FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
(NO FEE REQUIRED)
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[NO FEE REQUIRED]
For the transition period from to
Commission File Number 0-24000
ERIE INDEMNITY COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0466020
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 Erie Insurance Place, Erie, Pennsylvania 16530
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (814) 870-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, stated value $.0292 per share
Class B Common Stock, stated value $70 per share
(Title of class)
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 period 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock of non-affiliates: There is no active
market for the Class B voting stock and no Class B voting stock has been sold in
the last year upon which a price could be established.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 63,813,523 Class A shares and
3,070 Class B shares of Common Stock outstanding on February 28, 2002.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 2001 (the "Annual Report") are incorporated by
reference into Parts I, II and IV of this Form 10-K Report.
2. Portions of the Registrant's Proxy Statement relating to the Annual Meeting
of Shareholders to be held April 30, 2002 are incorporated by reference
into Parts I and III of this Form 10-K Report.
1
INDEX
PART ITEM NUMBER AND CAPTION PAGE
----- ----------------------- ----
I Item 1. Business 3
I Item 2. Properties 14
I Item 3. Legal Proceedings 14
I Item 4. Submission of Matters to a
Vote of Security Holders 14
II Item 5. Market for Registrant's Common Stock
and Related Shareholder Matters 15
II Item 6. Selected Consolidated Financial Data 15
II Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16
II Item 7a. Quantitative and Qualitative Disclosure
about Market Risk 16
II Item 8. Financial Statements and Supplementary
Data 16
II Item 9. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosures 16
III Item 10. Directors and Executive Officers
of the Registrant 17
III Item 11. Executive Compensation 23
III Item 12. Security Ownership of Certain
Beneficial Owners and Management 23
III Item 13. Certain Relationships and Related
Transactions 23
IV Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 24
2
PART I
Item 1. Business
Erie Indemnity Company (the "Company") is a Pennsylvania
corporation formed in 1925 to be the attorney-in-fact for Erie Insurance
Exchange (the "Exchange"), a Pennsylvania-domiciled reciprocal insurance
exchange. The Company's principal business activity consists of management of
the affairs of the Exchange with fees from the Exchange accounting for
approximately 78% of the Company's consolidated revenues. The Company also
participates in the property/casualty insurance business through its three
wholly owned subsidiaries, Erie Insurance Company ("Erie Insurance Co."), Erie
Insurance Company of New York ("Erie NY") and Erie Insurance Property and
Casualty Company ("Erie P&C") and through its management of the Flagship City
Insurance Company ("Flagship"), a subsidiary of the Exchange. The Company and
Exchange also own a 21.6% and 53.5% common stock interest, respectively, in Erie
Family Life Insurance Company ("EFL"), an affiliated life insurance company.
Together with the Exchange, the Company and its subsidiaries and affiliates
operate collectively under the name Erie Insurance Group("The ERIE").
The ERIE is a regional insurance group that underwrites a broad
line of personal and commercial coverages. Insurance products are marketed
primarily in the Mid-Atlantic and Northeast regions through approximately 7,400
independent agents comprising approximately 1,600 insurance agencies. The
property/casualty insurers managed by the Company are licensed to do business in
sixteen states and in the District of Columbia and at December 31, 2001,
operated in eleven states and the District of Columbia. Branch offices are
maintained throughout the eleven contiguous states in which the Company does
business.
As of December 31, 2001, the Company had 3,668 full-time
employees, of which 1,808 provide claims specific services exclusively for the
property/casualty insurance companies of The ERIE and 125 perform general
services exclusively for EFL. Both the Exchange and EFL reimburse the Company
monthly for the cost of these services. None of the Company's employees is
covered by a collective bargaining agreement. The Company believes that its
relationship with its employees is good.
Erie P&C, Flagship, Erie Insurance Co. and Erie NY participate in
an intercompany pooling agreement with the Exchange. Under the pooling agreement
all property/casualty reinsurance business of the Group is ceded to the
Exchange. The pooling agreement provides for the Exchange to assume all premiums
and losses, including related asset and liability amounts, from all
property/casualty affiliates of The ERIE. This pooling agreement further
provides for Erie Insurance Co. and Erie NY to share proportionately through
retrocession in the results of all of The ERIE's non-affiliated
property/casualty insurance operations. Erie Insurance Co.'s and Erie NY's
proportionate share of the reinsurance pool are 5.0 percent and 0.5 percent,
respectively. An excess of loss reinsurance agreement between the Exchange, Erie
Insurance Co. and Erie NY limits the amount of sustained ultimate net losses in
any applicable accident year for the Erie Insurance Co. and Erie NY. The excess
of loss reinsurance agreement is excluded from the pooling arrangement.
Information About Business Segments
Reference is made to Note 15 of the "Notes to the Consolidated
Financial Statements" included in the Annual Report, page 46 for information as
to total revenue and net income attributable to the two business segments
(management operations and property/casualty insurance operations) in which the
Company is engaged.
3
Management Operations
For services performed in its role as attorney-in-fact for the
Policyholders of the Exchange, the Company charges the Exchange a management fee
calculated as a percentage of the affiliated assumed (Erie Insurance Co., Erie
NY, Erie P&C and Flagship) and direct premiums written by the Exchange. The
management fee is compensation for: (a) acting as attorney-in-fact for the
Exchange, (b) managing the business and affairs of the Exchange, and (c) paying
certain general administrative expenses not part of the settlement of losses or
the management of investments.
The Company's Board of Directors may change the management fee at
its discretion. However, the maximum fee level which can be charged the
Exchange, is limited by the agreement between the Exchange and the Company (or
its property/casualty affiliates), to 25 percent of the affiliated assumed and
direct written premium. The Board considers several factors in determining the
management fee rate, including the relative financial position of the Exchange
and the Company and the long-term capital needs of the Exchange to ensure its
continued growth, competitiveness, and superior financial strength, which
ultimately benefits The ERIE. The management fee rate charged the Exchange was
25 percent from 1999 to 2001. In December 2001, the Board voted to maintain the
25 percent management fee rate for all of 2002.
All premiums collected, less the management fee paid to the
Company, are retained by the Exchange for the purpose of paying losses, loss
adjustment expenses, investment expenses and other miscellaneous expenses
including insurance-related taxes, licenses and fees, certain information
technology costs covered under a technology cost-sharing agreement, and for
other purposes that are to the benefit of the policyholders.
The Company receives a service agreement fee from the Exchange as
compensation for the management and administration of voluntary assumed
reinsurance business from non-affiliated insurers. The fee of 7% of voluntary
reinsurance premiums assumed from non-affiliated insurers is compensation for
accounting, underwriting and operating expenses in connection with the
administration of this business.
The Company also receives service charges from the Exchange for
fees collected from policyholders for providing extended payment terms on
policies written by the insurers managed by the Company. These charges, as well
as the service agreement fee described above are included in service agreement
revenue in the Consolidated Statements of Operations.
4
Property/Casualty Insurance Operations
Industry
One of the distinguishing features of the property/casualty
insurance industry in general is that its products are priced before its costs
are known, as premium rates are generally determined before losses are reported.
Current prices must be established from forecasts of the ultimate costs expected
to arise from exposures underwritten during the coverage period when the rates
are applied. This unique pricing environment affects the financial statements
primarily through the loss reserves. Changes in statutory, "regulatory" and case
law can significantly affect the liabilities associated with known risks after
the insurance contract is in place. Property/casualty insurance companies'
ability to increase prices in response to declines in profitability are limited
by the large number of competitors and the similarity of products offered, as
well as regulatory constraints.
The profitability of the property/casualty insurance business can
be influenced by many external factors some of which include rate competition,
the severity and frequency of claims, terrorist actions, natural disasters,
state regulation of premium rates, and other areas of competition, defaults of
reinsurers, investment market conditions, general business conditions, court
decisions that define and may expand the extent of coverage and the amount of
compensation due for injuries and losses.
Inflation also can affect the loss costs of property/casualty
insurers and, as a consequence, insurance rates. Insurance premiums are
established before losses and loss adjustment expenses and the extent to which
inflation may impact such expenses, are known. Consequently, in establishing
premium rates, the Company attempts to anticipate the potential impact of
inflation.
Lines of Business
The property/casualty insurers managed by the Company underwrite a
broad range of insurance for risks. In 2001, personal lines comprised 71.8% of
direct and affiliated assumed premium revenue while commercial lines constituted
the remaining 28.2%. The core products in the personal lines are private
passenger automobile (75.2%) and homeowners (22.3%) while the core commercial
lines consist principally of multi-peril (37.0%), automobile (30.3%) and
workers' compensation (29.2%).
See "Selected Segment Information" contained on page 28 of the
Annual Report for the distribution of direct premiums written by The ERIE.
Reinsurance
Reference is made to Note 12 of the "Notes to Consolidated Financial
Statements" contained in the Annual Report for the year ended December 31, 2001,
page 44 through 45 incorporated herein by reference, for a complete discussion
of reinsurance transactions.
5
Combined Ratios
The combined ratio is a standard industry measurement of the
results of property/casualty insurance underwriting operations. The statutory
combined ratio is the sum of the ratio of incurred losses and loss adjustment
expenses to net premiums earned ("loss ratio"), the ratio of underwriting
expenses incurred to net premiums written ("expense ratio") and, the ratio of
dividends to policyholders to net premiums earned ("dividend ratio"). The
generally accepted accounting principles ("GAAP") combined ratio is calculated
in the same manner except that it is based on GAAP reported amounts and the
denominator for each component is net premiums earned. A combined ratio under
100% generally indicates an underwriting profit; a combined ratio over 100%
generally indicates an underwriting loss before contemplation of the time value
of money. Investment income, federal income taxes and other non-underwriting
income or expense are not reflected in the combined ratio. The profitability of
The ERIE is a function of income and expense from both its underwriting and
investment operations.
The ratios shown in the table below for the Company's
property/casualty insurance subsidiaries Erie Insurance Co. and Erie NY, are
prepared in accordance with GAAP and with the National Association of Insurance
Commissioners (NAIC) Codified Statutory Accounting Practices ("SAP"). The NAIC
Codified SAP contain a provision allowing for prescribed or permitted accounting
practices to be determined by each states' insurance commissioner. Accordingly,
such discretion will continue to allow prescribed or permitted accounting
practices that may differ from state to state.
Combined Ratios
Year Ended December 31,
2001 2000 1999
------ ------ ------
GAAP Combined Ratio 114.9% 108.4% 103.0%
===== ===== =====
Statutory operating ratios:
Loss ratio 84.5 80.1 74.6
Expense and dividend ratio 30.1 28.2 28.2
----- ----- -----
Statutory Combined Ratio 114.6% 108.3% 102.8%
===== ===== =====
Increased loss severity in the Company's private passenger automobile
and workers' compensation lines of business, combined with unaffiliated assumed
voluntary reinsurance losses from the September 11th terrorists attack on the
World Trade Center, contributed to the increased loss ratio in 2001 compared to
2000. The 2001 expense and dividend ratio increased in 2001 partly as a result
of the Company's share of expenses related to the eCommerce initiative, which
totaled $1,314,734.
Seasonal Factors
The Company's management fee is earned when premiums are written.
Historically, due to policy renewal and sales patterns, writings are strongest
in the second and third quarters of the calendar year. While loss and loss
adjustment expenses are not entirely predictable, historically such costs have
been greater during the third and fourth quarters, influenced by the weather in
the geographic regions where the Company and affiliated property/casualty
insurers operate.
Financial Condition-Investments
The Company's investment strategy takes a long-term perspective
emphasizing investment quality, diversification and investment returns providing
6
for liquidity to meet the short and long-term commitments of the Company.
Investments are managed on a total return approach that focuses on current
income and capital appreciation. The Company's investment portfolio, at market
value, increased to $840,967,085 at December 31, 2001, which represents 43.4% of
total assets. Investment income reflected on the Consolidated Statements of
Operations is affected by shifts in the types of investments in the portfolio,
changes in interest rates and other factors. Net investment income, was
$49,883,896 in 2001 compared to $48,400,343 in 2000, and $43,344,356 in 1999.
The Company reviews the investment portfolio to evaluate positions
that might incur other-than-temporary declines in value. For all investment
holdings, general economic conditions and/or conditions specifically affecting
the underlying issuer or its industry are considered in evaluating impairment in
value. In addition to specific factors, the primary factors considered in the
Company's review of investment valuation are the length of time the market value
is below cost and the amount the market value is below cost.
If the Company's policy for determining the recognition of
impaired positions were different, the Company's Consolidated Statements of
Financial Position and results of operations could be significantly impacted.
Management believes its investment valuation philosophy and accounting practices
result in appropriate and timely measurement of value and recognition of
impairment.
Included in investments is a 21.6% common stock interest in EFL of
$44,683,170 at December 31, 2001, which is accounted for under the equity method
of accounting. EFL, which was organized in 1967 as a Pennsylvania-domiciled life
insurance company, has an A.M. Best and Company Inc. ("A.M. Best") rating of A+
(Superior). EFL is primarily engaged in the business of underwriting and selling
non-participating individual and group life insurance policies, including
universal life and individual and group annuity products in ten states and the
District of Columbia.
Reference is made to the Financial Condition section of the
"Management Discussion and Analysis" contained in the Annual Report for the year
ended December 31, 2001 pages 20 through 22 incorporated herein by reference,
for a complete discussion of investments.
Financial Ratings
Insurance companies are rated by rating agencies to provide
insurance consumers and investors with meaningful information on specific
insurance companies. Higher ratings generally indicate financial stability and a
strong ability to pay claims. The ratings are generally based upon factors
relevant to policyholders and are not directed toward return to investors.
The Exchange, Flagship, Erie Insurance Co., Erie P&C and Erie NY
all have current ratings of A++ (Superior) from A.M. Best with respect to their
financial strength and claims-paying ability. In evaluating an insurer's
financial and operating performance, A.M. Best reviews the insurer's
profitability, leverage and liquidity as well as the insurer's book of business,
the adequacy and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its loss reserves and the experience and
competency of its management. Management believes that this A.M. Best rating of
A++ (Superior) is an important factor in marketing The ERIE's property/casualty
insurance to its agents and customers.
Competition
The property/casualty markets in which the Company operates are
highly competitive. Property/casualty insurers generally compete on the basis of
customer service, price, brand recognition, coverages offered, claim handling
ability, financial stability and geographic coverage. In addition, because the
7
insurance products of The ERIE are marketed exclusively through independent
insurance agents, these agents have the opportunity to represent more than one
company. The ERIE, thus, potentially faces competition within its appointed
agencies should it fail to deliver excellence in product, price, service and
relationships.
Market competition bears directly on the price charged for
insurance products and services provided within the insurance regulatory
framework. Growth is driven by a company's ability to provide insurance services
at a price that is reasonable and acceptable to the customer. In addition, the
marketplace is affected by available capacity of the insurance industry. Surplus
expands and contracts primarily in conjunction with profit levels generated by
the industry. Growth is the product of a company's ability to retain existing
customers and to attract new customers as well as movement in the average
premium per policy charged by the Company. Firming pricing in 2001 and a return
to "hard market" conditions, particularly for commercial and personal insurance,
have allowed the property/casualty subsidiaries and affiliates to raise prices
or maintain current prices to gain competitive advantage in the insurance
marketplace.
The Company, in managing the property/casualty insurers of The
ERIE, has followed several strategies which the management of the Company
believes will result in underwriting performance which exceeds those of the
property/casualty industry in general. First, the Company employs an
underwriting philosophy and product mix targeted to produce an Erie Insurance
Group-wide underwriting profit, i.e., a combined ratio of less than 100% on a
long-term basis, through careful risk selection, adequate pricing and prompt
fair claims settlement practices. The careful selection of risks allows for
lower claims frequency and loss severity, thereby enabling insurance to be
offered at favorable prices. The Company, as well as the property/casualty
industry, experienced increased loss severity in private passenger automobile
and in commercial lines in 2001. This caused the loss and loss adjustment
expense to outpace premiums earned. The firming of auto pricing in the second
half of 2001 along with deteriorating loss cost trends have allowed the company
to begin raising auto insurance prices to mitigate underwriting losses. All
policies issued by the Group are for a one-year term. Therefore the impact of
the rate increases will take at least one year before the full impact is
recognized in the underwriting results of the Company.
Second, management focuses on consistently providing superior
service to policyholders and agents in both underwriting and claims handling.
The ERIE's ability to provide superior customer service is reflected in the
Group policy retention and new policy growth rates. Continued improvement in new
policy growth drove the gains experienced in the Group's direct written premium.
Policies in force increased 8.5% to 3,109,583 from 2,865,553 in 2000 and 6.5% in
2000 from 2,689,849 in 1999. Policy retention (the percentage of existing
policyholders who renew their policies) remained excellent at 90.9%, 91.0% and
90.5% for the years ended December 31, 2001, 2000 and 1999, respectively, for
all lines of business combined. See "Selected Segment Information" contained on
page 28 of the Annual Report for policy in force counts and retention rates for
The ERIE.
Third, the Company maintains a business model designed to provide
the advantages of localized marketing and claims servicing with the economies of
scale from centralized accounting, administrative, underwriting, investment,
information management and other support services.
Finally, a careful agent selection process exists in which The
ERIE seeks to be the lead company with its agents in order to enhance the agency
relationship and the likelihood of receiving the most desirable underwriting
opportunities from its agents. The Company has ongoing, direct communications
with its agency force. Agents have a number of company sponsored venues designed
to promote sharing of ideas, concerns and suggestions with the senior management
of the ERIE with the goal of improving communications and service. These efforts
8
have resulted in outstanding agency penetration and the ability to sustain
long-term agency partnerships.
Reserves
Loss reserves are established to account for the estimated
ultimate costs of loss and loss adjustment expenses for claims that have been
reported but not yet settled and claims that have been incurred but not yet
reported. The estimated loss reserve for reported claims is based primarily upon
a case-by-case evaluation of the type of risk involved and knowledge of the
circumstances surrounding each claim and the insurance policy provisions
relating to the type of loss. Estimates of reserves for unreported claims and
loss settlement expenses are determined on the basis of historical information
by line of business as adjusted to current conditions. Inflation is implicitly
provided for in the reserving function through analysis of costs, trends and
reviews of historical reserving results.
The process of estimating the liability for unpaid losses and loss
adjustment expenses is inherently judgmental and can be influenced by factors
subject to variation. Possible sources of variation include claim frequency and
severity, changing rates of inflation as well as changes in other economic
conditions, judicial trends and legislative changes. It is unlikely that future
losses and loss adjustment expenses will develop exactly as projected. The
Company continually refines reserves as experience develops and new information
becomes known. The Company reflects adjustments to reserves in the results of
operations in the periods in which the estimates are changed. With the exception
of reserves relating to certain workers' compensation cases, which have been
discounted at 2.5% in 2001 and 2000, loss reserves are not discounted.
For a reconciliation of beginning and ending property/casualty
unpaid losses and loss adjustment expense reserves for each of the last three
years, see Note 9 of the "Notes to Consolidated Financial Statements" contained
in the Annual Report page 43.
9
The following table sets forth the development of the Company's
net reserves for unpaid losses and loss adjustment expenses from 1994 through
2001. The table has been computed on a statutory basis without reflecting the
estimated salvage and subrogation to be recovered on these losses in the future
(See following discussion in "Financial Regulation" section).
Year Ended December 31,
--------------------------------------------------------------------------------------
2001 2000 1999 1998 1997 1996 1995 1994
------ ------ ------ ------ ------ ------ ------ -------
(in millions)
Reserve for unpaid
losses and loss
adjustment expense $122.3 $105.7 $ 98.1 $ 94.4 $ 92.5 $ 87.7 $ 82.0 $ 71.3
======
Development of
liability as of:
One year later 111.9 104.4 93.7 90.2 88.5 79.7 67.0
-----
Two years later 106.4 95.5 89.7 88.7 81.5 67.3
-----
Three years later 97.2 90.4 88.2 82.8 71.1
----
Four years later 90.9 87.6 83.3 72.2
----
Five years later 88.1 82.4 73.5
----
Six years later 83.5 72.4
----
Seven years later 73.5
Cumulative
(Deficiency) excess ( 6.2) ( 8.3) ( 2.8) 1.6 ( 0.4) ( 1.5) ( 2.2)
====== ====== ======= ===== ======= ====== ======
Cumulative amount of liability
paid through:
One year later $ 41.2 $ 38.9 $ 33.6 $ 31.3 $ 32.6 $ 29.3 $ 22.1
====== ====== ====== ====== ====== ====== ======
Two years later $ 59.2 $ 52.4 $ 48.3 $ 48.7 $ 44.7 $ 36.2
====== ====== ====== ====== ====== ======
Three years later $ 63.9 $ 59.2 $ 57.8 $ 53.9 $ 44.7
====== ====== ====== ====== ======
Four years later $ 65.5 $ 63.5 $ 59.4 $ 49.8
====== ====== ====== ======
Five years later $ 67.4 $ 62.5 $ 53.2
====== ====== ======
Six years later $ 64.8 $ 55.0
======== ======
Seven years later $ 56.5
======
The top line shows the estimated liability that was recorded at
the end of each of the indicated years for all current and prior year unpaid
losses and loss expenses. The upper portion of the table shows re-estimations of
the original recorded reserve as of the end of each successive year. The
estimate is increased or decreased as payments are made and more information
becomes known about the development of remaining unpaid claims. The lower
portion of the table shows the cumulative amount paid in succeeding years for
losses incurred prior to the Statement of Financial Position date. The
cumulative deficiency or redundancy represents the aggregate amount by which
original estimates of reserves as of that year-end have changed in subsequent
years. An excess in reserves means that reserves established in prior years
exceeded actual losses and loss adjustment expenses or were reevaluated at less
than the originally reserved amount. A deficiency in reserves means that the
reserves established in prior years were less than actual losses and loss
adjustment expenses or were reevaluated at more than the originally reserved
amount.
Included in the 2001 unpaid losses and loss adjustment expenses
reserve of $122,333,970 are the Company's share of estimated incurred losses of
the Erie Insurance Group's reinsurance business stemming from the September 11th
attack on the World Trade Center. The portion of reinsurance losses recorded by
the Company through its property/casualty subsidiaries net of recoveries from
the excess of loss agreement with the Exchange was $5,839,445, or $0.06 per
share after taxes. The property/casualty insurers are exposed to both direct and
reinsurance losses arising from possible future terrorist actions.
10
Adverse development on loss reserves established for the year ended
December 31, 1999 was the result of an increase in loss severity experienced by
the Company on its direct business and additional losses on its voluntary
assumed reinsurance business related to the December 1999 European windstorms.
Government Regulation
The property/casualty insurers managed by the Company are subject
to supervision and regulation in the states in which they transact business. The
primary purpose of such supervision and regulation is the protection of
policyholders. The extent of such regulation varies, but generally derives from
state statutes which delegate regulatory, supervisory and administrative
authority to state insurance departments. Accordingly, the authority of the
state insurance departments includes the establishment of standards of solvency
which must be met and maintained by insurers, the licensing to do business of
insurers and agents, the nature of the limitations on investments, the approval
of premium rates for property/casualty insurance, the provisions which insurers
must make for current losses and future liabilities, the deposit of securities
for the benefit of policyholders, the approval of policy forms, notice
requirements for the cancellation of policies and the approval of certain
changes in control. In addition, many states have enacted variations of
competitive rate-making laws which allow insurers to set certain premium rates
for certain classes of insurance without having to obtain the prior approval of
the state insurance department. State insurance departments also conduct
periodic examinations of the affairs of insurance companies and require the
filing of annual and other reports relating to the financial condition of
insurance companies.
The Company's property/casualty insurance subsidiaries may be
required, under the solvency or guaranty laws of the various states in which
they are licensed, to pay assessments to fund policyholder losses or liabilities
of insolvent insurance companies. Depending on state law, insurers can be
assessed an amount that is generally equal to between 1% and 2% of premiums
written for the relevant lines of insurance in that state each year to pay the
claims of an insolvent insurer. Certain states permit these assessments, or a
portion thereof, to be recorded as an offset to future premium taxes. The
property/casualty insurers managed by the Company have made accruals for their
portion of assessments related to such insolvencies based upon the most current
information furnished by the guaranty associations. Reference is made to Note 2
of the "Notes to Consolidated Financial Statements" contained in the Annual
Report for the year ended December 31, 2001, pages 35 through 36 incorporated
herein by reference, for a complete discussion of guaranty association
assessment accruals and their related offsetting tax credits.
The Company's property/casualty insurers are also required to
participate in various involuntary insurance programs for automobile insurance,
as well as other property and casualty lines, in states in which such companies
operate. These involuntary programs provide various insurance coverages to
individuals or other entities that otherwise are unable to purchase such
coverage in the voluntary market. These programs include joint underwriting
associations, assigned risk plans, fair access to insurance requirements
("FAIR") plans, reinsurance facilities and windstorm plans. Legislation
establishing these programs generally provides for participation in proportion
to voluntary writings of related lines of business in that state. Generally,
state law requires participation in such programs as a condition to doing
business in that state. The loss ratio on insurance written under involuntary
programs has traditionally been greater than the loss ratio on insurance in the
voluntary market; however, the impact of these involuntary programs on the
property/casualty insurers managed by the Company has been immaterial.
Pennsylvania regulations limit the amount of dividends EFL can pay
its shareholders and limit the amount of dividends the Erie Insurance Co. and
11
Erie Insurance Property and Casualty Company can pay to the Company, while New
York state regulates the amount of dividends Erie NY can pay to the Erie
Insurance Co. The limitations are fully described and reference is made herein
to Note 13 of the "Notes to Consolidated Financial Statements" contained in
pages 45 through 46 in the Annual Report for the year ended December 31, 2001,
incorporated by reference.
Financial Regulation
The Company's property/casualty insurance subsidiaries are
required to file financial statements prepared using SAP with state regulatory
authorities. The adjustments necessary to reconcile the Company's
property/casualty insurance subsidiaries' net income and shareholders' equity
prepared in accordance with SAP to net income and shareholders' equity prepared
in accordance with GAAP are as follows:
Net Income
-----------------------
Year Ended
December 31,
-----------------------
2001 2000
--------- ---------
(in thousands)
SAP amounts.......................... ($ 4,929) $ 5,091
Adjustments:
Deferred policy acquisition
costs............................. 3,816 1,798
Deferred income taxes.............. 1,392 32
Federal alternative minimum
tax credit recoverable............ 0 188
Salvage and subrogation............ 312 221
Incurred premium adjustment........ ( 1,816) ( 798)
Other.............................. 83 10
-------- --------
GAAP amounts......................... ($ 1,142) $ 6,542
======== ========
Shareholders' Equity
--------------------------------
As of December 31,
--------------------------------
2001 2000 1999
--------- --------- --------
(in thousands)
SAP amounts.......................... $ 92,128 $ 89,637 $ 81,709
Adjustments:
Deferred policy acquisition
costs............................. 17,018 13,202 11,405
Diffrence between GAAP and
SAP deferred income taxes....... ( 354) 3,569 3,350
Salvage and subrogation............ 3,661 3,349 3,128
Statutory reserves................. 0 865 2,656
Incurred premium adjustment........ ( 14,018) ( 12,202) ( 11,405)
Unrealized gains net of
deferred taxes.................... 4,722 2,331 38
Other.............................. 223 7 ( 3)
-------- -------- -------
GAAP amounts......................... $103,380 $100,758 $ 90,878
======== ======== ========
Effective January 1, 2001, the NAIC adopted the Codification of
Statutory Accounting Practices (Codification) as the NAIC-supported basis of
accounting. Codification resulted in changes to the Company's statutory-basis
financial statements, the most significant of which was the recording of
statutory deferred taxes for certain of the Company's property/casualty
insurance subsidiaries. The total cumulative adjustment increased the surplus of
the Company's property/casualty insurance subsidiaries by $4.5 million as of
January 1, 2001.
12
The NAIC has adopted risk-based capital ("RBC") standards that require
insurance companies to calculate and, report statutory capital and surplus needs
based on a formula measuring underwriting, investment and other business risks
inherent in an individual company's operations. These RBC standards have not
affected the operation of the Company as each of the property/casualty insurance
subsidiaries and affiliates has statutory capital and surplus in excess of RBC
requirements.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
1995: Certain forward-looking statements contained herein involve risks and
uncertainties. Many factors could cause future results to differ materially from
those discussed. Examples of such factors include variations in catastrophe
losses due to changes in weather patterns, other natural causes or terrorist
actions; changes in insurance regulations or legislation that disadvantage the
members of the Group in the marketplace and recession; economic conditions or
stock market changes affecting pricing or demand for insurance products or
ability to generate investment income and returns. Growth and profitability have
been and will be potentially materially affected by these and other factors.
13
Item 2. Properties
The Company and its subsidiaries, the Exchange and its subsidiary,
Flagship, and EFL share a corporate home office complex in Erie, Pennsylvania
which contains 549,786 square feet and is owned by the Exchange. At December 31,
2001 in addition to the Erie branch office, the Company also operated 22
additional field offices in 11 states. Of these sites, 17 provide both agency
support and claims services and are referred to as "Branch Offices", while the
remaining 5 provide only claims services and are considered "Claims Offices".
The Company owns three of its field offices. Three field offices
are owned by and leased from the Exchange. The annual rent expense incurred by
the Company for the field offices and home office complex totaled $10,842,301 in
2001. One office is owned by and leased from EFL at an annual rental in 2001 of
$311,760. The remaining 14 offices are leased from various unaffiliated parties
at an aggregate annual rental in 2001 of approximately $1,815,000. Total rent
and operating expenses for all office space occupied by the Company in 2001 was
$18,938,140, of which $11,984,989, or approximately 63%, was reimbursed for
office space used by it's affiliates.
Item 3. Legal Proceedings
Information concerning the legal proceedings of the Company is
incorporated by reference to the section "Legal Proceedings" in the Company's
definitive Proxy Statement with respect to the Company's Annual Meeting of
Shareholders to be held on April 30, 2002 to be filed with the Securities and
Exchange Commission within 120 days of December 31, 2001 (the "Proxy
Statement").
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 2001.
14
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
Reference is made to "Market Price of and Dividends on the Common
Stock and Related Shareholder Matters" on page 48 of the Annual Report for the
year ended December 31, 2001, incorporated herein by reference, for information
regarding the high and low sales prices for the Company's stock and additional
information regarding such stock of the Company.
As of February 28, 2002, there were approximately 1,093 beneficial
shareholders of record of the Company's Class A non-voting common stock and 29
beneficial shareholders of record of the Company's Class B voting common stock.
Of the 63,813,523 shares of the Company's Class A common stock
outstanding as of February 28, 2002, approximately 22,824,839 shares are freely
transferable without restriction or further registration under the Securities
Act of 1933 (the Act), as amended unless purchased by affiliates of the Company
as that terms is defined in Rule 144 under the Act. The 40,988,684 remaining
outstanding shares of Class A common stock (the Restricted Shares) are held by
the Company's directors, executive officers and their affiliates and are
restricted securities that are eligible to be sold publicly pursuant to an
effective registration statement under the Act or in accordance with the
applicable exemption, including Rule 144, from the registration requirements
under the Act. The Company is unable to estimate the amount of Restricted Shares
that may be sold under Rule 144 since this amount will depend in part on the
price for the Class A common stock, the personal circumstances of the sellers
and other factors. Sales of a substantial number of Restricted Shares in the
public market, or the availability of such shares, could adversely affect the
price of the Class A common stock.
In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated for purposes of Rule 144) who beneficially
has owned Restricted Shares for at least two years, including affiliates of the
Company, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of: (1) one percent of the number of shares of
Class A common stock then outstanding, or (2) the average weekly trading volume
of the Class A common stock in The NASDAQ Stock MarketSM during the four
calendar weeks preceding the date on which notice of sale is filed with the SEC.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. However, a person (or persons whose shares are aggregated for purposes
of Rule 144) who is deemed not to have been an affiliate of the Company at any
time during the 90 days preceding a sale, and who beneficially has owned the
Restricted Shares for at least three years at the time of sale, would be
entitled to sell such shares under Rule 144(k) without regard to the aforesaid
limitations.
Item 6. Selected Consolidated Financial Data
Reference is made to "Selected Consolidated Financial Data" on
page 15 of the Annual Report for the year ended December 31, 2001, incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 16 through 26 of the
Annual Report for the year ended December 31, 2001, incorporated herein by
reference.
15
Item 7a. Quantitative and Qualitative Disclosure about Market Risk
Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 22 through 23 of the
Annual Report for the year ended December 31, 2001, incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
Reference is made to the "Consolidated Financial Statements"
included on pages 29 through 33 and to the "Quarterly Results of Operations"
contained in the "Notes to Consolidated Financial Statements" on page 47 of the
Annual Report for the year ended December 31, 2001, incorporated herein by
reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosures
None.
16
PART III
Item 10. Directors and Executive Officers of the Registrant
Erie Insurance Group President and CEO, Stephen A. Milne, retired
from the Company effective January 18, 2002. Jan R. Van Gorder, Senior Executive
Vice President, Secretary and General Counsel, is acting President and CEO until
a new President and CEO is selected. Mr. Milne remains on the Board of Directors
of the Company and the Erie Indemnity Company, the principal management company
of the Erie Insurance Group.
Directors are elected to one year terms at the Company's annual
meeting of Shareholders.
(a) Certain information as to the Directors of the Company is as follows:
Age Present Principal Position with Erie
as of Indemnity Company and Other Material
Name 12/31/01 Positions Held During the Last Five Years
- -----------------------------------------------------------------------------------------------------------------------------------
Samuel P. Black, III 59 Director since 1997. President, Treasurer and Secretary,
1,3,4,6 Samuel P. Black & Associates, Inc.--insurance agency;
Director--the Company, Erie Insurance Company, Flagship City
Insurance Company, Erie Insurance Property & Casualty
Company and Erie Family Life Insurance Company.
J. Ralph Borneman, Jr. 63 Director since 1992. President and Chief Executive Officer,
3,4 Body-Borneman Associates, Inc., insurance agency. President,
Body-Borneman, Ltd. and Body-Borneman, Inc., insurance
agencies. Director--the Company, Erie Insurance Company,
Erie Family Life Insurance Company, Erie Insurance Company
of New York and National Penn Bancshares.
Patricia Garrison-Corbin 54 Director since 2000. President, P.G. Corbin & Company 1987 -
2,4,5C Present. Director--the Company, Erie Insurance Company and
Erie Family Life Insurance Company.
Susan Hirt Hagen 1,6C 66 Director since 1980. Managing Partner, Hagen, Herr &
Peppin, Group Relations Consultants since 1990; Director--the
Company, Erie Insurance Company and Erie Family Life
Insurance Company, since 1980.
1 Member of Executive Committee
2 Member of Audit Committee
3 Member of Executive Compensation Committee
4 Member of Nominating Committee
5 Member of Investment Committee
6 Member of Charitable Giving Committee
C Committee Chairperson
17
Age Present Principal Position with Erie
as of Indemnity Company and Other Material
Name 12/31/01 Positions Held During the Last Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
F. William Hirt 1C,6 76 Director since 1965. Chairman of the Board of the Company,
Erie Insurance Company, Erie Family Life Insurance Company,
Erie Insurance Property & Casualty Company and Flagship City
Insurance Company since September 1993; Chairman of the
Board of Erie Insurance Company of New York since April
1994. Chairman of the Executive Committee of the Company and
the Erie Family Life Insurance Company since November 1990;
Interim President and Chief Executive Officer of the
Company, Erie Family Life Insurance Company, Erie Insurance
Company, Erie Insurance Property & Casualty Company,
Flagship City Insurance Company and Erie Insurance Company
of New York from January 1, 1996 to February 12, 1996;
Chairman of the Board, Chief Executive Officer and Chairman
of the Executive Committee of the Company, Erie Family Life
Insurance Company and Erie Insurance Company for more than
five years prior thereto; Director--the Company, Erie
Insurance Company, Flagship City Insurance Company, Erie
Family Life Insurance Company, Erie Insurance Property &
Casualty Company and Erie Insurance Company of New York.
Samuel P. Katz 2,3 52 Director since 2000. Chief Executive Officer, Greater
Philadelphia First, July 2000 - Present; Managing Partner,
Wynnefield Capital Advisors, Inc., 1997 - Present;
President, Entersport Capital Advisors, Inc., President 1997
- Present; Partner, Stafford Capital Partners, L.P. 1994 -
1997; Director - the Company, Erie Insurance Company and
Erie Family Life Insurance Company.
Claude C. Lilly, III 2 55 Director since 2000. Professor and Dean, University of North
Carolina, Charlotte 1997 - Present; Professor, Florida State
University 1978 - 1997; Director-- the Company, Erie
Insurance Company and Erie Family Life Insurance Company.
1 Member of Executive Committee
2 Member of Audit Committee
3 Member of Executive Compensation Committee
6 Member of Charitable Giving Committee
C Committee Chairperson
18
Age Present Principal Position with Erie
as of Indemnity Company and Other Material
Name 12/31/01 Positions Held During the Last Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
Stephen A. Milne 1,5 53 Director since 1996. Retired President and Chief Executive
Officer of the Company, Erie Insurance Company, Erie Family
Life Insurance Company, Flagship City Insurance Company,
Erie Insurance Property & Casualty Company and Erie
Insurance Company of New York 1996 - January 18, 2002;
Executive Vice President of the Company, Erie Insurance
Company, Flagship City Insurance Company, Erie Insurance
Property & Casualty Company and Erie Insurance Company of
New York 1994 - 1996. Director--the Company, Erie Insurance
Company, Erie Family Life Insurance Company, Erie Insurance
Company of New York, Flagship City Insurance Company and
Erie Insurance Property & Casualty Company.
Henry N. Nassau 1,5 47 Director since 2000. General Counsel, Internet Capital Group
1999 - Present; Partner, Dechert, Price & Rhoades 1987 -
1999; Director-- the Company, Erie Insurance Company and
Erie Family Life Insurance Company.
John M. Petersen 1,4C 73 Director since 1979. Retired; President and Chief Executive
Officer of the Company, Erie Family Life Insurance Company,
Erie Insurance Company, Flagship City Insurance Company and
Erie Insurance Property & Casualty Company 1993 - 1995 and
Erie Insurance Company of New York 1994 - 1995;
Director--the Company, Erie Insurance Company, Flagship City
Insurance Company, Erie Family Life Insurance Company, Erie
Insurance Property & Casualty Company, Erie Insurance
Company of New York, and Spectrum Control.
1 Member of Executive Committee
4 Member of Nominating Committee
5 Member of Investment Committee
C Committee Chairperson
19
Age Present Principal Position with Erie
as of Indemnity Company and Other Material
Name 12/31/01 Positions Held During the Last Five Years
- ------------------------------------------------------------------------------------------------------------------------------------
Jan R. Van Gorder 1 54 Director since 1990. Acting President and Chief Executive
Officer of the Company, Erie Insurance Company, Erie Family
Life Insurance Company, Flagship City Insurance Company,
Erie Insurance Property and Casualty Company and Erie
Insurance Company of New York since January 19, 2002. Senior
Executive Vice President, Secretary and General Counsel of
the Company, Erie Family Life Insurance Company and Erie
Insurance Company since 1990 and of Flagship City Insurance
Company and Erie Insurance Property & Casualty Company since
1992 and 1993, respectively and of Erie Insurance Company of
New York since 1994. Director--the Company, Erie Insurance
Company, Flagship City Insurance Company, Erie Insurance
Property & Casualty Company, Erie Insurance Company of New
York and Erie Family Life Insurance Company.
Robert C. Wilburn 2C,3C,4,5 58 Director since 1999. President and Chief Executive Officer,
The Gettysburg National Battlefield Museum Foundation since
2001; Distinguished Service Professor, Carnegie Mellon
University since 1999; Retired, President and Chief
Executive Officer, Colonial Williamsburg Foundation, 1992 -
1999; Director - the Company, Erie Insurance Company and
Erie Family Life Insurance Company.
1 Member of Executive Committee
2 Member of Audit Committee
3 Member of Executive Compensation Committee
4 Member of Nominating Committee
5 Member of Investment Committee
C Committee Chairperson
20
(b) Certain information as to the executive officers of the Company is as follows:
Age Principal Occupation for Past
as of Five Years and Positions with
Name 12/31/01 Erie Insurance Group
- ------------------------------------------------------------------------------------------------------------------------------------
Acting President & Chief
Executive Officer
- ------------------------
Jan R. Van Gorder, Esq. 54 Acting President and Chief Executive Officer since January
19, 2002. Senior Executive Vice President, Secretary and
General Counsel of the Company, EFL and Erie Insurance Co.
since 1990, and of Flagship and Erie P&C since 1992 and
1993, respectively, and of Erie NY since April 1994.
Executive Vice Presidents
- -------------------------
Philip A. Garcia 45 Executive Vice President and Chief Financial Officer since
1997; Senior Vice President and Controller 1993 - 1997.
Director, the Erie NY, Flagship and Erie P&C.
Jeffrey A. Ludrof 42 Executive Vice President - Insurance Operations of the
Company, Erie Insurance Co., Flagship, Erie P&C, and Erie NY
since 1999; Senior Vice President 1994 - 1999; Regional Vice
President 1993 - 1994. Director Erie NY, Flagship and Erie
P&C.
21
Age Principal Occupation for Past
as of Five Years and Positions with
Name 12/31/01 Erie Insurance Group
- ------------------------------------------------------------------------------------------------------------------------------------
Senior Vice Presidents
- ----------------------
Eugene C. Connell 47 Senior Vice President since 1990.
Michael J. Krahe 48 Senior Vice President since 1999; Vice President 1994 - 1999.
George R. Lucore 51 Senior Vice President since 1995; Regional Vice President
1993 - 1995.
Thomas B. Morgan 38 Senior Vice President since October 2001; Assistant Vice
President and Branch Manager 1997 - October 2001;
Independent Insurance Agent 1988 - 1997.
Timothy G. NeCastro 41 Senior Vice President and Controller since 1997; Department
Manager - Internal Audit November 1996 - 1997.
James R. Roehm 53 Senior Vice President since 1991.
John P. Sommerwerck 51 Senior Vice President and Chief Information Officer since
May 2000
Barry P. Stiles 52 Senior Vice President since 1999; Vice President 1993 - 1999.
Michael S. Zavasky 49 Senior Vice President since 1998; Vice President and
Managing Director of Reinsurance 1990 - 1998.
Douglas F. Ziegler 51 Senior Vice President, Treasurer and Chief Investment
Officer since 1993.
Regional Vice Presidents
- -----------------------
George D. Dufala 30 Regional Vice President since April 2000; Assistant Vice
President 1993 - April 2000.
Douglas N. Fitzgerald 45 Regional Vice President since 1993.
Terry L. Hamman 47 Regional Vice President since 1995; Assistant Vice President
1993 - 1995.
Eric D. Root 33 Regional Vice President since April 2000; Branch manager
1996 - April 2000.
22
Item 11. Executive Compensation
The answer to this item is incorporated by reference to the
Company's definitive Proxy Statement relating to the Annual Meeting of
Shareholders to be held on April 30, 2002, except for the Performance Graph,
which has not been incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The answer to this item is incorporated by reference to the
Company's definitive Proxy Statement relating to the Annual Meeting of
Shareholders to be held on April 30, 2002 to be filed with the Securities and
Exchange Commission within 120 days of December 31, 2001.
Item 13. Certain Relationships and Related Transactions
Since the formation of the Company and the Exchange in 1925, the
Company, as the attorney-in-fact appointed by the policyholders of the Exchange,
has managed the property/casualty insurance operations of the Exchange. The
Company's operations are interrelated with the operations of the Exchange, and
the Company's results of operations are largely dependent on the success of the
Exchange.
Reference is made to Note 10 of the "Notes to Consolidated
Financial Statements" on pages 43 through 44 of the Annual Report for the year
ended December 31, 2001, incorporated herein by reference, for a complete
discussion of related party transactions.
Information with respect to certain relationships with Company
directors is incorporated by reference to the Company's definitive Proxy
Statement relating to the Annual Meeting of Shareholders to be held on April 30,
2002 to be filed with the Securities and Exchange Commission within 120 days of
December 31, 2001.
23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial statements, financial statement schedules and exhibits
filed:
(1) Consolidated Financial Statements
Page*
----
Erie Indemnity Company and Subsidiaries:
Independent Auditors' Report on the
Consolidated Financial Statements............................. 29
Consolidated Statements of Operations
for the three years ended
December 31, 2001, 2000 and 1999.............................. 30
Consolidated Statements of Financial
Position as of December 31, 2001
and 2000 ................................................... 31
Consolidated Statements of Cash Flows
for the three years ended
December 31, 2001, 2000 and 1999.............................. 32
Consolidated Statements of Shareholders'
Equity for the three years ended
December 31, 2001, 2000 and 1999.............................. 33
Notes to Consolidated Financial Statements...................... 34
(2) Financial Statement Schedules
Page
----
Erie Indemnity Company and Subsidiaries:
Report of Independent Auditors on Schedules.................... 31
Schedule I. Summary of Investments - Other
than Investments in Related
Parties.......................................... 32
Schedule IV. Reinsurance...................................... 33
Schedule VI. Supplemental Information
Concerning Property/Casualty
Insurance Operations............................. 34
All other schedules have been omitted since they are not required, not
applicable or the information is included in the financial statements or notes
thereto.
* Refers to the respective page of Erie Indemnity Company's 2001 Annual Report
to Shareholders. The "Consolidated Financial Statements" and "Notes to
Consolidated Financial Statements and Auditors' Report" thereon on pages 29 to
47 are incorporated by reference. With the exception of the portions of such
Annual Report specifically incorporated by reference in this Item and Items 1,
5, 6, 7, 7a and 8, such Annual Report shall not be deemed filed as part of this
Form 10-K Report or otherwise subject to the liabilities of Section 18 of the
Securities Exchange Act of 1934.
24
(3) Exhibits
Exhibit
Number Description of Exhibit
- ------- ----------------------
3.1* Articles of Incorporation of Registrant
3.2** Amended and Restated By-laws of Registrant
3.3## Amended and Restated By-laws of Registrant
dated March 9, 1999
4A* Form of Registrant's Class A Common
Stock certificate
4B* Form of Registrant's Class B Common
Stock certificate
10.1*** Retirement Plan for Employees of Erie
Insurance Group, effective as of
December 31, 1989
10.2*** Restatement of Supplemental Retirement
Plan for Certain Members of the Erie
Insurance Group Retirement Plan for
Employees, effective as of January 1,
1990
10.3*** Deferred Compensation Plan of
Registrant
10.4*** Retirement Plan for Outside Directors
of Registrant, effective as of
January 1, 1991
10.5*** Employee Savings Plan of Erie Insurance
Group, effective as of April 1, 1992
10.6*** Amendment to Employee Savings Plan of
Erie Insurance Group
10.7*** Supplemental 401(k) Plan of Erie Insurance
Group effective as of January 1, 1994
10.8*** Service Agreement dated January 1, 1989
between Registrant and Erie Insurance
Company
10.9*** Service Agreement dated June 21, 1993
between Registrant and Erie Insurance
Property & Casualty Company
10.10*** Service Agreement dated June 21, 1993
between Registrant and Flagship City
Insurance Company
10.11*** Reinsurance Pooling Agreement dated
January 1, 1992 between Erie Insurance
Company and Erie Insurance Exchange
25
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.12*** Form of Subscriber's Agreement whereby
policyholders of Erie Insurance Exchange
appoint Registrant as their
Attorney-in-Fact
10.13* Stock Redemption Plan of Registrant dated
December 14, 1989
10.14* Stock Purchase Agreement dated December 20,
1991, between Registrant and Erie Insurance
Exchange relating to the capital stock of
Erie Insurance Company
10.15** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1,
1994 between Erie Insurance Exchange
and Erie Insurance Co.
10.16**** Stock Redemption Plan of Registrant as
restated December 12, 1995
10.17**** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1, 1995
between Erie Insurance Exchange and Erie
Insurance Company of New York
10.18**** Service Agreement dated January 1, 1995
between Registrant and Erie Insurance
Company of New York
10.19***** Consulting Agreement for Investing Services
dated January 2, 1996 between Erie Indemnity
Company and John M. Petersen
10.20***** Agreement dated April 29, 1994 between Erie
Indemnity Company and Thomas M. Sider
10.21****** Aggregate Excess of Loss Reinsurance Agreement effective
January 1, 1997 between Erie Insurance Exchange, by and
through its Attorney-in-Fact, Erie Indemnity Company and Erie
Insurance Company and its wholly-owned subsidiary Erie
Insurance Company of New York
10.22# 1997 Annual Incentive Plan of Erie Indemnity
Company
10.23# Erie Indemnity Company Long-Term Incentive Plan
10.24# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Stephen A.
Milne
10.25# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Jan R. Van
Gorder
26
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.26# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Philip A.
Garcia
10.27# Employment Agreement effective December 16, 1997
by and between Erie Indemnity Company and John J.
Brinling, Jr.
10.28### Employment Agreement effective June 30, 1999 by
and between Erie Indemnity Company and Jeffrey A.
Ludrof
10.29### Employment Agreement effective December 15, 1999
By and between Erie Indemnity Company and
Douglas F. Ziegler
10.30### Addendum to Employment Agreement effective December
15, 1999 by and between Erie Indemnity Company
and Stephen A. Milne
10.31### Addendum to Employment Agreement effective December
15, 1999 by and between Erie Indemnity Company
and Jan R. Van Gorder
10.32### Addendum to Employment Agreement effective December
15, 1999 by and between Erie Indemnity Company
and Philip A. Garcia
10.33### Addendum to Employment Agreement effective December
15, 1999 by and between Erie Indemnity Company
and John J. Brinling, Jr.
10.34### Addendum to Employment Agreement effective December
15, 1999 by and between Erie Indemnity Company
and Jeffrey A. Ludrof
10.35& Addendum to Employment Agreement effective December
15, 2000 by and between Erie Indemnity Company
and Stephen A. Milne
10.36& Addendum to Employment Agreement effective December
15, 2000 by and between Erie Indemnity Company
and Jan R. Van Gorder
10.37& Addendum to Employment Agreement effective December
15, 2000 by and between Erie Indemnity Company
and Philip A. Garcia
10.38& Addendum to Employment Agreement effective December
15, 2000 by and between Erie Indemnity Company
and John J. Brinling, Jr.
10.39& Addendum to Employment Agreement effective December
15, 2000 by and between Erie Indemnity Company
and Jeffrey A. Ludrof
10.40& Addendum to Employment Agreement effective December
15, 2000 by and between Erie Indemnity Company
and Douglas F. Ziegler
27
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.41&& Cost Sharing Agreement for Information Technology
Development dated March 14, 2001 between Registrant
and member companies of the Erie Insurance Group.
10.42 Addendum to Employment Agreement effective December
12, 2001 by and between Erie Indemnity Company
and Stephen A. Milne
10.43 Addendum to Employment Agreement effective December
12, 2001 by and between Erie Indemnity Company
and Jan R. Van Gorder
10.44 Addendum to Employment Agreement effective December
12, 2001 by and between Erie Indemnity Company
and Philip A. Garcia
10.45 Addendum to Employment Agreement effective December
12, 2001 by and between Erie Indemnity Company
and John J. Brinling, Jr.
10.46 Addendum to Employment Agreement effective December
12, 2001 by and between Erie Indemnity Company
and Jeffrey A. Ludrof
10.47 Addendum to Employment Agreement effective December
12, 2001 by and between Erie Indemnity Company
and Douglas F. Ziegler
10.48 Summary of termination benefits provided under
the Employment Agreement effective January 18,
2002 by and between Erie Indemnity Company and
Stephen A. Milne.
11 Statement re computation of per share
earnings
13 2001 Annual Report to Shareholders.
Reference is made to the Annual Report
furnished to the Commission, herewith.
21 Subsidiaries of Registrant
99.1## Report of the Special Committee to the
Board of Directors
- ----------------------------------
* Such exhibit is incorporated by reference to th e like numbered
exhibit in Registrant's Form 10 Registration Statement Number 0-24000
filed with the Securities and Exchange Commission on May 2, 1994.
** Such exhibit is incorporated by reference to the like numbered
exhibit in Registrant's Form 10/A Registration Statement Number
0-24000 filed with the Securities and Exchange Commission on August
3, 1994.
*** Such exhibit is incorporated by reference to the like titled but
renumbered exhibit in Registrant's Form 10 Registration Statement
Number 0-24000 filed with the Securities and Exchange Commission on
May 2, 1994.
**** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1995 that was filed with the Commission on March 25,
1996.
28
***** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K/A amended annual report for the year
ended December 31, 1995 that was filed with the Commission on April
25, 1996.
****** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1996 that was filed with the Commission on March 21,
1997.
# Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1997 that was filed with the Commission on March 25,
1998.
## Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1998 that was filed with the Commission on March 30,
1999.
### Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1999 that was filed with the Commission on March 23,
2000.
& Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 2000 that was filed with the Commission on March 23,
2001.
&& Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-Q quarterly report for the quarter ended
June 30, 2001 that was filed with the Commission on July 17, 2001.
(b) Reports on Form 8-K:
On December 12, 2001 the Company filed a report on Form 8-K,
reporting under Item 5, that the Company would recognize charges for
realized capital losses related to the sale of certain impaired
securities, as well as, realized charges for other-than-temporary
impairments of equity and debt securities held in the Company's
available-for-sale investment portfolios.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 5, 2002 ERIE INDEMNITY COMPANY
(Registrant)
Principal Officers
/s/ Jan R. Van Gorder
Jan R. Van Gorder, Acting President and CEO,
Executive Vice President, Secretary & General Counsel
/s/ Philip A. Garcia
Philip A. Garcia, Executive Vice President & CFO
/s/ Timothy G. NeCastro
Timothy G. NeCastro, Senior Vice President & Controller
Board of Directors
/s/ Samuel P. Black, III /s/ Claude C. Lilly, III
Samuel P. Black, III Claude C. Lilly, III
/s/ J. Ralph Borneman, Jr. /s/ Stephen A. Milne
J. Ralph Borneman, Jr. Stephen A. Milne
Patricia Garrison-Corbin /s/ Henry N. Nassau
Henry N. Nassau
/s/ Susan Hirt Hagen /s/ John M. Petersen
Susan Hirt Hagen John M. Petersen
/s/ F. William Hirt /s/ Jan R. Van Gorder
F. William Hirt Jan R. Van Gorder
/s/ Samuel P. Katz /s/ Robert C. Wilburn
Samuel P. Katz Robert C. Wilburn
30
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders
Erie Indemnity Company
We have audited the consolidated statements of financial position of Erie
Indemnity Company and subsidiaries (Company) as of December 31, 2001 and 2000
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2001, as
contained in the 2001 annual report, incorporated by reference in the annual
report on Form 10-K for the year ended December 31, 2001. In connection with our
audits of the financial statements, we also have audited the financial statement
schedules, as listed in the accompanying index. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Erie Indemnity
Company and subsidiaries as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
/s/ Malin, Bergquist & Company, LLP
Malin, Bergquist & Company, LLP
Erie, Pennsylvania
February 7, 2002
31
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2001
Amount at which
Cost or Shown in the
Amortized Fair Statement of
Type of Investment Cost Value Financial Position
- -----------------------------------------------------------------------------------------------------
(In Thousands)
Available-for-sale securities:
Fixed maturities:
U.S. treasuries & government agencies $ 11,211 $ 11,713 $ 11,713
States and political subdivisions 42,392 44,121 44,121
Special revenues 110,267 113,418 113,418
Public utilities 25,150 26,270 26,270
U.S. industrial and miscellaneous 311,757 319,308 319,308
Foreign 26,634 27,476 27,476
Redeemable Preferred Stocks 16,012 17,567 17,567
Equity securities:
Common stock:
U.S. banks, trusts and insurance companies 3,284 4,082 4,082
U.S. industrial and miscellaneous 28,718 59,709 59,709
Foreign 0 0 0
Non-redeemable preferred stock:
Public utilities 2,370 2,379 2,379
U.S. banks, trusts and insurance companies 14,685 15,565 15,565
U.S. industrial and miscellaneous 91,185 91,647 91,647
Foreign 19,485 20,416 20,416
------------- ------------- -------------
Total available-for-sale securities: $ 703,150 $ 753,671 $ 753,671
------------- ------------- -------------
Real estate mortgage loans $ 5,700 $ 5,700 $ 5,700
Limited partnerships 79,668 81,596 81,596
------------- ------------- -------------
Total investments $ 788,518 $ 840,967 $ 840,967
============= ============= =============
32
SCHEDULE IV - REINSURANCE
Percentage
Ceded to Assumed of amount
Other from Other Net Assumed
Direct Companies Companies Amount to Net
------------- ------------- ------------- ------------- -------------
December 31,2001
Premiums for the year
Property and Liability Insurance $ 432,306,939 $ 439,697,934 $ 145,039,248 $ 137,648,253 105.6%
December 31,2000
Premiums for the year
Property and Liability Insurance $ 377,569,981 $ 382,394,388 $ 129,281,124 $ 124,456,717 103.9%
December 31,1999
Premiums for the year
Property and Liability Insurance $ 351,227,872 $ 356,608,390 $ 122,604,391 $ 117,223,873 104.6%
33
SCHEDULE VI - SUPPLMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
Deferred
Policy Reserves for Discount, if Net
Acquisition Unpaid Loss & any deducted Unearned Earned Investment
Costs LAE Expenses from reserves* Premiums Premiums Income
-----------------------------------------------------------------------------------
(In thousands)
@ 12/31/01
Consolidated P&C Entities $ 17,018 $ 557,278 $ 2,390 $ 311,969 $ 137,648 $ 17,071
Unconsolidated P&C Entities 0 0 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0 0 0
Total $ 17,018 $ 557,278 $ 2,390 $ 311,969 $ 137,648 $ 17,071
@ 12/31/00
Consolidated P&C Entities $ 13,202 $ 477,879 $ 1,509 $ 263,855 $ 123,708 $ 18,381
Unconsolidated P&C Entities 0 0 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0 0 0
Total $ 13,202 $ 477,879 $ 1,509 $ 263,855 $ 123,708 $ 18,381
@ 12/31/99
Consolidated P&C Entities $ 11,405 $ 432,895 $ 1,377 $ 237,452 $ 117,224 $ 16,765
Unconsolidated P&C Entities 0 0 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0 0 0
Total $ 11,405 $ 432,895 $ 1,377 $ 237,452 $ 117,224 $ 16,765
34
SCHEDULE VI - SUPPLMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS (CONTINUED)
Loss and Losses Adjustment Expenses Amortization
Incurred Related to of Deferred Net
(1) (2) Policy Loss & LAE Premiums
Current Year Prior Years Acquisition Costs Paid Written
----------------------------------------------------------------------------------------
@ 12/31/01
Consolidated P&C Entities $ 11,258 $ 6,160 $ 24,276 $ 100,840 $ 146,936
Unconsolidated P&C Entities 0 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0 0
Total $ 11,258 $ 6,160 $ 24,276 $ 100,840 $ 146,936
@ 12/31/00
Consolidated P&C Entities $ 93,416 $ 6,148 $ 22,793 $ 92,236 $ 128,044
Unconsolidated P&C Entities 0 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0 0
Total $ 93,416 $ 6,148 $ 22,793 $ 92,236 $ 128,044
@ 12/31/99
Consolidated P&C Entities $ 88,422 $ (703 ) $ 22,507 $ 84,192 $ 118,426
Unconsolidated P&C Entities 0 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0 0
Total $ 88,422 $ (703 ) $ 22,507 $ 84,192 $ 118,426
* Workers compensation reserves were discounted at 2.5% in 2001, 2000 and 1999.
35
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
- ------ ---------------------- --------------
3.1* Articles of Incorporation of Registrant
3.2** Amended and Restated By-laws of Registrant
3.3## Amended and Restated By-laws of Registrant
dated March 9, 1999
4A* Form of Registrant's Class A Common
Stock certificate
4B* Form of Registrant's Class B Common
Stock certificate
10.1*** Retirement Plan for Employees of Erie
Insurance Group, effective as of
December 31, 1989
10.2*** Restatement of Supplemental Retirement
Plan for Certain Members of the Erie
Insurance Group Retirement Plan for
Employees, effective as of January 1,
1990
10.3*** Deferred Compensation Plan of
Registrant
10.4*** Retirement Plan for Outside Directors
of Registrant, effective as of
January 1, 1991
10.5*** Employee Savings Plan of Erie Insurance
Group, effective as of April 1, 1992
10.6*** Amendment to Employee Savings Plan of
Erie Insurance Group
10.7*** Supplemental 401(k) Plan of Erie Insurance
Group effective as of January 1, 1994
10.8*** Service Agreement dated January 1, 1989
between Registrant and Erie Insurance
Company
10.9*** Service Agreement dated June 21, 1993
between Registrant and Erie Insurance
Property & Casualty Company
10.10*** Service Agreement dated June 21, 1993
between Registrant and Flagship City
Insurance Company
10.11*** Reinsurance Pooling Agreement dated
January 1, 1992 between Erie Insurance
Company and Erie Insurance Exchange
36
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
- ------ ---------------------- ------------
10.12*** Form of Subscriber's Agreement whereby
policyholders of Erie Insurance Exchange
appoint Registrant as their
Attorney-in-Fact
10.13* Stock Redemption Plan of Registrant dated
December 14, 1989
10.14* Stock Purchase Agreement dated December 20,
1991, between Registrant and Erie Insurance
Exchange relating to the capital stock of
Erie Insurance Company
10.15** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1,
1994 between Erie Insurance Exchange
and Erie Insurance Co.
10.16**** Stock Redemption Plan of Registrant
restated as of December 12, 1995
10.17**** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1, 1995
between Erie Insurance Exchange and Erie
Insurance Company of New York
10.18**** Service Agreement dated January 1, 1995
between Registrant and Erie Insurance
Company of New York
10.19***** Consulting Agreement for Investing Services
dated January 2, 1996 between Erie Indemnity
Company and John M. Petersen
10.20***** Agreement dated April 29, 1994 between Erie
Indemnity Company and Thomas M. Sider
10.21****** Aggregate Excess of Loss Reinsurance Agreement
effective January 1, 1997 between Erie Insurance
Exchange, by through its Attorney-in-Fact, Erie
Indemnity Company and Erie Insurance Company and
its wholly-owned subsidiary Erie Insurance
Company of New York
10.22# 1997 Annual Incentive Plan of Erie Indemnity
Company
10.23# Erie Indemnity Company Long-Term Incentive Plan
10.24# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Stephen A.
Milne
10.25# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Jan R. Van
Gorder
37
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
- ------ ---------------------- ------------
10.26# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Philip A.
Garcia
10.27# Employment Agreement effective December 16, 1997
by and between Erie Indemnity Company and John J.
Brinling, Jr.
10.28### Employment Agreement effective June 30, 1999 by
and between Erie Indemnity Company and Jeffrey A.
Ludrof
10.29### Employment Agreement effective December 15, 1999
By and between Erie Indemnity Company and
Douglas F. Ziegler
10.30### Addendum to Employment Agreement effective December
15, 1999 by and between Erie Indemnity Company
and Stephen A. Milne
10.31### Addendum to Employment Agreement effective December
15, 1999 by and between Erie Indemnity Company
and Jan R. Van Gorder
10.32### Addendum to Employment Agreement effective December
15, 1999 by and between Erie Indemnity Company
and Philip A. Garcia
10.33### Addendum to Employment Agreement effective December
15, 1999 by and between Erie Indemnity Company
and John J. Brinling, Jr.
10.34### Addendum to Employment Agreement effective December
15, 1999 by and between Erie Indemnity Company
and Jeffrey A. Ludrof
10.35& Addendum to Employment Agreement effective December
15, 2000 by and between Erie Indemnity Company
and Stephen A. Milne
10.36& Addendum to Employment Agreement effective December
15, 2000 by and between Erie Indemnity Company
and Jan R. Van Gorder
10.37& Addendum to Employment Agreement effective December
15, 2000 by and between Erie Indemnity Company
and Philip A. Garcia
10.38& Addendum to Employment Agreement effective December
15, 2000 by and between Erie Indemnity Company
and John J. Brinling, Jr.
10.39& Addendum to Employment Agreement effective December
15, 2000 by and between Erie Indemnity Company
and Jeffrey A. Ludrof
10.40& Addendum to Employment Agreement effective December
15, 2000 by and between Erie Indemnity Company
and Douglas F. Ziegler
38
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
- ------ ---------------------- ------------
10.41&& Cost Sharing Agreement for Information Technology
Development dated March 14, 2001 between
Registrant and member companies of the Erie
Insurance Group.
10.42 Addendum to Employment Agreement effective December
12, 2001 by and between Erie Indemnity Company
and Stephen A. Milne 41
10.43 Addendum to Employment Agreement effective December
12, 2001 by and between Erie Indemnity Company
and Jan R. Van Gorder 42
10.44 Addendum to Employment Agreement effective December
12, 2001 by and between Erie Indemnity Company
and Philip A. Garcia 43
10.45 Addendum to Employment Agreement effective December
12, 2001 by and between Erie Indemnity Company
and John J. Brinling, Jr. 44
10.46 Addendum to Employment Agreement effective December
12, 2001 by and between Erie Indemnity Company
and Jeffrey A. Ludrof 45
10.47 Addendum to Employment Agreement effective December
12, 2001 by and between Erie Indemnity Company
and Douglas F. Ziegler 46
10.48 Summary of termination benefits provided under the
Employment Agreement effective January 18, 2002 by
and between Erie Indemnity Company and Stephen A.
Milne. 47
11 Statement re computation of per share
earnings 48
13 2001 Annual Report to Shareholders.
Reference is made to the Annual Report
furnished to the Commission, herewith. 49
21 Subsidiaries of Registrant 98
99.1## Report of the Special Committee to the
Board of Directors
- ----------------------------------------
* Such exhibit is incorporated by reference to the like numbered
exhibit in Registrant's Form 10 Registration Statement Number 0-24000
filed with the Securities and Exchange Commission on May 2, 1994.
** Such exhibit is incorporated by reference to the like numbered
exhibit in Registrant's Form 10/A Registration Statement Number
0-24000 filed with the Securities and Exchange Commission on August
3, 1994.
*** Such exhibit is incorporated by reference to the like titled but
renumbered exhibit in Registrant's Form 10 Registration Statement
Number 0-24000 filed with the Securities and Exchange Commission on
May 2, 1994.
**** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1995 that was filed with the Commission on March 25,
1996.
***** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K/A amended annual report for the year
ended December 31, 1995 that was filed with the Commission on April
25, 1996.
39
****** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1996 that was filed with the Commission on March 21,
1997.
# Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1997 that was filed with the Commission on March 25,
1998.
## Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1998 that was filed with the Commission on March 30,
1999.
### Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1999 that was filed with the Commission on March 23,
2000.
& Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 2000 that was filed with the Commission on March 23,
2001.
&& Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-Q quarterly report for the quarter ended
June 30, 2001 that was filed with the Commission on July 17, 2001.
40
EXHIBIT 10.42 - ADDENDUM TO EMPLOYMENT AGREEMENT
This Addendum (the "Addendum") is made effective as of the 12th day of
December, 2001 and is intended to amend a certain Employment Agreement (the
"Agreement") by and between Erie Indemnity Company and Stephen A. Milne
effective as of December 16, 1997.
WHEREAS, the Company has determined that it is in the best interest of
the Company and its Shareholders to secure the continued employment of the
Executive in accordance with the terms of the Agreement; and
WHEREAS, the Board of Directors of the Company has previously
considered and agreed to extend the term of the Agreement from its original
term; and
WHEREAS, the Board of Directors of the Company at its meeting of
December 11, 2001 has again agreed to extend the term of the Agreement for a
period of one (1) additional year as contained herein; and
WHEREAS, the Executive is agreeable to the extension of the Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties agree
as follows:
1. Paragraph 1 of the Agreement with respect to the Term is hereby
amended by extending the Term to expire on December 15, 2005.
2. All other terms and conditions of the Agreement remain in full
force and effect.
ATTEST: ERIE INDEMNITY COMPANY
/s/ Jan R. Van Gorder By: /s/ F. William Hirt
Jan R. Van Gorder F. William Hirt
Secretary Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ Stephen A. Milne
Sheila M. Hirsch Stephen A. Milne
Executive Secretary 6200 Kuhl Road
Fairview, PA 16415
41
EXHIBIT 10.43 - ADDENDUM TO EMPLOYMENT AGREEMENT
This Addendum (the "Addendum") is made effective as of the 12th day of
December, 2001 and is intended to amend a certain Employment Agreement (the
"Agreement") by and between Erie Indemnity Company and Jan R. Van Gorder
effective as of December 16, 1997.
WHEREAS, the Company has determined that it is in the best interest of
the Company and its Shareholders to secure the continued employment of the
Executive in accordance with the terms of the Agreement; and
WHEREAS, the Board of Directors of the Company has previously
considered and agreed to extend the term of the Agreement from its original
term; and
WHEREAS, the Board of Directors of the Company at its meeting of
December 11, 2001 has again agreed to extend the term of the Agreement for a
period of one (1) additional year as contained herein; and
WHEREAS, the Executive is agreeable to the extension of the Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties agree
as follows:
1. Paragraph 1 of the Agreement with respect to the Term is hereby
amended by extending the Term to expire on December 15, 2003.
2. All other terms and conditions of the Agreement remain in full
force and effect.
ATTEST: ERIE INDEMNITY COMPANY
/s/ Stephen A. Milne By: /s/ F. William Hirt
Stephen A. Milne F. William Hirt
President & CEO Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ Jan R. Van Gorder
Sheila M. Hirsch Jan R. Van Gorder
Executive Secretary 6796 Manchester Beach Road
Fairview, PA 16415
42
EXHIBIT 10.44 - ADDENDUM TO EMPLOYMENT AGREEMENT
This Addendum (the "Addendum") is made effective as of the 12th day of
December, 2001 and is intended to amend a certain Employment Agreement (the
"Agreement") by and between Erie Indemnity Company and Philip A. Garcia
effective as of December 16, 1997.
WHEREAS, the Company has determined that it is in the best interest of
the Company and its Shareholders to secure the continued employment of the
Executive in accordance with the terms of the Agreement; and
WHEREAS, the Board of Directors of the Company has previously
considered and agreed to extend the term of the Agreement from its original
term; and
WHEREAS, the Board of Directors of the Company at its meeting of
December 11, 2001 has again agreed to extend the term of the Agreement for a
period of one (1) additional year as contained herein; and
WHEREAS, the Executive is agreeable to the extension of the Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties agree
as follows:
1. Paragraph 1 of the Agreement with respect to the Term is hereby
amended by extending the Term to expire on December 15, 2003.
2. All other terms and conditions of the Agreement remain in full
force and effect.
ATTEST: ERIE INDEMNITY COMPANY
/s/ Jan R. Van Gorder By: /s/ F. William Hirt
Jan R. Van Gorder F. William Hirt
Secretary Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ Philip A. Garcia
Sheila M. Hirsch Philip A. Garcia
Executive Secretary 786 Stockbridge Drive
Fairview, PA 16505
43
EXHIBIT 10.45 - ADDENDUM TO EMPLOYMENT AGREEMENT
This Addendum (the "Addendum") is made effective as of the 12th day of
December, 2001 and is intended to amend a certain Employment Agreement (the
"Agreement") by and between Erie Indemnity Company and John J. Brinling, Jr.
effective as of December 16, 1997.
WHEREAS, the Company has determined that it is in the best interest of
the Company and its Shareholders to secure the continued employment of the
Executive in accordance with the terms of the Agreement; and
WHEREAS, the Board of Directors of the Company has previously
considered and agreed to extend the term of the Agreement from its original
term; and
WHEREAS, the Board of Directors of the Company at its meeting of
December 11, 2001 has again agreed to extend the term of the Agreement for a
period of one (1) additional year as contained herein; and
WHEREAS, the Executive is agreeable to the extension of the Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties agree
as follows:
1. Paragraph 1 of the Agreement with respect to the Term is hereby
amended by extending the Term to expire on December 15, 2003.
2. All other terms and conditions of the Agreement remain in full
force and effect.
ATTEST: ERIE INDEMNITY COMPANY
/s/ Jan R. Van Gorder By: /s/ F. William Hirt
Jan R. Van Gorder F. William Hirt
Secretary Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ John J. Brinling Jr.
Sheila M. Hirsch John J. Brinling Jr.
Executive Secretary 5691 Culpepper Drive
Erie, PA 16506
44
EXHIBIT 10.46 - ADDENDUM TO EMPLOYMENT AGREEMENT
This Addendum (the "Addendum") is made effective as of the 12th day of
December, 2001 and is intended to amend a certain Employment Agreement (the
"Agreement") by and between Erie Indemnity Company and Jeffrey A. Ludrof
effective as of June 30, 1999.
WHEREAS, the Company has determined that it is in the best interest of
the Company and its Shareholders to secure the continued employment of the
Executive in accordance with the terms of the Agreement; and
WHEREAS, the Board of Directors of the Company has previously
considered and agreed to extend the term of the Agreement from its original
term; and
WHEREAS, the Board of Directors of the Company at its meeting of
December 11, 2001 has again agreed to extend the term of the Agreement for a
period of one (1) additional year as contained herein; and
WHEREAS, the Executive is agreeable to the extension of the Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties agree
as follows:
1. Paragraph 1 of the Agreement with respect to the Term is hereby
amended by extending the Term to expire on December 15, 2003.
2. All other terms and conditions of the Agreement remain in full
force and effect.
ATTEST: ERIE INDEMNITY COMPANY
/s/ Jan R. Van Gorder By: /s/ F. William Hirt
Jan R. Van Gorder F. William Hirt
Secretary Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ Jeffrey A. Ludrof
Sheila M. Hirsch Jeffrey A. Ludrof
Executive Secretary 170 Gateway Drive
Fairview, PA 16415
45
EXHIBIT 10.47 - ADDENDUM TO EMPLOYMENT AGREEMENT
This Addendum (the "Addendum") is made effective as of the 12th day of
December, 2001 and is intended to amend a certain Employment Agreement (the
"Agreement") by and between Erie Indemnity Company and Douglas F. Ziegler
effective as of December 15, 1999.
WHEREAS, the Company has determined that it is in the best interest of
the Company and its Shareholders to secure the continued employment of the
Executive in accordance with the terms of the Agreement; and
WHEREAS, the Board of Directors of the Company at its meeting of
December 11, 2001 has again agreed to extend the term of the Agreement for a
period of one (1) additional year as contained herein; and
WHEREAS, the Executive is agreeable to the extension of the Agreement.
NOW, THEREFORE, intending to be legally bound hereby, the parties agree
as follows:
1. Paragraph 1 of the Agreement with respect to the Term is hereby
amended by extending the Term to expire on December 15, 2003.
2. All other terms and conditions of the Agreement remain in full
force and effect.
ATTEST: ERIE INDEMNITY COMPANY
/s/ Jan R. Van Gorder By: /s/ F. William Hirt
Jan R. Van Gorder F. William Hirt
Secretary Chairman of the Board
WITNESS:
/s/ Sheila M. Hirsch /s/ Douglas F. Ziegler
Sheila M. Hirsch Douglas F. Ziegler
Executive Secretary 378 Ridgeview Drive
Erie, PA 16505
46
EXHIBIT 10.48 - SUMMARY OF TERMINATION BENEFITS UNDER EMPLOYMENT AGREEMENT
Summary of termination benefits provided under the Employment Agreement between
the Company and Stephen A. Milne dated December 16, 1997, as amended, (The
Employment Agreement) and summary of a separate performance recognition award
(The Performance Award) granted Stephen A. Milne by the Board of Directors of
the Company upon voluntary termination from active employment on January 18,
2002.
Termination benefits that were provided Mr. Milne under The Employment Agreement
are described under a provision in Section 8 of The Employment Agreement (which
was filed with the Commission as an exhibit to the 1997 Form 10K of the
Company), describing when termination from employment is "By the Executive
Without Good Reason".
Benefits that were provided under The Performance Award upon voluntary
termination from active employment by Mr. Milne on January 18, 2002 were as
follows:
1. A cash payment of five times the 2002 base annual salary of Mr. Milne
plus five times Mr. Milne's 2001 award under the Company's annual incentive
plan for Executives.
2. Continuation of the Company's health, dental and vision insurance
coverage for Mr. Milne and his spouse until age 65 and continuation of
Company life insurance programs regarding the life of Mr. Milne for his
lifetime.
3. Treatment of Mr. Milne's benefits under the Long-term Incentive Plan of
the Company as if Mr. Milne's termination was due to disability. The
benefits due upon disability under the plan are defined in Section
2.7(a)(i) and Section 2.7(a)(ii) of the Long-term incentive plan of the
Company as filed with the Commission as an exhibit to the 1997 Form 10K of
the Company.
4. Additional amounts under the Supplemental Employee Retirement Plan
(SERP) considering the following:
Payments, which are to begin immediately after termination of employment,
under the Company's pension/SERP plans, to include the following
enhancements.
- Mr. Milne is to be credited with 30 years of service under the
SERP's benefit formula.
- The normal form of payment under the SERP will be changed from a 10
year Certain and Continuous to 100% Joint and Survivor.
47
EXHIBIT 11. - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
2001 2000 1999
----------------------------------------------------
Class A weighted average common shares
outstanding (stated value $.0292) 63,974,329 64,586,402 66,118,572
Class B common shares outstanding
(stated value $70) 3,070 3,070 3,070
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
----------------------------------------------------
Total 71,342,329 71,954,402 73,486,572
====================================================
Net income $122,261,396 $152,393,015 $143,105,956
============ ============ ============
Per share amount $1.71 $2.12 $1.95
==== ==== ====
Beginning in 1999, the Company established a stock repurchase program. The
Company may repurchase as much as $120 million of its outstanding Class A common
stock through December 31, 2002. In 2001 220,000 shares were repurchased at a
total cost of $7,653,916, or an average price per share of $34.79. Since its
inception the Company has repurchased 3,195,677 shares at a total cost of
$93,373,265, or an average price per share of $29.22. The Company may purchase
the shares from time to time in the open market or by privately negotiated
transactions, depending on prevailing market conditions and alternative uses of
the Company's capital.
48
EXHIBIT 13
INCORPORATED BY REFERENCE, PAGE 16 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
audited financial statements and related notes found on pages 29 to 47 as they
contain important information helpful in evaluating the Company's operating
results and financial condition. (Note: A glossary of certain terms used in this
discussion can be found on page 27. Defined terms are italicized the first time
they appear in the text.)
OVERVIEW
Erie Indemnity Company (the Company) is a Pennsylvania business corporation
formed in 1925 to be the attorney-in-fact for Erie Insurance Exchange (the
Exchange), a Pennsylvania domiciled reciprocal insurance exchange. The Company's
principal business activity consists of management of the affairs of the
Exchange. Management fees received from the Exchange account for the majority of
the Company's consolidated revenues. The Company also is engaged in the
property/casualty insurance business through its wholly-owned subsidiaries, Erie
Insurance Company, Erie Insurance Property & Casualty Company, and Erie
Insurance Company of New York and through its management of Flagship City
Insurance Company (Flagship), a subsidiary of the Exchange. The Company also has
a 21.63 percent common stock interest in Erie Family Life Insurance Company
(EFL), an affiliated life insurance company. Together with the Exchange, the
Company and its subsidiaries and affiliates operate collectively under the name
Erie Insurance Group.
In its role as attorney-in-fact for the Policyholders of the Exchange, the
Company may charge a management fee up to 25 percent of the affiliated assumed
and direct premiums written by the Exchange. The Company's Board of Directors
has the authority to change the management fee at its discretion. The Company's
Board of Directors also acts in a fiduciary capacity with respect to the
operation of the Exchange. The management fee is compensation for: (a) acting as
attorney-in-fact for the Exchange, (b) managing the business and affairs of the
Exchange, and (C) paying certain general administrative expenses not part of the
settlement of losses or the management of investments. All premiums collected,
less the management fee paid to the Company, are retained by the Exchange for
the purpose of paying losses, loss adjustment expenses, investment expenses and
other miscellaneous expenses including insurance-related taxes, licenses and
fees, certain information technology costs covered under a technology
cost-sharing agreement, and for other purposes that are to the benefit of the
Policyholders. The management fee rate charged the Exchange was 25 percent for
each year from 1999 to 2001. In December 2001, the Board voted to maintain the
25 percent management fee rate for all of 2002.
Erie Insurance Property & Casualty Company, Flagship, Erie Insurance Company and
Erie Insurance Company of New York participate in an intercompany pooling
agreement with the Exchange. Under the pooling agreement, all property/casualty
insurance business of the Erie Insurance Group is ceded to the Exchange. This
pooling agreement provides for Erie Insurance Company and Erie Insurance Company
of New York to share proportionately through retrocession in the results of all
property/casualty insurance operations of the Exchange and the Company's
subsidiaries, except for the provisions of the excess of loss reinsurance
agreement discussed below. Erie Insurance Company's and Erie Insurance Company
of New York's proportionate share of the reinsurance pool is 5.0 percent and 0.5
percent, respectively. Erie Insurance Company and Erie Insurance Company of New
York also have in effect an all-lines aggregate excess of loss reinsurance
agreement with the Exchange. This reinsurance treaty is excluded from the
intercompany pooling agreement and limits the amount of sustained ultimate net
losses in any applicable accident year for the Erie Insurance Company and Erie
Insurance Company of New York.
The results of the Company's insurance operations are affected by the conditions
that affect all property/casualty insurance companies, such as increased
competition, catastrophic events, terrorist actions, changes in the regulatory
and legislative environments and changes in general economic and investment
conditions.
49
INCORPORATED BY REFERENCE, PAGES 16 AND 17 OF THE COMPANY'S 2001 ANNUAL REPORT
TO SHAREHOLDERS
RESULTS OF OPERATIONS
OVERVIEW
Consolidated net income in 2001 was $122,261,396, a decrease of 19.8 percent
from the 2000 net income of $152,393,015. Gains made in the Company's management
operations, including a 15.1 percent increase in management fee revenue, were
outpaced by losses experienced in the Company's insurance underwriting
operations and reduced levels of income from investment operations. The 2001
underwriting loss resulted from increased losses in the direct business of the
Company's property/casualty subsidiaries, primarily in private passenger and
commercial automobile and workers' compensation insurance, as well as assumed
reinsurance losses, some of which relate to the September 11th terrorist attacks
on the World Trade Center. The Company recognized $31,879,174 in net realized
losses from investments in 2001 on the sale of securities and related charges
for other-than-temporary impairments of equity securities and limited
partnerships.
Operating income (net income excluding realized gains/losses and related federal
income taxes) increased to $142,982,859 in 2001 from $141,363,933 in 2000.
Operating income per share for 2001 was $2.00 per share, an increase of 2.0
percent from $1.96 per share in 2000. Operating income in 2001 reflects a third
quarter after-tax charge of $3,795,639, or $.06 per share, from the World Trade
Center terrorist attacks and a fourth quarter after-tax charge of $6,933,732, or
almost $.10 a share, for severance charges related to the retirement of the
Company's chief executive officer. Operating income in 2000 included adverse
development on assumed reinsurance losses from the catastrophic storms that
devastated Europe in December 1999 contributing $1.4 million, or $.01 per share,
after federal income taxes.
ANALYSIS OF MANAGEMENT OPERATIONS
Net revenue from management operations rose 16.3 percent to $184,567,670 in 2001
from $158,746,324 in 2000 and 6.9 percent in 2000 from $148,517,964 in 1999.
Gross margins from management operations were 27.9 percent in 2001 compared to
gross margins of 27.6 percent in 2000 and 28.1 percent in 1999.
Management fee revenue derived from the direct and affiliated assumed premiums
of the Exchange rose $83,319,843, or 15.1 percent, to $634,965,490 in 2001 from
$551,645,647 in 2000. (See page 18 "Management Fee Revenue by State and Line of
Business.") The direct and affiliated assumed premiums of the Exchange grew 15.1
percent in 2001 to $2,539,861,960 from $2,206,582,573 in 2000. Increases in
average premium per policy, improvements in new policy growth and favorable
policy retention rates were all contributing factors in the growth. Firming
pricing in 2001 for commercial and personal insurance have allowed the Company's
property/casualty subsidiaries and affiliates to more adequately price its
products while maintaining its competitive advantage in the insurance
marketplace. The year-to-year growth rate of direct written premium in the
fourth quarter was 18.9 percent, up from 14.8 percent growth in the third
quarter, 14.0 percent growth in the second quarter and 12.8 percent growth in
the first quarter of 2001.
The average premium per policy increased 6.1 percent to $817 in 2001 from $770
in 2000. For personal auto (which accounted for 54.6 percent of the direct
written premiums of the Group and over 1.4 million policies in force), the
average premium per policy increased 3.1 percent to $967 in 2001 from $938 in
2000.
Continued improvement in new policy growth also drove the gains experienced in
the Group's direct written premium. Policies in force increased 8.5 percent to
3,109,583 in 2001 from 2,865,553 in 2000 and 6.5 percent in 2000 from 2,689,849
in 1999. Policy retention has remained excellent at 90.9 percent, 91.0 percent
and 90.5 percent for the years ended December 31, 2001, 2000 and 1999,
respectively, for all lines of business combined.
Service agreement revenue for the Company grew 20.2 percent to $27,247,018 in
2001 from $22,662,133 in 2000 and 46.8 percent from $15,440,862 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 $15,996,469, $12,512,783 and
$7,282,621 in 2001, 2000 and 1999, respectively. The 2001 and 2000 growth was
positively impacted by service charge increases from $2 to $3 per installment
for policies renewing in most states beginning in the second quarter of 2000.
Also included in service agreement revenue is service income received from
50
INCORPORATED BY REFERENCE, PAGE 18 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
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 nonaffiliated assumed reinsurance premiums. These fees
totaled $11,250,549, $10,149,350 and $8,158,241 on net voluntary assumed
reinsurance premiums of $160,722,122, $144,990,714 and $116,546,295 for 2001,
2000 and 1999, respectively.
The cost of management operations rose 14.9 percent to $477,644,838 in 2001 from
$415,561,456 in 2000 and 9.3 percent in 2000 from $380,298,179 in 1999.
Commissions to independent Agents, which are the largest component of the cost
of management operations, include scheduled commissions earned by independent
Agents on premiums written, as well as promotional incentives for Agents and
Agent contingency awards. Agent contingency awards are based upon a threeyear
average of the underwriting profitability of the direct business written and
serviced within the Erie Insurance Group by the independent Agent. Commission
costs rose 14.3 percent to $323,067,677 in 2001 from $282,746,734 in 2000 and
7.5 percent in 2000 from $263,112,139 in 1999. Commission costs grew at a slower
rate relative to the growth in direct premiums written in 2001 as a result of
lower accruals for Agent contingency awards compared to 2000. The provision for
Agent contingency awards totaled $15,692,870, $18,277,468 and $19,871,036 in
2001, 2000 and 1999, respectively. Commission costs, excluding Agent contingency
awards, increased 16.2 percent in 2001, which is in line with the increase in
direct written premiums.
The cost of management operations, excluding commission costs, increased 16.4
percent in 2001 to $154,577,161 from $132,814,722 in 2000 due primarily to
increases in personnel costs. The Company's personnel costs, net of
reimbursement from affiliates, totaled $94,361,308, $79,318,446 and $69,484,788
in 2001, 2000 and 1999, respectively. A portion of the increase in personnel
costs resulted from recognition of the severance obligation related to the
retirement of the Company's president and chief executive officer on January 18,
2002. The Company recorded a severance charge in the fourth quarter 2001 of
$10,667,280. Personnel costs, excluding the severance charge, rose 5.5 percent
in 2001 due to increases in Employee pay rates and staffing levels.
During 2001, the Company and the property/casualty insurance companies of the
Erie Insurance Group entered into a cost-sharing agreement for information
technology development. This agreement describes how member companies of the
Erie Insurance Group will share the costs to be incurred for the development of
new Internet-enabled property/casualty policy administration and customer
relationship management systems. This agreement provides that the application
development costs and the related enabling technology costs, such as technical
infrastructure and architectural tools, will be shared among the
property/casualty insurance companies in a manner consistent with the sharing of
insurance transactions under the existing intercompany pooling agreement. These
technology costs are included in the policy acquisition and other underwriting
expenses on the Company's Consolidated Statements of Operations.
Management fee revenue by state and line of business
For the year ended December 31, 2001
(dollars in thousands)
All Other
Private Commercial Commercial Workers' Lines of
State Passenger Auto Auto Homeowners Multi Peril Compensation Business Total
- -----------------------------------------------------------------------------------------------------------------------
District of Columbia $ 548 $ 108 $ 247 $ 510 $ 595 $ 117 $ 2,125
Illinois 3,075 645 1,048 1,667 1,010 223 7,668
Indiana 13,309 1,721 5,742 2,846 2,041 845 26,504
Maryland 40,521 6,869 12,689 6,383 6,311 2,671 75,444
New York 10,319 1,887 2,654 3,010 1,645 494 20,009
North Carolina 11,948 4,718 6,171 5,255 3,993 1,384 33,469
Ohio 29,094 4,312 9,619 7,123 0 1,697 51,845
Pennsylvania 193,280 23,004 50,042 27,319 26,801 7,806 328,252
Tennessee 3,712 1,378 1,450 1,830 1,278 386 10,034
Virginia 22,413 5,404 7,695 6,254 6,993 1,958 50,717
West Virginia 18,070 2,644 4,115 2,757 0 838 28,424
Wisconsin 191 52 68 63 78 23 475
- ------------------------------------------------------------------------------------------------------------------------
Total $346,480 $ 52,742 $ 101,540 $ 65,017 $ 50,745 $ 18,442 $ 634,966
========================================================================================================================
51
INCORPORATED BY REFERENCE, PAGE 19 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
Also included as part of this eCommerce program are information technology
infrastructure expenditures that are not subject to the cost-sharing agreement
for information technology. These eCommerce program costs are included in the
cost of management operations in the Company's Consolidated Statements of
Operations. These costs totaled $1,588,878 in 2001. (See additional discussion
of this program under "Analysis of Insurance Underwriting Operations" and
"Factors That May Affect Future Results.")
ANALYSIS OF INSURANCE UNDERWRITING OPERATIONS
The Company recorded underwriting losses of $20,462,530, $10,402,120 and
$3,538,884 in 2001, 2000 and 1999, respectively. The underwriting results in
2001 reflect higher losses experienced in private passenger auto, and commercial
automobile and workers' compensation lines of business, as well as losses from
assumed reinsurance.
Premiums earned increased $13,940,059, or 11.3 percent, to $137,648,253 in 2001
while losses and loss adjustment expenses incurred increased $17,636,989, or
17.7 percent, to $117,201,017 in 2001. The average premium per policy of the
Erie Insurance Group was $817, $770 and $763 in 2001, 2000 and 1999,
respectively.
The Company's property/casualty insurance subsidiaries' share of the Group's
direct business generated net underwriting losses of $16,358,294, $6,437,501 and
$946,925 in 2001, 2000 and 1999, respectively. In 2001, the Group continued to
experience a decrease in loss frequency; however, loss severity continued to
rise. The higher loss costs in 2001 also include adverse development of prior
accident year losses amounting to $5.9 million, net of reinsurance recoveries.
In 1998 and 1999, the Group lowered prices in the private passenger automobile
lines of insurance in response to extremely competitive market conditions and
improving loss trends in auto insurance. The firming of auto pricing in 2001 by
the industry in response to deteriorating loss cost trends have allowed the
Group to begin raising auto insurance prices in order to improve underwriting
profitability. All policies issued by the Group are for a one-year term.
Therefore, the impact of the rate increases will take at least one year before
the full impact is recognized in the underwriting results of the Company.
Catastrophes are an inherent risk of the property/casualty insurance business
and can have a material impact on the Company's insurance underwriting results.
In addressing this risk, the Company employs what it believes are reasonable
underwriting standards and monitors its exposure by geographic region.
Additionally, the Company's property/casualty insurance subsidiaries' excess of
loss reinsurance agreement with the Exchange should substantially mitigate the
effect of catastrophe losses on the Company's financial position. During 2001,
2000 and 1999, the Company's share of catastrophe losses from direct business
amounted to $1.6 million, $2.1 million and $4.4 million, respectively.
The Company's property/casualty insurance subsidiaries' unaffiliated voluntary
assumed reinsurance business generated net underwriting losses of $4,104,236,
$3,964,619 and $2,591,959 in 2001, 2000 and 1999, respectively. Contributing to
the 2001 increased loss are the Company's 5.5 percent share of the Erie
Insurance Group's estimated incurred reinsurance losses of $150 million from the
September 11th terrorist attacks on the World Trade Center. The Company's share
of these losses, resulting from its property/casualty insurance subsidiaries'
participation in the intercompany pooling agreement with the Exchange, totaled
$8,250,000 in 2001, before consideration of recoveries under an excess of loss
reinsurance agreement with the Exchange. The agreement reduces the net retention
on September 11th losses recorded by the Company to $5,839,445.
In late 2001, the Company took measures to improve the underwriting results from
its non-affiliated assumed reinsurance book of business. The effects of these
measures will be to lower the Company's exposure to loss by excluding terrorism
coverage on certain treaties and, at the same time, raising pricing
substantially. Pricing in the reinsurance marketplace has firmed considerably
since the events of September 11th and the Company is obtaining significant
price increases in its 2002 treaty renewals.
During 2001, the Company's property/casualty insurance subsidiaries, Erie
Insurance Company and Erie Insurance Company of New York, recorded $7,241,235 in
reinsurance recoveries under the excess of loss reinsurance agreement with the
Exchange. Of the total recoveries in 2001, $6,505,716 relates to accident year
2001 (including the losses related to the World Trade Center), with the balance
pertaining to the 1999 accident year. The total recoverable reduces the analysis
52
INCORPORATED BY REFERENCE, PAGES 19 AND 20 OF THE COMPANY'S 2001 ANNUAL REPORT
TO SHAREHOLDERS
of Company's loss and loss adjustment expenses in 2001. No cash payments have
been made between the companies in 2001 for these recoveries. There were no such
recoveries recognized in calendar years 2000 or 1999.
Included in the Company's policy acquisition and other underwriting expenses is
the property/casualty insurance subsidiaries' share of costs related to the
eCommerce initiative totaling $1,314,734 for 2001. The costs stem from the
technology cost-sharing agreement described in the analysis of management
operations section above, and will continue to increase as the program develops
through 2002 and 2003. Also included in underwriting expenses in 2001 is a
charge of $1,655,926 for state guaranty fund assessments related to the
insolvency of the Reliance Insurance Company.
The 2001 combined ratio for the Company's property/casualty insurance operations
calculated under Generally Accepted Accounting Principles (GAAP) was 114.9
compared to 108.4 in 2000 and 103.0 in 1999. The GAAP combined ratio for 2001,
2000 and 1999, excluding catastrophe losses on direct business, was 113.7, 106.7
and 99.3, respectively.
ANALYSIS OF INVESTMENT OPERATIONS
Net revenue from investment operations was $18,770,702 in 2001 compared to
$75,593,393 in 2000 and $63,775,746 in 1999. In 2001, the equity markets
declined and recovery was further slowed by the September 11th terrorist
attacks. As a result, the Company experienced valuation declines in its
investment portfolios over the past year. Net realized losses totaled
$31,879,174 in 2001 compared to realized gains of $16,967,819 in 2000 and
$14,745,334 in 1999. The Company recognized realized losses in 2001 as a result
of the sale of securities and charges for other-than-temporary impairments of
preferred stock and limited partnerships. The 2001 sales of investments in a
loss position was part of a proactive year-end tax selling strategy. Net
realized losses from sales of securities totaled $27,291,573, of which $9.6
million is expected to be recovered in federal income taxes paid in 1998, 1999
and 2000. Of this total realized loss, $4.5 million relates to sales of
securities of Enron Corporation and its related legal entities. Impairment
charges of investments with declines in value considered by management to be
other-than-temporary totaled $4,587,601 in 2001.
Net investment income rose 3.1 percent to $49,883,896 for the year ended
December 31, 2001 and 11.7 percent to $48,400,343 for the year ended December
31, 2000. The growth in investment income for 2001, 2000 and 1999 was affected
by cash outflows used by the Company to repurchase its shares which, through
December 31, 2001, totaled $93.4 million. Included in net investment income are
primarily interest and dividends on the Company's fixed maturity and equity
security portfolios.
Equity in losses of limited partnerships were $6,731 for the year ended December
31, 2001, compared to earnings of $4,733,285 and $640,925 in 2000 and 1999,
respectively. Private equity and fixed income limited partnerships realized
losses of $1,430,816 in 2001 compared to earnings of $2,807,632 in 2000. Real
estate limited partnerships reflected earnings of $1,424,085 in 2001 compared to
earnings of $1,925,653 in 2000.
The Company's earnings from its 21.6 percent ownership of Erie Family Life
Insurance Company (EFL) totaled $772,711 in 2001, down from $5,491,946 in 2000
and $5,045,131 in 1999. The decrease in level of earnings from the Company's
investment in Erie Family Life is related to sales of investments in 2001
resulting in net realized losses on EFL's Statement of Operations. This
investment is accounted for under the equity method of accounting.
53
INCORPORATED BY REFERENCE, PAGES 20 AND 21 OF THE COMPANY'S 2001 ANNUAL REPORT
TO SHAREHOLDERS
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
December 31, 2001 and 2000, the Company's investment portfolio of
investment-grade bonds, common stock, preferred stock and cash and cash
equivalents represents 42.6 percent and 46.1 percent, respectively, of total
assets. These investments provide the liquidity the Company requires to meet the
demands on its funds.
Distribution of investments
Carrying value at December 31,
(dollars in thousands)
2001 % 2000 %
----------------------------------------
Fixed maturities $ 559,873 67 $ 531,546 66
Equity securities:
Preferred stock 130,007 15 109,081 13
Common stock 63,791 7 95,365 12
Limited partnerships 81,596 10 68,242 8
Real estate mortgage loans 5,700 1 6,581 1
----------------------------------------
Total investments $ 840,967 100 % $ 810,815 100 %
========================================
The Company reviews the investment portfolio to evaluate positions that might
incur other-than-temporary declines in value. For all investment holdings,
general economic conditions and/or conditions specifically affecting the
underlying issuer or its industry are considered in evaluating impairment in
value. In addition to specific factors, the primary factors considered in the
Company's review of investment valuation are the length of time the market value
is below cost and the amount the market value is below cost.
For common equity securities (including equity limited partnerships) where the
decline in market value is more than 20 percent below cost for a period
exceeding six months, there is a presumption of impairment. The Company
considers market conditions, industry characteristics and the fundamental
operating results of the issuer before deciding to sell the investment at a loss
or to recognize an impairment charge to operations. For common equity securities
that have declined more than 20 percent below cost for a period exceeding twelve
months, the position is either sold or recognized as impaired and a charge to
operations is recognized as realized losses through the Consolidated Statements
of Operations.
For fixed maturity investments, the Company individually analyzes all positions
whose market value have declined more than 20 percent below cost for a period
exceeding six months. The Company considers market conditions, industry
characteristics and the fundamental operating results of the issuer to determine
if the decline is due to changes in interest rates, changes relating to a
decline in credit quality, or other issues affecting the investment. Positions
that have incurred market price decline of over 20 percent for a period greater
than six months where the creditworthiness of the issuer indicates a decline
that is other-than-temporary are either sold or recognized as impaired and
reflected as a charge to the Company's operations.
If the Company's policy for determining the recognition of impaired positions
were different, the Company's Consolidated Statements of Financial Position and
results of operations could be significantly impacted. Management believes its
investment valuation philosophy and accounting practices result in appropriate
and timely measurement of value and recognition of impairment.
54
INCORPORATED BY REFERENCE, PAGES 21 AND 22 OF THE COMPANY'S 2001 ANNUAL REPORT
TO SHAREHOLDERS
FIXED MATURITIES. Under its investment strategy, the Company maintains a fixed
maturities portfolio that is of very high quality and well diversified within
each market sector. The fixed maturities portfolio is managed with the goal of
achieving reasonable returns while limiting exposure to risk. At December 31,
2001, the carrying value of fixed maturity investments represented 66.6 percent
of total invested assets.
The Company's fixed maturity investments consist 96.9 percent of high-quality,
marketable bonds and redeemable preferred stock, all of which were rated at
investment-grade levels (above Ba/BB) at December 31, 2001. Included in this
investment-grade category are $230.2 million, or 41.1 percent, of the highest
quality bonds and redeemable preferred stock rated Aaa/AAA or Aa/AA or bonds
issued by the United States government. Generally, the fixed maturities in the
Company's portfolio are rated by external rating agencies. If not externally
rated, they are rated by the Company on a basis consistent with that used by the
rating agencies. Management classifies all fixed maturities as
available-for-sale securities, allowing the Company to meet its liquidity needs
and provide greater flexibility for its investment managers to appropriately
respond to changes in market conditions or strategic direction.
Securities classified as available-for-sale are carried at market value with
unrealized gains and losses included in shareholders' equity. At December 31,
2001, the net unrealized gain on fixed maturities, net of deferred taxes,
amounted to $10,693,076 compared to $4,793,120 at December 31, 2000.
The Company's investment strategy achieves a balanced maturity schedule in order
to moderate investment income in the event of interest rate declines in a year
in which a large amount of securities could be redeemed or mature.
EQUITY SECURITIES. Equity securities (common stock and non-redeemable preferred
stock) are carried on the Consolidated Statements of Financial Position at
market value. At December 31, 2001 and 2000, equity securities held by the
Company include net unrealized gains of $22,146,017 and $12,660,439,
respectively, net of deferred taxes. Investment characteristics of common and
preferred stocks differ substantially from one another. The Company's
non-redeemable preferred stock portfolio provides a source of highly predictable
current income that is competitive with investment-grade bonds. Non-redeemable
preferred stocks generally provide for fixed rates of return that, while not
guaranteed, resemble fixed income securities and are paid before common stock
dividends. Common stock provides capital appreciation potential within the
portfolio. Common stock investments inherently provide no assurance of producing
income because dividends are not guaranteed.
LIMITED PARTNERSHIP INVESTMENTS. The Company's limited partnership investments
include U.S. and foreign private equity, real estate and fixed income
investments. During 2001, limited partnership investments increased $13,354,660
to $81,596,108. Fixed income and real estate limited partnerships, which
comprise 34.5 percent of the total limited partnerships, produce a predictable
earnings stream while private equity limited partnerships, which comprise 65.5
percent of the total limited partnerships, tend to provide a less predictable
earnings stream but the potential for greater long-term returns.
The Company has outstanding commitments to invest up to $124 million related to
these limited partnership investments at December 31, 2001. These commitments
will be funded as required through the end of the respective investment periods,
which typically span three to five years and principally expire in 2005. At
December 31, 2001, the total commitment to fund limited partnerships that invest
in private equity securities is $87 million, real estate activities $22 million
and fixed income securities $15 million. At December 31, 2001, no one commitment
exceeded $7.5 million, or 6 percent, of the outstanding commitment amount. The
Company has sufficient cash flows from operations to meet these partnership
commitments.
INVESTMENT IN EFL. EFL markets various life insurance products, principally
non-participating individual and group life policies, including universal life
and individual and group annuity products, in eleven jurisdictions. The
Company's carrying value of $44,683,170 represents 21.63 percent of the
shareholders' equity of EFL at December 31, 2001.
LIABILITIES
PROPERTY/CASUALTY LOSS RESERVES. Loss reserves are established to account for
the estimated ultimate costs of loss and loss adjustment expenses for claims
55
INCORPORATED BY REFERENCE, PAGE 22 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
that have been reported but not yet settled and claims that have been incurred
but not reported. The estimated loss reserve for reported claims is based
primarily upon a case-by-case evaluation of the type of risk involved and
knowledge of the circumstances surrounding each claim and the insurance policy
provisions relating to the type of loss. Estimates of reserves for unreported
claims and loss settlement expenses are determined on the basis of historical
information by line of insurance as adjusted to current conditions. Loss
reserves are set at full expected cost, except for loss reserves for workers'
compensation which have been discounted at 2.5 percent in 2001 and 2000.
Inflation is implicitly provided for in the reserving function through analysis
of costs, trends and reviews of historical reserving results.
The process of estimating the liability for unpaid losses and loss expenses is
inherently judgmental and can be influenced by factors subject to variation.
Possible sources of variation include claim frequency and severity, changing
rates of inflation as well as changes in other economic conditions, judicial
trends and legislative changes. It is unlikely that future losses and loss
adjustment expenses will develop exactly as projected. The Company continually
refines reserves as experience develops and new information becomes known. The
Company reflects adjustments to reserves in the results of operations in the
periods in which the estimates are changed.
At December 31, 2001, the property/casualty insurance companies managed by the
Company had estimated total loss exposure related to the events of September
11th of $150 million. Only a nominal amount to date has been paid on losses
related to September 11th, which adds greater uncertainty to the loss estimates.
Additionally, disputes concerning whether the September 11th attack on the World
Trade Center should be considered one or two insurable events are currently
being litigated. The Company's $150 million loss estimate anticipates that the
events of September 11th is considered one event. If the attack comes to be
considered as two events, the total potential exposure for the Erie Insurance
Group would increase between $50 million and $75 million. The effect on the
Company, as a result, would be additional losses between $2.7 million and $4.1
million. Taking into consideration the excess of loss reinsurance agreement, the
net impact of such potential additional losses would be minimal to the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for a change in interest rates is
concentrated in the investment portfolio. The Company monitors this exposure
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. Generally, the Company does not hedge its
exposure to interest rate risk, as it holds fixed maturity investments to
maturity.
Principal cash flows and related weighted-average interest rates by expected
maturity dates for financial instruments sensitive to interest rates are as
follows:
Weighted-
December 31,2001 Principal average
(dollars in thousands) cash flows interest rate
- -----------------------------------------------------------------------
Fixed maturities and short-term bonds:
2002 $ 37,245 6.5%
2003 35,245 6.5%
2004 37,978 7.0%
2005 49,515 6.3%
2006 55,340 6.5%
Thereafter 330,872 7.5%
- -----------------------------------------------------------------------
Total $ 546,195
- -----------------------------------------------------------------------
Market Value $ 574,874
=======================================================================
56
INCORPORATED BY REFERENCE, PAGE 23 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
Weighted-
December 31,2000 Principal average
(dollars in thousands) cash flows interest rate
- -----------------------------------------------------------------------
Fixed maturities and short term bonds:
2001 $ 54,677 6.5%
2002 55,203 6.6%
2003 49,720 6.7%
2004 47,852 7.0%
2005 59,775 6.5%
Thereafter 289,077 7.2%
- -----------------------------------------------------------------------
Total $ 556,304
- -----------------------------------------------------------------------
Market Value $ 561,502
=======================================================================
Actual cash flows may differ from those stated as a result of calls and
prepayments
EQUITY PRICE RISK
The Company's portfolio of marketable equity securities, which is carried on the
Consolidated Statements of Financial Position at estimated fair value, has
exposure to price risk, the risk of potential loss in estimated fair value
resulting from an adverse change in prices. The Company's objective is to earn
competitive relative returns by investing in a diverse portfolio of
high-quality, liquid securities. Portfolio characteristics are analyzed
regularly and market risk is actively managed through a variety of techniques.
Portfolio holdings are diversified across industries; concentrations in any one
company or industry are limited by parameters established by management and the
Company's Board of Directors.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of an entity's ability to secure enough cash to meet its
contractual obligations and operating needs. The Company's major sources of
funds from operations are the net cash flow generated from management
operations, the net cash flow from Erie Insurance Company's and Erie Insurance
Company of New York's 5.5 percent participation in the underwriting results of
the reinsurance pool with the Exchange, and investment income from affiliated
and nonaffiliated investments. With respect to the management fee, funds are
generally received from the Exchange on a premiums collected basis. The other
receivable from Erie Insurance Exchange and affiliates represents the management
fee receivable from premiums written but not yet collected as well as the
management fee receivable on premiums collected in the current month, net of
operating expenses paid by the Exchange. The Company pays commissions on
premiums collected rather than premiums written. Cash outflows are variable
because of the fluctuations in settlement dates for liabilities for unpaid
losses and because of the potential for large losses, either individually or in
aggregate.
The Company generates sufficient net positive cash flow from its operations to
fund its commitments and build its investment portfolio, thereby increasing
future investment returns. The Company maintains a high degree of liquidity in
its investment portfolio in the form of readily marketable fixed maturities,
equity securities and short-term investments. Net cash flows provided by
operating activities for the years ended December 31, 2001, 2000 and 1999, were
$148,607,987, $130,614,256 and $136,967,568, respectively.
The Company pays nearly all general and administrative expenses on behalf of the
Exchange and other affiliated companies. The Exchange generally reimburses the
Company for these expenses on a paid basis each month.
Management fee and expense reimbursements due at December 31 from the Exchange
were $147,344,684 and $117,961,638 in 2001 and 2000, respectively. A receivable
from EFL for expense reimbursements totaled $2,255,597 at December 31, 2001,
compared to $1,997,012 at December 31, 2000. The Company also has a receivable
due from the Exchange for reinsurance recoverable from losses and unearned
premium balances ceded to the intercompany reinsurance pool. Such amounts
totaled $491,055,048 and $412,049,637 at December 31, 2001 and 2000,
respectively.
Beginning in 1999, the Company established a stock repurchase program. The
Company may repurchase as much as $120 million of its outstanding Class A common
stock through December 31, 2002. In 2001, there were 220,000 shares repurchased
at a total cost of $7,653,916. Since its inception, 3,195,677 shares have been
repurchased at a total cost of $93,373,265. The Company may purchase the shares
from time to time in the open market or by privately negotiated transactions,
depending on prevailing market conditions and alternative uses of the Company's
capital.
57
INCORPORATED BY REFERENCE, PAGES 23 AND 24 OF THE COMPANY'S 2001 ANNUAL REPORT
TO SHAREHOLDERS
Dividends declared to shareholders totaled $40,407,734, $36,188,667 and
$32,802,428 in 2001, 2000 and 1999, respectively. There are no regulatory
restrictions on the payment of dividends to the Company's shareholders, although
there are state law restrictions on the payment of dividends from the Company's
subsidiaries to the Company. Dividends from subsidiaries are not material to the
Company's cash flows.
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to deferred tax assets and
liabilities resulted in net deferred tax liabilities at December 31, 2001 and
2000 of $12,944,678 and $7,161,544, respectively. The primary reason for the
increase in the deferred tax liability is an increase in unrealized gains from
available-for-sale securities and limited partnerships in 2001 of $18,013,789
resulting in an increase in deferred tax liability of $6,304,826. Management
believes it is likely that the Company will have sufficient taxable income in
future years to realize the benefits of the gross deferred tax assets.
FINANCIAL RATINGS
The following table summarizes the current A.M. Best Company ratings for the
insurers managed by the Company:
Erie Insurance Exchange A++
Erie Insurance Company A++
Erie Insurance Property & Casualty Company A++
Erie Insurance Company of New York A++
Flagship City Insurance Company A++
Erie Family Life Insurance Company A+
According to A.M. Best, a superior rating (A++ or A+) is assigned to those
companies that, in A.M. Best's opinion, have achieved superior overall
performance when compared to the standards established by A.M. Best and have a
very strong ability to meet their obligations to policyholders over the long
term. Financial strength ratings have become increasingly important to the
insurers managed by the Company and to the industry in marketing insurance
products.
REGULATORY RISK-BASED CAPITAL
The 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, 2001, the
Company's property/casualty insurance subsidiaries' RBC levels are all
substantially in excess of levels that would require regulatory action.
REINSURANCE RISK
The property/casualty insurers managed by the Company do not maintain any ceded
reinsurance treaties with unaffiliated insurers due to their strong surplus
position, the cost of reinsurance and low ratio of the premium writings to
surplus. The Company does not believe the absence of ceded reinsurance treaties
will have a material adverse effect, over the long term, on the results of
operations of the insurance companies managed by the Company. However, the
absence of such treaties could have an adverse effect on the results of
operations of the insurance companies managed by the Company in a given year if
the frequency or severity of claims were substantially higher than historical
averages because of an unusual event or series of events. The Company's
reinsurance agreement in effect with the Exchange mitigates catastrophe loss
exposure risk to the Company's property/casualty insurance subsidiaries, but
does not mitigate the exposure of the Exchange.
58
INCORPORATED BY REFERENCE, PAGES 24 AND 25 OF THE COMPANY'S 2001 ANNUAL REPORT
TO SHAREHOLDERS
FACTORS THAT MAY AFFECT FUTURE RESULTS
MANAGEMENT OPERATIONS
MANAGEMENT FEE RATE. The management fee paid to the Company as attorney-in-fact
for the Exchange is subject to approval by the Company's Board of Directors. The
rate may be changed periodically by the Board at its discretion but may not
exceed 25 percent. The Board considers several factors in determining the
management fee rate, including the relative financial position of the Exchange
and the Company and the long-term capital needs of the Exchange, in order to
foster growth and competitiveness as well as maintain its superior financial
strength, which ultimately benefits the entire Erie Insurance Group. Because the
management fee revenue from the Exchange provides the majority of the Company's
revenue, the income of the Company is dependent upon the ability of the Exchange
to maintain its financial condition and its ability to continue to offer
competitive insurance products in the marketplace.
INSURANCE PRICING CONDITIONS. Given the direct correlation of direct premium
written to the management fee revenue of the Company, the premium growth and
financial viability of the property/casualty insurers managed by the Company
bear directly on the ongoing profitability of the Company. Competitive
conditions have exerted downward pressure on property/casualty insurance pricing
and characteristically soft market conditions (favoring buyers of insurance)
have prevailed for some time in both commercial and personal lines of insurance.
During 2001, prices for commercial insurance have firmed considerably and
personal lines prices have stabilized and started to trend higher. These trends
accelerated after the events of September 11th. The Company continually
evaluates pricing levels balancing competitive conditions and the need to
maintain the solid financial condition of the insurers it manages. Pricing
actions contemplated or taken by the insurers of the Erie Insurance Group are
subject to various regulatory requirements of the states in which these insurers
operate. Premium increases anticipated in 2002, due to pricing actions
contemplated, filed and awaiting approval, or approved through December 31,
2001, could amount to approximately $107 million in premium for the Erie
Insurance Group in 2002. The majority of the anticipated increase stems from the
private passenger and commercial auto lines of business as well as the homeowner
line of business. Further rate actions will be contemplated during 2002 and
future years affecting the overall competitiveness and profitability of the Erie
Insurance Group and the management fee levels of the Company.
The Company also receives service agreement revenue from the Exchange as
compensation for management of its voluntary assumed non-affiliated reinsurance
business. The Company's service fee is 7 percent of the non-affiliated assumed
voluntary reinsurance premiums. During the 2002 reinsurance renewal season, the
Exchange has been obtaining significant price increases on treaties it is
renewing. On average, renewal rates online are 40 to 50 percent above 2001
rates. However, the Exchange is reducing its aggregate exposure in
non-affiliated assumed voluntary reinsurance by non-renewing unprofitable
business, excluding terrorism coverage, and restricting exposure on certain
types of risks. As a result of raising prices and lowering aggregate exposure in
non-affiliated assumed voluntary reinsurance, the Company anticipates
reinsurance premium volume will be at or slightly below the 2001 premium level.
INSURANCE OPERATIONS
GEOGRAPHIC EXPANSION. On December 6, 2001, the Company announced the Erie
Insurance Group's intention to expand its operations into Minnesota. Minnesota
will be the 12th state served by the Group, in addition to the District of
Columbia. Beginning in the third quarter of 2004, the Group intends to write all
lines of insurance it currently offers, including auto, home, business, life and
annuities in Minnesota.
INCURRED BUT NOT REPORTED (IBNR) LOSSES. The insurance companies owned and
managed by the Company are exposed to new claims on previously closed files and
to larger than historical settlements on pending and unreported claims. The
Company is exposed to increased losses by virtue of its 5.5 percent
participation in the intercompany reinsurance pooling agreement with the
Exchange.
59
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
INSURANCE PREMIUM RATE INCREASES. Premium rate filings impact the Company's
property/casualty insurance subsidiaries. Rate increases filed in 2001 for the
private passenger auto, commercial auto, workers' compensation and homeowners
lines of business in various states were sought to offset growing loss costs in
these particular lines. See additional discussion of premium levels and pricing
in the insurance pricing conditions section above.
INSURANCE COMPANY INSOLVENCIES. The insurance companies owned and managed by the
Company pay assessments under the solvency or guaranty laws of the various
states in which they are licensed. During 2001, the Company received
notification of the insolvency of the Reliance Insurance Group. As a result, the
Erie Insurance Group property/casualty insurance companies recorded an estimated
assessment of $36.8 million, before consideration of potential premium tax
recoveries of $5.9 million. The Company's share of this assessment was $1.7
million and was recorded in the policy acquisition and other underwriting
expenses during the fourth quarter of 2001. This estimate was based upon
preliminary data relating to this insolvency and is subject to change as more
information becomes available. There are other insurance company insolvencies
that could impact future underwriting results of the Company, one of which is
Pennsylvania-based PHICO Insurance Company, which became insolvent in late 2001.
The impact of this insolvency on the Company's financial results cannot be
reasonably estimated at this time.
INFORMATION TECHNOLOGY COSTS. In 2001, the Company began a comprehensive program
of eCommerce initiatives in support of the Erie Insurance Group's business model
of distributing insurance products exclusively through independent Agents. The
eCommerce program includes initiatives to replace property/casualty policy
administration systems as well as Agent and customer interaction systems. The
program also includes significant information technology infrastructure
expenditures. It is intended to improve service and efficiency, as well as
result in increased sales. Total threeyear expenditures for the program are
estimated at $175 million. The cost of these initiatives will be shared among
several companies of the Erie Insurance Group, including the Company. The costs
of the eCommerce program reduced aftertax net income of the Company by $0.03 per
share for 2001. Current cost estimates indicate an additional reduction in the
Company's after-tax earnings per share of between $0.15 and $0.17 per share in
2002 and between $0.04 and $0.06 per share in 2003.
REGULATORY
FEDERAL CHARTERING. Congress is considering legislation that would create an
optional federal charter for insurers. The "Insurance Industry Modernization
Act" would establish an Office of National Insurers within the Treasury
Department. The office would have the power to charter, license and regulate
"national insurers" and its director would be required to establish a Division
of Consumer Affairs within the office. The proposed legislation would repeal the
McCarran-Ferguson Act, except for the sharing of historical loss data and
activities associated with participation in mandatory residual market and
workers' compensation mechanisms.
Federal chartering has the potential to create an uneven playing field for
insurers. Federally chartered companies could be subject to different regulatory
requirements than state chartered insurers in the areas of market conduct
oversight, solvency regulation, guaranty fund participation and premium tax
burdens. If this occurs, federally chartered insurers may obtain a competitive
advantage over state licensed carriers. The federal proposal also raises the
specter of a matrix of regulation and costly duplicative, or conflicting,
federal and state requirements. Finally, the partial repeal of McCarran-Ferguson
poses a threat to industry practices, which are currently exempt from antitrust
scrutiny.
TERRORISM. The tragic September 11th attacks resulted in staggering losses for
the insurance industry and have caused uncertainty in the insurance and
reinsurance market. The industry has been compelled to re-examine policy
language and to address the potential for future threats of terrorist events and
losses. ERIE's personal and commercial property and casualty insurance policies
were not intended to cover the risk of terrorist events and losses such as those
suffered in the September 11th attacks. It is difficult to predict and measure
the risks associated with possible future terrorist attacks.
60
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
To address the industry's terrorism exposure, insurers have been working with
Congress, the White House and other interested parties to enact legislation that
would help spread the risk of future terrorist losses. However, no federal
backstop legislation has been passed and future legislation is uncertain.
Regulators in states in which ERIE does business, with the exception of New
York, have approved limited optional terrorism exclusion endorsements for use
only on commercial property and liability lines within the framework developed
by ISO (Insurance Services Office, Inc.). These endorsements exclude claims for
terrorist acts involving the release of biological, chemical, nuclear or
radioactive materials. In other incidents of terrorism, thresholds must be met
before the exclusion will apply. For both property and liability coverage,
insured property damage must exceed $25 million. For liability coverage, the
exclusion will also apply if more than 50 people sustain serious physical
injury. When the threshold is met, there is no coverage. ERIE has made the
necessary filings to obtain approval for use of these optional exclusions where
deemed necessary.
The National Association of Insurance Commissioners (NAIC) has recently
announced a resolution to deny terrorism exclusions on personal lines policies.
NAIC action is advisory and states have approval authority; however, it is
likely that many states will follow the NAIC resolution. Through its trade
organizations and grassroots efforts, ERIE continues to work toward a federal
solution.
The Company's substantial portfolio of equity and fixed income investments could
also be affected by potential future terrorist actions, which may affect the
level of economic activity as well as investor confidence in the U.S. capital
markets.
MOLD. Over the course of the last several years, the industry has experienced
several significant jury verdicts handed down in cases involving property damage
and personal injuries, arguably related to mold. Potentially, The ERIE could see
an increase in the number of claims from both a first party and a third party
coverage context. The Company has created a mold task force committee which is
in the process of reviewing all of The ERIE's personal and commercial policies
in order to determine the feasibility of limiting claims. Presently, the
committee is studying various options ranging from an outright exclusion of mold
coverage to an exclusion with a buy-back endorsement for coverage.
PRIVACY. The insurance industry continues to address compliance issues required
by the Gramm Leach Bliley Financial Services Modernization Act (GLBA) and the
Health Insurance Portability and Accountability Act (HIPAA).
The GLBA places limits on how insurers may use and disclose consumer
information. It also requires all financial institutions to adopt internal
policies and procedures to protect the privacy and security of consumer
information and to deliver an annual privacy notice to all customers. Following
delivery of these notices in July 2001, consumer groups complained that the
notices were legalistic, complex and generally not "consumer friendly." In
response, the NAIC organized a task force to study the adoption of simplified
model language for insurer privacy notices. The NAIC has also proposed model
regulations that address the security of consumer information and provide
standards for insurance departments to measure compliance with privacy laws.
In February 2001, the Department of Health and Human Services (HHS) issued
regulations under HIPAA requiring health plans, health care providers and health
care clearinghouses ("covered entities") to adopt privacy policies for the
protection of health information. Regulations have also been adopted to set
standards for the electronic transfer of health information. Although the
Company's insurance operations are not directly subject to the regulations, the
Company will be required to comply if it elects to engage in the electronic
transfer of information to and from covered entities. The Company's health plan
for Employees, which is a covered entity under the regulations, will be required
to reach compliance by April 2003.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: Certain forward-looking statements contained herein involve risks and
uncertainties. Many factors could cause future results to differ materially from
those discussed. Examples of such factors include variations in catastrophe
losses due to changes in weather patterns, other natural causes or terrorist
actions; changes in insurance regulations or legislation that disadvantage the
members of the Group in the marketplace and recession; economic conditions or
stock market changes affecting pricing or demand for insurance products or
ability to generate investment income and returns. Growth and profitability have
been and will be potentially materially affected by these and other factors.
61
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
Glossary of selected insurance terms
Assume: To receive from an insurer or a reinsurer all or part of the insurance
or reinsurance written by an insurance or reinsurance entity.
Attorney-in-fact: Legal entity (Erie Indemnity Company, a corporate
attorney-in-fact) that is legally appointed by another (subscribers of the
Exchange) to transact business on its behalf.
Cede: To transfer to an insurer or a reinsurer all or part of the insurance or
reinsurance written by an insurance or reinsurance entity.
Direct premiums written: Premiums on policies written by an insurer with the
Policyholder.
GAAP combined ratio: Ratio of acquisition and underwriting expenses, losses and
loss adjustment expenses incurred to premiums earned, computed under Generally
Accepted Accounting Principles.
Gross margins from management operations: Net revenues from management
operations divided by total revenues from management operations.
Incurred but not reported: Estimated liabilities established by an insurer to
reflect the losses estimated to have occurred but that are not yet known by the
insurer.
Losses: An occurrence that is the basis for submission of a claim. Losses may be
covered, limited or excluded from coverage, depending on the terms of the
policy. "Loss" also refers to the amount of the insurer's liability arising out
of the occurrence.
Loss adjustment expenses (LAE): The expenses of settling claims, including legal
and other fees and expenses, and the portion of general expenses allocated to
claim settlement costs.
Loss reserves: Estimated liabilities established by an insurer to reflect the
estimated cost of claims payments and the related expenses that ultimately will
be incurred in respect of insurance it has written.
NAIC: The National Association of Insurance Commissioners, an association of the
top regulatory officials of all 50 states and the District of Columbia organized
to promote consistency of regulatory practices and statutory accounting
practices throughout the United States.
Policy retention: The percentage of existing Policyholders who renew their
policies.
Property/casualty insurance: Casualty insurance indemnifies an insured against
legal liability imposed for losses caused by injuries to third persons (i.e.,
not the policyholder). It includes, but is not limited to, employers' liability,
workers' compensation, public liability, automobile liability and personal
liability. Property insurance indemnifies a person with an insurable interest in
tangible property for his property loss, damage or loss of use.
Reciprocal insurance exchange: An unincorporated group of persons known as
subscribers who, under a common name, exchange insurance contracts with each
other for the purpose of providing indemnity among themselves from losses
through a common attorney-in-fact. Each subscriber gives a power of attorney
under which the attorney-in-fact represents each subscriber in exchanging
insurance contracts with the other subscribers.
Reinsurance: An instrument through which an insurer cedes to another insurer all
or a portion of the risk insured and conveys/pays to that other insurer a
portion of the premium received from the insured. Reinsurance makes the assuming
reinsurer liable to the extent of the coverage ceded. However, in the event the
reinsurer is unable to pay the assumed portion of the loss, the ceding insurer
would be responsible for the entire loss.
62
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
Selected Segment Information
The direct written premiums of the Erie Insurance Group have a direct impact on
the Company's management fee revenue and, consequently, the Company's management
operations. The Company's insurance underwriting operations are impacted by the
mix of the group's direct written premium. Below is a summary of direct written
premiums of the Erie Insurance Group by state and line of business.
Years Ended December 31
2001 2000 1999
- -------------------------------------------------------------------------------------------------------
Premiums written as a percent of total by state:
District of Columbia 0.3 % 0.3 % 0.2 %
Illinois 1.2 0.6 0.2
Indiana 4.2 4.0 3.9
Maryland 11.9 11.9 11.9
New York 3.1 2.7 2.2
North Carolina 5.3 4.6 4.1
Ohio 8.2 8.0 7.9
Pennsylvania 51.7 53.9 55.6
Tennessee 1.6 1.4 1.3
Virginia 8.0 8.0 8.1
West Virginia 4.4 4.6 4.6
Wisconsin 0.1 0.0 0.0
- ------------------------------------------------------------------------------------------------------
Total direct premiums written 100.00 % 100.00 % 100.00 %
Premiums written by line of business:
Personal:
Automobile 54.6 % 56.9 % 59.5 %
Homeowners 16.0 16.1 15.7
Other 1.2 1.3 0.9
- ------------------------------------------------------------------------------------------------------
Total personal 71.8 % 74.3 % 76.1 %
Commercial:
Automobile 8.3 % 7.8 % 7.3 %
Workers' compensation 8.0 7.2 6.5
Commercial multi-peril 10.2 9.1 8.3
Other 1.7 1.6 1.8
- ------------------------------------------------------------------------------------------------------
Total commercial 28.2 % 25.7 % 23.9 %
- ------------------------------------------------------------------------------------------------------
The growth rate of policies in force and policy retention trends can impact the
Company's management and property/casualty operating segments. Below is a
summary of each by line of business for the Erie Insurance Group's
property/casualty business.
Years Ended December 31 (amounts in thousands)
2001 2000 1999
- ---------------------------------------------------------------------------------------------------
Policies in force:
Personal lines 2,724 2,517 2,368
Commercial lines 386 349 322
- ---------------------------------------------------------------------------------------------------
Total policies in force 3,110 2,866 2,690
- ---------------------------------------------------------------------------------------------------
Policy retention percentages:
Personal policy retention percentages 91.3% 91.5% 91.0%
Commercial policy retention percentages 87.7% 85.9% 84.1%
Total policy retention percentages 90.9% 91.0% 90.5%
- ---------------------------------------------------------------------------------------------------
63
Index to Graphs included in the Management's Discussion and Analysis
GRAPH NUMBER AMOUNTS TO GRAPH
Graph # 1
=========
NET REVENUE FROM MANAGEMENT
OPERATIONS AND GROSS MARGINS
(In millions of dollars, except ratios)
1999 2000 2001
-----------------------
Net Revenue from Management Operations $148.5 $158.7 $184.6
Gross Margin from Management Operations 28.1% 27.6% 27.9%
Pie Chart # 1
=============
Diversification of fixed maturities
at December 31, 2001
U.S. Industrial & Miscellaneous 57%
Special Revenue 20%
States & Political Subdivisions 8%
Foreign 5%
Public Utilities 5%
Redeemable preferred stock 3%
Other 2%
Pie Chart # 2
=============
Quality* of fixed maturities
Carrying Value at December 31, 2001
Baa/BBB 32%
Aaa/AAA 27%
A 24%
Aa/AA 14%
Ba/BB or lower 3%
* As rated by Standard & Poor's or Moody's Investor's Service, Inc.
Pie Chart # 3
=============
Diversification of equity securities
at December 31, 2001 - Carrying Value
(1) U.S. Industrial & Miscellaneous 31%
(1) U.S. Banks, Trusts & Insurance Co's 2%
(2) U.S. Industrial & Miscellaneous 47%
(2) Foreign 11%
(2) U.S. Banks, Trusts & Insurance Co's 8%
(2) Public Utilities 1%
(1) Common Stock
(2) Nonredeemable Preferred Stock
64
INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
REPORT OF MANAGEMENT
The management of Erie Indemnity Company is responsible for the preparation of
information included in the financial statements in this annual report to
shareholders. The financial statements have been prepared in conformity with
Generally Accepted Accounting Principles. The balances in the financial
statements are developed from the financial records of the Company and reflect
estimates using judgment where amounts cannot be measured precisely or for
transactions not yet complete.
The Company's system of internal control is designed to safeguard Company assets
from unauthorized use or disposition and to provide for proper authorization,
execution and recording of Company transactions. Company personnel design,
maintain and monitor internal control on an ongoing basis. In addition, the
Company's internal auditors review and report on the functioning of various
aspects of internal control.
The Audit Committee of the Board of Directors, composed of outside directors,
meets periodically with the Company's management, internal auditors and
independent auditors to review the work of each and to inquire as to their
assessment of the performance of Company financial personnel. The independent
auditors and internal auditors have full and free access to the Audit Committee,
without the presence of management, to discuss results of work performed and
communicate other appropriate matters.
/s/ Jan R. Van Gorder
Jan R. Van Gorder
Acting President and Chief Executive Officer
February 7, 2002
/s/ Philip A. Garcia
Philip A. Garcia
Executive Vice President and Chief Financial Officer
February 7, 2002
/s/ Timothy G. NeCastro
Timothy G. NeCastro
Senior Vice President and Controller
February 7, 2002
INDEPENDENT AUDITORS' REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors and Shareholders
Erie Indemnity Company
Erie, Pennsylvania
We have audited the accompanying Consolidated Statements of Financial Position
of Erie Indemnity Company and subsidiaries as of December 31, 2001 and 2000, and
the related Consolidated Statements of Operations, Shareholders' Equity, and
Cash Flows for each of the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Erie Indemnity
Company and subsidiaries as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Malin, Bergquist & Company, LLP
Malin, Bergquist & Company, LLP
Erie, Pennsylvania
February 7, 2002
65
INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As of December 31, 2001 and 2000
(Dollars in thousands)
ASSETS 2001 2000
----------- -----------
Investments:
Fixed maturities at fair value
(amortized cost of $543,423
and $524,172, respectively) $ 559,873 $ 531,546
Equity securities at fair value (cost of
$159,727 and $184,968, respectively) 193,798 204,446
Limited partnerships (cost of $79,668
and $60,661, respectively) 81,596 68,242
Real estate mortgage loans 5,700 6,581
---------- ----------
Total investments $ 840,967 $ 810,815
Cash and cash equivalents 88,213 38,778
Accrued investment income 9,138 9,087
Premiums receivable from Policyholders 186,175 156,269
Prepaid federal income taxes 14,056 3,604
Reinsurance recoverable from Erie Insurance Exchange 491,055 412,050
Note receivable from Erie Family Life Insurance Company 15,000 15,000
Other receivables from Erie Insurance Exchange and affiliates 149,600 119,959
Reinsurance recoverable from non-affiliates 372 712
Deferred policy acquisition costs 17,018 13,202
Property and equipment 14,635 13,856
Equity in Erie Family Life Insurance Company 44,683 42,331
Other assets 64,654 44,936
---------- ----------
Total assets $1,935,566 $1,680,599
========== ==========
See accompanying notes to consolidated financial statements
66
INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (CONTINUED)
As of December 31, 2001 and 2000
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
---------- ----------
LIABILITIES
Unpaid losses and loss adjustment expenses $ 557,278 $ 477,879
Unearned premiums 311,969 263,855
Commissions payable and accrued 110,121 96,823
Accounts payable and accrued expenses 46,164 30,476
Deferred income taxes 12,945 7,161
Dividends payable 10,930 9,839
Employee benefit obligations 20,904 15,551
---------- ----------
Total liabilities $1,070,311 $ 901,584
---------- ----------
SHAREHOLDERS' EQUITY
Capital stock
Class A common, stated value $.0292 per
share; authorized 74,996,930 shares; 67,032,000
shares issued; 63,836,323 and 64,056,323 shares
outstanding in 2001 and 2000, respectively $ 1,955 $ 1,955
Class B common, stated value $70 per
share; authorized 3,070 shares;
3,070 shares issued and outstanding 215 215
Additional paid-in capital 7,830 7,830
Accumulated other comprehensive income 35,222 23,182
Retained earnings 913,406 831,552
---------- ----------
Total contributed capital and retained earnings $ 958,628 $ 864,734
Treasury stock, at cost, 3,195,677 shares in
2001 and 2,975,677 in 2000 ( 93,373) ( 85,719)
---------- ----------
Total shareholders' equity $ 865,255 $ 779,015
---------- ----------
Total liabilities and shareholders' equity $1,935,566 $1,680,599
========== ==========
See accompanying notes to consolidated financial statements
67
INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2001, 2000 and 1999
(Amounts in thousands, except per share data)
2001 2000 1999
------------------------------------------
MANAGEMENT OPERATIONS:
Management fee revenue $ 634,966 $ 551,646 $ 513,375
Service agreement revenue 27,247 22,662 15,441
--------- --------- ---------
Total revenue from management operations 662,213 574,308 528,816
Cost of management operations 477,645 415,562 380,298
--------- --------- ---------
Net revenue from management operations $ 184,568 $ 158,746 $ 148,518
--------- --------- ---------
INSURANCE UNDERWRITING OPERATIONS:
Premiums earned $ 137,648 $ 123,708 $ 117,224
--------- --------- ---------
Losses and loss adjustment expenses incurred 117,201 99,564 87,719
Policy acquisition and other underwriting expenses 40,910 34,546 33,044
--------- --------- ---------
Total losses and expenses $ 158,111 $ 134,110 $ 120,763
--------- --------- ---------
Underwriting loss ($ 20,463) ($ 10,402) ($ 3,539)
--------- --------- ---------
INVESTMENT OPERATIONS:
Net investment income $ 49,884 $ 48,401 $ 43,344
Net realized (losses) gains on investments ( 31,879) 16,968 14,746
Equity in earnings of Erie Family Life Insurance
Company 773 5,492 5,045
Equity in (losses) earnings of limited partnerships ( 7) 4,733 641
--------- --------- ---------
Net revenue from investment operations $ 18,771 $ 75,594 $ 63,776
--------- --------- ---------
Income before income taxes $ 182,876 $ 223,938 $ 208,755
Provision for income taxes 60,615 71,545 65,649
--------- --------- ---------
NET INCOME $ 122,261 $ 152,393 $ 143,106
========= ========= =========
Net income per share $ 1.71 $ 2.12 $ 1.95
========= ========= =========
Weighted average shares outstanding 71,342 71,954 73,487
========= ========= =========
See accompanying notes to consolidated financial statements
68
INCORPORATED BY REFERENCE, PAGE 33 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2001, 2000 and 1999
(Amounts in thousands, except per share data)
Accumulated
Total Other
Shareholders' Comprehensive Retained Comprehensive
Equity Income Earnings Income
-------------- ------------- ------------ ---------------
Balance, January 1, 1999 $ 655,223 $ 605,045 $ 40,178
Comprehensive income
Net income 143,106 143,106 143,106
Unrealized depreciation of investments, net of tax ( 13,597) ( 13,597) ( 13,597)
-----------
Comprehensive income $ 129,509
===========
Purchase of treasury stock ( 54,330)
Dividends declared:
Class A $.495 per share ( 32,575) ( 32,575)
Class B $74.25 per share ( 228) ( 228)
----------- ----------- -----------
Balance, December 31, 1999 $ 697,599 $ 715,348 $ 26,581
----------- ----------- -----------
Comprehensive income
Net income 152,393 152,393 152,393
Unrealized depreciation of investments, net of tax ( 3,399) ( 3,399) ( 3,399)
-----------
Comprehensive income $ 148,994
===========
Purchase of treasury stock ( 31,389)
Dividends declared:
Class A $.5575 per share ( 35,932) ( 35,932)
Class B $83.625 per share ( 257) ( 257)
----------- ----------- -----------
Balance, December 31, 2000 $ 779,015 $ 831,552 $ 23,182
----------- ----------- -----------
Comprehensive income
Net income 122,261 122,261 122,261
Unrealized appreciation of investments, net of tax 14,890 14,890 14,890
Minimum pension liability adjustment, net of tax ( 2,850) ( 2,850) ( 2,850)
----------
Comprehensive income $ 134,301
============
Purchase of treasury stock ( 7,654)
Dividends declared:
Class A $.6275 per share ( 40,119) ( 40,119)
Class B $94.125 per share ( 288) ( 288)
----------- ----------- -----------
Balance, December 31, 2001 $ 865,255 $ 913,406 $ 35,222
=========== =========== ===========
See accompanying notes to consolidated financial statements
69
INCORPORATED BY REFERENCE, PAGE 33 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
Years Ended December 31, 2001, 2000 and 1999
(Amounts in thousands, except per share data)
Class A Class B Additional Treasury
Common Common Paid-in-Capital Stock
----------- --------- --------------- ------------
Balance, January 1, 1999 $ 1,955 $ 215 $ 7,830 $ 0
Comprehensive income
Net income
Unrealized depreciation of investments, net of tax
Comprehensive income
Purchase of treasury stock ( 54,330)
Dividends declared:
Class A $.495 per share
Class B $74.25 per share
-----------
Balance, December 31, 1999 $ 1,955 $ 215 $ 7,830 ($ 54,330)
----------- ---------- ----------- -----------
Comprehensive income
Net income
Unrealized depreciation of investments, net of tax
Comprehensive income
Purchase of treasury stock ( 31,389)
Dividends declared:
Class A $.5575 per share
Class B $83.625 per share
-----------
Balance, December 31, 2000 $ 1,955 $ 215 $ 7,830 ($ 85,719)
----------- ---------- ----------- -----------
Comprehensive income
Net income
Unrealized appreciation of investments, net of tax
Minimum pension liability adjustment, net of tax
Comprehensive income
Purchase of treasury stock ( 7,654)
Dividends declared:
Class A $.6275 per share
Class B $94.125 per share
-----------
Balance, December 31, 2001 $ 1,955 $ 215 $ 7,830 ($ 93,373)
=========== ========== =========== ===========
See accompanying notes to consolidated financial statements
70
INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
(Dollars in thousands)
2001 2000 1999
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 122,261 $ 152,393 $ 143,106
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,350 2,745 1,766
Deferred income tax expense (benefit) 1,013 ( 2,112) ( 1,311)
Amortization of deferred policy acquisition costs 24,276 22,793 22,507
Realized loss (gain) on investments 31,879 ( 16,968) ( 14,746)
Equity in losses (income) from limited partnerships 7 ( 4,733) ( 641)
Net amortization of bond (discount) premium ( 199) ( 43) 80
Undistributed earnings of Erie Family Life 0 ( 4,020) ( 3,696)
Dividends received in excess of undistributed
earnings - Erie Family Life 821 0 0
Deferred compensation 294 642 1,212
Increase in accrued investment income ( 51) ( 1,089) ( 745)
Increase in receivables ( 138,213) ( 76,240) ( 6,274)
Policy acquisition costs deferred ( 28,092) ( 24,591) ( 23,049)
Increase in prepaid expenses and other assets ( 14,460) ( 939) ( 6,185)
Increase in accounts payable and
accrued expenses 16,362 8,068 3,343
Increase in commissions payable and accrued 13,298 3,950 7,868
Increase in income taxes recoverable ( 10,452) ( 629) ( 466)
Increase in loss reserves 79,398 44,984 6,730
Increase in unearned premiums 48,115 26,403 7,469
---------- ---------- ----------
Net cash provided by operating activities $ 148,607 $ 130,614 $ 136,968
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments:
Fixed maturities ($ 235,854) ($ 153,029) ($ 162,769)
Equity securities ( 67,549) ( 54,649) ( 71,637)
Mortgage loans 0 0 ( 66)
Limited partnership investments ( 28,380) ( 24,753) ( 20,667)
Sales/maturities of investments:
Fixed maturity sales 109,634 61,333 30,927
Fixed maturity calls/maturities 80,223 59,570 64,094
Equity securities 90,589 55,596 84,187
Mortgage loans 882 1,649 123
Limited partnership sales or distributions 6,634 6,227 1,368
Purchase of property and equipment ( 2,014) ( 308) ( 444)
Purchase of computer software ( 1,113) ( 1,032) ( 4,194)
Loans to agents ( 7,612) ( 1,781) ( 3,459)
Collections on agent loans 2,358 1,719 2,582
---------- ---------- -----------
Net cash used in investing activities ($ 52,202) ($ 49,458) ($ 79,955)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders ($ 39,316) ($ 35,203) ($ 32,049)
Purchase of treasury stock ( 7,654) ( 31,389) ( 54,330)
---------- ---------- ----------
Net cash used in financing activities ($ 46,970) ($ 66,592) ($ 86,379)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents $ 49,435 $ 14,564 ($ 29,366)
Cash and cash equivalents at beginning of year 38,778 24,214 53,580
---------- ---------- ----------
Cash and cash equivalents at end of year $ 88,213 $ 38,778 $ 24,214
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years ended December 31, 2001, 2000 and 1999 for income
taxes was $70,751, $74,286 and $67,495, respectively.
See accompanying notes to consolidated financial statements
71
INCORPORATED BY REFERENCE, PAGE 34 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All dollar amounts are in thousands except per share data
NOTE 1. NATURE OF BUSINESS
Erie Indemnity Company (Company), formed in 1925, is the
attorney-in-fact for the Erie Insurance Exchange (Exchange),
a reciprocal insurance exchange. The Company earns a
management fee for management services provided to the
Exchange and its affiliates. The Exchange is a Pennsylvania
domiciled property/casualty insurer rated A++ Superior by A.
M. Best. The Exchange is the 23rd largest insurer in the
United States based on net premiums written for all lines of
business. See also Note 10.
The Company's property/casualty insurance subsidiaries also
share proportionately in the results of all
property/casualty insurance underwriting operations of the
Exchange. The Exchange, Erie Insurance Company (EIC), a
wholly-owned subsidiary of the Company, and the Erie
Insurance Company of New York (EINY), a wholly-owned
subsidiary of the EIC, are part of an intercompany pooling
agreement. Under this agreement, EIC and EINY cede 100% of
their property/casualty insurance business, including
property/casualty insurance operations assets and
liabilities, to the Exchange. Erie Insurance Property &
Casualty Company, a wholly-owned subsidiary of the Company,
and Flagship City Insurance Company, owned by the Exchange,
participate in a quota share agreement, where all insurance
business is ceded to the Exchange. The Exchange retrocedes
to EIC and EINY a specified percentage (5% for EIC and .5%
for EINY during 2001, 2000 and 1999) of all pooled
property/casualty insurance business, including insurance
operations assets and liabilities. Insurance ceded by EIC,
EINY, Erie Insurance Property & Casualty Company and
Flagship City Insurance Company, to the Exchange does not
relieve EIC and EINY from their primary liability as the
original insurers. See also Note 12.
The Exchange, EIC and EINY together with the Erie Insurance
Property & Casualty Company and the Flagship City Insurance
Company as well as the Erie Family Life Insurance Company
(EFL) operate collectively as the "Erie Insurance Group
(EIG)."
The property/casualty insurers of the Erie Insurance Group
operate in 11 states and the District of Columbia. Business
consists, to a large extent, of private passenger and
commercial automobile, homeowners and workers' compensation
insurance in Pennsylvania, Ohio, West Virginia, Maryland and
Virginia.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States of America that differ from
statutory accounting practices prescribed or permitted for
insurance companies by regulatory authorities. See also Note
13.
Principles of consolidation
The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation. The 21.6% equity ownership of
EFL is not consolidated but accounted for under the equity
method of accounting.
Reclassifications
Certain amounts reported in prior years have been
reclassified to conform to the current year's financial
statement presentation.
72
INCORPORATED BY REFERENCE, PAGES 34 AND 35 OF THE COMPANY'S 2001 ANNUAL REPORT
TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Investments and cash equivalents
Fixed maturities and marketable equity securities are
classified as available-for-sale. Equity securities consist
primarily of common and nonredeemable preferred stocks while
fixed maturities consist of bonds, notes and redeemable
preferred stock. Available-for-sale securities are stated at
fair value, with the unrealized gains and losses, net of
deferred tax, reflected in shareholders' equity in
accumulated other comprehensive income. There are no
securities classified as "trading" or "held-to-maturity."
Realized gains and losses on sales of investments, are
recognized in income on the specific identification method.
Interest and dividend income is recorded as earned.
Limited partnerships include U.S. and foreign private
equity, real estate and fixed income investments. The
private equity limited partnerships invest primarily in
small- to medium-sized companies. Limited partnerships are
recorded using the equity method, which approximates the
Company's share of the carrying value of the partnership.
Unrealized gains and losses on private equity limited
partnerships are reflected in shareholders' equity in
accumulated other comprehensive income, net of deferred
taxes. The Company has not guaranteed any of the partnership
liabilities.
When a decline in value of investments is considered to be
other-than-temporary by Company management, the investments
are written down to realizable value. The write down is made
on an individual security or limited partnership basis and
is considered a realized loss in the Consolidated Statements
of Operations.
Mortgage loans on commercial real estate are recorded at
unpaid balances, adjusted for amortization of premium or
discount. A valuation allowance would be provided for
impairment in net realizable value based on periodic
valuations as needed.
Cash equivalents are principally comprised of investments in
bank money market funds and approximate fair value.
Derivatives
Financial Accounting Standards Board Statement of Financial
Accounting Standards (FAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133)
became effective for fiscal years beginning after June 15,
1999. Sections of FAS 133 were subsequently amended by FAS
138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" (an amendment of FAS 133 which
became effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000). FAS 133 and FAS 138
establish accounting and reporting standards for derivative
instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The
accounting for changes in the fair value of a derivative,
i.e. gains and losses, depends on the intended use of the
derivative and the resulting designation.
73
INCORPORATED BY REFERENCE, PAGE 35 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For derivatives not designated as a hedging instrument, the
gain or loss is recognized in earnings in the period of
change. Credit risk is managed by entering into transactions
using a bank counterparty with a high credit rating. See
also Note 3.
Fair value of financial instruments
Fair values of available-for-sale securities are based on
quoted market prices, where available, or dealer quotations.
The carrying amounts reported in the Consolidated Statements
of Financial Position approximate fair value. The carrying
value of receivables and liabilities arising in the ordinary
course of business approximates fair value.
Deferred policy acquisition costs
Commissions and other costs of acquiring insurance that vary
with, and are primarily related to, the production of new
and renewal business are deferred and amortized over the
terms of the policies or reinsurance treaties to which they
relate. The amount of costs to be deferred would be reduced
to the extent future policy premiums and anticipated
investment income would not exceed related losses, expenses
and Policyholder dividends. There have been no reduction in
costs deferred in any of the years presented. Amortization
expense, which is included in policy acquisition and other
underwriting expenses of insurance underwriting operations,
equaled $24,276, $22,793 and $22,507 in 2001, 2000 and 1999,
respectively.
Insurance liabilities
Losses incurred refer to amounts paid or expected to be paid
for loss events which have occurred through the balance
sheet date. The cost of investigating, resolving and
processing claims are referred to as "loss adjustment
expenses". A liability is established for the total unpaid
cost of losses and loss adjustment expenses, including
events occurring in current and prior years. Losses are
reported on the Consolidated Statements of Operations in
insurance underwriting operations.
The liability for losses and loss adjustment expenses
includes an amount determined from loss reports and
individual cases and an amount, based on past experience,
for losses incurred but not reported. Inflation is provided
for in the reserving function through analysis of costs,
trends and reviews of historical reserving results. Such
liabilities are necessarily based on estimates and, while
management believes the amount is appropriate, the ultimate
liability may differ from the amounts provided. The methods
for making such estimates and for establishing the resulting
liability are continually reviewed, and any adjustments
considered necessary are reflected in current earnings. Loss
reserves, as permitted by insurance department statute, are
set at full expected cost except for loss reserves for
workers' compensation which have been discounted at 2.5% in
2001 and 2000. Unpaid losses and loss adjustment expenses in
the Consolidated Statements of Financial Position were
reduced by $2,390 and $1,509 at December 31, 2001 and 2000,
respectively, due to discounting. The reserves for losses
and loss adjustment expenses are reported net of receivables
for salvage and subrogation of $3,661 and $3,349 at December
31, 2001 and 2000, respectively.
74
INCORPORATED BY REFERENCE, PAGES 35 AND 36 OF THE COMPANY'S 2001 ANNUAL REPORT
TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Environment-related claims
In establishing the liability for unpaid losses and loss
adjustment expenses related to environmental claims,
management considers facts currently known and the current
state of the law and coverage litigation. Liabilities are
recognized for known claims (including the cost of related
litigation) when sufficient information has been developed
to indicate the involvement of a specific insurance policy,
and management can reasonably estimate its liability. In
addition, liabilities have been established to cover
additional exposures on both known and unasserted claims.
Estimates of the liabilities are reviewed and updated
continually. The total amount of the Company's
property/casualty insurance subsidiaries' share of paid
losses and loss reserves pertaining to environment-related
claims is immaterial.
Liability for guaranty fund and other assessments
The Company's property/casualty insurance subsidiaries may
be required, under the solvency or guaranty laws of the
various states in which they are licensed, to pay
assessments up to prescribed limits to fund Policyholder
losses or liabilities of insolvent insurance companies. The
liability for guaranty fund or other assessments is recorded
when the event obligating the Company has occurred and the
amount can be reasonably estimated. The estimated liability
for guaranty fund and other assessments at December 31, 2001
and 2000 totaled $2,383 and $592, respectively. During 2001,
the Company received notification of the insolvency of
Reliance Insurance Company. It is expected this insolvency
will result in guaranty fund liabilities to be assessed the
Company's property/casualty insurance subsidiaries. The
Company has recorded an estimated liability that has been
charged to operations in the current period based on
preliminary data relating to this insolvency. The estimated
liability for the Reliance insolvency is $2,024 at December
31, 2001.
Certain states permit these assessments, or a portion
thereof, to be recovered as an offset to future premium
taxes. When an assessment can be recovered, an asset is
established on a basis consistent with the credits to be
realized under applicable state law. During 2001, the
Company's property/casualty insurance subsidiaries recorded
an asset of $559 related to these recoverable credits which
will be recovered in accordance with state law which ranges
between a 5 and 10 year period. These liabilities and
corresponding recoverable assets are presented gross on the
Consolidated Statement of Financial Position.
Reinsurance
The insurance underwriting operations segment in the
Consolidated Statements of Operations is presented net of
reinsurance activities. Gross losses and expenses incurred
are reduced for amounts expected to be recovered under
reinsurance agreements. Reinsurance transactions are
recorded gross on the Consolidated Statements of Financial
Position. Estimated reinsurance recoverables and receivables
for ceded unearned premiums are recorded as assets with
liabilities recorded for related unpaid losses and expenses
and unearned premiums. Reinsurance premiums are recognized
as revenue on a pro rata basis over the policy term.
75
INCORPORATED BY REFERENCE, PAGE 36 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income taxes
Provisions for income taxes include deferred taxes resulting
from changes in cumulative temporary differences between the
tax bases and financial statement bases of assets and
liabilities. Deferred taxes are provided on the liability
method, whereby deferred tax assets are recognized for
deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary
differences. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on
the date of enactment.
Property and equipment
Property and equipment are stated at cost. Improvements and
replacements are capitalized, while expenditures for
maintenance and repairs are charged to expense as incurred.
Depreciation of property and equipment is computed using
straight line and accelerated methods over the estimated
useful lives of the assets. The costs and accumulated
depreciation and amortization of property sold or retired
are removed from the accounts and gains or losses, if any,
are reflected in earnings for the year.
Property and equipment as of December 31 is summarized as
follows:
2001 2000
--------- ---------
Land $ 737 $ 737
Buildings 5,879 5,863
Leasehold improvements 518 322
Computer software 18,836 17,723
Computer equipment 5,416 3,706
Transportation equipment 544 450
--------- ---------
$ 31,930 $ 28,801
Less accumulated depreciation 17,295 14,945
--------- ---------
$ 14,635 $ 13,856
========= =========
Software development costs, primarily salaries and benefits,
totaling $7,842 and $7,797, are included in property and
equipment at December 31, 2001 and 2000, respectively.
Software development costs capitalized during 2001 and 2000
amounted to $45 and $499, respectively. These costs are
amortized on a straight-line basis over the expected life of
the applications once the software is ready for intended
use. Software amortization related to these costs totaled
$2,007, $1,697 and $199 in 2001, 2000 and 1999,
respectively.
During 2001, the Company entered into various operating
lease agreements for computer equipment. These leases
contain various early termination provisions which allow the
Company to cancel the leases generally after three years
from inception of the lease. The total projected commitment
for these leases at December 31, 2001, approximates $10,051
through the year 2004. Of this total, approximately $5,075
will be reimbursed to the Company from its affiliates. The
total rental expense for 2001 was $165.
76
INCORPORATED BY REFERENCE, PAGE 36 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue recognition
In 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in
Financial Statements." SAB 101 states revenue should not be
recognized until it is realized or realizable and earned.
Cited in SAB 101 are certain criteria that generally should
be met to determine when revenue is realized or realizable
and earned. The Company periodically evaluates its revenue
recognition practices in relation to the requirements of SAB
101. Management believes the revenue recognition practices
are in compliance with the provisions of SAB 101.
Recognition of management fee revenue
A management fee is charged the Exchange by the Company for
management of the affairs of the Exchange. The fee is
recorded as revenue, calculated as a percentage of Exchange
direct and affiliated assumed premiums written. The
management fees are recognized upon policy issuance or
renewal. The Exchange issues policies with annual terms
only.
Recognition of premium revenues and losses
Property and liability premiums are generally recognized as
revenue on a pro rata basis over the policy term. Unearned
premiums represent the unexpired portion of premiums
written.
Losses and loss adjustment expenses are recorded as
incurred. Premiums earned and losses and loss adjustment
expenses incurred are reflected in the Consolidated
Statements of Operations net of amounts ceded to the
Exchange. See also Note 12.
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. The total weighted average number of Class A
equivalent shares outstanding (including conversion of Class
B shares) was 71,342,329, 71,954,402, and 73,486,572 during
2001, 2000 and 1999, respectively.
77
INCORPORATED BY REFERENCE, PAGE 37 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS
The following tables summarize the cost and market value of
available-for-sale securities at December 31, 2001 and 2000:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- ------------
December 31, 2001
Fixed Maturities:
-----------------
U.S. treasuries &
government agencies $ 11,211 $ 502 $ 0 $ 11,713
States & political subdivisions 42,392 1,817 88 44,121
Special revenue 110,267 3,496 345 113,418
Public utilities 25,150 1,156 36 26,270
U. S. industrial &
miscellaneous 311,757 8,989 1,438 319,308
Foreign 26,634 859 17 27,476
----------- ----------- ----------- -----------
Total bonds $ 527,411 $ 16,819 $ 1,924 $ 542,306
Redeemable preferred stock 16,012 1,555 0 17,567
----------- ----------- ----------- -----------
Total fixed maturities $ 543,423 $ 18,374 $ 1,924 $ 559,873
----------- ----------- ----------- -----------
Equity Securities:
------------------
Common stock:
U. S. banks, trusts &
insurance companies $ 3,284 $ 814 $ 16 $ 4,082
U. S. industrial &
miscellaneous 28,718 31,570 579 59,709
Nonredeemable
preferred stock:
Public Utilities 2,370 12 3 2,379
U. S. banks, trusts &
insurance companies 14,685 938 58 15,565
U. S. industrial &
miscellaneous 91,185 2,573 2,111 91,647
Foreign 19,485 1,039 108 20,416
----------- ----------- ----------- -----------
Total equity securities $ 159,727 $ 36,946 $ 2,875 $ 193,798
----------- ----------- ----------- -----------
Total available-for-sale
securities $ 703,150 $ 55,320 $ 4,799 $ 753,671
=========== =========== =========== ===========
78
INCORPORATED BY REFERENCE, PAGE 37 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (CONTINUED)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- ------------
December 31, 2000
Fixed Maturities:
-----------------
U.S. treasuries &
government agencies $ 11,216 $ 420 $ 24 $ 11,612
States & political subdivisions 50,337 1,656 34 51,959
Special revenue 110,855 3,779 68 114,566
Public utilities 23,221 550 207 23,564
U. S. industrial &
miscellaneous 267,231 4,770 5,940 266,061
Foreign 30,082 238 406 29,914
----------- ----------- ----------- -----------
Total bonds $ 492,942 $ 11,413 $ 6,679 $ 497,676
Redeemable preferred stock 31,230 3,341 701 33,870
----------- ----------- ----------- -----------
Total fixed maturities $ 524,172 $ 14,754 $ 7,380 $ 531,546
----------- ----------- ----------- -----------
Equity Securities:
------------------
Common stock:
U. S. banks, trusts &
insurance companies $ 3,651 $ 422 $ 275 $ 3,798
U. S. industrial &
miscellaneous 63,662 38,286 15,343 86,605
Foreign 7,100 581 2,719 4,962
Nonredeemable
preferred stock:
U. S. banks, trusts &
insurance companies 22,094 97 66 22,125
U. S. industrial &
miscellaneous 62,266 1,987 3,119 61,134
Foreign 26,195 217 590 25,822
----------- ----------- ----------- -----------
Total equity securities $ 184,968 $ 41,590 $ 22,112 $ 204,446
----------- ----------- ----------- -----------
Total available-for-sale
securities $ 709,140 $ 56,344 $ 29,492 $ 735,992
=========== =========== =========== ===========
79
INCORPORATED BY REFERENCE, PAGE 38 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturities
at December 31, 2001, by remaining contractual term to maturity,
are shown below.
Amortized Estimated
Cost Fair Value
-------------- -----------
Due in one year or less $ 37,241 $ 37,787
Due after one year through five years 162,766 167,265
Due after five years through ten years 160,105 165,194
Due after ten years 183,311 189,627
----------- -----------
$ 543,423 $ 559,873
=========== ===========
Changes in unrealized gains (losses) consist of the following for
the years ended December 31:
2001 2000 1999
------------ ------------ ------------
Equity securities $ 14,593 ($ 24,410) $ 11,061
Fixed maturities 9,076 11,246 ( 24,123)
Limited partnerships ( 5,651) 5,930 1,616
Equity in unrealized gains (losses)
of Erie Family Life
Insurance Company 4,890 2,005 ( 9,473)
Deferred federal income tax (liability)
benefit ( 8,018) 1,830 7,322
----------- ------------ ------------
Increase (decrease) in unrealized gains $ 14,890 ($ 3,399) ($ 13,597)
============ ============ ============
Sources of net investment income for the years ended December 31
are as follows:
2001 2000 1999
------------ ------------ ------------
Fixed maturities $ 36,569 $ 34,445 $ 30,547
Equity securities 11,022 11,034 10,104
Cash equivalents and other 3,034 3,416 3,222
------------ ------------ ------------
Total investment income $ 50,625 $ 48,895 $ 43,873
Investment expense 741 494 529
------------ ------------ ------------
Net investment income $ 49,884 $ 48,401 $ 43,344
============ ============ ============
80
INCORPORATED BY REFERENCE, PAGE 38 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (CONTINUED)
Following are the components of net realized (loss) gain on
investments as reported on the Consolidated Statements of
Operations. The securities impairment charge in 2001 related
primarily to preferred stocks in the equipment leasing and
agricultural industry segments. The limited partnership
impairment charge resulted from one private equity partnership
that had investments of preferred stock in the eCommerce industry
and common stock in the customer relationship software industry.
The securities impairment charge in 2000 resulted from preferred
stocks in the financial services industry.
2001 2000 1999
----------- ------------ -----------
Fixed maturities:
----------------
Gross realized gains $ 4,216 $ 2,921 $ 712
Gross realized losses ( 7,941) ( 311) ( 87)
------------- ------------ ------------
Net realized (losses) gains ($ 3,725) $ 2,610 $ 625
------------- ------------ ------------
Equity securities:
-----------------
Gross realized gains $ 4,997 $ 18,070 $ 18,437
Gross realized losses ( 28,563) ( 2,445) ( 4,316)
Impairment charge ( 1,855) ( 1,267) 0
------------ ------------ ------------
Net realized (losses) gains ($ 25,421) $ 14,358 $ 14,121
------------ ------------ ------------
Limited partnership impairment charge ($ 2,733) $ 0 $ 0
------------ ------------ ------------
Net realized (losses) gains on
investments ($ 31,879) $ 16,968 $ 14,746
============ ============ ============
The components of equity in (losses) earnings of limited
partnerships as reported on the Consolidated Statements of
Operations for the years ended December 31 are as follows:
2001 2000 1999
------------ ------------ -------------
Private equity ($ 2,013) $ 1,464 ($ 354)
Real estate 1,424 1,926 905
Fixed income 582 1,343 90
------------ ------------ ------------
Total equity in (losses) earnings of limited
partnerships ($ 7) $ 4,733 $ 641
============ ============ ============
See also Note 14 for investment commitments related to
partnerships.
The Company participates in a securities lending program whereby
certain securities from its portfolio are loaned to other
institutions for short periods of time through a lending agent.
The Company maintains control over the securities. A fee is paid
to the Company by the borrower. Collateral, comprised of cash and
government securities, that exceeds the market value of the
loaned securities is maintained by the lending agent. The Company
has an indemnification agreement with the lending agent in the
event a borrower becomes insolvent or fails to return securities.
The Company had loaned securities with a market value of $46,771
and $31,776 and secured collateral of $48,804 and $33,468 at
December 31, 2001 and 2000, respectively. The borrower of the
securities is not permitted to sell or replace the security on
loan. The Company maintains the loaned securities on its
Consolidated Statements of Financial Position as part of its
invested assets. The Company has incurred no losses on the loan
program since the program's inception.
81
INCORPORATED BY REFERENCE, PAGE 39 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENTS (CONTINUED)
During 2001, the Company entered into several foreign currency
forward contracts related to its limited partnership investments,
which are by definition derivatives. These contracts were not
designated as hedges as the primary purpose is to generate
profits from short-term market movements. The forward contracts
have no cash requirements at the inception of the arrangement. At
December 31, 2001, the notional amount of the contracts
outstanding totaled $1,869. Changes in value, totaling $8 in
2001, have been recognized currently in earnings as realized
gains in the Consolidated Statements of Operations.
NOTE 4. COMPREHENSIVE INCOME
Comprehensive income is defined as any change in equity from
transactions and other events originating from nonowner sources.
The components of other comprehensive income follow for the years
ended December 31:
2001 2000 1999
------------- ------------- -------------
Unrealized holding (losses) gains on securities
arising during period ($ 8,971) $ 11,739 ($ 6,173)
Less: losses (gains) included in net income 31,879 ( 16,968) ( 14,746)
------------ ------------ ------------
Net unrealized holding gains (losses) arising
during period 22,908 ( 5,229) ( 20,919)
Income tax (liability) benefit related to unrealized
gains or losses ( 8,018) 1,830 7,322
------------ ------------ ------------
Net appreciation (depreciation) of
investments 14,890 ( 3,399) ( 13,597)
Minimum pension liability adjustment (See also Note 6) ( 4,384) 0 0
Tax asset related to pension liability
adjustment 1,534 0 0
------------ ------------ ------------
Net pension liability adjustment ( 2,850) 0 0
------------ ------------ ------------
Other comprehensive income (loss), net of tax $ 12,040 ($ 3,399) ($ 13,597)
============ ============ ============
NOTE 5. EQUITY IN ERIE FAMILY LIFE INSURANCE COMPANY
The Company owns 21.6% of EFL's common shares outstanding, which
is accounted for using the equity method of accounting. EFL is a
Pennsylvania-domiciled life insurance company operating in ten
states and the District of Columbia.
82
INCORPORATED BY REFERENCE, PAGES 39 AND 40 OF THE COMPANY'S 2001 ANNUAL REPORT
TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. EQUITY IN ERIE FAMILY LIFE INSURANCE COMPANY (CONTINUED)
The following represents condensed financial information for EFL
on a Generally Accepted Accounting Principles (GAAP) basis:
2001 2000 1999
----------- ----------- ------------
Investments $ 869,723 $ 881,069 $ 817,460
Total assets 1,120,483 1,020,343 954,532
Liabilities 914,724 824,623 783,429
Shareholders' equity 205,759 195,720 171,103
Revenues 89,514 115,373 102,924
Net income 2,738 25,390 23,325
Comprehensive income (loss) 17,410 31,421 ( 5,191)
Dividends paid to shareholders 7,229 6,662 6,096
The Company's share of EFL's net unrealized gains or (losses) on
securities, as reflected in shareholders' equity, is $3,983, $801
and ($502) at December 31, 2001, 2000 and 1999, respectively.
NOTE 6. BENEFIT PLANS
Pension plans
The Company's pension plans consist of: (1) a
noncontributory-defined benefit pension plan covering
substantially all Employees of the Company, (2) an unfunded
supplemental employee retirement plan (SERP) for its senior
and executive officers and (3) an unfunded pension plan for
its outside directors. Information about the plans follows
for the years ended December 31:
2001 2000
---------- ----------
Net periodic benefit cost:
Service cost $ 6,837 $ 6,329
Interest cost 8,325 7,705
Expected return on plan assets ( 13,709) ( 12,322)
Amortization of prior service cost 844 989
Recognized net actuarial gain ( 2,583) ( 2,303)
Amortization of unrecognized initial net asset ( 234) ( 234)
---------- ----------
Net periodic benefit cost $ 520 $ 164
========== ==========
83
INCORPORATED BY REFERENCE, PAGE 40 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. BENEFIT PLANS (CONTINUED)
2001 2000
---------- ----------
Change in benefit obligation:
Benefit obligation at January 1 $ 116,693 $ 104,588
Service cost 6,837 6,329
Interest cost 8,325 7,705
Amendments 55 611
Actuarial loss (gain) 14,523 ( 2,114)
Benefits paid ( 1,729) ( 426)
---------- ----------
Benefit obligation at December 31 $ 144,704 $ 116,693
========== ==========
Change in plan assets:
Fair value of plan assets at January 1 $ 171,636 $ 160,385
Actual return on plan assets ( 31,413) 11,688
Employer contributions (refunds) 9,271 ( 11)
Benefits paid ( 1,729) ( 426)
---------- ----------
Fair value of plan assets at December 31 $ 147,765 $ 171,636
========== ==========
Reconciliation of funded status:
Funded status at December 31 $ 3,061 $ 54,943
Unrecognized net actuarial loss (gain) 10,986 ( 51,342)
Unrecognized prior service cost 5,236 6,025
Unrecognized initial net asset ( 469) ( 701)
---------- ----------
Net amount recognized on Consolidated
Statements of Financial Position $ 18,814 $ 8,925
========== ==========
Amounts recognized in the consolidated statements
of financial position consist of:
Prepaid benefit cost $ 25,451 $ 15,096
Accrued benefit liability ( 13,686) ( 8,656)
Intangible asset 2,665 2,485
Accumulated other comprehensive income 4,384 0
----------- -----------
Net amount recognized at year end $ 18,814 $ 8,925
========== ==========
Weighted-average assumptions as of December 31:
Employee pension plan:
Discount rate 7.00% 7.50%
Expected return on plan assets 8.25 8.25
Rate of compensation increase 5.00 5.00
SERP:
Discount rate 7.00% 7.50%
Rate of compensation increase 6.00-7.25 5.00
The amendment amounts relate primarily to two additional
participants being added to the SERP for each of the years
2001 and 2000.
The Employee pension plan has assets that include cash,
treasury bonds, corporate bonds, common and preferred stocks
and mortgages.
84
INCORPORATED BY REFERENCE, PAGES 40 AND 41 OF THE COMPANY'S 2001 ANNUAL REPORT
TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. BENEFIT PLANS (CONTINUED)
An additional minimum pension liability of $4,384 resulted
in 2001 due to changes in discount rates, the rate of
compensation increase and certain other assumptions of the
SERP. The additional pension liability was recorded as a
reduction to shareholders' equity as accumulated other
comprehensive income, net of deferred income taxes.
The Company's funding policy regarding the Employee pension
plan is to contribute amounts sufficient to meet ERISA
funding requirements plus such additional amounts as may be
determined to be appropriate.
The Employee pension plan purchases individual annuities
periodically from EFL to settle retiree benefit payments.
Such purchases equaled $4,513, $5,627 and $5,322 in 2001,
2000 and 1999, respectively. These are non-participating
annuity contracts under which EFL has unconditionally
contracted to provide specified benefits to beneficiaries in
return for a fixed premium from the plan. However, the plan
remains the primary obligor to the beneficiaries and a
contingent liability exists in the event EFL could not honor
the annuity contracts. The benefit obligation has been
reduced for these annuities purchased for retirees.
The projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for the pension
plans with accumulated benefit obligations in excess of plan
assets (SERP and the pension plan for outside directors)
were $20,348, $13,686 and $0 respectively, as of December
31, 2001, and $12,696, $8,656 and $0, respectively, as of
December 31, 2000.
Post-retirement benefits other than pensions
The Company provides post-retirement medical coverage for
eligible retired Employees and eligible dependents. To be
eligible for benefits, an employee must be 60 years old and
have 15 years of continuous full-time service. The benefits
are provided from retirement to age 65. The benefits are
unfunded as the Company pays the obligations when due. The
cash payments for such benefits were $379, $161 and $121 in
2001, 2000 and 1999, respectively. Actuarially determined
costs are recognized over the period the Employee provides
service to the Company. Information about this plan follows
for the years ended December 31:
2001 2000
--------- ---------
Net periodic benefit cost:
Service cost $ 400 $ 400
Interest cost 389 385
Amortization of prior service cost ( 36) ( 37)
Recognized net actuarial gain ( 50) ( 27)
-------- --------
Net periodic benefit cost $ 703 $ 721
======== ========
Change in benefit obligation:
Benefit obligation at January 1 $ 5,803 $ 4,745
Service cost 400 400
Interest cost 389 385
Actuarial loss 919 434
Benefits paid ( 379) ( 161)
-------- --------
Benefit obligation at December 31 $ 7,132 $ 5,803
======== ========
Reconciliation of Funded status:
Funded status at December 31 ($ 7,132) ($ 5,803)
Unrecognized net actuarial loss (gain) 244 ( 726)
Unrecognized prior service costs ( 330) ( 366)
-------- --------
Net liability recognized on Consolidated Statements
of Financial Position ($ 7,218) ($ 6,895)
======== ========
85
INCORPORATED BY REFERENCE, PAGE 41 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. BENEFIT PLANS (CONTINUED)
The weighted average discount rate used to measure the
accumulated post-retirement benefit obligation was 7.0% and
7.50% in 2001 and 2000, respectively. The December 31, 2001,
accumulated benefit obligation was based on a 10.0% increase
in the cost of covered health care benefits during 2001. The
expected health care cost trend rate assumption for 2002 is
10.0%. This rate is assumed to decrease gradually to 5.5%
per year in 2006 and to remain at that level thereafter.
2001 2000
--------- ----------
Effect on total of service and interest cost components:
1% Increase $ 126 $ 126
1% Decrease ( 106) ( 106)
Effect on post-retirement benefit obligation:
1% Increase $ 1,023 $ 814
1% Decrease ( 871) ( 695)
Employee savings plan
The Company has an Employee Savings Plan for its Employees.
Beginning January 2001, the maximum percentage that eligible
participants were permitted to contribute to the plan was
increased to 15%. The Company match was also changed to 100%
of the participant contributions up to 3% of compensation
and 50% of participant contributions over 3% and up to 5% of
compensation. Additionally, regular part-time Employees are
eligible to participate in the plan. Prior to 2001, eligible
participants were permitted to make contributions of 1% to
8% of compensation to the plan on a pre-tax salary reduction
basis. The Company matched one-half of the participant
contributions up to 6% of compensation. All full-time
Employees were eligible to participate in the plan. The
Company's matching contributions to the plan in 2001, 2000
and 1999 were $5,329, $3,499 and $3,245, respectively.
Employees are permitted to invest a portion of employer
contributions in the Class A common stock of the Company.
The plan acquires shares in the open market necessary to
meet the obligations of the plan.
86
INCORPORATED BY REFERENCE, PAGES 41 AND 42 OF THE COMPANY'S 2001 ANNUAL REPORT
TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. BENEFIT PLANS (CONTINUED)
Management incentive plans and deferred compensation
The Company has separate annual and long-term incentive
plans and a deferred compensation plan, which are available
for key management employees. The deferred compensation plan
is an unfunded arrangement for a select group of management
and highly compensated employees of the Company. Those
participating in this plan can select hypothetical
investment funds for their deferrals and are credited with
interest based on the investment results. The incentive
plans are available to key management employees and link
awards to current year and three-year performance period
targets. The awards are settled with cash and Company stock.
The Company purchases its stock in the open market when
awards are settled in stock. The Company accrues estimated
compensation expense in the applicable performance period
based on its best estimate of the achievement of the
performance targets. Expense recorded in 2001, 2000 and 1999
relating to these incentive and deferred compensation plans
equaled $3,424, $3,445 and $3,352, respectively. Actual
payments totaled $2,441 and $1,590 in 2001 and 2000,
respectively. There were no payments in 1999. The Company
also has a deferred compensation plan for certain of its
outside directors. Expenses recorded in 2001, 2000, and 1999
with related (losses) earnings amounted to ($70), $78 and
$241, respectively. The losses in the current year were a
result of the performance of the investments that comprise
the plan assets.
Health and dental benefits
The Company has self-funded health and dental care plans for
all of its Employees and eligible dependents. Estimated
unpaid claims incurred are accrued as a liability at
December 31, 2001 and 2000. Operations were charged $19,826,
$17,456 and $14,756 in 2001, 2000 and 1999, respectively,
for the cost of health and dental care provided under these
plans.
All liabilities for the above mentioned plans are presented
in this note in total for all employees of the Erie
Insurance Group. The gross liability is presented in the
Consolidated Statements of Financial Position as employee
benefit obligations with amounts expected to be recovered
from the Company's affiliates included in other assets.
NOTE 7. INCOME TAXES
The provision for income taxes consists of the following for the
years ended December 31:
2001 2000 1999
---------- ---------- ----------
Federal income taxes:
Currently due $ 59,602 $ 73,657 $ 66,960
Deferred 1,013 ( 2,112) ( 1,311)
---------- ---------- ----------
Total $ 60,615 $ 71,545 $ 65,649
========== ========== ==========
A reconciliation of the provision for income taxes with amounts
determined by applying the statutory federal income tax rates to
pre-tax income is as follows:
2001 2000 1999
----------- ----------- ------------
Income tax at statutory rates $ 64,007 $ 78,378 $ 73,051
Tax-exempt interest ( 2,729) ( 3,046) ( 3,229)
Dividends received deduction ( 2,398) ( 2,160) ( 2,064)
Other 1,735 ( 1,627) ( 2,109)
---------- ---------- ----------
Provision for income taxes $ 60,615 $ 71,545 $ 65,649
========== ========== ==========
87
INCORPORATED BY REFERENCE, PAGE 42 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. INCOME TAXES (CONTINUED)
Temporary differences and carryforwards, which give rise to
deferred tax assets and liabilities, are as follows for the years
ended December 31:
2001 2000
--------- ---------
Deferred tax assets:
Loss reserve discount $ 4,580 $ 3,965
Unearned premiums 4,960 4,286
Employee benefit plan obligations 4,800 4,111
Severance benefits 3,801 0
Write downs of securities 1,606 443
Other 1,525 1,212
--------- ---------
Total deferred tax assets $ 21,272 $ 14,017
--------- ---------
Deferred tax liabilities:
Deferred policy acquisition costs $ 5,956 $ 4,621
Unrealized gains 16,822 12,051
Pension and other benefits 7,021 2,438
Other 4,418 2,068
--------- ---------
Total deferred tax liabilities $ 34,217 $ 21,178
--------- ---------
Net deferred income tax liability $ 12,945 $ 7,161
========= =========
The Company, as a corporate attorney-in-fact for a reciprocal
insurer, is not subject to state corporate taxes.
NOTE 8. CAPITAL STOCK
Class A and B shares
Holders of Class B shares may, at their option, convert
their shares into Class A shares at the rate of 2,400 Class
A shares for each Class B share. There is no provision for
conversion of Class A shares to Class B shares and Class B
shares surrendered for conversion cannot be reissued. Each
share of Class A common stock outstanding at the time of the
declaration of any dividend upon shares of Class B common
stock shall be entitled to a dividend payable at the same
time, at the same record date, and in an amount at least
equal to 2/3 of 1% of any dividend declared on each share of
Class B common stock. The Company may declare and pay a
dividend in respect of Class A common stock without any
requirement that any dividend be declared and paid in
respect of Class B common stock. Sole voting power is vested
in Class B common stock except insofar as any applicable law
shall permit Class A common stock to vote as a class in
regards to any changes in the rights, preferences and
privileges attaching to Class A common stock.
88
INCORPORATED BY REFERENCE, PAGES 42 AND 43 OF THE COMPANY'S 2001 ANNUAL REPORT
TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. CAPITAL STOCK (CONTINUED)
Stock repurchase plan
Beginning in 1999, the Company established a stock
repurchase program. The Company may repurchase as much as
$120 million of its outstanding Class A common stock through
December 31, 2002. Treasury shares are recorded on the
Consolidated Statements of Financial Position at cost. In
2001 there were 220,000 shares repurchased at a total cost
of $7,654, or an average price per share of $34.79. Since
its inception, 3,195,677 shares have been repurchased at a
total cost of $93,373, or an average price per share of
$29.22. 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.
NOTE 9. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of beginning and
ending loss and loss adjustment expense liability balances for
the Company's wholly-owned property/casualty insurance
subsidiaries:
2001 2000 1999
---------- ---------- -----------
Total unpaid losses and loss
adjustment expenses at January 1, gross $ 477,879 $ 432,895 $ 426,165
Less reinsurance recoverables 375,567 337,911 334,708
---------- ---------- ----------
Net balance at January 1 102,312 94,984 91,457
Incurred related to:
Current accident year 111,258 93,416 88,422
Prior accident years 5,943 6,148 ( 703)
---------- ---------- ----------
Total incurred 117,201 99,564 87,719
Paid related to:
Current accident year 59,637 53,251 50,560
Prior accident years 41,203 38,985 33,632
---------- ---------- ----------
Total paid 100,840 92,236 84,192
---------- ---------- ----------
Net balance at December 31 118,673 102,312 94,984
Plus reinsurance recoverables 438,605 375,567 337,911
---------- ---------- ----------
Total unpaid losses and loss adjustment
expenses at December 31, gross $ 557,278 $ 477,879 $ 432,895
========== ========== ==========
Included in the 2001 losses and loss adjustment expenses incurred
related to current accident year of $111,258 are the Company's
share of estimated incurred losses of the Erie Insurance Group's
reinsurance business stemming from the September 11th attack on
the World Trade Center of $8,250. Partially offsetting these
losses is an aggregate excess of loss reinsurance agreement
between the Exchange and the Company's property/casualty
insurance subsidiaries. See also Note 12. This agreement reduces
the net retention of these losses recorded by the Company to
$5,839. Current loss estimates are based on the assumption that
the attack will be considered one event. If the attack comes to
89
INCORPORATED BY REFERENCE, PAGE 43 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED)
be considered two events, the total potential exposure for EIG
would increase between $50,000 and $75,000. The effect on the
Company would be additional losses between $2,750 and $4,125.
Taking into consideration the excess of loss reinsurance
agreement, the net impact of such potential additional losses
would be minimal to the Company. The property/casualty insurers
are exposed to both direct and reinsurance losses arising from
possible future terrorist actions and other catastrophic events.
The 2001 incurred losses related to prior accident years of
$5,943 are due primarily to adverse development of losses in the
private passenger auto liability and workers' compensation lines
of business and are generally the result of ongoing analysis of
recent loss development trends. These losses are reflected in the
insurance underwriting operations segment of the Consolidated
Statements of Operations.
The 2000 incurred losses related to prior accident years of
$6,148 are due to adverse development of reinsurance losses from
the catastrophic storms in Europe in December 1999, combined with
increased loss severity in private passenger automobile and in
commercial lines of business.
NOTE 10. RELATED PARTY TRANSACTIONS
Management fee
A management fee is charged to the Exchange for management
services provided by the Company. The fee is a percentage of
Exchange direct and affiliated assumed premiums written. The
percentage rate is adjusted periodically within specified
limits by the Company's Board of Directors. The management
fee charged the Exchange was 25% for each year from 1999 to
2001.
In December 2001, the Board of Directors elected to maintain
the 25% management fee rate for all of 2002. The Company's
Board of Directors may change the management fee rate at its
discretion, but it may not exceed 25%.
eCommerce Program and Related Information Technology
Infrastructure
During 2001, the Erie Insurance Group undertook a series of
initiatives to develop its eCommerce capabilities. In
connection with this program, the Company and the
property/casualty insurance companies of the Erie Insurance
Group entered into a Cost Sharing Agreement for Information
Technology Development (Agreement). The Agreement describes
how member companies of the Erie Insurance Group will share
the costs to be incurred for the development of new Internet
enabled property/casualty policy administration and customer
relationship management systems. The Agreement provides that
the cost of the systems and the related enabling technology
costs, such as required infrastructure and architectural
tools, will be shared among the property/casualty insurance
companies in a manner consistent with the sharing of
insurance transactions under the existing intercompany
pooling agreement. See also Note 12. These costs are
included in the policy acquisition and other underwriting
expenses in the Consolidated Statements of Operations. The
Company's share of these costs, incurred by the Company's
property/casualty subsidiaries totaled $1,315 for the year
ended December 31, 2001.
Certain other costs of the eCommerce Program are related to
information technology hardware and are not included under
the Agreement. These costs are included in the cost of
management operations in the Consolidated Statement of
Operations. The Company's share of these infrastructure
costs amounted to $1,589 for the year ended December 31,
2001.
90
INCORPORATED BY REFERENCE, PAGE 44 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. RELATED PARTY TRANSACTIONS (CONTINUED)
Service agreement revenue
A service agreement fee is charged to the Exchange to
compensate the Company for its management of non-affiliated
assumed reinsurance business on behalf of the Exchange. The
Company receives a fee of 7% of voluntary reinsurance
premiums assumed from non-affiliated insurers and is
responsible for accounting, underwriting, and operating
expenses in connection with the administration of this
business. Service agreement fee revenue amounted to $11,251,
$10,149 and $8,158 in 2001, 2000 and 1999, respectively.
Also included in service agreement revenue are service
charges collected from Policyholders for providing extended
payment terms on policies written by the insurers managed by
the Company. In June 2000, this administrative fee collected
from Policyholders increased from $2 to $3 per installment
for policies renewing in most states. Service charge revenue
amounted to $15,996, $12,513 and $7,283 in 2001, 2000 and
1999, respectively.
Expense reimbursements
The Company pays for and is reimbursed by the Exchange for
expenses incurred in connection with adjustment of claims
and administrative services and by EFL for administrative
expenses. Reimbursements are made to the Company from these
affiliates monthly. The amounts of such expense
reimbursements were as follows for the years ended December
31:
2001 2000 1999
----------- ----------- -----------
Erie Insurance Exchange $ 162,549 $ 142,519 $ 136,045
Erie Family Life 18,545 18,631 14,740
----------- ----------- -----------
Total reimbursements $ 181,094 $ 161,150 $ 150,785
=========== =========== ===========
Office leases
The Company occupies certain office facilities owned by the
Exchange and EFL. The Company leases office space on a
year-to-year basis from the Exchange. Rent expenses under
these leases totaled $10,842, $10,703 and $10,320 in 2001,
2000 and 1999, respectively. The Company has a lease
commitment until 2008 with EFL for a branch office. Rentals
paid to EFL under this lease totaled $311 in 2001, $309 in
2000 and $303 in 1999.
Note receivable from EFL
The Company is due $15 million from EFL in the form of a
surplus note. The note bears an annual interest rate of
6.45% and all payments of interest and principal of the note
may be repaid only out of unassigned surplus of EFL and are
subject to prior approval of the Pennsylvania Insurance
Commissioner. Interest on the surplus note is scheduled to
be paid semi-annually. The note will be payable on demand on
or after December 31, 2005. During 2001, 2000 and 1999, EFL
paid interest to the Company totaling $968 each year.
Structured settlements with EFL
The Erie Insurance Group affiliated property/casualty
insurance companies periodically purchase annuities from EFL
in connection with the structured settlement of claims. The
Company's pro-rata share (5.5%) of such annuities purchased
equaled $708, $889 and $1,282 in 2001, 2000 and 1999,
respectively.
91
INCORPORATED BY REFERENCE, PAGE 44 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. RECEIVABLES FROM ERIE INSURANCE EXCHANGE AND CONCENTRATIONS OF
CREDIT RISK
Financial instruments, which potentially expose the Company to
concentrations of credit risk, include unsecured receivables from
the Exchange. Most all of the Company's revenue and receivables
are from the Exchange and affiliates.
Management fee and expense reimbursements due from the Exchange
were $147,344 and $117,962 in 2001 and 2000, respectively. A
receivable from EFL for expense reimbursements totaled $2,256 at
December 31, 2001 compared to $1,997 at December 31, 2000. The
Company also has a receivable due from the Exchange for
reinsurance recoverable from losses and unearned premium balances
ceded to the pool totaling $491,055 and $412,050 in 2001 and
2000, respectively.
Premiums receivable from Policyholders at December 31, 2001 and
2000 equaled $186,175 and $156,269, respectively. A significant
amount of these receivables are ceded to the Exchange as part of
the intercompany pooling agreement. At December 31, 2001, the
Exchange's statutory total assets totaled almost $7 billion and
Policyholders' surplus totaled $3 billion.
NOTE 12. REINSURANCE
EIC and EINY have an intercompany reinsurance pooling agreement
with the Exchange, whereby EIC and EINY cede all of their direct
property/casualty insurance to the Exchange, except for the
annual premium under the all-lines aggregate excess of loss
reinsurance agreement discussed below. EIC and EINY then assume
5% and 0.5%, respectively, of the total of the Exchange's
insurance business (including the business assumed from EIC and
EINY). The companies settle accounts between them by payment of
amounts due within 30 days after the end of each quarterly
accounting period.
EIC and EINY have in effect an all-lines aggregate excess of loss
reinsurance agreement with the Exchange. Under this agreement,
EIC and EINY reinsure their net retained share of the
intercompany reinsurance pool such that once EIC and EINY have
sustained ultimate net losses in any applicable accident year
that exceed an amount equal to 72.5% of EIC and EINY's net
premiums earned in that period, the Exchange will be liable for
95% of the amount of such excess, up to but not exceeding, an
amount equal to 95% of 15% of EIC and EINY's net premium earned.
Losses equal to 5% of the net ultimate net loss in excess of the
retention under the contract are retained net by EIC and EINY.
The annual premium is subject to a minimum premium of $950. This
reinsurance treaty is excluded from the intercompany pooling
agreement. The annual premium paid to the Exchange for the
agreement totaled $1,423, $1,268 and $1,199 in 2001, 2000 and
1999 respectively. Recoveries during 2001 amounted to $7,241, of
which $6,506 relates to the 2001 accident year. The balance of
the recoveries under this agreement recorded in 2001 related to
the 1999 accident year. There were no loss recoveries by EIC or
EINY under the agreement for 2000 or 1999.
To the extent the Exchange assumes reinsurance business from
nonaffiliated sources, the Company participates because of its
pooling agreement with the Exchange. Similarly, the Company also
participates in the business ceded from the Exchange. Reinsurance
premiums, commissions, expense reimbursements and reserves
related to reinsurance business are accounted for on bases
consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts.
Premiums ceded to the Exchange have been reported as a reduction
of premium income. The Company's property and liability
reinsurance assumed from foreign insurance companies is accounted
for using the periodic method, whereby premiums are recognized as
revenue over the policy term, and claims, including an estimate
of claims incurred but not reported, are recognized as they
occur. The amount of reinsurance business assumed from foreign
insurance companies is not significant.
92
INCORPORATED BY REFERENCE, PAGES 45 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. REINSURANCE (CONTINUED)
Reinsurance contracts do not relieve the Company from its primary
obligations to Policyholders. A contingent liability exists with
respect to reinsurance receivables in the event reinsurers are
unable to meet their obligations under the reinsurance
agreements.
The following summarizes insurance and reinsurance activities for
the Company:
2001 2000 1999
-------------- ------------- -------------
Premiums Earned:
Direct $ 432,307 $ 377,570 $ 351,228
Assumed nonaffiliates 7,391 4,824 5,380
Ceded to Erie Insurance Exchange ( 439,698) ( 382,394) ( 356,608)
Assumed from Erie Insurance Exchange 137,648 123,708 117,224
------------- ------------ -------------
Net $ 137,648 $ 123,708 $ 117,224
============= ============ =============
Losses and Loss Adjustment Expenses
Incurred:
Direct $ 374,440 $ 325,644 $ 264,177
Assumed nonaffiliates 14,262 3,956 6,512
Ceded to Erie Insurance Exchange ( 388,702) ( 329,600) ( 270,689)
Assumed from Erie Insurance Exchange 117,201 99,564 87,719
------------- ------------ -------------
Net $ 117,201 $ 99,564 $ 87,719
============= ============ =============
NOTE 13. STATUTORY INFORMATION
The statutory financial statements of Erie Insurance Property &
Casualty Company and EIC are prepared in accordance with
accounting practices prescribed by the Pennsylvania Insurance
Department. EINY prepares its statutory financial statements in
accordance with accounting practices prescribed by the New York
Insurance Department. Prescribed Statutory Accounting Practices
(SAP) include state laws, regulations, and general administration
rules, as well as a variety of publications from the National
Association of Insurance Commissioners (NAIC). The NAIC adopted
the Codification of Statutory Accounting Practices
(Codification), effective January 1, 2001, as the NAIC-supported
basis of accounting. The Codification was approved with a
provision allowing for prescribed or permitted accounting
practices to be determined by each states' insurance
commissioner. Accordingly, such discretion will continue to allow
prescribed or permitted accounting practices that may differ from
state to state. The New York State Insurance Department did not
adopt the deferred tax provisions of Codification, thus no
deferred taxes are recorded on the EINY statutory financial
statements.
Codification resulted in changes to the Company's statutory-basis
financial statements, the most significant of which was the
recording of statutory deferred taxes for EIC and Erie Insurance
Property & Casualty Company. The total cumulative adjustment
increased the surplus of the Company's property/casualty
insurance subsidiaries by $4,446 as of January 1, 2001.
93
INCORPORATED BY REFERENCE, PAGES 45 AND 46 OF THE COMPANY'S 2001 ANNUAL REPORT
TO SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. STATUTORY INFORMATION (CONTINUED)
Accounting principles used to prepare statutory financial
statements differ from those used to prepare financial statements
on the basis of generally accepted accounting principles.
Consolidated balances including amounts reported by the
property/casualty insurance subsidiaries on the statutory basis
would be as follows:
2001 2000 1999
----------- ----------- ------------
Shareholders' equity at December 31, $ 854,003 $ 767,894 $ 688,802
Net income for the year ended December 31, 118,475 150,942 142,615
The amount of dividends the Company's Pennsylvania-domiciled
property/casualty subsidiaries, EIC and Erie Insurance Property &
Casualty Company, can pay without the prior approval of the
Pennsylvania Insurance Commissioner is limited by Pennsylvania
regulation to not more than the greater of: (a) 10% of its
statutory surplus as reported on its last annual statement, or
(b) the net income as reported on its last annual statement. The
amount of dividends that the Erie Insurance Company's New
York-domiciled property/casualty subsidiary, EINY, can pay
without the prior approval of the New York Superintendent of
Insurance is limited to the lesser of: (a) 10% of its statutory
surplus as reported on its last annual statement, or (b) 100% of
its adjusted net investment income during such period. At
December 31, 2001, the maximum dividend the Company could receive
from its property/casualty insurance subsidiaries was $5,491. No
dividends were paid to the Company from its property/casualty
insurance subsidiaries in 2001 or 2000.
The amount of dividends EFL, a Pennsylvania-domiciled life
insurer, can pay to its shareholders without the prior approval
of the Pennsylvania Insurance Commissioner is limited by statute
to the greater of: (a) 10% of its statutory surplus as regards
Policyholders as shown on its last annual statement on file with
the commissioner, or (b) the net income as reported for the
period covered by such annual statement, but shall not include
pro rata distribution of any class of the insurer's own
securities. Accordingly, the Company's share of the maximum
dividend payout which may be made in 2002 without prior
Pennsylvania Commissioner approval is $2,295. Dividends to the
Company totaled $1,594 in 2001 and $1,472 in 2000.
NOTE 14. COMMITMENTS
The Company has outstanding commitments to invest up to $124,000
in limited partnerships at December 31, 2001. These commitments
will be funded as required through the end of the respective
investment periods, which typically span 3 to 5 years expiring in
2005. At December 31, 2001, the total commitment to fund limited
partnerships that invest in private equity securities is $87,000,
real estate activities $22,000 and fixed income securities
$15,000. At December 31, 2001, no one partnership commitment
exceeded $7.5 million, or 6%, of the outstanding commitment
amount.
During 2001, the Company entered into contracts to provide
services related to the eCommerce program with various external
vendors. The total outstanding commitment for these contracts at
December 31, 2001, was $16,146, of which approximately $12,943
will be reimbursed to the Company by the Exchange. The majority
of these committed services at December 31, 2001, are expected to
be performed in 2002.
94
INCORPORATED BY REFERENCE, PAGE 46 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. SEGMENT INFORMATION
The Company operates its business as two reportable segments -
management operations and property/casualty insurance operations.
Accounting policies for segments are the same as those described
in the summary of significant accounting policies. See also Note
2. Assets are not allocated to the segments and are reviewed in
total by management for purposes of decision making. No single
customer or agent provides 10% or more of revenues for the
Exchange.
The Company's principal operations consist of serving as
attorney-in-fact for the Exchange, which constitute its
management operations. The Company's property/casualty insurance
operations arise through direct business of its subsidiaries and
by virtue of the pooling agreement between its subsidiaries and
the Exchange, which includes assumed reinsurance from
nonaffiliated domestic and foreign sources. Insurance provided in
the property/casualty operations consists of personal and
commercial lines and is sold by independent agents. Personal
lines are marketed to individuals and commercial lines are
marketed to small and medium-sized businesses. The performance of
the personal lines and commercial lines is evaluated based upon
the underwriting results as determined under SAP for the total
pooled business of the Group.
Summarized financial information for these operations is
presented below.
2001 2000 1999
------------- ------------- -------------
Management operations:
---------------------
Revenue:
Management fee revenue $ 634,966 $ 551,646 $ 513,375
Service agreement revenue 27,247 22,662 15,441
------------ ------------ ------------
Total revenue from management operations 662,213 574,308 528,816
Net revenue from investment operations 1,700 57,213 47,011
------------ ------------ ------------
Total revenue $ 663,913 $ 631,521 $ 575,827
============ ============ ============
Income before taxes $ 186,267 $ 215,959 $ 195,529
============ ============ ============
Net income $ 123,403 $ 145,851 $ 133,235
============ ============ ============
Property/casualty operations:
----------------------------
Revenue:
Premiums earned:
Commercial lines $ 34,970 $ 28,456 $ 25,147
Personal lines 97,078 89,369 87,334
Reinsurance 8,866 7,880 6,185
------------ ------------ ------------
Total premiums earned (SAP) 140,914 125,705 118,666
GAAP adjustments ( 3,266) ( 1,997) ( 1,442)
------------ ------------ ------------
Total premiums earned (GAAP) 137,648 123,708 117,224
Net revenue from investment operations 17,071 18,381 16,765
------------ ------------ ------------
Total revenue $ 154,719 $ 142,089 $ 133,989
============ ============ ============
Expense:
Losses and expenses:
Commercial lines $ 41,417 $ 31,914 $ 26,726
Personal lines 107,851 92,012 85,512
Reinsurance 12,970 12,203 9,225
------------ ------------ ------------
Total losses and expenses (SAP) 162,238 136,129 121,463
GAAP adjustments ( 4,127) ( 2,019) ( 700)
------------ ------------ ------------
Total losses and expenses (GAAP) $ 158,111 $ 134,110 $ 120,763
============ ============ ============
(Loss) income before taxes ($ 3,391) $ 7,979 $ 13,226
============ ============ ============
Net (loss) income ($ 1,142) $ 6,542 $ 9,871
============ ============ ============
95
INCORPORATED BY REFERENCE, PAGE 47 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
ERIE INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
2001
- ----
Net revenue from management operations $ 43,200 $ 53,104 $ 55,044 $ 33,220
Underwriting loss ( 3,538) ( 1,786) ( 10,589) ( 4,550)
Net revenue (loss) from investment operations 12,196 18,731 6,994 ( 19,150)
---------- ---------- ---------- ----------
Income before income taxes 51,858 70,049 51,449 9,520
========== ========== ========== ==========
Net income $ 34,785 $ 47,129 $ 34,430 $ 5,917
========== ========== ========== ==========
Net income per share $ 0.49 $ 0.66 $ 0.48 $ 0.08
========== ========== ========== ==========
Comprehensive income $ 36,407 $ 45,414 $ 31,081 $ 21,399
========== ========== ========== ==========
2000
- ----
Net revenue from management operations $ 36,618 $ 43,310 $ 44,417 $ 34,401
Underwriting loss ( 3,203) ( 1,590) ( 2,742) ( 2,867)
Net revenue from investment operations 19,515 20,658 18,986 16,435
---------- ---------- ---------- ----------
Income before income taxes 52,930 62,378 60,661 47,969
========== ========== ========== ==========
Net income $ 36,185 $ 42,518 $ 41,192 $ 32,498
========== ========== ========== ==========
Net income per share $ 0.50 $ 0.59 $ 0.58 $ 0.45
========== ========== ========== ==========
Comprehensive income $ 50,036 $ 35,093 $ 41,565 $ 22,300
========== ========== ========== ==========
1999
- ----
Net revenue from management operations $ 34,367 $ 40,587 $ 41,945 $ 31,619
Underwriting (loss) gain ( 607) 1,113 ( 1,580) ( 2,465)
Net revenue from investment operations 14,770 16,177 16,450 16,379
---------- ---------- ---------- ----------
Income before income taxes 48,530 57,877 56,815 45,533
========== ========== ========== ==========
Net income $ 33,407 $ 39,225 $ 38,425 $ 32,049
========== ========== ========== ==========
Net income per share $ 0.45 $ 0.53 $ 0.53 $ 0.44
========== ========== ========== ==========
Comprehensive income $ 31,897 $ 32,180 $ 26,295 $ 39,137
========== ========== ========== ==========
During the fourth quarter of 2001, the Company realized net losses on the sale
of impaired securities and realized charges for other-than-temporary impairments
of equity securities and limited partnerships totaling $29,153. Realized losses
resulted in an after-tax earnings per share reduction of $0.27. The investment
sales were part of a proactive year-end tax planning strategy and will produce
the recovery of approximately $9.6 million of federal income taxes paid in 1998,
1999 and 2000. Also contributing to the fourth quarter 2001 decline in net
income per share were charges for a severance benefit stemming from the
retirement of the president and CEO of the Erie Insurance Group. The Company's
share of charges related to this severance was approximately $0.10 per share,
after taxes.
96
INCORPORATED BY REFERENCE, PAGE 48 OF THE COMPANY'S 2001 ANNUAL REPORT TO
SHAREHOLDERS
MARKET PRICE OF AND DIVIDENDS ON THE COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
COMMON STOCK PRICES
The Class A non-voting common stock of the Company trades on The NASDAQ Stock
Market under the symbol "ERIE." The following sets forth the range of high and
low trading prices by quarter as reported by The NASDAQ Stock Market.
CLASS A TRADING PRICE
2001 2000
Low High Low High
- --------------------------------------------------------------------
First Quarter 25.63 30.13 26.25 32.63
Second Quarter 27.54 36.12 27.50 32.88
Third Quarter 30.83 39.70 28.25 32.13
Fourth Quarter 36.65 41.27 23.88 30.00
- --------------------------------------------------------------------
No established trading market exists for the Class B voting common stock.
On February 18, 1997, the Executive Committee of the Board of Directors approved
an enhancement to the Company's 401(K) plan for Employees which permits
participants to invest a portion of the Company's contributions to the plan in
shares of Erie Indemnity Class A common stock. The plan's Trustee was authorized
to buy Erie Indemnity Company Class A common stock on behalf of 401(K) plan
participants beginning May 8, 1997.
In 1998, the Board of Directors of the Company approved a stock repurchase plan
beginning January 1, 1999, under which the Company may repurchase as much as
$120 million of its outstanding Class A common stock through December 31, 2002.
Treasury shares are recorded on the Consolidated Statements of Financial
Position at cost. In 2001, there were 220,000 shares repurchased at a total cost
of $7,653,916, or an average price per share of $34.79. Since its inception,
3,195,677 shares have been repurchased at a total cost of $93,373,265, or an
average price per share of $29.22. 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.
COMMON STOCK DIVIDENDS
The Company historically has declared and paid cash dividends on a quarterly
basis at the discretion of the Board of Directors. The payment and amount of
future dividends on the common stock will be determined by the Board of
Directors and will depend on, among other things, earnings, financial condition
and cash requirements of the Company at the time such payment is considered, and
on the ability of the Company to receive dividends from its subsidiaries, the
amount of which is subject to regulatory limitations. Dividends declared for
each class of stock during 2001 and 2000 are as follows:
DIVIDENDS DECLARED
2001: Class A share Class B share
- ---------------------------------------------------------------
First Quarter $ .1525 $ 22.875
Second Quarter .1525 22.875
Third Quarter .1525 22.875
Fourth Quarter .1700 25.500
- ---------------------------------------------------------------
$ .6275 $ 94.125
===============================================================
2000: Class A share Class B share
- ---------------------------------------------------------------
First Quarter $ .1350 $ 20.250
Second Quarter .1350 20.250
Third Quarter .1350 20.250
Fourth Quarter .1525 22.875
- ---------------------------------------------------------------
$ .5575 $ 83.625
===============================================================
American Stock Transfer & Trust Company serves as the Company's transfer agent
and registrar.
97
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Registrant owns 100% of the outstanding stock of the following companies:
Name State of Formation
Erie Insurance Property
& Casualty Company Pennsylvania
Erie Insurance Company Pennsylvania
EI Holding Corp. Delaware
EI Service Corp. Pennsylvania
Erie Insurance Company of New York -
Wholly owned by Erie Insurance Company New York
98