were developed for use during this testing. The results of testing did not
indicate that key business processing applications will encounter any material
problems in the year 2000 due to the inability to recognize dates in the year
2000.
Certain administrative systems (non-insurance operations) which operate in LAN
based PC environments also underwent Year 2000 simulation testing which was
completed at the end of July, 1999. These systems are vendor certified as
compliant; however, management believed the presence of certain customizations
made testing prudent. Test results; however, indicated no material problems.
The Y2K Office conducts ongoing monitoring of key external parties including
utility suppliers, voice and data communications providers and financial
institutions. Where possible and practicable, focused testing has been
accomplished with these parties. No matter has come to our attention concerning
the state of readiness of these key third parties that causes management to
believe any of these parties will be unable to provide continuous service to the
Company.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
During the second quarter of 1999, each business unit developed contingency
plans designed to respond to potential component or total systems failure. The
plans incorporated a variety of back up processes some of which are automated,
some manual. The plans provide that several operating areas accelerate work into
1999 or postpone work into later January 2000, where possible. Provisions for
back up capabilities on services provided by key third parties are also
included in the plans where feasible.
With the approval of the plans by Executive Management in July, 1999, the
Company began carrying out the steps necessary to support the back up plans
during the third quarter. These steps included the orientation and training of
employees integral to the plan as well as the procurement of supplies and
equipment necessary to conduct business in the back up environment, should that
become necessary. Orientation and training is targeted for completion by October
31, 1999.
Cost to Address Year 2000 Issues
Prior to 1998, the Company did not establish a specific budget to address the
Year 2000 Issue. By including Year 2000 changes in the scope of each system
development and maintenance project, the Year 2000 Issue became an extension of
all system projects. It is estimated that through September 30, 1999 costs
incurred for specific Y2K activities including programming, testing, integrated
test planning, contingency plan development and administrative efforts
approximate $2.4 million. This estimate includes the cost of internal efforts
based on salary and benefit rates for personnel engaged in these activities.
Future costs will be incurred as contingency plan testing continues during 1999.
Management believes that the cost to complete contingency planning and
administrative support will approximate $100,000 during the remaining three
months of 1999 based on the project plans for these activities. Costs incurred
to replace non-compliant software and hardware during 1999 have not been and are
not expected to be significant.
Risk of the Company's Year 2000 Issues
The proper functioning of the Company's computer systems and applications is
critical to the continued operations of the Company. By addressing the Year 2000
Issue over several years in the ordinary course of business, the costs and
uncertainty associated with it have been reduced significantly. Management does
not believe that critical business operations of the Company will be adversely
affected to any significant degree by the Year 2000 Issue.
It is possible that certain key external parties will certify their systems as
year 2000 compliant when in fact they are not. The inability of the Company to
respond to uncontrollable circumstances remains a concern. For example, if
numerous key third parties are unable to support the operations of the Company,
operations could be adversely affected. The Company, as part of overall risk
management, has prepared contingency plans to respond, where feasible, to the
possibility of key third party failure(s). Management does not believe that
these scenarios have a greater than remote possibility of occurrence.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Company's Contingency Plans if a Vendor or the Company Fail to Address Year
2000 Issues
This risk described above has been addressed through contingency planning. The
level of contingency planning is commensurate with the relative importance of
the external party to the operations of the Company and the relative risk that
the party will be unable to operate satisfactorily in 2000. Such contingency
plans have been developed and will be tested during the first half of the fourth
quarter 1999.
The statements containing the beliefs of management about the Company's state of
readiness for Year 2000 Issues are necessarily forward-looking statements that
involve risks and uncertainties. These risks and uncertainties include but are
not limited to: human or mechanical errors in correcting Year 2000 Issues;
incorrect or improper (intentional or otherwise) representations by third
parties as to their compliance or remediation efforts; the failure of third
parties to follow through on their remediation efforts; and the inability to
identify and/or locate processing chips that are subject to Year 2000 problems.
"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 "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,
securities markets fluctuations, and technological difficulties and
advancements.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The H.O. Hirt Trusts collectively own 2,340 shares of the Company's Class B
Common Stock, which has the exclusive right to vote in the election of directors
of the Company. Since such shares represent 76.22% of the outstanding share of
the Company Class B Common Stock, the vote of the H.O. Hirt Trusts is sufficient
to determine the outcome of any election of directors. The trustees of the H.O.
Hirt Trusts are F. William Hirt, Chairman of the Board of the Company, a
director of the Company, a beneficial owner of more that 10% of the Company's
outstanding Class A Common Stock and a beneficiary of one of the two H.O. Hirt
Trusts; his sister, Susan Hirt Hagen, a director of the Company, a beneficial
owner of more than 10% of the Company's outstanding Class A Common Stock and a
beneficiary of the other H.O. Hirt Trust and Mellon Bank, N.A. Under the
provisions of the H.O. Hirt Trusts, the shares of the company's Class B Common
Stock held by the H.O. Hirt Trusts are to be voted as directed by a majority of
the three trustees.
Under the Pennsylvania Insurance Company Law and the Company's By-laws, the
candidates for the election as directors of the Company are to be nominated by a
committee consisting solely of persons who are not officers or employees of the
Company or of any entity controlling, controlled by or under common control with
the Company and who are not beneficial owners of a controlling interest in the
voting securities of the Company. On March 11, 1998, the Nominating Committee of
the Company's Board of Directors nominated 12 persons as candidates for election
as directors of the Company at the Company's April 28, 1998 annual meeting of
shareholders. The 12 persons nominated did not include Thomas B. Hagen, the
husband of Susan Hirt Hagen, as a candidate for election as a director of the
Company at such annual meeting. Thomas B. Hagen had served as a director of the
Company since 1979.
On April 2, 1998, Susan Hirt Hagen, a director, filed duplicate petitions in the
Orphans' Court Division of the Court of Common Pleas of Erie County,
Pennsylvania (the "Court") seeking the removal of Mellon Bank N.A. ("Mellon") as
a co-trustee of the H.O. Hirt Trusts. The principal basis for the alleged relief
was the allegation that Mellon, as the owner of an insurance agency, was a
competitor of the Company. Among the relief requested by Susan Hirt Hagen in the
petitions was the grant of a preliminary injunction against Mellon from voting
the Class B Common Stock held by the H.O. Hirt Trusts for the purpose of the
election of directors at the Company's April 28, 1998 Annual Meeting of
Shareholders. Because of the potential substantial harm to the Company if the
preliminary injunction was granted, the Company filed a petition to intervene in
the preliminary injunction proceedings which the Court granted on April 21, 1998
and an order denying Susan Hirt Hagen's request for a preliminary injunction. On
April 28, 1998, the Company's 1998 Annual Meeting of Shareholders was held as
scheduled and each of the candidates for election as a director of the Company
named in the Company's April 1, 1998 proxy statement was elected as a director
of the Company with the affirmative votes of Mellon and F. William Hirt as a
majority of the trustees of the H.O. Hirt Trusts.
On June 3, 1998, the Company, because of its substantial interest in the outcome
of any matter involving a change in Mellon's status as a co-trustee of the H.O.
Hirt Trusts, petitioned the Court to intervene in the trial of the issues
remaining under Susan Hirt Hagen's petitions to remove Mellon as a co-trustee.
On June 24, 1998, the Court denied the Company's petition, and, on July 13,
1998, the Company appealed the Court's denial to the Superior Court of
Pennsylvania. On August 5, 1998, Susan Hirt Hagen, a director of the Company,
filed a motion with the Superior Court of Pennsylvania to quash the Company's
appeal. On August 17, 1998, the Company filed its response to Susan Hirt Hagen's
motion to quash the Company's appeal. On October 19, 1998, the Superior Court of
Pennsylvania denied without prejudice Susan Hirt Hagen's motion to quash the
Company's appeal, and the Superior Court of Pennsylvania established a schedule
for the submission of briefs on the merits of the Company's appeal.
19
Item 1. Legal Proceedings (Continued)
During June and July 1998, substantial discovery took place involving Susan Hirt
Hagen's petitions to remove Mellon as co-trustee. Preceding the scheduled trial
date of July 30, 1998, discussions took place between counsel for Mellon and
counsel for Susan Hirt Hagen concerning a possible basis for settlement of the
pending litigation. These discussions involved the circumstances under which
Mellon might resign as co-trustee of the H.O. Hirt Trusts and the establishment
of procedures pursuant to which a successor trustee would be appointed by the
Court or by agreement of Susan Hirt Hagen and F. William Hirt. After a hearing
conducted on July 30, 1998, the Court by letter advised counsel for all parties
that the Court would not approve the settlement proposal that had been presented
during the July 30, 1998 hearing, and that Mellon was to advise the Court on or
before August 21, 1998 whether a revised settlement proposal would be submitted
or whether the petitions to remove Mellon as co-trustee should be scheduled for
trial by the Court for some later unspecified date.
On August 4, 1998, the Company filed a further petition with the Court seeking
the right to intervene in the proceedings insofar as the proceedings would
entail the possible approval of any settlement of the petitions to remove Mellon
as co-trustee or the appointment of a successor trustee to Mellon. On October
21, 1998, Mellon submitted to the Court a Petition to Resign Pursuant to and
upon the Fulfillment of Certain Conditions Precedent (the "Mellon Petition"). On
October 29, 1998, the Court conducted a hearing at which time, among other
things, the Court heard testimony from two potential successor corporate
trustees to Mellon, each of which potential successors (either Bankers Trust or
Bank Boston), the Court was advised, had the approval of Mellon, Susan Hirt
Hagen and F. William Hirt. During that same hearing, the Court indicated that it
would accept the Mellon Petition and would in the future enter an order
providing for the granting of the Mellon Petition, in conjunction with a further
hearing on the matter of the appointment of a successor corporate co-trustee and
the final Court approval thereof. On November 2, 1998, the Court scheduled such
a further hearing for January 6, 1999.
On January 6, 1999, with the concurrence of all parties, the Court accepted the
resignation of Mellon as co-trustee of the H.O. Trusts and released Mellon from
all further obligations with respect to the H.O. Hirt Trusts. On the same date,
the Court appointed Bankers Trust as the successor co-trustee of the H.O. Hirt
Trusts. On January 26, 1999, the Court assessed $637,500 in costs incurred by
Mellon in connection with the removal litigation against Susan Hirt Hagen.
On March 3, 1999 Bankers Trust filed with the Court a Petition to Accept
Resignation of Trustee (the "Bankers Trust Petition") in which Bankers Trust
requested the Court that its resignation as corporate Co-Trustee of the H. O.
Hirt Trusts be accepted and a successor corporate Trustee be appointed. On March
4, 1999 the Court appointed Judge William R. Cunningham to serve in the Orphans'
Court to preside over the matter of the Bankers Trust Petition, and a hearing
was fixed for May 7, 1999. On or about May 6, 1999 Bankers Trust filed a
petition for Citation to Show Cause why Declaratory Relief Should not be Granted
("Bankers Trust Declaratory Action Petition"). The Bankers Trust Declaratory
Action Petition seeks a determination by the Court whether a provision of the
Pennsylvania Insurance Company Law, Section 40 P.S. ss.991.1405(c)(4) provides
the exclusive means by which persons may be nominated and elected to the Board,
or whether the Trustees have the power to nominate and elect to the Board
persons other than those designated by the Nominating Committee.
On May 7, 1999 the Court issued an Order approving the resignation of Bankers
Trust Company as the corporate Trustee effective upon the entry of an Order
appointing a successor corporate Trustee. Also on May 7, 1999 the Court issued
an Order setting a schedule for the filing and determination of objections to
the Bankers Trust Declaratory Action Petition, indicating that any objections to
the Petition must be filed on or before May 25, 1999; responses to the
objections must be filed on or before June 15, 1999; and the Court set Oral
Argument on any objections and responses on June 29, 1999. Thereafter, if
necessary, a Hearing on the merits of the Declaratory Action Petition would be
held on July 28, 1999.
20
Item 1. Legal Proceedings (Continued)
On June 16, 1999, Susan Hirt Hagen filed with the Court a motion for leave to
amend the response she had filed to the Petition, so as to assert a claim
against the Company in the nature of a request for a permanent injunction
against certain Bylaw amendments adopted by the Company effective June 15, 1999.
On June 29, 1999, the Court heard oral argument on the objections which the
Company and F. William Hirt filed to the Petition. On July 15, 1999, the Court
entered its Order and Opinion which sustained the objections to the Petition and
dismissed without prejudice the Petition, and also dismissed without prejudice
Susan Hirt Hagen's Motion to Amend.
Item 5. Other Information
Election of Directors.
- ----------------------
At its regularly scheduled quarterly Board Meeting held on September 13, 1999,
the Board of Directors of the Company, in accordance with the Company's By-Laws,
increased the number of Directors to 13 from 11 and elected 3 new Directors to
fill the new positions as well as a position created by the retirement of
Director Edmund J. Mehl. Director Mehl had served on the Board of Directors for
30 years and retired under the Board's general retirement policy.
Elected to the Board were Gwendolyn S. King who from 1992-1999 served as Senior
Vice President and Head of Corporate and Public Affairs for the Philadelphia
Electric Company. Prior to that time, from 1989-1992, Ms. King served as a
Commissioner for the U.S. Social Security Administration. Also elected was
Martin J. Lippert who since 1997 has served as the Vice Chairman and Chief
Information Officer of Systems and Technology for Royal Bank of Canada where he
also serves a Executive Vice President. From 1981-1997 Mr. Lippert served in
various management positions with Mellon Bank, Pittsburgh, Pennsylvania. Also
elected was Robert C. Wilburn who has retired as President and Chief Executive
Officer of the Colonial Williamsburg Foundation where he served from 1992 until
his retirement. Prior to that time, he served as President of the Carnegie
Institute Library of Pittsburgh from 1984-1992. Mr. Wilburn is currently an
adjunct professor at Carnegie Mellon University.
Changes to By-Laws - Shareholder Proposals
- ------------------------------------------
A. Deadline for Submitting Shareholder Proposals to the
Company for Inclusion in the Company's Proxy Statement
Relating to the Company's 2000 Annual Meeting of
Shareholders Pursuant to and in Compliance with SEC
Rule 14a-8.
Any shareholder who, in accordance with and subject
to the provisions of Rule 14a-8 of the proxy rules of the Securities and
Exchange Commission, wishes to submit a proposal for inclusion in the
Company's proxy statement for its 2000 Annual Meeting of Shareholders must
deliver such proposal in writing to the Company's Secretary at the Company's
principal executive offices at 100 Erie Insurance Place, Erie, Pennsylvania
16530, not later than December 1, 1999.
B. Requirements Under the Company's By-laws for Advance
Notice to the Company of Shareholder Proposals to be
Presented at the Company's 2000 Annual Meeting of
Shareholders Otherwise than Pursuant to and in Compliance
with SEC Rule 14a-8.
The Company amended Section 2.07 of its By-laws
relating to shareholder proposals. The following description of Section 2.07
as so amended is a materially complete summary of Section 2.07 as so
amended. Reference is made, however, to the complete text of Section 2.07
as included in Exhibit 3.4 to this Form 10-Q Quarterly Report and such
summary is qualified in its entirety by such reference.
21
Pursuant to amended Section 2.07 of the Company's
By-Laws, if a shareholder desires to present at the 2000 Annual Meeting of
Shareholders (i) a proposal relating to candidates for election as directors
by shareholders or (ii) a proposal relating to other than nominations for and
election of directors, otherwise than pursuant to Rule 14a-8 of the proxy rules
of the Securities and Exchange Commission, such shareholder must comply with the
provisions for shareholder proposals set forth in the By-Laws which are
summarized below. Written notice of any such proposal containing the
information required under such By-Law provisions must be delivered
during the period commencing on December 1, 1999 and ending on
December 31, 1999 to the following address:
(i) Written notice of a proposal relating to
candidates for election as directors by shareholders must be delivered in
person, by first class United States mail postage prepaid or by reputable
overnight delivery service to the Nominating Committee of the Board of
Directors of the Company to the attention of the Company's Secretary at the
Company's principal executive offices at 100 Erie Insurance Place, Erie,
Pennsylvania 16530; and
(ii) Written notice of a proposal relating to other
than candidates for election as directors by shareholders must be delivered in
person, by first class United States mail postage prepaid or by reputable
overnight delivery service to the Board of Directors of the Company to the
attention of the Company's Secretary at the Company's principal executive
offices at 100 Erie Insurance Place, Erie, Pennsylvania 16530.
(a) Shareholder Proposals Relating to Candidates for
Election as Directors by Shareholders.
A proposal by a shareholder of a candidate for
election by shareholders as a director at any meeting of shareholders at which
directors are to be elected may be made by notice in writing, delivered in
person or by first class United States mail postage prepaid or by reputable
overnight delivery service, to the Nominating Committee of the Board of
Directors of the Company to the attention of the Secretary of the Company at
the principal office of the Company, within the time limits specified herein.
In the case of an annual meeting of shareholders, any
such written proposal of a candidate must be received by the Nominating
Committee not less than 90 calendar days nor more than 120 calendar days before
the first anniversary of the date on which the Company first mailed its
proxy statement to shareholders for the annual meeting of shareholders in the
immediately preceding year; provided, however, that in the case of an annual
meeting of shareholders that is called for a date which is not within 30
calendar days before or after the first anniversary date of the annual meeting
of shareholders in the immediately preceding year, any such written
proposal must be received by the Company's Board of Directors not less than
five business days after the date the Company shall have mailed notice to its
shareholders that an annual meeting of shareholders will be held or
issued a press release, filed a periodic report with the Securities and Exchange
Commission or otherwise publicly disseminated notice that an annual meeting of
shareholders will be held.
In the case of a special meeting of shareholders, any
such written proposal of a candidate must be received by the Nominating
Committee within five business days after the earlier of the date that the
Company shall have mailed notice to its shareholders that a special
meeting of shareholders will be held or issued a press release, filed a
periodic report with the Securities and Exchange Commission or otherwise
publicly disseminated notice that a special meeting of shareholders will be
held.
Such written proposal of a candidate must set forth
(A) the name and address of the shareholder who intends to make the proposal,
(B) the name, age, business address and, if known, residence address of each
person so proposed, (C) the principal occupation or employment of each person
so proposed for the past five years, (D) the number of shares of capital stock
of the Company beneficially owned within the meaning of Securities and
Exchange Commission Rule 13d-1 by each person so proposed and the earliest date
of acquisition of any such capital stock, (E) a description of any arrangement
or understanding between each person so proposed and the proposing shareholder
with respect to such person's proposed candidate for election as a director by
shareholders and actions to be proposed or taken by such person as a director,
(F) the written consent of each person so proposed to serve as a director if
nominated and elected as a director and (G) such other information regarding
each such person as would be required under the proxy solicitation rules of the
Securities and Exchange Commission if proxies were to be solicited for the
election as a director of each person so proposed.
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If a written proposal of a candidate submitted to the
Nominating Committee fails, in the reasonable judgment of the Nominating
Committee, to contain the information specified in the immediately preceding
paragraph or is otherwise deficient, the Chairperson of the Nominating
Committee shall, as promptly as is practicable under the circumstances,
provide written notice to the shareholder of such failure or deficiency in
the written proposal of nomination and such shareholder shall have five business
days from receipt of such notice to submit a revised written proposal of a
candidate that corrects such failure or deficiency in all material respects.
(b) Shareholder Proposals Relating to Other Than
Candidates for Elections as Directors by Shareholder.
A shareholder of the Company may bring a matter
(other than a proposal to the Nominating Committee of a candidate for election
as a Director by shareholders which is covered by subsection (a) of Section
2.07 of the By-laws) before a meeting of shareholders only if (A) such matter
is a proper matter for shareholder action and such shareholder shall have
provided notice in writing, delivered in person or by first class United States
mail postage prepaid or by reputable overnight delivery service, to the
Secretary of the Company at the principal office of the Company, within the time
limits specified herein or (B) the shareholder complies with the provisions of
Rule 14a-8 under the Securities Exchange Act of 1934 relating to inclusion of
shareholder proposals in the Company's proxy statement.
In the case of an annual meeting of shareholders, any
such written notice of presentation of a matter must be received by the
Secretary of the Company not less than 90 calendar days nor more than 120
calendar days before the first anniversary of the date on which the Company
first mailed its proxy statement to shareholders for the annual meeting of
shareholders in the immediately preceding year; provided, however, that in
the case of an annual meeting of shareholders that is called for a date which is
not within 30 calendar days before or after the first anniversary date of the
annual meeting of shareholders in the immediately preceding year, any such
written notice of presentation of a matter must be received by the Secretary
of the Company within five business days after the earlier of the date the
Company shall have mailed notice to its shareholders that an annual meeting
of shareholders will be held, issued a press release, filed a periodic report
with the Securities and Exchange Commission or otherwise publicly disseminated
notice that an annual meeting of shareholders will be held.
In the case of a special meeting of shareholders, any
such written notice of presentation of a matter must be received by the
Secretary of the Company within five business days after the earlier of the
date the Company shall have mailed notice to its shareholders that a special
meeting of shareholders will be held, issued a press release, filed a periodic
report with the Securities and Exchange Commission or otherwise publicly
disseminated notice that a special meeting of shareholders will be held.
Such written notice of presentation of a matter shall
set forth information regarding such matter equivalent to the information
regarding such matter that would be required under the proxy solicitation
rules of the Securities and Exchange Commission if proxies were solicited
for shareholder consideration of such matter at a meeting of shareholders.
If a written notice of presentation of a matter
submitted to the Company's Board of Directors fails, in the reasonable judgment
of the Company's Board of Directors, to contain the information specified in the
immediately preceding paragraph or is otherwise deficient, the Chairperson
of the Company's Board of Directors shall, as promptly as is practicable under
the circumstances, provide written notice to the shareholder who submitted the
written notice of presentation of a matter of such failure or deficiency in the
written notice of presentation of a matter and such shareholder shall have
five business days from receipt of such notice to submit a revised written
notice of presentation of a matter that corrects such failure or deficiency
in all material respects.
23
Only matters submitted in accordance with the By-Law
provisions summarized herein shall be eligible for presentation of such meeting
of shareholders, and any matter not submitted to the Company's Board of
Directors in accordance with such provisions shall not be considered or acted
upon at such meeting of shareholders.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 3.4 - Amendement and Restatement of Company By-Laws dated August 16,1999
Exhibit 27 - Financial Data Schedule
All other exhibits for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are applicable, and therefore, have been omitted.
The Company did not file any reports on Form 8-K during the three-month period
ended September 30, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Erie Indemnity Company
(Registrant)
Date: October 27, 1999 \s\ Stephen A. Milne
(Stephen A. Milne, President & CEO)
\s\ Philip A. Garcia
(Philip A. Garcia,Executive Vice President & CFO)
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