10-Q 1 0001.txt 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, 2000 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--64,380,413 shares as of October 16, 2000. Class B Common Stock, no par value, with a stated value of $70 per share--3,070 shares as October 16, 2000. 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, 2000 and December 31, 1999 Consolidated Statements of Operations--Three and nine months ended September 30, 2000 and 1999 Consolidated Statements of Comprehensive Income--Three and nine months ended September 30, 2000 and 1999 Consolidated Statements of Cash Flows--Nine months ended September 30, 2000 and 1999 Notes to Consolidated Financial Statements--September 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K Item 11. Statement Regarding Computation of Per Share Earnings SIGNATURES 2 PART I. FINANCIAL INFORMATION ERIE INDEMNITY COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands) September 30, December 31, ASSETS 2000 1999 -------------- ------------- (Unaudited) INVESTMENTS Fixed maturities at fair value (amortized cost of $520,580 and $489,394, respectively) $ 521,510 $ 485,522 Equity securities at fair value (cost of $184,984 and $171,495, respectively) 218,178 215,383 Real estate mortgage loans 6,617 8,230 Limited partnerships 66,308 39,116 ---------- ---------- Total investments $ 812,613 $ 748,251 Cash and cash equivalents 34,392 24,214 Accrued investment income 10,099 7,998 Premiums receivable from Policyholders 163,208 140,868 Prepaid federal income tax 0 2,975 Reinsurance recoverable from Erie Insurance Exchange 397,969 365,217 Note receivable from Erie Family Life Insurance Company 15,000 15,000 Other receivables from Erie Insurance Exchange and affiliates 128,008 105,752 Reinsurance recoverable non-affiliates 846 912 Deferred policy acquisition costs 13,043 11,405 Property and equipment 14,003 15,261 Equity in Erie Family Life Insurance Company 42,096 37,007 Other assets 45,024 43,934 ---------- ---------- Total assets $1,676,301 $1,518,794 ========== ========== (Continued) See Notes to Consolidated Financial Statements.
3 ERIE INDEMNITY COMPANY CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands) September 30, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999 -------------- ----------- (Unaudited) LIABILITIES Unpaid losses and loss adjustment expenses $ 464,282 $ 432,895 Unearned premiums 270,552 237,452 Commissions payable and accrued 97,504 92,874 Accounts payable and accrued expenses 30,368 24,187 Federal income tax payable 1,102 0 Deferred income taxes 12,605 11,805 Dividends payable 8,771 8,853 Employee benefit obligations 15,024 13,129 ---------- ---------- Total liabilities $ 900,208 $ 821,195 ---------- ---------- SHAREHOLDERS' EQUITY Capital Stock Class A common, stated value $.0292 per share; authorized 74,996,930 shares; 67,032,000 shares issued; 64,402,613 and 65,131,501 shares outstanding in 2000 and 1999, respectively $ 1,955 $ 1,955 Class B common, stated value $70 per share; authorized 3,070 shares; 3,070 shares issued and outstanding 215 215 Additional paid-in capital 7,830 7,830 Accumulated other comprehensive income 33,380 26,581 Retained earnings 808,879 715,348 ---------- ---------- Total contributed capital and retained earnings $ 852,259 $ 751,929 Treasury stock, at cost - 2,629,387 shares repurchased through September 30, 2000 and 1,900,499 shares repurchased through December 31, 1999 ( 76,166) ( 54,330) ---------- ---------- Total shareholders' equity $ 776,093 $ 697,599 ---------- ---------- Total liabilities and shareholder's equity $1,676,301 $1,518,794 ========== ========== See Notes to Consolidated Financial Statements.
4 ERIE INDEMNITY COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended September 30 September 30 -------------------------- -------------------------- 2000 1999 2000 1999 (In thousands, except per share data) MANAGEMENT OPERATIONS: Management fee revenue $ 145,719 $ 135,797 $ 421,992 $ 395,134 Service agreement revenue 6,553 3,792 16,722 11,226 ------------ ----------- ----------- ----------- Total revenue from management operations 152,272 139,589 438,714 406,360 Cost of management operations 107,855 97,643 314,369 289,461 ------------ ----------- ----------- ----------- Net revenue from management operations $ 44,417 $ 41,946 $ 124,345 $ 116,899 ------------ ----------- ----------- ----------- INSURANCE UNDERWRITING OPERATIONS: Premiums earned $ 31,194 $ 29,449 $ 91,762 $ 87,573 Losses and loss adjustment expenses incurred 25,216 22,375 73,180 63,896 Policy acquisition and other underwriting expenses 8,720 8,654 26,117 24,751 ------------ ----------- ----------- ----------- Total losses and expenses 33,936 31,029 99,297 88,647 ------------ ----------- ----------- ----------- Underwriting loss ($ 2,742) ($ 1,580) ($ 7,535) ($ 1,074) ------------ ----------- ----------- ----------- INVESTMENT OPERATIONS: Equity in earnings of Erie Family Life Insurance Company $ 1,304 $ 1,456 $ 3,983 $ 3,784 Equity in earnings of limited partnerships 1,722 158 4,139 316 Net investment income 12,016 10,747 35,652 31,987 Net realized gain on investments 3,944 4,089 15,385 11,310 ------------ ----------- ----------- ----------- Net revenue from investment operations 18,986 16,450 59,159 47,397 ------------ ----------- ----------- ----------- Income before income taxes 60,661 56,816 175,969 163,222 Provision for income taxes 19,469 18,391 56,073 52,165 ------------ ----------- ----------- ----------- Net income $ 41,192 $ 38,425 $ 119,896 $ 111,057 ============ =========== =========== =========== Net income per share $ 0.57 $ 0.52 $ 1.66 $ 1.51 ============ =========== =========== =========== Weighted average shares outstanding (Note B) 71,871 73,322 72,092 73,781 ============ =========== =========== =========== Dividends declared per share: Class A non-voting common $ .135 $ 0.12 $ .405 $ 0.36 ------------ ----------- ----------- ----------- Class B common $ 20.25 $ 18.00 $ 60.75 $ 54.00 ------------ ----------- ----------- ----------- See Notes to Consolidated Financial Statements.
5 ERIE INDEMNITY COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended Nine Months Ended September 30 September 30 ------------------------- ------------------------- 2000 1999 2000 1999 (In thousands) Net Income $ 41,192 $ 38,425 $ 119,896 $ 111,057 ---------- ----------- ---------- ----------- Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period 4,518 ( 14,571) 25,845 ( 20,514) Less: reclassification adjustment for gains included in net income 3,944 4,089 15,385 11,310 ---------- ----------- ---------- ----------- Net unrealized holding gains (losses) arising during period $ 574 ($ 18,660) $ 10,460 ($ 31,824) Income tax (expense) benefit related to unrealized gains or losses ( 201) 6,532 ( 3,661) 11,139 ---------- ----------- ---------- ----------- Other comprehensive income (loss), net of tax $ 373 ($ 12,128) $ 6,799 ($ 20,685) ---------- ----------- ---------- ----------- Comprehensive income $ 41,565 $ 26,297 $ 126,695 $ 90,372 ========== =========== ========== ===========
6 ERIE INDEMNITY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended Nine Months Ended September 30, September 30 2000 , 1999 --------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 119,896 $ 111,057 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,007 1,361 Deferred income tax benefit ( 1,674) ( 649) Amortization of deferred policy acquisition costs 15,059 16,758 Realized gain on investments ( 15,385) ( 11,310) Net amortization of bond (discount) premium ( 7) 83 Undistributed earnings of Erie Family Life ( 2,879) ( 2,772) Deferred compensation 783 584 Increase in accrued investment income ( 2,101) ( 1,712) Increase in receivables ( 77,281) ( 33,904) Policy acquisition costs deferred ( 16,697) ( 17,722) Increase in prepaid expenses and other assets ( 1,132) ( 3,735) Increase in accounts payable and accrued expenses 7,293 5,428 Increase in commissions payable and accrued 4,630 5,510 Increase in income taxes payable 4,077 3,755 Increase in loss reserves 31,387 15,682 Increase in unearned premiums 33,100 17,552 ----------- ---------- Net cash provided by operating activities $ 101,076 $ 105,966 CASH FLOWS FROM INVESTING ACTIVITIES Net purchase of investments (Note C) ( 41,906) ( 58,373) Purchase of property and equipment ( 17) ( 338) Purchase of computer software ( 733) ( 3,885) Loans to agents ( 1,252) ( 2,350) Collections on agent loans 1,293 2,184 ----------- ---------- Net cash used in investing activities ($ 42,615) ($ 62,762) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid to shareholders ($ 26,447) ($ 24,129) Treasury stock ( 21,836) ( 39,710) ------------ ---------- Net cash used in financing activities ($ 48,283) ($ 63,839) ------------ ---------- Net increase (decrease) in cash and cash equivalents 10,178 ( 20,635) Cash and cash equivalents at beginning of period 24,214 53,580 ----------- ---------- Cash and cash equivalents at end of period $ 34,392 $ 32,945 =========== ========== Supplemental disclosures of cash flow information: Cash paid during the nine months ended September 30, 2000 and 1999 for income taxes was $53,668 and $46,475 respectively. See Notes to Consolidated Financial Statements.
7 ERIE INDEMNITY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) All amounts are in thousands of dollars except per share data and policy count information 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, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. 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, 1999. In December 1999, the Securities and Exchange Commission issued Statement of Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements" and amended it in March and June 2000 with respect to effective dates. This SAB defines when revenue is realized or realizable and earned. The Company evaluated its revenue recognition practices and found them to be in compliance with the provisions of this SAB. NOTE B -- EARNINGS PER SHARE Earnings per share is based on the weighted average number of Class A shares outstanding (64,723,967 and 66,412,876 at September 30, 2000 and 1999, respectively), giving effect to the conversion of the weighted average number of Class B shares outstanding (3,070 in 2000 and 1999) 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 71,870,951 for the quarter ended September 30, 2000 and 73,322,329 for the comparable period a year ago. For the nine months ended September 30, 2000 weighted average equivalent shares outstanding were 72,091,967 compared to 73,780,876 for the nine months ended September 30, 1999. NOTE C -- INVESTMENTS Management considers all fixed maturities and marketable equity securities available-for-sale. Marketable equity securities consist primarily of common and non-redeemable preferred stocks while fixed maturities consist of bonds, notes and redeemable preferred stock. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of comprehensive income and shareholders' equity. Management determines the appropriate classification of fixed maturities at the time of purchase and reevaluates such designation as of each statement of financial position date. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE C -- INVESTMENTS (Continued) The following is a summary of available-for-sale securities:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------- ------------ ------------- ------------- September 30, 2000 Fixed maturities: ---------------- U.S. treasuries & government agencies $ 11,218 $ 239 $ 49 $ 11,408 States & political subdivisions 48,182 1,202 239 49,145 Special revenue 117,657 3,089 301 120,445 Public utilities 23,260 304 584 22,980 U.S. industrial & miscellaneous 259,858 2,771 6,914 255,715 Foreign 31,078 180 727 30,531 -------------- ------------ ------------- ------------- Total bonds $ 491,253 $ 7,785 $ 8,814 $ 490,224 Redeemable preferred stock 29,327 2,582 623 31,286 -------------- ------------ ------------- ------------- Total fixed maturities $ 520,580 $ 10,367 $ 9,437 $ 521,510 -------------- ------------ ------------- ------------- Equity securities: ----------------- Common stock: U.S. banks, trusts & insurance companies $ 3,180 $ 170 $ 260 $ 3,090 U.S. industrial & miscellaneous 57,921 44,664 7,838 94,747 Foreign 7,830 1,241 774 8,297 Non-redeemable preferred stock: U.S. banks, trusts & insurance companies 23,694 89 1,814 21,969 U.S. industrial & miscellaneous 64,558 2,257 3,862 62,953 Foreign 27,801 263 942 27,122 -------------- ------------ ------------- ------------- Total equity securities $ 184,984 $ 48,684 $ 15,490 $ 218,178 -------------- ------------ ------------- ------------- Total available-for-sale securities $ 705,564 $ 59,051 $ 24,927 $ 739,688 ============== ============ ============= =============
9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE C -- INVESTMENTS (Continued)
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------ ------------- ------------- December 31, 1999 Fixed Maturities: ---------------- U.S. treasuries & government agencies $ 11,029 $ 136 $ 114 $ 11,051 States & political subdivisions 52,064 1,477 423 53,118 Special revenue 120,170 2,487 561 122,096 Public utilities 20,909 17 608 20,318 U.S. industrial & miscellaneous 232,458 1,644 6,926 227,176 Foreign 21,593 83 933 20,743 ------------- ------------ ------------- ------------- Total bonds $ 458,223 $ 5,844 $ 9,565 $ 454,502 Redeemable preferred stock 31,171 657 808 31,020 ------------- ------------ ------------- ------------- Total fixed maturities $ 489,394 $ 6,501 $ 10,373 $ 485,522 ------------- ------------ ------------- ------------- Equity securities: ----------------- Common stock: U.S. banks, trusts & insurance companies $ 3,887 $ 3,631 $ 362 $ 7,156 U.S. industrial & miscellaneous 56,035 51,194 4,097 103,132 Foreign industrial & miscellaneous 4,948 1,000 437 5,511 Non-redeemable preferred stock: U.S. banks, trusts & insurance companies 38,708 615 2,629 36,694 U.S. industrial & miscellaneous 61,109 894 5,341 56,662 Foreign industrial & miscellaneous 6,808 25 605 6,228 ------------- ------------ ------------- ------------- Total equity securities $ 171,495 $ 57,359 $ 13,471 $ 215,383 ------------- ------------ ------------- ------------- Total available-for-sale securities $ 660,889 $ 63,860 $ 23,844 $ 700,905 ============= ============ ============= =============
10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE C -- INVESTMENTS (Continued) The Company participates in a securities lending program whereby certain securities from its portfolio are loaned to other institutions for short periods of time. A fee is paid to the Company by the borrower. Collateral that exceeds the market value of the loaned securities is maintained by the lending agent. The Company's policy is to require collateral equal to 102 percent of the market value of the loaned securities. The Company has an indemnification agreement with the lending agents in the event a borrower becomes insolvent or fails to return securities. At September 30, 2000, the Company had loaned securities with a market value of $18.8 million and secured collateral of $19.3 million. Mortgage loans on commercial real estate are recorded at unpaid balances, adjusted for amortization of premium or discount. A valuation allowance would be provided for impairment in net realizable value based on periodic valuations. Limited partnerships include U.S. domestic and foreign private equity, real estate and fixed income investments. The private equity limited partnerships invest in small-to medium-sized companies. The private equity limited partnerships are carried at estimated market value with unrealized gains and losses reflected in shareholder's equity in accumulated other comprehensive income. Investment income or loss is recognized on the sale of the equity investment. Real estate and fixed income limited partnerships are recorded using the equity method, which approximates the Company's share of the carrying value of the partnership. The components of equity in earnings (loss) of limited partnerships are as follows:
Three Months Ended Nine Months Ended September 30 September 30 2000 1999 2000 1999 --------- --------- ---------- --------- Limited Partnerships - Private Equity $ 1,045 ($ 141) $ 977 ($ 352) LimitedPartnerships - Real Estate 228 257 1,783 661 Limited Partnerships - Fixed Income 449 42 1,379 7 --------- -------- ---------- -------- $ 1,722 $ 158 $ 4,139 $ 316 ========= ======== ========== ========
The following is the detail of net purchase of investments as presented in the Consolidated Statements of Cash Flows: Nine Months Ended Nine Months Ended September 30, September 30, 2000 1999 --------------- ---------------- Purchase of investments: Fixed maturities ($ 118,335) ($ 122,197) Equity securities ( 46,441) ( 48,472) Mortgage loans 0 ( 66) Limited partnerships ( 19,892) ( 13,220) ------------ ------------ Total purchases ($ 184,668) ($ 183,955) ------------ ------------ Sales/maturities of investments: Sales of fixed maturities 47,634 30,301 Calls of fixed maturities 40,830 44,560 Equity securities 46,938 49,849 Mortgage loans 1,614 88 Limited partnerships 5,746 784 ------------ ------------ Total sales/maturities $ 142,762 $ 125,582 ------------ ------------ Net purchase of investments ($ 41,906) ($ 58,373) ============ ============
11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE D -- SUMMARIZED FINANCIAL STATEMENT INFORMATION OF AFFILIATE The Company has a 21.63% investment in Erie Family Life Insurance Company (EFL) and accounts for this investment using the equity method of accounting. The following is summarized financial statement information for EFL:
Nine Months Ended Nine Months Ended September 30, September 30, 2000 1999 --------------- ---------------- Revenues $ 87,208 $ 77,915 Benefits and expenses 59,054 51,693 ------------ ------------ Income before income taxes 28,154 26,222 Income taxes 9,741 8,729 ------------ ------------ Net income $ 18,413 $ 17,493 ============ ============ Comprehensive income (loss) $ 28,631 ($ 11,078) ============ ============ Dividends paid to shareholders $ 4,961 $ 4,536 ============ ============ Net unrealized appreciation (depreciation) on investment securities at September 30, net of deferred taxes $ 7,874 ($ 2,400) ============ ============
NOTE E -- NOTE RECEIVABLE FROM ERIE FAMILY LIFE INSURANCE COMPANY In 1995, EFL issued a surplus note to the Company for $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. EFL paid interest of $484 to the Company in the third quarter of 2000 and 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. At its regular quarterly meeting on March 7, 2000, the Board announced expanded authorization for share repurchases up to an additional $50 million of its outstanding Class A common stock through December 31, 2002. Treasury shares are recorded on the Consolidated Statements of Financial Position at cost. NOTE G -- RECLASSIFICATIONS Certain amounts previously reported in the 1999 financial statements have been reclassified to conform to the current period's presentation. NOTE H -- SEGMENT INFORMATION The Company operates its business as three reportable segments - management operations, property/casualty insurance operations and life insurance operations. The Company's principal operations consist of serving as attorney-in-fact for the Erie Insurance Exchange (Exchange) which constitutes its management operations. The Company's property/casualty insurance operations arise by virtue of a pooling arrangement between the Company's insurance subsidiaries and the Exchange. The Company also has a 21.63% equity interest in EFL which comprises its life insurance operations segment. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE H -- SEGMENT INFORMATION (Continued) Summarized financial information for these operations is presented below. Income amounts include each industry segment's share of investment income and realized gain or loss on investments which are reported in the investment operations segment on the Consolidated Statements of Operations.
Three Months Ended Nine Months Ended September 30 September 30 2000 1999 2000 1999 ------------- -------------- -------------- ------------- Revenue: Management operations $ 165,443 $ 150,459 $ 480,194 $ 437,419 Property/casualty insurance operations 35,705 33,572 105,458 100,127 Life insurance operations 1,304 1,456 3,983 3,784 ------------- -------------- -------------- ------------- Total revenue $ 202,452 $ 185,487 $ 589,635 $ 541,330 ============= ============== ============== ============= Income before income taxes: Management operations $ 57,588 $ 52,817 $ 165,825 $ 147,959 Property/casualty insurance operations 1,769 2,543 6,161 11,479 Life insurance operations 1,304 1,456 3,983 3,784 ------------- -------------- -------------- ------------- Total income before income taxes $ 60,661 $ 56,816 $ 175,969 $ 163,222 ============= ============== ============== ============= Net income: Management operations $ 38,615 $ 35,323 $ 111,167 $ 99,316 Property/casualty insurance operations 1,416 1,724 5,025 8,151 Life insurance operations 1,161 1,378 3,704 3,590 ------------- -------------- -------------- ------------- Net income $ 41,192 $ 38,425 $ 119,896 $ 111,057 ============= ============== ============== =============
As of As of September 30, 2000 December 31, 1999 ----------------- ---------------- Assets: Management operations $ 794,691 $ 723,377 Property/casualty insurance operations 839,514 758,410 Life insurance operations 42,096 37,007 ---------------- -------------- Total assets $ 1,676,301 $ 1,518,794 ================ ==============
The Company is the attorney-in-fact for the Exchange, a reciprocal insurance exchange. The Company earns a management fee for administrative and underwriting services provided to the Exchange and its affiliates. The management fee charged to the Exchange was 25% of the affiliated assumed and direct premiums written by the Exchange for the nine months ended September 30, 2000 and 1999. The following is the Company's management fee revenue on the Consolidated Statements of Operations presented by line of business:
Three Months Ended Nine Months Ended September 30 September 30 2000 1999 2000 1999 -------- -------- -------- -------- Private Passenger Auto $ 83,667 $ 81,631 $240,517 $234,699 Commercial Auto 10,697 9,412 33,174 30,191 Homeowner 25,349 23,102 67,265 60,687 Commercial Multi-Peril 12,309 10,242 37,987 32,371 Worker's Compensation 9,643 7,812 30,948 26,298 All Other Lines of Business 4,054 3,598 12,101 10,888 -------- -------- -------- -------- Total $145,719 $135,797 $421,992 $395,134 ======== ======== ======== ========
13 The following is the detail for growth in policy counts and retention rates for the Erie Insurance Group's property/casualty operations:
Private All other Policy Passenger CML* CML* Worker's Lines of Counts Auto Auto Homeowner Multi-Peril Comp. Business Total -------- ----------- ------ ---------- ------------ -------- ---------- --------- 12/31/99 1,274,869 82,760 917,902 174,085 43,508 196,725 2,689,849 03/31/00 1,287,868 83,534 931,971 178,191 44,235 199,580 2,725,379 06/30/00 1,305,888 85,089 952,325 184,913 45,408 204,412 2,778,035 09/30/00 1,324,104 86,592 971,213 190,120 46,529 208,832 2,827,390 Retention Rates -------- 12/31/99 91.58% 89.27% 90.47% 87.42% 87.59% 86.85% 90.35% 03/31/00 91.83 89.52 90.66 88.08 88.52 87.23 90.45 06/30/00 92.03 89.53 90.89 88.19 88.62 87.57 90.72 09/30/00 92.19 89.90 90.88 88.38 88.67 87.75 91.03 *CML = Commercial
NOTE I -- GEOGRAPHIC EXPANSION On March 7, 2000 the Company announced the Erie Insurance Group's intention to expand its marketing territory into Wisconsin. Wisconsin will be the eleventh state served by the Group, in addition to the District of Colombia. In Wisconsin, the Group intends to write all lines of insurance it currently offers, including auto, home, business, life and annuities. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the historical financial information and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 1999 as filed with the Securities and Exchange Commission on March 23, 2000. OPERATING RESULTS Financial Overview Consolidated net income increased by 7.2% for the third quarter of 2000 to $41,192,193, or $.57 per share, from $38,424,589 or $.52 per share, for the third quarter of 1999. Earnings per share, which were positively impacted by the Company's share repurchase program, rose by 9.4% for the third quarter of 2000. For the nine months ended September 30, 2000, earnings per share increased 10.5% to $1.66 per share, from $1.51 per share reported for the same period in 1999. Improved management and investment operating segments were somewhat offset by increased losses experienced in the Company's insurance underwriting operations. RESULTS OF OPERATIONS Analysis of Management Operations Management fee revenue derived from the management operations of the Company, serving as attorney-in-fact for the Erie Insurance Exchange (the Exchange), increased 7.3% to $145,719,261 for the three months ended September 30, 2000 from $135,796,427 for the three months ended September 30, 1999. Management fee revenue increased 6.8% to $421,991,451 in the first nine months of 2000 compared to $395,133,491 for the same period in 1999 (see Note H, "Segment information") The management fee rate charged to the Exchange was 25% for all periods presented. The Company's Board of Directors has the authority to change the management fee rate at its discretion, but cannot exceed a rate of 25%. The direct and affiliated assumed premiums written of the Exchange, grew by $39,691,335, or 7.3%, to $582,877,042 for the third quarter of 2000 from $543,185,707 in the third quarter of 1999. For the first nine months of 2000 premiums written increased 6.8% to $1,687,965,795 compared to $1,580,533,960 written for the first nine months of 1999. Policy growth for 2000 for the Erie Insurance Group was strong as policy retention rates and new policy growth improved. Policies in force increased 6.3% to 2,827,390 at September 30, 2000 from 2,659,174 at September 30, 1999. Policy retention (the percentage of current Policyholders who have renewed their policies) was 91.0% and 90.3% for the quarters ended September 30, 2000 and 1999, respectively, for all lines of business (see Note H, "Segment information") Service agreement revenue grew by $2,760,583 to $6,552,886 in the third quarter of 2000 from $3,792,303 for the same period in 1999. Included in service agreement revenue are service charges the Company collects from Policyholders for providing extended payment terms on policies written by the Group. Such service charges amounted to $3,828,807 and $1,623,263 for the quarters ended September 30, 2000 and 1999 respectively. During the second quarter of 2000, this charge increased from $2 to $3 per month for policies renewing in most states which accounts for a large portion of the quarterly increase. Also included in service agreement revenue is service income received from the Exchange as compensation for the management and administration of voluntary assumed reinsurance from non-affiliated insurers. The Company receives a service fee of 7.0 percent of non-affiliated assumed reinsurance premiums. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Service fees totaled $2.7 million and $2.2 million for the three months ended September 30, 2000 and 1999 respectively, on net voluntary assumed reinsurance premiums of $38.9 million and $31.0 million for the third quarters of 2000 and 1999, respectively. For the nine months ended September 30, 2000 service agreement revenue increased 49.0% to $16,722,381 from $11,225,977. Service charges increased $3,981,616 to $9,050,269 in 2000 while service agreement income rose by 24.6% to $7,672,112 in 2000. The cost of management operations increased 10.5% for the third quarter of 2000 to $107,854,662 from $97,643,292 during the third quarter of 1999. For the nine months ended September 30, 2000 the cost of management operations grew by 8.6% to $314,368,727 compared to $289,460,747 for the same period in 1999. Commissions to independent Agents are the largest component of the cost of management operations. Included in commission expenses are the cost of scheduled commissions to independent Agents on premiums written as well as promotional incentives for Agents and Agent contingency awards. Agent contingency awards are based upon a three-year average of the underwriting profitability of the direct business written and serviced by the independent Agent within the Erie Insurance Group of companies. Commission costs totaled $74,825,430 for the third quarter of 2000, a 9.1% increase over the $68,592,632 reported in the third quarter of 1999. Commissions grew by 8.9% to $216,264,816 from $198,660,015 recorded for the first nine months of 1999. Commission costs grew faster than the rate of growth in written premiums due to increased provisions for agent contingency awards, changes in the mix of business written and increased costs from special commission contracts used primarily to assist new ERIE agencies get established. The cost of management operations excluding commission costs increased 13.7% for the quarter ended September 30, 2000 to $33,029,232 primarily due to increased information technology expenditures and field sales employee incentive compensation. For the first nine months of 2000, the cost of operations excluding commission costs increased 8.0% to $98,103,911 from $90,800,732 recorded for the same period in 1999. Net revenue from the Company's management operations increased 5.9% to $44,417,485 for the three months ended September 30, 2000 from $41,945,438 for the same period in 1999. For the nine months ended September 30, 2000 net revenue from management operations totaled $124,345,105, an increase of 6.4% when compared to the first nine months of 1999. The gross margin from management operations (net revenue divided by total revenue), of 29.2% in the third quarter of 2000, was slightly less than the gross margin of 30.0% reported in the third quarter of 1999. Analysis of Insurance Underwriting Operations The insurance underwriting operation results of the Company's property/casualty insurance subsidiaries, Erie Insurance Company and Erie Insurance Company of New York, which together assume a 5.5 percent share of the underwriting results of the Erie Insurance Group under an intercompany pooling arrangement, declined during the third quarter of 2000 when compared to the same period in 1999. Earned premiums increased 5.9% to $31,194,440 for the third quarter of 2000 compared to earned premiums of $29,449,004 for the same period in 1999. Total losses and expenses increased 9.4% from $31,028,462 in the third quarter of 1999 to $33,936,508 in the third quarter of 2000. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The result of the growth in premiums earned combined with the increase in loss and related expenses generated an underwriting loss of $2,742,068 for the third quarter of 2000 compared to a loss of $1,579,458 for the third quarter of 1999. The underwriting loss resulted from higher loss ratios experienced in private passenger automobile and in commercial lines, principally worker's compensation and commercial auto lines of business. Catastrophe losses were $316,000 for the third quarter of 2000 compared to $1,342,000 for the same period in 1999. The Company had an underwriting loss of $7,535,065 for the first nine months of 2000 compared to an underwriting loss of $1,073,850 for the same period in 1999. Additional development on losses from catastrophic storms that devastated Europe in December 1999 contributed about $1.7 million in assumed reinsurance losses in the first nine months of 2000. The GAAP combined ratio for the Company's property/casualty insurance operations was 108.8% for the three months ended September 30, 2000 compared to a ratio of 105.4% for the same period in 1999. The GAAP combined ratio increased to 108.2% for the nine months ended September 30, 2000 compared to a ratio of 101.2% for the same period in 1999. The GAAP combined ratio represents the ratio of loss, loss adjustment, acquisition, and other underwriting expenses incurred to premiums earned. Analysis of Investment Operations Net revenue from investment operations for the third quarter of 2000 increased 15.4% to $18,986,285 from $16,449,582 in the third quarter of 1999. This growth was primarily the result of a $1,565,336 increase in equity in earnings of limited partnerships combined with a $1,269,220 increase in net investment income. Earnings recognized from the Company's 21.6% ownership of Erie Family Life Insurance Company declined slightly to $1,303,442 in the third quarter of 2000 from $1,456,208 recorded in the third quarter of 1999. Net revenue from investment operations for the nine months ended September 30, 2000 increased 24.8% to $59,159,393 from $47,397,211 for the same period in 1999. This increase resulted from a $3,665,001 increase in net investment income, a $4,074,858 increase in net realized gains on investments and a $3,823,349 increase in equity in earnings of limited partnerships. FINANCIAL CONDITION Investments The Company's investment strategy takes a long-term perspective emphasizing investment quality, diversification and superior investment returns. Investments are managed on a total return approach that focuses on current income and capital appreciation. The Company's investment strategy also provides for liquidity to meet the short- and long-term commitments of the Company. At September 30, 2000, the Company's investment portfolio of investment-grade bonds, common stock and preferred stock, all of which are readily marketable, totaled $723 million, or 43.2%, of total assets. These investments provide the liquidity the Company requires to meet demands on its funds. At September 30, 2000, 91.0% of total investments consist of fixed maturities and equity securities, while mortgage loans and limited partnerships, represented 9.0% of total investments at that date. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mortgage loans on real estate and limited partnerships have the potential for higher returns, but also carry more risk, including less liquidity and greater uncertainty in the rate of return. The Company has not held or issued derivative financial instruments. The Company's investments are subject to certain risks, including interest rate and price risk. The Company monitors exposure to interest rate risk through periodic reviews of asset and liability positions. Estimates of cash flows and the impact of interest rate fluctuations relating to the investment portfolio are monitored regularly. Price risk is defined as the potential loss in estimated fair value resulting from an adverse change in prices. The Company's objective is to earn competitive relative returns by investing in a diverse portfolio of high-quality, liquid securities. Portfolio characteristics are analyzed regularly and market risk is actively managed through a variety of techniques. Portfolio holdings are diversified across industries and concentrations in any one company or industry are limited by parameters established by management and the Company's Board of Directors. At September 30, 2000, the Company's five largest investments in corporate debt securities totaled $25.5 million, none of which individually exceeded $5.5 million. These investments had a market value of $25.6 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. 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. 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, 2000 and 1999, were $101,075,731 and $105,966,170, respectively. Dividends declared and paid to shareholders for the quarter ended September 30, 2000 and 1999, totaled $8,787,056 and $7,919,212, respectively. Dividends declared and paid for the nine months ended September 30, 2000 were $26,447,305 compared to $24,129,363 for the same period ended in 1999. There are no regulatory restrictions on the payment of dividends to the Company's shareholders, although there are state law restrictions on the payment of dividends from the Company's insurance subsidiaries to the Company. Dividends from subsidiaries are not material to the Company's cash 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, 2000 of $12,605,207 and at December 31, 1999 of $11,805,286. The primary reason for the increase in the deferred tax liability is an increase in unrealized gains in 2000 of $8.1 million resulting in an increased deferred tax liability of $2.8 million. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 1999, the Exchange, its subsidiary Flagship City Insurance Company and the Company's property/casualty insurance subsidiaries' all had Risk Based Capital levels substantially in excess of levels that would require regulatory action. At September 30, 2000 and December 31, 1999, the Company's receivables from its affiliates totaled $525,976,885 and $470,968,903, respectively. These receivables, primarily due from the Exchange, as a result of the management fee, expense reimbursements and the intercompany reinsurance pool, represent a significant concentration of credit risk. Factors That May Effect Future Results On August 10, 2000 the Erie Insurance Group filed for a rate increase in it's private passenger auto insurance rates in Pennsylvania beginning January 1, 2001. This increase was requested to offset increasing loss costs in Pennsylvania private passenger automobile. The overall effect of this filing is an estimated $10.2 million, or 1.2% increase in premium in 2001. This rate increase will provide an additional $2.5 million in annual gross revenue from management operations, assuming no change in the current management fee rate. 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) $10 million and (2) an additional annual amount as determined by the Board in 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. In September 2000 the Company received notice that a qualifying estate wishes to exercise its redemption rights pursuant to the Company's Redemption Plan. In accordance with the terms of the Redemption Plan, the Company is currently preparing a fair market valuation of the block of stock presented to the Company by the estate. The Company estimates the repurchase of shares from the estate, pursuant to the redemption plan, will amount to approximately $30 million. Any payment in redemption of the shares will reduce the redemption amount. As of September 30, 2000, 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. At its regular quarterly meeting on March 7, 2000, the Board announced expanded authorization for share repurchases up to an additional $50 million of its outstanding Class A common stock through December 31, 2002. During the third quarter of 2000, 226,181 shares were repurchased at a total cost of $6,867,918 or an average price of $30.36. The Company repurchased 728,888 shares at a total cost of $21,835,828 or an average price of $29.96 during 2000. 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk is primarily related to fluctuations in prices and interest rates. Quantitative and qualitative disclosures about market risk resulting from changes in prices and interest rates are included in Item 7A. in the Company's 1999 Annual Report on Form 10-K. There have been no material changes in such risks or the Company's periodic reviews of asset and liability positions during the nine months ended September 30, 2000. The information contained in the Investments section of Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference. "Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995: Certain forward-looking statements contained herein involve risks and uncertainties. Many factors could cause future results to differ materially from those discussed. Examples of such factors include variations in catastrophe losses due to changes in weather patterns or other natural causes; changes in insurance regulations or legislation that disadvantage the members of the Group in the marketplace and recession, economic conditions or stock market changes affecting pricing or demand for insurance products or ability to generate investment income. Growth and profitability have been and will be potentially materially affected by these and other factors. 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings On April 24, 2000, the Court issued a preliminary injunction allowing the nominations of candidates for director in addition to those recommended by the Nominating Committee. Reference is made to Item 4 of the Company's Form 10-Q Report for the quarter ended June 30, 2000 for the names of the persons elected as directors. Reference is made to the description contained under this caption in the Company's Form 10-Q Report for the quarter ended June 30, 2000. There have been no material developments in the legal proceedings since the grant of the preliminary injunction. Item 6. Exhibits and Reports on Form 8-K 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 exhibits or reports on Form 8-K during the three month period ended September 30, 2000. Item 11. Statement Regarding Computation of Per Share Earnings:
Three Months Ended Nine Months Ended September 30 September 30 ----------------------------- ----------------------------- 2000 1999 2000 1999 Class A weighed average common shares outstanding (stated value $.0292) 64,502,951 65,954,329 64,723,967 66,412,876 Conversion of Class B shares to class A shares (One share of Class B for 2,400 shares of Class A) 7,368,000 7,368,000 7,368,000 7,368,000 ------------ ------------ ------------ ------------ Total weighted average shares 71,870,951 73,322,329 72,091,967 73,780,876 ============ ============ ============ ============ Net income $ 41,192,193 $ 38,424,589 $119,895,654 $111,057,129 ============ ============ ============ ============ Net income per share $ .57 $ .52 $ 1.66 $ 1.51 ============ ============ ============ ============
21 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 19, 2000 \s\ Stephen A. Milne Stephen A. Milne, President & CEO \s\ Philip A. Garcia Philip A. Garcia, Executive Vice President & CFO