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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-24000
ERIE INDEMNITY COMPANY
(Exact name of registrant as specified in its charter)
| Pennsylvania | 25-0466020 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
| 100 Erie Insurance Place, Erie, Pennsylvania | 16530 | |
| (Address of principal executive offices) | (Zip code) |
(814) 870-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class A common stock, stated value $0.0292 per share, listed on the NASDAQ Stock Market, LLC
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
| Large Accelerated Filer þ | Accelerated Filer o | Non-Accelerated Filer o (Do not check if a smaller reporting company) | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Aggregate market value of voting and non-voting common stock held by non-affiliates as of the last
business day of the registrant’s most recently completed second fiscal quarter: $1.3 billion of
Class A non-voting common stock as of June 30, 2010. There is no active market for the Class B
voting common stock. The Class B common stock is closely held by few shareholders.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as
of the latest practicable date: 49,751,555
shares of Class A common stock and 2,546 shares of
Class B common stock outstanding on February 18, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Part III of this Form 10-K (Items 10, 11, 12, 13, and 14) are incorporated by reference
to the information statement on Form 14(C) to be filed with the Securities and Exchange Commission
no later than 120 days after December 31, 2010.
INDEX
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PART I
Item 1. Business
General
Erie Indemnity Company (“Indemnity”) is a publicly held Pennsylvania business corporation that
since 1925 has been the managing attorney-in-fact for the subscribers (policyholders) of the Erie
Insurance Exchange (“Exchange”). The Exchange is a subscriber owned Pennsylvania-domiciled
reciprocal insurer that writes property and casualty insurance.
Indemnity’s primary function is to perform certain services for the Exchange relating to the sales,
underwriting and issuance of policies on behalf of the Exchange. This is done in accordance with a
subscriber’s agreement (a limited power of attorney) executed by each subscriber (policyholder),
appointing Indemnity as their common attorney-in-fact to transact business on their behalf and to
manage the affairs of the Exchange. Pursuant to the subscriber’s agreement and for its services as
attorney-in-fact, Indemnity earns a management fee calculated as a percentage of the direct
premiums written by the Exchange and the other members of the Property and Casualty Group, which
are assumed by the Exchange under an intercompany pooling arrangement.
Through December 31, 2010, Indemnity also operated as a property and casualty insurer through its
wholly owned subsidiaries, Erie Insurance Company (“EIC”), Erie Insurance Company of New York
(“ENY”) and Erie Insurance Property and Casualty Company (“EPC”). EIC, ENY and EPC, together with
the Exchange and its wholly owned subsidiary, Flagship City Insurance Company (“Flagship”), are
collectively referred to as the “Property and Casualty Group”. The Property and Casualty Group
operates in 11 Midwestern, Mid-Atlantic and Southeastern states and the District of Columbia and
writes primarily private passenger automobile, homeowners, commercial multi-peril, commercial automobile and
workers compensation lines of insurance.
On December 31, 2010, Indemnity sold all of the outstanding capital stock of its wholly owned
property and casualty subsidiaries to the Exchange. There was no gain or loss resulting from this
sale as Indemnity and the Exchange are deemed to be under common
control. Under this new structure, all property and casualty insurance operations are owned by the
Exchange, and Indemnity will continue to function as the management company. There was no impact on
the existing reinsurance pooling agreement between the Exchange and EIC or ENY as a result of the
sale, nor was there any impact to the subscribers (policyholders) of the Exchange, to the
Exchange’s independent insurance agents, or to Indemnity’s employees.
Erie Family Life Insurance Company (“EFL”) is an affiliated life insurance company that underwrites
and sells individual and group life insurance policies and fixed annuities. Indemnity and the
Exchange own 21.6% and 78.4% of EFL, respectively. On November 4, 2010, Indemnity entered into a
definitive agreement for the sale of its 21.6% ownership interest in EFL to the Exchange, which is
scheduled to close by March 31, 2011. Upon the closing date, the Exchange will own 100% of EFL.
Because Indemnity and the Exchange are deemed to be under common control for financial reporting
purposes, any gains or losses resulting from the sale of Indemnity’s equity interest in EFL will be
recorded as an adjustment directly to Indemnity’s equity balance at March 31, 2011.
“Indemnity shareholder interest” refers to the interest in Erie Indemnity Company owned by the
Class A and Class B shareholders. “Noncontrolling interest” refers to the interest in the Erie
Insurance Exchange held for the benefit of the subscribers (policyholders).
The consolidated financial statements of Erie Indemnity Company reflect the results of Indemnity
and its variable interest entity, the Exchange, which we refer to collectively as “Erie Insurance
Group” (“we,” “us,” “our”).
Business segments
We operate our business as four reportable segments — management operations, property and casualty
insurance operations, life insurance operations and investment operations. Financial information
about these segments is set forth in and referenced to Item 8. “Financial Statements and
Supplementary Data — Note 5, Segment Information, of Notes to Consolidated Financial Statements”
contained within this report. Further discussion of financial results by operating segment is
provided in and referenced to Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” contained within this report.
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Management operations — We generate internal management fee revenue, which accrues to the
benefit of the Indemnity shareholder interest, as Indemnity provides services to the Exchange
relating to the sales, underwriting and issuance of policies. The Exchange is the sole customer of
our management operations. Indemnity charges the Exchange a management fee, determined by our Board
of Directors, not to exceed 25% of all premiums written or assumed by the Exchange for its services
as attorney-in-fact. Management fee revenue is eliminated upon consolidation.
Property and casualty insurance operations — The Property and Casualty Group generates
revenue by insuring standard and preferred risks, with personal lines comprising 73% of the 2010
direct written premiums and commercial lines comprising the remaining 27%. The principal personal
lines products based upon 2010 direct written premiums were private passenger automobile (48%) and
homeowners (21%). The principal commercial lines products based on 2010 direct written premiums
were commercial multi-peril (11%), commercial automobile (7%) and workers compensation (6%).
The members of the Property and Casualty Group pool their underwriting results under an
intercompany pooling agreement. Under the pooling agreement, the Exchange retains a 94.5% interest
in the net underwriting results of the Property and Casualty Group, while EIC retains a 5.0%
interest and ENY retains a 0.5% interest. Prior to December 31, 2010, the underwriting results
retained by EIC and ENY accrued to the benefit of the Indemnity shareholder interest. Due to the
sale of Indemnity’s property and casualty subsidiaries to the Exchange on December 31, 2010, all
property and casualty underwriting results accrue to the benefit of
the subscribers (policyholders) of the
Exchange, or noncontrolling interest, after December 31, 2010.
Historically, due to policy renewal and sales patterns, the Property and Casualty Group’s direct
written premiums are greater in the second and third quarters than in the first and fourth quarters
of the calendar year. Property and casualty insurance premiums earned accounted for approximately
81% of our total consolidated revenue in 2010, 90% in 2009 and 142% in 2008. The proportion of
property and casualty insurance premiums to total consolidated revenues was significantly greater
in 2008 due to losses generated from our investment operations as a result of unfavorable market
conditions.
The Property and Casualty Group is represented by nearly 2,100 independent agencies comprising
almost 9,500 licensed representatives, which is our sole distribution channel. In addition to their
principal role as salespersons, the independent agents play a significant role as underwriting and
service providers and are fundamental to the Property and Casualty Group’s success.
The Property and Casualty Group writes business in Illinois, Indiana, Maryland, New York, North
Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, Wisconsin and the District of
Columbia. The states of Pennsylvania, Maryland and Virginia made up 63% of the Property and
Casualty Group’s 2010 direct written premium.
While sales, underwriting and policy issuance services are centralized at our home office, the
Property and Casualty Group maintains 24 field offices throughout its operating region to provide
claims services to policyholders and marketing support for the independent agencies that represent
us.
The Property and Casualty Group ranked as the 13th largest automobile insurer in the
United States based on 2009 direct written premiums and as the 19th largest property and
casualty insurer in the United States based on 2009 total lines net premium written according to AM
Best.
Life insurance operations — Our life insurance operations generate revenue from the sale
of individual and group life insurance policies and fixed annuities. These products are offered
through our property and casualty agency force to provide an opportunity to cross-sell both
personal and commercial accounts. EFL writes business in 10 states including Illinois, Indiana,
Maryland, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and Wisconsin and
the District of Columbia. The state of Pennsylvania made up 51% of EFL’s 2010 premium and annuity
considerations, with Maryland, Virginia and Ohio making up nearly 10% each.
As discussed previously, currently Indemnity and the Exchange own 21.6% and 78.4% of EFL,
respectively. Upon the sale of Indemnity’s ownership interest in EFL, scheduled to close by March
31, 2011, the Exchange will own 100% of the life insurance operations.
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Investment operations — Our investment operations generate revenue from our fixed
maturity, equity security and alternative investment portfolios. The portfolios are managed with
the objective of maximizing after-tax returns on a risk-adjusted basis. Revenues and losses
included in investment operations consist of net investment income, net realized gains and losses,
net impairment losses recognized in earnings for our fixed maturity and preferred equity
portfolios, and equity in earnings and losses from our alternative investments, which include
private equity, real estate, and mezzanine limited partnerships. The volatility inherent in the
financial markets has the potential to impact our investment portfolio from time-to-time. Net
revenues from our investment operations accounted for approximately 17% of our total consolidated
revenue in 2010 and 8% in 2009, where in 2008 net losses from our investment operations negatively
impacted our total consolidated revenues by 46% as a result of unfavorable market conditions.
Competition
Property and casualty insurers generally compete on the basis of customer service, price, consumer
recognition, coverages offered, claims handling, financial stability and geographic coverage.
Vigorous competition, particularly in the personal lines automobile and homeowners lines of
business, is provided by large, well-capitalized national companies, some of which have broad
distribution networks of employed or captive agents, by smaller regional insurers and by large
companies who market and sell personal lines products directly to consumers. In addition, because
the insurance products of the Property and Casualty Group are marketed exclusively through
independent insurance agents, the Property and Casualty Group faces competition within its
appointed agencies based on ease of doing business, product, price and service relationships.
Market competition bears directly on the price charged for insurance products and services subject
to regulatory limitations. Growth is driven by a company’s ability to provide insurance services
and competitive prices while maintaining target profit margins. Industry capital levels can also
significantly affect prices charged for coverage. Growth is a 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.
The Erie Insurance Group has a strategic focus that we believe will result in long-term
underwriting performance. First, we employ an underwriting philosophy and product mix targeted to
produce a Property and Casualty Group underwriting profit on a long-term basis through careful risk
selection and rational pricing. The careful selection of risks allows for lower claims frequency
and loss severity, thereby enabling insurance to be offered at favorable prices. The Property and
Casualty Group has continued to refine its risk measurement and price segmentation model used in
the underwriting and pricing processes. Second, the Property and Casualty Group focuses on
consistently providing superior service to policyholders and agents. Third, the Property and
Casualty Group’s business model is designed to provide the advantages of localized marketing and
claims servicing with the economies of scale and low cost of operations from centralized
accounting, administrative, underwriting, investment, information management and other support
services.
Finally, we carefully select the independent agencies that represent the Property and Casualty
Group. The Property and Casualty Group seeks to be the lead insurer with its agents in order to
enhance the agency relationship and the likelihood of receiving the most desirable underwriting
opportunities from its agents. We have ongoing, direct communications with the agency force. Agents
have access to a number of venues we sponsor designed to promote sharing of ideas, concerns and
suggestions with the senior management of the Property and Casualty Group with the goal of
improving communications and service. We continue to evaluate new ways to support our agents’
efforts, from marketing programs to identifying potential customer leads, to grow the business of
the Property and Casualty Group and sustain our long-term agency partnerships. The higher agency
penetration and long-term relationships allow for greater efficiency in providing agency support
and training.
EFL, our life insurer, is subject to many of the same structural advantages and environmental
challenges as the Property and Casualty Group. Term life business accounts for the majority of
policies issued by EFL, and this product line is extremely competitive and increasingly transparent
due in part to the proliferation of on-line quoting services. Besides price, ease of application
and processing improvements represent areas where companies are finding ways to differentiate
themselves among independent producers. EFL continues to progress in these areas using
state-of-the-art technology and third-party vendors. Historically, sound underwriting and
disciplined approaches to pricing and investing have contributed to favorable operating results.
While EFL will be challenged to maintain these trends in the face of intensified competition going
forward, we continue to shape our strategy and core processes to respond more effectively to the
needs of our policyholders and independent agents.
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Employees
We employed approximately 4,200 people at December 31, 2010, of which approximately 2,090, or 50%,
provide claims specific services exclusively for the Property and Casualty Group and approximately
65, or 2%, perform services exclusively for EFL.
Reserves for losses and loss expenses
The table that follows illustrates the change over time of the loss and loss expense reserves
established for the Property and Casualty Group at the end of the last ten calendar years. The Property
and Casualty Group’s obligation at December 31, 2010 is $3.6 billion. An additional discussion of
our property and casualty loss reserve methodology can be found in and is referenced to Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical
Accounting Estimates” contained within this report.
The Property and Casualty Group discounts only workers compensation reserves. These reserves are
discounted on a nontabular basis as prescribed by the Insurance Department of the Commonwealth of
Pennsylvania. The interest rate of 2.5% used to discount these reserves is based upon the Property
and Casualty Group’s historical workers compensation payout pattern. The Property and Casualty
Group’s unpaid losses and loss expenses reserves were reduced by $127 million and $136 million at
December 31, 2010 and 2009, respectively, as a result of this discounting.
An additional discussion of property and casualty loss reserve activity can be found in and is
referenced to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Financial Condition” section contained within this report.
| Property and Casualty Group | ||||||||||||||||||||||||||||||||||||||||
| Reserves for Unpaid Losses and Loss Expenses | ||||||||||||||||||||||||||||||||||||||||
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| (in millions) | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||||||||||||||
Gross liability for unpaid losses
and loss expenses (LAE) |
$ | 2,348 | $ | 2,940 | $ | 3,401 | $ | 3,629 | $ | 3,779 | $ | 3,830 | $ | 3,684 | $ | 3,586 | $ | 3,598 | $ | 3,584 | ||||||||||||||||||||
Gross liability re-estimated as of: |
||||||||||||||||||||||||||||||||||||||||
One year later |
2,677 | 2,986 | 3,360 | 3,592 | 3,651 | 3,559 | 3,487 | 3,502 | 3,336 | |||||||||||||||||||||||||||||||
Two years later |
2,731 | 3,021 | 3,423 | 3,583 | 3,508 | 3,467 | 3,409 | 3,320 | ||||||||||||||||||||||||||||||||
Three years later |
2,789 | 3,117 | 3,482 | 3,558 | 3,464 | 3,412 | 3,307 | |||||||||||||||||||||||||||||||||
Four years later |
2,895 | 3,190 | 3,497 | 3,516 | 3,437 | 3,358 | ||||||||||||||||||||||||||||||||||
Five years later |
2,979 | 3,223 | 3,466 | 3,494 | 3,404 | |||||||||||||||||||||||||||||||||||
Six years later |
3,027 | 3,173 | 3,440 | 3,485 | ||||||||||||||||||||||||||||||||||||
Seven years later |
2,977 | 3,186 | 3,430 | |||||||||||||||||||||||||||||||||||||
Eight years later |
2,980 | 3,189 | ||||||||||||||||||||||||||||||||||||||
Nine years later |
2,964 | |||||||||||||||||||||||||||||||||||||||
Cumulative (deficiency) redundancy |
$ | (616 | ) | $ | (249 | ) | $ | (29 | ) | $ | 144 | $ | 375 | $ | 472 | $ | 377 | $ | 266 | $ | 262 | N/A | ||||||||||||||||||
Cumulative amount of gross
liability paid through: |
||||||||||||||||||||||||||||||||||||||||
One year later |
$ | 859 | $ | 933 | $ | 1,055 | $ | 1,066 | $ | 1,067 | $ | 1,019 | $ | 1,042 | $ | 1,033 | $ | 955 | ||||||||||||||||||||||
Two years later |
1,339 | 1,477 | 1,638 | 1,699 | 1,630 | 1,621 | 1,573 | 1,538 | ||||||||||||||||||||||||||||||||
Three years later |
1,658 | 1,819 | 2,034 | 2,056 | 2,016 | 1,962 | 1,889 | |||||||||||||||||||||||||||||||||
Four years later |
1,858 | 2,044 | 2,245 | 2,294 | 2,235 | 2,147 | ||||||||||||||||||||||||||||||||||
Five years later |
1,990 | 2,161 | 2,394 | 2,431 | 2,342 | |||||||||||||||||||||||||||||||||||
Six years later |
2,061 | 2,256 | 2,484 | 2,509 | ||||||||||||||||||||||||||||||||||||
Seven years later |
2,131 | 2,316 | 2,541 | |||||||||||||||||||||||||||||||||||||
Eight years later |
2,172 | 2,357 | ||||||||||||||||||||||||||||||||||||||
Nine years later |
$ | 2,201 | ||||||||||||||||||||||||||||||||||||||
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Government Regulation
Property and casualty insurers are subject to supervision and regulation in the states in which
they transact business. The extent of such regulation varies, but generally derives from state
statutes that 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 that 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 and casualty insurance, the provisions that 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 that 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 quarterly and annual reports relating to the financial condition of insurance
companies.
The Property and Casualty Group is 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. The loss ratio on insurance written under
involuntary programs has traditionally been greater than the loss ratio on insurance in the
voluntary market. Although currently the federal government does not
directly regulate the insurance industry, federal programs, such as
federal terrorism backstop legislation and the Federal Insurance
Office established under the Dodd-Frank Act can also impact the
insurance industry.
Our life insurer, EFL, is subject to similar state regulations as the Property and Casualty Group,
although specific laws and statutes applicable to life insurance and annuity carriers govern its
activities. Valuation laws require statutory reserves to be held at conservative levels, which can
have a substantial impact on the amount of free surplus that is available for financing new
business and other growth opportunities.
Most states have enacted legislation that regulates insurance holding company systems such as the
Erie Insurance Group. Each insurance company in the holding company system is required to register
with the insurance supervisory authority of its state of domicile and furnish information regarding
the operations of companies within the holding company system that may materially affect the
operations, management or financial condition of the insurers within the system. Pursuant to these
laws, the respective insurance departments may examine Indemnity, as the management company, the
Property and Casualty Group and EFL at any time and may require disclosure and/or prior approval of
certain transactions with the insurers and Indemnity, as an insurance holding company.
All transactions within the holding company system affecting the insurers Indemnity manages are
filed with the applicable insurance departments and must be fair and reasonable. Approval of the
applicable insurance commissioner is required prior to the consummation of transactions affecting
the control of an insurer. In some states, the acquisition of 10% or more of the outstanding common
stock of an insurer or its holding company is presumed to be a change in control. The sale of
Indemnity’s wholly owned property and casualty subsidiaries, EIC, ENY and EPC, and the sale
of Indemnity’s 21.6% ownership interest in EFL have both been approved by the appropriate
regulatory agencies. Approval of the applicable insurance commissioner is also required in order to
declare extraordinary dividends. See Item 8, “Financial Statements and Supplementary Data — Note
23, Statutory Information, of Notes to Consolidated Financial Statements” contained within this
report.
Website access
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
all amendments to those reports are available free of charge on our website at
www.erieinsurance.com as soon as reasonably practicable after such material is filed electronically
with the SEC. Our Code of Conduct is available on our website and in printed form upon request. Our information statement on
Form 14(C) is also available free of
charge at www.erieinsurance.com. Copies of our annual report on Form 10-K will be made available,
free of charge, upon written request as well by contacting Investor
Relations, Erie Indemnity Company, 100 Erie Insurance Place, Erie, PA
16530, or calling 1-800-458-0811.
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Item 1A. Risk Factors
Our business involves various risks and uncertainties, including, but not limited to those
discussed in this section. The events described in the risk factors below, or any additional risk
outside of those discussed below, could have a material adverse effect on our business, financial
condition, operating results or liquidity if they actually occur. This information should be
considered carefully together with the other information contained in this report, including
management’s discussion and analysis of financial condition and results of operations, the
consolidated financial statements and the related notes.
Risk factors related to the Indemnity shareholder interest
If the management fee rate paid by the Exchange is reduced or if there is a significant decrease in
the amount of premiums written or assumed by the Exchange, revenues and profitability could be
materially adversely affected.
Indemnity is dependent upon management fees paid by the Exchange, which represent its principal
source of revenue. Pursuant to the subscriber’s agreements with the policyholders at the Exchange,
Indemnity may retain up to 25% of all premiums written or assumed by the Exchange. Therefore,
management fee revenue from the Exchange is calculated by multiplying the management fee rate by
the direct premiums written by the Exchange and the other members of the Property and Casualty
Group, which are assumed by the Exchange under an intercompany pooling arrangement. Accordingly,
any reduction in direct premiums written by the Property and Casualty Group would have a
proportional negative effect on Indemnity’s revenues and net income. See the “Risk factors relating
to the non-controlling interest owned by the Exchange, which includes the Property and Casualty
Group and EFL” section, herein, for a discussion of risks impacting direct written premium.
The management fee rate is determined by the Board of Directors and may not exceed 25% of the
premiums written or assumed by the Exchange. The Board of Directors sets the management fee rate
each December for the following year. At their discretion, the rate can be changed at any time. The
factors considered by the Board in setting the management fee rate include Indemnity’s financial
position in relation to the Exchange and the long-term needs of the Exchange for capital and
surplus to support its continued growth and competitiveness. If the Exchange’s surplus were
significantly reduced, the management fee rate could be reduced and Indemnity’s revenues and
profitability could be materially adversely affected.
If the costs of providing services to the Exchange are not controlled, Indemnity’s revenues and
profitability could be materially adversely affected.
Pursuant to the subscriber’s agreements with the policyholders at the Exchange, Indemnity is
appointed to perform certain services, regardless of the cost of providing those services. These
services relate to the sales, underwriting and issuance of policies on behalf of the Exchange.
Indemnity incurs significant costs related to commissions, employees, and technology in order to
provide these services.
Commissions to independent agents are the largest component of Indemnity’s cost of operations.
Commissions include scheduled commissions to agents based on premiums written as well as additional
commissions and bonuses to agents, which are earned by achieving certain targeted measures.
Changes to commission rates or bonus programs may result in increased future costs and lower
profitability.
Employees are an essential part of the operating costs related to providing services for the
Exchange. As a result, Indemnity’s profitability is affected by employee costs, including salary,
medical, pension and other benefit costs. Recent regulatory developments and economic factors that
are beyond our control indicate that employee healthcare costs will continue to increase. Although
Indemnity actively manages these cost increases, there can be no assurance that future cost
increases will not occur and reduce its profitability.
Technological development is necessary to reduce Indemnity’s costs and the Property and Casualty
Group’s operating costs and to facilitate agents’ and policyholders’ ability to do business with
the Property and Casualty Group. If we are unable to keep pace with the advancements in
technology, our ability to compete with other insurance companies who have advanced technological
capabilities will be negatively affected. This could result in additional costs as we invest in
new technology and systems.
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Our ability to attract, develop and retain talented executives, key managers and employees is
critical to our success.
Our future performance is substantially dependent upon our ability to attract, motivate and retain
executives and other key management. The loss of the services and leadership of certain key
officers and the failure to attract, motivate and develop talented new executives and managers
could prevent us from successfully communicating, implementing and executing business strategies,
and therefore have a material adverse effect on our financial condition and results of operations.
Our success also depends on our ability to attract, develop and retain a talented employee base.
The inability to staff all functions of our business with employees possessing the appropriate
technical expertise could have an adverse effect on our business performance. Staffing
appropriately skilled employees for the deployment and maintenance of information technology
systems, the appropriate handling of claims, and rendering of disciplined underwriting is critical
to the success of our business.
If we are unable to keep pace with technological advancements in the insurance industry or are
unable to ensure system availability or to secure system information, the ability of the Erie
Insurance Group to compete effectively could be impaired.
The Indemnity is responsible for providing the technological resources necessary to support the
operations of the Erie Insurance Group. Our business is highly dependent upon the effective
operations of our technology and information systems. We rely on these systems to assist in key
functions of core business operations including processing claims, applications, and premium
payments, providing customer support, performing actuarial and financial analysis, and maintaining
key data. We have an established business continuity plan to ensure the continuation of core
business operations in the event that normal business operations could not be performed due to a
catastrophic event. While we continue to test and assess our business continuity plan to ensure it
meets the needs of our core business operations and addresses multiple business interruption
events, there is no assurance that core business operations could be performed upon the occurrence
of such an event. The failure of our information systems for any reason could result in a material
adverse effect on our business, financial condition, or results of operations.
Advancements in technology continue to make it easier to store, share and transport information. A
security breach of our computer systems could interrupt or damage our operations or harm our
reputation if confidential company or customer information were to be misappropriated from our
systems. Cases where sensitive data is exposed or lost may lead to a loss in competitive advantage
or lawsuits.
The performance of Indemnity’s investment portfolio is subject to a variety of investment risks,
which may in turn have a material adverse effect on its results of operations or financial
condition.
The Indemnity’s investment portfolio is comprised principally of fixed-income maturities and
limited partnerships. At December 31, 2010 the Indemnity’s investment portfolio consisted of
approximately 50% fixed income securities, 40% limited partnerships, and 10% equity securities.
All of Indemnity’s marketable securities are subject to market volatility. To the extent that
future market volatility negatively impacts Indemnity’s investments, its financial condition will
be negatively impacted. We review the investment portfolio on a continuous basis to evaluate
positions that might have incurred other-than-temporary declines in value. The primary factors
considered in our review of investment valuation include the extent and duration to which fair
value is less than cost, historical operating performance and financial condition of the issuer,
short- and long-term prospects of the issuer and its industry, specific events that occurred
affecting the issuer including rating downgrades and, depending on the type of security, our intent
to sell or our ability and intent to retain the investment for a period of time sufficient to allow
for a recovery in value. As the process for determining impairments is highly subjective, changes
in our assessments may have a material effect on Indemnity’s operating results and financial
condition. See also Item 7A. “Quantitative and Qualitative Disclosures about Market Risk”.
If the fixed-income, equity, or limited partnership portfolios were to suffer a substantial
decrease in value, Indemnity’s financial position could be materially adversely affected through
increased unrealized losses or impairments.
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Currently, 75% of the fixed-income portfolio is invested in municipal securities. The performance
of the fixed-income portfolio is subject to a number of risks including:
| • | Interest rate risk — the risk of adverse changes in the value of fixed-income securities as a result of increases in market interest rates. | ||
| • | Investment credit risk — the risk that the value of certain investments may decrease due to the deterioration in financial condition of, or the liquidity available to, one or more issuers of those securities or, in the case of asset-backed securities, due to the deterioration of the loans or other assets that underlie the securities, which, in each case, also includes the risk of permanent loss. | ||
| • | Concentration risk — the risk that the portfolio may be too heavily concentrated in the securities of one or more issuers, sectors, or industries, which could result in a significant decrease in the value of the portfolio in the event of a deterioration of the financial condition, performance, or outlook of those issuers, sectors, or industries. | ||
| • | Liquidity risk — the risk that Indemnity will not be able to convert investment securities into cash on favorable terms and on a timely basis, or that Indemnity will not be able to sell them at all, when desired. Disruptions in the financial markets, or a lack of buyers for the specific securities that Indemnity is trying to sell, could prevent it from liquidating securities or cause a reduction in prices to levels that are not acceptable to Indemnity. |
In addition to the fixed-income securities, a significant portion of Indemnity’s portfolio is
invested in limited partnerships. At December 31, 2010, the Indemnity had investments in limited
partnerships of $216 million, or 16% of total assets. In addition, Indemnity is obligated to invest
up to an additional $50 million in limited partnerships, including private equity, real estate and
mezzanine partnership investments. Limited partnerships are significantly less liquid and generally
involve higher degrees of price risk than publicly traded securities. Limited partnerships, like
publicly traded securities, have exposure to market volatility; but unlike fixed-income securities,
cash flows and return expectations are less predictable. The primary basis for the valuation of
limited partnership interests are financial statements prepared by the general partner. Because of
the timing of the preparation and delivery of these financial statements, the use of the most
recently available financial statements provided by the general partners result in a quarter delay
in the inclusion of the limited partnership results in our Consolidated Statements of Operations.
Due to this delay, Indemnity’s financial statements at December 31, 2010, do not reflect market
conditions experienced in the fourth quarter of 2010.
Indemnity’s equity securities have exposure to price risk, the risk of potential loss in estimated
fair value resulting from an adverse change in prices. Indemnity does not hedge its exposure to
equity price risk inherent in its equity investments. Equity markets, sectors, industries, and
individual securities may also be subject to some of the same risks that affect Indemnity’s
fixed-income portfolio, as discussed above.
Indemnity is subject to credit risk from the Exchange because the management fees from the Exchange
are not paid immediately when premiums are written.
Indemnity recognizes management fees due from the Exchange as income when the premiums are written
because at that time Indemnity has performed substantially all of the services it is required to
perform, including sales, underwriting and policy issuance activities. However, such fees are not
paid to Indemnity by the Exchange until the Exchange collects the premiums from policyholders. As a
result, Indemnity holds receivables for management fees since such fees are based on premiums that
have been written and assumed.
Indemnity also holds receivables from the Exchange for costs it pays on the Exchange’s behalf. The
receivable from the Exchange totaled $232 million or 18% of our total assets at December 31, 2010.
Deteriorating capital and credit market conditions may significantly affect Indemnity’s ability to
meet liquidity needs and access capital.
Sufficient liquidity and capital levels are required to pay operating expenses, income taxes, and
to provide the necessary resources to fund future growth opportunities, pay dividends, and
repurchase stock. Our management estimates the appropriate level of capital necessary based on
current and projected results, which include a factor for
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potential exposures based on these Risk Factors. Failure to accurately estimate Indemnity’s
capital needs may have a material adverse effect on its financial condition until additional
sources of capital can be located. Further, a deteriorating financial condition may create a
negative perception of the Indemnity by third parties, including rating agencies, investors,
agents, and customers which could impact its ability to access additional capital in the debt or
equity markets.
The primary sources of liquidity for Indemnity are management fees and cash flows generated from
its investment portfolio. In the event Indemnity’s current sources do not satisfy its needs,
Indemnity has the ability to access its $100 million bank line of credit, from which there were no
borrowings as of December 31, 2010, or sell assets in the investment portfolio. Volatility in the
financial markets could impair Indemnity’s ability to sell certain of its fixed income securities
and to a greater extent its significantly less liquid limited partnership investments, or cause
such investments to sell at deep discounts.
In the event these traditional sources of liquidity are not available, Indemnity may have to seek
additional financing. Indemnity’s access to funds will depend on a number of factors including
current market conditions, the availability of credit to the financial services industry, market
liquidity, and credit ratings. In deteriorating market conditions, Indemnity may not be able to
obtain additional financing on favorable terms, or at all.
Indemnity is subject to claims and legal proceedings, which, if determined unfavorably, could have
a material adverse effect on Indemnity’s business, results of operations or financial condition.
Indemnity faces a significant risk of litigation and regulatory investigations and actions in the
ordinary course of operating its businesses, including the risk of class action lawsuits.
Indemnity’s pending legal and regulatory actions include proceedings specific to Indemnity and
others generally applicable to business practices in the industries in which it operates. In
Indemnity’s management operations, we are, have been, or may become subject to class actions and
individual suits alleging, among other things, issues relating to sales or underwriting practices,
payment of contingent or other sales commissions, product design, product disclosure, policy
issuance and administration, additional premium charges for premiums paid on a periodic basis,
charging excessive or impermissible fees on products, recommending unsuitable products to
customers, and breaching alleged fiduciary or other duties to customers. Indemnity is also subject
to litigation arising out of its general business activities such as its contractual and employment
relationships. Plaintiffs in class action and other lawsuits against Indemnity may seek very large
or indeterminate amounts, including punitive and treble damages, which may remain unknown for
substantial periods of time. Indemnity is also subject to various regulatory inquiries, such as
information requests, subpoenas and books and record examinations, from state and federal
regulators and authorities.
Risk factors relating to the non-controlling interest owned by the Exchange, which includes the
Property and Casualty Group and EFL
Deteriorating general economic conditions may have an adverse effect on the non-controlling
interest’s operating results and financial condition.
Unfavorable changes in economic conditions, including declining consumer confidence, inflation,
high unemployment and recession, among others, may lead the Property and Casualty Group’s customers
to modify coverage, not renew policies, or even cancel policies, which could adversely affect the
premium revenue of the Property and Casualty Group, and consequently Indemnity’s management fee.
These conditions could also impair the ability of customers to pay premiums when due, and as a
result, the Property and Casualty Group’s reserves and write-offs could increase.
In addition, downward economic trends also may have an adverse effect on both Indemnity’s and the
Property and Casualty Group’s investment results by negatively impacting the business conditions
and impairing credit for the issuers of securities held in their respective investment portfolios.
This could reduce fair values of investments and generate significant unrealized losses or
impairment charges which may adversely affect their respective financial results.
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The Property and Casualty Group depends on independent insurance agents, which exposes the Property
and Casualty Group to risks not applicable to companies with exclusive agents or other forms of
distribution.
The Property and Casualty Group markets and sells its insurance products through independent,
non-exclusive agencies. These agencies are not obligated to sell only the Property and Casualty
Group’s insurance products, and generally they also sell competitors’ insurance products. As a
result, the Property and Casualty Group’s business depends in large part on the marketing and sales
efforts of these agencies. To the extent these agencies’ marketing efforts cannot be maintained at
their current levels of volume or they bind the Property and Casualty Group to unacceptable
insurance risks, fail to comply with established underwriting guidelines or otherwise improperly
market the Property and Casualty Group’s products, the results of operations and business of the
Property and Casualty Group could be adversely affected. Also, to the extent these agencies place
business with competing insurers due to compensation arrangements, product differences, price
differences, ease of doing business or other reasons, the results of operations of the Property and
Casualty Group could be adversely affected. If the Property and Casualty Group is unsuccessful in
maintaining and increasing the number of agencies in its independent agent distribution system, the
results of operations of the Property and Casualty Group could be
adversely affected. To the extent that consumer preferences cause the insurance industry to migrate to a delivery
system other than independent agencies, the business of the Property and Casualty Group could be
adversely affected. Also, to the extent the agencies choose to place significant portions or all of
their business with competing insurance companies, the results of operations and business of the
Property and Casualty Group could be adversely affected.
The Property and Casualty Group maintains a brand recognized for superior customer service. Our
ability to maintain this reputation is a key factor to the Property and Casualty Group’s success.
The Property and Casualty Group consistently ranks high in consumer surveys for customer service.
Incidents such as failure to protect sensitive customer data, errors in processing a claim, systems
failures, or unfavorable litigation, among others, may result in reputational harm to the Property
and Casualty Group’s brand and the potential for reduction in business. While we maintain and
execute processes to minimize these events, we cannot completely eliminate this risk.
The Property and Casualty Group faces significant competition from other regional and national
insurance companies. Failure to keep pace with competitors may result in lower market share and
revenues, which may have a material adverse affect on the Property and Casualty Group’s financial
condition.
The Property and Casualty Group competes with regional and national property/casualty insurers
including direct writers of insurance coverage. Many of these competitors are larger and many have
greater financial, technical and operating resources. In addition, there is competition within each
independent insurance agency that represents other carriers as well as the Property and Casualty
Group.
If we are unable to perform at industry best practice levels in terms of quality, cost containment,
and speed-to-market due to inferior operating resources and/or problems with external
relationships, the Property and Casualty Group’s business performance may suffer. As the business
environment changes, if we are unable to adapt timely to emerging industry changes, or if our
people do not conform to the changes, the Property and Casualty Group’s business could be
materially impacted.
The property/casualty insurance industry is highly competitive on the basis of product, price and
service. If competitors offer property/casualty products with more coverage and/or better service
or offer lower rates, and we are unable to implement product or service improvements quickly enough
to keep pace, the Property and Casualty Group’s ability to grow and renew its business may be
adversely impacted.
The internet continues to grow as a method of product distribution, and as a preferred method of
product and price comparison. We compete against established ‘direct to consumer’ insurers as well
as insurers that use a combination of agent and online distribution. We expect the competitors in
this channel to grow. Failure to position our distribution technology effectively in light of these
trends and changing demographics could inhibit the Property and Casualty Group’s ability to grow
and maintain its customer base. The Property and Casualty Group’s growth could also be adversely
impacted by an inability to accommodate prospective customers based on lack of geographic agency
presence.
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Changes in applicable insurance laws, regulations or changes in the way regulators administer those
laws or regulations could adversely change the Property and Casualty Group’s operating environment
and increase its exposure to loss or put it at a competitive disadvantage.
Property and casualty insurers are subject to extensive supervision in the states in which they do
business. This regulatory oversight includes, by way of example, matters relating to licensing
examination, rate setting, market conduct, policy forms, limitations on the nature and amount of
certain investments, claims practices, mandated participation in involuntary markets and guaranty
funds, reserve adequacy, insurer solvency, transactions between affiliates and restrictions on
underwriting standards. Such regulation and supervision are primarily for the benefit and
protection of policyholders and not for the benefit of shareholders. For instance, members of the
Property and Casualty Group are subject to involuntary participation in specified markets in
various states in which they operate, and the rate levels the Property and Casualty Group is
permitted to charge do not always correspond with the underlying costs associated with the coverage
issued. Although currently the federal government does not directly regulate the insurance
industry, federal programs, such as federal terrorism backstop legislation and the Federal
Insurance Office established under the Dodd-Frank Act can also impact the insurance industry. In
addition to specific insurance regulation, the Property and Casualty Group must also comply with
other regulatory, legal and ethical requirements relating to the general operation of a business.
Premium rates and reserves must be established for members of the Property and Casualty Group from
forecasts of the ultimate costs expected to arise from risks underwritten during the policy period.
The Property and Casualty Group’s underwriting profitability could be adversely affected to the
extent such premium rates or reserves are too low or by the effects of inflation.
One of the distinguishing features of the property and 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. Consequently, in establishing premium rates, we attempt to anticipate
the potential impact of inflation, including medical cost inflation, construction and auto repair
cost inflation and tort issues. Medical costs are a broad element of inflation that impacts
personal and commercial auto, general liability, workers compensation and commercial multi-peril
lines of insurance written by the Property and Casualty Group. Accordingly, premium rates must be
established from forecasts of the ultimate costs expected to arise from risks underwritten during
the policy period. These premium rates may prove to be inadequate if future inflation is
significantly higher than the inflation anticipated in the pricing.
Further, property and casualty insurers establish reserves for losses and loss expenses that will
not be paid and settled for many years. Numerous factors affect both the current estimates and
final settlement value of these losses and loss expenses. It is possible that the ultimate
liability for these losses and loss expenses will exceed these reserves because of unanticipated
changes in the future development of known losses, the unanticipated emergence of losses that have
occurred but are currently unreported and larger than expected settlements on pending and
unreported claims. The process of estimating reserves is inherently judgmental and can be
influenced by factors that are subject to variation. If pricing or reserves of the Property and
Casualty Group are not sufficient, the Property and Casualty Group’s underwriting profitability may
be adversely impacted.
Not completely knowing costs before products are priced has caused the property and casualty
insurance industry to cycle through periods of pricing corrections, resulting in an oscillation of
profitability and premium growth. Based on this experience, we expect this cyclicality to continue.
The Property and Casualty Group seeks an appropriate balance between profitability and premium
growth, but the need to remain competitive prevents it from being completely immune to the cyclical
routine. The periods of intense price competition in the cycle could adversely affect the Property
and Casualty Group’s financial condition, profitability, or cash flows.
Emerging claim and coverage issues in the insurance industry are unpredictable and could cause an
adverse effect on the Property and Casualty Group’s results of operation or financial condition.
As industry practices and legal, judicial, social and other environmental conditions change,
unexpected and unintended issues related to claim and coverage may emerge. These issues may
adversely affect the Property and Casualty Group’s business by either extending coverage beyond its
underwriting intent or by increasing the number or size of claims. In some instances, these
emerging issues may not become apparent for some time after the Property and Casualty Group has
issued the affected insurance policies. As a result, the full extent of liability under the
Property and Casualty Group’s insurance policies may not be known for many years after the policies
are issued.
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Changes in reserve estimates may adversely affect EFL’s operating results.
Reserves for life-contingent contract benefits are computed on the basis of long-term actuarial
assumptions of future investment yields, mortality, morbidity, persistency and expenses. We
periodically review the adequacy of these reserves on an aggregate basis and if future experience
differs significantly from assumptions, adjustments to reserves and amortization of deferred policy
acquisition costs may be required which could have a material adverse effect on EFL’s operating
results.
The financial performance of members of the Property and Casualty Group could be adversely affected
by severe weather conditions or other catastrophic losses, including terrorism.
The Property and Casualty Group conducts business in 11 states and the District of Columbia,
primarily in the Mid-Atlantic, Midwestern and Southeastern portions of the United States. A
substantial portion of this business is private passenger and commercial automobile, homeowners and
workers compensation insurance in Ohio, North Carolina, Maryland, Virginia and particularly,
Pennsylvania. As a result, a single catastrophe occurrence, destructive weather pattern, change in
climate condition, general economic trend, terrorist attack, regulatory development or other
condition disproportionately affecting one or more of the states in which the Property and Casualty
Group conducts substantial business could adversely affect the results of operations of members of
the Property and Casualty Group. Common natural catastrophe events include hurricanes, earthquakes,
tornadoes, hail storms and severe winter weather. The frequency and severity of these catastrophes
is inherently unpredictable. The extent of losses from a catastrophe is a function of both the
total amount of insured exposures in the area affected by the event and the severity of the event.
Terrorist attacks could cause losses from insurance claims related to the property/casualty
insurance operations, as well as a decrease in our equity, net income or revenue. The federal
Terrorism Risk Insurance Program Reauthorization and Extension Act of 2007 requires that some
coverage for terrorist loss be offered by primary commercial property insurers and provides federal
assistance for recovery of claims through 2014. While the Property and Casualty Group is exposed to
terrorism losses in commercial lines and workers compensation, these lines are afforded a limited
backstop above insurer deductibles for acts of terrorism under this federal program. The Property
and Casualty Group has no personal lines terrorist coverage in place. The Property and Casualty
Group could incur large net losses if terrorist attacks occur.
The Property and Casualty Group maintains a property catastrophe reinsurance treaty that was
renewed effective January 1, 2011, that provides coverage of 90% of a loss up to $500 million in
excess of the Property and Casualty Group’s loss retention of $350 million per occurrence. In
addition, a second property catastrophe reinsurance treaty was entered into with nonaffiliated
reinsurers providing coverage of up to 90% of a loss of $25 million in excess of the first property
catastrophe reinsurance treaty’s coverage of $850 million. The treaties exclude losses from acts
of terrorism. Catastrophe reinsurance may prove inadequate if a major catastrophic loss exceeds the
reinsurance limit which could adversely affect the Property and Casualty Group’s underwriting
profitability and financial position.
The inability to acquire reinsurance coverage at reasonable rates or collect amounts due from
reinsurers could have an adverse effect on the Property and Casualty Group.
The availability and cost of reinsurance are subject to prevailing market conditions, both in terms
of price and available capacity. The availability of reinsurance capacity can be impacted by
general economic conditions and conditions in the reinsurance market, such as the occurrence of
significant reinsured events. The availability and cost of reinsurance could affect the Property
and Casualty Group’s business volume and profitability.
Although the reinsurer is liable to the Property and Casualty Group to the extent of the ceded
reinsurance, the Property and Casualty Group remains liable as the direct insurer on all risks
reinsured. Reinsurance contracts do not relieve the Property and Casualty Group from its primary
obligations to policyholders. As a result, ceded reinsurance arrangements do not eliminate the
Property and Casualty Group’s obligation to pay claims. Accordingly, the Property and Casualty
Group is subject to credit risk with respect to its ability to recover amounts due from reinsurers.
The Property and Casualty Group’s inability to collect a material recovery from a reinsurer could
have an adverse effect on its underwriting profitability and financial condition.
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The performance of the Exchange’s investment portfolio is subject to a variety of investment risks,
which may in turn have a material adverse effect on its results of operations or financial
condition.
The Exchange’s investment portfolio is comprised principally of fixed-income maturities, common
stocks, and limited partnerships. At December 31, 2010 the Exchange’s investment portfolio
consisted of approximately 65% fixed income securities, 20% common stocks, 10% limited
partnerships, and 5% preferred equity securities.
All of the Exchange’s marketable securities are subject to market volatility. To the extent that
future market volatility negatively impacts the Exchange’s investments, its financial condition
will be negatively impacted. We review the investment portfolio on a continuous basis to evaluate
positions that might have incurred other-than-temporary declines in value. The primary factors
considered in our review of investment valuation include the extent and duration to which fair
value is less than cost, historical operating performance and financial condition of the issuer,
short- and long-term prospects of the issuer and its industry, specific events that occurred
affecting the issuer including rating downgrades and, depending on the type of security, our intent
to sell or our ability and intent to retain the investment for a period of time sufficient to allow
for a recovery in value. As the process for determining impairments is highly subjective, changes
in our assessments may have a material effect on the Exchange’s operating results and financial
condition. See also Item 7A. “Quantitative and Qualitative Disclosures about Market Risk”.
If the fixed-income, equity, or limited partnership portfolios were to suffer a substantial
decrease in value, the Exchange’s financial position could be materially adversely affected through
increased unrealized losses or impairments. A significant decrease in the Exchange’s portfolio
could also put it, or its subsidiaries, at risk of failing to satisfy regulatory minimum capital
requirements.
Currently, 30% of the Exchange’s fixed-income portfolio is invested in financial sector securities
and 20% are invested in municipal securities and results may vary depending on the market
environment. The performance of the fixed-income portfolio is subject to a number of risks
including:
| • | Interest rate risk — the risk of adverse changes in the value of fixed-income securities as a result of increases in market interest rates. | ||
| • | Investment credit risk — the risk that the value of certain investments may decrease due to the deterioration in financial condition of, or the liquidity available to, one or more issuers of those securities or, in the case of asset-backed securities, due to the deterioration of the loans or other assets that underlie the securities, which, in each case, also includes the risk of permanent loss. | ||
| • | Concentration risk — the risk that the portfolio may be too heavily concentrated in the securities of one or more issuers, sectors, or industries, which could result in a significant decrease in the value of the portfolio in the event of a deterioration of the financial condition, performance, or outlook of those issuers, sectors, or industries. | ||
| • | Liquidity risk — the risk that the Exchange will not be able to convert investment securities into cash on favorable terms and on a timely basis, or that the Exchange will not be able to sell them at all, when desired. Disruptions in the financial markets, or a lack of buyers for the specific securities that the Exchange is trying to sell, could prevent it from liquidating securities or cause a reduction in prices to levels that are not acceptable to the Exchange. |
The Exchange’s common and preferred equity securities have exposure to price risk, the risk of
potential loss in estimated fair value resulting from an adverse change in prices. The Exchange
does not hedge its exposure to equity price risk inherent in its equity investments. Equity
markets, sectors, industries, and individual securities may also be subject to some of the same
risks that affect the Exchange’s fixed-income portfolio, as discussed above.
In addition, a significant portion of the Exchange’s portfolio is invested in limited partnerships.
At December 31, 2010, the Exchange had investments in limited partnerships of $1.1 billion, or 8%
of total assets. In addition, the Exchange is obligated to invest up to an additional $402 million
in limited partnerships, including private equity, real estate and mezzanine partnership
investments. Limited partnerships are significantly less liquid and generally involve higher
degrees of price risk than publicly traded securities. Limited partnerships, like publicly traded
securities, have exposure to market volatility; but unlike fixed income securities, cash flows and
return expectations
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are less predictable. The primary basis for the valuation of limited partnership interests are
financial statements prepared by the general partner. Because of the timing of the preparation and
delivery of these financial statements, the use of the most recently available financial statements
provided by the general partners result in a quarter delay in the inclusion of the limited
partnership results in our Consolidated Statements of Operations. Due to this delay, the Exchange’s
financial statements at December 31, 2010, do not reflect market conditions experienced in the
fourth quarter of 2010.
Deteriorating capital and credit market conditions may significantly affect the Exchange’s ability
to meet liquidity needs and access capital.
Sufficient liquidity and capital levels are required to pay claims, claims-related expenses and
income taxes as well as to build the Exchange’s investment portfolio, provide for additional
protection against possible large, unexpected losses and maintain adequate surplus amounts.
Management estimates the appropriate level of capital necessary based on current and projected
results, which include a factor for potential exposures based on these Risk Factors. Failure to
accurately estimate the Exchange’s capital needs may have a material adverse effect on the
Exchange’s financial condition until additional sources of capital can be located. Further, a
deteriorating financial condition may create a negative perception of the Exchange by third
parties, including rating agencies, investors, agents, and customers which could impact the
Exchange’s ability to access additional capital in the debt or equity markets.
The primary sources of liquidity for the Exchange are insurance premiums and cash flow generated
from the investment portfolio. In the event the Exchange’s current sources do not satisfy its
needs, the Exchange has the ability to access its $200 million bank line of credit, from which
there were no borrowings as of December 31, 2010. The Exchange may also sell assets in the
investment portfolio. Volatility in the financial markets could impair the Exchange’s ability to
sell certain of its fixed income securities or to a greater extent its significantly less liquid
limited partnership investments, or cause such investments to sell at deep discounts.
In the event these traditional sources of liquidity are not available, the Exchange may have to
seek additional financing. The Exchange’s access to funds will depend on a number of factors
including current market conditions, the availability of credit to the financial services industry,
market liquidity, and credit ratings. In deteriorating market conditions, the Exchange may not be
able to obtain additional financing on favorable terms, or at all.
If there were a failure to maintain a commercially acceptable financial strength rating, the
Property and Casualty Group’s competitive position in the insurance industry would be adversely
affected.
Financial strength ratings are an important factor in establishing the competitive position of
insurance companies and may be expected to have an effect on an insurance company’s sales. Higher
ratings generally indicate greater financial stability and a stronger ability to meet ongoing
obligations to policyholders. Ratings are assigned by rating agencies to insurers based upon
factors that the rating agencies believe are relevant to policyholders. Currently the Property and
Casualty Group’s pooled AM Best rating is an A+ (“superior”). A significant downgrade in this or
other ratings would reduce the competitive position of the Property and Casualty Group making it
more difficult to attract profitable business in the highly competitive property/casualty insurance
market.
The Property and Casualty Group is subject to claims and legal proceedings, which, if determined
unfavorably to the Property and Casualty Group, could have a material adverse effect on our
business, results of operations or financial condition.
The Property and Casualty Group faces a significant risk of litigation and regulatory
investigations and actions in the ordinary course of operating its businesses, including the risk
of class action lawsuits. The Property and Casualty Group’s pending legal and regulatory actions
include proceedings specific to the Property and Casualty Group and others generally applicable to
business practices in the industries in which it operates. In the Property and Casualty Group’s
insurance operations, we are, have been, or may become subject to class actions and individual
suits alleging, among other things, issues relating to claims payments and procedures, denial or
delay of benefits, charging excessive or impermissible fees on products, and breaching fiduciary or
other duties to customers. The Property and Casualty Group is also subject to litigation arising
out of its general business activities such as its contractual relationships. Plaintiffs in class
action and other lawsuits against the Property and Casualty Group may seek very large or
indeterminate amounts, including punitive and treble damages, which may remain unknown for
substantial periods of time. The Property and Casualty Group is also subject to various regulatory
inquiries, such as information requests, subpoenas and books and record examinations, from state
and federal regulators and
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authorities. See also the litigation risks associated with the Indemnity shareholder interest for
additional discussion of litigation risks.
The Exchange is dependent on the Indemnity to perform certain services, including sales,
underwriting, and the issuance of policies. Failure to perform these services effectively may have
a material adverse effect on the financial condition of the Exchange.
Pursuant to the attorney-in-fact agreements with the policyholders at the Exchange, the Indemnity
is responsible for performing key functions for the Exchange including management and operational
services and related technology systems. The Exchange has no employees, as the Indemnity employs
all personnel related to performing operating functions for the Exchange. In addition, the Board
of Directors for the Indemnity has the responsibility for such Exchange-related activities as
setting the management fee paid by the Exchange to the Indemnity. As a result, the business and
financial condition of the Exchange would be materially adversely affected if the Indemnity was not
able to provide the necessary operating and management services required by the Exchange.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The companies comprising the Erie Insurance Group share a corporate home office complex in Erie,
Pennsylvania, which comprises approximately 500,000 square feet and is owned by the Exchange.
The Erie Insurance Group also operates 24 field offices in 11 states. Eighteen of these offices
provide both agency support and claims services and are referred to as branch offices, while the
remaining six provide only claims services and are considered claims offices. Of these field
offices, eight are owned by the Erie Insurance Group (Indemnity owns three comprising approximately
40,000 square feet, the Exchange owns four comprising approximately 43,000 square feet, and EFL
owns one comprising approximately 22,000 square feet), while the remaining 16 field offices are
leased from unaffiliated parties, comprising approximately 104,000 square feet.
Item 3. Legal Proceedings
Reference is made to Item 8. “Financial Statements and Supplementary Data — Note 21, Commitments
and Contingencies, of Notes to Consolidated Financial Statements” contained within this report.
Item 4. Removed and Reserved
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Common stock market prices and dividends
Our Class A, non-voting common stock trades on The NASDAQ Stock MarketSM LLC under the
symbol “ERIE.” No established trading market exists for the Class B voting common stock. American
Stock Transfer & Trust Company serves as our transfer agent and registrar. As of February 18, 2011,
there were approximately 871 beneficial shareholders of record of our Class A non-voting common
stock and 11 beneficial shareholders of record of our Class B voting common stock.
We historically have 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, our operating results,
financial condition, cash requirements and general business conditions at the time such payment is
considered.
The common stock high and low sales prices and dividends for each full quarter of the last two
years were as follows:
| 2010 | 2009 | |||||||||||||||||||||||||||||||
| Cash Dividend | Cash Dividend | |||||||||||||||||||||||||||||||
| Sales Price | Declared | Sales Price | Declared | |||||||||||||||||||||||||||||
| Quarter ended | High | Low | Class A | Class B | High | Low | Class A | Class B | ||||||||||||||||||||||||
March 31 |
$ | 43.13 | $ | 38.03 | $ | 0.480 | $ | 72.00 | $ | 38.67 | $ | 28.57 | $ | 0.45 | $ | 67.50 | ||||||||||||||||
June 30 |
46.89 | 42.59 | 0.480 | 72.00 | 36.47 | 32.72 | 0.45 | 67.50 | ||||||||||||||||||||||||
September 30 |
56.20 | 44.38 | 0.480 | 72.00 | 38.67 | 35.01 | 0.45 | 67.50 | ||||||||||||||||||||||||
December 31 |
65.47 | 55.41 | 0.515 | 77.25 | 40.18 | 35.21 | 0.48 | 72.00 | ||||||||||||||||||||||||
Total |
$ | 1.955 | $ | 293.25 | $ | 1.83 | $ | 274.50 | ||||||||||||||||||||||||
Stock performance
The following graph depicts the cumulative total shareholder return (assuming reinvestment of
dividends) for the periods indicated for our Class A common stock compared to the Standard & Poor’s
500 Stock Index and the Standard & Poor’s Property-Casualty Insurance Index:
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
Erie Indemnity Company Class A common stock |
$ | 100 | * | $ | 112 | $ | 103 | $ | 79 | $ | 86 | $ | 147 | |||||||||||
Standard & Poor’s 500 Stock Index |
100 | * | 113 | 98 | 69 | 78 | 85 | |||||||||||||||||
Standard & Poor’s Property-Casualty
Insurance Index |
110 | * | 116 | 122 | 77 | 97 | 112 | |||||||||||||||||
| * | Assumes $100 invested at the close of trading on the last trading day preceding the first day of the fifth preceding fiscal year in our Class A common stock, Standard & Poor’s 500 Stock Index and Standard & Poor’s Property-Casualty Insurance Index. |
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Issuer Purchases of Equity Securities
A stock repurchase plan was authorized January 1, 2004 allowing us to repurchase up to $250 million
of our outstanding Class A nonvoting common stock through December 31, 2006. Our Board of Directors
approved continuations of this stock repurchase program for an additional $250 million in February
2006, $100 million in September 2007, and $100 million in April 2008. Subsequent continuations were
approved for amounts that included and were not in addition to any unspent amounts under the
current program of $100 million in May 2009, $100 million in April 2010, and $150 million in
December 2010 which was authorized with no time limitation. As of December 31, 2010, we have
approximately $146 million of repurchase authority remaining under this plan. We may purchase
shares, from time-to-time, in the open market or through privately negotiated transactions,
depending on prevailing market conditions and alternative uses of our capital and at times and in a
manner that we deem appropriate. During 2010, shares repurchased totaled 1.1 million at a total
cost of $57 million. Cumulative shares repurchased under this plan since inception totaled 12.9
million at a total cost of $671 million as of December 31, 2010. See Item 8. “Financial Statements
and Supplementary Data — Note 19, Capital Stock, of Notes to Consolidated Financial Statements”
contained within this report for discussion of additional shares repurchased outside of this plan.
The following table summarizes Indemnity’s Class A common stock repurchased each month, based upon
trade date, during the quarter ended December 31, 2010:
| Approximate Dollar | ||||||||||||||||
| Total Number of | Value of Shares | |||||||||||||||
| Shares Purchased as | that May Yet be | |||||||||||||||
| (dollars in millions, except per share data) | Total Number of | Average Price Paid | Part of Publicly | Purchased Under the | ||||||||||||
| Period | Shares Purchased | Per Share | Announced Plan | Plan | ||||||||||||
October 1 — 31, 2010 |
122,464 | $ | 56.65 | 122,464 | ||||||||||||
November 1 — 30, 2010 |
11,202 | 58.77 | 11,202 | |||||||||||||
December 1 — 31, 2010 |
64,700 | 64.66 | 64,700 | |||||||||||||
Total |
198,366 | 198,366 | $ | 146 | ||||||||||||
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Item 6. Selected Consolidated Financial Data
| ERIE INDEMNITY COMPANY | ||||||||||||||||||||
| Years Ended December 31, | ||||||||||||||||||||
| (dollars in millions, except share data) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Operating data: |
||||||||||||||||||||
Premiums earned |
$ | 3,987 | $ | 3,869 | $ | 3,834 | $ | 3,832 | $ | 3,943 | ||||||||||
Net investment income |
433 | 433 | 438 | 451 | 432 | |||||||||||||||
Realized gains (losses) on investments |
307 | 286 | (1,597 | ) | (5 | ) | 188 | |||||||||||||
Equity in earnings (losses) of limited partnerships |
128 | (369 | ) | (58 | ) | 352 | 235 | |||||||||||||
Other income |
35 | 36 | 34 | 31 | 30 | |||||||||||||||
Total revenues |
4,890 | 4,255 | 2,651 | 4,661 | 4,828 | |||||||||||||||
Net income (loss) |
660 | 446 | (616 | ) | 919 | 852 | ||||||||||||||
Less: Net income (loss) attributable to
noncontrolling interest in consolidated entity —
Exchange |
498 | 338 | (685 | ) | 706 | 648 | ||||||||||||||
Net Income attributable to Indemnity |
162 | 108 | 69 | 213 | 204 | |||||||||||||||
Per share data attributable to Indemnity: |
||||||||||||||||||||
Net income per Class A share — diluted |
$ | 2.85 | $ | 1.89 | $ | 1.19 | $ | 3.43 | $ | 3.13 | ||||||||||
Book value per share — Class A common and
equivalent B shares |
16.24 | 15.74 | 13.79 | 17.68 | 18.17 | (5) | ||||||||||||||
Dividends declared per Class A share |
1.955 | 1.83 | 1.77 | 1.64 | 1.48 | |||||||||||||||
Dividends declared per Class B share |
293.25 | 274.50 | 265.50 | 246.00 | 222.00 | |||||||||||||||
Financial position data: |
||||||||||||||||||||
Total assets |
$ | 14,344 | $ | 13,287 | $ | 12,505 | $ | 14,104 | $ | 13,157 | ||||||||||
Less: Total assets attributable to
noncontrolling interest in consolidated entity —
Exchange (1) |
13,369 | 11,876 | 11,101 | 12,477 | 11,431 | |||||||||||||||
Total assets attributable to Indemnity (1) |
975 | 1,411 | 1,404 | 1,627 | 1,726 | |||||||||||||||
Total equity |
6,334 | 5,725 | (2) | 4,759 | 6,024 | 5,481 | ||||||||||||||
Less: Noncontrolling interest in consolidated entity —
Exchange |
5,422 | 4,823 | (2) | 3,967 | 4,973 | 4,319 | ||||||||||||||
Total equity attributable to Indemnity |
912 | 902 | (2) | 792 | (3) | 1,051 | 1,162 | (5) | ||||||||||||
Treasury stock attributable to Indemnity |
872 | 814 | 811 | 709 | 472 | |||||||||||||||
Cumulative number of shares repurchased and held
in treasury at December 31, attributable to
Indemnity |
18,235,094 | 17,086,127 | 16,994,707 | 14,938,663 | (4) | 10,448,471 | ||||||||||||||
| (1) | The total assets attributable to the Exchange, or noncontrolling interest, and the total assets attributable to the Indemnity shareholder interest are presented with intercompany payables/receivables eliminated. | |
| (2) | On April 1, 2009, we adopted the accounting guidance related to non-credit other-than-temporary impairments for our debt security portfolio. The net impact of the cumulative effect adjustment on April 1, 2009 increased retained earnings and reduced other comprehensive income by $6 million, net of tax, related to the Indemnity shareholder interest and by $95 million, net of tax, related to the Exchange, or noncontrolling interest, resulting in no effect on shareholder’s equity. | |
| (3) | On January 1, 2008, we adopted the fair value option for our common stock portfolio. The net impact of the cumulative effect adjustment increased retained earnings and reduced other comprehensive income by $11 million, net of tax, related to the Indemnity shareholder interest resulting in no effect on shareholder’s equity. | |
| (4) | Includes 1.9 million shares of our Class A non-voting common stock from the F. William Hirt Estate separate from our stock repurchase program. | |
| (5) | On December 31, 2006, shareholders’ equity decreased by $21 million, net of taxes, related to the Indemnity shareholder interest as a result of initially applying the recognition provisions for employers’ accounting for defined benefit pension and other postretirement plans. |
Due to the sale of Indemnity’s property and casualty insurance subsidiaries to the Exchange on
December 31, 2010, all property and casualty underwriting results and all investment results for
these companies accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling
interest, after December 31, 2010. Prior to and through December 31, 2010, the underwriting
results retained by EIC and ENY and the investment results of EIC, ENY and EPC accrued to the
benefit of the Indemnity shareholder interest. (See Item 8. “Financial Statements and
Supplementary Data — Note 1, Nature of Operations, of Notes to Consolidated Financial Statements”
and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,
Recent Events” section contained within this report.)
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of financial condition and results of operations highlights significant
factors influencing the Erie Insurance Group (“we,” “us,” “our”). (See Item 8. “Financial
Statements and Supplementary Data — Note 2, Significant Accounting Policies, of Notes to
Consolidated Financial Statements” contained within this report and the “Recent Accounting
Pronouncements” section that follows.) This discussion should be read in conjunction with the
audited financial statements and related notes and all other items contained within this Annual
Report on Form 10-K, as they contain important information helpful in evaluating our financial
condition and operating results.
INDEX
| Page Number | ||||
Cautionary statement regarding forward-looking information |
21 | |||
Recent accounting pronouncements |
22 | |||
Recent events |
23 | |||
Operating overview |
24 | |||
Critical accounting estimates |
29 | |||
Results of operations |
39 | |||
Management operations |
39 | |||
Property and casualty insurance operations |
41 | |||
Life insurance operations |
47 | |||
Investment operations |
48 | |||
Financial condition |
51 | |||
Investments |
51 | |||
Liabilities |
54 | |||
Shareholders’ equity |
55 | |||
Impact of inflation |
56 | |||
Liquidity and capital resources |
56 | |||
Transactions/agreements between Indemnity and noncontrolling interest (Exchange) |
63 | |||
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:
Statements contained herein that are not historical fact are forward-looking statements and, as
such, are subject to risks and uncertainties that could cause actual events and results to differ,
perhaps materially, from those discussed herein. Forward-looking statements relate to future
trends, events or results and include, without limitation, statements and assumptions on which such
statements are based that are related to our plans, strategies, objectives, expectations,
intentions and adequacy of resources. Examples of forward-looking statements are discussions
relating to premium and investment income, expenses, operating results, agency relationships, and
compliance with contractual and regulatory requirements. Forward-looking statements are not
guarantees of future performance and involve risks and uncertainties that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements. Among the risks and uncertainties, in addition to those set
forth in our filings with the Securities and Exchange Commission, that could cause actual results
and future events to differ from those set forth or contemplated in the forward-looking statements
include the following:
Risk factors related to the Indemnity shareholder interest:
| • | dependence on Indemnity’s relationship with the Exchange and the management fee under the agreement with the subscribers at the Exchange; | ||
| • | costs of providing services to the Exchange under the subscriber’s agreement; | ||
| • | ability to attract and retain talented management and employees; | ||
| • | ability to maintain the uninterrupted operations of our business, including our information technology systems; | ||
| • | factors affecting the quality and liquidity of our investment portfolio; | ||
| • | credit risk from the Exchange; | ||
| • | ability to meet liquidity needs and access capital; and | ||
| • | outcome of pending and potential litigations against us. |
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Risk factors related to the non-controlling interest owned by the Exchange, which includes the
Property and Casualty Group and EFL:
| • | general business and economic conditions; | ||
| • | dependence on the independent agency system; | ||
| • | ability to maintain our reputation for superior customer service; | ||
| • | factors affecting price competition; | ||
| • | government regulation of the insurance industry, including approval of rate increases and rating factors such as credit and prior experience, and required processes related to underwriting and claims handling; | ||
| • | the uncertain role of the Federal Government, and the ongoing role of the States, in regulating the property/casualty or life insurance industries; | ||
| • | premium rates and reserves must be established from forecasts of ultimate costs; | ||
| • | emerging claims, coverage issues in the industry, and changes in reserve estimates related to the property and casualty business; | ||
| • | changes in reserve estimates related to the life business; | ||
| • | severe weather conditions or other catastrophic losses, including terrorism; | ||
| • | ability to acquire reinsurance coverage and collectability from reinsurers; | ||
| • | factors affecting the quality and liquidity of our investment portfolio; | ||
| • | ability to meet liquidity needs and access capital; | ||
| • | ability to maintain acceptable financial strength rating; | ||
| • | outcome of pending and potential litigation against us; and | ||
| • | dependency on service provided by Indemnity. |
A forward-looking statement speaks only as of the date on which it is made and reflects Indemnity’s
analysis only as of that date. Indemnity undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events, changes in
assumptions, or otherwise.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 12, 2009, the Financial Accounting Standards Board (“FASB”) updated Accounting Standards
Codification (“ASC”) 810, Consolidation, which amended the existing guidance for determining
whether an enterprise is the primary beneficiary of a variable interest entity (“VIE”). (See Item
8. “Financial Statements and Supplementary Data — Note 2, Significant Accounting Policies, of Notes
to Consolidated Financial Statements” contained within this report.)
As of January 1, 2010, Erie Indemnity Company (“Indemnity”) adopted the new accounting principle on
a retrospective basis since inception as required under generally accepted accounting principles
(“GAAP”). As a result of this new guidance, Indemnity is considered to be the primary beneficiary
of its affiliated VIE, the Erie Insurance Exchange (“Exchange”), and therefore have a controlling
financial interest in the Exchange. Indemnity is named as, and serves as, the Exchange’s
attorney-in-fact. Consolidation of the Exchange is required given the significance of the
management fee to the Exchange and because Indemnity has the power to direct the activities of the
Exchange that most significantly impact the Exchange’s economic performance.
The 2009 and 2008 financial information within this report has been conformed to this consolidated
presentation.
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RECENT EVENTS
On November 4, 2010, Indemnity entered into a definitive agreement with the Exchange for the sale
of all the outstanding capital stock of Indemnity’s wholly owned property and casualty
insurance subsidiaries, Erie Insurance Company, Erie Insurance Company of New York, and Erie
Insurance Property and Casualty Company, to the Exchange for an aggregate purchase price equal to
the subsidiaries’ GAAP book value as of December 31, 2010.
The sale
of Indemnity’s wholly owned property and casualty insurance subsidiaries was
completed on December 31, 2010, at which time Indemnity received cash consideration from the
Exchange of $293 million based upon an estimated purchase price. The GAAP book value of these
entities on December 31, 2010 was slightly lower than the estimated purchase price. Also,
Indemnity retained a deferred tax asset of $6 million that was not transferable to the Exchange.
This deferred tax asset is related to capital losses that will be available to offset future
capital gains of Indemnity. Indemnity recorded a liability of
$8 million to the Exchange for the deferred tax asset and the difference
in the GAAP book value. Net after-tax cash proceeds
to Indemnity from the sale of Indemnity’s wholly owned property and casualty insurance
subsidiaries are estimated to be $285 million. Final settlement of the transaction will occur by
March 31, 2011. There was no gain or loss resulting from this
sale as Indemnity and the Exchange are deemed to be under common
control. In 2010, the wholly owned property and casualty insurance
subsidiaries contributed $19 million, or $0.34 per share,
to Indemnity’s net income, driven by the investment results of
these companies.
Also on November 4, 2010, Indemnity entered into a definitive agreement for the sale of its 21.6%
ownership interest in Erie Family Life Insurance Company (“EFL”) to the Exchange, which is
scheduled to close by March 31, 2011, for a per share purchase price equal to 95% of EFL’s GAAP
book value per share as of March 31, 2011. On the closing date, the Exchange will pay Indemnity
approximately $82 million in cash based on an estimated purchase price. Within ninety (90) days
following the closing date, the financials of EFL as of March 31, 2011 will be finalized. In the
event that 95% of the GAAP book value per share as of that date is higher than the estimated
purchase price, the Exchange will pay Indemnity the difference; if it is lower, Indemnity will pay
the Exchange the difference. Net after-tax cash proceeds from the sale are estimated to be $55
million to $60 million to Indemnity. In 2010, EFL contributed
$7 million, or $0.13 per share, to Indemnity’s net
income.
Indemnity
recorded a deferred tax provision in the fourth quarter of 2010 of $18 million related to
its equity interest in EFL. This deferred tax charge was required due to Indemnity’s decision to
sell its 21.6% ownership interest in EFL rather than receiving its share of EFL’s earnings in the
form of future dividends, which would have been eligible for an 80% dividend received deduction.
Under the new structure, effective December 31, 2010 all property and casualty insurance operations
are owned by the Exchange and effective March 31, 2011, all life insurance operations will be owned
by the Exchange. Indemnity will continue to function as the management company. This new structure
removes underwriting volatility from Indemnity’s operations and allows it to better utilize
capital. It also centralizes underwriting risk and its supporting capital within the Exchange,
providing greater capital management flexibility to enhance service and product offerings.
There was no impact on the existing reinsurance pooling agreement between the Exchange and Erie
Insurance Company or Erie Insurance Company of New York as a result of the sale, nor was there any
impact to the subscribers (policyholders) of the Exchange, to the Exchange’s independent insurance
agents, or to Indemnity’s employees.
Because Indemnity and the Exchange are deemed to be under common control for financial reporting
purposes, any gains or losses resulting from the sale of Indemnity’s equity interest in EFL will be
recorded as an adjustment directly to Indemnity’s equity balance
at March 31, 2011.
For further information relating to the consolidation of Indemnity and the Exchange, see Item 8.
“Financial Statements and Supplementary Data — Note 2, Significant Accounting Policies, of Notes to
Consolidated Financial Statements” contained within this report and the previous “Recent Accounting
Pronouncements” section. For further information relating to the
sale of Indemnity’s wholly owned
property and casualty subsidiaries and its equity interest in EFL, see Item 8. “Financial
Statements and Supplementary Data — Note 1, Nature of Operations, of Notes to Consolidated
Financial Statements” contained within this report and the “Operating Overview” section that
follows.
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OPERATING OVERVIEW
Overview
The Erie Insurance Group represents the consolidated results of Indemnity and the results of its
variable interest entity, the Exchange. The Erie Insurance Group operates predominantly as a
property and casualty insurer through its regional insurance carriers that write a broad range of
personal and commercial lines coverages. Our property and casualty insurance companies include the
Exchange, Erie Insurance Company (“EIC”), Erie Insurance Company of New York (“ENY”), Erie
Insurance Property and Casualty Company (“EPC”) and Flagship City Insurance Company (“Flagship”).
These entities operate collectively as the “Property and Casualty Group.” The Erie Insurance Group
also operates as a life insurer through its affiliate, EFL, which is owned 21.6% by Indemnity and
78.4% by the Exchange, which underwrites and sells individual and group life insurance policies and
fixed annuities.
The Exchange is a reciprocal insurance exchange, which is an unincorporated association of
individuals, partnerships and corporations that agree to insure one another. Each applicant for
insurance to the Exchange signs a subscriber’s agreement, which contains an appointment of
Indemnity as their attorney-in-fact to transact the business of the Exchange on their behalf.
Pursuant to the subscriber’s agreement and for its services as attorney-in-fact, Indemnity earns a
management fee calculated as a percentage of the direct premiums written by the Exchange and the
other members of the Property and Casualty Group, which are assumed by the Exchange under an
intercompany pooling arrangement.
Indemnity shareholders benefit from their interest in Indemnity’s equity and income, but not the
equity or income of the Exchange. The Exchange’s equity, which is comprised of its retained
earnings and accumulated other comprehensive income, is held for the benefit of its subscribers
(policyholders) and meets the definition of a noncontrolling interest, which is reflected as such
in our consolidated financial statements. Therefore, the consolidation of the Exchange resulted in
no change to Indemnity’s net income or equity.
“Indemnity shareholder interest” refers to the interest in Erie Indemnity Company owned by the
Class A and Class B shareholders. “Noncontrolling interest” refers to the interest in the Erie
Insurance Exchange held for the benefit of the subscribers (policyholders).
Indemnity shareholders’ interest in income generally comprises:
| • | a management fee of up to 25% of all property and casualty insurance premiums written or assumed by the Exchange, less the costs associated with the sales, underwriting and issuance of these policies; | ||
| • | a 5.5% interest in the net underwriting results of the property and casualty insurance operations through December 31, 2010(1); | ||
| • | a 21.6% equity interest in the net earnings of EFL through March 31, 2011(2); | ||
| • | net investment income and results on investments that belong to Indemnity(1); and | ||
| • | other income and expenses, including income taxes, that are the responsibility of Indemnity. |
The Exchange’s, or the noncontrolling interest, in income generally comprises:
| • | a 94.5% interest in the net underwriting results of the property and casualty insurance operations through December 31, 2010 (1); | ||
| • | a 78.4% equity interest in the net earnings of EFL through March 31, 2011(2); | ||
| • | net investment income and results on investments that belong to the Exchange and its subsidiaries, which include the Exchange and Flagship through December 31, 2010(1) and EFL; and | ||
| • | other income and expenses, including income taxes, that are the responsibility of the Exchange and its subsidiaries. |
| (1) | Prior to and through December 31, 2010, the underwriting results retained by EIC and ENY and the investment results of EIC, ENY and EPC accrued to the benefit of the Indemnity shareholder interest. Due to the sale of Indemnity’s property and casualty subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting results and all investment results for these companies accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after December 31, 2010. (See Item 8. “Financial Statements and Supplementary Data — Note 1, Nature of Operations, of Notes to Consolidated Financial Statements” contained within this report and the previous “Recent Events” section.) | |
| (2) | As a result of the pending sale of Indemnity’s 21.6% ownership interest in EFL to the Exchange which is scheduled to close by March 31, 2011, all earnings of EFL will accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after March 31, 2011. (See Item 8.“Financial Statements and Supplementary Data — Note 1, Nature of Operations, of Notes to Consolidated Financial Statements” contained within this report and the previous “Recent Events” section.) |
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Table of Contents
Results of the Erie Insurance Group’s operations by interest
The following table represents a breakdown of the composition of the income attributable to
Indemnity and the income attributable to the noncontrolling interest (Exchange). For purposes of
this discussion, EFL’s investments are included in the life insurance operations.
| Eliminations of related party | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Indemnity shareholder interest | Noncontrolling interest (Exchange) | transactions | Erie Insurance Group | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Years ended | Years ended | Years ended | Years ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | Percent | 2010 | 2009 | 2008 | Percent | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||||||||||
Management operations |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Management fee revenue, net |
100.0 | % | $ | 1,009 | $ | 965 | $ | 950 | $ | — | $ | — | $ | — | $ | (1,009 | ) | $ | (965 | ) | $ | (950 | ) | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||
Service agreement revenue |
100.0 | % | 34 | 35 | 33 | — | — | — | — | — | — | 34 | 35 | 33 | ||||||||||||||||||||||||||||||||||||||||||
Total revenue from management
operations |
1,043 | 1,000 | 983 | — | — | — | (1,009 | ) | (965 | ) | (950 | ) | 34 | 35 | 33 | |||||||||||||||||||||||||||||||||||||||||
Cost of management operations |
100.0 | % | 841 | 813 | 810 | — | — | — | (841 | ) | (813 | ) | (810 | ) | — | — | — | |||||||||||||||||||||||||||||||||||||||
Income from management operations
before taxes |
202 | 187 | 173 | — | — | — | (168 | ) | (152 | ) | (140 | ) | 34 | 35 | 33 | |||||||||||||||||||||||||||||||||||||||||
Property and casualty insurance
operations |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net premiums earned |
5.5 | %(2) | 216 | 209 | 207 | 94.5 | %(2) | 3,709 | 3,599 | 3,564 | — | — | — | 3,925 | 3,808 | 3,771 | ||||||||||||||||||||||||||||||||||||||||
Losses and loss expenses |
5.5 | %(2) | 155 | 145 | 137 | 94.5 | %(2) | 2,660 | 2,499 | 2,357 | (5 | ) | (5 | ) | (5 | ) | 2,810 | 2,639 | 2,489 | |||||||||||||||||||||||||||||||||||||
Policy acquisition and other
underwriting expenses |
5.5 | %(2) | 61 | 63 | 57 | 94.5 | %(2) | 1,052 | 1,072 | 978 | (174 | ) | (158 | ) | (146 | ) | 939 | 977 | 889 | |||||||||||||||||||||||||||||||||||||
Income (loss) from property and
casualty insurance operations
before taxes |
0 | 1 | 13 | (3 | ) | 28 | 229 | 179 | 163 | 151 | 176 | 192 | 393 | |||||||||||||||||||||||||||||||||||||||||||
Life insurance operations(1) |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total revenue |
21.6 | %(3) | 37 | 27 | 13 | 78.4 | %(3) | 135 | 100 | 47 | (2 | ) | (2 | ) | (2 | ) | 170 | 125 | 58 | |||||||||||||||||||||||||||||||||||||
Total benefits and expenses |
21.6 | %(3) | 26 | 25 | 25 | 78.4 | %(3) | 96 | 92 | 89 | (2 | ) | (2 | ) | (2 | ) | 120 | 115 | 112 | |||||||||||||||||||||||||||||||||||||
Income (loss) from life insurance
operations before taxes |
11 | 2 | (12 | ) | 39 | 8 | (42 | ) | — | — | — | 50 | 10 | (54 | ) | |||||||||||||||||||||||||||||||||||||||||
Investment operations |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net investment income(2) |
37 | 42 | 44 | 312 | 311 | 318 | (11 | ) | (11 | ) | (11 | ) | 338 | 342 | 351 | |||||||||||||||||||||||||||||||||||||||||
Net realized (losses) gains on
investments(2) |
(1 | ) | 10 | (43 | ) | 301 | 397 | (973 | ) | — | — | — | 300 | 407 | (1,016 | ) | ||||||||||||||||||||||||||||||||||||||||
Net impairment losses recognized in
earnings(2) |
(1 | ) | (12 | ) | (70 | ) | (3 | ) | (91 | ) | (418 | ) | — | — | — | (4 | ) | (103 | ) | (488 | ) | |||||||||||||||||||||||||||||||||||
Equity in earnings (losses) of
limited partnerships |
21 | (76 | ) | 6 | 106 | (283 | ) | (64 | ) | — | — | — | 127 | (359 | ) | (58 | ) | |||||||||||||||||||||||||||||||||||||||
Goodwill Impairment |
— | — | — | (22 | ) | — | — | — | — | — | (22 | ) | — | — | ||||||||||||||||||||||||||||||||||||||||||
Income (loss) from investment
operations before
taxes(2) |
56 | (36 | ) | (63 | ) | 694 | 334 | (1,137 | ) | (11 | ) | (11 | ) | (11 | ) | 739 | 287 | (1,211 | ) | |||||||||||||||||||||||||||||||||||||
Income (loss) from operations before
income taxes and noncontrolling
interest |
269 | 154 | 111 | 730 | 370 | (950 | ) | — | — | — | 999 | 524 | (839 | ) | ||||||||||||||||||||||||||||||||||||||||||
Provision for income taxes |
107 | 46 | 42 | 232 | 32 | (265 | ) | — | — | — | 339 | 78 | (223 | ) | ||||||||||||||||||||||||||||||||||||||||||
Net income (loss) |
$ | 162 | $ | 108 | $ | 69 | $ | 498 | $ | 338 | $ | (685 | ) | $ | — | $ | — | $ | — | $ | 660 | $ | 446 | $ | (616 | ) | ||||||||||||||||||||||||||||||
| (1) | Earnings on life insurance related invested assets are integral to the evaluation of the life insurance operations because of the long duration of life products. On that basis, for presentation purposes, the life insurance operations in the table above include life insurance related investment results. However, the life insurance investment results are included in the investment operations segment discussion as part of the Exchange’s investment results. | |
| (2) | Prior to and through December 31, 2010, the underwriting results retained by EIC and ENY and the investment results of EIC, ENY and EPC accrued to the benefit of the Indemnity shareholder interest. Due to the sale of Indemnity’s property and casualty subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting results and all investment results for these companies accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after December 31, 2010. (See Item 8. “Financial Statements and Supplementary Data — Note 1, Nature of Operations, of Notes to Consolidated Financial Statements” contained within this report and the previous “Recent Events” section.) | |
| (3) | As a result of the pending sale of Indemnity’s 21.6% ownership interest in EFL to the Exchange which is scheduled to close by March 31, 2011, all earnings of EFL will accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after March 31, 2011. (See Item 8. “Financial Statements and Supplementary Data — Note 1, Nature of Operations, of Notes to Consolidated Financial Statements” contained within this report and the previous “Recent Events” section.) |
Net income in 2010 was positively impacted by improved financial markets compared to 2009,
which positively impacted our investment and life insurance operations. Our property and casualty
insurance operation’s direct written premium increased 4.5% in 2010, which also positively impacted
management fee revenue. The increase in direct written premium was driven by an increase in
policies in force and modest increases in average premium per policy. Property and casualty
insurance losses were higher in 2010 compared to 2009, due to higher catastrophe and current year
losses, offset somewhat by favorable development on prior accident years. Also in 2010, our
noncontrolling interest incurred a charge of $22 million for the impairment of goodwill relating to
its purchase of EFL stock in 2006, and the Indemnity shareholder interest incurred a charge of $18
million for a deferred tax expense related to the pending sale of its 21.6% ownership interest of
EFL to the Exchange.
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Reconciliation of operating income to net income
We believe that investors’ understanding of our performance related to the Indemnity shareholder
interest is enhanced by the disclosure of the following non-GAAP financial measure. Our method of
calculating this measure may differ from those used by other companies and therefore comparability
may be limited.
Operating income is net income excluding realized capital gains and losses, impairment losses and
related federal income taxes. Our common stock portfolio is measured at fair value. As such,
changes in fair value related to common stocks are reported in earnings. These unrealized gains or
losses are included in the net realized gains and losses on investments in our Consolidated
Statements of Operations that are used to calculate operating income. Equity in earnings or losses
of EFL and equity in earnings or losses of limited partnerships are included in the calculation of
operating income. Equity in earnings or losses of limited partnerships includes the respective
investment’s realized capital gains and losses, as well as unrealized gains and losses, but does
not include the realized gain or loss when a limited partnership is sold in the secondary market.
We use operating income to evaluate the results of our operations. It reveals trends in our
management services, property and casualty insurance underwriting (1) and investment
operations that may be obscured by the net effects of realized capital gains and losses including
impairment losses. Realized capital gains and losses including impairment losses, may vary
significantly between periods and are generally driven by business decisions and economic
developments such as capital market conditions, the timing of which is unrelated to our management
services and property and casualty insurance underwriting processes (1). We believe it
is useful for investors to evaluate these components separately and in the aggregate when reviewing
our performance. We are aware that the price to earnings multiple commonly used by investors as a
forward-looking valuation technique uses operating income as the denominator. Operating income
should not be considered as a substitute for net income prepared in
accordance with U.S. GAAP and
does not reflect our overall profitability.
The following table reconciles operating income and net income for Indemnity shareholder interest
for the years ended December 31(1):
| Indemnity shareholder interest | ||||||||||||
| (in millions, except per share data) | 2010 | 2009 | 2008 | |||||||||
Operating income attributable to Indemnity |
$ | 163 | $ | 109 | $ | 142 | ||||||
Net realized losses and impairments on investments |
(2 | ) | (2 | ) | (113 | ) | ||||||
Income tax benefit |
1 | 1 | 40 | |||||||||
Realized losses and impairments, net of income taxes |
(1 | ) | (1 | ) | (73 | ) | ||||||
Net income attributable to Indemnity |
$ | 162 | $ | 108 | $ | 69 | ||||||
Per Indemnity Class A common share-diluted: |
||||||||||||
Operating income attributable to Indemnity |
$ | 2.88 | $ | 1.91 | $ | 2.46 | ||||||
Net realized losses and impairments on investments |
(0.04 | ) | (0.03 | ) | (1.95 | ) | ||||||
Income tax benefit |
0.01 | 0.01 | 0.68 | |||||||||
Realized losses and impairments, net of income taxes |
(0.03 | ) | (0.02 | ) | (1.27 | ) | ||||||
Net income attributable to Indemnity |
$ | 2.85 | $ | 1.89 | $ | 1.19 | ||||||
| (1) | Prior to and through December 31, 2010, the underwriting results retained by EIC and ENY and the investment results of EIC, ENY and EPC accrued to the benefit of the Indemnity shareholder interest. Due to the sale of Indemnity’s property and casualty subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting results and all investment results for these companies accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after December 31, 2010. (See Item 8. “Financial Statements and Supplementary Data — Note 1, Nature of Operations, of Notes to Consolidated Financial Statements” contained within this report and the previous “Recent Events” section.) |
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Operating Segments
As a result of the changes in our reporting entity at January 1, 2010 (see Item 8. “Financial
Statements and Supplementary Data — Note 2, Significant Accounting Policies, of Notes to
Consolidated Financial Statements” contained within this report and the previous “Recent Accounting
Pronouncements” section), our reportable segments have increased from three to four. Our reportable
segments include management operations, property and casualty insurance operations, life insurance
operations and investment operations. The segment information that follows includes
reclassification of all comparative prior period information.
Management operations
Management operations generate internal management fee revenue, which accrues to the benefit of the
Indemnity shareholder interest, as Indemnity provides services relating to the sales, underwriting
and issuance of policies on behalf of the Exchange. Management fee revenue is based upon all premiums written
or assumed by the Exchange and the management fee rate, which is not to exceed 25%. Our Board of
Directors establishes the management fee rate at least annually, generally in December for the
following year, and considers factors such as the relative financial strength of Indemnity and the
Exchange and projected revenue streams. The management fee rate was set at 25% for 2010, 2009 and
2008. Our Board of Directors set the 2011 rate again at 25%, its maximum level. Management fee
revenue is eliminated upon consolidation.
Property and casualty insurance operations
The property and casualty insurance industry is highly cyclical, with periods of rising premium
rates and shortages of underwriting capacity followed by periods of substantial price competition
and excess capacity. The cyclical nature of the insurance industry has a direct impact on the
direct written premiums of the Property and Casualty Group. The Property and Casualty Group’s
workers compensation and commercial auto lines of business continue to experience reduced exposures
and reduced average premium per policy due to continuing unfavorable economic conditions. Industry
property and casualty premium rates in 2010 showed signs of firming for personal lines, where most
commercial lines continued to reflect rate reductions as the economy began to show signs of a
sluggish recovery.
The property and casualty insurance business is driven by premium growth, the combined ratio and
investment returns. The property and casualty operation’s premium growth strategy focuses on growth
by expansion of existing operations including a careful agency selection process and increased
market penetration in existing operating territories. Expanding the size of our existing agency
force of almost 2,100 independent agencies, with nearly 9,500 licensed representatives, will
contribute to future growth as new agents build their books of business with the Property and
Casualty Group. In 2010 we appointed 125 new agencies made up of 233 licensed representatives.
The property and casualty insurance operations insure standard and preferred risks while adhering
to a set of consistent underwriting standards. Nearly 50% of premiums are derived from personal
auto, 20% from homeowners and 30% from commercial lines. Pennsylvania, Maryland and Virginia made
up 63% of the property and casualty lines insurance business 2010 direct written premium.
The members of the Property and Casualty Group pool their underwriting results under an
intercompany pooling agreement. Under the pooling agreement, the Exchange retains a 94.5% interest
in the net underwriting results of the Property and Casualty Group, while EIC retains a 5.0%
interest and ENY retains a 0.5% interest. Prior to and through December 31, 2010, the underwriting
results retained by EIC and ENY accrued to the benefit of the Indemnity shareholder interest. Due
to the sale of Indemnity’s property and casualty subsidiaries to the Exchange on December 31, 2010,
all property and casualty underwriting results accrue to the benefit of the subscribers (policyholders) of the
Exchange, or noncontrolling interest, after December 31, 2010.
The combined ratio, expressed as a percentage, is the key measure of underwriting profitability
traditionally used in the property and casualty insurance industry. It is the sum of the ratio of
losses and loss expenses to premiums earned (loss ratio) plus the ratio of policy acquisition and
other underwriting expenses to premiums earned (expense ratio). When the combined ratio is less
than 100%, underwriting results are generally considered profitable; when the combined ratio is
greater than 100%, underwriting results are generally considered unprofitable.
Factors affecting loss and loss expenses include the frequency and severity of losses, the nature
and severity of catastrophic losses, the quality of risks underwritten and underlying claims and
settlement expenses related to medical costs and litigation.
Investments held by the Property and Casualty Group are reported in the investment operations
segment, separate from the underwriting business.
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Life insurance operations
EFL generates revenues through sales of its individual and group life insurance policies and fixed
annuities. These products provide our property and casualty agency force an opportunity to
cross-sell both personal and commercial accounts. EFL’s profitability depends principally on the
ability to develop, price and distribute insurance products, attract and retain deposit funds,
generate investment returns and manage expenses. Other drivers include mortality and morbidity
experience, persistency experience to enable the recovery of acquisition costs, maintaining
interest spreads over the amounts credited to deposit funds and the maintenance of strong ratings
from rating agencies.
Earnings on life insurance related invested assets are integral to the evaluation of the life
insurance operations because of the long duration of life products. On that basis, for presentation
purposes in the Management’s Discussion and Analysis, the life insurance operations include life
insurance related investment results. However, for presentation purposes in the segment footnote,
the life insurance investment results are included in the investment operations segment discussion
as part of the Exchange’s investment results.
Investment operations
We generate revenues from our fixed maturity, equity security and alternative investment portfolios
to support our underwriting business. The portfolios are managed with the objective of maximizing
after-tax returns on a risk-adjusted basis. Management actively evaluates the portfolios for
impairments. We record impairment writedowns on investments in instances where the fair value of
the investment is substantially below cost, and we conclude that the decline in fair value is
other-than-temporary.
Our investment operations reflected the improvement experienced in the financial markets in 2010.
During 2010, we impaired $6 million of securities compared to $126 million in 2009. Our alternative
investments benefited from the improved financial market conditions in the fourth quarter of 2009
and the first three quarters of 2010. The upturn across all markets had a significant impact on
the portfolios of our partnerships. Equity in earnings of limited partnerships was $128 million in
2010 compared to losses of $369 million in 2009. The valuation adjustments in the limited
partnerships are based on financial statements received from our general partners, which are
generally received on a quarter lag. As a result, the 2010 partnership earnings do not reflect the
valuation changes from the fourth quarter of 2010.
General conditions and trends affecting our business
Economic conditions
Although the financial markets have shown signs of improvement recently, overall economic
conditions remain uncertain. Unfavorable changes in economic conditions, including declining
consumer confidence, inflation, high unemployment and recession, among others, may lead the
Property and Casualty Group’s customers to modify coverage, not renew policies, or even cancel
policies, which could adversely affect the premium revenue of the Property and Casualty Group, and
consequently Indemnity’s management fee. These conditions could also impair the ability of
customers to pay premiums when due, and as a result, the Property and Casualty Group’s reserves and
write-offs could increase. Our key challenge is to generate profitable revenue growth in a highly
competitive market that continues to experience the effects of unfavorable economic conditions.
Market volatility
Our portfolio of fixed income, preferred and common stocks and limited partnerships are subject to
market volatility especially in periods of instability in the worldwide financial markets.
Depending upon market conditions, which are unpredictable and remain uncertain, considerable
fluctuation could exist in our reported total investment income, which could have an adverse impact
on our financial condition, results of operations and cash flows.
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CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements include amounts based on estimates and assumptions that have
a significant effect on reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period and
related disclosures. Management considers an accounting estimate to be critical if (1) it requires
assumptions to be made that were uncertain at the time the estimate was made, and (2) different
estimates that could have been used, or changes in the estimate that are likely to occur from
period-to-period, could have a material impact on our consolidated statements of operations or
financial position.
The following presents a discussion of those accounting policies surrounding estimates that we
believe are the most critical to our reported amounts and require the most subjective and complex
judgment. If actual events differ significantly from the underlying assumptions, there could be
material adjustments to prior estimates that could potentially adversely affect our results of
operations, financial condition and cash flows. The estimates and the estimating methods used are
reviewed continually, and any adjustments considered necessary are reflected in current earnings.
Property and casualty insurance loss and loss expense reserves
Property and casualty insurance loss and loss expense reserves are established to provide for the
estimated costs of paying claims under insurance policies written by us. These reserves include
estimates for both claims that have been reported (case) and those that have been incurred but not
reported (IBNR) and include estimates of all future payments associated with processing and
settling these claims.
The process of establishing loss reserves is complex and involves a variety of actuarial
techniques. The loss reserve estimation process is based largely on the assumption that past
development trends are an appropriate indicator of future events. Reserve estimates are based on
our assessment of known facts and circumstances, review of historical settlement patterns,
estimates of trends in claims frequency and severity, legal theories of liability and other
factors. Variables in the reserve estimation process can be affected by 1) internal factors,
including changes in claims handling procedures and changes in the quality of risk selection in the
underwriting process, and 2) external events, such as economic inflation, and regulatory and
legislative changes. Due to the inherent complexity of the assumptions used, final loss settlements
may vary significantly from the current estimates, particularly when those settlements may not
occur until well into the future.
How reserves are established
Case reserves are established by a claims handler on each individual claim and are adjusted as new
information becomes known during the course of handling the claims. IBNR reserves represent the
difference between the case reserves for actual reported loss and loss expenses and the estimated
ultimate cost of all claims.
Our loss and loss expense reserves include amounts related to short tail and long tail lines of
business. Tail refers to the time period between the occurrence of a loss and the final settlement
of the claim. The longer the time span between the incidence of a loss and the settlement of the
claim, the more the ultimate settlement amount can vary. Most of our loss and loss expense
reserves relate to long tail liability lines of business including workers compensation, bodily
injury and other liability coverages, such as commercial liability. Short tail lines of business,
which represent a smaller percentage of our loss reserves, include personal auto physical damage
and personal property.
Our actuaries review all direct reserve estimates on a quarterly basis for both current and prior
accident years using the most current claim data. Reserves for massive injury claims, including
auto no-fault and workers compensation claims, are reviewed at a more detailed level semi-annually.
These massive injury claim reserves are relatively few in number and are very long tail
liabilities. In intervening quarters, development on massive injury reserves are monitored to
confirm that the estimate of ultimate losses should not change. If an unusual development is
observed, a detailed review is conducted to determine whether the reserve estimate should change.
Significant changes to the factors discussed above, which are either known or reasonably projected
through analysis of internal and external data, are quantified in the reserve estimates each
quarter.
The quarterly reserve reviews incorporate a variety of actuarial methods and judgments and involve
rigorous analysis. A comprehensive review is performed of the various estimation methods and
reserve levels produced by each. The various methods generate different estimates of ultimate
losses by product line and product coverage combination. Thus, reserves are comprised of a set of
point estimates of the ultimate losses developed from the various methods. These multiple reserve
point estimates are reviewed by our reserving actuaries and reserve best estimates are selected.
The selected reserve estimates are discussed with management.
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Numerous factors are considered in setting reserve levels, including, but not limited to, the
assessed reliability of key loss trends and assumptions that may be significantly influencing the
current actuarial indications, the maturity of the accident year, pertinent claims frequency and
severity trends observed over recent years, the level of volatility within a particular line of
business and the improvement or deterioration of actuarial rate indications in the current period
as compared to prior periods. Certain methods are considered more credible for each
product/coverage combination depending on the maturity of the accident quarter, the mix of business
and the particular internal and external influences impacting the claims experience or the method.
The following is a discussion of the most common methods used:
Paid development — Paid loss development patterns are generated from historical data
organized by accident quarter and calendar quarter and applied to current paid losses by accident
quarter to generate estimated ultimate losses. Paid development techniques do not use information
about case reserves and therefore are not affected by changes in case reserving practices. These
techniques are generally most useful for short-tailed lines since a high percentage of ultimate
losses are paid in early periods of development.
Incurred development — Incurred loss development patterns (reflecting cumulative paid
losses plus current case reserves) are generated from historical data organized by accident quarter
and calendar quarter. The patterns are applied to current incurred losses by accident quarter to
generated estimated ultimate losses. Incurred methods and/or combinations of the paid and incurred
methods are used in developing estimated ultimate losses for short-tail coverages, such as personal
auto physical damage and personal property claims, and more mature accident quarters of long-tail
coverages, such as personal auto liability claims and commercial liability claims, including
workers compensation.
Weather event paid and reported development — The historical patterns utilized in paid and
reported development methods for weather events are derived from historical data for the same type
of weather event. Initial weather event ultimate loss estimates are reviewed with claims
management.
Bornhuetter-Ferguson — Bornhuetter-Ferguson is a method of combining the
expected-loss-ratio ultimate losses and the paid-or-incurred development ultimate losses. It places
more weight on the paid-or-incurred development ultimate losses as an accident quarter matures.
The Bornhuetter-Ferguson method is generally used on the first four to eight accident quarters on
long-tail coverages because a low percentage of losses are paid in the early period of development.
An expected loss ratio is developed through a review of historical loss ratios by accident quarter,
adjusted for changes to earned premium, mix of business and other factors that are expected to
impact the loss ratio for the accident quarter being evaluated. A preliminary estimate of ultimate
losses is calculated by multiplying this expected loss ratio by earned premium.
Survival ratio — This method measures the ratio of the average loss and loss expense
amount paid annually to the total reserve for the product line or product coverage. The survival
ratio represents the number of years of payments that the current level of reserves will cover. The
reserve is established so that a particular ratio, representing the time to closing of all claims,
is achieved. This method is also used as a reasonability check of reserve adequacy.
Individual claim — This method estimates the ultimate losses on a claim-by-claim basis. An
annual payment assumption is made for each claimant and then projected into the future based upon a
particular assumption of the future inflation rate and life expectancy of the claimant. This method
is used for unusual, large claims.
Line of business methods
For each product line and product/coverage combination, certain methods are given more influence
than other methods. The discussion below gives a general indication of which methods are preferred
for each line of business. As circumstances change, the methods that are given greater weight can
change.
Massive injury claims (such as certain auto no-fault and workers compensation claims) —
These claims develop over a long period of time and are relatively few in number. We
utilize the individual claim method to evaluate each claim’s ultimate losses.
Personal auto physical damage and homeowners — These lines are fast-developing and paid and
incurred development techniques are used. We rely primarily on incurred development
techniques for the most recent accident months.
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| Personal auto liability (such as bodily injury and uninsured/underinsured motorist) — For auto liability, and bodily injury in particular, we review the results of a greater number of techniques than for physical damage. We use the Bornhuetter-Ferguson method for the first four to eight accident quarters and paid and incurred development methods for the older accident periods. | |||
| Workers compensation and long tailed liability (such as commercial liability) — We generally rely on the expected loss ratio, Bornhuetter-Ferguson and incurred development techniques. These techniques are generally weighted together, relying more heavily on the Bornhuetter-Ferguson method at early ages of development and more on the incurred development method as an accident year matures. |
The
methods used for estimating loss expenses are as follows:
| Defense and cost containment expenses (D&CC) — D&CC is analyzed using paid development techniques and an analysis of the relationship between D&CC payments and loss payments. | |||
| Adjusting and other expenses (A&O) — A&O reserves are projected based on an expected cost per claim year, the anticipated claim closure pattern, and the ratio of paid A&O to paid loss. |
Key assumptions for loss reserving
The accuracy of the various methods used to estimate reserves is a function of the degree to which
underlying assumptions are satisfied. The most significant key assumptions are:
Development patterns — Historical paid and reported amounts contain patterns which
indicate how unpaid and unreported amounts will emerge in future periods. Unless reasons or
factors are identified that invalidate the extension of historical patterns into the future, these
patterns can be used to make projections necessary for estimating IBNR reserves. This is the most
significant assumption and it applies to all methods.
Impact
of inflation — Property and casualty insurance reserves are established before the extent to which inflation may
impact such reserves is known. Consequently, in establishing reserves, we attempt to anticipate the
potential impact of inflation, including medical cost inflation, construction and auto repair cost
inflation and tort issues. Medical costs are a broad element of inflation that impacts personal and
commercial auto, general liability, workers compensation and commercial multi-peril lines of
insurance written by the Property and Casualty Group.
Claims with atypical emergence patterns — Characteristics of certain subsets of claims,
such as those with high severity, have the potential to distort patterns contained in historical
paid loss and reported loss data. When testing indicates this to be the case for a particular
subset of claims, our actuaries segregate these claims from the data and analyze them separately.
Subsets of claims that fall into this category include certain auto no-fault and workers
compensation claims.
Future cost increases and claimant mortality — Future cost increase assumptions are
derived from a review of historical cost increases and are assumed to persist into the future.
Future medical cost increases and claimant mortality assumptions utilized in the reserve estimates
for massive injury claims are obtained from industry studies adjusted for our own experience.
Reserve levels are sensitive to these assumptions because they represent projections over 30 to 40
years into the future.
Changes in loss ratio trends — Prior loss ratio assumptions utilized in the
Bornhuetter-Ferguson method are derived from projections of historical loss ratios based on actual
experience from more mature accident periods adjusted for assumed changes in average premiums,
frequency, and severity. These assumptions influence only the most recent accident periods, but
the majority of reserves originate with the most recent accident periods. Reserve levels are highly
sensitive to these assumptions.
Relationship of loss expense to losses — D&CC-to-loss ratio assumptions utilized in the
Bornhuetter-Ferguson method are initially derived from historical relationships. These historical
ratios are adjusted according to the impact of changing internal and external factors. The
A&O-to-loss ratio assumption is similarly derived from historical relationships and adjusted as
required for identified internal or external changes.
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Reserve estimate variability
The property and casualty reserves with the greatest potential for variation are the massive injury
reserves. The automobile no-fault law in Pennsylvania before 1986 and workers compensation policies
provide for unlimited medical benefits. The estimate of ultimate liabilities for these claims is
subject to significant judgment due to variations in claimant health, mortality over time and
health care cost trends. Workers compensation massive injury claims have been segregated from the
total population of workers compensation claims. Ultimate losses are estimated on a claim-by-claim
basis. An annual payment assumption is made for each of the claimants who have sustained massive
injuries. We are currently reserving for about 300 claimants requiring lifetime medical care, of
which about 120 involve massive injuries. The annual payment is projected into the future based
upon particular assumptions of the future inflation rate and life expectancy of the claimant. The
most significant variable in estimating this liability is medical cost inflation. The life
expectancy (mortality rate) assumption underlying the estimate reflects experience to date. Actual
experience, different than that assumed, could also have a significant impact on the reserve
estimate.
| • | Our medical inflation rate assumption in setting this reserve for 2010 and 2009 is an 8% annual increase grading down 0.5% per year to an ultimate rate of 5%. Our medical inflation rate assumption in setting this reserve for 2008 was a 9% annual increase grading down 1% after the first year, then grading down 0.5% per year to an ultimate rate of 5%. | ||
| • | The mortality rate assumption in 2010 and 2009 is based on the disabled pensioner mortality table by gender. In 2008, our mortality rate assumption gave 75% weighting to our own mortality experience and 25% weighting to the male-female combined disabled pensioner mortality table. | ||
| • | Loss reserves are set at full expected cost, except for workers compensation loss reserves, which are discounted on a nontabular basis using an interest rate of 2.5% and our historical workers compensation payout patterns. In 2009, we changed our workers compensation discounting method to segregate the workers compensation massive injury claims that have longer payout patterns from the non-massive injury workers compensation claims, and continue to use this methodology in 2010. |
Auto no-fault (massive injury claims) — The automobile massive injury reserve carried by
the Property and Casualty Group totaled $440 million at December 31, 2010, compared to $463 million
at December 31, 2009. The decrease in the pre-1986 automobile massive injury reserves in 2010
compared to 2009 was primarily due to settling three claims. A 100-basis point increase
in the medical cost inflation assumption would result in an increase in the Property and
Casualty Group’s net liability of $77 million.
Workers compensation (massive injury claims) — The workers compensation massive injury
reserve carried by the Property and Casualty Group totaled $154 million at December 31, 2010,
compared to $144 million at December 31, 2009. The increase in the workers compensation massive
injury reserves in 2010 compared to 2009 was primarily due to adding four new claims with higher
reserve amounts than four prior claims that were settled in 2010. The discount on these reserves
was $77 million at December 31, 2010. A 100-basis point increase in the medical cost inflation
assumption would result in an increase in the Property and Casualty Group’s net liability of $48
million and an increase in the discount of $22 million at December 31, 2010.
Workers compensation reserves, excluding massive injury claims, are also subject to discounting.
The discount on these reserves was $50 million at December 31, 2010. A 100-basis point increase in
the discount rate would decrease these reserves by $16 million. If we assumed a three year average
development instead of a five year average development, the Property and Casualty Group’s net
liability would decrease by $4 million.
We also perform analyses to evaluate the adequacy of past reserve levels. Using subsequent
information, we perform retrospective reserve analyses to test whether previously established
estimates for reserves were reasonable. Our 2010 retrospective reserve analysis indicated that
direct reserves, including salvage and subrogation recoveries, had an estimated redundancy of
approximately $188 million, which was 5.2% of the net loss reserves at December 31, 2009.
In 2009, our analysis indicated direct reserves, including salvage and subrogation recoveries, had
an estimated redundancy of $30 million, or 0.8% of reserves at December 31, 2008, and our 2008
analysis indicated an estimated redundancy of $124 million, or 3.4% of reserves at December 31,
2007. See an additional discussion of our reserve development in the “Development of prior year
loss reserves” section.
Due to the sale of Indemnity’s property and casualty insurance subsidiaries to the Exchange on
December 31, 2010, all property and casualty loss and loss expense reserves accrue to the benefit of the
subscribers (policyholders) of the Exchange, or noncontrolling interest, after December 31, 2010.
(See Item 8. “Financial Statements and Supplementary Data — Note 1, Nature of Operations, of Notes
to Consolidated Financial Statements” contained within this report and the previous “Recent Events”
section.)
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Life insurance and annuity policy reserves
Reserves for traditional life insurance future policy benefits are computed primarily by the net
level premium method. Generally, benefits are payable over an extended period of time and related
reserves are calculated as the present value of future expected benefits to be paid reduced by the
present value of future expected net premiums. Such reserves are established based on methods and
underlying assumptions in accordance with generally accepted accounting principles and applicable
actuarial standards. Principal assumptions used in the establishment of policy reserves are
mortality, lapses, expenses and investment yields. Mortality assumptions are based on tables
typically used in the industry, modified to reflect actual experience and to include a provision
for the risk of adverse deviation where appropriate. Lapse, expense and investment yield
assumptions are based on actual company experience and may include a provision for the risk of
adverse deviation. Assumptions on these policies are locked in at the time of issue and are not
subject to change unless a premium deficiency exists. A premium deficiency exists if, based on
revised assumptions, the existing contract liabilities together with the present value of future
gross premiums are not sufficient to cover the present value of future expected benefits and
maintenance costs and to recover unamortized acquisition costs. Historically, our reserves plus
expected gross premiums have been demonstrated to be sufficient. There were no premium
deficiencies in 2010, 2009 or 2008.
Reserves for income-paying annuity future policy benefits are computed as the present value of
future expected benefits. Principal assumptions used in the establishment of policy reserves are
mortality and investment yields. Interest rates used to discount future expected benefits are set
at the policy level and range from 2.25% to 9.0%. The equivalent aggregate interest rate is 5.65%.
If the aggregate interest rate was reduced by 100 basis points, the present value of future
expected benefits would increase by $20 million at December 31, 2010, of which Indemnity’s share
would equate to $4 million.
Reserves for universal life and deferred annuity plans are based on the contract account balance
without reduction for surrender charges.
Investment valuation
We make estimates concerning the valuation of all investments. Valuation techniques are used to
derive the fair value of the available-for-sale and trading securities we hold. Fair value is the
price that would be received to sell an asset in an orderly transaction between willing market
participants at the measurement date.
Fair value measurements are based upon observable and unobservable inputs. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs reflect our view
of market assumptions in the absence of observable market information. We utilize valuation
techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
For purposes of determining whether the market is active or inactive, the classification of a
financial instrument was based on the following definitions:
| • | An active market is one in which transactions for the assets being valued occur with sufficient frequency and volume to provide reliable pricing information. | ||
| • | An inactive (illiquid) market is one in which there are few and infrequent transactions, where the prices are not current, price quotations vary substantially, and/or there is little information publicly available for the asset being valued. |
We continually assess whether or not an active market exists for all of our investments and as of
each reporting date re-evaluate the classification in the fair value hierarchy. All assets carried
at fair value are classified and disclosed in one of the following three categories:
| • | Level 1 — Quoted prices for identical instruments in active markets not subject to adjustments or discounts. | ||
| • | Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. | ||
| • | Level 3 — Instruments whose significant value drivers are unobservable and reflect management’s estimate of fair value based on assumptions used by market participants in an orderly transaction as of the valuation date. |
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Level 1 primarily consists of publicly traded common stock, nonredeemable preferred stocks and
treasury securities and reflects market data obtained from independent sources, such as prices
obtained from an exchange or a nationally recognized pricing service for identical instruments in
active markets.
Level 2 includes those financial instruments that are valued using industry-standard models that
consider various inputs, such as the interest rate and credit spread for the underlying financial
instruments. All significant inputs are observable, or derived from observable information in the
marketplace, or are supported by observable levels at which transactions are executed in the
marketplace. Financial instruments in this category primarily include municipal securities, asset
backed securities, collateralized-mortgage obligations, foreign and domestic corporate bonds and
redeemable preferred stocks and certain nonredeemable preferred stocks.
Level 3 securities are valued based upon unobservable inputs, reflecting our estimates of value
based on assumptions used by market participants. Securities are assigned to Level 3 in cases
where non-binding broker quotes are significant to the valuation and there is a lack of
transparency as to whether these quotes are based on information that is observable in the
marketplace. Fair value estimates for securities valued using unobservable inputs require
significant judgment due to the illiquid nature of the market for these securities and represent
the best estimate of the fair value that would occur in an orderly transaction between willing
market participants at the measurement date under current market conditions. Fair value for these
securities are generally determined using comparable securities or non-binding broker quotes
received from outside broker dealers based on security type and market conditions. Remaining
un-priced securities are valued using an estimate of fair value based on indicative market prices
that include significant unobservable inputs not based on, nor corroborated by, market information,
including the utilization of discounted cash flow analyses which have been risk-adjusted to take
into account illiquidity and other market factors. This category primarily consists of certain
private preferred stock and bond securities, collateralized debt and loan obligations, and credit
linked notes.
As of each reporting period, financial instruments recorded at fair value are classified based on
the lowest level of input that is significant to the fair value measurement. The presence of at
least one unobservable input would result in classification as a Level 3 instrument. Our
assessment of the significance of a particular input to the fair value measurement requires
judgment, and considers factors specific to the asset, such as the relative impact on the fair
value as a result of including a particular input and market conditions. We did not make any
other significant judgments except as described above.
Estimates of fair values for our investment portfolio are obtained primarily from a nationally
recognized pricing service. Our Level 1 category includes those securities valued using an
exchange traded price provided by the pricing service. The methodologies used by the pricing
service that support a Level 2 classification of a financial instrument include multiple
verifiable, observable inputs including benchmark yields, reported trades, broker/dealer quotes,
issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Pricing
service valuations for Level 3 securities are based on proprietary models and are used when
observable inputs are not available in illiquid markets. In limited circumstances we adjust the
price received from the pricing service when in our judgment a better reflection of fair value is
available based on corroborating information and our knowledge and monitoring of market conditions
such as a disparity in price of comparable securities and/or non-binding broker quotes. We perform
continuous reviews of the prices obtained from the pricing service. This includes evaluating the
methodology and inputs used by the pricing service to ensure we determine the proper classification
level of the financial instrument. Price variances, including large periodic changes, are
investigated and corroborated by market data. We have reviewed the pricing methodologies of our
pricing service and believe that their prices adequately consider market activity in determining
fair value.
In cases in which a price from the pricing service is not available, values are determined by
obtaining non-binding broker quotes and/or market comparables. When available, we obtain multiple
quotes for the same security. The ultimate value for these securities is determined based on our
best estimate of fair value using corroborating market information. Our evaluation includes the
consideration of benchmark yields, reported trades, issuer spreads, two-sided markets, benchmark
securities, bids, offers and reference data.
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Investments are evaluated monthly for other-than-temporary impairment loss. Some factors
considered in evaluating whether or not a decline in fair value is other-than-temporary include:
| • | the extent and duration for which fair value is less than cost; | ||
| • | historical operating performance and financial condition of the issuer; | ||
| • | short- and long-term prospects of the issuer and its industry based on analysts’ recommendations; | ||
| • | specific events that occurred affecting the issuer, including rating downgrades; | ||
| • | our intent to sell or more likely than not be required to sell (debt securities); and | ||
| • | our ability and intent to retain the investment for a period of time sufficient to allow for a recovery in value (equity securities). |
For debt securities in which we do not expect full recovery of amortized cost, the security is
deemed to be credit-impaired. Credit-related impairments and impairments on securities we intend to
sell or more likely than not will be required to sell are recorded in the Consolidated Statements
of Operations. It is our intention to sell all debt securities with credit impairments. For
available-for-sale equity securities, a charge is recorded in the Consolidated Statements of
Operations for positions that have experienced other-than-temporary impairments due to credit
quality or other factors.
The primary basis for the valuation of limited partnership interests is financial statements
prepared by the general partner. Because of the timing of the preparation and delivery of these
financial statements, the use of the most recently available financial statements provided by the
general partners generally result in a quarter delay in the inclusion of the limited partnership
results in our Consolidated Statements of Operations. Due to this delay, these financial
statements do not reflect the market conditions experienced in the fourth quarter of 2010. Nearly
all of the underlying investments in our limited partnerships are valued using a source other than
quoted prices in active markets. Our limited partnership holdings are considered investment
companies where the general partners record assets at fair value. Several factors are to be
considered in determining whether an entity is an investment company. Among these factors are a
large number of investors, low level of individual ownership and passive ownership that indicate
the entity is an investment company.
We have three types of limited partnership investments: private equity, mezzanine debt and real
estate. Our private equity and mezzanine debt partnerships are diversified among numerous
industries and geographies to minimize potential loss exposure. The fair value amounts for our
private equity and mezzanine debt partnerships are based on the financial statements prepared by
the general partners, who use various methods to estimate fair value including the market approach,
income approach and the cost approach. The market approach uses prices and other pertinent
information from market-generated transactions involving identical or comparable assets or
liabilities. Such valuation techniques often use market multiples derived from a set of
comparables. The income approach uses valuation techniques to convert future cash flows or earnings
to a single discounted present value amount. The measurement is based on the value indicated by
current market expectations about those future amounts. The cost approach is derived from the
amount that is currently required to replace the service capacity of an asset. If information
becomes available that would impair the cost of investments owned by the partnerships, then the
general partner would generally adjust to the net realizable value.
Real estate limited partnerships are recorded by the general partner at fair value based on
independent appraisals and/or internal valuations. Real estate projects under development are
generally valued at cost and impairment tested by the general partner. We minimize the risk of
market decline by avoiding concentration in a particular geographic area and are diversified across
residential, commercial, industrial and retail real estate investments.
We perform various procedures in review of the general partners’ valuations, and while we rely on
the general partners’ financial statements as the best available information to record our share of
the partnership unrealized gains and losses resulting from valuation changes, we adjust our
financial statements for impairments of the partnership investments where appropriate. As there is
no ready market for these investments, they have the greatest potential for variability. We survey
each of the general partners quarterly about expected significant changes (plus or minus 10%
compared to previous quarter) to valuations prior to the release of the fund’s quarterly and annual
financial statements. Based on that information from the general partner, we consider whether
additional disclosure is warranted.
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Deferred acquisition costs related to life insurance and investment-type contracts
Deferred acquisition costs (DAC) on life insurance and investment-type contracts are amortized in
proportion to gross premiums, gross margins or gross profits, depending on the type of contract.
DAC related to traditional life insurance products is amortized in proportion to premium revenues
over the premium-paying period of related policies using assumptions consistent with those used in
computing policy liability reserves. These assumptions are not revised after policy issuance unless
the DAC balance is deemed to be unrecoverable from future expected profits. In any period where
the actual policy terminations are higher (lower) than anticipated policy terminations, DAC
amortization will be accelerated (decelerated) in that period.
DAC related to universal life products and deferred annuities is amortized over the estimated lives
of the contracts in proportion to actual and expected future gross profits, which include
investment, mortality and expense margins and surrender charges. Both historical and anticipated
investment returns, including realized gains and losses, are considered in determining the
amortization of DAC. When the actual gross profits change from previously estimated gross profits,
the cumulative DAC amortization is re-estimated and adjusted by a cumulative charge or credit to
current operations. When actual gross profits exceed those previously estimated, DAC amortization
will increase, resulting in a current period charge to earnings. The opposite result occurs when
the actual gross profits are below the previously estimated gross profits. DAC is also adjusted for
the impact of unrealized gains or losses on investments as if these gains or losses had been
realized, with corresponding credits or charges, net of income taxes, included in EFL’s accumulated
other comprehensive income, which is presented in the noncontrolling interest owned by
policyholders-Exchange in the Consolidated Statements of Financial Position.
The actuarial assumptions used to determine investment, mortality and expense margins and surrender
charges are reviewed periodically, are based on best estimates and do not include any provision for
the risk of adverse deviation. If actuarial analysis indicates that expectations have changed, the
actuarial assumptions are updated and the investment, mortality and expense margins and surrender
charges are unlocked. If this unlocking results in a decrease in the present value of future
expected gross profits, DAC amortization for the period will increase. If this unlocking results in
an increase in the present value of future expected gross profits, DAC amortization for the current
period will decrease.
DAC is periodically reviewed for recoverability. For traditional life products, if the benefit
reserves plus anticipated future premiums and interest earnings for a line of business are less
than the current estimate of future benefits and expenses (including any unamortized DAC), a charge
to income is recorded for additional DAC amortization or for increased benefit reserves. For
universal life and deferred annuities, if the current present value of future expected gross
profits is less than the unamortized DAC, a charge to income is recorded for additional DAC
amortization. There were no impairments to DAC in 2010, 2009 or 2008.
Deferred taxes
Deferred tax assets represent the tax benefit of future deductible temporary differences and
operating loss and tax credit carry-forwards. Deferred tax assets are measured using the enacted
tax rates expected to be in effect when such benefits are realized if there is no change in tax
law. We perform an analysis of our deferred tax assets to determine
recoverability on a quarterly basis for each legal entity, consistent with how we file our tax
returns. Deferred tax assets are reduced by a valuation allowance, if based on the weight of
available evidence, it is more likely than not that some portion, or all, of the deferred tax
assets will not be realized. In determining the need for a valuation allowance, we consider
carry-back capacity, reversal of existing temporary differences, future taxable income and tax
planning strategies. The determination of the valuation allowance for our deferred tax assets
requires management to make certain judgments and assumptions regarding future operations that are
based on our historical experience and our expectations of future performance. Our judgments and
assumptions are subject to change given the inherent uncertainty in predicting future performance,
which is impacted by such things as financial market conditions, policyholder behavior, competitor
pricing, new product introductions, and specific industry and economic conditions.
Indemnity had a net deferred tax liability of $26 million at December 31, 2010, compared to a net
deferred tax asset of $41 million at December 31, 2009. There was no valuation allowance recorded
on Indemnity at December 31, 2010, compared to $2 million recorded at December 31, 2009. In the
fourth quarter of 2010, Indemnity recorded a deferred tax provision of $18 million related to its
equity interest in EFL. This deferred tax charge is required due to Indemnity’s decision to sell
its 21.6% ownership interest in EFL rather than receiving its share of EFL’s earnings in the form
of future dividends, which would have been eligible for an 80% dividend received deduction. (See
Item 8. “Financial Statements and Supplementary Data — Note 1, Nature of Operations, of Notes to
Consolidated Financial Statements” contained within this report and the previous “Recent Events”
section.)
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The Exchange had a net deferred tax liability of $257 million at December 31, 2010, compared to a
net deferred tax asset of $75 million at December 31, 2009. There was no valuation allowance
recorded on the Exchange at December 31, 2010, compared to $4 million recorded at December 31,
2009, which was primarily related to impairments on investments where the related deferred tax asset was not
expected to be realized.
Retirement benefit plans
Our pension plan for employees is the largest and only funded benefit plan we offer. Our pension
and other retirement benefit obligations are developed from actuarial estimates. Several
statistical and other factors, which attempt to anticipate future events, are used in calculating
the expense and liability related to the plans. Key factors include assumptions about the discount
rates and expected rates of return on plan assets. We review these assumptions annually and modify
them considering historical experience, current market conditions, including changes in investment
returns and interest rates, and expected future trends.
Accumulated and projected benefit obligations are expressed as the present value of future cash
payments. We discount those cash payments using a yield curve developed from corporate bond yield
information with maturities that correspond to the payment of benefits. Lower discount rates
increase present values and subsequent year pension expense; higher discount rates decrease present
values and subsequent year pension expense. The discount rate assumption used to determine the
benefit obligation for 2010 was determined based on a yield curve developed from corporate bond
yield information. The construction of these yield curves is based on yields of corporate bonds
rated Aa quality. Target yields are developed from bonds at various maturity points and a curve is
fitted to those targets. Spot rates (zero coupon bond yields) are developed from the yield curve
and used to discount benefit payment amounts associated with each future year. The present value of
plan benefits is calculated by applying the spot/discount rates to projected benefit cash flows. A
single discount rate is then developed to produce the same present value. This represents the
suggested discount rate. The cash flows from the yield curve were matched against our projected
benefit payments in the pension plan, which have a duration of about 18 years. This yield curve
supported the selection of a 5.69% discount rate for the projected benefit obligation at December
31, 2010 and for the 2011 pension expense. The 2010 expense was based on a discount rate assumption
of 6.11%. A change of 25 basis points in the discount rate assumption, with other assumptions held
constant, would have an estimated $2 million impact on net pension and other retirement benefit
costs in 2011.
The discount rate assumption used to determine the benefit obligation for 2009 and 2008 was based
on a bond-matching study that compared projected pension plan benefit flows to the cash flows from
a comparable portfolio of non-callable bonds rated AA- or higher. These bonds had maturities
primarily between zero and 26 years. For years beyond year 27, there were no appropriate bonds
maturing. In these instances, the study estimated the appropriate bond by assuming that there would
be bonds available with the same characteristics as the available bond maturing in the immediately
preceding year. Outlier bonds were excluded from the study.
Unrecognized actuarial gains and losses are being recognized over a 15-year period, which
represents the expected remaining service period of the employee group. Unrecognized actuarial
gains and losses arise from several factors, including experience and assumption changes in the
obligations and from the difference between expected returns and actual returns on plan assets.
These unrecognized gains and losses are recorded in the pension plan obligation on the Consolidated
Statements of Financial Position and Accumulated Other Comprehensive Income. These amounts are
systematically recognized to net periodic pension expense in future periods, with gains decreasing
and losses increasing future pension expense.
The expected long-term rate of return for the pension plan represents the average rate of return to
be earned on plan assets over the period the benefits included in the benefit obligation are to be
paid. The expected long-term rate of return is less susceptible to annual revisions, as there are
typically no significant changes in the asset mix. The long-term rate of return is derived from
expected future returns for each asset category based on applicable indices and their historical
relationships under various market conditions. These expected future returns are then weighted
based on our target asset allocation percentages for each asset category. A reasonably possible
change of 25 basis points in the expected long-term rate of return assumption, with other
assumptions held constant, would have an estimated $1 million impact on net pension benefit cost.
We use a four year averaging method to determine the market-related value of plan assets, which is
used to determine the expected return component of pension expense. Under this methodology, asset
gains or losses that result from returns that differ from our long-term rate of return assumption
are recognized in the market-related value of assets on a level basis over a four year period. The
component of the net actuarial loss generated during 2010 that related to the
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actual investment
return being different from that assumed during the prior year was a gain of $16 million.
Recognition of this gain will be deferred over a four year period, consistent with the market-related asset
value methodology. Once factored into the market-related asset value, these experience gains and
losses will be amortized over a period of 15 years, which is the remaining service period of the
employee group.
Estimates of fair values of the pension plan assets are obtained primarily from a nationally
recognized pricing service. Our Level 1 category includes a money market fund that is a mutual
fund for which the fair value is determined using an exchange traded price provided by the pricing
service. Our Level 2 category includes commingled pools. Estimates of fair values for securities
held by our commingled pools are obtained primarily from the pricing service. The methodologies
used by the pricing service that support a Level 2 classification of a financial instrument include
multiple verifiable, observable inputs including benchmark yields, reported trades, broker/dealer
quotes, issuers spreads, two-sided markets, benchmark securities, bids, offers and reference data.
There were no Level 3 investments during 2010.
The actuarial assumptions we used in determining our pension and retirement benefits may differ
materially from actual results due to changing market and economic conditions, higher or lower
withdrawal rates, or longer or shorter life spans of participants. While we believe that the
assumptions used are appropriate, differences in actual experience or changes in assumptions may
materially affect our financial position, results of operations or cash flows.
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RESULTS OF OPERATIONS
The information that follows is presented on a segment basis prior to eliminations.
Management operations
Management fee revenue is earned by Indemnity from services relating to the sales, underwriting and
issuance of policies on behalf of the Exchange, and is eliminated upon consolidation.
| Erie Insurance Group | ||||||||||||||||||||
| Years ended December 31, | ||||||||||||||||||||
| (dollars in millions) | 2010 | % Change | 2009 | % Change | 2008 | |||||||||||||||
Management fee revenue |
$ | 1,009 | 4.6 | % | $ | 965 | 1.6 | % | $ | 950 | ||||||||||
Service agreement revenue |
34 | (1.8 | ) | 35 | 7.7 | 33 | ||||||||||||||
Total revenue from management operations |
1,043 | 4.3 | 1,000 | 1.8 | 983 | |||||||||||||||
Cost of management operations |
841 | 3.4 | 813 | 0.5 | 810 | |||||||||||||||
Income from management operations-Indemnity (1) |
$ | 202 | 8.5 | % | $ | 187 | 8.1 | % | $ | 173 | ||||||||||
Gross margin |
19.4 | % | 0.7 | pts. | 18.7 | % | 1.1 | pts. | 17.6 | % | ||||||||||
| (1) | Indemnity retains 100% of the income from management operations. |
Management fee revenue
Management fee revenue is based upon all premiums written or assumed by the Exchange and the management fee rate, which is determined by our Board of Directors at least annually. Management fee revenue is calculated by multiplying the management fee rate by the direct premiums written by the Exchange and the other members of the Property and Casualty Group, which are assumed by the Exchange under an intercompany pooling agreement. The following table presents the calculation of management fee revenue.
Management fee revenue is based upon all premiums written or assumed by the Exchange and the management fee rate, which is determined by our Board of Directors at least annually. Management fee revenue is calculated by multiplying the management fee rate by the direct premiums written by the Exchange and the other members of the Property and Casualty Group, which are assumed by the Exchange under an intercompany pooling agreement. The following table presents the calculation of management fee revenue.
| Erie Insurance Group | ||||||||||||||||||||
| Years ended December 31 | ||||||||||||||||||||
| (dollars in millions) | 2010 | % Change | 2009 | % Change | 2008 | |||||||||||||||
Property and Casualty Group direct written
premiums |
$ | 4,035 | 4.5 | % | $ | 3,861 | 1.6 | % | $ | 3,800 | ||||||||||
Management fee rate |
25 | % | 25 | % | 25 | % | ||||||||||||||
Management fee revenue, gross (1) |
$ | 1,009 | 4.5 | % | $ | 965 | 1.6 | % | $ | 950 | ||||||||||
| NM = not meaningful | ||
| (1) | Gross management fee revenue is adjusted by an estimated allowance that Indemnity records for management fees returned on mid-term policy cancellations resulting in management fee revenue, net of allowance. Management fees are returned to the Exchange when policies are cancelled mid-term and unearned premiums are refunded. The change in the allowance for management fees returned on cancelled policies was not significant for the years ended December 31, 2010, 2009 and 2008. |
Direct written premiums of the Property and Casualty Group increased 4.5% in 2010, compared to
2009, due to a 3.3% increase in policies in force and modest increases in average premium. The
year-over-year average premium per policy for all lines of business increased 1.1% at December 31,
2010, compared to a decrease of 1.9% at December 31, 2009. The policy retention ratio was 90.7% at
December 31, 2010, compared to 90.6% at both December 31, 2009 and 2008. See the “Property and
casualty insurance operations” segment that follows for a complete discussion of property and
casualty direct written premiums.
The management fee rate was set at 25%, the maximum rate, for 2010, 2009 and 2008. The management
fee rate for 2011 has again been set at the maximum rate of 25% by our Board of Directors. Changes
in the management fee rate can affect the segment’s revenue and net income significantly. See also,
the “Transactions/Agreements between Indemnity and Noncontrolling Interest (Exchange), Board
oversight” section within this report.
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Service
agreement revenue
Service agreement revenue includes service charges Indemnity collects from policyholders for providing extended payment terms on policies written by the Property and Casualty Group and late payment and policy reinstatement fees. The service charges are fixed dollar amounts per billed installment. Service agreement revenue totaled $34 million, $35 million and $33 million in 2010, 2009 and 2008, respectively. The decrease in service agreement revenue in 2010 resulted from a slight decline in late payment and policy reinstatement fees and a continued shift in policies to the no-fee, single payment plan. The shift to the single payment plan is driven by a discount in pricing offered for paid-in-full policies as consumers’ continue to desire to avoid service charges. The increase in 2009, compared to 2008, was primarily driven by the implementation of late payment and policy reinstatement fees that became effective in March 2008.
Service agreement revenue includes service charges Indemnity collects from policyholders for providing extended payment terms on policies written by the Property and Casualty Group and late payment and policy reinstatement fees. The service charges are fixed dollar amounts per billed installment. Service agreement revenue totaled $34 million, $35 million and $33 million in 2010, 2009 and 2008, respectively. The decrease in service agreement revenue in 2010 resulted from a slight decline in late payment and policy reinstatement fees and a continued shift in policies to the no-fee, single payment plan. The shift to the single payment plan is driven by a discount in pricing offered for paid-in-full policies as consumers’ continue to desire to avoid service charges. The increase in 2009, compared to 2008, was primarily driven by the implementation of late payment and policy reinstatement fees that became effective in March 2008.
Cost of management operations
| Erie Insurance Group | ||||||||||||||||||||
| Years ended December 31, | ||||||||||||||||||||
| % | % | |||||||||||||||||||
| (in millions) | 2010 | Change | 2009 | Change | 2008 | |||||||||||||||
Commissions |
$ | 564 | 2.1 | % | $ | 552 | (0.3 | )% | $ | 554 | ||||||||||
Non-commission expense |
277 | 6.0 | 261 | 2.1 | 256 | |||||||||||||||
Total cost of management operations |
$ | 841 | 3.4 | % | $ | 813 | 0.5 | % | $ | 810 | ||||||||||
Commissions — Scheduled rate commissions increased $25 million in 2010, compared to 2009, impacted
by the 4.5% increase in direct written premiums of the Property and Casualty Group. Offsetting this
increase was a decrease in agent bonuses and accelerated commissions of $14 million driven
primarily by a reduction in our estimate of the profitability component of the bonus when factoring
in the most recent year’s underwriting data.
In 2009, scheduled rate commissions increased $10 million, compared to 2008, impacted by the 1.6%
increase in direct written premiums of the Property and Casualty Group, which was offset by a $13
million decrease in agent bonuses as our estimate of the profitability component of the bonus
decreased when factoring in the most recent year’s underwriting data.
Non-commission expense — Non-commission expense increased $16 million in 2010 compared to 2009.
Personnel costs, the second largest component in the cost of management operations, increased $12
million primarily as a result of increases in salaries and benefits. All other operating costs
increased $9 million, related primarily to our technology initiatives, offset by a $5 million
reduction for a favorable ruling related to an outstanding judgment against us.
In 2009, non-commission expense increased $5 million compared to 2008. Personnel costs increased $1
million primarily as a result of higher pension benefit costs due to the change in the discount
rate assumption used to calculate the pension expense from 6.62% in 2008 to 6.06% in 2009, offset
by a decrease in salaries. All other operating costs increased $7 million primarily related to our
technology initiatives. Also, 2008 included $3 million of executive severance costs and other
compensation expense not included in 2009.
The Indemnity gross margin of 19.4% in 2010 was positively impacted by a $5 million reduction for a
favorable court ruling. Excluding this adjustment, the gross margin would have been 18.9%, compared
to 18.7% in 2009. The improved gross margin in 2010, compared to 2009, resulted from revenue growth
slightly outpacing expense growth.
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Property and casualty insurance operations
A summary of the results of operations of our property and casualty insurance business is as
follows:
| Property and Casualty Group | ||||||||||||||||||||
| Years ended December 31, | ||||||||||||||||||||
| (dollars in millions) | 2010 | % Change | 2009 | % Change | 2008 | |||||||||||||||
Direct written premium |
$ | 4,035 | 4.5 | % | $ | 3,861 | 1.6 | % | $ | 3,800 | ||||||||||
Reinsurance — assumed and ceded |
(16 | ) | NM | 0 | NM | (12 | ) | |||||||||||||
Net written premium |
4,019 | 4.1 | 3,861 | 1.9 | 3,788 | |||||||||||||||
Change in unearned premium |
94 | 78.1 | 53 | NM | 17 | |||||||||||||||
Net premiums earned |
3,925 | 3.1 | 3,808 | 1.0 | 3,771 | |||||||||||||||
Losses and loss expenses |
2,815 | 6.4 | 2,644 | 6.0 | 2,494 | |||||||||||||||
Policy acquisition and other underwriting expenses |
1,113 | (1.7 | ) | 1,135 | 9.5 | 1,035 | ||||||||||||||
Total losses and expenses |
3,928 | 4.0 | 3,779 | 7.1 | 3,529 | |||||||||||||||
Underwriting income — Erie Insurance Group |
$ | (3 | ) | NM | $ | 29 | (87.3 | )% | $ | 242 | ||||||||||
Underwriting income — Indemnity (1) |
$ | 0 | $ | 1 | $ | 13 | ||||||||||||||
Underwriting income — Exchange (1) |
$ | (3 | ) | $ | 28 | $ | 229 | |||||||||||||
Loss and loss expense ratio |
71.7 | % | 2.3 | pts. | 69.4 | % | 3.3 | pts. | 66.1 | % | ||||||||||
Policy acquisition and other underwriting expense
ratio |
28.4 | (1.4 | ) | 29.8 | 2.3 | 27.5 | ||||||||||||||
Combined ratio |
100.1 | % | 0.9 | pts. | 99.2 | % | 5.6 | pts. | 93.6 | % | ||||||||||
| NM = not meaningful | ||
| (1) | Prior to and through December 31, 2010, the underwriting results retained by EIC and ENY accrued to the benefit of the Indemnity shareholder interest. Due to the sale of Indemnity’s property and casualty subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting results accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after December 31, 2010. (See Item 8. “Financial Statements and Supplementary Data — Note 1, Nature of Operations, of Notes to Consolidated Financial Statements” contained within this report and the previous “Recent Events” section.) |
We measure profit or loss for our property and casualty insurance segment based upon
underwriting results, which represents net earned premium less loss and loss expenses and
underwriting expense on a pre-tax basis. Loss and combined ratios are key performance indicators
that we use to assess business trends and to make comparisons to industry results. Investment
results of our underwriting business are included in our investment operations segment.
Direct written premiums
Direct written premiums of the Property and Casualty Group increased 4.5% to $4.0 billion in 2010,
compared to nearly $3.9 billion in 2009, driven by an increase in policies in force and modest
increases in average premium per policy. Year-over-year policies in force for all lines of business
increased by 3.3% in 2010 as the result of increased new policies sold and continuing strong
policyholder retention, compared to an increase of 3.5% in 2009. The year-over-year average premium
per policy for all lines of business increased 1.1% in 2010, compared to a decrease of 1.9% in
2009. The combined impact of these increases was seen primarily in the personal lines renewal
business and commercial lines new business.
Premiums generated from new business increased 5.2% to $456 million in 2010, compared to an
increase of 5.0%, or $433 million, in 2009. Underlying the trend in new business premiums was an
increase in new business policies in force of 1.3% in 2010, compared to 7.7% in 2009, while the
year-over-year average premium per policy on new business increased 3.8% in 2010, compared to a
decline of 2.5% in 2009.
Premiums generated from renewal business increased 4.4% to nearly $3.6 billion in 2010, compared to
an increase of 1.2%, or $3.4 billion, in 2009. Underlying the trend in renewal business premiums
was an increase in renewal business policies in force of 3.6% in 2010, compared to 3.0% in 2009,
and an increase in the renewal business year-over-year average premium per policy of 0.8% in 2010,
compared to a decline of 1.7% in 2009. The Property and Casualty Group’s year-over-year policy
retention ratio was 90.7% at December 31, 2010, and 90.6% at both December 31, 2009 and 2008.
The Property and Casualty Group implemented modest rate increases in 2010 and 2009 in order to meet
loss cost expectations. These rate increases, however, were offset by the Property and Casualty
Group’s economically sensitive
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lines, such as workers compensation and commercial auto, which
continue to experience reduced exposures and
reduced average premium per policy as a result of continuing unfavorable economic conditions. Our
modest rate increases in 2009 were offset by exposure reductions and changes in our mix of business
which resulted in a slight decrease to our overall average premium per policy in both the workers
compensation and commercial auto lines of business.
The Property and Casualty Group primarily writes only one-year policies. Consequently, rate actions
take 12 months to be fully recognized in written premium and 24 months to be recognized fully in
earned premiums. Since rate changes are realized at renewal, it takes 12 months to implement a rate
change to all policyholders and another 12 months to earn the decreased or increased premiums in
full. As a result, certain rate actions approved in 2009 were reflected in 2010, and recent rate
actions in 2010 will be reflected in 2011.
Personal lines — Total personal lines premiums written increased 5.7% to nearly $3.0 billion in
2010, compared to nearly $2.8 billion in 2009. Total personal lines policies in force increased
3.2% in 2010 and the total personal lines year-over-year average premium per policy increased 2.4%.
New business premiums written on personal lines increased 2.1% in 2010, compared to 9.1% in 2009.
Personal lines new business policies in force decreased 0.1% in 2010, compared to an increase of
8.6% in 2009, while the year-over-year average premium per policy on personal lines new business
increased 2.2% in 2010, compared to 0.4% in 2009.
| • | Private passenger auto new business premiums written increased 1.8% in 2010, compared to 8.2% in 2009. New business policies in force for private passenger auto decreased 0.9% in 2010, compared to an increase of 8.7% in 2009, while the new business year-over-year average premium per policy for private passenger auto increased 2.7% in 2010, compared to a decrease of 0.4% in 2009. | ||
| • | Homeowners new business premiums written increased 1.9% in 2010, compared to 11.6% in 2009. New business policies in force for homeowners decreased 0.1% in 2010 compared to an increase of 8.8% in 2009. The new business year-over-year average premium per policy for homeowners increased 2.0% in 2010, compared to 2.6% in 2009. |
Renewal premiums written on personal lines increased 6.1% in 2010, compared to 3.2% in 2009, driven
by a modest increase in average premium per policy and steady policy retention trends. The
year-over-year average premium per policy on personal lines renewal business increased 2.4% in
2010, compared to 0.1% in 2009. The personal lines year-over-year policy retention ratio was 91.5%
at December 31, 2010 and 2009, and 91.4% in 2008.
| • | Private passenger auto renewal premiums written increased 5.0% in 2010, compared to 1.6% in 2009. The year-over-year average premium per policy on private passenger auto renewal business increased 2.2% in 2010, compared to a decrease of 0.6% in 2009. The private passenger auto year-over-year policy retention ratio was 91.8% at December 31, 2010, compared to 91.9% at December 31, 2009 and 91.8% at December 31, 2008. | ||
| • | Homeowners renewal premiums written increased 8.4% in 2010, compared to 6.1% in 2009. The year-over-year average premium per policy on homeowners renewal business increased 4.5% in 2010, compared to 3.0% in 2009. The homeowners year-over-year policyholder retention ratio was 91.2% at December 31, 2010 and 2009, and 91.1% at December 31, 2008. |
Commercial lines — Total commercial lines premiums written increased slightly, by 1.4%, to almost
$1.1 billion in 2010 compared to 2009. Total commercial lines policies in force increased 4.0%,
while the total commercial lines year-over-year average premium per policy decreased 2.5%.
New business premiums written on commercial lines increased 11.6% in 2010, compared to a decrease
of 2.5% in 2009. Commercial lines new business policies in force increased 7.8% in 2010, compared
to 3.7% in 2009, while the year-over-year average premium per policy on commercial lines new
business increased 3.5% in 2010, compared to a decrease of 6.0% in 2009.
Renewal premiums for commercial lines decreased 0.2% in 2010, and 3.8% in 2009. The improvement
seen in commercial lines renewal premiums was driven by smaller decreases in average premium per
policy and steady policy retention trends. The year-over-year average premium per policy on
commercial lines renewal business decreased 3.3% in 2010, compared to 6.1% in 2009, due primarily
to the workers compensation and commercial auto lines of business
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in both years. The workers
compensation and commercial auto year-over-year average premium per
policy on renewal business decreased 9.2% and 2.9%,
respectively, in 2010, compared to decreases of 14.4% and 4.2%, respectively, in 2009. Contributing
to the lower average premium per policy in 2010 were shifts in the mix of our book of business
and lower exposures driven by reductions in payroll levels for the workers compensation line of
business, and shifts in the mix of our book of business and fewer
insured vehicles for the commercial auto line of business, but to a lesser
extent than in 2009 and 2008. The year-over-year policy retention ratio for commercial lines was 85.3% at
December 31, 2010, 84.9% at December 31, 2009, and 85.3% at
December 31, 2008.
Future trends—premium revenue — We plan to continue our efforts to grow Property and Casualty
Group premiums and improve our competitive position in the marketplace. Expanding the size of our
agency force will contribute to future growth as existing and new agents build their book of
business with the Property and Casualty Group. In 2010, we appointed 125 new agencies and had a
total of 2,084 agencies with 9,489 licensed representatives as of December 31, 2010.
The changes in premium levels attributable to growth in policies in force of the Property and
Casualty Group directly affect the profitability of the Property and Casualty Group and have a
direct bearing on Indemnity’s management fee. Our continued focus on underwriting discipline and
the maturing of our pricing segmentation model has contributed to our growth in new policies in
force and steady retention ratios. The continued growth of the policy base of the Property and
Casualty Group is dependent upon the Property and Casualty Group’s ability to retain existing and
attract new policyholders. A lack of new policy growth or the inability to retain existing
customers could have an adverse effect on the Property and Casualty Group’s premium level growth,
and Indemnity’s management fee.
The changes in premium levels attributable to rate changes of the Property and Casualty Group also
directly affect the profitability of the Property and Casualty Group and have a direct bearing on
Indemnity’s management fee. Pricing actions contemplated or taken by the Property and Casualty
Group are subject to various regulatory requirements of the states in which these insurers operate.
The pricing actions already implemented, or to be implemented, have an effect on the market
competitiveness of the Property and Casualty Group’s insurance products. Such pricing actions, and
those of competitors, could affect the ability of our agents to retain and attract new business. We
expect our pricing actions to result in a net increase in direct written premium in 2011, however,
exposure reductions and changes in our mix of business as a result of economic conditions could
impact the average premium written by the Property and Casualty Group, as customers may continue to
reduce coverages.
Current year losses and loss expenses
The current accident year loss and loss expense ratio, excluding catastrophe losses, was 70.6% in
2010, compared to 68.4% in 2009, and 67.6% in 2008.
The personal lines loss and loss expense ratio related to the current accident year, excluding
catastrophe losses, was 70.4% in 2010, compared to 69.1% in 2009, and 66.7% in 2008. Excluding
catastrophe losses, the current accident year loss and loss expense ratio for personal auto
decreased to 73.4% in 2010 from 74.3% in 2009, while the homeowners loss and loss expense ratio
increased to 64.5% from 60.0% for the same periods, respectively. The homeowners line of business
experienced an increase in frequency in 2010 compared to 2009.
The commercial lines loss and loss expense ratio related to the current accident year, excluding
catastrophe losses, was 71.3% in 2010, compared to 66.9% in 2009, and 70.1% in 2008. Excluding
catastrophe losses, the current accident year loss and loss expense ratios for 2010 and 2009,
respectively, were 82.9% and 79.0% for the workers compensation line of business, 71.0% and 63.6%
for the commercial multi-peril line of business, and 68.7% and 65.0% for the commercial auto line
of business. The commercial multi-peril line of business experienced an increase in frequency in
2010 compared to 2009.
Catastrophe losses
Catastrophic events, destructive weather patterns, or changes in climate conditions are an inherent
risk of the property and casualty insurance business and can have a material impact on our property
and casualty insurance underwriting results. The Property and Casualty Group conducts business
primarily in the Mid-Atlantic, Mid-western and Southeastern portions of the United States. A
substantial portion of the business is personal and commercial automobile, homeowners and workers
compensation insurance in Ohio, Maryland, Virginia and, particularly, Pennsylvania. Common
catastrophe events include severe winter storms, hurricanes, earthquakes, tornadoes, wind and hail
storms. In addressing these risks, we employ what we believe are reasonable underwriting standards
and monitor our exposure by geographic region.
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The Property and Casualty Group’s definition of catastrophes includes those weather-related or
other loss events that we consider significant to our geographic footprint which, individually or
in the aggregate, may not reach the level of a national catastrophe as defined by the Property
Claim Service (PCS). The Property and Casualty Group maintains property catastrophe reinsurance
coverage from nonaffiliated reinsurers to mitigate future potential catastrophe loss exposures and
no longer participates in the voluntary assumed reinsurance business, which lowers the variability
of the Property and Casualty Group’s underwriting results. The property catastrophe reinsurance
coverage in 2010 provided coverage of up to 95% of a loss of $500 million in excess of the Property
and Casualty Group’s loss retention of $400 million per occurrence. This agreement was renewed
effective January 1, 2011, that provides coverage of 90% of a loss up to $500 million in excess of
the Property and Casualty Group’s loss retention of $350 million per occurrence. In addition, a
second property catastrophe reinsurance treaty was entered into with nonaffiliated reinsurers
providing coverage of up to 90% of a loss of $25 million in excess of the first property
catastrophe reinsurance treaty’s coverage of $850 million. The treaties exclude losses from acts of
terrorism.
While the Property and Casualty Group is exposed to terrorism losses in commercial lines, including
workers compensation, these lines are afforded a limited backstop above insurer deductibles for
foreign acts of terrorism under the federal Terrorism Risk Insurance Program Reauthorization and
Extension Act of 2007 that continues through December 31, 2014. The Property and Casualty Group has
no personal lines terrorism coverage in place. Although current models suggest the most likely
occurrences would not have a material impact on the Property and Casualty Group, there is a chance
that if future terrorism attacks occur, the Property and Casualty Group could incur large losses.
Catastrophe losses, as defined by the Property and Casualty Group, totaled $288 million in 2010,
$129 million in 2009, and $127 million in 2008, and amounted to 7.3 points, 3.4 points, and 3.4
points of the respective loss ratios. Catastrophe losses in 2010 were impacted by ice, snow, wind,
flooding, hail and tornadoes primarily in the states of Pennsylvania, Maryland and Ohio. In 2009,
catastrophe losses were impacted by flooding, hail, tornado and wind storms primarily in
Pennsylvania, Ohio and Indiana, where 2008 catastrophe losses resulted primarily from flooding,
tornado and wind storms related to Hurricane Ike, primarily in Ohio and Pennsylvania.
Development
of prior year loss reserves
The following table provides a breakout of our prior year loss reserve development by type of
business:
The following table provides a breakout of our prior year loss reserve development by type of
business:
| Erie Insurance Group | ||||||||||||
| Years ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Direct business including
salvage and subrogation |
$ | (188 | ) | $ | (30 | ) | $ | (124 | ) | |||
Assumed reinsurance business |
(51 | ) | (38 | ) | (65 | ) | ||||||
Ceded reinsurance business |
(5 | ) | (25 | ) | 3 | |||||||
Total prior year loss development |
$ | (244 | ) | $ | (93 | ) | $ | (186 | ) | |||
| Negative amounts represent a redundancy (decrease in reserves), while positive amounts represent a deficiency (increase in reserves). |
Direct business including salvage and subrogation — The following table presents the overall
prior year loss development of direct reserves, including the effects of salvage and subrogation
recoveries, for the personal and commercial lines operations by accident year.
| Years ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
2009 |
$ | (60 | ) | $ | — | $ | — | |||||
2008 |
(47 | ) | 4 | — | ||||||||
2007 |
(39 | ) | (11 | ) | (59 | ) | ||||||
2006 |
(17 | ) | (18 | ) | (33 | ) | ||||||
2005 |
(17 | ) | (4 | ) | (1 | ) | ||||||
2004 |
0 | 10 | (9 | ) | ||||||||
2003 |
(9 | ) | (60 | ) | 14 | |||||||
2002 |
15 | 16 | (1 | ) | ||||||||
2001 |
0 | (2 | ) | (2 | ) | |||||||
2000 and prior |
(14 | ) | 35 | (33 | ) | |||||||
Total |
$ | (188 | ) | $ | (30 | ) | $ | (124 | ) | |||
| Negative amounts represent a redundancy (decrease in reserves), while positive amounts represent a deficiency (increase in reserves). |
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The 2010 favorable development totaled $188 million, improved the combined ratio by 4.8 points
and represented 5.2% of the net loss reserves at December 31, 2009. The most significant factors
contributing to the 2010 favorable development were:
| • | Favorable development of $64 million related to the commercial multi-peril line of business and resulted primarily from improvements in severity trends on both property and liability lines, which impacted various recent accident years. | ||
| • | Favorable development of $60 million related to the personal auto line of business and primarily resulted from better than expected severity trends on automobile bodily injury and uninsured/underinsured motorist bodily injury, which impacted the more recent accident years. An additional $8 million of favorable development stems from the settlement of three pre-1986 automobile massive injury claims. | ||
| • | Favorable development of $45 million related to the workers compensation line of business and resulted primarily from improvements in severity trends and the settlement of four workers compensation massive injury claims, which impacted the more recent accident years. | ||
| • | Adverse development of $39 million was experienced in 2010 as a result of reserve strengthening on commercial liability claims that impacted the 2002 accident year. Of this amount, $9 million related to the commercial multi-peril line of business and $30 million related to other commercial lines. |
The 2009 favorable development totaled $30 million, improved the combined ratio by 0.8 points and
represented 0.8% of the net loss reserves at December 31, 2008. The most significant factors
contributing to the 2009 favorable development were:
| • | Favorable development of $138 million related to the workers compensation line of business. This favorable development was a function of 1) the settlement of several massive injury workers compensation claims of $56 million, 2) changes to mortality assumptions of $14 million and 3) a change in the payout patterns used in the calculation to discount workers compensation reserves of $45 million. The settlement of the massive injury workers compensation claims impacted several accident years. The changes in assumptions and the discount calculation impacted all accident years. | ||
| • | Adverse development of $77 million related to the personal auto line of business primarily in the pre-1986 automobile massive injury claims. The mortality assumptions used for these claims were changed to a 100% weighting of the disabled pensioner mortality table and gender specific mortality tables were used, resulting in an increase to reserves of $44 million. The remaining adverse development resulted primarily from personal auto bodily injury claims as greater than expected frequency and severity trends were experienced related to accident years 2007 and 2008. | ||
| • | Adverse development of $67 million related to the commercial multi-peril lines of business impacting various accident years. The majority of the adverse development stems from liability claims on accident years 2007 and 2008 as greater than expected severity trends were experienced. Adverse development on accident years prior to 2007 resulted mainly from the outcome of certain court decisions. |
The 2008 favorable development totaled $124 million, improved the combined ratio by 3.3 points and
represented 3.4% of the net loss reserves at December 31, 2007. The most significant factors
contributing to 2008 favorable development were:
| • | Favorable development of $78 million related to the personal auto line of business and $18 million related to the commercial auto line of business primarily impacting the 2007, 2006 and 2000 and prior accident years. We experienced improvements in frequency trends and slight improvements in severity trends on automobile bodily injury and uninsured/underinsured motorist bodily injury. We believe this improvement was impacted by the employment of specialty claims units in Pennsylvania to improve claims handling and control severity. We also made revisions to anticipated attendant care costs on automobile massive injury claims related to accident years prior to 1986. Pennsylvania’s auto no-fault law provided for unlimited medical benefits prior to 1986. | ||
| • | Favorable development of $24 million related to the commercial multi-peril line of business and $17 million related to the homeowners line of business primarily impacting the 2007 accident year. This favorable development was the result of lower than expected frequency trends as improvements in claims handling procedures, changes in growth rates, and shifts in the mix of business caused changes in loss development patterns over the more recent accident years. |
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Additional information on direct loss reserve development is provided in Item 1. “Business,
Reserves for losses and loss expenses.” The variability in reserve development over the ten year
period illustrates the uncertainty of the loss reserving process. Conditions and trends that have
affected reserve development in the past will not necessarily recur in the future. It is not
appropriate to extrapolate future favorable or unfavorable reserve development based upon amounts
experienced in prior years.
Assumed reinsurance — The Property and Casualty Group’s favorable development of prior accident
year loss reserves on its assumed reinsurance business totaled $51 million in 2010, compared to $38
million in 2009, and $65 million in 2008. The favorable development in 2010 was due to less than
anticipated growth in involuntary reinsurance. In 2009 and 2008 the favorable development was due
to less than anticipated growth in involuntary reinsurance and, to a lesser extent, reductions in
reserve levels related to World Trade Center losses.
Ceded reinsurance — Favorable development of ceded reinsurance reserves totaled $5 million in
2010, compared to favorable development of $25 million in 2009, and adverse development of $3
million in 2008. Ceded reinsurance reserves are primarily related to the pre-1986 automobile
massive injury claims. The favorable development in 2010 was primarily the result of a $9 million
increase related to the business catastrophe liability line, offset by a $4 million reduction in
ceded recoveries related to the pre-1986 automobile massive injury reserves. As mentioned in the
2009 discussion of direct business above, the pre-1986 automobile massive injury reserves increased
in 2009 due to assumption changes and frequency trends. These reserve increases drove the
corresponding increase in the 2009 receivable from the ceded reinsurer.
Policy acquisition and other underwriting expenses
Our policy acquisition and other underwriting expense ratio decreased 1.4 points in 2010, compared
to an increase of 2.3 points in 2009. The management fee rate was 25% in 2010, 2009 and 2008. The
year ended December 31, 2009 included a charge of $62 million related to the write-off of assumed
involuntary reinsurance premium related to the North Carolina Beach and Coastal Plans deemed
uncollectible as a result of state legislation, which contributed 1.6 points to the 2009 policy
acquisition and other underwriting expense ratio.
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Life insurance operations
EFL is a Pennsylvania-domiciled life insurance company which underwrites and sells individual and
group life insurance policies and fixed annuities and operates in 10 states and the District of
Columbia.
| Erie Family Life Insurance Company | |||||||||||||||||||||
| Years ended December 31, | |||||||||||||||||||||
| % | % | ||||||||||||||||||||
| (in millions) | 2010 | Change | 2009 | Change | 2008 | ||||||||||||||||
Individual life premiums |
$ | 61 | 1.5 | % | $ | 60 | (2.8 | )% | $ | 62 | |||||||||||
Group life and other premiums |
3 | (3.2 | ) | 3 | (5.8 | ) | 3 | ||||||||||||||
Other revenue |
1 | (3.0 | ) | 1 | (0.6 | ) | 1 | ||||||||||||||
Total net policy revenue |
65 | 1.3 | 64 | (2.8 | ) | 66 | |||||||||||||||
Net investment income |
94 | 1.6 | 93 | 6.2 | 87 | ||||||||||||||||
Net realized gains (losses) on investments |
14 | NM | 3 | NM | (10 | ) | |||||||||||||||
Impairment losses recognized in earnings |
(2 | ) | 91.6 | (23 | ) | 72.5 | (83 | ) | |||||||||||||
Equity in earnings (losses) of limited partnerships |
1 | NM | (10 | ) | NM | 0 | |||||||||||||||
Total revenues |
172 | 35.0 | 127 | NM | 60 | ||||||||||||||||
Benefits and other changes in policy reserves |
90 | 1.4 | 89 | (4.8 | ) | 94 | |||||||||||||||
Amortization of deferred policy acquisition costs |
17 | 33.3 | 13 | NM | 3 | ||||||||||||||||
Other operating expenses |
15 | (2.4 | ) | 15 | (11.1 | ) | 17 | ||||||||||||||
Total benefits and expenses |
122 | 4.3 | 117 | 2.7 | 114 | ||||||||||||||||
Income (loss) before income taxes |
50 | NM | 10 | NM | (54 | ) | |||||||||||||||
Income (loss) before taxes — Indemnity (1) |
$ | 11 | NM | $ | 2 | NM | $ | (12 | ) | ||||||||||||
Income (loss) before taxes — Exchange (1) |
$ | 39 | NM | $ | 8 | NM | $ | (42 | ) | ||||||||||||
| NM = not meaningful | ||
| (1) | Indemnity has a 21.6% ownership interest in EFL and the Exchange has a 78.4% ownership interest in EFL. As a result of the pending sale of Indemnity’s 21.6% ownership interest in EFL to the Exchange which is scheduled to close by March 31, 201l, all earnings of EFL will accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after March 31, 2011. (See Item 8. “Financial Statements and Supplementary Data — Note 1, Nature of Operations, of Notes to Consolidated Financial Statements” contained within this report and the previous “Recent Events” section.) |
Premiums
Gross
policy revenues increased 4.1% to $106 million in 2010, compared to $102 million in 2009, and $100
million in 2008. EFL reinsures a large portion of its traditional products in order to reduce
claims volatility. Our reinsurers assume 75% of the risk on new term business. Ceded reinsurance
premiums were $42 million in 2010, $39 million in 2009, and $35 million in 2008.
Premiums received on annuity and universal life products totaled $113 million, $181 million, and
$170 million in 2010, 2009 and 2008, respectively. Of this amount, annuity and universal life
premiums recorded as deposits and therefore not reflected in revenue on the Consolidated Statements
of Operations were $97 million, $164 million, and $153 million in 2010, 2009 and 2008,
respectively.
Investments
Due to continued improvements in market conditions in 2010, EFL experienced low levels of
impairments and an increase in net realized gains on investments compared to 2009. Equity in
earnings of limited partnerships also reflected the improvement in market conditions. In 2009,
impairments decreased significantly compared to 2008 due to improving market conditions, while
equity in losses of limited partnerships reflects the deterioration in market conditions in the
fourth quarter of 2008, as limited partnership activity is reported on a one quarter lag. See
additional discussion of investments in the “Investment Operations” segment that follows.
Benefits and expenses
Total benefits and expenses were primarily impacted in 2010 by an increase in the amortization of
deferred policy acquisition costs due to a significant reduction in impairments and experiencing a
greater level of realized gains as a result of the continued improvements in market conditions in
2010, compared to 2009. The amortization of deferred policy acquisition costs in 2008 was impacted
by the more significant impairment losses recorded in 2008.
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Investment operations
Prior to and through December 31, 2010, the investment results from EIC, ENY and EPC accrued to the
benefit of the Indemnity shareholder interest. Due to the sale of Indemnity’s property and casualty
subsidiaries to the Exchange on December 31, 2010, the investment results for these companies will
accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after
December 31, 2010. (See Item 8. “Financial Statements and Supplementary Data — Note 1, Nature of
Operations, of Notes to Consolidated Financial Statements” contained within this report and the
previous “Recent Events” section.)
| Erie Insurance Group | ||||||||||||||||||||
| Years ended December 31, | ||||||||||||||||||||
| % | % | |||||||||||||||||||
| (in millions) | 2010 | Change | 2009 | Change | 2008 | |||||||||||||||
Indemnity |
||||||||||||||||||||
Net investment income |
$ | 37 | (11.9) | % | $ | 42 | (4.6 | )% | $ | 44 | ||||||||||
Net realized
(losses) gains on investments |
(1 | ) | NM | 10 | NM | (43 | ) | |||||||||||||
Net impairment losses recognized in earnings |
(1 | ) | NM | (12 | ) | NM | (70 | ) | ||||||||||||
Equity in
earnings (losses) of limited partnerships |
21 | NM | (76 | ) | NM | 6 | ||||||||||||||
Net revenue (loss) from investment operations —
Indemnity(1) |
$ | 56 | NM | $ | (36 | ) | NM | $ | (63 | ) | ||||||||||
Exchange |
||||||||||||||||||||
Net investment income |
$ | 407 | 1.2 | % | $ | 402 | (0.7 | )% | $ | 405 | ||||||||||
Net realized gains (losses) on investments |
314 | NM | 402 | NM | (983 | ) | ||||||||||||||
Net impairment losses recognized in earnings |
(5 | ) | NM | (114 | ) | NM | (501 | ) | ||||||||||||
Equity in earnings (losses) of limited partnerships |
107 | NM | (293 | ) | NM | (64 | ) | |||||||||||||
Goodwill impairment |
(22 | ) | NM | — | NM | — | ||||||||||||||
Net revenue (loss) from investment operations —
Exchange(1) (2) |
$ | 801 | NM | $ | 397 | NM | $ | (1,143 | ) | |||||||||||
| NM = not meaningful | ||
| (1) | As a result of the sale of Indemnity’s property and casualty insurance subsidiaries, EIC, ENY and EPC, to the Exchange on December 31, 2010, future investment revenue and losses generated from these entities will no longer accrue to the benefit of the Indemnity shareholder interest. Investment revenue from these entities totaled $29 million in 2010 and $21 million in 2009, compared to losses of $9 million in 2008. These components of investment income will accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, in 2011 and thereafter. (See Item 8. “Financial Statements and Supplementary Data — Note 1, Nature of Operations, of Notes to Consolidated Financial Statements” contained within this report and the previous “Recent Events” section.) | |
| (2) | The Exchange’s results include net revenues of EFL operations of $107 million and $63 million in 2010 and 2009, respectively and net losses of $6 million in 2008. |
Net investment income includes primarily interest and dividends on our fixed maturity and
equity security portfolio.
Indemnity net investment income decreased 11.9% in 2010 primarily due to lower yields on fixed
income and preferred stock holdings. The Exchange net investment income for 2010 increased slightly
as lower investment yields were offset by larger invested balances compared to 2009.
Realized
gains on investments decreased in both Indemnity and the Exchange compared to 2009 in large part due to
realized losses generated on the sale of limited partnership holdings. In 2010 the Indemnity
recognized losses of $12 million and the Exchange recognized losses of $46 million on sales of
limited partnerships. These partnerships were sold to recapture tax paid on previous period
capital gains that were due to expire. The Exchange recorded unrealized gains on its common stock
portfolio of $254 million and $464 million in 2010 and
2009, respectively compared to unrealized losses of $416
million in 2008. These securities are
classified as trading securities and therefore any change in the fair value is recorded through
income. The Exchange recorded realized gains on the sale of common stock of $70 million in 2010 and
losses of $60 million and $499 million in 2009 and 2008, respectively.
Impairment losses recognized in earnings decreased $11 and $109 million for the year ended December
31, 2010 compared to the year ended December 31, 2009 in Indemnity and Exchange, respectively. The
decrease in impairments totaled $58 million and $387 for the year ended December 31, 2009 compared
to the year ended December 31, 2008 for the Indemnity and
Exchange, respectively. These decreases
are due to improved market conditions.
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Indemnity’s equity in earnings of limited partnerships totaled $21 million in 2010 compared to
losses of $76 million in 2009 and gains of $6 million in 2008. The Exchange’s equity in earnings of
limited partnerships totaled $107 million in 2010, compared to losses of $293 million and $64
million in 2009 and 2008 respectively. These 2010 gains were primarily a result of improved market
conditions across all limited partnership sectors.
Goodwill is reviewed for impairment at least annually or more frequently if events occur or
circumstances change that would indicate that a triggering event has occurred. The goodwill
impairment test follows a two step process. In the first step, the fair value of a reporting unit
is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair
value, the second step of the impairment test is performed for purposes of measuring the
impairment.
Prior to December 31, 2010, the Exchange had $22 million of goodwill attributed to its purchase of
EFL’s stock in 2006. On November 4, 2010, the Exchange entered into an agreement to purchase the
Indemnity’s remaining 21.6% ownership interest in EFL, which is expected to be completed by March
31, 2011. A valuation of EFL was performed by an external independent third party in
preparation for the sale. The valuation resulted in a purchase price determination of 95% of book
value. In response to the valuation and sale price, management concluded that the possibility for
impairment existed and step two of the goodwill impairment test was completed to determine the
impairment amount. Step two of the impairment test compared the value of new business for EFL to
the current goodwill balance. The analysis determined that the value of EFL’s new business did not
support the $22 million goodwill and an impairment entry was made to write down the entire goodwill
balance at December 31, 2010. The charge of $22 million decreased the net income attributable to
the Exchange.
The breakdown of our net realized (losses) gains on investments is as follows:
| Erie Insurance Group | ||||||||||||
| Years ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Indemnity |
||||||||||||
Securities sold: |
||||||||||||
Fixed maturities |
$ | 5 | $ | 1 | $ | (2 | ) | |||||
Preferred stock equity securities |
1 | 1 | (5 | ) | ||||||||
Common stock equity securities |
5 | (3 | ) | (16 | ) | |||||||
Common stock valuation adjustments |
0 | 11 | (22 | ) | ||||||||
Limited partnerships |
(12 | ) | 0 | 2 | ||||||||
Total net realized (losses) gains — Indemnity (1) |
$ | (1 | ) | $ | 10 | $ | (43 | ) | ||||
Exchange |
||||||||||||
Securities sold: |
||||||||||||
Fixed maturities |
$ | 25 | $ | (15 | ) | $ | (40 | ) | ||||
Preferred stock equity securities |
11 | 13 | (35 | ) | ||||||||
Common stock equity securities |
70 | (60 | ) | (499 | ) | |||||||
Common stock valuation adjustments |
254 | 464 | (416 | ) | ||||||||
Limited partnerships |
(46 | ) | 0 | 7 | ||||||||
Total net realized gains (losses) — Exchange (1) (2) |
$ | 314 | $ | 402 | $ | (983 | ) | |||||
| (1) | See Item 8. “Financial Statements and Supplementary Data — Note 7, Investments, of Notes to Consolidated Financial Statements” contained within this report for additional disclosures regarding net realized gains (losses) on investments. | |
| (2) | The Exchange net realized gains (losses) include net realized gains from EFL operations of $14 million in 2010 and $3 million in 2009 and net realized losses of $10 million in 2008. |
Impairment charges of $1 million on fixed maturities were incurred by the Indemnity in 2010.
Exchange impairment charges of $5 million included $4 million on fixed maturities and $1 million on
preferred stock in 2010. Impairment charges during 2010 decreased significantly compared to 2009 as
the financial markets continue to stabilize.
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The components of equity in earnings (losses) of limited partnerships are as follows:
| Erie Insurance Group | ||||||||||||||||||||
| Years ended December 31, | ||||||||||||||||||||
| (in millions) | 2010 | % Change | 2009 | % Change | 2008 | |||||||||||||||
Indemnity |
||||||||||||||||||||
Private equity |
$ | 14 | NM | $ | (12 | ) | NM | $ | 5 | |||||||||||
Real estate |
0 | NM | (58 | ) | NM | (4 | ) | |||||||||||||
Mezzanine debt |
7 | NM | (6 | ) | NM | 5 | ||||||||||||||
Total equity in earnings
(losses) of limited
partnerships —
Indemnity |
$ | 21 | NM | $ | (76 | ) | NM | $ | 6 | |||||||||||
Exchange |
||||||||||||||||||||
Private equity |
$ | 77 | NM | $ | (34 | ) | 19.0 | % | $ | (42 | ) | |||||||||
Real estate |
3 | NM | (257 | ) | NM | (47 | ) | |||||||||||||
Mezzanine debt |
27 | NM | (2 | ) | NM | 25 | ||||||||||||||
Total equity in earnings
(losses) of limited
partnerships —
Exchange(1) |
$ | 107 | NM | $ | (293 | ) | NM | $ | (64 | ) | ||||||||||
| NM = not meaningful | ||
| (1) | Total equity in earnings (losses) of limited partnerships include earnings from EFL operations of $0.5 million in 2010 and losses of $10 million in 2009 and $0.1 million in 2008. |
Limited partnership earnings pertain to investments in U.S. and foreign private equity, real
estate and mezzanine debt partnerships. Valuation adjustments are recorded to reflect the fair
value of limited partnerships. These adjustments are recorded as a component of equity in earnings
of limited partnerships in the Consolidated Statements of Operations.
We experienced an increase in earnings as a result of asset value increases recognized in 2010 due
to current favorable market conditions. Limited partnership earnings tend to be cyclical based on
market conditions, the age of the partnership and the nature of the investments. Generally, limited
partnership earnings are recorded by us on a quarter lag from financial statements we receive from
our general partners. As a consequence, earnings from limited partnerships reported at December
31, 2010 do not reflect investment valuation changes that may have resulted from the financial
markets and the economy in general in the fourth quarter of 2010.
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FINANCIAL CONDITION
Investments
Prior to and through December 31, 2010, the investment results from EIC, ENY and EPC accrued to the
benefit of the Indemnity shareholder interest. Due to the sale of Indemnity’s property and casualty
subsidiaries to the Exchange on December 31, 2010, the investment results for these companies will
accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after
December 31, 2010. (See Item 8. “Financial Statements and Supplementary Data — Note 1, Nature of
Operations, of Notes to Consolidated Financial Statements” contained within this report and the
previous “Recent Events” section.)
Our 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. Our investment strategy also provides for
liquidity to meet our short- and long-term commitments.
Distribution of investments
| Erie Insurance Group | ||||||||||||||||
| Carrying value at December 31, | ||||||||||||||||
| % to | % to | |||||||||||||||
| (in millions) | 2010 | total | 2009 | total | ||||||||||||
Indemnity |
||||||||||||||||
Fixed maturities |
$ | 264 | 50 | % | $ | 664 | 68 | % | ||||||||
Equity securities: |
||||||||||||||||
Preferred stock |
24 | 4 | 38 | 4 | ||||||||||||
Common stock |
28 | 5 | 42 | 4 | ||||||||||||
Limited partnerships: |
||||||||||||||||
Real estate |
83 | 16 | 99 | 10 | ||||||||||||
Private equity |
86 | 16 | 85 | 9 | ||||||||||||
Mezzanine debt |
47 | 9 | 51 | 5 | ||||||||||||
Real estate mortgage loans |
1 | 0 | 1 | 0 | ||||||||||||
Total investments — Indemnity |
$ | 533 | 100 | % | $ | 980 | 100 | % | ||||||||
Exchange |
||||||||||||||||
Fixed maturities |
$ | 7,279 | 65 | % | $ | 6,517 | 66 | % | ||||||||
Equity securities: |
||||||||||||||||
Preferred stock |
570 | 5 | 472 | 5 | ||||||||||||
Common stock |
2,306 | 20 | 1,835 | 18 | ||||||||||||
Limited partnerships: |
||||||||||||||||
Real estate |
339 | 3 | 397 | 4 | ||||||||||||
Private equity |
555 | 5 | 503 | 5 | ||||||||||||
Mezzanine debt |
214 | 2 | 216 | 2 | ||||||||||||
Policy loans |
15 | 0 | 15 | 0 | ||||||||||||
Real estate mortgage loans |
4 | 0 | 5 | 0 | ||||||||||||
Total investments — Exchange |
$ | 11,282 | 100 | % | $ | 9,960 | 100 | % | ||||||||
Total investments — Erie Insurance
Group |
$ | 11,815 | $ | 10,940 | ||||||||||||
We continually review 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, including
downgrades by the major rating agencies, are considered in evaluating impairment in value. In
addition to specific factors, other factors considered in our review of investment valuation are
the length of time the fair value is below cost and the amount the fair value is below cost.
We individually analyze all positions with emphasis on those that have, in management’s opinion,
declined significantly below cost. In compliance with impairment guidance for debt securities,
we perform further analysis to determine if a credit-related impairment has occurred. Some of the
factors considered in determining whether a debt security is credit impaired include potential for
the default of interest and/or principal, level of subordination, collateral of the issue,
compliance with financial covenants, credit ratings and industry conditions. We have the intent to
sell all credit-impaired debt securities, therefore the entire amount of the impairment charges are
included in earnings and no
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credit impairments are recorded in other comprehensive income.
Prior to the second quarter of 2009, there was no
differentiation between impairments related to credit loss and those
related to other factors and declines in fair value of debt
securities were deemed other-than-temporary if we did not have the
intent and ability to hold a security to recovery. For available-for-sale equity securities, a
charge is recorded in the Consolidated Statement of Operations for positions that have experienced
other-than-temporary impairments due to credit quality or other
factors. (See “Investment
Operations” section herein.)
If our policy for determining the recognition of impaired positions was different, our Consolidated
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.
Fixed maturities
Under our investment strategy, we maintain a fixed maturities portfolio that is of high quality and
well diversified within each market sector. This investment strategy also achieves a balanced
maturity schedule. The fixed maturities portfolio is managed with the goal of achieving reasonable
returns while limiting exposure to risk. The municipal bond portfolio accounts for $197 million, or
75%, of the total fixed maturity portfolio for Indemnity and $1.5 billion or 20% of the fixed
maturity portfolio for the Exchange at December 31, 2010. The overall credit rating of the
municipal portfolio without consideration of the underlying insurance is AA-. Because of the
rating downgrades of municipal bond insurers, the underlying insurance does not improve the overall
credit rating.
Fixed maturities classified as available-for-sale are carried at fair value with unrealized gains
and losses, net of deferred taxes, included in shareholders’ equity. At December 31, 2010,
Indemnity’s net unrealized gains on fixed maturities, net of deferred taxes, amounted to $5 million
compared to net unrealized gains of $14 million at December 31, 2009. At December 31, 2010, the
Exchange had net unrealized gains on fixed maturities of $270 million compared to net unrealized
gains of $156 million at December 31, 2009.
The following is a breakdown of the fair value of our fixed maturities portfolio by sector and
rating as of December 31, 2010 for Indemnity and Exchange, respectively:
| Erie Insurance Group | ||||||||||||||||||||||||
| (in millions) | Non-investment | Fair | ||||||||||||||||||||||
| Industry Sector | AAA | AA | A | BBB | grade | value | ||||||||||||||||||
Indemnity |
||||||||||||||||||||||||
Structured securities(1) |
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 4 | $ | 4 | ||||||||||||
Financial |
0 | 2 | 10 | 12 | 2 | 26 | ||||||||||||||||||
Government — municipal |
63 | 95 | 37 | 2 | 0 | 197 | ||||||||||||||||||
Industrial |
0 | 0 | 2 | 0 | 0 | 2 | ||||||||||||||||||
U.S. treasury |
25 | 0 | 0 | 0 | 0 | 25 | ||||||||||||||||||
Utilities |
0 | 0 | 0 | 10 | 0 | 10 | ||||||||||||||||||
Total —
Indemnity |
$ | 88 | $ | 97 | $ | 49 | $ | 24 | $ | 6 | $ | 264 | ||||||||||||
Exchange |
||||||||||||||||||||||||
Structured securities(1) |
$ | 327 | $ | 42 | $ | 9 | $ | 23 | $ | 36 | $ | 437 | ||||||||||||
Basic materials |
0 | 0 | 37 | 157 | 5 | 199 | ||||||||||||||||||
Communications |
0 | 0 | 150 | 328 | 21 | 499 | ||||||||||||||||||
Consumer |
0 | 27 | 195 | 415 | 67 | 704 | ||||||||||||||||||
Diversified |
0 | 0 | 22 | 0 | 0 | 22 | ||||||||||||||||||
Energy |
17 | 11 | 107 | 331 | 31 | 497 | ||||||||||||||||||
Financial |
27 | 317 | 1,154 | 637 | 144 | 2,279 | ||||||||||||||||||
Funds |
0 | 0 | 0 | 5 | 0 | 5 | ||||||||||||||||||
Government — municipal |
422 | 795 | 228 | 24 | 2 | 1,471 | ||||||||||||||||||
Industrial |
0 | 5 | 93 | 220 | 26 | 344 | ||||||||||||||||||
U.S. treasury |
12 | 0 | 0 | 0 | 0 | 12 | ||||||||||||||||||
Government sponsored entity |
73 | 0 | 2 | 0 | 0 | 75 | ||||||||||||||||||
Government — other countries |
0 | 0 | 15 | 6 | 0 | 21 | ||||||||||||||||||
Technology |
0 | 0 | 41 | 72 | 0 | 113 | ||||||||||||||||||
Utilities |
0 | 3 | 88 | 435 | 75 | 601 | ||||||||||||||||||
Total —
Exchange |
$ | 878 | $ | 1,200 | $ | 2,141 | $ | 2,653 | $ | 407 | $ | 7,279 | ||||||||||||
| (1) | Structured securities include asset-backed securities, collateral, lease and debt obligations, commercial mortgage-backed securities and residential mortgage-backed securities. |
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Equity securities
Our equity securities consist of common stock and nonredeemable preferred stock. Investment
characteristics of common stock and nonredeemable preferred stock differ substantially from one
another. Our nonredeemable preferred stock portfolio provides a source of current income that is
competitive with investment-grade bonds.
The following tables present an analysis of the fair value of our preferred and common stock
securities by sector for Indemnity and Exchange, respectively.
| Erie Insurance Group | ||||||||||||||||
| Fair Value at December 31, | ||||||||||||||||
| (in millions) | 2010 | 2009 | ||||||||||||||
| Industry sector | Preferred stock | Common stock | Preferred stock | Common stock | ||||||||||||
Indemnity |
||||||||||||||||
Basic materials |
$ | 0 | $ | 0 | $ | 0 | $ | 2 | ||||||||
Communications |
1 | 2 | 1 | 2 | ||||||||||||
Consumer |
0 | 14 | 0 | 15 | ||||||||||||
Diversified |
0 | 0 | 0 | 1 | ||||||||||||
Energy |
0 | 2 | 0 | 3 | ||||||||||||
Financial |
11 | 6 | 27 | 9 | ||||||||||||
Funds |
0 | 0 | 0 | 3 | ||||||||||||
Industrial |
2 | 3 | 2 | 6 | ||||||||||||
Technology |
3 | 1 | 3 | 1 | ||||||||||||
Utilities |
7 | 0 | 5 | 0 | ||||||||||||
Total —
Indemnity |
$ | 24 | $ | 28 | $ | 38 | $ | 42 | ||||||||
Exchange |
||||||||||||||||
Basic materials |
$ | 0 | $ | 124 | $ | 0 | $ | 95 | ||||||||
Communications |
9 | 174 | 8 | 170 | ||||||||||||
Consumer |
5 | 564 | 0 | 457 | ||||||||||||
Diversified |
0 | 12 | 0 | 8 | ||||||||||||
Energy |
0 | 185 | 0 | 157 | ||||||||||||
Financial |
428 | 292 | 348 | 231 | ||||||||||||
Funds |
0 | 309 | 0 | 298 | ||||||||||||
Government |
0 | 0 | 3 | 0 | ||||||||||||
Industrial |
5 | 324 | 5 | 207 | ||||||||||||
Technology |
14 | 295 | 12 | 190 | ||||||||||||
Utilities |
109 | 27 | 96 | 22 | ||||||||||||
Total —
Exchange |
$ | 570 | $ | 2,306 | $ | 472 | $ | 1,835 | ||||||||
Our preferred stock equity securities are classified as available-for-sale and are carried at fair
value on the Consolidated Statements of Financial Position with all changes in unrealized gains and
losses reflected in other comprehensive income. At December 31, 2010, the unrealized gain on
preferred stock classified as available-for-sale securities, net of deferred taxes amounted to $3
million for Indemnity and $44 million for the Exchange, compared to an unrealized gain net of
deferred taxes of $2 million for Indemnity and $31 million for the Exchange at December 31, 2009.
The common stock portfolio is classified as a trading portfolio and measured at fair value with all
changes in unrealized gains and losses reflected in our Consolidated Statements of Operations.
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Limited partnership investments
During 2010, investments in limited partnerships decreased $19 million for Indemnity and $8 million
for the Exchange due to the sale of 9 partnerships in the Indemnity and 11 partnerships in the
Exchange as part of a tax planning strategy to recapture tax paid on previous period capital gains
that were due to expire. The components of limited partnership investments are as follows:
| Erie Insurance Group | ||||||||
| At December 31, | ||||||||
| (in millions) | 2010 | 2009 | ||||||
Indemnity |
||||||||
Private equity |
$ | 86 | $ | 85 | ||||
Real estate |
83 | 99 | ||||||
Mezzanine debt |
47 | 51 | ||||||
Total limited partnerships — Indemnity |
$ | 216 | $ | 235 | ||||
Exchange |
||||||||
Private equity |
$ | 555 | $ | 503 | ||||
Real estate |
339 | 397 | ||||||
Mezzanine debt |
214 | 216 | ||||||
Total limited partnerships — Exchange |
$ | 1,108 | $ | 1,116 | ||||
Liabilities
Property and casualty loss reserves
Loss reserves are established to account for the estimated ultimate costs of loss and loss expenses
for claims that have been reported but not yet settled and claims that have been incurred but not
reported. While we exercise professional diligence to establish reserves at the end of each period
that are fully reflective of the ultimate value of all claims incurred, these reserves are, by
their nature, only estimates and cannot be established with absolute certainty.
The factors which may potentially cause the greatest variation between current reserve estimates
and the actual future paid amounts are: unforeseen changes in statutory or case law altering the
amounts to be paid on existing claim obligations, new medical procedures and/or drugs with costs
significantly different from those seen in the past, and claims patterns on current business that
differ significantly from historical claims patterns.
Loss and loss expense reserves are presented on our Consolidated Statements of Financial Position
on a gross basis. The following tables represent the direct and assumed loss and loss expense
reserves by major line of business for Indemnity and Exchange, respectively. The reinsurance
recoverable amount represents the related ceded amounts which results in the net liability
attributable to Indemnity and Exchange, respectively.
As of December 31, 2010, all property and casualty insurance underwriting related risk resides with
the Exchange. (See Item 8. “Financial Statements and Supplementary Data — Note 1, Nature of
Operations, of Notes to Consolidated Financial Statements” contained within this report and the
previous “Recent Events” section.)
| Erie Insurance Group | ||||||||
| At December 31, | ||||||||
| (in millions) | 2010 | 2009 | ||||||
Indemnity |
||||||||
Gross reserve liability: |
||||||||
Personal auto |
$ | 0 | $ | 221 | ||||
Automobile massive injury |
0 | 147 | ||||||
Homeowners |
0 | 22 | ||||||
Workers compensation |
0 | 169 | ||||||
Workers compensation massive injury |
0 | 12 | ||||||
Commercial auto |
0 | 56 | ||||||
Commercial multi-peril |
0 | 68 | ||||||
All other lines of business |
0 | 57 | ||||||
Gross reserves |
0 | 752 | ||||||
Reinsurance recoverable |
0 | 1 | ||||||
Net reserve liability — Indemnity |
$ | 0 | $ | 751 | ||||
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| Erie Insurance Group | ||||||||
| At December 31, | ||||||||
| (in millions) | 2010 | 2009 | ||||||
Exchange |
||||||||
Gross reserve liability: |
||||||||
Personal auto |
$ | 1,105 | $ | 887 | ||||
Automobile massive injury |
440 | 316 | ||||||
Homeowners |
240 | 178 | ||||||
Workers compensation |
481 | 342 | ||||||
Workers compensation massive injury |
154 | 132 | ||||||
Commercial auto |
286 | 226 | ||||||
Commercial multi-peril |
566 | 475 | ||||||
All other lines of business |
312 | 290 | ||||||
Gross reserves |
3,584 | 2,846 | ||||||
Reinsurance recoverable |
188 | 199 | ||||||
Net reserve liability — Exchange |
$ | 3,396 | $ | 2,647 | ||||
The reserves that have the greatest potential for variation are the massive injury claim reserves.
The Property and Casualty Group is currently reserving for about 300 claimants requiring lifetime
medical care, of which about 120 involve massive injuries. The reserve carried by the Property and
Casualty Group for the massive injury claimants, which includes automobile and workers compensation
massive injury reserves, was $428 million at December 31, 2010, which is net of $166 million of
anticipated reinsurance recoverables, compared to $428 million at December 31, 2009, which was net
of $179 million of anticipated reinsurance recoverables. The decrease in the pre-1986 automobile
massive injury gross reserves at December 31, 2010, compared to December 31, 2009, was primarily
due to settling three claims and the payment of $8 million in losses in 2010, while the increase in
the workers compensation massive injury reserves at December 31, 2010, compared to December 31,
2009, was primarily due to adding four new claims with higher reserve amounts than four prior
claims that were settled in 2010.
The estimation of ultimate liabilities for these claims is subject to significant judgment due to
variations in medical cost inflation, claimant health and mortality over time. Actual experience,
different than that assumed, could have a significant impact on the reserve estimates. A 100-basis
point change in the medical cost inflation assumption would result in a change in the combined
automobile and workers compensation massive injury reserves of $102 million. The life expectancy
(mortality rate) assumption underlying the estimate reflects experience to date. It is anticipated
that these massive injury claims will require payments over the next 30 to 40 years. Massive injury
claims payments totaled $21 million, $16 million, and $15 million in 2010, 2009 and 2008,
respectively.
Life insurance reserves
EFL’s primary commitment is its obligation to pay future policy benefits under the terms of its
life insurance and annuity contracts. To meet these future obligations, EFL establishes life
insurance reserves based upon the type of policy, the age, gender and risk class of the insured and
the number of years the policy has been in force. EFL also establishes annuity and universal life
reserves based on the amount of policyholder deposits (less applicable insurance and expense
charges) plus interest earned on those deposits. Life insurance and annuity reserves are supported
primarily by EFL’s long-term, fixed income investments as the underlying policy reserves are
generally also of a long-term nature.
Shareholders’ equity
Pension plan
The funded status of our postretirement benefit plans is recognized in the statement of financial
position, with a corresponding adjustment to accumulated other comprehensive income, net of tax.
At December 31, 2010, shareholders’ equity decreased by $4 million, net of tax, of which $3 million
represents amortization of the prior service cost and net actuarial loss and $7 million represents
the current period actuarial loss. The 2010 actuarial loss was primarily due to the change in the
discount rate assumption used to measure the future benefit obligations to 5.69% in 2010 from 6.11%
in 2009. Although Indemnity is the sponsor of these postretirement plans and records the funded
status of these plans, generally the Exchange and EFL reimburse
Indemnity for approximately 57% of
the annual benefit expense of these plans. At December 31, 2009, shareholders’ equity increased by
$24 million, net of tax, of which $2 million represents amortization of the prior service cost and
net actuarial loss and $22 million represents the current period actuarial gain. The 2009 actuarial
gain was primarily due to greater than expected actual investment returns. Also contributing to the
gain were assumption changes made based on actual experience, such as the decrease in the assumed
rate of compensation increase.
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IMPACT OF INFLATION
Property and casualty insurance premiums are established before losses occur and before loss
expenses are incurred, and therefore, before the extent to which inflation may impact such costs is
known. Consequently, in establishing premium rates, we attempt to anticipate the potential impact
of inflation, including medical cost inflation, construction and auto repair cost inflation and
tort issues. Medical costs are a broad element of inflation that impacts personal and commercial
auto, general liability, workers compensation and commercial multi-peril lines of insurance written
by the Property and Casualty Group.
LIQUIDITY AND CAPITAL RESOURCES
Sources and uses of cash
Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet the short-
and long-term cash requirements of its business operations and growth needs. Our liquidity
requirements have been met primarily by funds generated from premiums collected and income from
investments. The insurance operations provide liquidity in that premiums are collected in advance
of paying losses under the policies purchased with those premiums. Cash outflows for the property
and casualty business are generally variable since settlement dates for liabilities for unpaid
losses and the potential for large losses, whether individual or in the aggregate, cannot be
predicted with absolute certainty. Accordingly, after satisfying our operating cash requirements,
excess cash flows are used to build our investment portfolio in order to increase future investment
income, which then may be used as a source of liquidity if cash from our insurance operations would
not be sufficient to meet our obligations. Cash provided from these sources is used primarily to
fund losses and policyholder benefits, fund the costs of operations including commissions, salaries
and wages, pension plans, share repurchases, dividends to shareholders and the purchase and
development of information technology. We expect that our operating cash needs will be met by funds
generated from operations.
Continuing
volatility in the financial markets presents challenges to us as we do occasionally
access our investment portfolio as a source of cash. Some of our fixed income investments, despite
being publicly traded, are illiquid due to current credit market conditions. Further volatility in
these markets could impair our ability to sell certain of our fixed income securities or cause such
securities to sell at deep discounts. Additionally, our limited
partnership investments are significantly less liquid. We believe we have sufficient liquidity to meet our needs from other sources even if
market volatility persists throughout 2011.
Cash flow activities — Erie Insurance Group
The following table is a summary of our condensed consolidated cash flows for the years ended
December 31:
| Erie Insurance Group | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Net cash provided by operating activities |
$ | 721 | $ | 889 | $ | 720 | ||||||
Net cash used in investing activities |
(405 | ) | (890 | ) | (425 | ) | ||||||
Net cash used in financing activities |
(120 | ) | (42 | ) | (141 | ) | ||||||
Net increase (decrease) in cash |
$ | 196 | $ | (43 | ) | $ | 154 | |||||
Cash flows
provided by operating activities totaled $721 million in 2010,
$889 million in 2009, and
$720 million in 2008. The decrease in 2010 was primarily driven by the payment of federal income
taxes of $69 million, compared to the recovery of federal income taxes of $121 million in 2009. The
increase in cash flows from operating activities in 2009, compared to 2008, was primarily driven by
the recovery of federal income taxes of $121 million compared to the payment of federal income
taxes of $273 million in 2008, somewhat offset by lower distributions from limited partnerships.
At December 31, 2010, we recorded a net deferred tax liability of $283 million, which included
capital loss carry-forwards of $16 million. There was no valuation allowance at December 31, 2010.
We have the ability to carry-back capital losses of $281 million as a result of gains recognized in
prior years. In 2010 capital losses totaled $256 million, which will be carried back to recapture
taxes paid in prior years. In the fourth quarter of 2010, we received a tax refund of $91 million
relating to the carry-back of 2009 capital losses.
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Cash flows
used in investing activities totaled $405 million in 2010, compared to $890 million in
2009 and $425 million in 2008. In 2010, we generated more proceeds from limited partnerships and
certain fixed maturities while
using less cash for the purchase of fixed maturities. At December 31, 2010, we had contractual
commitments to invest up to $452 million related to our limited partnership investments to be
funded as required by the partnerships’ agreements. At December 31, 2010, the total remaining
commitment to fund limited partnerships that invest in private equity securities was $198 million,
real estate activities was $160 million and mezzanine debt securities was $94 million. In 2009,
cash flows used in investing activities increased compared to 2008, as we generated more proceeds
from sales of common stocks in 2008 as part of a tax planning strategy.
For a
discussion of cash flows used in financing activities, see the
following “Cash flow activities — Indemnity,” as the primary drivers of financing cash flows related to Indemnity.
Cash flow activities — Indemnity
The following table summarizes Indemnity cash flows for the years ended December 31:
The following table summarizes Indemnity cash flows for the years ended December 31:
| Indemnity | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Net cash provided by operating activities |
$ | 193 | $ | 180 | $ | 151 | ||||||
Net cash provided by (used in) investing
activities |
196 | (69 | ) | 73 | ||||||||
Net cash used in financing activities |
(155 | ) | (96 | ) | (194 | ) | ||||||
Net increase in cash |
$ | 234 | $ | 15 | $ | 30 | ||||||
See Item 8. “Financial Statements and Supplementary Data — Note 24, Indemnity Supplemental
Information, of Notes to Consolidated Financial Statements” contained within this report for more
detail on Indemnity cash flows.
Indemnity’s cash flows provided by operating activities increased to $193 million in 2010, compared
to $180 million in 2009, and $151 million in 2008. Increased cash from operating activities in
2010, compared to 2009, was primarily due to an increase in management fee revenues received offset
by a decrease in reimbursements collected from affiliates. Management fee revenues were higher
reflecting the increase in the premiums written or assumed by the Exchange. Cash paid for agent
commissions and bonuses decreased to $532 million in 2010, compared to $535 million in 2009, as a
result of a decrease in cash paid for agent bonuses. We made a contribution to our pension plan of
$13 million in the second quarter of 2010, compared to $14 million made in the third quarter of
2009. Indemnity’s policy is generally to contribute an amount equal to the greater of the IRS
minimum required contribution or the target normal cost for the year plus interest to the date the
contribution is made. Indemnity is generally reimbursed about 57% of the net periodic benefit cost
of the pension plan from its affiliates. In 2009, increased cash from operating activities compared
to 2008 was primarily due to increased management fee revenues received offset by lower
distributions from limited partnerships.
At December 31, 2010, Indemnity recorded a net deferred tax liability of $26 million, which
included capital loss carry-forwards of $7 million. There was no valuation allowance at December
31, 2010. Indemnity has the ability to carry back capital losses of $39 million as a result of
gains recognized in prior years. In 2010 capital losses totaled $39 million, which will be carried
back to recapture taxes paid in prior years. In the fourth quarter of 2010, we received a tax
refund of $11 million relating to the carry-back of 2009 capital losses. Indemnity’s capital gain
and loss strategies take into consideration its ability to offset gains and losses in future
periods, carry-back of capital loss opportunities to the three preceding years, and capital
loss carry-forward opportunities to apply against future capital gains over the next five years.
Cash flows provided by Indemnity investing activities totaled $196 million in 2010, compared to
cash used of $69 million in 2009, and cash provided of $73 million in 2008. In the fourth quarter
of 2010, Indemnity received cash consideration from the Exchange of $281 million, net of $12
million cash disposed, as a result of the sale of Indemnity’s wholly owned property and
casualty insurance subsidiaries, EIC, ENY and EPC, to the Exchange on December 31, 2010, based upon
an estimated purchase price. The GAAP book value of these entities on December 31, 2010 was
slightly lower than the estimated purchase price. Also, Indemnity retained a deferred tax asset of
$6 million that was not transferable to the Exchange. This deferred tax asset is related to capital
losses that will be available to offset future capital gains of Indemnity. Indemnity recorded a
liability to the Exchange for the difference between the GAAP book value and the deferred tax asset
of $8 million. Net after-tax cash proceeds to Indemnity from the sale of Indemnity’s
wholly owned property and casualty insurance subsidiaries are estimated to be $285 million.
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Final settlement of the transaction will occur by March 31, 2011. (See Item 8. “Financial Statements and
Supplementary Data — Note 1, Nature of Operations, of Notes to Consolidated Financial Statements”
contained within this report and the previous “Recent Events” section.)
Indemnity’s 2010 investing activities also included increased cash used to purchase certain fixed
maturities, offset somewhat by increased cash from the sale of other fixed maturities and limited
partnerships compared to 2009. Impacting Indemnity future investing activities are limited
partnership commitments, which totaled $50 million at December 31, 2010, and will be funded as
required by the partnerships’ agreements. At December 31, 2010, Indemnity’s total remaining
commitment to fund limited partnerships that invest in private equity securities was $21 million,
real estate activities was $17 million and mezzanine debt securities was $12 million. Indemnity’s
investing activities in 2009 were impacted by lower investment balances due to the significant
share repurchase activity in 2008. Also, in the second quarter of 2009, Indemnity made a capital
contribution to EFL in the amount of $12 million to support EFL’s life insurance and annuity
business and strengthen its surplus.
Cash flows used in Indemnity financing activities totaled $155 million in 2010, $96 million in
2009, and $194 million in 2008. The increase in cash used in financing activities in 2010 was
primarily driven by increases in the cash outlay for share repurchases and dividends paid to
shareholders. Indemnity repurchased 1.1 million shares of its Class A nonvoting common stock in
conjunction with its stock repurchase plan at a total cost of $57 million during 2010. In 2009,
shares repurchased under this plan totaled 0.1 million at a total cost of $3 million, compared to
2.1 million shares at a total cost of $102 million in 2008. In December 2010, our Board of
Directors approved a continuation of the current stock repurchase program for a total of $150
million. Indemnity has approximately $146 million of repurchase authority remaining under this plan
at December 31, 2010.
In 2010, we also repurchased 44,206 shares of our outstanding Class A nonvoting common stock
outside of our publicly announced share repurchase program at a total cost of $2 million. Of this
amount, 39,406 shares were purchased in June for $1.8 million, or $45.92 per share, in conjunction
with our long-term incentive plan and 4,800 shares were purchased in July for $0.2 million, or
$48.75 per share, for the vesting of stock-based awards for executive management. These shares were
delivered to plan participants and executive management, respectively, in July 2010.
Dividends paid to shareholders totaled $98 million, $93 million, and $92 million in 2010, 2009 and
2008, respectively. Indemnity increased both its Class A and Class B shareholder quarterly
dividends for 2010. There are no regulatory restrictions on the payment of dividends to Indemnity’s
shareholders. Dividends have been approved at a 7.3% increase for 2011.
Indemnity’s
financing activities during 2008 included short-term borrowings of $75
million on its bank line of credit for certain intercompany cash settlement needs. Payments were
made on the line of credit of $45 million and $30 million in the third and fourth quarters of 2008,
respectively, reducing the outstanding balance to zero at December 31, 2008. This line of credit
was extended to December 31, 2011. Also during the first quarter of 2008, Indemnity borrowed $30
million from EIC, its then 100% owned property and casualty insurance subsidiary, to fund
certain operating and financing activities. Indemnity repaid the entire balance during the second
quarter of 2008. This intercompany borrowing was eliminated upon consolidation and therefore had no
impact on the Consolidated Statements of Financial Position or Operations.
Capital Outlook
We regularly prepare forecasts evaluating the current and future cash requirements of Indemnity and
the Exchange for both normal and extreme risk events. Should an extreme risk event result in a cash
requirement exceeding normal cash flows, we have the ability to meet our future funding
requirements through various alternatives available to us.
Indemnity — Outside of Indemnity’s normal operating and investing cash activities, future funding
requirements could be met through 1) Indemnity’s cash and cash equivalents, which total
approximately $310 million at December 31, 2010, 2) a $100 million bank line of credit held by
Indemnity, from which there were no borrowings as of December 31, 2010, and 3) liquidation of
assets held in Indemnity’s investment portfolio, including common stock, preferred stock and
investment grade bonds which totaled approximately $310 million at December 31, 2010. Volatility in
the financial markets could impair Indemnity’s ability to sell certain of its fixed income
securities or cause such securities to sell at deep discounts. Additionally, Indemnity has the
ability to curtail or modify discretionary cash outlays such as those related to shareholder
dividends and share repurchase activities.
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Indemnity had no borrowings under its line of credit at December 31, 2010. At December 31, 2010,
bonds with fair values of $128 million were pledged as collateral. These securities have no
restrictions. The bank requires
compliance with certain covenants, which include minimum net worth and leverage ratios. Indemnity
was in compliance with its bank covenants at December 31, 2010.
Prior to and through December 31, 2010, the underwriting results retained by EIC and ENY and the
investment results of EIC, ENY and EPC accrued to the benefit of the Indemnity shareholder
interest. Due to the sale of Indemnity’s property and casualty subsidiaries to the Exchange on
December 31, 2010, all property and casualty underwriting results and all investment results for
these companies accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling
interest, after December 31, 2010. The net cash provided from
these entities by operating activities
totaled $30 million in 2010, $33 million in 2009, and $29 million in 2008. These operating cash
flows will accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest,
in 2011 and thereafter. (See Item 8. “Financial Statements and Supplementary Data — Note 1, Nature
of Operations, of Notes to Consolidated Financial Statements” contained within this report and the
previous “Recent Events” section.)
Exchange —Outside of the Exchange’s normal operating and investing cash activities, future funding
requirements could be met through 1) the Exchange’s cash and cash equivalents, which total
approximately $120 million at December 31, 2010, 2) a $200 million bank line of credit held by the
Exchange, from which there were no borrowings at December 31, 2010, and 3) liquidation of assets
held in the Exchange’s investment portfolio, including common stock, preferred stock and investment
grade bonds which totaled approximately $9.7 billion at December 31, 2010. Volatility in the
financial markets could impair the Exchange’s ability to sell certain of its fixed income
securities or cause such securities to sell at deep discounts.
The Exchange had no borrowings under its line of credit at December 31, 2010. At December 31, 2010,
bonds with fair values of $252 million were pledged as collateral. These securities have no
restrictions. The bank requires compliance with certain covenants, which include statutory surplus
and risk based capital ratios. The Exchange was in compliance with its bank covenants at December
31, 2010.
Indemnity has no rights to the assets, capital, or line of credit of the Exchange and, conversely,
the Exchange has no rights to the assets, capital, or line of credit of Indemnity. We believe we
have the funding sources available to us to support cash flow requirements in 2011.
Contractual obligations
Cash outflows for the Property and Casualty Group are variable because the fluctuations in
settlement dates for claims payments vary and cannot be predicted with absolute certainty. While
volatility in claims payments could be significant for the Property and Casualty Group, the cash
flow requirements for claims have not historically had a significant effect on our liquidity. Based
on a historical 15-year average, about 30% of losses and loss expenses for the Property and
Casualty Group included in the reserve are paid out in the subsequent 12-month period and
approximately 68% are paid out within a five-year period. Losses that are paid out after that
five-year period reflect long-tail lines such as workers compensation and auto bodily injury.
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We have certain obligations and commitments to make future payments under various contracts. As of
December 31, 2010, the aggregate obligations were as follows:
| Erie Insurance Group | ||||||||||||||||||||
| Payments due by period | ||||||||||||||||||||
| 2016 and | ||||||||||||||||||||
| (in millions) | Total | 2011 | 2012-2013 | 2014-2015 | thereafter | |||||||||||||||
Fixed obligations: |
||||||||||||||||||||
Indemnity: |
||||||||||||||||||||
Limited partnership commitments (1) |
$ | 50 | $ | 47 | $ | 3 | $ | 0 | $ | 0 | ||||||||||
Pension contribution (2) |
15 | 15 | 0 | 0 | 0 | |||||||||||||||
Other commitments (3) |
38 | 22 | 14 | 2 | 0 | |||||||||||||||
Operating leases—vehicles |
16 | 5 | 8 | 3 | 0 | |||||||||||||||
Operating leases—real estate (4) |
6 | 2 | 3 | 1 | 0 | |||||||||||||||
Operating leases—computers |
3 | 2 | 1 | 0 | 0 | |||||||||||||||
Total fixed contractual obligations — Indemnity |
128 | 93 | 29 | 6 | 0 | |||||||||||||||
Noncontrolling interest: |
||||||||||||||||||||
Limited partnership commitments (1) |
402 | 273 | 77 | 52 | 0 | |||||||||||||||
Total fixed contractual obligations — Exchange |
402 | 273 | 77 | 52 | 0 | |||||||||||||||
Total fixed contractual obligations — Erie Insurance Group |
530 | 366 | 106 | 58 | 0 | |||||||||||||||
Gross property and casualty loss and loss expense reserves
— Exchange (5) |
3,584 | 1,075 | 968 | 394 | 1,147 | |||||||||||||||
Life gross long-term liabilities (6) |
4,025 | 188 | 379 | 406 | 3,052 | |||||||||||||||
Gross contractual obligations — Erie Insurance Group (7) |
$ | 8,139 | $ | 1,629 | $ | 1,453 | $ | 858 | $ | 4,199 | ||||||||||
Gross contractual obligations net of estimated reinsurance recoverables are as follows:
| Payments due by period | ||||||||||||||||||||
| 2016 and | ||||||||||||||||||||
| (in millions) | Total | 2011 | 2012-2013 | 2014-2015 | thereafter | |||||||||||||||
Gross
contractual obligations — Erie Insurance Group (7) |
$ | 8,139 | $ | 1,629 | $ | 1,453 | $ | 858 | $ | 4,199 | ||||||||||
Estimated reinsurance recoverables — property and casualty |
188 | 56 | 51 | 21 | 60 | |||||||||||||||
Estimated reinsurance recoverables — life (8) |
447 | 21 | 40 | 41 | 345 | |||||||||||||||
Net contractual obligations — Erie Insurance Group |
$ | 7,504 | $ | 1,552 | $ | 1,362 | $ | 796 | $ | 3,794 | ||||||||||
| (1) | Limited partnership commitments will be funded as required for capital contributions at any time prior to the agreement expiration date. The commitment amounts are presented using the expiration date as the factor by which to age when the amounts are due. At December 31, 2010, Indemnity’s total commitment to fund limited partnerships that invest in private equity securities is $21 million, real estate activities $17 million and mezzanine debt of $12 million. At December 31, 2010, the Exchange’s total commitment to fund limited partnerships that invest in private equity securities is $177 million, real estate activities $143 million and mezzanine debt of $82 million. | |
| (2) | The pension contribution for 2011 was estimated in accordance with the Pension Protection Act of 2006. Contributions anticipated in future years are expected to be an amount at least equal to the IRS minimum required contribution in accordance with this Act. | |
| (3) | Other commitments include various agreements for service, including such things as computer software, telephones and maintenance. | |
| (4) | Operating leases—real estate are for 16 of our 24 field offices that are operated in the states in which the Property and Casualty Group does business and three operating leases are for warehousing facilities leased from unaffiliated parties. | |
| (5) | Due to the sale of Indemnity’s property and casualty insurance subsidiaries to the Exchange on December 31, 2010, all property and casualty loss and loss expense reserves accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after December 31, 2010. (See Item 8. “Financial Statements and Supplementary Data — Note 1, Nature of Operations, of Notes to Consolidated Financial Statements” contained within this report and the previous “Recent Events” section.) | |
| (6) | Contractual obligations on gross long-term liabilities represent estimated benefit payments from insurance policies and annuity contracts including claims currently payable. Actual obligations in any single year will vary based on actual mortality, morbidity, lapse and withdrawal experience. The sum of these obligations exceeds the liability on the Consolidated Statement of Financial Position of $1.6 billion due to expected future premiums and investment income that, along with invested assets backing the liabilities, will be used to fund these obligations. | |
| (7) | Gross contractual obligations do not include the obligations for our unfunded benefit plans, including the Supplemental Employee Retirement Plan (SERP) for our executive and senior management and the directors’ retirement plan. The recorded accumulated benefit obligations for these plans at December 31, 2010, are $5 million. We expect to have sufficient cash flows from operations to meet the future benefit payments as they become due. | |
| (8) | Reinsurance recoverables on life business includes estimated amounts from reinsurers on long-term liabilities that are subject to the credit worthiness of the reinsurer. |
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Off-balance sheet arrangements
Off-balance sheet arrangements include those with unconsolidated entities that may have a material
current or future effect on our financial condition or results of operations, including material
variable interests in unconsolidated entities that conduct certain activities. We have no material
off-balance sheet obligations or guarantees, other than limited partnership investment commitments.
Financial ratings
Our property and casualty insurers are rated by rating agencies that provide insurance consumers
with meaningful information on the financial strength of insurance entities. 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 insurance companies are currently rated by AM Best Company as follows:
| Erie Insurance Exchange | A+ | |||
| Erie Insurance Company | A+ | |||
| Erie Insurance Property and Casualty Company | A+ | |||
| Erie Insurance Company of New York | A+ | |||
| Flagship City Insurance Company | A+ | |||
| Erie Family Life Insurance Company | A |
The outlook for all ratings is stable. According to AM Best, a “Superior” rating (A+), the second
highest of their financial strength rating categories, is assigned to those companies that, in AM
Best’s opinion, have achieved superior overall performance when compared to the standards
established by AM Best and have a superior ability to meet their obligations to policyholders over
the long term. Only 9% of insurance groups are rated A+ or higher, and we are included in that
group. By virtue of its affiliation with the Property and Casualty Group, EFL is typically rated
one level lower, or an “Excellent” rating (A), than the property and casualty companies by AM Best
Company. The insurers of the Property and Casualty Group are also rated by Standard & Poor’s, but
this rating is based solely on public information. Standard & Poor’s rates these insurers AApi,
“very strong,” and EFL Api, “strong.” Financial strength ratings continue to be an important factor
in evaluating the competitive position of insurance companies.
Regulatory risk-based capital
The standard set by the National Association of Insurance Commissioners (NAIC) 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, 2010, all property and
casualty insurance companies and the life insurance company had RBC levels substantially in excess
of levels that would require regulatory action.
Regulatory restrictions on surplus
The members of the Property and Casualty Group and EFL are subject to various regulatory
restrictions that limit the maximum amount of dividends available to be paid without prior approval
of insurance regulatory authorities. The Exchange’s property and casualty insurance subsidiaries
have a maximum of $29 million available for such dividends in
2011 without prior approval of the
Pennsylvania Insurance Commissioner for Pennsylvania-domiciled subsidiaries and the New York
Superintendent of Insurance for the New York domiciled subsidiary. No dividends were paid from the
property and casualty subsidiaries in 2010, 2009 or 2008.
The
maximum dividend EFL could pay its shareholders in 2011 without prior
approval is $38 million. No
dividends were paid to Indemnity or the Exchange in 2010, 2009 or 2008.
The Exchange is operated for the benefit of its subscribers (policyholders) and any distributions
it might declare would only be payable to them. The Exchange did not make any distributions to its
subscribers (policyholders) in 2010, 2009 or 2008.
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Enterprise risk management
As a large property and casualty insurer with supplemental life insurance operations, we are
exposed to many risks. The role of our Enterprise Risk Management (ERM) function is to ensure that
all significant risks are clearly identified, understood, proactively managed and consistently
monitored to achieve strategic objectives for all stakeholders of the Erie Insurance Group. As an
insurance company, we are in the business of taking risks from our policyholders, managing these
risks in a cost-effective manner and ensuring long term stability for policyholders as well as
shareholders. Since risk is integral to our business, we strive to manage the multitude of risks we
face in an optimal manner.
Our risks can be broadly classified into insurance, investment and operational risks. These risks
are a function of our business segments as well as the market and regulatory environment within
which we operate. Since certain risks can occur simultaneously or be correlated with other risks,
an event or a series of events has the potential to impact multiple areas of our business and
materially affect our operations, financial position or liquidity. Therefore our ERM program takes
a holistic view of risk and ensures implementation of risk responses to mitigate potential impacts
across our entire group of companies.
Our ERM process is founded on a governance framework that ensures oversight at
multiple levels of our organization including our Board of Directors
and risk committees made up of senior management. Accountability to
identify, manage and mitigate risk is embedded within all functions and areas of our business. We
have defined risk tolerances to monitor and manage significant risks within acceptable levels. In
addition to identifying, evaluating, prioritizing, monitoring and mitigating significant risks, our
ERM process includes extreme event analyses and scenario testing. Dynamic Financial Analysis (DFA)
and catastrophe modeling enable us to quantify risk within our property and casualty insurance
operations and investment portfolio. Model output is used to quantify the potential variability of
future performance and the sufficiency of capital levels given our defined tolerance for risk. The
models provide insight into capital management, allocation of capital by product lines, catastrophe
exposure management and reinsurance purchasing decisions. Additionally, ERM tools have been
developed and modified to enhance our ability to assess project level risk and to provide senior
management with pertinent risk information, enabling them to make better informed decisions.
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TRANSACTIONS / AGREEMENTS BETWEEN INDEMNITY AND NONCONTROLLING INTEREST (EXCHANGE)
Board oversight
Our Board of Directors (Board) has a broad oversight responsibility over intercompany relationships
within and among the Property and Casualty Group. As a consequence, the Board may be required to
make decisions or take actions that may not be solely in the interest of our shareholders such as:
| • | setting the management fee rate paid by the Exchange to Indemnity; | ||
| • | ratifying any other significant intercompany activity. |
Subscriber’s agreement
Indemnity
serves as attorney-in-fact for the policyholders at the Exchange, a reciprocal insurance exchange. Each
applicant for insurance to a reciprocal insurance exchange signs a subscriber’s agreement that
contains an appointment of an attorney-in-fact. Through the designation of attorney-in-fact,
Indemnity is required to provide sales, underwriting and policy issuance services to the
policyholders of the Exchange, as discussed previously. Pursuant to the subscriber’s agreement, for
these services Indemnity earns a management fee calculated as a percentage of the direct premiums
written by the Exchange and the other members of the Property and Casualty Group, which are assumed
by the Exchange under an intercompany pooling arrangement.
Intercompany agreements
Pooling
Members of the Property and Casualty Group participate in an intercompany reinsurance pooling
agreement. Under the pooling agreement, all insurance business of the Property and Casualty Group
is pooled in the Exchange. The Erie Insurance Company and Erie Insurance Company of New York share
in the underwriting results of the reinsurance pool through retrocession. Since 1995, the Board of
Directors has set the allocation of the pooled underwriting results at 5.0% participation for Erie
Insurance Company, 0.5% participation for Erie Insurance Company of New York and 94.5%
participation for the Exchange.
Prior to and through December 31, 2010, the underwriting results retained by Erie Insurance Company
and Erie Insurance Company of New York accrued to the benefit of the Indemnity shareholder
interest. Due to the sale of Indemnity’s property and casualty subsidiaries to the Exchange on
December 31, 2010, all property and casualty underwriting results for these companies accrue to the benefit of the
subscribers (policyholders) of the Exchange, or noncontrolling interest, after December 31, 2010.
(See Item 8. “Financial Statements and Supplementary Data — Note 1, Nature of Operations, of Notes
to Consolidated Financial Statements” contained within this report and the previous “Recent Events”
section.)
Service agreements
Indemnity makes certain payments on behalf of the Erie Insurance Group’s related entities. These
amounts are reimbursed to Indemnity on a cost basis in accordance
with service agreements between Indemnity and the individual
entities within the Erie Insurance Group. Cash
transfers are settled quarterly.
Leased property
The Exchange leases certain office facilities to Indemnity on a five and six year basis with
options to renew. Rents are determined considering returns on invested capital and building
operating and overhead costs. Rental costs of shared facilities are allocated based on square
footage occupied.
Intercompany cost allocation
The allocation of costs affects the financial condition of the Erie Insurance Group companies.
Management must determine that allocations are consistently made in accordance with intercompany
management service agreements, the attorney-in-fact agreements with the policyholders of the
Exchange and applicable insurance laws and regulations. While allocation of costs under these
various agreements requires management judgment and interpretation, such allocations are performed
using a consistent methodology, which in management’s opinion, adheres to the terms and intentions
of the underlying agreements.
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Intercompany receivables of Indemnity
| Percent of | Percent of | Percent of | ||||||||||||||||||||||
| Indemnity | Indemnity | Indemnity | ||||||||||||||||||||||
| (in millions) | 2010 | total assets | 2009 | total assets | 2008 | total assets | ||||||||||||||||||
Reinsurance recoverable from and ceded
unearned
premiums to the Exchange |
$ | 0 | 0.0 | % | $ | 902 | 33.8 | % | $ | 887 | 34.0 | % | ||||||||||||
Other receivables from the Exchange and
affiliates
(management fees, costs and reimbursements) |
232 | 17.7 | 213 | 8.0 | 218 | 8.3 | ||||||||||||||||||
Note receivable from EFL |
25 | 1.9 | 25 | 0.9 | 25 | 0.9 | ||||||||||||||||||
Total intercompany receivables |
$ | 257 | 19.6 | % | $ | 1,140 | 42.7 | % | $ | 1,130 | 43.2 | % | ||||||||||||
Indemnity has significant receivables from the Exchange that result in a concentration of credit
risk. In 2009 and 2008, these receivables included the liability for losses and unearned premiums
ceded to the Exchange under the intercompany pooling agreement and from management services
performed by Indemnity for the Exchange. Prior to and through December 31, 2010, all
property and casualty insurance underwriting receivables recorded by EIC, ENY and EPC accrued to
the benefit of the Indemnity shareholder interest. Due to the sale of Indemnity’s property and
casualty subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting
receivables accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest,
on and after December 31, 2010. At December 31, 2010 and thereafter, Indemnity’s receivables from
the Exchange primarily include the management fee due for services performed by Indemnity for the
Exchange under the subscriber’s agreement. (See Item 8. “Financial Statements and Supplementary
Data — Note 1, Nature of Operations, of Notes to Consolidated Financial Statements” contained
within this report and the previous “Recent Events” section.)
Credit risks related to the receivables from the Exchange are evaluated periodically by management.
Prior to and through December 31, 2010, reinsurance contracts did not relieve Indemnity from its
primary obligations to policyholders if the Exchange were unable to satisfy its obligation, and
Indemnity collected its reinsurance recoverable amounts generally within 30 days of actual
settlement of losses.
In addition to Indemnity’s receivable from the Exchange for management fees and costs Indemnity
pays on behalf of the Exchange, Indemnity also pays certain costs for, and is reimbursed by, EFL.
Since its inception, Indemnity has collected these amounts due from the Exchange and EFL in a
timely manner (normally quarterly). There is interest charged on the outstanding balance due from
the Exchange until its quarterly settlement that is based on an independent mutual fund rate.
Surplus notes
The Exchange holds a surplus note for $20 million from EFL that is payable on demand on or after
December 31, 2025 with prior approval of the Pennsylvania Insurance Commissioner. EFL paid interest to the Exchange on the surplus note of $1 million in 2010 and
2009. No other interest is charged or received on this intercompany balance due to the timely
settlement terms and nature of the note.
Indemnity
holds a surplus note for $25 million from EFL that is payable on demand on or after
December 31, 2018 with prior approval of the Pennsylvania Insurance Commissioner. EFL paid interest to Indemnity on the surplus note of $2 million in 2010
and 2009. No other interest is charged or received on this intercompany balance due to the timely
settlement terms and nature of the note.
Capital contribution
In June 2009, the Exchange made a $43 million capital contribution to EFL and Indemnity made a $12
million capital contribution to EFL to strengthen its surplus. This $55 million in capital
contributions increased EFL’s investments and total shareholders’ equity.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Prior to and through December 31, 2010, the investment results from EIC, ENY and EPC accrued to the
benefit of the Indemnity shareholder interest. Due to the sale of Indemnity’s property and casualty
subsidiaries to the Exchange on December 31, 2010, the investment results for these companies will
accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after
December 31, 2010. (See Item 8. “Financial Statements and Supplementary Data — Note 1, Nature of
Operations, of Notes to Consolidated Financial Statements” contained within this report and the
previous “Recent Events” section.)
Market risk
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as
interest rates, as well as other relevant market rate or price changes. The volatility and
liquidity in the markets in which the underlying assets are traded directly influence market risk.
The following is a discussion of our primary risk exposures, including interest rate risk,
investment credit risk, concentration risk, liquidity risk, equity price risk and how those
exposures are currently managed as of December 31, 2010.
Interest rate risk
We invest primarily in fixed maturity investments, which comprised 49.5% of invested assets for
Indemnity and 64.5% of invested assets for the Exchange at December 31, 2010. The value of the
fixed maturity portfolio is subject to interest rate risk. As market interest rates decrease, the
value of the portfolio goes up with the opposite holding true in rising interest rate environments.
We do not hedge our exposure to interest rate risk since we have the capacity and intention to hold
the fixed maturity positions until maturity. A common measure of the interest sensitivity of fixed
maturity assets is modified duration, a calculation that utilizes maturity, coupon rate, yield and
call terms to calculate an average age of the expected cash flows. The longer the duration, the
more sensitive the asset is to market interest rate fluctuations. Duration is analyzed quarterly to
ensure that it remains in the targeted range we established.
A sensitivity analysis is used to measure the potential loss in future earnings, fair values or
cash flows of market-sensitive instruments resulting from one or more selected hypothetical changes
in interest rates and other market rates or prices over a selected period. In our sensitivity
analysis model, a hypothetical change in market rates is selected that is expected to reflect
reasonably possible changes in those rates. The following pro forma information is presented
assuming a 100-basis point increase in interest rates at December 31 of each year and reflects the
estimated effect on the fair value of our fixed maturity investment portfolio. We used the modified
duration of our fixed maturity investment portfolio to model the pro forma effect of a change in
interest rates at December 31, 2010 and 2009.
Fixed maturities interest-rate sensitivity analysis
| At December 31, | ||||||||
| (dollars in millions) | 2010 | 2009 | ||||||
Indemnity |
||||||||
Fair value of fixed income portfolio |
$ | 264 | $ | 664 | ||||
Fair value assuming 100-basis point rise in interest rates |
$ | 255 | $ | 635 | ||||
Modified duration — Indemnity |
3.93 | 4.35 | ||||||
Exchange |
||||||||
Fair value of fixed income portfolio |
$ | 7,279 | $ | 6,517 | ||||
Fair value assuming 100-basis point rise in interest rates |
$ | 6,954 | $ | 6,249 | ||||
Modified duration — Exchange |
4.87 | 4.58 | ||||||
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While the fixed income portfolio is sensitive to interest rates, the future principal cash flows
that will be received are presented as follows by contractual maturity date. Actual cash flows may
differ from those stated as a result of calls, prepayments or defaults.
| December 31, 2010 | ||||||||
| (in millions) | Indemnity | Exchange | ||||||
Fixed maturities: |
||||||||
2011 |
$ | 64 | $ | 309 | ||||
2012 |
22 | 553 | ||||||
2013 |
21 | 719 | ||||||
2014 |
18 | 564 | ||||||
2015 |
25 | 681 | ||||||
Thereafter |
100 | 4,030 | ||||||
Total (1) |
$ | 250 | $ | 6,856 | ||||
Fair value |
$ | 264 | $ | 7,279 | ||||
| (1) | These amounts exclude Indemnity’s $25 million surplus note due from EFL and the Exchange’s $20 million surplus note due from EFL. |
| December 31, 2009 | ||||||||
| (in millions) | Indemnity | Exchange | ||||||
Fixed maturities: |
||||||||
2010 |
$ | 39 | $ | 364 | ||||
2011 |
34 | 388 | ||||||
2012 |
70 | 626 | ||||||
2013 |
81 | 774 | ||||||
2014 |
64 | 596 | ||||||
Thereafter |
357 | 3,641 | ||||||
Total (1) |
$ | 645 | $ | 6,389 | ||||
Fair value |
$ | 664 | $ | 6,517 | ||||
| (1) | These amounts exclude Indemnity’s $25 million surplus note due from EFL and the Exchange’s $20 million surplus note due from EFL. |
Investment credit risk
Our objective is to earn competitive returns by investing in a diversified portfolio of securities.
Our portfolios of fixed maturity securities, nonredeemable preferred stock, mortgage loans and, to
a lesser extent, short-term investments are subject to credit risk. This risk is defined as the
potential loss in fair value resulting from adverse changes in the borrower’s ability to repay the
debt. We manage this risk by performing upfront underwriting analysis and ongoing reviews of credit
quality by position and for the fixed maturity portfolio in total. We do not hedge the credit risk
inherent in our fixed maturity investments.
Generally, the fixed maturities in our portfolio are rated by external rating agencies. If not
externally rated, we rate them internally on a basis consistent with that used by the rating
agencies. We classify all fixed maturities as available-for-sale securities, allowing us to meet
our liquidity needs and provide greater flexibility to appropriately respond to changes in market
conditions. The following table shows our fixed maturity investments by S&P rating as of December
31, 2010:
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| Erie Insurance Group | ||||||||||||
| (in millions) | Amortized cost | Fair value | Percent of total | |||||||||
Indemnity |
||||||||||||
Comparable S&P Rating |
||||||||||||
AAA, AA, A |
$ | 229 | $ | 234 | 88.5 | % | ||||||
BBB |
24 | 24 | 9.2 | |||||||||
Total investment grade |
253 | 258 | 97.7 | |||||||||
BB |
0 | 2 | 0.8 | |||||||||
B |
4 | 4 | 1.5 | |||||||||
CCC, CC, C |
0 | 0 | 0.0 | |||||||||
Total non-investment grade |
4 | 6 | 2.3 | |||||||||
Total — Indemnity |
$ | 257 | $ | 264 | 100.0 | % | ||||||
Exchange |
||||||||||||
Comparable S&P Rating |
||||||||||||
AAA, AA, A |
$ | 4,012 | $ | 4,219 | 58.0 | % | ||||||
BBB |
2,485 | 2,653 | 36.4 | |||||||||
Total investment grade |
6,497 | 6,872 | 94.4 | |||||||||
BB |
284 | 314 | 4.3 | |||||||||
B |
70 | 77 | 1.1 | |||||||||
CCC, CC, C |
12 | 16 | 0.2 | |||||||||
Total non-investment grade |
366 | 407 | 5.6 | |||||||||
Total — Exchange |
$ | 6,863 | $ | 7,279 | 100.0 | % | ||||||
Approximately 1% of Indemnity and 6% of the Exchange fixed income portfolio is invested in
structured products. This includes mortgage-backed securities (MBS), collateralized debt and loan
obligations (CDO and CLO), collateralized mortgage obligations (CMO), asset-backed (ABS) and
credit-linked notes. The overall credit rating of the structured product portfolio is AA.
The municipal bond portfolio accounts for $197 million, or 75% of the total fixed maturity
portfolio for the Indemnity, and $1.5 billion, or 20% of the total fixed maturity portfolio for the
Exchange. The overall credit rating of the municipal portfolio without consideration of the
underlying insurance is AA-.
In our limited partnership investment portfolio we are exposed to credit risk, as well as price
risk. Price risk is defined as the potential loss in estimated fair value resulting from an
adverse change in prices. Our investments are directly affected by the impact of changes in these
risk factors on the underlying investments held by our fund managers, which could vary
significantly from fund to fund. We manage these risks by performing up front due diligence on our
fund managers, ongoing monitoring and through the construction of a diversified portfolio.
Indemnity is also exposed to a concentration of credit risk with the Exchange. See the section,
“Transactions / Agreements between Indemnity and Noncontrolling Interest (Exchange), Intercompany
receivables of Indemnity” for further discussion of this risk.
Concentration Risk
While our portfolio is well diversified within each market sector, there is an inherent risk of
concentration in a particular industry or sector. We continually monitor our level of exposure to
individual issuers as well as or our allocation to each industry and market sector against
internally established policies. See the “Financial Condition” section of, Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” contained within this
report for details of investment holdings by sector.
Liquidity Risk
Periods of volatility in the financial markets can create conditions where fixed maturity
investments, despite being publicly traded, can become illiquid. However, we actively manage the
maturity profile of our fixed maturity portfolio such that scheduled repayments of principal occur
on a regular basis. Additionally, there is no ready market for our investments in limited
partnerships which increases the risk they may not be converted to cash on favorable terms and on a
timely basis.
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Equity price risk
Our portfolio of equity securities, which is carried on the Consolidated Statements of Financial
Position at estimated fair value, has exposure to the risk of potential loss in estimated fair
value resulting from an adverse change in prices (“price risk”). We do not hedge our exposure to
price risk inherent in our equity investments. Our objective is to earn competitive relative
returns by investing in a diverse portfolio of high-quality, liquid securities. Portfolio holdings
are diversified across industries and among exchange-traded small- to large-cap stocks. We measure
risk by comparing the performance of the marketable equity portfolio to benchmark returns such as
the Standard & Poors (S&P) 500 Composite Index. Beta is a measure of a security’s systematic
(non-diversifiable) risk, which is the percentage change in an individual security’s return for a
1% change in the return of the market. The average Beta for our common stock holdings was 0.95 for
Indemnity and 1.02 for the Exchange. Based on a hypothetical 20% reduction in the overall value of
the stock market, the fair value of the common stock portfolio would decrease by approximately $5
million for Indemnity and $470 million for the Exchange.
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Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Erie Indemnity Company
Erie, Pennsylvania
of Erie Indemnity Company
Erie, Pennsylvania
We have audited Erie Indemnity Company’s internal control over financial reporting as of December
31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Erie
Indemnity Company’s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Erie Indemnity Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated statements of financial position of Erie Indemnity Company
as of December 31, 2010 and 2009, and the related consolidated statements of operations,
shareholders’ equity, and cash flows for each of the three years in the period ended December 31,
2010 of Erie Indemnity Company and our report dated February 24, 2011 expressed an unqualified
opinion thereon.
/s/ Ernst & Young, LLP
Cleveland, Ohio
February 24, 2011
February 24, 2011
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Erie Indemnity Company
Erie, Pennsylvania
of Erie Indemnity Company
Erie, Pennsylvania
We have audited the accompanying consolidated statements of financial position
of Erie Indemnity Company as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedules
listed in the Index at 15 (a). These financial statements and
schedules are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements
and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Erie Indemnity Company at December 31, 2010 and 2009, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S.
generally accepted accounting principles. 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.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2010 the Company adopted and retrospectively applied the Financial Accounting Standards Board’s amended accounting guidance
related to the consolidation of variable interest entities.
As discussed in Note 2 to the consolidated financial statements, in 2009 the
Company changed its method of accounting for recognizing other-than-temporary impairment charges for its debt securities in connection with
the adoption of the revised Financial Accounting Standards Board’s other-than-temporary impairment model.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Erie Indemnity Company’s internal control over financial reporting as of December 31, 2010,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 24, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young, LLP
Cleveland, Ohio
February 24, 2011
February 24, 2011
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ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2010, 2009 and 2008
(dollars in millions, except share data)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2010, 2009 and 2008
(dollars in millions, except share data)
| 2010 | 2009 | 2008 | ||||||||||
Revenues |
||||||||||||
Premiums earned |
$ | 3,987 | $ | 3,869 | $ | 3,834 | ||||||
Net investment income |
433 | 433 | 438 | |||||||||
Net realized investment gains (losses) |
313 | 412 | (1,026 | ) | ||||||||
Net impairment losses recognized in earnings |
(6 | ) | (126 | ) | (571 | ) | ||||||
Equity in earnings (losses) of limited partnerships |
128 | (369 | ) | (58 | ) | |||||||
Other income |
35 | 36 | 34 | |||||||||
Total revenues |
4,890 | 4,255 | 2,651 | |||||||||
Benefits and expenses |
||||||||||||
Insurance losses and loss expenses |
2,900 | 2,728 | 2,582 | |||||||||
Policy acquisition and underwriting expenses |
969 | 1,003 | 908 | |||||||||
Goodwill impairment |
22 | — | — | |||||||||
Total benefits and expenses |
3,891 | 3,731 | 3,490 | |||||||||
Income (loss) from operations before income taxes
and noncontrolling interests |
999 | 524 | (839 | ) | ||||||||
Provision (benefit) for income taxes |
339 | 78 | (223 | ) | ||||||||
Net income (loss) |
$ | 660 | $ | 446 | $ | (616 | ) | |||||
Less: Net income (loss) attributable to noncontrolling
interest in consolidated entity — Exchange |
498 | 338 | (685 | ) | ||||||||
Net income attributable to Indemnity |
$ | 162 | $ | 108 | $ | 69 | ||||||
Earnings Per Share |
||||||||||||
Net income attributable to Indemnity per share |
||||||||||||
Class A common stock — basic |
$ | 3.18 | $ | 2.10 | $ | 1.34 | ||||||
Class A common stock — diluted |
$ | 2.85 | $ | 1.89 | $ | 1.19 | ||||||
Class B common stock — basic and diluted |
$ | 462.83 | $ | 312.45 | $ | 204.20 | ||||||
Weighted average shares outstanding attributable to
Indemnity — Basic |
||||||||||||
Class A common stock |
50,705,607 | 51,250,606 | 51,824,649 | |||||||||
Class B common stock |
2,546 | 2,549 | 2,551 | |||||||||
Weighted average shares outstanding attributable to
Indemnity — Diluted |
||||||||||||
Class A common stock |
56,884,894 | 57,428,999 | 58,003,976 | |||||||||
Class B common stock |
2,546 | 2,549 | 2,551 | |||||||||
See accompanying notes to Consolidated Financial Statements.
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ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
At December 31, 2010 and 2009
(dollars in millions, except per share data)
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
At December 31, 2010 and 2009
(dollars in millions, except per share data)
| 2010 | 2009 | |||||||
Assets |
||||||||
Investments-Indemnity |
||||||||
Available-for-sale securities, at fair value: |
||||||||
Fixed maturities (amortized cost of $257 and $642, respectively) (See Note 1) |
$ | 264 | $ | 664 | ||||
Equity securities (cost of $20 and $35, respectively) (See Note 1) |
24 | 38 | ||||||
Trading securities, at fair value (cost of $21 and $36, respectively) |
28 | 42 | ||||||
Limited partnerships (cost of $202 and $281, respectively) |
216 | 235 | ||||||
Other invested assets |
1 | 1 | ||||||
Investments-Exchange |
||||||||
Available-for-sale securities, at fair value: |
||||||||
Fixed maturities (amortized cost of $6,863 and $6,277, respectively) (See Note 1) |
7,279 | 6,517 | ||||||
Equity securities (cost of $503 and $425, respectively) (See Note 1) |
570 | 472 | ||||||
Trading securities, at fair value (cost of $1,773 and $1,556, respectively) |
2,306 | 1,835 | ||||||
Limited partnerships (cost of $1,083 and $1,392, respectively) |
1,108 | 1,116 | ||||||
Other invested assets |
19 | 20 | ||||||
Total investments |
11,815 | 10,940 | ||||||
Cash and cash equivalents (Exchange portion of $120 and $158, respectively) |
430 | 234 | ||||||
Premiums receivable from policyholders (Exchange portion of $942 and $715, respectively) (See
Note 1) |
942 | 906 | ||||||
Reinsurance recoverable (Exchange portion of $201 and $212, respectively) (See Note 1) |
201 | 215 | ||||||
Deferred income taxes (Exchange portion of $0 and $75, respectively) |
0 | 116 | ||||||
Deferred acquisition costs (Exchange portion of $467 and $416, respectively) (See Note 1) |
467 | 467 | ||||||
Other assets (Exchange portion of $357 and $306, respectively) |
489 | 409 | ||||||
Total assets |
$ | 14,344 | $ | 13,287 | ||||
Liabilities and shareholders’ equity |
||||||||
Liabilities |
||||||||
Indemnity liabilities |
||||||||
Losses and loss expense reserves (See Note 1) |
$ | — | $ | 752 | ||||
Unearned premiums (See Note 1) |
— | 325 | ||||||
Deferred income taxes |
26 | 0 | ||||||
Other liabilities |
382 | 387 | ||||||
Exchange liabilities |
||||||||
Losses and loss expense reserves (See Note 1) |
3,584 | 2,846 | ||||||
Life policy and deposit contract reserves |
1,603 | 1,540 | ||||||
Unearned premiums (See Note 1) |
2,082 | 1,656 | ||||||
Deferred income taxes |
257 | 0 | ||||||
Other liabilities |
76 | 56 | ||||||
Total liabilities |
8,010 | 7,562 | ||||||
Indemnity’s shareholders’ equity |
||||||||
Class A common stock,
stated value $0.0292 per share; authorized 74,996,930 shares; issued
68,289,600
shares, 50,054,506 and 51,203,473 shares outstanding, respectively |
2 | 2 | ||||||
Class B common stock, convertible at a rate of 2,400 Class A shares for one Class B
share, stated value $70 per share; 2,546 shares authorized, issued and outstanding,
respectively |
0 | 0 | ||||||
Additional paid-in-capital |
8 | 8 | ||||||
Accumulated other comprehensive loss |
(53 | ) | (43 | ) | ||||
Retained earnings, before cumulative effect adjustment |
1,827 | 1,743 | ||||||
Cumulative effect of accounting changes, net of tax |
— | 6 | ||||||
Retained earnings, after cumulative effect adjustment |
1,827 | 1,749 | ||||||
Total contributed capital and retained earnings |
1,784 | 1,716 | ||||||
Treasury stock, at cost, 18,235,094 and 17,086,127 shares, respectively |
(872 | ) | (814 | ) | ||||
Total Indemnity shareholders’ equity |
912 | 902 | ||||||
Noncontrolling interest in consolidated entity — Exchange |
5,422 | 4,823 | ||||||
Total equity |
6,334 | 5,725 | ||||||
Total liabilities, shareholders’ equity and noncontrolling interest |
$ | 14,344 | $ | 13,287 | ||||
See accompanying notes to Consolidated Financial Statements. See Note 24, “Indemnity Supplemental
Information,” for supplemental consolidating statements of financial position information.
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ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years ended December 31, 2010, 2009 and 2008
(dollars in millions, except per share data)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years ended December 31, 2010, 2009 and 2008
(dollars in millions, except per share data)
| 2010 | 2009 | 2008 | ||||||||||
Common stock |
||||||||||||
Class A |
$ | 2 | $ | 2 | $ | 2 | ||||||
Class B |
0 | 0 | 0 | |||||||||
Total common stock |
2 | 2 | 2 | |||||||||
Additional paid-in capital |
8 | 8 | 8 | |||||||||
Accumulated other comprehensive income |
||||||||||||
Balance, beginning of year |
(43 | ) | (136 | ) | 10 | |||||||
Cumulative effect of change in accounting principle, net
of tax (Note 2) |
— | (6 | ) | (11 | ) | |||||||
Unrealized gains (losses), net of tax (Note 20) |
9 | 75 | (44 | ) | ||||||||
Reclassification of unrealized gain on sale of P&C
affiliated subsidiaries, net of tax |
(15 | ) | — | — | ||||||||
Postretirement plans, net of tax (Note 20) |
(4 | ) | 24 | (91 | ) | |||||||
Balance, end of year |
(53 | ) | (43 | ) | (136 | ) | ||||||
Retained earnings |
||||||||||||
Balance, beginning of year |
1,749 | 1,729 | 1,740 | |||||||||
Net income |
162 | 108 | 69 | |||||||||
Dividends declared — Class A ($1.955, $1.83 and $1.77
per share, respectively) |
(99 | ) | (94 | ) | (91 | ) | ||||||
Dividends declared — Class B ($293.25, $274.50 and
$265.50 per share, respectively) |
0 | 0 | 0 | |||||||||
Reclassification of unrealized gain on sale of P&C
affiliated subsidiaries, net of tax |
15 | — | — | |||||||||
Cumulative effect of change in accounting principle, net
of tax (Note 2) |
— | 6 | 11 | |||||||||
Balance, end of year |
1,827 | 1,749 | 1,729 | |||||||||
Treasury stock |
||||||||||||
Balance, beginning of year |
(814 | ) | (811 | ) | (709 | ) | ||||||
Purchase of treasury stock |
(58 | ) | (3 | ) | (102 | ) | ||||||
Balance, end of year |
(872 | ) | (814 | ) | (811 | ) | ||||||
Total Indemnity shareholders’ equity |
912 | 902 | 792 | |||||||||
Noncontrolling interest in consolidated entity — Exchange |
||||||||||||
Balance, beginning of year |
4,823 | 3,967 | 4,918 | |||||||||
Comprehensive income (loss) |
599 | 856 | (951 | ) | ||||||||
Balance, end of year |
5,422 | 4,823 | 3,967 | |||||||||
Total equity |
$ | 6,334 | $ | 5,725 | $ | 4,759 | ||||||
See accompanying notes to Consolidated Financial Statements.
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ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2010, 2009 and 2008
(in millions)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2010, 2009 and 2008
(in millions)
| 2010 | 2009 | 2008 | ||||||||||
Cash flows from operating activities |
||||||||||||
Premiums collected |
$ | 4,055 | $ | 3,964 | $ | 3,843 | ||||||
Net investment income received |
445 | 421 | 453 | |||||||||
Limited partnership distributions |
122 | 81 | 315 | |||||||||
Service agreement fee received |
34 | 35 | 32 | |||||||||
Commissions and bonuses paid to agents |
(532 | ) | (535 | ) | (534 | ) | ||||||
Losses paid |
(2,398 | ) | (2,241 | ) | (2,201 | ) | ||||||
Loss expenses paid |
(419 | ) | (405 | ) | (384 | ) | ||||||
Other underwriting and acquisition costs paid |
(517 | ) | (552 | ) | (530 | ) | ||||||
Interest paid on bank line of credit |
0 | 0 | (1 | ) | ||||||||
Income taxes (paid) recovered |
(69 | ) | 121 | (273 | ) | |||||||
Net cash provided by operating activities |
721 | 889 | 720 | |||||||||
Cash flows from investing activities |
||||||||||||
Purchase of investments: |
||||||||||||
Fixed maturities |
(1,760 | ) | (1,938 | ) | (1,784 | ) | ||||||
Preferred stock |
(179 | ) | (176 | ) | (244 | ) | ||||||
Common stock |
(1,495 | ) | (1,450 | ) | (2,232 | ) | ||||||
Limited partnerships |
(165 | ) | (174 | ) | (396 | ) | ||||||
Sales/maturities of investments: |
||||||||||||
Fixed maturity sales |
562 | 510 | 790 | |||||||||
Fixed maturity calls/maturities |
1,009 | 734 | 1,002 | |||||||||
Preferred stock |
135 | 210 | 263 | |||||||||
Common stock |
1,376 | 1,394 | 2,151 | |||||||||
Net collections (distributions) on policy loans |
0 | 1 | (2 | ) | ||||||||
Sale of and returns on limited partnerships |
142 | 15 | 40 | |||||||||
Purchase of property and equipment |
(33 | ) | (14 | ) | (9 | ) | ||||||
Net distributions on agent loans |
3 | (2 | ) | (4 | ) | |||||||
Net cash used in investing activities |
(405 | ) | (890 | ) | (425 | ) | ||||||
Cash flows from financing activities |
||||||||||||
Annuity and supplementary contract deposits and interest |
111 | 183 | 191 | |||||||||
Annuity and supplementary contract surrenders and withdrawals |
(79 | ) | (129 | ) | (147 | ) | ||||||
Universal life deposits and interest |
38 | 39 | 21 | |||||||||
Universal life surrenders |
(35 | ) | (39 | ) | (12 | ) | ||||||
Purchase of treasury stock |
(57 | ) | (3 | ) | (102 | ) | ||||||
Dividends paid to shareholders |
(98 | ) | (93 | ) | (92 | ) | ||||||
Decrease in collateral from securities lending |
0 | (285 | ) | (361 | ) | |||||||
Redemption of securities lending collateral |
0 | 285 | 361 | |||||||||
Proceeds from bank line of credit |
0 | 0 | 75 | |||||||||
Payments on bank line of credit |
0 | 0 | (75 | ) | ||||||||
Net cash used in financing activities |
(120 | ) | (42 | ) | (141 | ) | ||||||
Net increase (decrease) in cash and cash equivalents |
196 | (43 | ) | 154 | ||||||||
Cash and cash equivalents at beginning of year |
234 | 277 | 123 | |||||||||
Cash and cash equivalents at end of year |
$ | 430 | $ | 234 | $ | 277 | ||||||
See accompanying notes to Consolidated Financial Statements. See Note 22, “Supplementary Data
on Cash Flows,” for supplemental cash flow information.
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ERIE
INDEMNITY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations
Erie Indemnity Company (“Indemnity”) is a publicly held Pennsylvania business corporation that
since 1925 has been the managing attorney-in-fact for the subscribers
(policyholders) at the Erie
Insurance Exchange (“Exchange”). The Exchange is a subscriber owned Pennsylvania-domiciled
reciprocal insurer that writes property and casualty insurance.
Indemnity’s primary function is to perform certain services for the Exchange relating to the sales,
underwriting and issuance of policies on behalf of the Exchange. This is done in accordance with a
subscriber’s agreement (a limited power of attorney) executed by each subscriber (policyholder),
appointing Indemnity as their common attorney-in-fact to transact business on their behalf and to
manage the affairs of the Exchange. Pursuant to the subscriber’s agreement and for its services as
attorney-in-fact, Indemnity earns a management fee calculated as a percentage of the direct
premiums written by the Exchange and the other members of the Property and Casualty Group, which
are assumed by the Exchange under an intercompany pooling arrangement.
Through December 31, 2010, Indemnity also operated as a property and casualty insurer through its
wholly owned subsidiaries, Erie Insurance Company (“EIC”), Erie Insurance Company of New York
(“ENY”) and Erie Insurance Property and Casualty Company (“EPC”). EIC, ENY and EPC, together with
the Exchange and its wholly owned subsidiary, Flagship City Insurance Company (“Flagship”), are
collectively referred to as the “Property and Casualty Group”. The Property and Casualty Group
operates in 11 Midwestern, Mid-Atlantic and Southeastern states and the District of Columbia and
primarily writes private passenger automobile (48%), homeowners (21%), commercial multi-peril
(11%), commercial automobile (7%), and workers compensation (6%) lines of insurance based upon 2010
direct written premiums.
On
December 31, 2010, Indemnity sold all of the outstanding capital stock of its wholly owned
property and casualty subsidiaries to the Exchange. There was no gain or loss resulting from this
sale as Indemnity and the Exchange are deemed to be under common
control. Under this new structure, all property and casualty insurance operations are owned by the
Exchange, and Indemnity will continue to function as the management company. There was no impact on
the existing reinsurance pooling agreement between the Exchange and EIC or ENY as a result of the
sale, nor was there any impact to the subscribers (policyholders) of the Exchange, to the
Exchange’s independent insurance agents, or to Indemnity’s employees.
Erie Family Life Insurance Company (“EFL”) is an affiliated life insurance company that underwrites
and sells individual and group life insurance policies and fixed annuities. Indemnity and the
Exchange own 21.6% and 78.4% of EFL, respectively. On November 4, 2010, Indemnity entered into a
definitive agreement for the sale of its 21.6% ownership interest in EFL to the Exchange, which is
scheduled to close by March 31, 2011. Upon the closing date, the Exchange will own 100% of EFL.
Because Indemnity and the Exchange are deemed to be under common control for financial reporting
purposes, any gains or losses resulting from the sale of Indemnity’s equity interest in EFL will be
recorded as an adjustment directly to Indemnity’s equity balance at March 31, 2011.
“Indemnity shareholder interest” refers to the interest in Erie Indemnity Company owned by the
Class A and Class B shareholders. “Noncontrolling interest” refers to the interest in the Erie
Insurance Exchange held for the benefit of the subscribers (policyholders).
The consolidated financial statements of Erie Indemnity Company reflect the results of Indemnity
and its variable interest entity, the Exchange, which we refer to collectively as “Erie Insurance
Group” (“we,” “us,” “our”).
Note 2. Significant Accounting Policies
Retrospective adoption of new accounting principle
On
June 12, 2009, the Financial Accounting Standards Board
(“FASB”) updated Accounting Standards Codification (“ASC”) 810, Consolidation,
which amended the existing guidance for determining whether an enterprise is the primary
beneficiary of a variable interest entity (“VIE”). As of January 1, 2010 Erie Indemnity Company
adopted the new accounting principle on a retrospective basis since
inception. The 2009 and 2008 financial information within this report
has been conformed to this consolidated presentation.
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This guidance changed the methodology for assessing whether an enterprise is the primary
beneficiary of a VIE by requiring a qualitative analysis to determine if an enterprise’s variable
interest gives it a controlling financial interest. The qualitative analysis looks at the power to
direct activities of the VIE that most significantly impact economic performance and the right to
receive benefits (or obligation to absorb losses) from the VIE that could be significant.
In accordance with the new accounting guidance, Indemnity is deemed to be the primary beneficiary
of the Exchange given the significance of the management fee to the Exchange and Indemnity’s power
to direct the Exchange’s significant activities. Under the previously issued accounting guidance,
Indemnity was not deemed the primary beneficiary of the Exchange and its financial position and
operating results were not consolidated with Indemnity’s. Following adoption of the new accounting
guidance, as primary beneficiary of the Exchange, Erie Indemnity Company has consolidated Indemnity
and the Exchange’s financial position and operating results. Furthermore, upon consolidation of the
Exchange, 100% of the ownership of EFL resides within the consolidated entity and consequently
EFL’s financial results are also consolidated.
There was no cumulative effect to Indemnity’s shareholders’ equity from consolidation of the
Exchange and EFL. The noncontrolling interest in total equity represents the amount of the Exchange’s subscribers’
(policyholders’) equity.
Basis of presentation and principles of consolidation
The accompanying consolidated financial statements have been prepared in conformity with U.S.
generally accepted accounting principles (“GAAP”) and include the accounts of Indemnity together
with its affiliated companies in which Indemnity holds a majority voting or economic interest. In
addition, we consolidate the Exchange as a variable interest entity for which Indemnity is the
primary beneficiary. All intercompany accounts and transactions have been eliminated in
consolidation. The required presentation of noncontrolling interests is reflected in the
consolidated financial statements. Noncontrolling interests represent the ownership interests of
the Exchange, all of which is held by parties other than Indemnity
(i.e., the Exchange’s subscribers
(policyholders)). Noncontrolling interests also include the Exchange subscribers’ 78.4% ownership
interest in EFL.
Presentation of assets and liabilities — While the assets of the Exchange are presented separately
in the Consolidated Statements of Financial Position, the Exchange’s assets can only be used to
satisfy the Exchange’s liabilities or for other unrestricted activities. ASC 810, Consolidation,
does not require separate presentation of the Exchange’s assets. However, because the shareholders
of Indemnity have no rights to the assets of the Exchange and, conversely, the Exchange has no
rights to the assets of Indemnity, we have presented the invested assets of the Exchange separately
on the Consolidated Statements of Financial Position along with the remaining consolidated assets
reflecting the Exchange’s portion parenthetically. Liabilities are required under ASC 810,
Consolidation, to be presented separately for the Exchange on the Consolidated Statements of
Financial Position as the Exchange’s creditors do not have recourse to the general credit of
Indemnity.
Rights of shareholders of Indemnity and subscribers (policyholders) of the Exchange — The
shareholders of Indemnity, through the management fee, have a controlling financial interest in the
Exchange, however, they have no other rights to or obligations arising from assets and liabilities
of the Exchange. The shareholders of Indemnity own its equity but have no rights or interest in the
Exchange’s (noncontrolling interest) income or equity. The noncontrolling interest equity
represents the Exchange’s equity held for the benefit of its subscribers (policyholders), who have
no rights or interest in the Indemnity shareholder interest income or equity.
All intercompany assets and liabilities between Indemnity and the Exchange have been eliminated in
the Consolidated Statements of Financial Position.
The preparation of financial statements in conformity with GAAP requires us 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.
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Adopted accounting pronouncements
In 2007, the FASB issued guidance under FASB ASC 325, Financial Instruments, that gave us the
irrevocable option to report selected financial assets and liabilities at fair value and
established presentation and disclosure requirements. We adopted the fair value option for our
common stock portfolio. Beginning January 1, 2008, all changes in fair value of our common stock
are recognized in earnings as they occur. The net impact of the cumulative effect adjustment for
our common stock portfolio on January 1, 2008 increased retained earnings and reduced other
comprehensive income by $11 million, net of tax.
On April 1, 2009, we adopted new accounting guidance under FASB ASC 320, Investments — Debt and
Equity Securities. This guidance amended the other-than-temporary impairment (“OTTI”) model for debt
securities and requires that credit-related losses and securities in an unrealized loss position
that we intend to sell be recognized in earnings, with the remaining decline recognized in other
comprehensive income. Additionally, this accounting guidance modified the presentation of OTTI in
the statement of operations with the total OTTI presented along with an offset for the amount of
OTTI recognized in other comprehensive income. Disclosures include further disaggregation of
securities, methodology, inputs related to credit-related loss impairments and a rollforward of
credit-related loss impairments. The adoption of this guidance required a cumulative effect
adjustment to reclass previously recognized non-credit other-than-temporary impairments from
retained earnings to other comprehensive income. The net impact of the cumulative effect
adjustment increased retained earnings and decreased other comprehensive income by $6 million, net
of tax. Disclosures regarding our impairment methodology are included in this note under the
caption Investments. The remaining disclosures regarding credit and non-credit related impairments
have been provided in Note 7.
In
January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures
about Fair Value Measurements. This guidance updated the disclosures on FASB ASC 820, Fair Value
Measurements and Disclosures. The additional disclosures include the amounts and reasons for
significant transfers between the levels in the fair value hierarchy, the expansion of fair market
disclosures by each class of assets, disclosure of the policy for recognition of level transfers,
and disclosure of the valuation techniques used for all Level 2 and Level 3 assets. These
disclosures were effective for periods beginning after December 15, 2009 and have been included in
Note 6, “Fair Value.” An additional disclosure requirement to present purchases, sales, issuances,
and settlements of Level 3 activity on a gross basis becomes effective with periods beginning after
December 15, 2010.
Pending accounting pronouncements
In October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or
Renewing Insurance Contracts. This guidance modifies the definition of the types of costs incurred
by insurance entities that can be capitalized in the acquisition of new and renewal insurance
contracts. The amendments in this update specify that the costs are limited to incremental direct
costs that result directly from successful contract transactions and would not have been incurred
by the insurance entity had the contract transactions not occurred. These costs must be directly
related to the underwriting, policy issuance and processing, medical and inspection and sales force
contract selling. The amendments also specify that advertising costs only should be included as
deferred acquisition costs if the direct-response advertising criteria are met. ASU 2010-26 is
effective for interim and annual reporting periods beginning after December 15, 2011 with either
prospective or retrospective adoption permitted. Although we have not
performed a detailed analysis, the adoption method and impact of this update on
the Company’s financial position, cash flows, or results of operations is expected to be
immaterial.
Investments
Available-for-sale securities — Fixed maturity and preferred stock securities are classified as
available-for-sale and are reported at fair value. Unrealized holding gains and losses, net of
related tax effects, on fixed maturities and preferred stock are charged or credited directly to
shareholders’ equity as accumulated other comprehensive income (loss).
Realized gains and losses on sales of fixed maturity and preferred stock securities are recognized
in income based upon the specific identification method. Interest and dividend income are
recognized as earned.
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Fixed income and redeemable preferred stock (debt securities) are evaluated monthly for
other-than-temporary impairment loss. For debt securities that have experienced a decline in fair
value and we intend to sell or for which it is more likely than not we will be required to sell the
security before recovery of its amortized cost, an other-than-temporary impairment is deemed to
have occurred and is recognized in earnings.
Debt securities that have experienced a decline in fair value and that we do not intend to sell,
and that will not be required to sell before recovery, are evaluated to determine if the decline in
fair value is other-than-temporary.
Some factors considered in this evaluation include:
| • | the extent and duration to which fair value is less than cost; | ||
| • | historical operating performance and financial condition of the issuer; | ||
| • | short and long-term prospects of the issuer and its industry based on analysts’ recommendations; | ||
| • | specific events that occurred affecting the issuer, including a ratings downgrade; | ||
| • | near term liquidity position of the issuer; and | ||
| • | compliance with financial covenants. |
If a decline is deemed to be other-than-temporary, an assessment is made to determine the amount of
the total impairment related to a credit loss and that related to all other factors. Consideration
is given to all available information relevant to the collectability of the security in this
determination. If the entire amortized cost basis of the security will not be recovered, a credit
loss exists. Currently, we have the intent to sell all of our securities that have been determined
to have a credit-related impairment. As a result, the entire amount of the impairment has been
recognized in earnings. If we had securities with credit impairments that we did not intend to
sell, the non-credit portion of the impairment would have been recorded in other comprehensive
income.
Impairment charges on non-redeemable preferred securities and hybrid securities with equity
characteristics are included in earnings consistent with the treatment for equity securities.
Trading securities — Our common stock securities are trading securities which are reported at fair
value. Unrealized holding gains and losses on these securities are included in net realized gains
(losses) in the Consolidated Statement of Operations. Realized gains and losses on sales of common
stock are recognized in income based on the specific identification method. Dividend income is
recognized as earned.
Limited partnerships — Limited partnerships include U.S. and foreign private equity, real estate
and mezzanine debt investments. The private equity limited partnerships invest primarily in small-
to medium-sized companies. The general partners for our limited partnerships determine the market
value of investments in the partnerships, including any other-than-temporary impairments of these
individual investments. The primary basis for the valuation of limited partnership interests are
financial statements prepared by the general partner. Because of the timing of the preparation and
delivery of these financial statements, the use of the most recently available financial statements
provided by the general partners result in a quarter delay in the inclusion of the limited
partnership results in our Consolidated Statements of Operations. Due to this delay, these
financial statements do not yet reflect the market conditions experienced in the fourth quarter of
2010.
Nearly all of the underlying investments in our limited partnerships are valued using a source
other than quoted prices in active markets. The fair value amounts for our private equity and
mezzanine debt partnerships are based on the financial statements of the general partners, who use
multiple methods to estimate fair value including the market approach, income approach or the cost
approach. The market approach uses prices and other pertinent information from market-generated
transactions involving identical or comparable assets or liabilities. Such valuation techniques
often use market multiples derived from a set of comparables. The income approach uses valuation
techniques to convert future cash flows or earnings to a single discounted present value amount.
The measurement is based on the value indicated by current market expectations on those future
amounts. The cost approach is derived from the amount that is currently required to replace the
service capacity of an asset. If information becomes available that would impair the cost of these
partnerships, then the general partner would generally adjust to the net realizable value. For
real estate limited partnerships, the general partners record these at fair value based on an
independent appraisal or internal estimates of fair value.
We perform various procedures in review of the general partners’ valuations. While we generally
rely on the general partners’ financial statements as the best available information to record our
share of the partnership
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unrealized gains and losses resulting from valuation changes, we adjust our financial statements
for impairments at the fund level as necessary. There were no valuation changes in 2010, 2009 or
2008. As there is a limited market for these investments, they have the greatest potential for
market price variability.
Unrealized gains and losses for these investments are reflected in equity in earnings (losses) of
limited partnerships in our Consolidated Statements of Operations in accordance with the equity
method of accounting. Cash contributions made to and distributions received from the partnerships
are recorded in the period in which the transaction occurs.
Cash and cash equivalents — Short-term investments, consisting of cash, money market accounts and
other short-term, highly liquid investments with a maturity of three months or less at the date of
purchase, are considered cash and cash equivalents.
Deferred acquisition costs
Acquisition costs that vary with and relate to the production of insurance and investment-type
contracts are deferred. Such costs consist principally of commissions, premium taxes and policy
issuance expenses.
Property
and casualty insurance — Deferred acquisition costs
(“DAC”) for property and casualty
insurance contracts, which is primarily composed of commissions and certain underwriting expenses,
is amortized on a pro rata basis over the applicable policy term. 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 was no reduction in costs deferred in any periods presented. The DAC profitability is
analyzed annually to ensure recoverability.
Life insurance — DAC related to traditional life insurance products is amortized in proportion to
premium revenues over the premium-paying period of related policies using assumptions about
mortality, morbidity, lapse rates, expenses and future yield on related investments established
when the policy was issued. Amortization is adjusted each period to reflect policy lapse or
termination rates as compared to anticipated experience. DAC related to universal life products and
deferred annuities is amortized over the estimated lives of the contracts in proportion to actual
and expected future gross profits, investment, mortality and expense margins and surrender charges.
Both historical and anticipated investment returns, including realized gains and losses, are
considered in determining the amortization of DAC.
Estimated gross profits are adjusted monthly to reflect actual experience to date and/or for the
unlocking of underlying key assumptions based on experience studies. DAC is periodically reviewed
for recoverability. For traditional life products, if the benefit reserves plus anticipated future
premiums and interest earnings for a line of business are less than the current estimate of future
benefits and expenses (including any unamortized DAC), a charge to income is recorded for
additional DAC amortization or for increased benefit reserves. For universal life and deferred
annuities, if the current present value of future expected gross profits is less than the
unamortized DAC, a charge to income is recorded for additional DAC amortization.
Deferred taxes
Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of
assets and liabilities and their reported amounts in the consolidated financial statements, using
the statutory tax rates in effect for the year in which the differences are expected to reverse.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the
results of operations in the period that includes the enactment date under the law. Valuation
allowances on deferred tax assets are estimated based on our assessment of the realizability of
such amounts.
Property and casualty unpaid losses and loss expenses
Unpaid losses and loss expenses include estimates for claims that have been reported and those
that have been incurred but not reported, as well as estimates of all expenses associated with
processing and settling these claims, less estimates of anticipated salvage and subrogation
recoveries. Unpaid loss and loss expense reserves are set at full expected cost, except for
workers compensation loss reserves, which have been discounted using an interest rate of 2.5%.
Estimating the ultimate cost of future losses and loss expenses is an uncertain and complex
process. This estimation process is based on the assumption that past developments are an
appropriate indicator of future events, and involves a variety of actuarial techniques that
analyze experience, trends and other relevant factors. The uncertainties involved with the
reserving process include internal factors, such as changes in claims handling
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procedures, as well as external factors, such as economic trends and changes in the concepts of
legal liability and damage awards. Accordingly, final loss settlements may vary from the present
estimates, particularly when those payments may not occur until well into the future.
We regularly review the adequacy of our estimated loss and loss expense reserves by line of
business. Adjustments to previously established reserves are reflected in the operating results of
the period in which the adjustment is determined to be necessary. Such adjustments could possibly
be significant, reflecting any variety of new and adverse or favorable trends.
Life insurance reserves
The liability for future benefits of life insurance contracts is the present value of such benefits
less the present value of future net premiums. Life insurance and income-paying annuity future
policy benefit reserves are computed primarily by the net level premium method with assumptions as
to mortality, withdrawal, lapses and investment yields. Traditional life insurance products are
subject to loss recognition testing. The adequacy of the related reserves is verified as part of
loss recognition testing. Loss recognition is necessary when the sum of the reserve and the
present value of projected policy cash flows is less than unamortized DAC.
Deferred annuity future benefit reserves are established at accumulated account values without
reduction for surrender charges. These account values are credited with varying interest rates
determined at the discretion of EFL subject to certain minimums.
Agent bonus estimates
Agent bonuses are based on an individual agency’s property and casualty underwriting profitability
and also include a component for growth in agency property and casualty premiums if the agency’s
underwriting profitability targets for our book of business are met. The estimate for agent
bonuses, which are based on the performance over 36 months, is modeled on a monthly basis using
actual underwriting data by agency for the two prior years combined with the current year-to-date
actual data. At December 31 of each year, we use actual data available and record an accrual based
on the expected payment amount. These costs are included in the policy acquisition and underwriting
expenses in the Consolidated Statements of Operations.
Recognition of premium revenues and losses
Property and casualty insurance — Insurance premiums written are earned over the terms of the
policies on a pro-rata basis. Unearned premiums represent that portion of premiums written which is
applicable to the unexpired terms of policies in force. Losses and loss expenses are recorded as
incurred.
Life insurance — Premiums on traditional life insurance products are recognized as revenue when
due. Reserves for future policy benefits are established as premiums are earned. Premiums
received for annuity and universal life products are reported as deposits and included in
liabilities. For universal life products, revenue is recognized as amounts are assessed against
the policyholder’s account for mortality coverage and contract expenses. The primary source of
revenue on annuity deposits is derived from the interest earned by EFL, which is reflected in net
investment income.
Reinsurance
Property and casualty insurance — Property and casualty assumed and ceded reinsurance
premiums are earned over the terms of the reinsurance contracts. Premiums ceded to other companies
are reported as a reduction of premium income. Reinsurance contracts do not relieve the Property
and Casualty Group from its obligations to policyholders.
Life insurance — Reinsurance premiums, commissions and expense reimbursements on reinsurance ceded
on life insurance policies are accounted for on a basis consistent with those used in accounting
for the underlying reinsured policies. Expense reimbursements received in connection with new
reinsurance ceded have been accounted for as a reduction of the related policy acquisition costs.
Amounts recoverable from reinsurers for future policy benefits are estimated in a manner consistent
with the assumptions used for the underlying policy benefits. Amounts recoverable for incurred
claims, future policy benefits and expense reimbursements are recorded as assets. Reinsurance
contracts do not relieve EFL from its obligations to policyholders.
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Recognition of management fee revenue
Indemnity earns management fees from the Exchange for providing sales, underwriting and policy
issuance services. Pursuant to the subscriber’s agreements with the policyholders at the Exchange,
Indemnity may retain up to 25% of all premiums written or assumed by the Exchange. Management fee
revenue is calculated by multiplying the management fee rate by the direct premiums written by the
Exchange and the other members of the Property and Casualty Group, which are assumed by the
Exchange under an intercompany pooling arrangement. The Property and Casualty Group issues
policies with annual terms only. Management fees are recorded as revenue upon policy issuance or
renewal, as substantially all of the services required to be performed by us have been satisfied
at that time. Certain activities are performed and related costs are incurred by us subsequent to
policy issuance in connection with the services provided to the Exchange; however, these
activities are inconsequential and perfunctory. Management fee revenue is eliminated upon
consolidation.
Recognition of service agreement revenue
Included in service agreement revenue are service charges Indemnity collects from policyholders for
providing multiple payment plans on policies written by the Property and Casualty Group. Service
charges, which are flat dollar charges for each installment billed beyond the first installment,
are recognized as revenue when bills are rendered to the policyholder. Service agreement revenue
also includes late payment and policy reinstatement fees. Service agreement revenue is included in
other income in the Consolidated Statements of Operations.
Note 3. Earnings Per Share
Basic earnings per share are calculated under the two-class method, which allocates earnings to
each class of stock based on its dividend rights. Class B shares are convertible into Class A
shares at a conversion ratio of 2,400 to 1. See Note 19, “Capital Stock.” Class A
diluted earnings per share are calculated under the if-converted method which reflects the
conversion of Class B shares and the effect of potentially dilutive outstanding employee
stock-based awards and awards vested and not yet vested related to the outside directors’ stock
compensation plan. Vested shares related to the outside directors’
compensation plan were included in the table below for the first time
in 2010. The 2009 and 2008 amounts have been updated to include these
shares. This had no impact on previously reported diluted earnings
per share.
A reconciliation of the numerators and denominators used in the basic and diluted per-share
computations is presented as follows for each class of Indemnity common stock:
| Indemnity Earnings Per Share Calculation | ||||||||||||||||||||||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
| Allocated | Weighted | Per- | Allocated | Weighted | Per- | Allocated | Weighted | Per- | ||||||||||||||||||||||||||||
| (dollars in millions, | net income | shares | share | net income | shares | share | net income | shares | share | |||||||||||||||||||||||||||
| except per share data) | (numerator) | (denominator) | amount | (numerator) | (denominator) | amount | (numerator) | (denominator) | amount | |||||||||||||||||||||||||||
Class A — Basic EPS: |
||||||||||||||||||||||||||||||||||||
Income available to
Class A stockholders |
$ | 161 | 50,705,607 | $ | 3.18 | $ | 107 | 51,250,606 | $ | 2.10 | $ | 68 | 51,824,649 | $ | 1.34 | |||||||||||||||||||||
Dilutive effect of
stock awards |
0 | 68,887 | — | 0 | 60,793 | — | 0 | 56,927 | — | |||||||||||||||||||||||||||
Assumed conversion of
Class B shares |
1 | 6,110,400 | — | 1 | 6,117,600 | — | 1 | 6,122,400 | — | |||||||||||||||||||||||||||
Class A — Diluted
EPS: |
||||||||||||||||||||||||||||||||||||
Income available to
Class A stockholders
on Class A
equivalent shares |
$ | 162 | 56,884,894 | $ | 2.85 | $ | 108 | 57,428,999 | $ | 1.89 | $ | 69 | 58,003,976 | $ | 1.19 | |||||||||||||||||||||
Class B — Basic and
diluted EPS: |
||||||||||||||||||||||||||||||||||||
Income available to
Class B stockholders |
$ | 1 | 2,546 | $ | 462.83 | $ | 1 | 2,549 | $ | 312.45 | $ | 1 | 2,551 | $ | 204.20 | |||||||||||||||||||||
Note 4. Variable Interest Entity
Exchange
The Exchange is a reciprocal insurance exchange domiciled in Pennsylvania, for which Indemnity
serves as attorney-in-fact. Indemnity holds a variable interest in the Exchange because of the
absence of decision-making capabilities by the equity owners (subscribers) of the Exchange and
because of the significance of the management
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fee the Exchange pays to Indemnity as the decision maker. The new accounting guidance, which we
adopted on January 1, 2010, requires entities to perform a qualitative analysis to determine the primary
beneficiary of variable interest entities. As a result of adopting the new guidance, Indemnity is
deemed to have a controlling financial interest in the Exchange and is considered the primary
beneficiary. The Exchange’s results have been consolidated with those of Indemnity. We have
retrospectively applied the new accounting guidance and have consolidated the Exchange for all
periods presented in this report for comparability purposes. See Note 2, “Significant Accounting
Policies.”
Consolidation of the Exchange is required given the significance of the management fee to the
Exchange and because Indemnity has the power to direct the activities of the Exchange that most
significantly impact the Exchange’s economic performance. Indemnity earns management fee revenues
from the Exchange for services provided as attorney-in-fact for the Exchange. Indemnity’s
management fee revenues are based on all premiums written or assumed by the Exchange. Indemnity’s
Board of Directors determines the management fee rate paid by the Exchange to Indemnity. This rate
cannot exceed 25% of the direct and affiliated assumed written premiums of the Exchange, as defined
by the subscriber’s agreement signed by each policyholder. The management fee revenues and
management fee expenses are eliminated in consolidation.
Indemnity has no obligation related to any underwriting and/or investment losses experienced by the
Exchange. Indemnity would however be adversely impacted if the Exchange incurred significant
underwriting and/or investment losses. If the surplus of the Exchange were to decline significantly
from its current level, its financial strength ratings could be reduced and as a consequence the
Exchange could find it more difficult to retain its existing business and attract new business. A
decline in the business of the Exchange would have an adverse effect on the amount of the
management fees Indemnity receives. In addition, a decline in the surplus of the Exchange from its
current level may impact the management fee rate received by Indemnity. Indemnity also has an
exposure to a concentration of credit risk related to the unsecured receivables due from the
Exchange for its management fee.
On December 31, 2010, Indemnity sold all of the outstanding capital stock of its wholly owned
subsidiaries to the Exchange. Under this new structure, all property and casualty insurance
operations are owned by the Exchange, and Indemnity will continue to function as the management
company. There was no impact on the existing reinsurance pooling agreement between the Exchange and
EIC or ENY as a result of the sale, nor was there any impact to the subscribers (policyholders) of
the Exchange, to the Exchange’s independent insurance agents, or to Indemnity’s employees.
Indemnity has not provided financial or other support to the Exchange for the reporting periods
presented. At December 31, 2010, there are no explicit or implicit arrangements that would require
Indemnity to provide future financial support to the Exchange. Indemnity is not liable if the
Exchange was to be in violation of its debt covenants or was unable to meet its obligation for
unfunded commitments to limited partnerships.
Note 5. Segment Information
As a result of the changes in our reporting entity effective January 1, 2010 (see Note 2,
“Significant Accounting Policies”), our reportable segments have increased from three to four. Our
reportable segments now include management operations, property and casualty insurance operations,
life insurance operations and investment operations. The segment information presented below
includes reclassification of all comparative prior period segment information. Accounting policies
for segments are the same as those described in the summary of significant accounting policies. See
Note 2, “Significant Accounting Policies.” Assets are not allocated to the segments but rather are
reviewed in total for purposes of decision-making. No single customer or agent provides 10% or more
of revenues.
Our management operations segment consists of serving as attorney-in-fact for the Exchange.
Indemnity operates in this capacity solely for the Exchange. We evaluate profitability of our
management operations segment principally on the gross margin from management operations. Indemnity
earns management fees from the Exchange for providing sales, underwriting and policy issuance
services. Management fee revenue, which is eliminated in consolidation, is calculated as a
percentage not to exceed 25% of all the direct premiums written by the Exchange and the other
members of the Property and Casualty Group, which are assumed by the Exchange under an intercompany
pooling arrangement. The Property and Casualty Group issues policies with annual terms only.
Management fees are recorded upon policy issuance or renewal, as substantially all of the services
required to be performed by Indemnity have been satisfied at that time. Certain activities are
performed and related costs are
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incurred by us subsequent to policy issuance in connection with the services provided to the
Exchange; however, these activities are inconsequential and perfunctory. Although these management
fee revenues and expenses are eliminated in consolidation, the amount of the fee directly impacts
the allocation of our consolidated net income between noncontrolling interest, which bears the
management fee expense and represents the interests of the Exchange subscribers (policyholders),
and Indemnity’s interest which earns the management fee revenue and represents Indemnity
shareholder interest in net income.
Our property and casualty insurance operations segment includes personal and commercial lines.
Personal lines consist primarily of personal auto and homeowners and are marketed to individuals.
Commercial lines consist primarily of commercial multi-peril, commercial auto and workers
compensation and are marketed to small- and medium-sized businesses. Our property and casualty
policies are sold by independent agents. Our property and casualty insurance underwriting
operations are conducted through the Exchange and its subsidiaries, which includes assumed
voluntary reinsurance from nonaffiliated domestic and foreign sources, assumed involuntary and
ceded reinsurance business. The Exchange exited the assumed voluntary reinsurance business
effective December 31, 2003, and therefore unaffiliated reinsurance includes only run-off activity
of the previously assumed voluntary reinsurance business. We evaluate profitability of the
property and casualty operations principally based on net underwriting results represented by the
combined ratio.
Our life insurance operations segment includes traditional and universal life insurance products
and fixed annuities marketed to individuals using the same independent agency force utilized by our
property and casualty operations. We evaluate profitability of the life insurance segment
principally based on segment net income, including investments, which for segment purposes are
reflected in the investment operations segment. At the same time, we recognize that
investment-related income is integral to the evaluation of the life insurance segment because of
the long duration of life products. In 2010, investment activities on life insurance-related assets
generated revenues of $107 million resulting in EFL reporting income before income taxes of $50
million, before intercompany eliminations. In 2009, investment activities on life insurance-related
assets generated revenues of $63 million resulting in EFL reporting income before income taxes of
$10 million, before intercompany eliminations. In 2008,
investment activities on life insurance-related assets generated
losses of $6 million resulting in EFL reporting a loss before income
taxes of $54 million, before intercompany eliminations. See Note 25, “EFL Supplemental Information.”
The investment operations segment performance is evaluated based on appreciation of assets, rate of
return and overall return. Investment-related income for the life operations is included in the
investment segment results.
The following tables summarize the components of the Consolidated Statements of Operations by
reportable business segments:
| Erie Insurance Group | ||||||||||||||||||||||||
| For the year ended December 31, 2010 | ||||||||||||||||||||||||
| Property | ||||||||||||||||||||||||
| and | ||||||||||||||||||||||||
| casualty | Life | |||||||||||||||||||||||
| Management | insurance | insurance | Investment | |||||||||||||||||||||
| (in millions) | operations | operations | operations | operations | Eliminations | Consolidated | ||||||||||||||||||
Premiums earned/life policy revenue |
$ | 3,925 | $ | 64 | $ | (2 | ) | $ | 3,987 | |||||||||||||||
Net investment income |
$ | 444 | (11 | ) | 433 | |||||||||||||||||||
Net realized investment gains |
313 | 313 | ||||||||||||||||||||||
Net impairment losses recognized in
earnings |
(6 | ) | (6 | ) | ||||||||||||||||||||
Equity in earnings of limited
partnerships |
128 | 128 | ||||||||||||||||||||||
Management fee revenue |
$ | 1,009 | (1,009 | ) | — | |||||||||||||||||||
Service agreement and other revenue |
34 | 1 | 35 | |||||||||||||||||||||
Total revenues |
1,043 | 3,925 | 65 | 879 | (1,022 | ) | 4,890 | |||||||||||||||||
Cost of management operations |
841 | (841 | ) | — | ||||||||||||||||||||
Insurance losses and loss expenses |
2,815 | 90 | (5 | ) | 2,900 | |||||||||||||||||||
Policy acquisition and underwriting
expense |
1,113 | 32 | (176 | ) | 969 | |||||||||||||||||||
Goodwill impairment |
22 | 22 | ||||||||||||||||||||||
Total benefits and expenses |
841 | 3,928 | 122 | 22 | (1,022 | ) | 3,891 | |||||||||||||||||
Income (loss) before income taxes |
202 | (3 | ) | (57 | ) | 857 | — | 999 | ||||||||||||||||
Provision (benefit) for income taxes |
71 | (1 | ) | (20 | ) | 289 | — | 339 | ||||||||||||||||
Net income (loss) |
$ | 131 | $ | (2 | ) | $ | (37 | ) | $ | 568 | $ | — | $ | 660 | ||||||||||
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| Erie Insurance Group | ||||||||||||||||||||||||
| For the year ended December 31, 2009 | ||||||||||||||||||||||||
| Property | ||||||||||||||||||||||||
| and | Life | |||||||||||||||||||||||
| Management | casualty | insurance | Investment | |||||||||||||||||||||
| (in millions) | operations | operations | Operations | operations | Eliminations | Consolidated | ||||||||||||||||||
Premiums earned/life policy revenue |
$ | 3,808 | $ | 63 | $ | (2 | ) | $ | 3,869 | |||||||||||||||
Net investment income |
$ | 444 | (11 | ) | 433 | |||||||||||||||||||
Net realized investment gains |
412 | 412 | ||||||||||||||||||||||
Net impairment losses recognized in
earnings |
(126 | ) | (126 | ) | ||||||||||||||||||||
Equity in losses of limited partnerships |
(369 | ) | (369 | ) | ||||||||||||||||||||
Management fee revenue |
$ | 965 | (965 | ) | — | |||||||||||||||||||
Service agreement and other revenue |
35 | 1 | 36 | |||||||||||||||||||||
Total revenues |
1,000 | 3,808 | 64 | 361 | (978 | ) | 4,255 | |||||||||||||||||
Cost of management operations |
813 | (813 | ) | — | ||||||||||||||||||||
Insurance losses and loss expenses |
2,644 | 89 | (5 | ) | 2,728 | |||||||||||||||||||
Policy acquisition and underwriting
expense |
1,135 | 28 | (160 | ) | 1,003 | |||||||||||||||||||
Total benefits and expenses |
813 | 3,779 | 117 | — | (978 | ) | 3,731 | |||||||||||||||||
Income (loss) before income taxes |
187 | 29 | (53 | ) | 361 | — | 524 | |||||||||||||||||
Provision (benefit) for income taxes |
60 | 10 | (19 | ) | 27 | — | 78 | |||||||||||||||||
Net income (loss) |
$ | 127 | $ | 19 | $ | (34 | ) | $ | 334 | $ | — | $ | 446 | |||||||||||
| Erie Insurance Group | ||||||||||||||||||||||||
| For the year ended December 31, 2008 | ||||||||||||||||||||||||
| Property | ||||||||||||||||||||||||
| and | Life | |||||||||||||||||||||||
| Management | casualty | insurance | Investment | |||||||||||||||||||||
| (in millions) | operations | operations | operations | operations(1) | Eliminations | Consolidated | ||||||||||||||||||
Premiums earned/life policy revenue |
$ | 3,771 | $ | 65 | $ | (2 | ) | $ | 3,834 | |||||||||||||||
Net investment income |
$ | 449 | (11 | ) | 438 | |||||||||||||||||||
Net realized investment losses |
(1,026 | ) | (1,026 | ) | ||||||||||||||||||||
Net impairment losses recognized in
earnings |
(571 | ) | (571 | ) | ||||||||||||||||||||
Equity in losses of limited partnerships |
(58 | ) | (58 | ) | ||||||||||||||||||||
Management fee revenue |
$ | 950 | (950 | ) | — | |||||||||||||||||||
Service agreement and other revenue |
33 | 1 | 34 | |||||||||||||||||||||
Total revenues (losses) |
983 | 3,771 | 66 | (1,206 | ) | (963 | ) | 2,651 | ||||||||||||||||
Cost of management operations |
810 | (810 | ) | — | ||||||||||||||||||||
Insurance losses and loss expenses |
2,494 | 93 | (5 | ) | 2,582 | |||||||||||||||||||
Policy acquisition and underwriting
expense |
1,035 | 21 | (148 | ) | 908 | |||||||||||||||||||
Total benefits and expenses |
810 | 3,529 | 114 | — | (963 | ) | 3,490 | |||||||||||||||||
Income (loss) before income taxes |
173 | 242 | (48 | ) | (1,206 | ) | — | (839 | ) | |||||||||||||||
Provision (benefit) for income taxes |
56 | 84 | (17 | ) | (346 | ) | — | (223 | ) | |||||||||||||||
Net income (loss) |
$ | 117 | $ | 158 | $ | (31 | ) | $ | (860 | ) | $ | — | $ | (616 | ) | |||||||||
| (1) | The more significant realized losses, impairment charges and market value adjustments on limited partnership investments were impacted by the significant disruption in the financial markets, primarily in the third and fourth quarters of 2008. |
See the “Results of the Erie Insurance Group’s operations by interest” table in the
Management’s Discussion and Analysis for the composition of income attributable to Indemnity and
income attributable to the noncontrolling interest (Exchange).
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Note 6. Fair Value
Our available-for-sale and trading securities are recorded at fair value, which is the price that
would be received to sell the asset in an orderly transaction between willing market participants
as of the measurement date.
Valuation techniques used to derive the fair value of our available-for-sale and trading
securities are based on observable and unobservable inputs. Observable inputs reflect market data
obtained from independent sources.
Unobservable inputs reflect our own assumptions regarding fair market value for these securities.
Although the majority of our prices are obtained from third party sources, we also perform an
internal pricing review for securities with low trading volumes in the current market conditions.
Financial instruments are categorized based upon the following characteristics or inputs to the
valuation techniques:
Level 1
|
Quoted prices for identical instruments in active markets not subject to adjustments or discounts | |
Level 2
|
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. | |
Level 3
|
Instruments whose significant value drivers are unobservable and reflect management’s estimate of fair value based on assumptions used by market participants in an orderly transaction as of the valuation date. |
The following table represents the fair value measurements on a recurring basis for our
consolidated available-for-sale and trading securities by major category and level of input at
December 31, 2010:
| Erie Insurance Group | ||||||||||||||||
| Fair value measurements using: | ||||||||||||||||
| Quoted prices in | Significant | |||||||||||||||
| active markets for | Significant | unobservable | ||||||||||||||
| identical assets | observable inputs | inputs | ||||||||||||||
| (in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Indemnity |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Fixed maturities: |
||||||||||||||||
U.S. treasuries and government agencies |
$ | 25 | $ | 25 | $ | 0 | $ | 0 | ||||||||
Municipal securities |
197 | 0 | 197 | 0 | ||||||||||||
U.S. corporate debt — non-financial |
12 | 0 | 12 | 0 | ||||||||||||
U.S. corporate debt — financial |
26 | 0 | 26 | 0 | ||||||||||||
Structured securities: |
||||||||||||||||
Collateralized debt obligations |
4 | 0 | 0 | 4 | ||||||||||||
Total fixed maturities |
$ | 264 | $ | 25 | $ | 235 | $ | 4 | ||||||||
Equity securities: |
||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||
Financial |
$ | 11 | $ | 5 | $ | 6 | $ | 0 | ||||||||
Non-financial |
12 | 6 | 6 | 0 | ||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||
Non-financial |
1 | 0 | 1 | 0 | ||||||||||||
Total equity securities |
$ | 24 | $ | 11 | $ | 13 | $ | 0 | ||||||||
Total available-for-sale securities |
$ | 288 | $ | 36 | $ | 248 | $ | 4 | ||||||||
Trading securities: |
||||||||||||||||
Common stock |
$ | 28 | $ | 28 | $ | 0 | $ | 0 | ||||||||
Total trading securities |
$ | 28 | $ | 28 | $ | 0 | $ | 0 | ||||||||
Total — Indemnity |
$ | 316 | $ | 64 | $ | 248 | $ | 4 | ||||||||
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| Erie Insurance Group | ||||||||||||||||
| Fair value measurements using: | ||||||||||||||||
| Quoted prices in | Significant | |||||||||||||||
| active markets for | Significant | unobservable | ||||||||||||||
| identical assets | observable inputs | inputs | ||||||||||||||
| (in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Exchange |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Fixed maturities: |
||||||||||||||||
U.S. treasuries and government agencies |
$ | 12 | $ | 12 | $ | 0 | $ | 0 | ||||||||
U.S. government sponsored enterprises |
75 | 0 | 75 | 0 | ||||||||||||
Foreign government |
21 | 0 | 21 | 0 | ||||||||||||
Municipal securities |
1,471 | 0 | 1,467 | 4 | ||||||||||||
U.S. corporate debt — non-financial |
2,535 | 6 | 2,520 | 9 | ||||||||||||
U.S. corporate debt — financial |
1,897 | 6 | 1,889 | 2 | ||||||||||||
Foreign corporate debt — non-financial |
449 | 0 | 449 | 0 | ||||||||||||
Foreign corporate debt — financial |
382 | 0 | 382 | 0 | ||||||||||||
Structured securities: |
||||||||||||||||
Asset-backed securities — auto loans |
38 | 0 | 38 | 0 | ||||||||||||
Asset-backed securities — other |
19 | 0 | 9 | 10 | ||||||||||||
Collateralized debt obligations |
70 | 0 | 40 | 30 | ||||||||||||
Commercial mortgage-backed |
86 | 0 | 86 | 0 | ||||||||||||
Residential mortgage-backed: |
||||||||||||||||
Government sponsored enterprises |
205 | 0 | 205 | 0 | ||||||||||||
Non-government sponsored enterprises |
19 | 0 | 19 | 0 | ||||||||||||
Total fixed maturities |
$ | 7,279 | $ | 24 | $ | 7,200 | $ | 55 | ||||||||
Equity securities: |
||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||
Financial |
$ | 373 | $ | 102 | $ | 264 | $ | 7 | ||||||||
Non-financial |
133 | 48 | 85 | 0 | ||||||||||||
Government sponsored enterprises |
0 | 0 | 0 | 0 | ||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||
Financial |
55 | 16 | 39 | 0 | ||||||||||||
Non-financial |
9 | 0 | 9 | 0 | ||||||||||||
Total equity securities |
$ | 570 | $ | 166 | $ | 397 | $ | 7 | ||||||||
Total
available-for-sale securities |
$ | 7,849 | $ | 190 | $ | 7,597 | $ | 62 | ||||||||
Trading securities: |
||||||||||||||||
Common stock |
$ | 2,306 | $ | 2,294 | $ | 0 | $ | 12 | ||||||||
Total trading securities |
$ | 2,306 | $ | 2,294 | $ | 0 | $ | 12 | ||||||||
Total — Exchange |
$ | 10,155 | $ | 2,484 | $ | 7,597 | $ | 74 | ||||||||
Total — Erie Insurance Group |
$ | 10,471 | $ | 2,548 | $ | 7,845 | $ | 78 | ||||||||
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Level 3 Assets — Quarterly Change:
| Erie Insurance Group | ||||||||||||||||||||||||||||
| Beginning | Ending | |||||||||||||||||||||||||||
| balance at | Included in other | Purchases, | Transfer(s) in | balance at | ||||||||||||||||||||||||
| September 30, | Transfer(s) in | Included in | comprehensive | sales and | and (out) of | December 31, | ||||||||||||||||||||||
| (in millions) | 2010 | and (out) (1) | earnings (2) | income | adjustments | Level 3 (3) | 2010 | |||||||||||||||||||||
Indemnity |
||||||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||||||
U.S. corporate debt — financial |
$ | 2 | $ | (2 | ) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||
Collateralized debt obligations |
7 | (4 | ) | 0 | 0 | 0 | 1 | 4 | ||||||||||||||||||||
Total fixed maturities |
9 | (6 | ) | 0 | 0 | 0 | 1 | 4 | ||||||||||||||||||||
Preferred stock: |
||||||||||||||||||||||||||||
U.S. nonredeemable — financial |
2 | (1 | ) | 0 | 0 | (1 | ) | 0 | 0 | |||||||||||||||||||
Total preferred stock |
2 | (1 | ) | 0 | 0 | (1 | ) | 0 | 0 | |||||||||||||||||||
Total Level 3 assets — Indemnity |
$ | 11 | $ | (7 | ) | $ | 0 | $ | 0 | $ | (1 | ) | $ | 1 | $ | 4 | ||||||||||||
Exchange |
||||||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||||||
Municipal securities |
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 4 | $ | 4 | ||||||||||||||
U.S. corporate debt —
non-financial |
9 | 0 | 0 | 0 | 0 | 0 | 9 | |||||||||||||||||||||
U.S. corporate debt — financial |
0 | 2 | 0 | 0 | 0 | 0 | 2 | |||||||||||||||||||||
Asset-backed securities — other |
5 | 0 | 0 | 0 | 0 | 5 | 10 | |||||||||||||||||||||
Collateralized debt obligations |
42 | 4 | (1 | ) | 1 | (16 | ) | 0 | 30 | |||||||||||||||||||
Total fixed maturities |
56 | 6 | (1 | ) | 1 | (16 | ) | 9 | 55 | |||||||||||||||||||
Preferred stock: |
||||||||||||||||||||||||||||
U.S. nonredeemable — financial |
5 | 1 | 0 | 1 | 0 | 0 | 7 | |||||||||||||||||||||
Total preferred stock |
5 | 1 | 0 | 1 | 0 | 0 | 7 | |||||||||||||||||||||
Trading securities: |
||||||||||||||||||||||||||||
Common stock |
11 | 0 | 1 | 0 | 0 | 0 | 12 | |||||||||||||||||||||
| Total trading securities | 11 | 0 | 1 | 0 | 0 | 0 | 12 | |||||||||||||||||||||
Total Level 3 assets — Exchange |
$ | 72 | $ | 7 | $ | 0 | $ | 2 | $ | (16 | ) | $ | 9 | $ | 74 | |||||||||||||
Total Level 3 assets — Erie
Insurance Group |
$ | 83 | $ | 0 | $ | 0 | $ | 2 | $ | (17 | ) | $ | 10 | $ | 78 | |||||||||||||
87
Table of Contents
Level 3 Assets — Year-to-Date Change:
| Erie Insurance Group | ||||||||||||||||||||||||||||
| Beginning | Ending | |||||||||||||||||||||||||||
| balance at | Included in other | Purchases, | Transfer(s) in | balance at | ||||||||||||||||||||||||
| December 31, | Transfer(s) in | Included in | comprehensive | sales and | and (out) of | December 31, | ||||||||||||||||||||||
| (in millions) | 2009 | and (out) (1) | earnings (2) | income | adjustments | Level 3 (3) | 2010 | |||||||||||||||||||||
Indemnity |
||||||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||||||
U.S. corporate debt — financial |
$ | 2 | $ | (2 | ) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||
Collateralized debt obligations |
8 | (4 | ) | 0 | 0 | 0 | 0 | 4 | ||||||||||||||||||||
Total fixed maturities |
10 | (6 | ) | 0 | 0 | 0 | 0 | 4 | ||||||||||||||||||||
Preferred stock: |
||||||||||||||||||||||||||||
U.S. nonredeemable — financial |
1 | (1 | ) | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||
Total preferred stock |
1 | (1 | ) | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||
Total Level 3 assets — Indemnity |
$ | 11 | $ | (7 | ) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 4 | |||||||||||||
Exchange |
||||||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||||||
Municipal securities |
$ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 4 | $ | 4 | ||||||||||||||
U.S. corporate debt —
non-financial |
17 | 0 | 0 | 0 | 0 | (8 | ) | 9 | ||||||||||||||||||||
U.S. corporate debt — financial |
0 | 2 | 0 | 0 | 0 | 0 | 2 | |||||||||||||||||||||
Asset-backed securities — other |
5 | 0 | 0 | 0 | 0 | 5 | 10 | |||||||||||||||||||||
Collateralized debt obligations |
49 | 4 | (1 | ) | 5 | (19 | ) | (8 | ) | 30 | ||||||||||||||||||
Total fixed maturities |
71 | 6 | (1 | ) | 5 | (19 | ) | (7 | ) | 55 | ||||||||||||||||||
Preferred stock: |
||||||||||||||||||||||||||||
U.S. nonredeemable — financial |
4 | 1 | 0 | 2 | 0 | 0 | 7 | |||||||||||||||||||||
Total preferred stock |
4 | 1 | 0 | 2 | 0 | 0 | 7 | |||||||||||||||||||||
Trading securities: |
||||||||||||||||||||||||||||
Common stock |
9 | 0 | 3 | 0 | 0 | 0 | 12 | |||||||||||||||||||||
Total
trading securities |
9 | 0 | 3 | 0 | 0 | 0 | 12 | |||||||||||||||||||||
Total Level 3 assets — Exchange |
$ | 84 | $ | 7 | $ | 2 | $ | 7 | $ | (19 | ) | $ | (7 | ) | $ | 74 | ||||||||||||
Total Level 3 assets — Erie
Insurance Group |
$ | 95 | $ | 0 | $ | 2 | $ | 7 | $ | (19 | ) | $ | (7 | ) | $ | 78 | ||||||||||||
| (1) | Transfers in and out are attributable to the sale of Indemnity’s wholly owned property and casualty insurance subsidiaries Erie Insurance Company, Erie Insurance Company of New York and Erie Insurance Property and Casualty Company, to the Exchange. Level 3 securities previously held by the Indemnity are shown as transfer (out) while transfers to the Exchange are shown as transfer in. | |
| (2) | Includes losses as a result of other-than-temporary impairments and accrual of discount and amortization of premium. These amounts are reported in the Consolidated Statement of Operations. There were no unrealized gains or losses included in earnings for the three or twelve months ended December 31, 2010 on Level 3 securities. | |
| (3) | Transfers in and out of Level 3 are attributable to changes in the availability of market observable information for individual securities within the respective categories. There were no significant transfers in and out of Level 3. Transfers in and out of levels are recognized at the end of the period. There were no significant transfers between Levels 1 and 2 during the twelve months ended December 31, 2010. |
88
Table of Contents
The following table represents the fair value measurements on a recurring basis for our
consolidated available-for-sale and trading securities by major category and level of input at
December 31, 2009:
| Erie Insurance Group | ||||||||||||||||
| At December 31, 2009 | ||||||||||||||||
| Fair value measurements using: | ||||||||||||||||
| Quoted prices in | Significant | Significant | ||||||||||||||
| active markets for | observable | unobservable | ||||||||||||||
| identical assets | inputs | inputs | ||||||||||||||
| (in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Indemnity |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Fixed maturities: |
||||||||||||||||
U.S. treasuries and government agencies |
$ | 3 | $ | 3 | $ | 0 | $ | 0 | ||||||||
U.S. government sponsored enterprises |
14 | 0 | 14 | 0 | ||||||||||||
Foreign government |
2 | 0 | 2 | 0 | ||||||||||||
Municipal securities |
244 | 0 | 244 | 0 | ||||||||||||
U.S. corporate debt — non-financial |
181 | 3 | 178 | 0 | ||||||||||||
U.S. corporate debt — financial |
138 | 0 | 136 | 2 | ||||||||||||
Foreign corporate debt — non-financial |
28 | 0 | 28 | 0 | ||||||||||||
Foreign corporate debt — financial |
20 | 0 | 20 | 0 | ||||||||||||
Structured securities: |
||||||||||||||||
Asset-backed securities — auto loans |
4 | 0 | 4 | 0 | ||||||||||||
Collateralized debt obligations |
8 | 0 | 0 | 8 | ||||||||||||
Commercial mortgage-backed |
5 | 0 | 5 | 0 | ||||||||||||
Residential mortgage-backed: |
||||||||||||||||
Government sponsored enterprises |
14 | 0 | 14 | 0 | ||||||||||||
Non-government sponsored enterprises |
3 | 0 | 3 | 0 | ||||||||||||
Total fixed maturities |
$ | 664 | $ | 6 | $ | 648 | $ | 10 | ||||||||
Equity securities: |
||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||
Financial |
$ | 22 | $ | 6 | $ | 15 | $ | 1 | ||||||||
Non-financial |
10 | 3 | 7 | 0 | ||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||
Financial |
5 | 0 | 5 | 0 | ||||||||||||
Non-financial |
1 | 0 | 1 | 0 | ||||||||||||
Total equity securities |
$ | 38 | $ | 9 | $ | 28 | $ | 1 | ||||||||
Total available-for-sale securities |
$ | 702 | $ | 15 | $ | 676 | $ | 11 | ||||||||
Trading securities: |
||||||||||||||||
Common stock |
$ | 42 | $ | 42 | $ | 0 | $ | 0 | ||||||||
Total trading securities |
$ | 42 | $ | 42 | $ | 0 | $ | 0 | ||||||||
Total — Indemnity |
$ | 744 | $ | 57 | $ | 676 | $ | 11 | ||||||||
89
Table of Contents
| Erie Insurance Group | ||||||||||||||||
| At December 31, 2009 | ||||||||||||||||
| Fair value measurements using: | ||||||||||||||||
| Quoted prices in | Significant | Significant | ||||||||||||||
| active markets for | observable | unobservable | ||||||||||||||
| identical assets | inputs | inputs | ||||||||||||||
| (in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Exchange |
||||||||||||||||
Available-for-sale securities: |
||||||||||||||||
Fixed maturities: |
||||||||||||||||
U.S. treasuries and government agencies |
$ | 5 | $ | 5 | $ | 0 | $ | 0 | ||||||||
U.S. government sponsored enterprises |
77 | 0 | 77 | 0 | ||||||||||||
Foreign government |
11 | 0 | 11 | 0 | ||||||||||||
Municipal securities |
1,441 | 0 | 1,441 | 0 | ||||||||||||
U.S. corporate debt — non-financial |
2,193 | 22 | 2,154 | 17 | ||||||||||||
U.S. corporate debt — financial |
1,552 | 4 | 1,548 | 0 | ||||||||||||
Foreign corporate debt — non-financial |
395 | 0 | 395 | 0 | ||||||||||||
Foreign corporate debt — financial |
299 | 0 | 299 | 0 | ||||||||||||
Structured securities: |
||||||||||||||||
Asset-backed securities — auto loans |
51 | 0 | 51 | 0 | ||||||||||||
Asset-backed securities — credit cards |
5 | 0 | 5 | 0 | ||||||||||||
Asset-backed securities — other |
33 | 0 | 28 | 5 | ||||||||||||
Collateralized debt obligations |
77 | 0 | 28 | 49 | ||||||||||||
Commercial mortgage-backed |
127 | 0 | 127 | 0 | ||||||||||||
Residential mortgage-backed: |
||||||||||||||||
Government sponsored enterprises |
198 | 0 | 198 | 0 | ||||||||||||
Non-government sponsored enterprises |
53 | 0 | 53 | 0 | ||||||||||||
Total fixed maturities |
$ | 6,517 | $ | 31 | $ | 6,415 | $ | 71 | ||||||||
Equity securities: |
||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||
Financial |
$ | 301 | $ | 96 | $ | 201 | $ | 4 | ||||||||
Non-financial |
113 | 47 | 66 | 0 | ||||||||||||
Government sponsored enterprises |
3 | 2 | 1 | 0 | ||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||
Financial |
47 | 12 | 35 | 0 | ||||||||||||
Non-financial |
8 | 0 | 8 | 0 | ||||||||||||
Total equity securities |
$ | 472 | $ | 157 | $ | 311 | $ | 4 | ||||||||
Total available-for-sale securities |
$ | 6,989 | $ | 188 | $ | 6,726 | $ | 75 | ||||||||
Trading securities: |
||||||||||||||||
Common stock |
$ | 1,835 | $ | 1,826 | $ | 0 | $ | 9 | ||||||||
Total trading securities |
$ | 1,835 | $ | 1,826 | $ | 0 | $ | 9 | ||||||||
Total — Exchange |
$ | 8,824 | $ | 2,014 | $ | 6,726 | $ | 84 | ||||||||
Total — Erie Insurance Group |
$ | 9,568 | $ | 2,071 | $ | 7,402 | $ | 95 | ||||||||
90
Table of Contents
Level 3 Assets — Quarterly Change:
| Erie Insurance Group | ||||||||||||||||||||||||
| Beginning | Ending | |||||||||||||||||||||||
| balance at | Included in other | Transfers in and | balance at | |||||||||||||||||||||
| September 30, | Included in | comprehensive | Purchases, sales | (out) of | December 31, | |||||||||||||||||||
| (in millions) | 2009 | earnings(1) | income | and adjustments | Level 3(2) | 2009 | ||||||||||||||||||
Indemnity |
||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. corporate debt — financial |
$ | 0 | $ | 0 | $ | 0 | $ | 2 | $ | 0 | $ | 2 | ||||||||||||
Collateralized debt obligations |
9 | 0 | 0 | 0 | (1 | ) | 8 | |||||||||||||||||
Total fixed maturities |
9 | 0 | 0 | 2 | (1 | ) | 10 | |||||||||||||||||
Preferred stock: |
||||||||||||||||||||||||
U.S. nonredeemable — financial |
4 | 0 | 0 | (3 | ) | 0 | 1 | |||||||||||||||||
Total preferred stock |
4 | 0 | 0 | (3 | ) | 0 | 1 | |||||||||||||||||
Total Level 3 assets — Indemnity |
$ | 13 | $ | 0 | $ | 0 | $ | (1 | ) | $ | (1 | ) | $ | 11 | ||||||||||
Exchange |
||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. corporate debt — non-financial |
$ | 17 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 17 | ||||||||||||
Foreign corporate debt — non-financial |
1 | 0 | 0 | 0 | (1 | ) | 0 | |||||||||||||||||
Asset-backed securities — other |
5 | 0 | 0 | 0 | 0 | 5 | ||||||||||||||||||
Collateralized debt obligations |
77 | (4 | ) | 0 | 0 | (24 | ) | 49 | ||||||||||||||||
Total fixed maturities |
100 | (4 | ) | 0 | 0 | (25 | ) | 71 | ||||||||||||||||
Preferred stock: |
||||||||||||||||||||||||
U.S. nonredeemable — financial |
9 | 0 | 0 | 0 | (5 | ) | 4 | |||||||||||||||||
U.S. nonredeemable — non-financial |
5 | 0 | 0 | (5 | ) | 0 | 0 | |||||||||||||||||
Total preferred stock |
14 | 0 | 0 | (5 | ) | (5 | ) | 4 | ||||||||||||||||
Trading securities: |
||||||||||||||||||||||||
Common stock |
1 | 2 | 0 | 6 | 0 | 9 | ||||||||||||||||||
Total trading securities |
1 | 2 | 0 | 6 | 0 | 9 | ||||||||||||||||||
Total Level 3 assets — Exchange |
$ | 115 | $ | (2 | ) | $ | 0 | $ | 1 | $ | (30 | ) | $ | 84 | ||||||||||
Total Level 3 assets — Erie Insurance Group |
$ | 128 | $ | (2 | ) | $ | 0 | $ | 0 | $ | (31 | ) | $ | 95 | ||||||||||
91
Table of Contents
Level 3 Assets — Year-to-Date Change:
| Erie Insurance Group | ||||||||||||||||||||||||
| Beginning | Ending | |||||||||||||||||||||||
| balance at | Included in other | Transfers in and | balance at | |||||||||||||||||||||
| December 31, | Included in | comprehensive | Purchases, sales | (out) of | December 31, | |||||||||||||||||||
| (in millions) | 2008 | earnings(1) | income | and adjustments | Level 3(2) | 2009 | ||||||||||||||||||
Indemnity |
||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. corporate debt — financial |
$ | 5 | $ | 0 | $ | 0 | $ | (2 | ) | $ | (1 | ) | $ | 2 | ||||||||||
Commercial mortgage-backed |
2 | 0 | 0 | 0 | (2 | ) | 0 | |||||||||||||||||
Collateralized debt obligations |
7 | (1 | ) | 2 | 1 | (1 | ) | 8 | ||||||||||||||||
Total fixed maturities |
14 | (1 | ) | 2 | (1 | ) | (4 | ) | 10 | |||||||||||||||
Preferred stock: |
||||||||||||||||||||||||
U.S. nonredeemable — financial |
7 | 0 | 0 | 1 | (7 | ) | 1 | |||||||||||||||||
U.S. nonredeemable — non-financial |
4 | 0 | 0 | 0 | (4 | ) | 0 | |||||||||||||||||
Total preferred stock |
11 | 0 | 0 | 1 | (11 | ) | 1 | |||||||||||||||||
Total Level 3 assets — Indemnity |
$ | 25 | $ | (1 | ) | $ | 2 | $ | 0 | $ | (15 | ) | $ | 11 | ||||||||||
Exchange |
||||||||||||||||||||||||
Available-for-sale securities: |
||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. corporate debt — financial |
$ | 36 | $ | 0 | $ | 0 | $ | (16 | ) | $ | (20 | ) | $ | 0 | ||||||||||
U.S. corporate debt — non-financial |
21 | 0 | 0 | (2 | ) | (2 | ) | 17 | ||||||||||||||||
Foreign corporate debt — financial |
1 | 0 | 0 | 0 | (1 | ) | 0 | |||||||||||||||||
Foreign corporate debt — non-financial |
2 | 0 | 0 | 0 | (2 | ) | 0 | |||||||||||||||||
Asset-backed securities — other |
5 | 0 | 0 | 0 | 0 | 5 | ||||||||||||||||||
Collateralized debt obligations |
36 | (7 | ) | 10 | 8 | 2 | 49 | |||||||||||||||||
Commercial mortgage-backed |
7 | 0 | 0 | 0 | (7 | ) | 0 | |||||||||||||||||
Total fixed maturities |
108 | (7 | ) | 10 | (10 | ) | (30 | ) | 71 | |||||||||||||||
Preferred stock: |
||||||||||||||||||||||||
U.S. nonredeemable — financial |
24 | 0 | 2 | 0 | (22 | ) | 4 | |||||||||||||||||
U.S. nonredeemable — non-financial |
22 | 0 | 0 | (5 | ) | (17 | ) | 0 | ||||||||||||||||
Total preferred stock |
46 | 0 | 2 | (5 | ) | (39 | ) | 4 | ||||||||||||||||
Trading securities: |
||||||||||||||||||||||||
Common stock |
0 | 3 | 0 | 6 | 0 | 9 | ||||||||||||||||||
Total trading securities |
0 | 3 | 0 | 6 | 0 | 9 | ||||||||||||||||||
Total Level 3 assets — Exchange |
$ | 154 | $ | (4 | ) | $ | 12 | $ | (9 | ) | $ | (69 | ) | $ | 84 | |||||||||
Total Level 3 assets — Erie Insurance Group |
$ | 179 | $ | (5 | ) | $ | 14 | $ | (9 | ) | $ | (84 | ) | $ | 95 | |||||||||
| (1) | Includes losses as a result of other-than-temporary impairments and accrual of discount and amortization of premium. These amounts are reported in the Consolidated Statement of Operations. There were no unrealized gains or losses included in earnings for the three or twelve months ended December 31, 2009 on Level 3 securities. | |
| (2) | Transfers in and out of Level 3 are attributable to changes in the availability of market observable information for individual securities within the respective categories. Transfers in and out of levels are recorded at the end of the period. |
92
Table of Contents
Estimates of fair values for our investment portfolio are obtained primarily from a nationally
recognized pricing service. Our Level 1 category includes those securities valued using an
exchange traded price provided by the pricing service. The methodologies used by the pricing
service that support a Level 2 classification of a financial instrument include multiple
verifiable, observable inputs including benchmark yields, reported trades, broker/dealer quotes,
issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Pricing
service valuations for Level 3 securities are based on proprietary models and are used when
observable inputs are not available in illiquid markets. In limited circumstances we adjust the
price received from the pricing service when, in our judgment, a better reflection of fair value is
available based on corroborating information and our knowledge and monitoring of market conditions.
At December 31, 2010, we adjusted some prices received by the pricing service to reflect an
alternate fair market value based on observable market data such as a disparity in price of
comparable securities and/or non-binding broker quotes.
The following table displays
the number and values of these adjustments for the year ended
December 31, 2010:
| Value of securities | ||||||||||||
| Value of securities | used in the | |||||||||||
| Number of | using pricing | financial | ||||||||||
| (dollars in millions) | holdings | service | statements | |||||||||
Exchange |
2 | $ | 0.4 | $ | 1.2 | |||||||
Total — Erie Insurance Group |
$ | 0.4 | $ | 1.2 | ||||||||
We perform continuous reviews of the prices obtained from the pricing service. This includes
evaluating the methodology and inputs used by the pricing service to ensure we determine the proper
level classification of the financial instrument. Price variances, including large periodic
changes, are investigated and corroborated by market data. We have reviewed the pricing
methodologies of our pricing service and believe that their prices adequately consider market
activity in determining fair value.
In cases in which a price from the pricing service is not available, values are determined by
obtaining non-binding broker quotes and/or market comparables. When available, we obtain multiple
quotes for the same security. The ultimate value for these securities is determined based on our
best estimate of fair value using corroborating market information. Our evaluation includes the
consideration of benchmark yields, reported trades, issuer spreads, two-sided markets, benchmark
securities, bids, offers and reference data.
For certain structured securities in an illiquid market, there may be no prices available from a
pricing service and no comparable market quotes available. In these situations, we value the
security using an internally-developed risk-adjusted discounted cash flow model.
93
Table of Contents
The following table sets forth the fair value of the consolidated fixed maturity and preferred
stock securities by pricing source:
| Erie Insurance Group | ||||||||||||||||
| December 31, 2010 | ||||||||||||||||
| (in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Indemnity |
||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
Priced via pricing services |
$ | 260 | $ | 25 | $ | 235 | $ | 0 | ||||||||
Priced via market comparables/non-binding broker quote(1) |
0 | 0 | 0 | 0 | ||||||||||||
Priced via internal modeling (2) |
4 | 0 | 0 | 4 | ||||||||||||
Total fixed maturity securities |
264 | 25 | 235 | 4 | ||||||||||||
Preferred stock securities: |
||||||||||||||||
Priced via pricing services |
22 | 11 | 11 | 0 | ||||||||||||
Priced via market comparables/non-binding broker quote (1) |
2 | 0 | 2 | 0 | ||||||||||||
Priced via internal modeling (2) |
0 | 0 | 0 | 0 | ||||||||||||
Total preferred stock securities |
24 | 11 | 13 | 0 | ||||||||||||
Common stock securities: |
||||||||||||||||
Priced via pricing services |
28 | 28 | 0 | 0 | ||||||||||||
Priced via market comparables/non-binding broker quote (1) |
0 | 0 | 0 | 0 | ||||||||||||
Priced via internal modeling (2) |
0 | 0 | 0 | 0 | ||||||||||||
Total common stock securities |
28 | 28 | 0 | 0 | ||||||||||||
Total available-for-sale/trading securities — Indemnity |
$ | 316 | $ | 64 | $ | 248 | $ | 4 | ||||||||
Exchange |
||||||||||||||||
Fixed maturity securities: |
||||||||||||||||
Priced via pricing services |
$ | 7,138 | $ | 24 | $ | 7,114 | $ | 0 | ||||||||
Priced via market comparables/non-binding broker quote (1) |
86 | 0 | 86 | 0 | ||||||||||||
Priced via internal modeling (2) |
55 | 0 | 0 | 55 | ||||||||||||
Total fixed maturity securities |
7,279 | 24 | 7,200 | 55 | ||||||||||||
Preferred stock securities: |
||||||||||||||||
Priced via pricing services |
533 | 166 | 367 | 0 | ||||||||||||
Priced via market comparables/non-binding broker quote (1) |
37 | 0 | 30 | 7 | ||||||||||||
Priced via internal modeling (2) |
0 | 0 | 0 | 0 | ||||||||||||
Total preferred stock securities |
570 | 166 | 397 | 7 | ||||||||||||
Common stock securities: |
||||||||||||||||
Priced via pricing services |
2,294 | 2,294 | 0 | 0 | ||||||||||||
Priced via market comparables/non-binding broker quote (1) |
0 | 0 | 0 | 0 | ||||||||||||
Priced via
internal
modeling (2) |
12 | 0 | 0 | 12 | ||||||||||||
Total common stock securities |
2,306 | 2,294 | 0 | 12 | ||||||||||||
Total available-for-sale/trading securities — Exchange |
$ | 10,155 | $ | 2,484 | $ | 7,597 | $ | 74 | ||||||||
Total available-for-sale/trading securities — Erie Insurance Group |
$ | 10,471 | $ | 2,548 | $ | 7,845 | $ | 78 | ||||||||
| (1) | All broker quotes obtained for securities were non-binding. When a non-binding broker quote was the only price available, the security was classified as Level 3. | |
| (2) | Internal modeling using a discounted cash flow model was performed on 12 fixed maturities representing less than 0.5% of the total available-for-sale portfolio of the Erie Insurance Group. |
We have no assets that were measured at fair value on a nonrecurring basis during the year
ended December 31, 2010.
94
Table of Contents
Note 7. Investments
The following tables summarize the cost and fair value of our available-for-sale securities at
December 31, 2010 and 2009:
| Erie Insurance Group | ||||||||||||||||
| December 31, 2010 | ||||||||||||||||
| (in millions) | Amortized | Gross unrealized | Gross unrealized | Estimated | ||||||||||||
| Available-for-sale securities | cost | gains | losses | fair value | ||||||||||||
Indemnity |
||||||||||||||||
Fixed maturities: |
||||||||||||||||
U.S. treasuries and government agencies |
$ | 25 | $ | 0 | $ | 0 | $ | 25 | ||||||||
U.S. government sponsored enterprises |
0 | 0 | 0 | 0 | ||||||||||||
Municipal securities |
193 | 6 | 2 | 197 | ||||||||||||
U.S. corporate debt — non-financial |
12 | 0 | 0 | 12 | ||||||||||||
U.S. corporate debt — financial |
24 | 2 | 0 | 26 | ||||||||||||
Structured securities: |
||||||||||||||||
Collateralized debt obligations |
3 | 1 | 0 | 4 | ||||||||||||
Total fixed maturities |
$ | 257 | $ | 9 | $ | 2 | $ | 264 | ||||||||
Equity securities: |
||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||
Financial |
$ | 8 | $ | 3 | $ | 0 | $ | 11 | ||||||||
Non-financial |
11 | 1 | 0 | 12 | ||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||
Non-financial |
1 | 0 | 0 | 1 | ||||||||||||
Total equity securities |
$ | 20 | $ | 4 | $ | 0 | $ | 24 | ||||||||
Total available-for-sale securities — Indemnity |
$ | 277 | $ | 13 | $ | 2 | $ | 288 | ||||||||
Exchange |
||||||||||||||||
Fixed maturities: |
||||||||||||||||
U.S. treasuries and government agencies |
$ | 11 | $ | 1 | $ | 0 | $ | 12 | ||||||||
U.S. government sponsored enterprises |
74 | 1 | 0 | 75 | ||||||||||||
Foreign government |
20 | 1 | 0 | 21 | ||||||||||||
Municipal securities |
1,437 | 43 | 9 | 1,471 | ||||||||||||
U.S. corporate debt — non-financial |
2,354 | 186 | 5 | 2,535 | ||||||||||||
U.S. corporate debt — financial |
1,767 | 137 | 7 | 1,897 | ||||||||||||
Foreign corporate debt — non-financial |
415 | 34 | 0 | 449 | ||||||||||||
Foreign corporate debt — financial |
364 | 20 | 2 | 382 | ||||||||||||
Structured securities: |
||||||||||||||||
Asset-backed securities — auto loans |
36 | 2 | 0 | 38 | ||||||||||||
Asset-backed securities — other |
18 | 1 | 0 | 19 | ||||||||||||
Collateralized debt obligations |
69 | 6 | 5 | 70 | ||||||||||||
Commercial mortgage-backed |
82 | 5 | 1 | 86 | ||||||||||||
Residential mortgage-backed: |
||||||||||||||||
Government sponsored enterprises |
196 | 9 | 0 | 205 | ||||||||||||
Non-government sponsored enterprises |
20 | 0 | 1 | 19 | ||||||||||||
Total fixed maturities |
$ | 6,863 | $ | 446 | $ | 30 | $ | 7,279 | ||||||||
Equity securities: |
||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||
Financial |
$ | 317 | $ | 58 | $ | 2 | $ | 373 | ||||||||
Non-financial |
126 | 9 | 2 | 133 | ||||||||||||
Government sponsored enterprises |
0 | 0 | 0 | 0 | ||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||
Financial |
52 | 6 | 3 | 55 | ||||||||||||
Non-financial |
8 | 1 | 0 | 9 | ||||||||||||
Total equity securities |
$ | 503 | $ | 74 | $ | 7 | $ | 570 | ||||||||
Total
available-for-sale securities — Exchange |
$ | 7,366 | $ | 520 | $ | 37 | $ | 7,849 | ||||||||
Total available-for-sale securities — Erie Insurance Group |
$ | 7,643 | $ | 533 | $ | 39 | $ | 8,137 | ||||||||
95
Table of Contents
| Erie Insurance Group | ||||||||||||||||
| At December 31, 2009 | ||||||||||||||||
| (in millions) | Amortized | Gross unrealized | Gross unrealized | Estimated | ||||||||||||
| Available-for-sale securities | cost | gains | losses | fair value | ||||||||||||
Indemnity |
||||||||||||||||
Fixed maturities: |
||||||||||||||||
U.S. treasuries and government agencies |
$ | 3 | $ | 0 | $ | 0 | $ | 3 | ||||||||
U.S. government sponsored enterprises |
14 | 0 | 0 | 14 | ||||||||||||
Foreign government |
2 | 0 | 0 | 2 | ||||||||||||
Municipal securities |
235 | 9 | 0 | 244 | ||||||||||||
U.S. corporate debt — non-financial |
172 | 10 | 1 | 181 | ||||||||||||
U.S. corporate debt — financial |
135 | 7 | 4 | 138 | ||||||||||||
Foreign corporate debt — non-financial |
26 | 2 | 0 | 28 | ||||||||||||
Foreign corporate debt — financial |
19 | 2 | 1 | 20 | ||||||||||||
Structured securities: |
||||||||||||||||
Asset-backed securities — auto loans |
4 | 0 | 0 | 4 | ||||||||||||
Collateralized debt obligations |
10 | 0 | 2 | 8 | ||||||||||||
Commercial mortgage-backed |
5 | 0 | 0 | 5 | ||||||||||||
Residential mortgage-backed: |
||||||||||||||||
Government sponsored enterprises |
14 | 0 | 0 | 14 | ||||||||||||
Non-government sponsored enterprises |
3 | 0 | 0 | 3 | ||||||||||||
Total fixed maturities |
$ | 642 | $ | 30 | $ | 8 | $ | 664 | ||||||||
Equity securities: |
||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||
Financial |
$ | 20 | $ | 3 | $ | 1 | $ | 22 | ||||||||
Non-financial |
9 | 1 | 0 | 10 | ||||||||||||
Government sponsored enterprises |
0 | 0 | 0 | 0 | ||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||
Financial |
5 | 0 | 0 | 5 | ||||||||||||
Non-financial |
1 | 0 | 0 | 1 | ||||||||||||
Total equity securities |
$ | 35 | $ | 4 | $ | 1 | $ | 38 | ||||||||
Total available-for-sale securities — Indemnity |
$ | 677 | $ | 34 | $ | 9 | $ | 702 | ||||||||
Exchange |
||||||||||||||||
Fixed maturities: |
||||||||||||||||
U.S. treasuries and government agencies |
$ | 5 | $ | 0 | $ | 0 | $ | 5 | ||||||||
U.S. government sponsored enterprises |
76 | 1 | 0 | 77 | ||||||||||||
Foreign government |
10 | 1 | 0 | 11 | ||||||||||||
Municipal securities |
1,389 | 55 | 3 | 1,441 | ||||||||||||
U.S. corporate debt — non-financial |
2,078 | 125 | 10 | 2,193 | ||||||||||||
U.S. corporate debt — financial |
1,498 | 82 | 28 | 1,552 | ||||||||||||
Foreign corporate debt — non-financial |
375 | 22 | 2 | 395 | ||||||||||||
Foreign corporate debt — financial |
292 | 11 | 4 | 299 | ||||||||||||
Structured securities: |
||||||||||||||||
Asset-backed securities — auto loans |
48 | 3 | 0 | 51 | ||||||||||||
Asset-backed securities — credit cards |
5 | 0 | 0 | 5 | ||||||||||||
Asset-backed securities — other |
35 | 0 | 2 | 33 | ||||||||||||
Collateralized debt obligations |
88 | 5 | 16 | 77 | ||||||||||||
Commercial mortgage-backed |
127 | 5 | 5 | 127 | ||||||||||||
Residential mortgage-backed: |
||||||||||||||||
Government sponsored enterprises |
192 | 6 | 0 | 198 | ||||||||||||
Non-government sponsored enterprises |
59 | 0 | 6 | 53 | ||||||||||||
Total fixed maturities |
$ | 6,277 | $ | 316 | $ | 76 | $ | 6,517 | ||||||||
Equity securities: |
||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||
Financial |
$ | 259 | $ | 53 | $ | 11 | $ | 301 | ||||||||
Non-financial |
111 | 4 | 2 | 113 | ||||||||||||
Government sponsored enterprises |
1 | 2 | 0 | 3 | ||||||||||||
Foreign nonredeemable preferred securities: |
||||||||||||||||
Financial |
46 | 4 | 3 | 47 | ||||||||||||
Non-financial |
8 | 0 | 0 | 8 | ||||||||||||
Total equity securities |
$ | 425 | $ | 63 | $ | 16 | $ | 472 | ||||||||
Total available-for-sale securities — Exchange |
$ | 6,702 | $ | 379 | $ | 92 | $ | 6,989 | ||||||||
Total available-for-sale securities — Erie Insurance Group |
$ | 7,379 | $ | 413 | $ | 101 | $ | 7,691 | ||||||||
96
Table of Contents
The amortized cost and estimated fair value of fixed maturities at December 31, 2010, are
shown below by remaining contractual term to maturity. Mortgage-backed securities are allocated
based on their stated maturity dates. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties.
| Erie Insurance Group | ||||||||
| Amortized | Estimated | |||||||
| (in millions) | cost | fair value | ||||||
Indemnity |
||||||||
Due in one year or less |
$ | 64 | $ | 66 | ||||
Due after one year through five years |
88 | 92 | ||||||
Due after five years through ten years |
59 | 61 | ||||||
Due after ten years |
46 | 45 | ||||||
Total fixed maturities — Indemnity |
$ | 257 | $ | 264 | ||||
Exchange |
||||||||
Due in one year or less |
$ | 318 | $ | 335 | ||||
Due after one year through five years |
2,492 | 2,646 | ||||||
Due after five years through ten years |
2,724 | 2,920 | ||||||
Due after ten years |
1,329 | 1,378 | ||||||
Total fixed maturities — Exchange |
$ | 6,863 | $ | 7,279 | ||||
Total fixed maturities — Erie Insurance Group |
$ | 7,120 | $ | 7,543 | ||||
Fixed maturities and equity securities in a gross unrealized loss position at December 31, 2010 are
as follows for Indemnity. Data is provided by length of time securities were in a gross unrealized
loss position.
December 31, 2010
| Erie Insurance Group | ||||||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | No. of | ||||||||||||||||||||||
| (dollars in millions) | value | losses | value | losses | value | losses | holdings | |||||||||||||||||||||
Indemnity |
||||||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||||||
U.S. government sponsored enterprises |
$ | 25 | $ | 0 | $ | 0 | $ | 0 | $ | 25 | $ | 0 | 1 | |||||||||||||||
Municipal securities |
39 | 2 | 1 | 0 | 40 | 2 | 20 | |||||||||||||||||||||
U.S. corporate debt — non-financial |
11 | 0 | 0 | 0 | 11 | 0 | 1 | |||||||||||||||||||||
U.S. corporate debt — financial |
20 | 0 | 0 | 0 | 20 | 0 | 2 | |||||||||||||||||||||
Total fixed maturities — Indemnity |
$ | 95 | $ | 2 | $ | 1 | $ | 0 | $ | 96 | $ | 2 | 24 | |||||||||||||||
Equity securities: |
||||||||||||||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||||||||||||||
Non-financial |
$ | 3 | $ | 0 | $ | 0 | $ | 0 | $ | 3 | $ | 0 | 1 | |||||||||||||||
Total equity securities — Indemnity |
$ | 3 | $ | 0 | $ | 0 | $ | 0 | $ | 3 | $ | 0 | 1 | |||||||||||||||
Quality breakdown of fixed maturities at December 31, 2010
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | No. of | ||||||||||||||||||||||
| (dollars in millions) | Value | losses | value | losses | value | losses | holdings | |||||||||||||||||||||
Indemnity |
||||||||||||||||||||||||||||
Investment grade |
$ | 95 | $ | 2 | $ | 1 | $ | 0 | $ | 96 | $ | 2 | 24 | |||||||||||||||
Non-investment grade |
0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Total fixed maturities — Indemnity |
$ | 95 | $ | 2 | $ | 1 | $ | 0 | $ | 96 | $ | 2 | 24 | |||||||||||||||
97
Table of Contents
Fixed maturities and equity securities in a gross unrealized loss position at December 31,
2010 are as follows for the Exchange. Data is provided by length of time securities were in a
gross unrealized loss position.
December 31, 2010
| Erie Insurance Group | ||||||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | No. of | ||||||||||||||||||||||
| (dollars in millions) | value | losses | value | losses | value | losses | holdings | |||||||||||||||||||||
Exchange |
||||||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||||||
U.S. treasuries and government agencies |
$ | 2 | $ | 0 | $ | 0 | $ | 0 | $ | 2 | $ | 0 | 1 | |||||||||||||||
U.S. government sponsored enterprises |
20 | 0 | 0 | 0 | 20 | 0 | 2 | |||||||||||||||||||||
Foreign government |
10 | 0 | 0 | 0 | 10 | 0 | 1 | |||||||||||||||||||||
Municipal securities |
299 | 8 | 5 | 1 | 304 | 9 | 59 | |||||||||||||||||||||
U.S. corporate debt — non-financial |
217 | 4 | 36 | 1 | 253 | 5 | 43 | |||||||||||||||||||||
U.S. corporate debt — financial |
141 | 2 | 85 | 5 | 226 | 7 | 47 | |||||||||||||||||||||
Foreign corporate debt — non-financial |
8 | 0 | 16 | 0 | 24 | 0 | 5 | |||||||||||||||||||||
Foreign corporate debt — financial |
32 | 2 | 7 | 0 | 39 | 2 | 6 | |||||||||||||||||||||
Structured securities: |
||||||||||||||||||||||||||||
Collateralized debt obligations |
1 | 0 | 33 | 5 | 34 | 5 | 6 | |||||||||||||||||||||
Commercial mortgage-backed |
0 | 0 | 12 | 1 | 12 | 1 | 2 | |||||||||||||||||||||
Residential mortgage-backed: |
||||||||||||||||||||||||||||
Government sponsored enterprises |
6 | 0 | 0 | 0 | 6 | 0 | 2 | |||||||||||||||||||||
Non-government sponsored enterprises |
0 | 0 | 7 | 1 | 7 | 1 | 2 | |||||||||||||||||||||
Total fixed maturities — Exchange |
$ | 736 | $ | 16 | $ | 201 | $ | 14 | $ | 937 | $ | 30 | 176 | |||||||||||||||
Equity securities: |
||||||||||||||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||||||||||||||
Financial |
$ | 25 | $ | 0 | $ | 24 | $ | 2 | $ | 49 | $ | 2 | 6 | |||||||||||||||
Non-financial |
14 | 1 | 20 | 1 | 34 | 2 | 4 | |||||||||||||||||||||
Foreign nonredeemable preferred
securities: |
||||||||||||||||||||||||||||
Financial |
6 | 1 | 15 | 2 | 21 | 3 | 5 | |||||||||||||||||||||
Total equity securities — Exchange |
$ | 45 | $ | 2 | $ | 59 | $ | 5 | $ | 104 | $ | 7 | 15 | |||||||||||||||
Quality breakdown of fixed maturities at December 31, 2010
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | No. of | ||||||||||||||||||||||
| (dollars in millions) | value | losses | value | losses | value | losses | holdings | |||||||||||||||||||||
Exchange |
||||||||||||||||||||||||||||
Investment grade |
$ | 703 | $ | 16 | $ | 155 | $ | 11 | $ | 858 | $ | 27 | 154 | |||||||||||||||
Non-investment grade |
33 | 0 | 46 | 3 | 79 | 3 | 22 | |||||||||||||||||||||
Total fixed maturities — Exchange |
$ | 736 | $ | 16 | $ | 201 | $ | 14 | $ | 937 | $ | 30 | 176 | |||||||||||||||
The above securities for Indemnity and the Exchange have been evaluated and determined to be
temporary impairments for which we expect to recover our entire principal plus interest. The
primary components of this analysis are a general review of market conditions and financial
performance of the issuer along with the extent and duration of which fair value is less than cost.
Any debt securities that we intend to sell or will more likely than not be required to sell before
recovery are included in other-than-temporary impairments with the impairment charges recognized in
earnings.
98
Table of Contents
Fixed maturities and equity securities in a gross unrealized loss position at December 31, 2009 are
as follows for Indemnity. Data is provided by length of time securities were in a gross unrealized
loss position.
December 31, 2009
| Erie Insurance Group | ||||||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | No. of | ||||||||||||||||||||||
| (dollars in millions) | value | losses | value | losses | Value | losses | holdings | |||||||||||||||||||||
Indemnity |
||||||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||||||
U.S. government sponsored enterprises |
$ | 8 | $ | 0 | $ | 0 | $ | 0 | $ | 8 | $ | 0 | 2 | |||||||||||||||
Municipal securities |
18 | 0 | 5 | 0 | 23 | 0 | 12 | |||||||||||||||||||||
U.S. corporate debt — non-financial |
19 | 0 | 8 | 1 | 27 | 1 | 16 | |||||||||||||||||||||
U.S. corporate debt — financial |
16 | 1 | 40 | 3 | 56 | 4 | 42 | |||||||||||||||||||||
Foreign corporate debt — non-financial |
0 | 0 | 4 | 0 | 4 | 0 | 3 | |||||||||||||||||||||
Foreign corporate debt — financial |
2 | 0 | 3 | 1 | 5 | 1 | 4 | |||||||||||||||||||||
Structured securities: |
||||||||||||||||||||||||||||
Collateralized debt obligations |
0 | 0 | 3 | 2 | 3 | 2 | 6 | |||||||||||||||||||||
Commercial mortgage-backed |
0 | 0 | 1 | 0 | 1 | 0 | 1 | |||||||||||||||||||||
Residential mortgage-backed: |
||||||||||||||||||||||||||||
Government sponsored enterprises |
6 | 0 | 0 | 0 | 6 | 0 | 2 | |||||||||||||||||||||
Non-government sponsored enterprises |
0 | 0 | 3 | 0 | 3 | 0 | 2 | |||||||||||||||||||||
Total fixed maturities — Indemnity |
$ | 69 | $ | 1 | $ | 67 | $ | 7 | $ | 136 | $ | 8 | 90 | |||||||||||||||
Equity securities: |
||||||||||||||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||||||||||||||
Financial |
$ | 5 | $ | 0 | $ | 5 | $ | 1 | $ | 10 | $ | 1 | 8 | |||||||||||||||
Non-financial |
3 | 0 | 4 | 0 | 7 | 0 | 3 | |||||||||||||||||||||
Foreign nonredeemable preferred
securities: |
||||||||||||||||||||||||||||
Financial |
0 | 0 | 1 | 0 | 1 | 0 | 1 | |||||||||||||||||||||
Total equity securities — Indemnity |
$ | 8 | $ | 0 | $ | 10 | $ | 1 | $ | 18 | $ | 1 | 12 | |||||||||||||||
Quality breakdown of fixed maturities at December 31, 2009
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | No. of | ||||||||||||||||||||||
| (dollars in millions) | value | losses | value | losses | value | losses | holdings | |||||||||||||||||||||
Indemnity
|
||||||||||||||||||||||||||||
Investment grade |
$ | 69 | $ | 1 | $ | 49 | $ | 4 | $ | 118 | $ | 5 | 71 | |||||||||||||||
Non-investment grade |
0 | 0 | 18 | 3 | 18 | 3 | 19 | |||||||||||||||||||||
Total fixed maturities — Indemnity |
$ | 69 | $ | 1 | $ | 67 | $ | 7 | $ | 136 | $ | 8 | 90 | |||||||||||||||
99
Table of Contents
Fixed maturities and equity securities in a gross unrealized loss position at December 31,
2009 are as follows for the Exchange. Data is provided by length of time securities were in a
gross unrealized loss position.
December 31, 2009
| Erie Insurance Group | ||||||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | No. of | ||||||||||||||||||||||
| (dollars in millions) | value | losses | value | losses | value | losses | holdings | |||||||||||||||||||||
Exchange |
||||||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||||||
U.S. government sponsored enterprises |
$ | 50 | $ | 0 | $ | 0 | $ | 0 | $ | 50 | $ | 0 | 6 | |||||||||||||||
Municipal securities |
105 | 2 | 26 | 1 | 131 | 3 | 24 | |||||||||||||||||||||
U.S. corporate debt — non-financial |
128 | 3 | 129 | 7 | 257 | 10 | 56 | |||||||||||||||||||||
U.S. corporate debt — financial |
159 | 2 | 318 | 26 | 477 | 28 | 98 | |||||||||||||||||||||
Foreign corporate debt — non-financial |
12 | 0 | 36 | 2 | 48 | 2 | 9 | |||||||||||||||||||||
Foreign corporate debt — financial |
17 | 0 | 68 | 4 | 85 | 4 | 17 | |||||||||||||||||||||
Structured securities: |
||||||||||||||||||||||||||||
Asset backed — credit cards |
0 | 0 | 5 | 0 | 5 | 0 | 1 | |||||||||||||||||||||
Asset backed — other |
0 | 0 | 18 | 2 | 18 | 2 | 3 | |||||||||||||||||||||
Collateralized debt obligations |
8 | 1 | 28 | 15 | 36 | 16 | 15 | |||||||||||||||||||||
Commercial mortgage-backed |
1 | 0 | 34 | 5 | 35 | 5 | 6 | |||||||||||||||||||||
Residential mortgage-backed: |
||||||||||||||||||||||||||||
Government sponsored enterprises |
28 | 0 | 0 | 0 | 28 | 0 | 4 | |||||||||||||||||||||
Non-government sponsored enterprises |
0 | 0 | 45 | 6 | 45 | 6 | 9 | |||||||||||||||||||||
Total fixed maturities — Exchange |
$ | 508 | $ | 8 | $ | 707 | $ | 68 | $ | 1,215 | $ | 76 | 248 | |||||||||||||||
Equity securities: |
||||||||||||||||||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||||||||||||||||||
Financial |
$ | 36 | $ | 2 | $ | 72 | $ | 9 | $ | 108 | $ | 11 | 20 | |||||||||||||||
Non-financial |
14 | 0 | 43 | 2 | 57 | 2 | 10 | |||||||||||||||||||||
Foreign nonredeemable preferred
securities: |
||||||||||||||||||||||||||||
Financial |
0 | 0 | 18 | 3 | 18 | 3 | 4 | |||||||||||||||||||||
Total equity securities — Exchange |
$ | 50 | $ | 2 | $ | 133 | $ | 14 | $ | 183 | $ | 16 | 34 | |||||||||||||||
Quality breakdown of fixed maturities at December 31, 2009
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | No. of | ||||||||||||||||||||||
| (dollars in millions) | value | losses | value | losses | value | losses | holdings | |||||||||||||||||||||
Exchange |
||||||||||||||||||||||||||||
Investment grade |
$ | 494 | $ | 8 | $ | 522 | $ | 50 | $ | 1,016 | $ | 58 | 191 | |||||||||||||||
Non-investment grade |
14 | 0 | 185 | 18 | 199 | 18 | 57 | |||||||||||||||||||||
Total fixed maturities — Exchange |
$ | 508 | $ | 8 | $ | 707 | $ | 68 | $ | 1,215 | $ | 76 | 248 | |||||||||||||||
100
Table of Contents
Investment income, net of expenses, was generated from the following portfolios as follows for
the years ended December 31:
| Erie Insurance Group | |||||||||||||
| (in millions) | 2010 | 2009 | 2008 | ||||||||||
Indemnity |
|||||||||||||
Fixed maturities |
$ | 33 | $ | 36 | $ | 36 | |||||||
Equity securities |
4 | 5 | 9 | ||||||||||
Cash equivalents and other |
1 | 1 | 2 | ||||||||||
Total investment income |
38 | 42 | 47 | ||||||||||
Less: investment expenses |
1 | 0 | 3 | ||||||||||
Investment income, net of expenses — Indemnity |
$ | 37 | $ | 42 | 44 | ||||||||
Exchange |
|||||||||||||
Fixed maturities |
$ | 350 | $ | 343 | $ | 319 | |||||||
Equity securities |
72 | 68 | 88 | ||||||||||
Cash equivalents and other |
2 | 4 | 13 | ||||||||||
Total investment income |
424 | 415 | 420 | ||||||||||
Less: investment expenses |
28 | 24 | 26 | ||||||||||
Investment income, net of expenses — Exchange |
$ | 396 | $ | 391 | $ | 394 | |||||||
Total consolidated investment income, net of expenses
— Erie Insurance Group |
$ | 433 | $ | 433 | $ | 438 | |||||||
Dividend income is recognized as earned and recorded to net investment income.
In 2010,
Indemnity sold its interest in nine limited partnerships and the Exchange sold its interest in
eleven limited partnerships, which generated net realized losses. There were no sales of limited
partnerships in 2009. In 2008, Indemnity and the Exchange sold their
interest in ten limited partnerships,
which generated net realized gains. Realized gains (losses) on Indemnity’s investments were as
follows:
| Erie Insurance Group | ||||||||||||
| Years ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Indemnity |
||||||||||||
Available-for-sale securities: |
||||||||||||
Fixed maturities |
||||||||||||
Gross realized gains |
$ | 6 | $ | 5 | $ | 3 | ||||||
Gross realized losses |
(1 | ) | (4 | ) | (5 | ) | ||||||
Net realized gains (losses) |
5 | 1 | (2 | ) | ||||||||
Equity securities |
||||||||||||
Gross realized gains |
1 | 8 | 8 | |||||||||
Gross realized losses |
0 | (7 | ) | (13 | ) | |||||||
Net realized gains (losses) |
1 | 1 | (5 | ) | ||||||||
Trading securities: |
||||||||||||
Common stock |
||||||||||||
Gross realized gains |
6 | 2 | 12 | |||||||||
Gross realized losses |
(1 | ) | (5 | ) | (28 | ) | ||||||
Valuation adjustments |
0 | 11 | (22 | ) | ||||||||
Net realized gains (losses) |
5 | 8 | (38 | ) | ||||||||
Limited partnerships: |
||||||||||||
Gross realized gains |
0 | 0 | 4 | |||||||||
Gross realized losses |
(12 | ) | 0 | (2 | ) | |||||||
Net realized (losses) gains |
(12 | ) | 0 | 2 | ||||||||
Net realized (losses) gains on investments — Indemnity |
$ | (1 | ) | $ | 10 | $ | (43 | ) | ||||
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Realized gains (losses) on the Exchange’s investments were as follows:
| Years ended December 31, | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Exchange |
||||||||||||
Available-for-sale securities: |
||||||||||||
Fixed maturities |
||||||||||||
Gross realized gains |
$ | 49 | $ | 22 | $ | 13 | ||||||
Gross realized losses |
(24 | ) | (37 | ) | (53 | ) | ||||||
Net realized gains (losses) |
25 | (15 | ) | (40 | ) | |||||||
Equity securities |
||||||||||||
Gross realized gains |
14 | 39 | 33 | |||||||||
Gross realized losses |
(3 | ) | (26 | ) | (68 | ) | ||||||
Net realized gains (losses) |
11 | 13 | (35 | ) | ||||||||
Trading securities: |
||||||||||||
Common stock |
||||||||||||
Gross realized gains |
205 | 143 | 155 | |||||||||
Gross realized losses |
(135 | ) | (203 | ) | (654 | ) | ||||||
Valuation adjustments |
254 | 464 | (416 | ) | ||||||||
Net realized gains (losses) |
324 | 404 | (915 | ) | ||||||||
Limited partnerships: |
||||||||||||
Gross realized gains |
0 | 0 | 15 | |||||||||
Gross realized losses |
(46 | ) | 0 | (8 | ) | |||||||
Net realized (losses) gains |
(46 | ) | 0 | 7 | ||||||||
Net realized gains (losses) on investments — Exchange |
$ | 314 | $ | 402 | $ | (983 | ) | |||||
Net realized gains (losses) on investments — Erie
Insurance Group |
$ | 313 | $ | 412 | $ | (1,026 | ) | |||||
The components of other-than-temporary impairments on investments are included below.
| Erie Insurance Group | ||||||||||||
| Years ended December 31 | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Indemnity |
||||||||||||
Fixed maturities |
$ | (1 | ) | $ | (7 | ) | $ | (36 | ) | |||
Equity securities |
0 | (5 | ) | (34 | ) | |||||||
Total |
(1 | ) | (12 | ) | (70 | ) | ||||||
Portion recognized in other comprehensive income |
0 | 0 | 0 | |||||||||
Net impairment losses recognized in earnings — Indemnity |
$ | (1 | ) | $ | (12 | ) | $ | (70 | ) | |||
Exchange |
||||||||||||
Fixed maturities |
$ | (4 | ) | $ | (54 | ) | $ | (306 | ) | |||
Equity securities |
(1 | ) | (60 | ) | (195 | ) | ||||||
Total |
(5 | ) | (114 | ) | (501 | ) | ||||||
Portion recognized in other comprehensive income |
0 | 0 | 0 | |||||||||
Net impairment losses recognized in earnings — Exchange |
$ | (5 | ) | $ | (114 | ) | $ | (501 | ) | |||
Net impairment losses recognized in earnings — Erie
Insurance Group |
$ | (6 | ) | $ | (126 | ) | $ | (571 | ) | |||
In
considering if fixed maturity securities were credit-impaired some of the factors considered
include: potential for the default of interest and/or principal, level of subordination, collateral
of the issue, compliance with financial covenants, credit ratings and industry conditions. We have
the intent to sell all credit-impaired fixed maturity securities, therefore the entire amount of
the impairment charges were included in earnings and no non-credit impairments were recognized in
other comprehensive income. Prior to the second quarter of 2009 when new impairment guidance was
issued for debt securities, the impairment policy for fixed maturities was consistent with that of
equity securities. See also Note 2, “Significant Accounting Policies.”
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Limited partnerships
Our limited partnership investments are recorded using the equity method of accounting. As these
investments are generally reported on a one-quarter lag, our limited partnership results through
December 31, 2010 are comprised of general partnership financial results for the fourth quarter of
2009 and the first, second, and third quarters of 2010. Given the lag in reporting, our limited
partnership results do not reflect the market conditions of the fourth quarter of 2010. Cash
contributions made to and distributions received from the partnerships are recorded in the period
in which the transaction occurs.
We have provided summarized financial information in the following table for the years ended
December 31, 2010 and 2009. Amounts provided in the table are presented using the latest available
financial statements received from the partnerships. Limited partnership financial information has
been presented based on the investment percentage in the partnerships for the Erie Insurance Group
consistent with how management evaluates the investments.
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As these investments are generally reported on a one-quarter lag, our limited partnership results
through December 31, 2010 include the general partnership results for the fourth quarter of 2009 and the
first three quarters of 2010.
| (dollars in millions) | As of and for the year ended December 31, 2010 | |||||||||||||||
| Income (loss) | ||||||||||||||||
| recognized | ||||||||||||||||
| due to valuation | ||||||||||||||||
| Investment percentage in partnership | Number of | adjustments | Income (loss) | |||||||||||||
| for Erie Insurance Group | partnerships | Asset recorded | by the partnerships | recorded | ||||||||||||
Indemnity |
||||||||||||||||
Private equity: |
||||||||||||||||
Less than 10% |
26 | $ | 78 | $ | 4 | $ | 7 | |||||||||
Greater than or equal to 10% but less than 50% |
3 | 8 | 3 | 0 | ||||||||||||
Greater than 50% |
0 | 0 | 0 | 0 | ||||||||||||
Total private equity |
29 | 86 | 7 | 7 | ||||||||||||
Mezzanine debt: |
||||||||||||||||
Less than 10% |
11 | 30 | 4 | 3 | ||||||||||||
Greater than or equal to 10% but less than 50% |
3 | 15 | 2 | (2 | ) | |||||||||||
Greater than 50% |
1 | 2 | 0 | 0 | ||||||||||||
Total mezzanine debt |
15 | 47 | 6 | 1 | ||||||||||||
Real
estate: |
||||||||||||||||
Less than 10% |
12 | 59 | 30 | (31 | ) | |||||||||||
Greater than or equal to 10% but less than 50% |
4 | 14 | 10 | (10 | ) | |||||||||||
Greater than 50% |
4 | 10 | 4 | (3 | ) | |||||||||||
Total real estate |
20 | 83 | 44 | (44 | ) | |||||||||||
Total limited partnerships — Indemnity |
64 | $ | 216 | $ | 57 | $ | (36 | ) | ||||||||
Exchange |
||||||||||||||||
Private equity: |
||||||||||||||||
Less than 10% |
41 | $ | 517 | $ | 28 | $ | 40 | |||||||||
Greater than or equal to 10% but less than 50% |
3 | 38 | 10 | 0 | ||||||||||||
Greater than 50% |
0 | 0 | 0 | (1 | ) | |||||||||||
Total private equity |
44 | 555 | 38 | 39 | ||||||||||||
Mezzanine debt: |
||||||||||||||||
Less than 10% |
14 | 142 | 12 | 13 | ||||||||||||
Greater than or equal to 10% but less than 50% |
3 | 41 | 2 | (2 | ) | |||||||||||
Greater than 50% |
3 | 31 | 0 | 2 | ||||||||||||
Total mezzanine debt |
20 | 214 | 14 | 13 | ||||||||||||
Real estate: |
||||||||||||||||
Less than 10% |
25 | 250 | (11 | ) | 10 | |||||||||||
Greater than or equal to 10% but less than 50% |
6 | 52 | 7 | (7 | ) | |||||||||||
Greater than 50% |
4 | 37 | 15 | (11 | ) | |||||||||||
Total real estate |
35 | 339 | 11 | (8 | ) | |||||||||||
Total limited partnerships — Exchange |
99 | $ | 1,108 | $ | 63 | $ | 44 | |||||||||
Total limited partnerships — Erie Insurance Group |
$ | 1,324 | $ | 120 | $ | 8 | ||||||||||
Per the limited partner financial statements, total partnership assets were $58 billion and total
partnership liabilities were $10 billion at December 31, 2010 (as recorded in the September 30,
2010 limited partnership financial statements). For the twelve month period comparable to that
presented in the preceding table (fourth quarter of 2009 and first three quarters of 2010), total
partnership valuation adjustment gains were $4 billion and total partnership net income was $3
billion.
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As these investments are generally reported on a one-quarter lag, our limited partnership results
through December 31, 2009 include the general partnership financial results for the fourth quarter of 2008
and the first three quarters of 2009.
| (dollars in millions) | As of and for the year ended December 31, 2009 | ||||||||||||||||
| (Loss) income | |||||||||||||||||
| recognized | |||||||||||||||||
| due to valuation | |||||||||||||||||
| Investment percentage in partnership | Number of | adjustments | (Loss) income | ||||||||||||||
| for Erie Insurance Group | partnerships | Asset recorded | by the partnerships | recorded | |||||||||||||
Indemnity |
|||||||||||||||||
Private equity: |
|||||||||||||||||
Less than 10% |
26 | $ | 76 | $ | (11 | ) | $ | (1 | ) | ||||||||
Greater than or equal to 10% but less than 50% |
3 | 6 | 0 | 0 | |||||||||||||
Greater than 50% |
1 | 3 | 0 | 0 | |||||||||||||
Total private equity |
30 | 85 | (11 | ) | (1 | ) | |||||||||||
Mezzanine debt: |
|||||||||||||||||
Less than 10% |
12 | 30 | (4 | ) | (1 | ) | |||||||||||
Greater than or equal to 10% but less than 50% |
3 | 18 | (2 | ) | 2 | ||||||||||||
Greater than 50% |
1 | 3 | (1 | ) | 0 | ||||||||||||
Total mezzanine debt |
16 | 51 | (7 | ) | 1 | ||||||||||||
Real estate: |
|||||||||||||||||
Less than 10% |
19 | 65 | (31 | ) | 1 | ||||||||||||
Greater than or equal to 10% but less than 50% |
5 | 17 | (6 | ) | 1 | ||||||||||||
Greater than 50% |
4 | 17 | (21 | ) | (2 | ) | |||||||||||
Total real estate |
28 | 99 | (58 | ) | 0 | ||||||||||||
Total limited partnerships — Indemnity |
74 | $ | 235 | $ | (76 | ) | $ | 0 | |||||||||
Exchange |
|||||||||||||||||
Private
equity: |
|||||||||||||||||
Less than 10% |
41 | $ | 466 | $ | (46 | ) | $ | 14 | |||||||||
Greater than or equal to 10% but less than 50% |
3 | 31 | 1 | (1 | ) | ||||||||||||
Greater than 50% |
1 | 6 | (1 | ) | (1 | ) | |||||||||||
Total private equity |
45 | 503 | (46 | ) | 12 | ||||||||||||
Mezzanine debt: |
|||||||||||||||||
Less than 10% |
14 | 138 | (11 | ) | 4 | ||||||||||||
Greater than or equal to 10% but less than 50% |
4 | 48 | (4 | ) | 9 | ||||||||||||
Greater than 50% |
3 | 30 | (2 | ) | 2 | ||||||||||||
Total mezzanine debt |
21 | 216 | (17 | ) | 15 | ||||||||||||
Real estate: |
|||||||||||||||||
Less than 10% |
32 | 302 | (164 | ) | (8 | ) | |||||||||||
Greater than or equal to 10% but less than 50% |
7 | 61 | (40 | ) | (1 | ) | |||||||||||
Greater than 50% |
4 | 34 | (48 | ) | 4 | ||||||||||||
Total real estate |
43 | 397 | (252 | ) | (5 | ) | |||||||||||
Total limited partnerships — Exchange |
109 | $ | 1,116 | $ | (315 | ) | $ | 22 | |||||||||
Total limited partnerships — Erie Insurance Group |
$ | 1,351 | $ | (391 | ) | $ | 22 | ||||||||||
Per the limited partner financial statements, total partnership assets were $53 billion and total
partnership liabilities were $11 billion at December 31, 2009 (as recorded in the September 30,
2009 limited partnership financial statements). For the twelve month period comparable to that
presented in the preceding table (fourth quarter of 2008 and first three quarters of 2009), total
partnership valuation adjustment losses were $8 billion and total partnership net losses were $1
billion.
See also Note 21, “Commitments and Contingencies,” for investment commitments related to limited
partnerships.
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Securities lending program
We previously participated in a program whereby marketable securities
from our investment portfolio were lent to independent brokers or dealers based on, among other things, their creditworthiness, in exchange for collateral initially equal to 102% of the value of the securities on loan and are
thereafter maintained at a minimum of 100% of the fair value of the securities loaned. The program was terminated in 2009.
Note 8. Goodwill Impairment
Goodwill is reviewed for impairment at least annually or more frequently if events occur or
circumstances change that would indicate that a triggering event has occurred. The goodwill
impairment test follows a two step process. In the first step, the fair value of a reporting unit
is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair
value, the second step of the impairment test is performed for purposes of measuring the
impairment.
Prior to December 31, 2010, the Exchange had $22 million of goodwill attributed to its purchase of
EFL’s stock in 2006. On November 4, 2010, the Exchange entered into an agreement to purchase the
Indemnity’s remaining 21.6% ownership interest in EFL, which is expected to be completed by March
31, 2011. A valuation of EFL was performed by an external independent third party in preparation
for the sale. The valuation resulted in a purchase price determination of 95% of book value. In
response to the valuation and sale price, management concluded that the possibility for impairment
existed and step two of the goodwill impairment test was completed to determine the impairment
amount. Step two of the impairment test compared the value of new business for EFL to the current
goodwill balance. The analysis determined that the value of EFL’s new business did not support the
$22 million goodwill and an impairment entry was made to write down the entire goodwill balance at
December 31, 2010. The charge of $22 million decreased the net income attributable to the Exchange.
Note 9. Capitalized Software Development Costs
We capitalize computer software costs developed or obtained for internal use in accordance with
ASC 350-40, Intangibles — Goodwill and Other, Internal-Use Software. Capitalized costs include
internal and external labor and overhead, all of which are attributable to Indemnity.
Capitalization ceases and amortization begins no later than the point at which a computer software
project is complete and ready for its intended use. Capitalized software costs are amortized over
a seven year period. There were no capitalized software costs for the
year ended December 31, 2008.
The following table outlines the total capitalized software development costs subject to
amortization and amortization expense for the years ended December 31:
| (in millions) | 2010 | 2009 | ||||||
| | | | | |||||||
Capitalized software development costs subject to amortization: |
||||||||
Balance January 1, |
$ | 0 | $ | 0 | ||||
Capitalized software projects put into use during the year |
16 | 0 | ||||||
Accumulated amortization |
(1 | ) | 0 | |||||
Balance December 31, net of amortization |
$ | 15 | $ | 0 | ||||
Amortization expense |
$ | 1 | $ | 0 | ||||
The following table outlines the total capitalized software development costs not yet subject to
amortization for the years ended December 31:
| (in millions) | 2010 | 2009 | ||||||
Capitalized software development costs in process: |
||||||||
Balance January 1, |
$ | 10 | $ | 0 | ||||
Capitalized software project costs |
22 | 10 | ||||||
Capitalized software projects put into use |
(16 | ) | 0 | |||||
Balance December 31, |
$ | 16 | $ | 10 | ||||
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Table of Contents
The following table outlines the estimated future amortization expense related to capitalized
software development costs as of December 31, 2010.
| (in millions) | |||||
| Year ending | |||||
December 31, |
Amortization expense | ||||
2011 |
$4 | ||||
2012 |
4 | ||||
2013 |
4 | ||||
2014 |
4 | ||||
2015 |
4 | ||||
We anticipate incurring additional costs related to our software development initiatives. These
costs are unknown at this time and therefore not considered in the table above.
Note 10. Bank Line of Credit
As of December 31, 2010, Indemnity has available a $100 million line of credit with a bank that
expires on December 31, 2011. There were no borrowings outstanding on the line of credit as of
December 31, 2010. Bonds with a fair value of $128 million are pledged as collateral on the line
at December 31, 2010.
As of December 31, 2010, the Exchange has available a $200 million revolving line of credit that
expires on September 30, 2012. There were no borrowings outstanding on the line of credit as of
December 31, 2010. Bonds with a fair value of $252 million are pledged as collateral on the line at
December 31, 2010.
Securities pledged as collateral on both lines have no restrictions and are reported as
available-for-sale fixed maturities in the Consolidated Statements of Financial Position as of
December 31, 2010. The banks require compliance with certain covenants, which include statutory
surplus and risk based capital ratios for Exchange’s line of credit and minimum net worth and
leverage ratios for Indemnity’s line of credit. We are in compliance with all covenants at December
31, 2010.
Note 11. Income Taxes
The provision (benefit) for income taxes consists of the following for the years ended December 31:
| Erie Insurance Group | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Indemnity |
||||||||||||
Current income taxes |
$ | 37 | $ | 56 | $ | 63 | ||||||
Deferred income taxes |
67 | (7 | ) | (23 | ) | |||||||
Total provision for income taxes — Indemnity |
104 | 49 | 40 | |||||||||
Exchange |
||||||||||||
Current income taxes |
(43 | ) | 7 | (40 | ) | |||||||
Deferred income taxes |
278 | 22 | (223 | ) | ||||||||
Total provision (benefit) for income taxes — Exchange |
235 | 29 | (263 | ) | ||||||||
Total provision (benefit) for income taxes — Erie
Insurance Group |
$ | 339 | $ | 78 | $ | (223 | ) | |||||
The deferred income tax expense in 2010 was primarily driven by the sale of previously impaired
investments and unrealized gains on common stock and limited partnerships. In addition, the
deferred tax liability recorded for Indemnity’s investment in Erie Family Life Insurance Company
increased by $18 million in 2010 as a result of a change in the tax rate used to calculate the
liability. This deferred tax charge was required due to Indemnity’s decision to sell its 21.6%
ownership interest in EFL rather than receiving its share of EFL’s earnings in the form of future
dividends, which would have been eligible for an 80% dividend received deduction. The deferred
income tax benefit in 2008 was primarily driven by impairments and unrealized losses on common
stock. The more significant impairment losses in 2008 related to bonds and preferred stocks in the
financial services industry.
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Table of Contents
A reconciliation of the provision (benefit) for income taxes with amounts determined by applying
the statutory federal income tax rates to pre-tax income is as follows for the years ended
December 31:
| Erie Insurance Group | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
| | | | | | |||||||||||
Indemnity |
||||||||||||
Income tax at statutory rates |
$ | 93 | $ | 53 | $ | 43 | ||||||
Tax-exempt interest |
(3 | ) | (3 | ) | (3 | ) | ||||||
Dividends received deduction |
(1 | ) | (1 | ) | (2 | ) | ||||||
Deferred tax valuation allowance |
(2 | ) | 0 | 1 | ||||||||
Erie Family Life earnings (1) |
15 | 0 | 0 | |||||||||
Other, net |
2 | 0 | 1 | |||||||||
Provision for income taxes — Indemnity |
104 | 49 | 40 | |||||||||
Exchange |
||||||||||||
Income tax at statutory rates |
259 | 130 | (337 | ) | ||||||||
Tax-exempt interest |
(16 | ) | (17 | ) | (17 | ) | ||||||
Dividends received deduction |
(11 | ) | (11 | ) | (14 | ) | ||||||
Deferred tax valuation allowance |
(4 | ) | (71 | ) | 110 | |||||||
Goodwill Impairments |
8 | 0 | 0 | |||||||||
Other, net |
(1 | ) | (2 | ) | (5 | ) | ||||||
Provision (benefit) for income taxes — Exchange |
235 | 29 | (263 | ) | ||||||||
Provision (benefit) for income taxes — Erie
Insurance Group |
$ | 339 | $ | 78 | $ | (223 | ) | |||||
| (1) | Indemnity’s tax rate on its share of EFL earnings was adjusted from 7% to 35% due to Indemnity’s decision to sell its 21.6% ownership interest in EFL to the Exchange, which is scheduled to close by March 31, 2011, rather than receiving its share of EFL’s earnings in the form of future dividends, which would have been eligible for an 80% dividend received deduction. |
Temporary differences and carry-forwards, which give rise to consolidated deferred tax assets
and liabilities, are as follows:
| Erie Insurance Group | ||||||||
| (in millions) | 2010 | 2009 | ||||||
Indemnity |
||||||||
Deferred tax assets: |
||||||||
Loss reserve discount |
$ | 0 | $ | 5 | ||||
Unearned premiums |
0 | 7 | ||||||
Net allowance for service fees and premium cancellations |
3 | 3 | ||||||
Other employee benefits |
8 | 6 | ||||||
Pension and other postretirement benefits |
21 | 19 | ||||||
Write-downs of impaired securities |
2 | 10 | ||||||
Capital loss carryover |
7 | 4 | ||||||
Limited partnerships |
0 | 18 | ||||||
Other |
1 | 3 | ||||||
Total deferred tax assets |
42 | 75 | ||||||
Deferred tax liabilities: |
||||||||
Deferred policy acquisition costs |
0 | 6 | ||||||
Unrealized gains on investments |
7 | 12 | ||||||
Equity interest in EFL |
22 | 4 | ||||||
Limited partnerships |
20 | 0 | ||||||
Depreciation |
7 | 1 | ||||||
Prepaid expenses |
5 | 4 | ||||||
Capitalized internally developed software |
5 | 3 | ||||||
Other |
2 | 2 | ||||||
Total deferred tax liabilities |
68 | 32 | ||||||
Valuation allowance |
0 | (2 | ) | |||||
Net deferred income tax (liability) asset — Indemnity |
$ | (26 | ) | $ | 41 | |||
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Table of Contents
| Erie Insurance Group (continued) | ||||||||
| (in millions) | 2010 | 2009 | ||||||
Exchange |
||||||||
Deferred tax assets: |
||||||||
Loss reserve discount |
$ | 83 | $ | 80 | ||||
Liability for future life and annuity policy benefits |
13 | 12 | ||||||
Unearned premiums |
156 | 140 | ||||||
Limited partnerships |
0 | 102 | ||||||
Write-downs of impaired securities |
42 | 114 | ||||||
Wash sales |
8 | 11 | ||||||
Capital loss carryover |
9 | 10 | ||||||
Other |
8 | 4 | ||||||
Total deferred tax assets |
319 | 473 | ||||||
Deferred tax liabilities: |
||||||||
Deferred policy acquisition costs |
153 | 148 | ||||||
Unrealized gains on investments |
356 | 232 | ||||||
Limited partnerships |
49 | 0 | ||||||
Net allowance for service fees and premium cancellations |
3 | 3 | ||||||
Other |
15 | 11 | ||||||
Total deferred tax liabilities |
576 | 394 | ||||||
Valuation allowance |
0 | (4 | ) | |||||
Net deferred income tax (liability) asset — Exchange |
$ | (257 | ) | $ | 75 | |||
Net deferred income tax (liability) asset — Erie
Insurance Group |
$ | (283 | ) | $ | 116 | |||
Indemnity had deferred tax asset valuation allowances of $0 and $2 million recorded at December 31,
2010 and December 31, 2009, respectively, related to impairments on investments where it is more
likely than not that the related deferred tax asset will not be realized.
The Exchange had deferred tax asset valuation allowances of $0 and $4 million recorded at December
31, 2010 and December 31, 2009, respectively, related to impairments on investments where it is
more likely than not that the related deferred tax asset will not be realized.
In 2010,
Indemnity generated taxable losses of $42 million and the
Exchange generated taxable losses of $192 million on the sale of
limited partnerships. These partnerships were sold to recapture tax
paid on prior period capital gains that were due to expire. The
unrealized losses on these partnerships were previously recorded as a
deferred tax asset. Indemnity and the Exchange are expected to
recapture $15 million and $67 million in tax on these
transactions in 2011, respectively.
We have one uncertain income tax position for which a current liability was recorded. As a
related temporary tax difference was also recognized, there was no impact on our operations or
financial position. We recognize interest related to our remaining uncertain tax position in
income tax expense. Accrued estimated interest on our unrecognized tax benefit was $0.2
million and $0.3 million at December 31, 2010 and 2009, respectively. The IRS has examined tax
filings through 2007 and is currently examining our federal income tax returns for 2008 and
2009. We do not currently estimate that our unrecognized tax benefits will change
significantly in the next 12 months.
Indemnity
is the attorney-in-fact for the subscribers (policyholders) at the Exchange, a reciprocal insurance exchange. In that
capacity, Indemnity provides all services and facilities necessary to conduct the Exchange’s
insurance business. Indemnity and the Exchange together constitute one insurance business.
Indemnity remits premium taxes for the Exchange in states where they conduct insurance business and
on that basis Indemnity is not subject to state corporate income or franchise taxes in these
states.
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Table of Contents
Note 12. Deferred Policy Acquisition Costs
The following table summarizes the components of the Property and Casualty Group’s and EFL’s
deferred policy acquisition costs asset for the years ended December 31:
| Erie Insurance Group | ||||||||
| (in millions) | 2010 | 2009 | ||||||
| Property and Casualty Group | ||||||||
Deferred policy acquisition costs asset at beginning of year |
$ | 313 | $ | 301 | ||||
Capitalized deferred policy acquisition costs |
649 | 623 | ||||||
Amortized deferred policy acquisition costs |
(635 | ) | (611 | ) | ||||
Deferred policy acquisition costs asset at end of year —
Property and Casualty Group |
$ | 327 | $ | 313 | ||||
Erie Family Life Insurance Company |
||||||||
Deferred policy acquisition costs asset at beginning of year |
$ | 154 | $ | 201 | ||||
Capitalized deferred policy acquisition costs |
17 | 19 | ||||||
Amortized deferred policy acquisition costs |
(16 | ) | (13 | ) | ||||
Amortized shadow deferred policy acquisition costs |
(15 | ) | (53 | ) | ||||
Deferred policy acquisition costs asset at end of year — EFL |
$ | 140 | $ | 154 | ||||
Deferred policy acquisition costs asset — Erie Insurance Group |
$ | 467 | $ | 467 | ||||
Note 13. Property and Casualty Unpaid Losses and Loss Expenses
The following table provides a reconciliation of property and casualty beginning and ending loss
and loss expense liability balances for the years ended December 31:
| Property and Casualty Group | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Total gross unpaid losses and loss expenses at January 1, |
$ | 3,598 | $ | 3,586 | $ | 3,684 | ||||||
Less reinsurance recoverable |
200 | 187 | 190 | |||||||||
Net liability at January 1, |
3,398 | 3,399 | 3,494 | |||||||||
Incurred losses and loss expenses related to: |
||||||||||||
Current accident year |
3,053 | 2,732 | 2,675 | |||||||||
Prior accident years |
(244 | ) | (93 | ) | (186 | ) | ||||||
Total incurred losses and loss expenses |
2,809 | 2,639 | 2,489 | |||||||||
Paid losses and loss expenses related to: |
||||||||||||
Current accident year |
1,855 | 1,608 | 1,546 | |||||||||
Prior accident years |
956 | 1,032 | 1,038 | |||||||||
Total paid losses and loss expenses |
2,811 | 2,640 | 2,584 | |||||||||
Total net liability at December 31, |
3,396 | 3,398 | 3,399 | |||||||||
Plus reinsurance recoverables |
188 | 200 | 187 | |||||||||
Total gross unpaid losses and loss expenses at December
31, |
$ | 3,584 | $ | 3,598 | $ | 3,586 | ||||||
Loss reserves are set at full expected cost, except for workers compensation loss reserves which
have been discounted using an interest rate of 2.5% for all periods presented. This discounting
reduced unpaid losses and loss expenses by $127 million and $136 million at December 31, 2010 and
2009, respectively. The reserves for losses and loss expenses are reported net of receivables for salvage and subrogation
of $141 million and $133 million at December 31, 2010 and 2009, respectively.
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Favorable development in 2010 on prior accident year direct loss reserves is primarily the result
of improvements in severity trends in our commercial multi-peril, personal auto and workers
compensation lines of business combined with the settlement of several large claims. The
favorable development in 2009 was primarily due to changes in our mortality rate and medical cost
assumptions in our workers compensation line of business and the change in the workers
compensation discount discussed above. This favorable development in 2009 was offset by adverse
development in our personal auto line of business as a result of the use of gender specific tables
in our mortality rate assumption and the outcome of some court decisions related to our commercial
multi-peril line of business. Driving the favorable development in 2008 was improved frequency
and severity trends in our personal auto, commercial auto, commercial multi-peril and homeowners
lines of business.
As discussed in Note 16, “Reinsurance,” the members of the Property and Casualty Group participate
in an intercompany reinsurance pooling arrangement, under which the Exchange retains 94.5% of the
property and casualty insurance business and EIC retains 5.0% and ENY retains 0.5%. The following
table reconciles the loss and loss expense reserve balances on the Consolidated Statements of
Financial Position, which is exclusive of intercompany transactions, to the ultimate liability of
the Exchange and Indemnity when factoring in intercompany pooling transactions and reinsurance
recoverables.
| (in millions) | Erie Insurance Group | |||||||||||||||
| Intercompany | ||||||||||||||||
| Gross liability at | pooling | Reinsurance | Net liability at | |||||||||||||
| At December 31, 2010: | December 31, 2010 | eliminations | recoverables | December 31, 2010 | ||||||||||||
Indemnity losses and loss expense
reserves(1) |
$ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Exchange losses and loss expense reserves |
3,584 | 0 | (188 | ) | 3,396 | |||||||||||
Losses and loss expense reserves |
$ | 3,584 | $ | — | $ | (188 | ) | $ | 3,396 | |||||||
| (in millions) | Erie Insurance Group | |||||||||||||||
| Intercompany | ||||||||||||||||
| Gross liability at | pooling | Reinsurance | Net liability at | |||||||||||||
| At December 31, 2009: | December 31, 2009 | eliminations | recoverables | December 31, 2009 | ||||||||||||
Indemnity losses and loss expense
reserves(1) |
$ | 752 | $ | (554 | ) | $ | (11 | ) | $ | 187 | ||||||
Exchange losses and loss expense reserves |
2,846 | 554 | (189 | ) | 3,211 | |||||||||||
Losses and loss expense reserves |
$ | 3,598 | $ | — | $ | (200 | ) | $ | 3,398 | |||||||
| (1) | Prior to December 31, 2010, all property and casualty insurance underwriting liabilities recorded by EIC, ENY and EPC were the responsibility of the Indemnity shareholder interest. Due to the sale of Indemnity’s property and casualty subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting liabilities are the responsibility of the subscribers (policyholders) of the Exchange, or noncontrolling interest, (See Note 1,“Nature of Operations”.) |
Note 14. Life Policy and Deposit Contract Reserves
| (in millions) | 2010 | 2009 | 2008 | |||||||||
| | | | | | |||||||||||
Deferred annuities |
$ | 1,117 | $ | 1,076 | $ | 1,017 | ||||||
Ordinary/traditional life |
254 | 229 | 207 | |||||||||
Universal life |
214 | 211 | 209 | |||||||||
Other |
18 | 24 | 16 | |||||||||
Life policy and deposit contract reserves |
$ | 1,603 | $ | 1,540 | $ | 1,449 | ||||||
The reinsurance credit
related to these reserves was $95 million, $82 million and
$70 million at December 31,
2010, 2009 and 2008, respectively, and is presented in other assets in the Consolidated Statements of
Financial Position.
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Note
15. Unearned Premiums
Unearned premiums are reflected net of intercompany eliminations on the Consolidated Statements of
Financial Position. Unearned premiums after the intercompany pooling transactions are presented
below.
| (in millions) | Erie Insurance Group | |||||||||||
| Intercompany | Net unearned | |||||||||||
| Balance at December | pooling | premiums at | ||||||||||
| At December 31, 2010: | 31, 2010 | transactions | December 31, 2010 | |||||||||
Indemnity unearned premiums (1) |
$ | 0 | $ | 0 | $ | 0 | ||||||
Exchange unearned premiums |
2,082 | 0 | 2,082 | |||||||||
Unearned premiums |
$ | 2,082 | $ | 0 | $ | 2,082 | ||||||
| Erie Insurance Group | ||||||||||||
| Intercompany | Net unearned | |||||||||||
| Balance at December | pooling | premiums at | ||||||||||
| At December 31, 2009: | 31, 2009 | transactions | December 31, 2009 | |||||||||
| | | | | | |||||||||||
Indemnity unearned premiums (1) |
$ | 325 | $ | (216 | ) | $ | 109 | |||||
Exchange unearned premiums |
1,656 | 216 | 1,872 | |||||||||
Unearned premiums |
$ | 1,981 | $ | — | $ | 1,981 | ||||||
| (1) | Prior to December 31, 2010, all property and casualty insurance underwriting liabilities recorded by EIC, ENY and EPC were the responsibility of the Indemnity shareholder interest. Due to the sale of Indemnity’s property and casualty subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting liabilities are the responsibility of the subscribers (policyholders) of the Exchange, or noncontrolling interest. (See Note 1, “Nature of Operations”.) |
Note 16. Reinsurance
Members of the Property and Casualty Group participate in an intercompany reinsurance pooling
agreement. Under the pooling agreement, all insurance business of the Property and Casualty Group
is pooled in the Exchange. EIC and ENY share in the underwriting results of the reinsurance pool
through retrocession. Since 1995, the Board of Directors has set the allocation of the pooled
underwriting results at 5.0% participation for EIC, 0.5% participation for ENY and 94.5%
participation for the Exchange. Intercompany accounts are settled by payment within 30 days after
the end of each quarterly accounting period. The purpose of the pooling agreement is to spread the
risks of the members of the Property and Casualty Group collectively across the different lines of
business they underwrite and geographic regions in which each operates. This agreement may be
terminated by any party as of the end of any calendar year by providing not less than 90 days
advance written notice. On December 31, 2010, Indemnity sold all of the outstanding capital stock
of its wholly owned subsidiaries to the Exchange. Under this new structure, all property and
casualty insurance operations will be owned by the Exchange, and Indemnity will continue to
function as the management company. There was no impact on the existing reinsurance pooling
agreement between the Exchange and EIC or ENY as a result of the sale.
Reinsurance contracts do not relieve the Property and Casualty Group or EFL from their primary
obligations to policyholders. A contingent liability exists with respect to reinsurance
recoverables in the event reinsurers are unable to meet their obligations under the reinsurance
agreements.
The Property and Casualty Group maintains a property catastrophe treaty with nonaffiliated
reinsurers to mitigate future potential catastrophe loss exposure. During 2010, this reinsurance
treaty provided coverage of up to 95% of a loss of $500 million in excess of the Property and
Casualty Group’s loss retention of $400 million per occurrence. This treaty was renewed for 2011,
providing coverage of up to 90% of a loss of $500 million in excess of the Property and Casualty
Group’s loss retention of $350 million per occurrence. In addition, a second property catastrophe
reinsurance treaty was entered into with nonaffiliated reinsurers providing coverage of up to 90%
of a loss of $25 million in excess of the first property catastrophe reinsurance treaty’s coverage
of $850 million. There have been no losses subject to this treaty.
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EFL maintains several reinsurance treaties with nonaffiliated life reinsurance companies in order
to reduce claims volatility. EFL had direct life insurance in force totaling $40 billion and $39
billion at December 31, 2010 and 2009, respectively. Of the amount, EFL ceded $22 billion and $21
billion of life insurance in force at December 31, 2010 and 2009, respectively. At December 31,
2010 and 2009, the largest amount of in-force life insurance ceded to one reinsurer totaled $11
billion and $10 billion, respectively.
The following tables summarize the direct insurance and reinsurance for the property and casualty
and life insurance activities, respectively, for the years ended December 31.
| (in millions) | Erie Insurance Group | |||||||||||
| Property and casualty insurance | 2010 | 2009 | 2008 | |||||||||
Premiums written: |
||||||||||||
Direct |
$ | 4,035 | $ | 3,861 | $ | 3,800 | ||||||
Assumed |
19 | 30 | 37 | |||||||||
Ceded |
(35 | ) | (30 | ) | (49 | ) | ||||||
Premiums written, net |
$ | 4,019 | 3,861 | $ | 3,788 | |||||||
Premiums earned: |
||||||||||||
Direct |
$ | 3,939 | $ | 3,806 | $ | 3,784 | ||||||
Assumed |
20 | 42 | 35 | |||||||||
Ceded |
(34 | ) | (40 | ) | (48 | ) | ||||||
Premiums earned, net |
3,925 | 3,808 | 3,771 | |||||||||
Insurance losses and loss expenses: |
||||||||||||
Direct |
2,834 | 2,655 | 2,507 | |||||||||
Assumed |
(15 | ) | 12 | (11 | ) | |||||||
Ceded |
(9 | ) | (28 | ) | (7 | ) | ||||||
Insurance losses and loss expenses, net |
$ | 2,810 | $ | 2,639 | $ | 2,489 | ||||||
| (in millions) | Erie Insurance Group | |||||||||||
| Life insurance | 2010 | 2009 | 2008 | |||||||||
Premiums earned: |
||||||||||||
Direct |
$ | 104 | $ | 100 | $ | 98 | ||||||
Ceded |
(42 | ) | (39 | ) | (35 | ) | ||||||
Premiums earned, net |
62 | 61 | 63 | |||||||||
Insurance losses and loss expenses: |
||||||||||||
Direct |
102 | 114 | 106 | |||||||||
Ceded |
(12 | ) | (25 | ) | (13 | ) | ||||||
Insurance losses and loss expenses, net |
$ | 90 | $ | 89 | $ | 93 | ||||||
| (in millions) | Erie Insurance Group | |||||||||||
| Total | 2010 | 2009 | 2008 | |||||||||
Premiums earned: |
||||||||||||
Property and casualty |
$ | 3,925 | $ | 3,808 | $ | 3,771 | ||||||
Life |
62 | 61 | 63 | |||||||||
Premiums earned, net |
3,987 | 3,869 | 3,834 | |||||||||
Insurance losses and loss expenses: |
||||||||||||
Property and casualty |
2,810 | 2,639 | 2,489 | |||||||||
Life |
90 | 89 | 93 | |||||||||
Insurance losses and loss expenses, net |
$ | 2,900 | $ | 2,728 | $ | 2,582 | ||||||
Note 17. Postretirement Benefits
Pension and retiree health benefit plans
Our pension plans consist of a noncontributory defined benefit pension plan covering substantially
all employees and an unfunded supplemental employee retirement plan (“SERP”) for certain members of
executive and senior management of the Erie Insurance Group. The pension plans provide benefits to
covered individuals satisfying certain age and service requirements. The defined benefit pension
plan and SERP provide benefits through a final average earnings formula and a percent of average
monthly compensation formula, respectively.
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We previously provided retiree health benefits in the form of medical and pharmacy health plans for
eligible retired employees and eligible dependents. In 2006, the retiree health benefit plan was
curtailed by an amendment that restricted eligibility to those who attained age 60 and 15 years of
service on or before July 1, 2010.
The liabilities for the plans described in this note are presented in total for all employees of
the Erie Insurance Group. The gross liability for postretirement benefits is presented in the
Consolidated Statements of Financial Position within other liabilities. Approximately 57% of
postretirement benefit expenses are reimbursed to Indemnity from the Exchange and EFL.
Our affiliated entities are charged an allocated portion of net periodic benefit costs under the
benefit plans. For our funded pension plan, amounts are settled in cash throughout the year for
related entities’ share of net periodic benefit costs. For our unfunded plans, we pay the
obligations when due. Amounts are settled in cash between affiliates when there is a payout under
the unfunded plans.
Assumptions used to determine benefit obligations at the periods ended December 31:
| 2010 | 2009 | 2008 | ||||||||||
Employee pension plan: |
||||||||||||
Discount rate |
5.69 | % | 6.11 | % | 6.06 | % | ||||||
Expected return on plan assets |
8.00 | 8.25 | 8.25 | |||||||||
Rate of compensation increase (1) |
4.15 | 4.15 | 4.25 | |||||||||
SERP: |
||||||||||||
Discount rate (2) |
5.69/5.19 | 6.11/5.00 | 6.06/5.00 | |||||||||
Rate of compensation increase |
6.00 | 6.00 | 6.00 | |||||||||
Assumptions used to determine net periodic benefit cost:
| 2010 | 2009 | 2008 | ||||||||||
Employee pension plan: |
||||||||||||
Discount rate |
6.11 | % | 6.06 | % | 6.62 | % | ||||||
Expected return on plan assets |
8.00 | 8.25 | 8.25 | |||||||||
Rate of compensation increase (1) |
4.15 | 4.15 | 4.25 | |||||||||
SERP: |
||||||||||||
Discount rate (2) |
6.11/5.00 | 6.06/5.00 | 6.62/5.00 | |||||||||
Rate of compensation increase |
6.00 | 6.00 | 6.00 | |||||||||
| (1) | Rate of compensation increase is age-graded. An equivalent single compensation increase rate of 4.15% in 2010 and 2009 and 4.25% in 2008 would produce similar results. | |
| (2) | Pre-retirement/post-retirement |
The two economic assumptions that have the most impact on the postretirement benefit expense
are the discount rate and the long-term rate of return on plan assets. The discount rate assumption
used to determine the benefit obligation was 5.69% for 2010 and was based on a yield curve
developed from corporate bond yield information. The construction of these yield curves is based
on yields of corporate bonds rated Aa quality. Target yields are developed from bonds at various
maturity points and a curve is fitted to those targets. Spot rates (zero coupon bond yields) are
developed from the yield curve and used to discount benefit payment amounts associated with each
future year. The present value of plan benefits is calculated by applying the spot/discount rates
to projected benefit cash flows. A single discount rate is then developed to produce the same
present value. This represents the suggested discount rate. The discount rate assumption used to
determine the benefit obligation for 2009 and 2008 was based on a bond-matching study that compared
projected pension plan benefit flows to the cash flows from a comparable portfolio of fixed
maturity instruments rated AA- or better with duration similar to plan liabilities. The approach
used to determine the long-term rate of return assumption derived expected future returns for each
asset category based on applicable indices and their historical relationships under various market
conditions. These expected future returns were then weighted based on our target asset allocation
percentages for each asset category.
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Pension
benefit plans
The following tables set forth change in benefit obligation, changes in plan assets and funded status of the pension plans as well as the net periodic benefit cost.
The following tables set forth change in benefit obligation, changes in plan assets and funded status of the pension plans as well as the net periodic benefit cost.
Pension benefits for the years ended December 31,
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Change in benefit obligation |
||||||||||||
Benefit obligation at beginning of period |
$ | 344 | $ | 326 | $ | 276 | ||||||
Service cost |
15 | 15 | 13 | |||||||||
Interest cost |
21 | 19 | 18 | |||||||||
Amendments |
1 | 3 | 0 | |||||||||
Actuarial loss (gain) |
25 | (12 | ) | 34 | ||||||||
Benefits paid |
(6 | ) | (4 | ) | (4 | ) | ||||||
Impact due to settlement |
0 | (3 | )(1) | (11 | )(1) | |||||||
Impact due to termination benefits |
0 | 0 | 0 | (1) | ||||||||
Benefit obligation at end of period |
$ | 400 | $ | 344 | $ | 326 | ||||||
Change in plan assets |
||||||||||||
Fair value of plan assets at beginning of period |
$ | 279 | $ | 218 | $ | 288 | ||||||
Actual return (loss) on plan assets |
41 | 51 | (82 | ) | ||||||||
Employer contributions |
13 | 14 | 15 | |||||||||
Benefits paid |
(5 | ) | (4 | ) | (3 | ) | ||||||
Fair value of plan assets at end of period |
$ | 328 | $ | 279 | $ | 218 | ||||||
Funded status at end of period |
$ | (72 | ) | $ | (65 | ) | $ | (108 | ) | |||
Accumulated benefit obligation, December 31 |
$ | 297 | $ | 252 | $ | 238 | ||||||
Amounts recognized in accumulated other comprehensive income,
before tax |
||||||||||||
Net actuarial loss |
$ | 110 | $ | 104 | $ | 145 | ||||||
Prior service cost |
5 | 5 | 3 | |||||||||
Net amount recognized |
$ | 115 | $ | 109 | $ | 148 | ||||||
Amounts recognized in Consolidated Statements of Financial Position |
||||||||||||
Accrued benefit liability |
(72 | ) | (65 | ) | (108 | ) | ||||||
Accumulated other comprehensive income, net of tax |
75 | 71 | 96 | |||||||||
Net amount recognized |
$ | 3 | $ | 6 | $ | (12 | ) | |||||
Components of net periodic benefit cost |
||||||||||||
Service cost |
$ | 15 | $ | 15 | $ | 12 | ||||||
Interest cost |
21 | 19 | 18 | |||||||||
Expected return on plan assets (2) |
(25 | ) | (24 | ) | (24 | ) | ||||||
Amortization of prior service cost |
1 | 0 | 0 | |||||||||
Recognized net actuarial loss |
3 | 3 | 0 | |||||||||
Settlement gain |
0 | (1 | )(1) | 0 | (1) | |||||||
Termination charge |
0 | 0 | 1 | (1) | ||||||||
Net periodic benefit expense before allocation to affiliates |
$ | 15 | $ | 12 | $ | 7 | ||||||
| (1) | In December 2007, employment agreements for certain members of executive management were signed which incorporated a payment in full of accrued SERP benefits as of December 2008 in a lump sum payment, after which time no additional SERP benefits would accrue. This resulted in the curtailment in 2007 and the subsequent settlement gains in 2008 and 2009. The 2008 termination charge relates to two of these members of executive management whose SERP payouts were to occur, and did occur, in 2009. | |
| (2) | The market-related value of plan assets is used to determine the expected return component of pension benefit cost. We use a four year averaging method to determine the market-related value, under which asset gains or losses that result from returns that differ from our long-term rate of return assumption are recognized in the market-related value of assets on a level basis over a four year period. Once factored into the market-related asset value, these experience losses will be amortized over a period of 15 years, which is the average remaining service period of the employee group in the plan. |
The 2010 net actuarial loss was primarily due to the change in the discount rate assumption
used to measure the future benefit obligations to 5.69% in 2010 from 6.11% in 2009. The
cumulative net actuarial loss was offset in 2009 by an actuarial gain resulting from actual
investment returns that were greater than expected. Also contributing to this gain were
assumption changes made based on actual experience, such as the decrease in the assumed rate of
compensation increase. The 2008 actuarial loss was primarily due to a significant difference in
the plan’s actual investment returns in 2008 from the expected returns assumed and the decrease in
the discount rate assumption used to estimate the future benefit obligations to 6.06% in 2008 from
6.62% in 2007. The component of the $145 million actuarial loss produced in 2008 that related to
the difference between actual and expected investment returns was $106 million. Recognition of
this loss is being deferred over the subsequent four year period.
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Amounts recognized in other comprehensive income for the years ended December 31 for pension
plans were as follows:
| Pension plans | ||||||||
| (in millions) | 2010 | 2009 | ||||||
Amortization of net actuarial loss |
$ | (4 | ) | $ | (3 | ) | ||
Amortization of prior service cost |
0 | 0 | ||||||
Net actuarial loss (gain) arising
during the year |
9 | (38 | ) | |||||
Amendments |
1 | (1) | 3 | (2) | ||||
Impact due to settlement/termination |
0 | 1 | (3) | |||||
Total recognized in other
comprehensive income |
$ | 6 | $ | (37 | ) | |||
| (1) | The charges recognized as amendments were the result of factoring in the prior service cost for four new plan participants in 2010. | |
| (2) | The charges recognized as amendments were the result of factoring in the prior service cost for six new plan participants in 2009. | |
| (3) | Settlement charges relate to SERP payouts for certain executives. |
The estimated net actuarial loss and prior service cost for the pension plans that will be
amortized from accumulated other comprehensive income into net periodic benefit cost during 2011
are $6 million and $1 million, respectively.
The following table sets forth amounts of benefits expected to be paid over the next 10 years from
the Company’s pension and other postretirement plans as of December 31,
| ( in millions) | Expected future cash flows |
|||
Year ending December 31, |
||||
2011 |
$ | 7 | ||
2012 |
8 | |||
2013 |
10 | |||
2014 |
11 | |||
2015 |
13 | |||
2016-2020 |
98 | |||
The following table provides information for the defined benefit pension plans with an accumulated
benefit obligation in excess of plan assets as of December 31,
| (in millions) | 2010 | 2009 | ||||||
Information for pension plans with an accumulated
benefit obligation in excess of plan assets |
||||||||
Projected benefit obligation |
$ | 10 | $ | 8 | ||||
Accumulated benefit obligation |
5 | 4 | ||||||
Our current policy is generally to contribute an amount equal to the greater of the IRS minimum
required contribution or the target normal cost for the year plus interest to the date the
contribution is made. For 2011, the expected contribution amount is $15 million.
The employee pension plan utilizes a return seeking and a liability asset matching allocation
strategy. It is based on the understanding that 1) equity investments are expected to outperform
debt investments over the long-term, 2) the potential volatility of short-term returns from
equities is acceptable in exchange for the larger expected long-term returns and 3) a portfolio
structured across investment styles and markets (both domestic and foreign) reduces volatility. As
a result, the employee pension plan’s investment portfolio utilizes a broadly diversified asset
allocation across domestic and foreign equity and debt markets. The investment portfolio is
composed of commingled pools that are dedicated exclusively to the management of employee benefit
plan assets.
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Our target asset allocation percentage was 60% equity securities and 40% fixed income securities
for both 2010 and 2009 and 65% equity securities and 35% fixed income securities for 2008.
The target asset allocation for the portfolio is:
| Target asset allocation | ||||
Return seeking assets: |
||||
US equity index |
17 | % | ||
US large capitalization core equity |
16 | |||
International risk-controlled equity |
15 | |||
US small capitalization core equity |
8 | |||
International small capitalization risk-controlled equity |
2 | |||
Emerging markets equity |
2 | |||
| 60 | % | |||
Liability matching assets: |
||||
Long duration fixed income |
16 | |||
Broad market fixed income |
15 | |||
Long duration corporate fixed income |
8 | |||
Money market |
1 | |||
| 40 | % | |||
| 100 | % | |||
The actual asset allocation for the portfolio is:
| 2010 | 2009 | |||||||
Pension plan asset allocations (employee pension plan) |
||||||||
Equity securities |
59.9 | % | 61.0 | % | ||||
Debt securities: |
||||||||
Due in one year |
1.0 | 0.4 | ||||||
Due beyond one year |
39.1 | 38.6 | ||||||
Total debt securities |
40.1 | 39.0 | ||||||
Total plan assets |
100.0 | % | 100.0 | % | ||||
The following tables represent the fair value measurements for the pension plan assets by
major category and level of input:
| At December 31, 2010 | ||||||||||||||||
| Fair value measurements using: | ||||||||||||||||
| Quoted prices in | Significant | Significant | ||||||||||||||
| active markets for | observable | unobservable | ||||||||||||||
| identical assets | inputs | inputs | ||||||||||||||
| (in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Institutional money market fund |
$ | 3 | $ | 3 | $ | 0 | $ | 0 | ||||||||
Return seeking assets: |
||||||||||||||||
US equity index(1) |
55 | 0 | 55 | 0 | ||||||||||||
US large capitalization core equity(2) |
51 | 0 | 51 | 0 | ||||||||||||
International risk-controlled equity(3) |
50 | 0 | 50 | 0 | ||||||||||||
US small capitalization core equity(4) |
26 | 0 | 26 | 0 | ||||||||||||
International small capitalization
risk-controlled equity(5) |
8 | 0 | 8 | 0 | ||||||||||||
Emerging markets equity(6) |
7 | 0 | 7 | 0 | ||||||||||||
Liability matching assets: |
||||||||||||||||
Long duration fixed income(7) |
51 | 0 | 51 | 0 | ||||||||||||
Broad market fixed income(8) |
49 | 0 | 49 | 0 | ||||||||||||
Long duration corporate fixed income(9) |
28 | 0 | 28 | 0 | ||||||||||||
Total |
$ | 328 | $ | 3 | $ | 325 | $ | 0 | ||||||||
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| At December 31, 2009 | ||||||||||||||||
| Fair value measurements using: | ||||||||||||||||
| Quoted prices in | ||||||||||||||||
| active markets for | Significant | Significant | ||||||||||||||
| identical assets | observable inputs | unobservable inputs | ||||||||||||||
| (in millions) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Institutional money market fund |
$ | 2 | $ | 2 | $ | 0 | $ | 0 | ||||||||
Return seeking assets: |
||||||||||||||||
US equity index(1) |
48 | 0 | 48 | 0 | ||||||||||||
US large capitalization core equity(2) |
45 | 0 | 45 | 0 | ||||||||||||
International risk-controlled equity(3) |
43 | 0 | 43 | 0 | ||||||||||||
US small capitalization core equity(4) |
21 | 0 | 21 | 0 | ||||||||||||
International small capitalization
risk-controlled equity(5) |
6 | 0 | 6 | 0 | ||||||||||||
Emerging markets equity(6) |
7 | 0 | 7 | 0 | ||||||||||||
Liability matching assets: |
||||||||||||||||
Long duration fixed income(7) |
42 | 0 | 42 | 0 | ||||||||||||
Broad market fixed income(8) |
42 | 0 | 42 | 0 | ||||||||||||
Long duration corporate fixed income(9) |
23 | 0 | 23 | 0 | ||||||||||||
Total |
$ | 279 | $ | 2 | $ | 277 | $ | 0 | ||||||||
| (1) | This category comprises equity index funds not actively managed that track the S&P 500. | |
| (2) | This category includes equity securities that seek to achieve excess returns relative to the S&P 500 while maintaining portfolio risk characteristics similar to the index. | |
| (3) | This category seeks long-term capital growth with an emphasis on controlling return volatility relative to an international market index. | |
| (4) | This category includes equity securities that seek to achieve excess returns relative to the Russell 2000 Index while maintaining portfolio risk characteristics similar to the index. | |
| (5) | This category seeks to provide excess returns relative to an international small cap index, while maintaining regional weights similar to the index. | |
| (6) | This category seeks long-term capital growth in securities of companies that have their principal business activities in countries in the Morgan Stanley Capital International Emerging Markets Free Index. | |
| (7) | This category seeks to generate returns that exceed the Barclays Capital Long Government/Credit Index through investment-grade fixed income securities. | |
| (8) | This category seeks to generate returns that exceed the Barclays Capital US Aggregate Bond Index through investment-grade fixed income securities. | |
| (9) | This category seeks to generate returns that exceed the Barclays Capital US Long Corporate Bond A or Better Index investing in US Corporate Bonds with an emphasis on long duration bonds rated A or better. |
Estimates of fair values of the pension plan assets are obtained primarily from a nationally
recognized pricing service. Our Level 1 category includes a money market fund that is a mutual
fund for which the fair value is determined using an exchange traded price provided by the pricing
service. Our Level 2 category includes commingled pools. Estimates of fair values for securities
held by our commingled pools are obtained primarily from the pricing service. The methodologies
used by the pricing service that support a Level 2 classification of a financial instrument
include multiple verifiable, observable inputs including benchmark yields, reported trades,
broker/dealer quotes, issuers spreads, two-sided markets, benchmark securities, bids, offers and
reference data. There were no Level 3 investments during 2010.
Retiree health benefit plan
The retiree health benefit plan was terminated in 2006. We continue to provide retiree health
benefits only to employees who met certain age and service requirements on or before July 1, 2010.
The accumulated benefit obligation and net periodic benefit cost of this plan were not material to
our consolidated financial statements. At December 31, 2010 and 2009, the accumulated benefit
obligation associated with these benefits was $7 million and $8 million, respectively. This plan is
funded only as claims are incurred. Periodic benefit costs for the Erie Insurance Group were $0.3
million in 2010 and 2009.
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Employee savings plan
All full-time and regular part-time employees are eligible to participate in a traditional
qualified 401(k) or a Roth 401(k) savings plan. We match 100% of the participant contributions up
to 3% of compensation and 50% of participant contributions over 3% and up to 5% of compensation.
Matching contributions paid to the plan were $9 million in 2010 and $8 million in both 2009 and
2008. Employees are permitted to invest the employer-matching contributions in our Class A common
stock and may sell the shares at any time without restriction. The plan acquires shares in the open
market necessary to meet the obligations of the plan. Plan participants held 0.2 million of our
Class A shares at December 31, 2010 and 2009. Liabilities for the 401(k) plan are presented in the
Consolidated Statements of Financial Position with other liabilities.
Note 18. Incentive
Plans and Deferred Compensation
We have separate annual and long-term incentive plans for our executive and senior vice presidents.
We also make available deferred compensation plans for executive and senior management and outside
directors.
Annual incentive plan
The annual incentive plan is a bonus plan that annually pays cash bonuses to our executive and
senior vice presidents.
The incentives under the annual incentive plan are based on the achievement of certain
predetermined performance targets. These targets are established by the Executive Compensation and
Development Committee of the Board and can include various financial measures. Incentives for the
2010 plan were based on measures specific to each member of executive and senior management,
primarily on statutory reported combined ratio, direct written premium of the Property and Casualty
Group and Indemnity net operating income, as defined in the plan. Incentives for the 2009 plan
were based on measures specific to each member of executive and senior management, primarily on
statutory reported combined ratio, policies in force of the Property and Casualty Group, direct
written premium of the Property and Casualty Group and Indemnity net operating income, as defined
in the plan.
The cost of the plan is charged to operations as the compensation is earned over the performance
period of one year. The after-tax compensation cost charged to operations for the annual incentive
plan bonus for the Erie Insurance Group was $2.9 million, $2.2 million, and $2.5 million for 2010,
2009 and 2008 respectively.
Long-term incentive plan
The long-term incentive plan (“LTIP”) is a performance based incentive plan designed to reward
executive and senior vice presidents who can have a significant impact on our long-term
performance.
Pre-2004 LTIP — Prior to 2004, restricted stock awards were determined based on the achievement of
predetermined financial performance goals for actual growth in our retained earnings. The
2003-2005 performance period was the final open award period under the pre-2004 LTIP. At December
31, 2008, all shares awarded for the 2003-2005 performance period were vested. The average grant
price for the 2003-2005 performance period was $52.65. The plan award of $0.5 million was paid in
January 2009.
2004 LTIP — Beginning in 2004, the LTIP award is based on the level of achievement of objective
measures of performance over a three-year period as compared to a peer group of property and
casualty companies that write predominately personal lines insurance. The 2009 and 2008 awards were
based on the reported combined ratio, growth in direct written premiums and total return on
invested assets as defined by the Erie Insurance Group. These internal measures are compared to the
same performance measures of a peer group of companies. Because the award is based on a comparison
to results of a peer group over a three-year period, the award accrual is based on estimates of
results for the remaining performance period. This estimate is subject to variability if our
results or the results of the peer group are substantially different than the results we project.
Beginning with the 2009-2011 performance period awards can be granted as either restricted
performance shares and/or performance units. Restricted performance shares represent the right to
receive shares of common stock. Performance units represent the right to receive a cash payment.
Previously only restricted performance shares were awarded and were granted at the beginning of a
performance period. The Compensation Committee now determines the form of the award to grant at the
beginning of each performance period. Both the restricted performance shares
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and performance units
are considered vested at the end of a performance period. The 2009-2011 performance period awards
were granted as performance units.
The maximum number of shares which may be earned under the plan by any single participant during
any one performance period is limited to 250,000 shares. The aggregate number of Class A common
stock that may be issued pursuant to awards granted under the LTIP is 1.0 million shares. With
respect to an award of performance units, the maximum dollar amount which may be earned under the
plan by any single participant during any one performance period is $3 million. A liability is
recorded and compensation expense is recognized ratably over the performance period.
At
December 31, 2009, the awards for the 2007-2009 performance period were fully vested in
accordance with the 2004 LTIP plan. The average grant price for the 2007-2009 performance period
was $44.48. The plan award of $2 million was paid in July 2010.
Earned amounts are allocated to related entities and settled in cash once the payout is made. The
after-tax compensation cost charged to operations for these restricted stock awards for the Erie
Insurance Group was $4.3 million for 2010 and $2.4 million for both 2009 and 2008.
Deferred compensation plans
The deferred compensation plans are arrangements for our executive and senior vice presidents
whereby the participants can elect to defer receipt of a portion of their compensation until a
later date. Supplemental employee contributions to the deferred compensation plan are deferrals
that cannot be credited to our tax-qualified 401(k) plan because they exceed the annual
contribution or compensation limits of that plan. However, these contributions are credited with a
company-matching contribution using the same formula as in our 401(k) plan. The deferred
compensation plan for directors allows them to defer receipt of a portion of their director and
meeting fees until a later date. Employees or directors participating in the respective plans
select hypothetical investment funds for their deferrals and are credited with the hypothetical
returns generated.
The awards, payments, deferrals and liabilities under the deferred compensation, annual and
long-term incentive plans for officers and directors were as follows for the years ended December
31:
| Erie Insurance Group | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Plan awards, employer match and hypothetical earnings |
||||||||||||
Long-term incentive plan awards |
$ | 7 | $ | 4 | $ | 4 | ||||||
Annual incentive plan awards |
4 | 3 | 4 | |||||||||
Deferred compensation plan, employer match
and hypothetical earnings (losses) |
2 | 1 | (4 | ) | ||||||||
Total plan awards and earnings |
13 | 8 | 4 | |||||||||
Total plan awards paid |
6 | 8 | 11 | |||||||||
Compensation deferred under the plans |
1 | 1 | 1 | |||||||||
Distributions from the deferred compensation plans |
(1 | ) | (1 | ) | (2 | ) | ||||||
Gross incentive plan and deferred compensation liabilities |
$ | 22 | $ | 15 | $ | 15 | ||||||
Stock compensation plan for outside directors
We have a stock compensation plan for our outside directors to further align the interests of
directors with shareholders by providing for a portion of annual compensation for the directors’
services in shares of our Class A common stock. Each director vests in the grant 25% every three
months over the course of a year. Dividends paid by us are reinvested into each director’s account
with additional shares of our Class A common stock. In 2010, the annual charge related to this
plan totaled $2 million. In 2009, the annual charge related to this plan totaled $0.4 million.
In 2008, compensation expense for this plan was offset by market value adjustments to the
directors’ accounts resulting in a net credit of $0.2 million.
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Note 19. Capital Stock
Class A and B shares
We have two classes of common stock, Class A which has a dividend preference, and Class B which has
voting power and a conversion right. 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 1.0%
of any dividend declared on each share of Class B common stock. We may declare and pay a dividend
in respect to Class A common stock without any requirement that any dividend be declared and paid
in respect to Class B common stock. Sole shareholder voting power is vested in Class B common
stock except insofar as any applicable law shall permit Class A common shareholders to vote as a
class in regards to any changes in the rights, preferences and privileges attaching to Class A
common stock. 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. In 2009, five shares of Class B
common stock were converted into 12,000 shares of Class A common stock. There were no conversions
of Class B shares to Class A shares in 2010 or 2008. There is no provision for conversion of Class
A shares to Class B shares and Class B shares surrendered for conversion cannot be reissued.
Stock repurchase plan
A stock repurchase program was authorized for our outstanding Class A nonvoting common stock
beginning January 1, 2004. Treasury shares are recorded in the Consolidated Statements of
Financial Position at total cost based upon trade date. Shares repurchased under this plan totaled
1.1 million during 2010 at a total cost of $57 million and 0.1 million shares during 2009 at a
total cost of $3 million. Cumulative shares repurchased under this plan since inception totaled
12.9 million at a total cost of $671 million as of December 31, 2010. In December 2010, our Board
of Directors approved a continuation of the current stock repurchase program for a total of $150
million, with no time limitation. We have approximately $146 million of repurchase authority
remaining under this plan at December 31, 2010.
In 2010, we also repurchased 44,206 shares of our outstanding Class A nonvoting common stock
outside of our publicly announced share repurchase program at a total cost of $2 million. Of this
amount, 39,406 shares were purchased in June for $1.8 million, or $45.92 per share, in conjunction
with our long-term incentive plan and 4,800 shares were purchased in July for $0.2 million, or
$48.75 per share, for the vesting of stock-based awards for executive management. These shares were
delivered to plan participants and executive management, respectively, in July 2010.
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Note 20. Comprehensive Income
The components of changes to comprehensive (loss) income follow for the periods ended December 31:
| Erie Insurance Group | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Indemnity |
||||||||||||
Cumulative effect of accounting changes, net of tax |
$ | — | $ | (6 | ) | $ | (11 | ) | ||||
Unrealized
(loss) gain on securities: |
||||||||||||
Gross unrealized holding gains (losses) on investments arising during period |
18 | 105 | (145 | ) | ||||||||
Unrealized gains transferred to the noncontrolling interest (1) |
(23 | ) | — | — | ||||||||
Reclassification adjustment for gross (gains) losses included in net income |
(5 | ) | 10 | 77 | ||||||||
Unrealized holding (losses) gains on investments |
(10 | ) | 115 | (68 | ) | |||||||
Income tax benefit (expense) related to unrealized (losses) gains |
4 | (40 | ) | 24 | ||||||||
Net unrealized holding (losses) gains on investments arising during year |
(6 | ) | 75 | (44 | ) | |||||||
Postretirement
plans: |
||||||||||||
Amortization of prior service cost |
0 | 0 | 0 | |||||||||
Amortization of actuarial loss |
4 | 3 | 0 | |||||||||
Net actuarial (loss) gain during year |
(9 | ) | 38 | (139 | ) | |||||||
Losses due to plan changes during year |
(1 | ) | (3 | ) | 0 | |||||||
Curtailment/settlement loss arising during year |
0 | (1 | ) | 0 | ||||||||
Postretirement benefits, gross |
(6 | ) | 37 | (139 | ) | |||||||
Income tax benefit (expense) related to postretirement benefits |
2 | (13 | ) | 48 | ||||||||
Postretirement plans, net |
(4 | ) | 24 | (91 | ) | |||||||
Change in other comprehensive (loss) income , net of tax — Indemnity |
(10 | ) | 93 | (146 | ) | |||||||
Change in other comprehensive income (loss), net of tax — Exchange |
101 | 423 | (266 | ) | ||||||||
Change in other comprehensive income (loss), net of tax — Erie
Insurance Group |
$ | 91 | $ | 516 | $ | (412 | ) | |||||
| (1) | This represents unrealized gains moved from Indemnity shareholder interest to the noncontrolling interest as a result of the December 31, 2010 sale of the P&C subsidiaries. |
The components of accumulated other comprehensive (loss) income, net of tax for the periods
ended December 31, are as follows:
| Erie Insurance Group | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Indemnity |
||||||||||||
Accumulated net appreciation (depreciation) of investments |
$ | 22 | $ | 28 | $ | (40 | ) | |||||
Accumulated net losses associated with post-retirement benefits |
(75 | ) | (71 | ) | (96 | ) | ||||||
Accumulated other comprehensive loss — Indemnity |
(53 | ) | (43 | ) | (136 | ) | ||||||
Exchange |
||||||||||||
Accumulated other comprehensive income (loss) — Exchange |
$ | 277 | $ | 176 | $ | (247 | ) | |||||
The components of comprehensive income (loss), net of tax for the periods ended December 31, are as
follows:
| Erie Insurance Group | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Net income (loss) — Erie Insurance Group |
$ | 660 | $ | 446 | $ | (616 | ) | |||||
Change in other comprehensive income (loss), net of tax — Erie
Insurance Group |
91 | 516 | (412 | ) | ||||||||
Less: Cumulative effect of accounting changes, net of tax |
— | (101 | ) | (11 | ) | |||||||
Less: Unrealized gains transferred to the noncontrolling
interest, net of tax (1) |
(15 | ) | — | — | ||||||||
Total comprehensive income (loss) — Erie Insurance Group |
766 | 1,063 | (1,017 | ) | ||||||||
Less: Noncontrolling interest in consolidated entity — Exchange |
599 | 856 | (951 | ) | ||||||||
Total comprehensive income (loss) — Indemnity |
$ | 167 | $ | 207 | $ | (66 | ) | |||||
| (1) | This represents unrealized gains moved from Indemnity shareholder interest to the noncontrolling interest as a result of the December 31, 2010 sale of the P&C subsidiaries. |
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Note 21. Commitments and Contingencies
Indemnity has contractual commitments to invest up to $50 million related to its limited
partnership investments at December 31, 2010. These commitments are split between private equity
securities of $21 million, real estate activities of $17 million and mezzanine debt securities of
$12 million. These commitments will be funded as required by the partnership agreements.
The Exchange, including EFL, has contractual commitments to invest up to $402 million related to
its limited partnership investments at December 31, 2010. These commitments are split between
private equity securities of $177 million, real estate activities of $143 million and mezzanine
debt securities of $82 million. These commitments will be funded as required by the partnership
agreements.
We are involved in litigation arising in the ordinary course of business. In our opinion, the
effects, if any, of such litigation are not expected to be material to our consolidated financial
condition, operations or cash flows.
Note 22. Supplementary Data on Cash Flows
A reconciliation of net income to net cash provided by operating activities as presented in the
Consolidated Statements of Cash Flows is as follows for the years ended December 31:
| Indirect method of cash flows | ||||||||||||
| Erie Insurance Group | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Cash
flows from operating activities: |
||||||||||||
Net income (loss) |
$ | 660 | $ | 446 | $ | (616 | ) | |||||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||||||
Depreciation |
12 | 9 | 7 | |||||||||
Amortization of deferred policy acquisition costs |
652 | 624 | 602 | |||||||||
Impairment of goodwill |
22 | — | — | |||||||||
Deferred income tax expense (benefit) |
342 | 15 | (246 | ) | ||||||||
Realized (gains) losses and impairments on investments |
(307 | ) | (285 | ) | 1,597 | |||||||
Equity in (earnings) losses of limited partnerships |
(128 | ) | 369 | 58 | ||||||||
Net amortization of bond premium (discount) |
9 | (12 | ) | 6 | ||||||||
Increase (decrease) in deferred compensation |
7 | 0 | (10 | ) | ||||||||
Limited partnership distributions |
122 | 81 | 315 | |||||||||
(Increase) decrease in receivables, reinsurance
recoverables and reserve credits |
(158 | ) | 209 | (222 | ) | |||||||
Increase in prepaid expenses |
10 | (9 | ) | 0 | ||||||||
Increase in deferred policy acquisition costs |
(667 | ) | (642 | ) | (626 | ) | ||||||
Increase (decrease) in accounts payable and accrued expenses |
25 | (4 | ) | (13 | ) | |||||||
Decrease in accrued agent bonuses |
(6 | ) | (12 | ) | (17 | ) | ||||||
(Decrease) increase in loss reserves |
(11 | ) | 12 | (155 | ) | |||||||
Increase in future life policy benefits and claims reserves |
21 | 37 | 19 | |||||||||
Increase in unearned premiums |
116 | 51 | 21 | |||||||||
Net cash provided by operating activities |
$ | 721 | $ | 889 | $ | 720 | ||||||
Note 23. Statutory Information
Accounting principles used to prepare statutory financial statements differ from those used to
prepare financial statements under U.S. GAAP. 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 statutory
financial statements of the Exchange and its subsidiaries, EIC, EPC, Flagship and EFL, are prepared
in accordance with accounting practices prescribed and permitted by the Pennsylvania Insurance
Department. ENY prepares its statutory financial statements in accordance with accounting practices
prescribed by the New York Insurance Department.
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Financial statements prepared under statutory accounting principles focus on the solvency of the
insurer and generally provide a more conservative approach than under GAAP. Differences between SAP
and GAAP include the valuation of investments, deferred policy acquisition cost assets, the
actuarial assumptions used in life reserves, deferred tax assets, and unearned subscriber fees.
Statutory net income and capital and surplus as determined in accordance with SAP prescribed or
permitted by insurance regulatory authorities are as follows:
| SAP Net Income (Loss) | Capital and Surplus | |||||||||||||||||||
| Years ended December 31, | At December 31, | |||||||||||||||||||
| (in millions) | 2010 | 2009 | 2008 | 2010 | 2009 | |||||||||||||||
Erie Insurance Company |
$ | 21 | $ | 16 | $ | (10 | ) | $ | 251 | $ | 232 | |||||||||
Erie Insurance Company of New York |
2 | 2 | 1 | 20 | 22 | |||||||||||||||
Erie Insurance Property & Casualty Company |
0 | 0 | 0 | 10 | 10 | |||||||||||||||
Erie Insurance Exchange |
531 | (56 | ) | (363 | ) | 5,070 | 4,518 | |||||||||||||
Flagship City Insurance Company |
0 | 0 | 0 | 11 | 10 | |||||||||||||||
Erie Family Life Insurance Company |
38 | 3 | (66 | ) | 208 | 174 | ||||||||||||||
The minimum statutory capital and surplus requirements under Pennsylvania and New York law for
Exchange’s stock property and casualty subsidiaries amounts to $12 million. The Exchange’s
subsidiaries’ total statutory capital and surplus significantly exceed these minimum requirements,
totaling $292 million at December 31, 2010. The risk-based capital levels of all members of the
Property and Casualty Group and EFL significantly exceed the minimum requirements. Cash and
securities with a carrying value of $14 million were deposited by the property and casualty and
life entities with regulatory authorities under statutory requirements at December 31, 2010.
As prescribed by the Insurance Department of the Commonwealth of Pennsylvania, the Exchange records
unearned subscriber fees (fees to attorney-in-fact) as deductions from unearned premium reserve and
charges current operations on a pro-rata basis over the periods covered by the policies. The
Pennsylvania-domiciled members of the Property and Casualty Group discount workers compensation
loss reserves on a non-tabular basis as prescribed by the Insurance Department of the Commonwealth
of Pennsylvania. The Exchange’s NAIC prepared statutory surplus, excluding the impact of the
Pennsylvania prescribed practices, would have been $4.6 billion at December 31, 2010. EIC’s NAIC
prepared statutory surplus, excluding the impact of the Pennsylvania prescribed practices, would
have been $244 million at December 31, 2010. EPC and Flagship record the discounting of workers
compensation loss reserves on a direct basis; however, after application of the intercompany
pooling arrangement, there is no impact on their financial statements.
The amount of dividends EIC, EPC and Flagship, Exchange’s Pennsylvania-domiciled property and
casualty subsidiaries, can pay without the prior approval of the Pennsylvania Insurance
Commissioner is limited 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 EIC’s New York-domiciled property and casualty
subsidiary, ENY, 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. In 2011, the
maximum dividend payout that the Exchange could receive from its property and casualty insurance
subsidiaries would be $29 million. No dividends were paid by these property and casualty insurance
subsidiaries in 2010, 2009 or 2008.
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 shown on its last annual statement on file with the
commissioner, or (b) the net income as reported on its last annual statement, but shall not include
pro-rata distribution of any class of the insurer’s own securities. Accordingly, the maximum
dividend payout that the Exchange and Indemnity could receive in 2011 without prior Pennsylvania
Commissioner approval is $30 million and $8 million, respectively. There were no dividends paid to
either the Exchange or Indemnity in 2010, 2009 or 2008.
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Note 24. Indemnity Supplemental Information
| Consolidating Statement of Financial Position | ||||||||||||||||
| Indemnity | Exchange | Reclassifications | Erie | |||||||||||||
| December 31, 2010 | shareholder | noncontrolling | and | Insurance | ||||||||||||
| (in millions) | interest | interest | eliminations | Group | ||||||||||||
Assets |
||||||||||||||||
Investments |
||||||||||||||||
Available-for-sale securities, at fair value: |
||||||||||||||||
Fixed maturities |
$ | 264 | $ | 7,279 | $ | — | $ | 7,543 | ||||||||
Equity securities |
24 | 570 | — | 594 | ||||||||||||
Trading securities, at fair value |
28 | 2,306 | — | 2,334 | ||||||||||||
Limited partnerships |
216 | 1,108 | — | 1,324 | ||||||||||||
Other invested assets |
1 | 19 | — | 20 | ||||||||||||
Total investments |
533 | 11,282 | — | 11,815 | ||||||||||||
Cash and cash equivalents |
310 | 120 | — | 430 | ||||||||||||
Premiums receivable from policyholders(1) |
— | 942 | — | 942 | ||||||||||||
Reinsurance recoverable(1) |
— | 201 | — | 201 | ||||||||||||
Deferred acquisition costs(1) |
— | 467 | — | 467 | ||||||||||||
Other assets |
132 | 357 | — | 489 | ||||||||||||
Receivables from Exchange and other affiliates(1) |
232 | — | (232 | ) | — | |||||||||||
Note receivable from EFL |
25 | — | (25 | ) | — | |||||||||||
Equity in EFL |
80 | — | (80 | ) | — | |||||||||||
Total assets |
$ | 1,312 | $ | 13,369 | $ | (337 | ) | $ | 14,344 | |||||||
Liabilities |
||||||||||||||||
Losses and loss expense reserves(1) |
$ | — | $ | 3,584 | $ | — | $ | 3,584 | ||||||||
Life policy and deposit contract reserves |
— | 1,603 | — | 1,603 | ||||||||||||
Unearned premiums(1) |
— | 2,082 | — | 2,082 | ||||||||||||
Deferred income taxes |
26 | 257 | — | 283 | ||||||||||||
Other liabilities |
374 | 341 | (257 | ) | 458 | |||||||||||
Total liabilities |
400 | 7,867 | (257 | ) | 8,010 | |||||||||||
Shareholders’ equity and noncontrolling interest |
||||||||||||||||
Total Indemnity shareholders’ equity |
912 | — | — | 912 | ||||||||||||
Noncontrolling interest for the benefit of
policyholders — Exchange |
— | 5,502 | (80 | ) | 5,422 | |||||||||||
Total equity |
912 | 5,502 | (80 | ) | 6,334 | |||||||||||
Total liabilities, shareholders’ equity and
noncontrolling interest |
$ | 1,312 | $ | 13,369 | $ | (337 | ) | $ | 14,344 | |||||||
| (1) | Prior to December 31, 2010, the underwriting assets and liabilities retained by EIC and ENY were the responsibility of the Indemnity shareholder interest. Due to the sale of Indemnity’s property and casualty subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting assets and liabilities are the responsibility of the subscribers (policyholders) of the Exchange, or noncontrolling interest. (See Note 1, “Nature of Operations”.) |
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| Consolidating Statement of Financial Position | ||||||||||||||||
| Indemnity | Exchange | Reclassifications | Erie | |||||||||||||
| December 31, 2009 | shareholder | noncontrolling | and | Insurance | ||||||||||||
| (in millions) | interest | interest | eliminations | Group | ||||||||||||
Assets |
||||||||||||||||
Investments |
||||||||||||||||
Available-for-sale securities, at fair value: |
||||||||||||||||
Fixed maturities |
$ | 664 | $ | 6,517 | $ | — | $ | 7,181 | ||||||||
Equity securities |
38 | 472 | — | 510 | ||||||||||||
Trading securities, at fair value |
42 | 1,835 | — | 1,877 | ||||||||||||
Limited partnerships |
235 | 1,116 | — | 1,351 | ||||||||||||
Other invested assets |
1 | 20 | — | 21 | ||||||||||||
Total investments |
980 | 9,960 | — | 10,940 | ||||||||||||
Cash and cash equivalents |
76 | 158 | — | 234 | ||||||||||||
Premiums receivable from policyholders(1) |
237 | 872 | (203 | ) | 906 | |||||||||||
Reinsurance recoverable(1) |
2 | 213 | — | 215 | ||||||||||||
Deferred income taxes |
41 | 75 | — | 116 | ||||||||||||
Deferred acquisition costs(1) |
17 | 450 | — | 467 | ||||||||||||
Other assets |
102 | 308 | (1 | ) | 409 | |||||||||||
Reinsurance recoverables and receivables from
Exchange and other affiliates(1) |
1,115 | — | (1,115 | ) | — | |||||||||||
Note receivable from EFL |
25 | — | (25 | ) | — | |||||||||||
Equity in EFL |
72 | — | (72 | ) | — | |||||||||||
Total assets |
$ | 2,667 | $ | 12,036 | $ | (1,416 | ) | $ | 13,287 | |||||||
Liabilities |
||||||||||||||||
Losses and loss expense reserves(1) |
$ | 965 | $ | 3,424 | $ | (791 | ) | $ | 3,598 | |||||||
Life policy and deposit contract reserves |
— | 1,540 | — | 1,540 | ||||||||||||
Unearned premiums(1) |
434 | 1,872 | (325 | ) | 1,981 | |||||||||||
Other liabilities |
366 | 305 | (228 | ) | 443 | |||||||||||
Total liabilities |
1,765 | 7,141 | (1,344 | ) | 7,562 | |||||||||||
Shareholders’ equity and noncontrolling interest |
||||||||||||||||
Total Indemnity shareholders’ equity |
902 | — | — | 902 | ||||||||||||
Noncontrolling interest for the benefit of
policyholders — Exchange |
— | 4,895 | (72 | ) | 4,823 | |||||||||||
Total equity |
902 | 4,895 | (72 | ) | 5,725 | |||||||||||
Total liabilities, shareholders’ equity
and noncontrolling interest |
$ | 2,667 | $ | 12,036 | $ | (1,416 | ) | $ | 13,287 | |||||||
| (1) | Indemnity’s insurance related accounts in this table include its wholly owned property and casualty insurance subsidiaries’ direct business in addition to their share of the pooling transactions, which represents 5.5% of the total Property and Casualty Group business. The Consolidated Statements of Financial Position include direct business only as the 5.5% of activity assumed in accordance with the intercompany pooling arrangement has been eliminated in the consolidated presentation. |
Receivables
from Exchange and EFL and concentrations of credit risk
Financial instruments could potentially expose Indemnity to concentrations of credit risk, including unsecured receivables from the Exchange. A majority of Indemnity’s revenue and receivables are from the Exchange and affiliates. See also Note 4, “Variable Interest Entity.”
Financial instruments could potentially expose Indemnity to concentrations of credit risk, including unsecured receivables from the Exchange. A majority of Indemnity’s revenue and receivables are from the Exchange and affiliates. See also Note 4, “Variable Interest Entity.”
Management fee and expense allocation amounts due from the Exchange were $229 million and $210
million at December 31, 2010 and 2009, respectively. The receivable from EFL for expense
allocations totaled $3 million at December 31, 2010 and 2009.
Indemnity is due $25 million from EFL in the form of a surplus note that was issued in 2003. The
note may be repaid only out of unassigned surplus of EFL. Both principal and interest payments are
subject to prior approval by the Pennsylvania Insurance Commissioner. The note bears an annual
interest rate of 6.7% and will be payable on demand on or after December 31, 2018, with interest
scheduled to be paid semi-annually. EFL paid annual interest to Indemnity of $2 million in both
2010 and 2009.
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Table of Contents
| Indemnity shareholder interest | ||||||||||||||||
| Years ended December 31, | ||||||||||||||||
| (in millions) | Percent | 2010 | 2009 | 2008 | ||||||||||||
Management operations |
||||||||||||||||
Management fee revenue, net |
100.0 | % | $ | 1,009 | $ | 965 | $ | 950 | ||||||||
Service agreement revenue |
100.0 | % | 34 | 35 | 33 | |||||||||||
Total revenue from management operations |
1,043 | 1,000 | 983 | |||||||||||||
Cost of management operations |
100.0 | % | 841 | 813 | 810 | |||||||||||
Income from management operations before taxes |
202 | 187 | 173 | |||||||||||||
Property and casualty insurance operations |
||||||||||||||||
Net premiums earned |
5.5 | %(2) | 216 | 209 | 207 | |||||||||||
Losses and loss expenses |
5.5 | %(2) | 155 | 145 | 137 | |||||||||||
Policy acquisition and other underwriting expenses |
5.5 | %(2) | 61 | 63 | 57 | |||||||||||
Income from property and casualty insurance operations before taxes |
0 | 1 | 13 | |||||||||||||
Life insurance operations (1) |
||||||||||||||||
Total revenue |
21.6 | %(3) | 37 | 27 | 13 | |||||||||||
Total benefits and expenses |
21.6 | %(3) | 26 | 25 | 25 | |||||||||||
Income (loss) from life insurance operations before taxes |
11 | 2 | (12 | ) | ||||||||||||
Investment operations |
||||||||||||||||
Net investment income (2) |
37 | 42 | 44 | |||||||||||||
Net realized (losses) gains on investments (2) |
(1 | ) | 10 | (43 | ) | |||||||||||
Net impairment losses recognized in earnings (2) |
(1 | ) | (12 | ) | (70 | ) | ||||||||||
Equity in earnings (losses) of limited partnerships |
21 | (76 | ) | 6 | ||||||||||||
Income (loss) from investment operations before taxes (2) |
56 | (36 | ) | (63 | ) | |||||||||||
Income from operations before income taxes and noncontrolling interest |
269 | 154 | 111 | |||||||||||||
Provision for income taxes |
107 | 46 | 42 | |||||||||||||
Net income |
$ | 162 | $ | 108 | $ | 69 | ||||||||||
| (1) | Earnings on life insurance related invested assets are integral to the evaluation of the life insurance operations because of the long duration of life products. On that basis, for presentation purposes, the life insurance operations in the table above include life insurance related investment results. However, the life insurance investment results are included in the investment operations segment discussion in Note 5, “Segment Information”. | |
| (2) | Prior to and through December 31, 2010, the underwriting results retained by EIC and ENY and the investment results of EIC, ENY and EPC accrued to the benefit of the Indemnity shareholder interest. Due to the sale of Indemnity’s property and casualty subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting results and all investment results for these companies accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after December 31, 2010. (See Note 1, “Nature of Operations”.) | |
| (3) | As a result of the pending sale of Indemnity’s 21.6% ownership interest in EFL to the Exchange which is scheduled to close by March 31, 2011, all earnings of EFL will accrue to the benefit of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after March 31, 2011. (See Note 1, “Nature of Operations”.) |
Expense allocations
All claims
handling services for the Exchange are performed by
Indemnity employees who are entirely dedicated to claims related
activities. All costs associated with these employees are reimbursed
to Indemnity from Exchange revenues in accordance with the
subscriber’s agreement. Likewise, Indemnity is reimbursed by EFL
from its revenues for all costs associated with employees who perform
life insurance operating activities for EFL in accordance with its
service agreement with Indemnity. Cash settlements for payments on
the account of the Exchange totaled $293 million,
$282 million and $267 million in 2010, 2009 and 2008,
respectively, and $27 million, $32 million and
$36 million in 2010, 2009 and 2008, respectively, for EFL. Cash
transfers are settled quarterly.
Common
overhead expenses included in the expenses paid by Indemnity are
allocated based on appropriate utilization statistics (employee
count, square footage, vehicle count, project hours, etc.)
specifically measured to accomplish proportional allocations.
Executive compensation is allocated based on each executive’s
primary responsibilities (management services, property and casualty
claims operations, EFL operations and investment operations). We
believe the methods used to allocate common overhead expenses among
the affiliated entities are reasonable.
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Table of Contents
Office leases
Indemnity leases certain office space on a five and six year basis from the Exchange including the
home office and three field office facilities. Rent expenses under these leases totaled $6 million
in 2010, 2009 and 2008. Indemnity also has a lease commitment with EFL for a branch office until
2018. Annual rentals paid to EFL under this lease totaled $0.4 million in 2010 and $0.3 million in
2009 and 2008.
Direct method of cash flows
Indemnity’s components of direct cash flows as included in the Consolidated Statements of Cash
Flows are as follows for the years ended December 31:
| Indemnity | ||||||||||||
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Management fee received |
$ | 947 | $ | 912 | $ | 898 | ||||||
Service agreement fee received |
34 | 35 | 32 | |||||||||
Premiums collected |
220 | 214 | 208 | |||||||||
Net investment income received |
45 | 45 | 52 | |||||||||
Limited partnership distributions |
21 | 13 | 29 | |||||||||
(Decrease) increase in reimbursements collected from affiliates |
(15 | ) | 3 | (8 | ) | |||||||
Commissions and bonuses paid to agents |
(532 | ) | (535 | ) | (534 | ) | ||||||
Salaries and wages paid |
(106 | ) | (110 | ) | (111 | ) | ||||||
Pension contribution and employee benefits paid |
(33 | ) | (32 | ) | (48 | ) | ||||||
Losses paid |
(132 | ) | (123 | ) | (121 | ) | ||||||
Loss expenses paid |
(23 | ) | (22 | ) | (21 | ) | ||||||
Other underwriting and acquisition costs paid |
(53 | ) | (54 | ) | (52 | ) | ||||||
General operating expenses paid |
(119 | ) | (104 | ) | (104 | ) | ||||||
Interest paid on bank line of credit |
0 | 0 | (1 | ) | ||||||||
Income taxes paid |
(61 | ) | (62 | ) | (68 | ) | ||||||
Net cash provided by operating activities |
193 | 180 | 151 | |||||||||
Net cash provided (used in) by investing activities |
196 | (69 | ) | 73 | ||||||||
Net cash used in financing activities |
(155 | ) | (96 | ) | (194 | ) | ||||||
Net increase in cash |
234 | 15 | 30 | |||||||||
Cash and cash equivalents at beginning of year |
76 | 61 | 31 | |||||||||
Cash and cash equivalents at end of year |
$ | 310 | $ | 76 | $ | 61 | ||||||
Note 25. EFL Supplemental Information
EFL is a Pennsylvania-domiciled life insurance company operating in 10 states and the District of
Columbia. Indemnity owns 21.6% of EFL’s common shares outstanding and accounted for its ownership
interest using the equity method of accounting. On November 4, 2010 Indemnity entered into a
definitive agreement for the sale of its 21.6% ownership interest in EFL to the Exchange, which is
scheduled to close by March 31, 2011. Upon the closing date, the Exchange will own 100% of the
life insurance operations. Indemnity’s share of EFL’s undistributed earnings included in retained
earnings as of December 31, 2010 and 2009, totaled $63 million and $55 million, respectively.
The following table presents condensed financial information for EFL on a U.S. GAAP basis for the
years ended December 31:
| (in millions) | 2010 | 2009 | 2008 | |||||||||
Policy and other revenues |
$ | 65 | $ | 64 | $ | 66 | ||||||
Net investment income (expense) |
107 | 63 | (6 | ) | ||||||||
Benefits and expenses |
122 | 117 | 114 | |||||||||
Income (loss) before income taxes |
50 | 10 | (54 | ) | ||||||||
Income tax expense (benefit) |
14 | (16 | ) | 14 | ||||||||
Net income (loss) |
36 | 26 | (68 | ) | ||||||||
Comprehensive income (loss) |
60 | 142 | (138 | ) | ||||||||
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In 2010 net income was positively impacted by improving market conditions and a reduction in
impairment charges which led to an increase in investment income of $44 million. Impairment
charges totaled $2 million in 2010 compared to $23 million and $83 million in 2009 and 2008,
respectively. Net realized gains on investments totaled $14 million and $3 million in 2010 and
2009, respectively compared to losses of $10 million recorded in 2008.
Net income in 2009 was positively impacted by a reduction in the deferred tax valuation allowance
of $19 million. A deferred tax valuation allowance of $33 million was recorded in the Statements
of Operations for 2008 related to the more significant impairment charges and contributed to the
net loss reported in 2008.
In 2008 a deferred tax valuation allowance of $7 million was recorded in accumulated other
comprehensive income for unrealized losses on securities where the related deferred tax asset was
not expected to be realized. This amount was reduced in both 2009 and 2010 driven by unrealized
gains during the year. The deferred tax valuation allowance was $0 at December 31, 2010.
In 2009 comprehensive income was positively impacted by the $27 million cumulative effect of
implementing new other-than-temporary impairment guidance in the second quarter. Additionally, EFL
experienced unrealized gains, after tax of $90 million in 2009 which contributed to the increase in
comprehensive income and investments. The comprehensive loss for 2008 included unrealized losses
after tax of $70 million resulting from the 2008 market conditions.
| As of December 31, | ||||||||
| (in millions, except per share data) | 2010 | 2009 | ||||||
Investments |
$ | 1,777 | $ | 1,639 | ||||
Total assets |
2,077 | 1,941 | ||||||
Liabilities |
1,685 | 1,609 | ||||||
Accumulated other comprehensive income |
42 | 18 | ||||||
Cumulative effect adjustment |
— | 27 | ||||||
Total shareholders’ equity |
393 | 333 | ||||||
Book value per share |
$ | 41.54 | $ | 35.19 | ||||
In June 2009, Indemnity made a $12 million capital contribution to EFL and the Exchange made a $43
million capital contribution to EFL to strengthen its surplus. The $55 million in capital
contributions increased EFL’s investments and total shareholders’ equity.
During the second quarter of 2009, a required cumulative effect adjustment reclassified previously
recognized non-credit other-than-temporary impairments of $27 million out of retained earnings.
Deferred taxes of $9 million related to this cumulative effect adjustment were offset by a
reduction in the valuation allowance in the same amount related to previously recognized
impairments.
Total shareholders’ equity increased $60 million at December 31, 2010 compared to December 31,
2009. The main factors driving this increase were $24 million in unrealized gains, net of tax and
net income of $36 million.
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Note
26. Quarterly Results of Operations (unaudited)
| (in millions, except per share data) | First quarter | Second quarter | Third quarter | Fourth quarter | Year ended | |||||||||||||||
2010 |
||||||||||||||||||||
Revenues |
$ | 1,216 | $ | 916 | $ | 1,357 | $ | 1,401 | $ | 4,890 | ||||||||||
Benefits and expenses |
988 | 967 | 952 | 984 | 3,891 | |||||||||||||||
Income (loss) from operations before income
taxes and noncontrolling interest |
228 | (51 | ) | 405 | 417 | 999 | ||||||||||||||
Net income (loss) |
162 | (31 | ) | 275 | 254 | 660 | ||||||||||||||
Less: Net income (loss) attributable to
noncontrolling interest in consolidated
entity — Exchange |
115 | (80 | ) | 221 | 242 | 498 | ||||||||||||||
Net income attributable to Indemnity |
$ | 47 | $ | 49 | $ | 54 | $ | 12 | $ | 162 | ||||||||||
Earnings per
share(1) |
||||||||||||||||||||
Net income attributable to Indemnity per share |
||||||||||||||||||||
Class A common stock — basic |
$ | 0.92 | $ | 0.96 | $ | 1.05 | $ | 0.25 | $ | 3.18 | ||||||||||
Class A common stock — diluted |
$ | 0.82 | $ | 0.86 | $ | 0.94 | $ | 0.22 | $ | 2.85 | ||||||||||
Class B common stock — basic and diluted |
$ | 132.83 | $ | 138.21 | $ | 150.87 | $ | 40.93 | $ | 462.83 | ||||||||||
| First quarter | Second quarter | Third quarter | Fourth quarter | Year ended | ||||||||||||||||
2009 |
||||||||||||||||||||
Revenues |
$ | 695 | $ | 1,149 | $ | 1,286 | $ | 1,125 | $ | 4,255 | ||||||||||
Benefits and expenses |
1,035 | 891 | 930 | 875 | 3,731 | |||||||||||||||
(Loss) income from operations before income
taxes and noncontrolling interest |
(340 | ) | 258 | 356 | 250 | 524 | ||||||||||||||
Net (loss) income |
(251 | ) | 271 | 252 | 174 | 446 | ||||||||||||||
Less: Net (loss) income attributable to
noncontrolling interest in consolidated
entity — Exchange |
(262 | ) | 238 | 212 | 150 | 338 | ||||||||||||||
Net income attributable to Indemnity |
$ | 11 | $ | 33 | $ | 40 | $ | 24 | $ | 108 | ||||||||||
Earnings per
share(1) |
||||||||||||||||||||
Net income attributable to Indemnity per share |
||||||||||||||||||||
Class A common stock — basic |
$ | 0.22 | $ | 0.63 | $ | 0.77 | $ | 0.48 | $ | 2.10 | ||||||||||
Class A common stock — diluted |
$ | 0.19 | $ | 0.57 | $ | 0.69 | $ | 0.43 | $ | 1.89 | ||||||||||
Class B common stock — basic and diluted |
$ | 34.78 | $ | 93.19 | $ | 112.06 | $ | 72.49 | $ | 312.45 | ||||||||||
(1) The
cumulative sum of quarterly basic and diluted net income per share
amounts may not equal total basic and diluted net income per share
for the year due to differences in weighted average shares and
equivalent shares outstanding for each of the periods
presented.
Note 27. Subsequent Events
We have evaluated for recognized and nonrecognized subsequent events through the date of financial
statement issuance. No items were identified in this period subsequent to the financial statement
date that required adjustment or disclosure.
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Table of Contents
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission rules and forms, and that such information is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow for timely decisions regarding required disclosures.
As required by the Securities and Exchange Commission Rule 13a-15(e), we carried out an evaluation,
under the supervision and with the participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2010. Based on the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective.
Changes in Internal Control over Financial Reporting
There has been no change in our internal controls over financial reporting during our most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect our
internal controls over financial reporting. Our process for evaluating controls and procedures is
continuous and encompasses constant improvement of the design and effectiveness of established
controls and procedures.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting of Erie Indemnity Company, as such term is defined in the Exchange Act Rules 13a-15(f).
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the Erie
Indemnity Company’s internal control over financial reporting based on the framework in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control-Integrated Framework,
management has concluded that Erie Indemnity Company’s internal control over financial reporting
was effective as of December 31, 2010.
/s/ Terrence W. Cavanaugh
|
/s/ Marcia A. Dall | /s/ Gregory J. Gutting | ||
Terrence W. Cavanaugh
|
Marcia A. Dall | Gregory J. Gutting | ||
President and
|
Executive Vice President and | Senior Vice President and | ||
Chief Executive Officer
|
Chief Financial Officer | Controller | ||
February 24, 2011
|
February 24, 2011 | February 24, 2011 |
Our independent auditors have issued an attestation report on management’s assessment of our
internal control over financial reporting. This report appears on page 69.
Item 9B. Other Information
There was no additional information in the fourth quarter of 2010 that has not already been filed
in a Form 8-K.
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Table of Contents
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information with respect to our directors, audit committee, and audit committee financial
experts and Section 16(a) beneficial ownership reporting compliance, is incorporated by reference
to the information statement on Form 14(C) to be filed with the Securities and Exchange Commission
no later than 120 days after December 31, 2010.
We have adopted a code of conduct that applies to all of our directors, officers (including our
chief executive officer, chief financial officer, chief accounting officer and any person
performing similar functions) and employees. We previously filed a copy of this Code of Conduct as
Exhibit 14 to the Registrant’s 2003 Form 10-K Annual Report as filed with the SEC on March 8,
2004. We have also made the Code of Conduct available on our website at
http://www.erieinsurance.com.
Executive Officers of the Registrant
| Age as of | Principal Occupation for Past Five Years and Positions with | |||||
| Name | 12/31/10 | Erie Insurance Group | ||||
President
& Chief Executive Officer: |
||||||
Terrence W. Cavanaugh
|
57 | President and Chief Executive Officer of Erie Indemnity Company since July 29, 2008; Senior Vice President, Chubb & Son/Federal Insurance, for more than five years prior thereto; Chief Operating Officer, Chubb Surety, for more than five years prior thereto; Director, Erie Indemnity Company, EFL, EIC, Flagship, ENY and EPC. | ||||
Executive Vice Presidents: |
||||||
Marcia A. Dall
|
47 | Executive Vice President and Chief Financial Officer since March 30, 2009; Chief Financial Officer — Healthcare, Cigna Corporation, January 2008 through March 2009; Chief Financial Officer — International & U.S. Mortgage Insurance, Genworth Financial, September 2006 through January 2008; Chief Financial Officer — International & U.S. Mortgage Insurance, GE Mortgage Insurance, for more than five years prior thereto; Director, EFL, EIC, Flagship, ENY and EPC. | ||||
James J. Tanous
|
63 | Executive Vice President, Secretary and General Counsel since April 30, 2007; Partner and Chairman of Jaeckle Fleischmann & Mugel, LLP (law firm headquartered in Buffalo, NY) for more than five years prior thereto; Director, EFL, EIC, Flagship, ENY and EPC. | ||||
Michael S. Zavasky
|
58 | Executive Vice President—Insurance Operations since March 7, 2008; Senior Vice President—Strategy Management, January 2006 through March 2008; Senior Vice President—Commercial Lines Underwriting, June 2001 through January 2006; Director, EFL, EIC, Flagship, ENY and EPC. | ||||
George D. Dufala
|
39 | Executive Vice President — Services since September 1, 2010; Senior Vice President, Erie Family Life Insurance Company, October 2008 through August 2010; Senior Vice President, Customer Service, January 2005 through September 2008. | ||||
132
Table of Contents
| Age as of | Principal Occupation for Past Five Years and Positions with | |||||
| Name | 12/31/10 | Erie Insurance Group | ||||
Executive Vice Presidents (continued): |
||||||
John F. Kearns
|
51 | Executive Vice President — Sales & Marketing since September 1, 2010; Senior Vice President, Commercial Lines Division, February 2007 through August 2010; Sabbatical, February 2005 through January 2007; President — Financial & Professional Services, St. Paul Travelers, November 2000 through January 2005. | ||||
Senior Vice President: |
||||||
Douglas F. Ziegler
|
60 | Senior Vice President, Treasurer and Chief Investment Officer since 1993; Director, EFL, EIC, Flagship, ENY, and EPC. | ||||
Item 11. Executive Compensation
The information required by this item with respect to executive compensation is incorporated by
reference to the information statement on Form 14(C) to be filed with the Securities and Exchange
Commission no later than 120 days after December 31, 2010.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information with respect to security ownership of certain beneficial owners and management and
securities authorized for issuance under equity compensation plans, is incorporated by reference to
the information statement on Form 14(C) to be filed with the Securities and Exchange Commission no
later than 120 days after December 31, 2010.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information with respect to certain relationships with our directors is incorporated by reference
to the information statement on Form 14(C) to be filed with the Securities and Exchange Commission
no later than 120 days after December 31, 2010.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the information statement on
Form 14(C) to be filed with the Securities and Exchange Commission no later than 120 days after
December 31, 2010.
133
Table of Contents
PART IV
Item 15. Exhibits and Financial Statement Schedules
| (a) | The following documents are filed as part of this report: |
| 1. | Consolidated Financial Statements | ||
| Included in Item 8 “Financial Statements and Supplementary Data” contained in this report. |
| Erie Indemnity Company: |
| • | Report of Independent Registered Public Accounting Firm on the Effectiveness of Internal Control over Financial Reporting | ||
| • | Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements | ||
| • | Consolidated Statements of Operations for the three years ended December 31, 2010, 2009 and 2008 | ||
| • | Consolidated Statements of Financial Position as of December 31, 2010 and 2009 | ||
| • | Consolidated Statements of Shareholders’ Equity for the three years ended December 31, 2010, 2009 and 2008 | ||
| • | Consolidated Statements of Cash Flows for the three years ended December 31, 2010, 2009 and 2008 | ||
| • | Notes to Consolidated Financial Statements |
| 2. | Financial Statement Schedules |
| Page | ||||||
Erie Indemnity Company:
|
||||||
Schedule I.
|
Summary of Investments — Other than Investments
in Related Parties |
136 | ||||
Schedule III.
|
Supplementary Insurance Information | 137 | ||||
Schedule IV.
|
Reinsurance | 138 | ||||
Schedule VI.
|
Supplemental Information Concerning Property – Casualty Insurance Operations | 139 | ||||
| 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. |
| 3. | Exhibit Index | 140 |
134
Table of Contents
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.
| February 24, 2011 | ERIE INDEMNITY COMPANY (Registrant) |
|||
| /s/ Terrence W. Cavanaugh | ||||
| Terrence W. Cavanaugh, President and CEO | ||||
| (Principal Executive Officer) | ||||
| /s/ Marcia A. Dall | ||||
| Marcia A. Dall, Executive Vice President & CFO | ||||
| (Principal Financial Officer) | ||||
| /s/ Gregory J. Gutting | ||||
| Gregory J. Gutting, Senior Vice President & Controller | ||||
| (Principal Accounting Officer) | ||||
Board of Directors
/s/ J. Ralph Borneman, Jr.
|
/s/ Lucian L. Morrison | |
J. Ralph Borneman, Jr.
|
Lucian L. Morrison | |
/s/ Terrence W. Cavanaugh
|
/s/ Thomas W. Palmer | |
Terrence W.
Cavanaugh
|
Thomas W. Palmer | |
/s/ Jonathan Hirt Hagen
|
/s/ Martin P. Sheffield | |
Jonathan Hirt Hagen
|
Martin P. Sheffield | |
/s/ Susan Hirt Hagen
|
/s/ Richard L. Stover | |
Susan Hirt
Hagen
|
Richard L. Stover | |
/s/ Thomas B. Hagen
|
/s/ Elizabeth A. Vorsheck | |
Thomas B.
Hagen
|
Elizabeth A. Vorsheck | |
/s/ C. Scott Hartz
|
/s/ Robert C. Wilburn | |
C. Scott Hartz
|
Robert C. Wilburn | |
/s/ Claude C. Lilly, III
|
||
Claude C. Lilly, III
|
135
Table of Contents
SCHEDULE I
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
(See Item 8, “Financial Statements and Supplementary Data — Note 1, Nature of Operations, of Notes to Consolidated Financial Statements”
contained within this report.)
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
(See Item 8, “Financial Statements and Supplementary Data — Note 1, Nature of Operations, of Notes to Consolidated Financial Statements”
contained within this report.)
| Erie Insurance Group | ||||||||||||
| December 31, 2010 | ||||||||||||
| Amortized | Estimated | Amount at which | ||||||||||
| (in millions) | cost | fair value | shown in the balance sheet | |||||||||
Indemnity |
||||||||||||
Fixed maturities: |
||||||||||||
U.S. treasuries and government agencies |
$ | 25 | $ | 25 | $ | 25 | ||||||
U.S. government sponsored enterprises |
0 | 0 | 0 | |||||||||
Municipal securities |
193 | 197 | 197 | |||||||||
U.S. corporate debt — non-financial |
12 | 12 | 12 | |||||||||
U.S. corporate debt — financial |
24 | 26 | 26 | |||||||||
Structured securities: |
||||||||||||
Collateralized debt obligations |
3 | 4 | 4 | |||||||||
Total fixed maturities-Indemnity |
$ | 257 | $ | 264 | $ | 264 | ||||||
Equity securities: |
||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||
Financial |
$ | 8 | $ | 11 | $ | 11 | ||||||
Non-financial |
11 | 12 | 12 | |||||||||
Foreign nonredeemable preferred securities: |
||||||||||||
Non-financial |
1 | 1 | 1 | |||||||||
Total equity securities — Indemnity |
$ | 20 | $ | 24 | $ | 24 | ||||||
Trading securities |
$ | 21 | $ | 28 | $ | 28 | ||||||
Limited partnerships |
$ | 202 | $ | 216 | $ | 216 | ||||||
Real estate mortgage loans |
$ | 1 | $ | 1 | $ | 1 | ||||||
Total Investments — Indemnity |
$ | 501 | $ | 533 | $ | 533 | ||||||
Exchange |
||||||||||||
Fixed maturities: |
||||||||||||
U.S. treasuries and government agencies |
$ | 11 | $ | 12 | $ | 12 | ||||||
U.S. government sponsored enterprises |
74 | 75 | 75 | |||||||||
Foreign government |
20 | 21 | 21 | |||||||||
Municipal securities |
1,437 | 1,471 | 1,471 | |||||||||
U.S. corporate debt — non-financial |
2,354 | 2,535 | 2,535 | |||||||||
U.S. corporate debt — financial |
1,767 | 1,897 | 1,897 | |||||||||
Foreign corporate debt — non-financial |
415 | 449 | 449 | |||||||||
Foreign corporate debt — financial |
364 | 382 | 382 | |||||||||
Structured securities: |
||||||||||||
Asset-backed securities — auto loans |
36 | 38 | 38 | |||||||||
Asset-backed securities — other |
18 | 19 | 19 | |||||||||
Collateralized debt obligations |
69 | 70 | 70 | |||||||||
Commercial mortgage-backed |
82 | 86 | 86 | |||||||||
Residential mortgage-backed: |
||||||||||||
Government sponsored enterprises |
196 | 205 | 205 | |||||||||
Non-government sponsored enterprises |
20 | 19 | 19 | |||||||||
Total fixed maturities — Exchange |
$ | 6,863 | $ | 7,279 | $ | 7,279 | ||||||
Equity securities: |
||||||||||||
U.S. nonredeemable preferred securities: |
||||||||||||
Financial |
$ | 317 | $ | 373 | $ | 373 | ||||||
Non-financial |
126 | 133 | 133 | |||||||||
Government sponsored enterprises |
0 | 0 | 0 | |||||||||
Foreign nonredeemable preferred securities: |
||||||||||||
Financial |
52 | 55 | 55 | |||||||||
Non-financial |
8 | 9 | 9 | |||||||||
Total equity securities — Exchange |
$ | 503 | $ | 570 | $ | 570 | ||||||
Trading securities |
$ | 1,773 | $ | 2,306 | $ | 2,306 | ||||||
Limited partnerships |
$ | 1,083 | $ | 1,108 | $ | 1,108 | ||||||
Life policy loans |
$ | 14 | $ | 14 | $ | 14 | ||||||
Real estate mortgage loans |
$ | 5 | $ | 5 | $ | 5 | ||||||
Total Investments — Exchange |
$ | 10,241 | $ | 11,282 | $ | 11,282 | ||||||
Total Investments — Erie Insurance Group |
$ | 10,742 | $ | 11,815 | $ | 11,815 | ||||||
136
Table of Contents
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
SUPPLEMENTARY INSURANCE INFORMATION
(See Item 8, “Financial Statements and Supplementary Data — Note 1, Nature of Operations, of
Notes to Consolidated Financial Statements” contained within this report.)
| Benefits, | ||||||||||||||||||||||||||||||||||||
| Reserves for | claims, | Amortization | Net | |||||||||||||||||||||||||||||||||
| Deferred | losses, loss | losses, | of deferred | premiums | ||||||||||||||||||||||||||||||||
| policy | expenses, | Net | and | policy | Other | written | ||||||||||||||||||||||||||||||
| acquisition | life policy | Unearned | Premiums | investment | settlement | acquisition | operating | (excluding | ||||||||||||||||||||||||||||
| (in millions) | costs | deposit contracts | premiums | earned | income* | expenses | costs | expenses* | life) | |||||||||||||||||||||||||||
December 31, 2010: |
||||||||||||||||||||||||||||||||||||
Property and casualty
insurance operations |
$ | 327 | $ | 3,584 | $ | 2,082 | $ | 3,925 | $ | 325 | $ | 2,810 | $ | 635 | $ | 303 | $ | 4,019 | ||||||||||||||||||
Life insurance
operations |
140 | 1,603 | 0 | 62 | 96 | 90 | 16 | 15 | 0 | |||||||||||||||||||||||||||
Management operations |
0 | 0 | 0 | 0 | 12 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Total |
$ | 467 | $ | 5,187 | $ | 2,082 | $ | 3,987 | $ | 433 | $ | 2,900 | $ | 651 | $ | 318 | $ | 4,019 | ||||||||||||||||||
December 31, 2009: |
||||||||||||||||||||||||||||||||||||
Property and casualty
insurance operations |
$ | 313 | $ | 3,598 | $ | 1,981 | $ | 3,808 | $ | 326 | $ | 2,639 | $ | 611 | $ | 364 | $ | 3,861 | ||||||||||||||||||
Life insurance
operations |
154 | 1,540 | 0 | 61 | 93 | 89 | 13 | 15 | 0 | |||||||||||||||||||||||||||
Management operations |
0 | 0 | 0 | 0 | 14 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Total |
$ | 467 | $ | 5,138 | $ | 1,981 | $ | 3,869 | $ | 433 | $ | 2,728 | $ | 624 | $ | 379 | $ | 3,861 | ||||||||||||||||||
December 31, 2008: |
||||||||||||||||||||||||||||||||||||
Property and casualty
insurance operations |
$ | 301 | $ | 3,586 | $ | 1,936 | $ | 3,771 | $ | 332 | $ | 2,489 | $ | 599 | $ | 289 | $ | 3,788 | ||||||||||||||||||
Life insurance
operations |
201 | 1,449 | 0 | 63 | 87 | 93 | 3 | 17 | 0 | |||||||||||||||||||||||||||
Management operations |
0 | 0 | 0 | 0 | 19 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Total |
$ | 502 | $ | 5,035 | $ | 1,936 | $ | 3,834 | $ | 438 | $ | 2,582 | $ | 602 | $ | 306 | $ | 3,788 | ||||||||||||||||||
| * | Net investment income and other operating expenses are charged directly to the respective entities, therefore an allocation basis is not required. |
137
Table of Contents
SCHEDULE IV
REINSURANCE
REINSURANCE
| Percentage | ||||||||||||||||||||
| Gross | Ceded to | Assumed | of amount | |||||||||||||||||
| amount | other | from other | Net | assumed | ||||||||||||||||
| (in millions) | (direct) | companies | companies | amount | to net | |||||||||||||||
December 31, 2010: |
||||||||||||||||||||
Life insurance in force |
$ | 40,431 | $ | 22,303 | $ | 0 | $ | 18,128 | 0.0 | % | ||||||||||
Premiums for the year: |
||||||||||||||||||||
Life insurance |
$ | 104 | $ | 42 | $ | 0 | $ | 62 | 0.0 | % | ||||||||||
Property and liability insurance |
3,939 | 34 | 20 | 3,925 | 0.5 | % | ||||||||||||||
Total premiums |
$ | 4,043 | $ | 76 | $ | 20 | $ | 3,987 | 0.5 | % | ||||||||||
December 31, 2009: |
||||||||||||||||||||
Life insurance in force |
$ | 38,961 | $ | 20,858 | $ | 0 | $ | 18,103 | 0.0 | % | ||||||||||
Premiums for the year: |
||||||||||||||||||||
Life insurance |
$ | 100 | $ | 39 | $ | 0 | $ | 61 | 0.0 | % | ||||||||||
Property and liability insurance |
3,806 | 40 | 42 | 3,808 | 1.1 | % | ||||||||||||||
Total premiums |
$ | 3,906 | $ | 79 | $ | 42 | $ | 3,869 | 1.1 | % | ||||||||||
December 31, 2008: |
||||||||||||||||||||
Life insurance in force |
$ | 37,697 | $ | 19,404 | $ | 0 | $ | 18,293 | 0.0 | % | ||||||||||
Premiums for the year: |
||||||||||||||||||||
Life insurance |
$ | 98 | $ | 35 | $ | 0 | $ | 63 | 0.0 | % | ||||||||||
Property and liability insurance |
3,784 | 48 | 35 | 3,771 | 0.9 | % | ||||||||||||||
Total premiums |
$ | 3,882 | $ | 83 | $ | 35 | $ | 3,834 | 0.9 | % | ||||||||||
138
Table of Contents
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
(See Item 8, “Financial Statements and Supplementary Data — Note 1, Nature of Operations, of Notes to Consolidated
Financial Statements” contained within this report.)
Financial Statements” contained within this report.)
| Discount, if | ||||||||||||||||||||||||
| Deferred | Reserve for | any, | ||||||||||||||||||||||
| policy | unpaid | deducted | Net | |||||||||||||||||||||
| acquisition | losses and loss | from | Unearned | Earned | investment | |||||||||||||||||||
| (in millions) | costs | expenses | reserves* | premiums | premiums | income | ||||||||||||||||||
December 31, 2010: |
||||||||||||||||||||||||
Consolidated P&C Entities |
$ | 327 | $ | 3,584 | $ | 127 | $ | 2,082 | $ | 3,925 | $ | 325 | ||||||||||||
Unconsolidated P&C Entities |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Proportionate share of
registrant & subsidiaries |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Total |
$ | 327 | $ | 3,584 | $ | 127 | $ | 2,082 | $ | 3,925 | $ | 325 | ||||||||||||
December 31, 2009: |
||||||||||||||||||||||||
Consolidated P&C Entities |
$ | 313 | $ | 3,598 | $ | 136 | $ | 1,981 | $ | 3,808 | $ | 326 | ||||||||||||
Unconsolidated P&C Entities |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Proportionate share of
registrant & subsidiaries |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Total |
$ | 313 | $ | 3,598 | $ | 136 | $ | 1,981 | $ | 3,808 | $ | 326 | ||||||||||||
December 31, 2008: |
||||||||||||||||||||||||
Consolidated P&C Entities |
$ | 301 | $ | 3,586 | $ | 98 | $ | 1,936 | $ | 3,771 | $ | 332 | ||||||||||||
Unconsolidated P&C Entities |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Proportionate share of
registrant & subsidiaries |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Total |
$ | 301 | $ | 3,586 | $ | 98 | $ | 1,936 | $ | 3,771 | $ | 332 | ||||||||||||
| * | Workers compensation case and incurred but not reported loss reserves were discounted at 2.5% for all years presented. |
| Losses and loss expenses | Amortization | |||||||||||||||||||
| incurred related to | of deferred | Net losses | ||||||||||||||||||
| (1) | (2) | policy | and loss | Net | ||||||||||||||||
| Current | Prior | acquisition | expenses | premiums | ||||||||||||||||
| (in millions) | year | years | costs | paid | written | |||||||||||||||
| December 31, 2010: | ||||||||||||||||||||
Consolidated P&C Entities |
$ | 3,053 | $ | (244 | ) | $ | 635 | $ | 2,811 | $ | 4,019 | |||||||||
Unconsolidated P&C Entities |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Proportionate share of
registrant & subsidiaries |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Total |
$ | 3,053 | $ | (244 | ) | $ | 635 | $ | 2,811 | $ | 4,019 | |||||||||
December 31, 2009: |
||||||||||||||||||||
Consolidated P&C Entities |
$ | 2,732 | $ | (93 | ) | $ | 611 | $ | 2,640 | $ | 3,861 | |||||||||
Unconsolidated P&C Entities |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Proportionate share of
registrant & subsidiaries |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Total |
$ | 2,732 | $ | (93 | ) | $ | 611 | $ | 2,640 | $ | 3,861 | |||||||||
December 31, 2008: |
||||||||||||||||||||
Consolidated P&C Entities |
$ | 2,675 | $ | (186 | ) | $ | 599 | $ | 2,584 | $ | 3,788 | |||||||||
Unconsolidated P&C Entities |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Proportionate share of
registrant & subsidiaries |
0 | 0 | 0 | 0 | 0 | |||||||||||||||
Total |
$ | 2,675 | $ | (186 | ) | $ | 599 | $ | 2,584 | $ | 3,788 | |||||||||
139
Table of Contents
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. Such exhibit is incorporated by reference to the like numbered exhibit in the Registrant’s Form 10 Registration Statement Number 0-24000 filed with the Commission on May 2, 1994. | |||
3.1A
|
Amendment to the Articles of Incorporation of Registrant effective May 2, 1996. Such exhibit is incorporated by reference to the like numbered exhibit in the Registrant’s Form 10-Q that was filed with the Commission on July 29, 2010. | |||
3.1B
|
Amendment to the Articles of Incorporation of Registrant effective May 4, 2001. Such exhibit is incorporated by reference to the like numbered exhibit in the Registrant’s Form 10-Q that was filed with the Commission on July 29, 2010. | |||
3.1C
|
Amendment to the Articles of Incorporation of Registrant effective May 10, 2007. Such exhibit is incorporated by reference to the like numbered exhibit in the Registrant’s Form 10-Q that was filed with the Commission on July 29, 2010. | |||
3.7
|
Erie Indemnity Company Amended and Restated Bylaws effective May 5, 2009. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 8-K that was filed with the Commission on May 11, 2009. | |||
10.12
|
Form of Subscriber’s Agreement whereby policyholders of Erie Insurance Exchange appoint Registrant as their Attorney-in-Fact. Such exhibit is incorporated by reference to the like titled but renumbered exhibit in the Registrant’s Form 10-Q that was filed with the Securities and Exchange Commission on November 6, 2002. | |||
10.97
|
Severance Agreement dated February 28, 2008, by and between Erie Indemnity Company and Thomas B. Morgan. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 8-K that was filed with the Commission on March 3, 2008. | |||
10.98
|
Separation Agreement between Erie Indemnity Company and Michael J. Krahe dated June 25, 2008. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 8-K that was filed with the Commission on June 26, 2008. | |||
10.99
|
Executive Retention Agreement between Erie Indemnity Company and Philip A. Garcia dated June 25, 2008. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 8-K that was filed with the Commission on June 26, 2008. | |||
10.100
|
Employment Agreement dated July 14, 2008, between Erie Indemnity Company and Terrence W. Cavanaugh. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 8-K that was filed with the Commission on July 18, 2008. |
140
Table of Contents
| Sequentially | ||||
| Exhibit | Numbered | |||
| Number | Description of Exhibit | Page | ||
10.101
|
Amendment of Erie Insurance Group Retirement Plan for Employees (As Amended and Restated Effective December 31, 2005) dated December 29, 2008. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-K annual report that was filed with the Commission on February 26, 2009. | |||
10.102
|
Amendment of Erie Insurance Group Employee Savings Plan (As Amended and Restated Effective January 1, 2006) dated December 29, 2008. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-K annual report that was filed with the Commission on February 26, 2009. | |||
10.103
|
Supplemental Retirement Plan for Certain Members of the Erie Insurance Group Retirement Plan for Employees (Amended and Restated as of January 1, 2009). Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-K annual report that was filed with the Commission on February 26, 2009. | |||
10.104
|
Deferred Compensation Plan of Erie Indemnity Company (As Amended and Restated as of January 1, 2009). Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-K annual report that was filed with the Commission on February 26, 2009. | |||
10.105
|
Erie Indemnity Company Deferred Compensation Plan for Outside Directors (As Amended and Restated as of January 1, 2009). Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-K annual report that was filed with the Commission on February 26, 2009. | |||
10.106
|
Erie Indemnity Company Long-Term Incentive Plan (Restated Effective January 1, 2009). Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-K annual report that was filed with the Commission on February 26, 2009. | |||
10.107
|
Erie Indemnity Company Annual Incentive Plan (As Amended and Restated Effective January 1, 2009). Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-K annual report that was filed with the Commission on February 26, 2009. | |||
10.108
|
Form of Indemnification Agreement that Registrant has entered into on November 14, 2008 with Terrence W. Cavanaugh (Director and Officer); J. Ralph Borneman, Jr., Patricia Garrison-Corbin, Jonathan Hirt Hagen, Susan Hirt Hagen, Thomas B. Hagen, C. Scott Hartz, Claude C. Lilly, III, Lucian L. Morrison, Thomas W. Palmer, Elizabeth A. Vorsheck, Robert C. Wilburn (Directors); James J. Tanous, Michael S. Zavasky and George R. Lucore (Officers). Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-K annual report that was filed with the Commission on February 26, 2009. |
141
Table of Contents
| Sequentially | ||||
| Exhibit | Numbered | |||
| Number | Description of Exhibit | Page | ||
10.109
|
Loan Agreement between Erie Indemnity Company and PNC Bank, National Association dated January 30, 2008, Amendment to Loan Documents dated February 27, 2008, Reimbursement Agreement for Standby Letter(s) of Credit dated February 27, 2008, Sixth Amendment to Loan Documents dated December 29, 2008, Eighth Amendment to Loan Documents dated April 21, 2009, and Ninth Amendment to Loan Documents dated June 29, 2009. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-Q that was filed with the Commission on August 5, 2009. | |||
10.110
|
Committed Line of Credit Note between Erie Indemnity Company and PNC Bank, National Association dated January 30, 2008, and Third Amended and Restated Committed Line of Credit Note dated December 29, 2008. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-Q that was filed with the Commission on August 5, 2009. | |||
10.111
|
Notification and Control Agreement between Erie Indemnity Company and PNC Bank, National Association dated January 30, 2008. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-Q that was filed with the Commission on August 5, 2009. | |||
10.112
|
Pledge Agreement between Erie Indemnity Company and PNC Bank, National Association dated January 30, 2008. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-Q that was filed with the Commission on August 5, 2009. | |||
10.113
|
$200,000,000.00 Revolving Credit Facility Credit Agreement between Erie Insurance Exchange acting by and through Erie Indemnity Company, its Attorney-in-Fact, and PNC Bank, National Association, JPMorgan Chase Bank, N.A., Bank of America, N.A., and PNC Capital Markets LLC dated September 30, 2009. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-Q that was filed with the Commission on October 29, 2009. | |||
10.114
|
Form of Revolving Credit Note that Erie Insurance Exchange has entered into by and through the Registrant, as its Attorney-in-Fact, on September 30, 2009 with Bank of America, N.A. ($35 million), The Bank of New York Mellon ($25 million), JPMorgan Chase Bank, N.A. ($35 million), PNC Bank, National Association ($55 million), U.S. Bank National Association ($25 million), and Wells Fargo Bank, National Association ($25 million). Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-Q that was filed with the Commission on October 29, 2009. | |||
10.115
|
Swing Note between Erie Insurance Exchange acting by and through Erie Indemnity Company, its Attorney-in-Fact, and PNC Bank, National Association dated September 30, 2009. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-Q that was filed with the Commission on October 29, 2009. |
142
Table of Contents
| Sequentially | ||||
| Exhibit | Numbered | |||
| Number | Description of Exhibit | Page | ||
10.116
|
Notification and Control Agreement between Erie Indemnity Company as Attorney-in-Fact for Erie Insurance Exchange and The Bank of New York Mellon and PNC Bank, National Association dated September 30, 2009. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-Q that was filed with the Commission on October 29, 2009. | |||
10.117
|
Pledge Agreement between Erie Indemnity Company as Attorney-in-Fact for Erie Insurance Exchange and PNC Bank, National Association dated September 30, 2009. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-Q that was filed with the Commission on October 29, 2009. | |||
10.118
|
Tenth Amendment to Loan Documents between Erie Indemnity Company and PNC Bank, National Association dated December 10, 2009. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 8-K that was filed with the Commission on December 10, 2009. | |||
10.119
|
Indemnification Agreement that Registrant has entered into on February 23, 2010 with Marcia A. Dall (Executive Vice President & CFO). Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-K that was filed with the Commission on February 25, 2010. | |||
10.120
|
First Amendment to Erie Indemnity Company Annual Incentive Plan (As Amended and Restated Effective January 1, 2009) effective January 1, 2010. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-Q that was filed with the Commission on May 6, 2010. | |||
10.121
|
Second Amendment to Erie Indemnity Company Annual Incentive Plan (As Amended and Restated Effective January 1, 2009) effective January 1, 2010. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 10-Q that was filed with the Commission on November 4, 2010. | |||
10.122
|
Stock Purchase Agreement between Erie Indemnity Company and Erie Insurance Exchange Relating to the Capital Stock of Erie Insurance Company, Erie Insurance Company of New York and Erie Property and Casualty Company dated November 4, 2010. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 8-K that was filed with the Commission on November 4, 2010. | |||
10.123
|
Stock Purchase Agreement between Erie Indemnity Company and Erie Insurance Exchange Relating to the Capital Stock of Erie Family Life Insurance Company dated November 4, 2010. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 8-K that was filed with the Commission on November 4, 2010. | |||
10.124*
|
Erie Insurance Group Retirement Plan for Employees (As Amended and Restated Effective December 31, 2009) dated December 23, 2010. | |||
10.125*
|
Erie Insurance Group Employee Savings Plan (As Amended and Restated Effective as of January 1, 2010) dated December 23, 2010. |
143
Table of Contents
| Sequentially | ||||
| Exhibit | Numbered | |||
| Number | Description of Exhibit | Page | ||
10.126*
|
Agreement dated January 13, 2010, by and between Erie Indemnity Company and George R. Lucore. | |||
10.127*
|
Eleventh Amendment to Loan Documents between Erie Indemnity Company and PNC Bank, National Association dated July 20, 2010. | |||
10.128*
|
Amendment to Loan Documents between Erie Indemnity Company and PNC Bank, National Association dated December 22, 2010. | |||
10.129*
|
Lease Agreement between Erie Insurance Exchange and Erie Indemnity Company dated January 1, 2011. | |||
14
|
Code of Conduct. 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, 2003 that was filed with the Commission on March 8, 2004. | |||
23*
|
Consent of Independent Registered Public Accounting Firm | |||
31.1*
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes—Oxley Act of 2002 | |||
31.2*
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes—Oxley Act of 2002 | |||
32*
|
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes—Oxley Act of 2002 | |||
99.1
|
Audited consolidated financial statements and accompanying footnote disclosures of Erie Indemnity Company for the fiscal years ended December 31, 2009 and 2008 conformed to reflect the amended guidance in ASC 810 Consolidation, which became effective January 1, 2010. Also included is the independent auditors’ report dual dated as of February 25, 2010 and May 6, 2010. Management’s Discussion and Analysis of Results of Operation for the fiscal year ended December 31, 2009 conformed to reflect these changes and the Controls and Procedures item. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 8-K that was filed with the Commission on May 6, 2010. | |||
99.2
|
Consent of Ernst &Young LLP. Such exhibit is incorporated by reference to the like titled exhibit in the Registrant’s Form 8-K that was filed with the Commission on May 6, 2010. | |||
101.INS*
|
XBRL Instance Document | |||
101.SCH*
|
XBRL Taxonomy Extension Schema Document | |||
101.CAL*
|
XBRL Taxonomy Extension Calculation Linkbase Document | |||
101.LAB*
|
XBRL Taxonomy Extension Labels Linkbase Document | |||
101.PRE*
|
XBRL Taxonomy Extension Presentation Linkbase Document | |||
101.DEF*
|
XBRL Taxonomy Extension Definition Linkbase Document |
| * | filed herewith |
144
Exhibit 10.124
Erie Insurance Group
RETIREMENT PLAN FOR EMPLOYEES
As Amended and Restated Effective December 31, 2009
Erie Insurance Group
RETIREMENT PLAN FOR EMPLOYEES
As Amended and Restated Effective December 31, 2009
Table of Content
ARTICLE I
— INTRODUCTION |
1 | |||
ARTICLE II
— DEFINITIONS |
2 | |||
2.1 “Accrued Pension” |
2 | |||
2.2 “Actuary” |
2 | |||
2.3 “Administrator” |
2 | |||
2.4 “Affiliate” |
2 | |||
2.5 “Anniversary Date” |
2 | |||
2.6 “Annuity Starting Date” |
2 | |||
2.7 “Beneficiary” |
3 | |||
2.8 “Board of Directors” or “Board” |
3 | |||
2.9 “Code” |
3 | |||
2.10 “Company” |
3 | |||
2.11 “Compensation” |
3 | |||
2.12 “Covered Employee” |
4 | |||
2.13 “Credited Service” |
4 | |||
2.14 “Date of Hire” |
4 | |||
2.15 “Date of Severance” |
4 | |||
2.16 “Earliest Retirement Age” |
5 | |||
2.17 “Effective Date” |
5 | |||
2.18 “Employee” |
5 | |||
2.19 “Employer(s)” |
5 | |||
2.20 “ERISA” |
5 | |||
2.21 “Final Average Earnings” |
5 | |||
2.22 “Highly Compensated” |
6 | |||
2.23 “Hour of Service” |
6 | |||
2.24 “Leased Employee” |
6 | |||
2.25 “Maternity or Paternity Absence” |
7 | |||
2.26 “Normal Retirement Age” |
7 | |||
2.27 “Normal Retirement Date” |
7 | |||
2.28 “Participant” |
7 | |||
2.29 “Period of Severance” |
8 | |||
2.30 “Plan” or “Pension Plan” |
8 | |||
2.31 “Plan Year” |
8 | |||
2.32 “Service” |
8 | |||
2.33 “Social Security Covered Compensation” |
8 | |||
2.34 “Spouse” |
8 | |||
2.35 “Test Compensation” |
8 | |||
2.36 “Total and Permanent Disability” |
9 | |||
2.37 “Trust Agreement” |
9 |
i
2.38 “Trustee” |
9 | |||
2.39 “Trust Fund” or “Fund” |
9 | |||
ARTICLE III
— ADMINISTRATION OF THE PLAN |
10 | |||
3.1 Pension Administrator |
10 | |||
3.2 Powers |
10 | |||
3.3 Delegation of Duties |
12 | |||
3.4 Administrator as Named Fiduciary |
13 | |||
3.5 Conclusiveness of Various Documents |
13 | |||
3.6 Actions to be Uniform |
13 | |||
3.7 Liability and Indemnification |
13 | |||
3.8 Claims Review Procedure |
14 | |||
3.9 Exhaustion of Administrative Remedies |
15 | |||
3.10 Deadline to File Civil Action |
16 | |||
3.11 Waiver of Participation |
16 | |||
ARTICLE IV
— SERVICE PROVISIONS |
17 | |||
4.1 Service |
17 | |||
4.2 Credited Service |
17 | |||
4.3 Loss and Reinstatement of Service |
17 | |||
4.4 Transfer To Other Employment |
18 | |||
4.5 Transfer From Other Employment |
18 | |||
ARTICLE V
— ELIGIBILITY FOR PENSIONS |
19 | |||
5.1 Normal Retirement |
19 | |||
5.2 Early Retirement |
19 | |||
5.3 Disability Retirement |
19 | |||
5.4 Vesting |
20 | |||
ARTICLE VI
— AMOUNT OF PENSIONS |
21 | |||
6.1 Normal Retirement Pension |
21 | |||
6.2 Early Retirement Pension |
21 | |||
6.3 Disability Retirement Pension |
21 | |||
6.4 Deferred Pension Upon Termination of Service |
22 | |||
6.5 Increase in Pension for Certain Retired Participants |
23 | |||
6.6 Offset of Accruals by Plan Distributions |
23 | |||
6.7 Non-Duplication of Benefits |
23 | |||
ARTICLE VII
— COMMENCEMENT AND DURATION OF PENSIONS |
25 | |||
7.1 Normal and Early Retirement Pensions |
25 | |||
7.2 Disability Retirement Pension |
25 | |||
7.3 Deferred Vested Pension |
26 | |||
7.4 Reemployment of a Retired Participant |
27 | |||
7.5 Automatic Surviving Spouse’s Pension |
28 | |||
7.6 Requirement for Spouse Consent |
30 | |||
7.7 Optional Forms of Pensions |
30 | |||
7.8 Payment of Small Pension |
32 | |||
7.9 Repayment of Cashout on Reemployment |
34 | |||
7.10 Delay in Commencement of Pension Payments |
34 | |||
7.11 Direct Rollover of Eligible Rollover Distributions |
36 | |||
7.12 Change to Pension Payments in Connection with Qualifying Event |
38 | |||
ARTICLE VIII
— DEATH BENEFITS |
42 | |||
8.1 Death Prior to Retirement or Severance |
42 |
ii
8.2 Death Prior to Commencement of Early or Disability Pensions |
42 | |||
8.3 Death Prior to Commencement of Vested Pensions |
43 | |||
8.4 Effect of Valid Joint and Survivor Election |
44 | |||
8.5 Death on or After Annuity Starting Date |
44 | |||
8.6 Death Benefit for Vested Participants Who Terminated After September 1, 1974
and Prior to August 23, 1984 |
45 | |||
ARTICLE IX
— TRUST FUND AND THE TRUSTEE |
46 | |||
9.1 Trust Fund |
46 | |||
9.2 Irrevocability |
47 | |||
9.3 Contributions by the Company |
47 | |||
9.4 Contributions By Participants |
48 | |||
9.5 Benefits Payable Only From Trust Fund |
48 | |||
9.6 Plan Expenses |
49 | |||
ARTICLE X
— BENEFIT LIMITATIONS |
50 | |||
10.1 Maximum Limitation Under Section 415(b) of the Code (Effective January 1, 2008) |
50 | |||
ARTICLE XI
— MISCELLANEOUS PROVISIONS |
54 | |||
11.1 Plan
Non-Contractual |
54 | |||
11.2 Non-Alienation of Retirement Rights or Benefits |
54 | |||
11.3 Payment of Pension to Others |
55 | |||
11.4 Prohibition Against Reversion |
55 | |||
11.5 Merger, Transfer of Assets or Liabilities |
55 | |||
11.6 Actuarial Equivalence |
56 | |||
11.7 Change of Vesting Schedule |
56 | |||
11.8 Controlled Group |
56 | |||
11.9 Severability |
57 | |||
11.10 Employer Records |
57 | |||
11.11 Application of Plan Provisions |
57 | |||
11.12 Missing Participants and Beneficiaries |
57 | |||
11.13 IRC 414(u) Compliance Provision |
58 | |||
ARTICLE XII
— AMENDMENT AND TERMINATION |
60 | |||
12.1 Amendment and Termination of the Plan |
60 | |||
12.2 Administration of the Plan in Case of Termination |
60 | |||
12.3 Internal Revenue Service Limitations |
61 | |||
ARTICLE XIII
— TOP-HEAVY PROVISIONS |
62 | |||
13.1 General |
62 | |||
13.2
Definitions Relating to Top-Heavy Provisions |
62 | |||
13.3 Top-Heavy Plan Vesting Requirements |
64 | |||
13.4 Top-Heavy Plan Minimum Benefit Requirements |
64 | |||
13.5 Limited Application of this Article |
66 | |||
ARTICLE XIV
— JURISDICTION |
67 | |||
14.1 Jurisdiction |
67 |
iii
Erie Insurance Group
RETIREMENT PLAN FOR EMPLOYEES
Effective December 31, 1946
As Amended and Restated Effective December 31, 2009
As Amended and Restated Effective December 31, 2009
ARTICLE I — INTRODUCTION
The Erie Insurance Group adopted a Retirement Plan, effective December 31, 1946. Such
Plan, which has been heretofore amended from time to time by action of the Board of Directors in
accordance with the provisions of the Plan, is herein amended and restated.
This amendment and restatement of the Plan shall constitute an amendment, restatement and
continuation of the Plan. This amendment and restatement is generally effective December 31, 2009.
However, certain provisions of this amendment and restatement are effective as of some other date.
The provisions of this amendment and restatement with stated effective dates prior to December 31,
2009 shall be deemed to amend the corresponding provisions, if any, of the Plan as in effect before
this amendment and restatement and all amendments thereto as of such dates. Events occurring
before the applicable effective date of any provision of this amendment and restatement shall be
governed by the applicable provision of the Plan as in effect on the date of the event. The object
of the Plan is to provide retirement pensions for eligible employees.
1
ARTICLE II — DEFINITIONS
For the purposes of this Retirement Plan for Employees, the following words and phrases shall
have the following meanings unless a different meaning is clearly required by the context. Any
terms herein used in the masculine shall be read and construed in the feminine where they would so
apply, and any terms used in the singular shall be read and construed in the plural if again so
applicable.
| 2.1 | “Accrued Pension” shall mean a pension amount determined with respect to a Participant in accordance with Section 6.2(a) of the Plan using the date of determination for the date of early retirement. | |
| 2.2 | “Actuary” shall mean the actuary or firm of actuaries chosen by, but independent of the Company, who is, or in the case of a firm one or more of whose members is, an enrolled actuary under the provisions of Section 3042 of the Employee Retirement Income Security Act of 1974. | |
| 2.3 | “Administrator” shall mean the administrative committee described in Article III of the Plan. | |
| 2.4 | “Affiliate” means any other employer which, together with the Company, is a member of a controlled group of corporations or of a commonly controlled trade or business (as defined in Code Sections 414(b) and (c) and as modified, where appropriate, by Code Section 415(h)) or of an affiliated service group (as defined in Code Section 414(m)) or other organization described in Code Section 414(o). Each such Affiliate shall be treated as an Affiliate only during such period as it is or was an Affiliate as defined above. | |
| 2.5 | “Anniversary Date” shall mean any December 31 occurring after the Effective Date. | |
| 2.6 | “Annuity Starting Date” shall mean the first day of the first period for which an amount is received as an annuity (whether by reason of retirement or other termination of employment) or, in the case of a benefit not payable as an annuity, the first day on which all events have occurred which entitle the Participant, or other distributee, to such benefit. A Participant whose benefit is suspended under any provision of the Plan shall not be deemed to have reached a new Annuity Starting Date when such benefit again |
2
| becomes payable. The Annuity Starting Date for benefits accrued after an earlier Annuity Starting Date shall be determined in accordance with Treasury Regulations. The Annuity Starting Date for a benefit payable under Section 7.10 shall be the applicable date described therein. | ||
| 2.7 | “Beneficiary” shall mean any person who, by reason of a designation made by a Participant under Plan procedures or by operation of the Plan, is or will be entitled to receive any amount or benefit hereunder upon the death of the Participant. Any attempt to designate a person as Beneficiary hereunder by means other than that permitted under the Plan shall be void and have no effect. | |
| 2.8 | “Board of Directors” or “Board” shall mean the Board of Directors of the Company. | |
| 2.9 | “Code” shall mean the Internal Revenue Code of 1986, as amended. | |
| 2.10 | “Company” shall mean Erie Indemnity Company, a corporation organized and existing under the laws of Pennsylvania. | |
| 2.11 | “Compensation” for any period shall mean the rate of base salary of a Covered Employee from the Employers during the period. For this purpose, “base salary” shall exclude Form W-2 income in the form of overtime compensation, bonuses, commissions, deferred compensation plan payments or severance pay under any severance benefit plan, but shall include Form W-2 income paid as a lump sum in lieu of merit increase and compensation excluded from Form W-2 income because of salary reduction agreements in connection with plans described in Section 125, 132(f)(4) or 401(k) of the Code, or resulting from deferred compensation contracts for the period in question. Compensation shall exclude any differential wage payments made on behalf of a Covered Employee who is on military leave. Effective for each Plan Year beginning on and after December 31, 1989, in no event shall the amount of Compensation taken into account under the Plan exceed the adjusted annual limitation permitted under Section 401(a)(17) of the Code for such Plan Year. Such adjusted annual limitation shall be, for each Plan Year beginning on and after December 31, 2001, $200,000 (as adjusted for cost-of-living increases in accordance with Section 401(a)(17)(B) of the Code). For purposes of determining benefit accruals in any given Plan Year beginning after December 31, 2001, the annual compensation limitation for |
3
| any determination period after December 31, 1993 and before December 31, 2001, shall be $200,000. | ||
| 2.12 | “Covered Employee” shall mean any Employee of an Employer, excluding: |
| (a) | any such Employee whose employment is governed by the terms of a collective bargaining agreement under which retirement benefits were the subject of good faith bargaining, | ||
| (b) | any such Employee who has voluntarily waived participation in the Plan, and | ||
| (c) | any such Employee who is compensated on an hourly basis. |
Notwithstanding any provision of the Plan to the contrary, an individual who an Employer
determines to be a contract employee, independent contractor, leased employee (including a
Leased Employee as defined hereunder), leased owner, leased manager, shared employee or
person working under a similar classification shall not become a Covered Employee
hereunder, regardless of whether any such individual is ultimately determined to be a
common law employee, unless and until the Employer shall otherwise determine. An
individual shall be treated as a Covered Employee only during such period as he is or was
a Covered Employee as defined above.
| 2.13 | “Credited Service” shall mean a Participant’s service determined in accordance with Article IV hereof for the purpose of calculating the amount of benefit earned under the Plan. | |
| 2.14 | “Date of Hire” shall mean the date on which an Employee first commences employment or reemployment and works at least one Hour of Service for an Employer or an Affiliate. | |
| 2.15 | “Date of Severance” shall mean the earliest to occur of the following dates: |
| (a) | date of retirement, | ||
| (b) | date of voluntary employment termination, | ||
| (c) | date of discharge by an Employer unless he is subsequently reemployed and given pay back to the date of discharge, | ||
| (d) | date of death, | ||
| (e) | the first anniversary of a date of absence from active employment for any other reason; provided, however, that a later Date of Severance shall apply with respect to a leave of absence which, under Employer policy, provides for a later |
4
| Date of Severance and, provided further, that the second anniversary of a date of absence from active employment shall be used for an Employee who is absent by reason of a Maternity or Paternity Absence which commenced on or after December 31, 1985, or who is absent by reason of Total and Permanent Disability. |
An Employee shall not incur a Date of Severance while he is in the active service of the
United States Armed Forces if his reemployment rights are protected by law.
| 2.16 | “Earliest Retirement Age” shall mean the earliest date on which, under the Plan, the Participant could elect to receive retirement benefits in accordance with Section 5.1 or 5.2 hereof. | |
| 2.17 | “Effective Date” shall mean December 31, 1946. | |
| 2.18 | “Employee” shall mean any common-law employee of an Employer or an Affiliate; provided, however, that for purposes of Section 2.22; “Employee” shall include any self-employed individual performing services for an Employer or Affiliate who is treated as an employee under Section 401(c)(1) of the Code. | |
| 2.19 | “Employer(s)” shall mean the Company, Erie Family Life Insurance Company, Erie Insurance Exchange, Erie Insurance Company, EI Holding Corp., EI Service Corp., Erie Insurance Company of New York, Erie Insurance Property & Casualty Company, Flagship City Insurance Company and any other Affiliate which may adopt this Plan. | |
| 2.20 | “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended. | |
| 2.21 | “Final Average Earnings” shall mean 1/36th of the Participant’s aggregate Compensation during the thirty-six consecutive calendar months as a Covered Employee which produces the greatest aggregate Compensation out of the one hundred twenty calendar month period as a Covered Employee ending on the earlier of the date on which the Participant retires or terminates employment with the Employers or the date on which the Participant is no longer considered a Covered Employee. In the event a Participant does not have thirty-six consecutive calendar months of Compensation as a Covered Employee (i) months in which the Participant is not a Covered Employee and months in which the Participant has no Compensation will be excluded for purposes of |
5
| determining consecutive months for the thirty-six and one hundred twenty month periods and (ii) with respect to a Participant with fewer than thirty-six total calendar months of Compensation as a Covered Employee, Final Average Earnings will be determined as the average monthly Compensation over the Participant’s entire period of employment as a Covered Employee. | ||
| 2.22 | “Highly Compensated” shall mean any Employee who is a more than five percent (5%) owner of an Employer or earned $110,000 or more in Test Compensation from the Employer in the calendar year that begins in the twelve month period that precedes the current Plan Year (the “lookback year”); provided, however, that such $110,000 figure shall be adjusted for cost of living at the same time and in the same manner as determined under Code Section 415(d). | |
| 2.23 | “Hour of Service” shall include the following: |
| (a) | each hour for which an Employee is directly or indirectly paid or entitled to payment from an Employer or an Affiliate as an Employee for the performance of duties during an applicable computation period (these hours must be credited to the Employee in the computation period during which the duties were performed and not when paid, if different); and | ||
| (b) | each hour for which back pay, irrespective of mitigation of damages, has been awarded or agreed to by an Employer or an Affiliate (these hours must be credited in the computation period or periods to which the award or agreement pertains rather than that in which the payment, award or agreement was made); and | ||
| (c) | each hour for which an Employee is directly or indirectly paid or entitled to payment from an Employer or an Affiliate for reasons, such as vacation, sickness or disability, other than for the performance of duties (these hours shall be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor regulations which are incorporated herein by reference). |
| 2.24 | “Leased Employee” shall mean any person (other than an Employee of an Employer) who pursuant to an agreement between the Employer and any other person (“leasing organization”) has performed services for the Employer (or for the Employer and related persons determined in accordance with Section 414(n)(6) of the Code) on a substantially full-time basis for a period of at least one year and such services are performed under primary direction or control by the recipient. Except as provided |
6
| below, any person satisfying the foregoing criteria shall be treated as an Employee. Contributions or benefits provided a Leased Employee by the leasing organization which are attributable to services performed for the Employer shall be treated as provided by the Employer. | ||
| Notwithstanding the foregoing, a Leased Employee shall not be considered an Employee of an Employer if: (i) such Leased Employee is covered by a money purchase pension plan providing: (1) a nonintegrated employer contribution rate of at least 10 percent of compensation, (2) immediate participation, and (3) full and immediate vesting; and (ii) Leased Employees do not constitute more than 20 percent of the Employer’s non-Highly Compensated workforce. | ||
| 2.25 | “Maternity or Paternity Absence” shall mean an absence from work by an Employee for any period: |
| (a) | by reason of pregnancy of the Employee, | ||
| (b) | by reason of the birth of a child of the Employee, | ||
| (c) | by reason of the placement of a child with the Employee in connection with the adoption of such child by such Employee, or | ||
| (d) | for purposes of caring for such child for a period immediately following such birth or placement. |
An absence will not be considered a “Maternity or Paternity Absence” unless the Employee
provides the Administrator with such timely information as the Administrator may
reasonably require to establish that the absence from work is for one of the four
permitted reasons outlined above. Nothing in this Plan shall require an Employer to grant
a paid leave of absence to any Employee.
| 2.26 | “Normal Retirement Age” of a Participant shall be age 65. | |
| 2.27 | “Normal Retirement Date” of a Participant shall be the first day of the month next following the month in which his sixty-fifth birthday occurs. | |
| 2.28 | “Participant” shall mean any Covered Employee and any former Covered Employee who is entitled to, or who is receiving, a retirement benefit or deferred vested pension under the Plan. |
7
| 2.29 | “Period of Severance” shall mean the period of time between an Employee’s Date of Severance and the date as of which he performs his first Hour of Service following reemployment. | |
| 2.30 | “Plan” or “Pension Plan” shall mean this “Erie Insurance Group Retirement Plan for Employees” as herein set forth with all amendments, modifications, appendices, and supplements hereafter made. | |
| 2.31 | “Plan Year” shall mean any period of 12 consecutive calendar months next preceding an Anniversary Date of the Plan. | |
| 2.32 | “Service” shall mean an Employee’s service determined in accordance with Article IV hereof for the purposes of meeting the eligibility requirements for a benefit under the Plan. | |
| 2.33 | “Social Security Covered Compensation” shall mean, for any Plan Year, the average (without indexing) of the Social Security taxable wage bases in effect for each calendar year during the 35-year period ending with the last day of the calendar year in which the Participant attains (or will attain) Social Security Retirement Age (as such term is defined in Section 10.1(a)(iv) hereof). In determining a Participant’s Social Security Covered Compensation for a Plan Year, the Social Security taxable wage base for the current Plan Year and any subsequent Plan Year shall be assumed to be the same as in effect for the Plan Year for which the determination is being made. A Participant’s Social Security Covered Compensation shall be automatically adjusted for each Plan Year in accordance with these provisions, up to and including the Plan Year in which the Participant attains Social Security Retirement Age. | |
| 2.34 | “Spouse” shall mean, with respect to any Participant, an individual who is the Participant’s spouse as defined under 1 U.S.C. Section 7 or other applicable Federal law. | |
| 2.35 | “Test Compensation” shall mean, for any Plan Year, an Employee’s compensation, reported under Sections 6041 and 6051 of the Code on Form W-2, as paid by the Company or other Employer for the calendar year ending with or within such Plan Year, including any amounts contributed pursuant to a salary reduction election on behalf of a Covered Employee to a plan described in Sections 125, 132(f), 402(e)(3), |
8
| 402(h)(1)(B), 403(b), or 457(b) of the Code for the period in question. Effective January 1, 2009, Test Compensation shall include any differential wage payments, as defined in Section 3401(h) of the Code, that are paid by an Employer during a period of qualified military service as defined in Section 414(u) of the Code. Test Compensation in any given year shall not exceed the adjusted annual limitation in effect for such year (as set forth in Section 2.11), provided that such limitation shall not be applied in determining the status of an Employee as a Highly Compensated Employee or Key Employee. To the extent permitted under regulations and other guidance promulgated by the Internal Revenue Service, the Company may elect to determine Test Compensation on a basis other than that provided above. | ||
| 2.36 | “Total and Permanent Disability” shall mean permanent incapacity resulting in the Participant being unable to engage in any gainful employment or occupation by reason of any medically demonstrable physical or mental condition, excluding, however, (a) incapacity contracted, suffered or incurred while the Participant was engaged in or which resulted from having engaged in a felonious enterprise; and (b) incapacity contracted, suffered or incurred in the employment of other than an Employer, including self-employment. | |
| 2.37 | “Trust Agreement” shall mean the trust agreement between the Company and a Trustee as provided in Section 9.1, together with all amendments, modifications and supplements, thereto. | |
| 2.38 | “Trustee” shall mean the Trustee or Trustees designated under a Trust Agreement including any successor or successors. | |
| 2.39 | “Trust Fund” or “Fund” shall mean the retirement plan trust fund established by the Company in accordance with Article IX. |
9
ARTICLE III — ADMINISTRATION OF THE PLAN
| 3.1 | Pension Administrator | |
| The Plan shall be administered by a committee that shall act as Plan Administrator. The initial members of the administrative committee have been appointed by the Board, effective January 1, 2008; provided, however, that such initial members, and any subsequent members of the administrative committee, shall serve at the pleasure of the Executive Council of the Company. Any individual who is a member of the administrative committee may resign by delivering his written resignation to the Executive Council of the Company. In the event of the death, resignation or removal of a member of the administrative committee, such Executive Council shall fill the vacancy. In making the appointment, the Executive Council shall not be limited to any particular person or group, and nothing herein contained shall be construed to prevent any Participant, director, officer, employee or shareholder of the Employers from service as a member of the administrative committee. Members of the administrative committee will not be compensated from the Trust Fund for services performed in such capacity, but the Company will reimburse such individuals for expenses reasonably and necessarily incurred by them in such capacity. | ||
| Initial appointment by the Board is evidenced by a resolution of the Board. Appointment by the Executive Council of the Company shall be evidenced in a writing executed on behalf of the Executive Council. Copies of such writings shall be delivered to the Trustee and to such other persons as may require notice of such appointments. | ||
| Appointment by the Board shall be evidenced by a certified copy of the resolution of the Board making such appointment, and copies of such certified resolution shall be delivered to the Trustee and to such other persons as may require such notice. | ||
| 3.2 | Powers | |
| The Administrator will have full power to administer the Plan in all of its details, subject, however, to the requirements of ERISA. This power shall include having the sole and absolute discretion to interpret and apply the provisions of the Plan to determine the rights and status hereunder of any individual, to decide disputes arising under the Plan, and to make any determinations and findings of fact with respect to benefits payable hereunder and the persons entitled thereto as may be required for any purpose under the Plan. Without limiting the generality of the above, the Administrator |
10
| is granted the following authority which it shall discharge in its sole and absolute discretion in accordance with Plan provisions as interpreted by the Administrator: |
| (a) | To make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan, including the modification of the claims procedure under Section 3.8 in accordance with any regulations issued under Section 503 of ERISA. | ||
| (b) | To interpret the Plan. | ||
| (c) | To decide all questions concerning the Plan and the eligibility of any person to participate in the Plan, his period of participation and/or service under the Plan, his date of birth, his eligibility to accrue a benefit under the Plan and to receive a distribution from the Plan. | ||
| (d) | To compute the amount of benefits which will be payable to any Participant or other person in accordance with the provisions of the Plan, and to determine the identity of the person or persons to whom such benefits will be paid. | ||
| (e) | To authorize the payment of Plan benefits and to direct cessation of benefit payments. | ||
| (f) | To appoint one or more investment managers to manage the investment and reinvestment of the Fund and to enter into management contracts on behalf of the Company with respect to such appointments. Unless and until the Administrator appoints an investment manager with respect to all or a specific portion of the Fund, the Trustee shall have exclusive authority to manage and control all or such portion of the Fund. | ||
| (g) | To appoint, employ or engage such other agents, counsel accountants, consultants and actuaries as may be required to assist in administering the Plan. | ||
| (h) | To establish procedures to determine whether a domestic relations order is a qualified domestic relations order within the meaning of Section 414(p) of the Code, to determine under such procedures whether a domestic relations order is a qualified domestic relations order and whether a putative alternate payee otherwise qualifies for benefits hereunder, to inform the parties to the order as to the effect of the order, and to direct the Trustee to hold in escrow or pay any amounts so directed to be held or paid by the order. | ||
| (i) | To determine whether the Plan has incurred a partial termination. | ||
| (j) | To obtain from the Employers, Employees, Participants, Spouses and Beneficiaries such information as shall be necessary for the proper administration of the Plan. |
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| (k) | To perform all reporting and disclosure requirements imposed upon the Plan by ERISA, the Code or any other lawful authority. | ||
| (l) | To take such steps as it, in its discretion, considers necessary and/or appropriate to remedy any inequity under the Plan that results from incorrect information received or communicated or as the consequence of administrative error including, but not limited to, recouping benefit overpayments. | ||
| (m) | To correct any defect, reconcile any inconsistency or supply any omission under the Plan. | ||
| (n) | To delegate its powers and duties to others in accordance with Section 3.3. | ||
| (o) | To exercise such other authority and responsibility as is specifically assigned to it under the terms of the Plan or the provisions of the Administrator’s charter and to perform any other acts necessary to the performance of its powers and duties. | ||
| The Administrator at its discretion may either request the Company or direct the Fund to pay for any or all services rendered by the Trustee and by persons appointed, employed or engaged under Section 3.2(f) or (g) or under the terms of the Trust Agreement. |
| The Administrator’s interpretations, decisions, computations and determinations under this Section 3.2 which are made in good faith will be final and conclusive upon the Employers, all Participants and all other persons concerned. Any action taken by the Administrator with respect to the rights or benefits of any person under the Plan shall be revocable by the Administrator as to payments or distributions not theretofore made, pursuant to such action, from the Trust Fund; and appropriate adjustments may be made in future payments or distributions to a Participant, Spouse or Beneficiary to offset any excess payment or underpayment previously made to such Participant, Spouse or Beneficiary from the Trust Fund. No ruling or decision of the Administrator in any one case shall create a basis for a retroactive adjustment in any other case prior to the date of written filing of each specific claim. | ||
| 3.3 | Delegation of Duties | |
| The Administrator may, from time to time, designate any individual to carry out any of the responsibilities of the Administrator other than the appointment of an investment manager(s). The individual so designated will have full authority or such limited |
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| authority as the Administrator may specify, to take such actions as are necessary or appropriate to carry out the responsibilities assigned by the Administrator. | ||
| 3.4 | Administrator as Named Fiduciary | |
| The Administrator will be a “named fiduciary” for purposes of section 402(a)(1) of ERISA with authority to control and manage the operation and administration of the Plan. | ||
| 3.5 | Conclusiveness of Various Documents | |
| The Administrator and the Company and its directors and officers will be entitled to rely upon all tables, valuations, certificates and reports furnished by any actuary, accountant, counsel or other expert appointed, employed or engaged by the Administrator or the Company. | ||
| 3.6 | Actions to be Uniform | |
| Any discretionary actions to be taken under the Plan by the Administrator will be nondiscriminatory and uniform with respect to all persons similarly situated. | ||
| 3.7 | Liability and Indemnification | |
| To the full extent allowed by law, the Administrator shall not incur any liability to any Participant or Beneficiary, or to any other person, by reason of any act or failure to act on the part of the Administrator if such act or omission is not the result of the Administrator’s gross negligence, willful misconduct or exercise of bad faith. To the full extent allowed by law, the Company agrees to indemnify the Administrator against all liability and expenses (including reasonable attorney’s fees and other reasonable expenses) occasioned by any act or omission to act if such act or omission is not the result of the Administrator’s gross negligence, willful misconduct or exercise of bad faith. Neither this Section 3.7 nor any other provision of this Plan shall be applied to invalidate, modify, or limit in any respect any contract, agreement, or arrangement for indemnifying or insuring the Administrator against, or otherwise limiting, such liability or expense, or for settlement of such liability, to the extent such contract, agreement, or arrangement is not precluded by the terms of Section 410 of ERISA. |
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| 3.8 | Claims Review Procedure | |
| The Administrator shall be responsible for the claims procedure under the Plan. An application for a retirement benefit or other benefit under the Plan shall be considered a claim for purposes of this Section 3.8. |
| (a) | Original Claim. In the event a claim of any Participant, Beneficiary, alternate payee, or other person (hereinafter referred to in this Section as the “Claimant”) for a benefit is partially or completely denied, the Administrator shall give, within ninety (90) days after receipt of the claim (or if special circumstances, made known to the Claimant, require an extension of time for processing the claim, within one hundred eighty (180) days after receipt of the claim), written notice of such denial to the Claimant. Such notice shall set forth, in a manner calculated to be understood by the Claimant, the specific reason or reasons for the denial (with reference to pertinent Plan provisions upon which the denial is based); an explanation of additional material or information, if any, necessary for the Claimant to perfect the claim; a statement of why the material or information is necessary; on and after January 1, 2002, a statement of the Claimant’s right to bring a civil action under Section 502(a) of ERISA; and an explanation of the Plan’s claims review procedure, including the time limits applicable to such procedure. | ||
| (b) | Review of Denied Claim. |
| (i) | A Claimant whose claim is partially or completely denied shall have the right to request a full and fair review of the denial by a written request delivered to the Administrator within sixty (60) days of receipt of the written notice of claim denial, or within such longer time as the Administrator, under uniform rules, determines. In such review, the Claimant or his duly authorized representative shall have the right to review, upon request and free of charge, all documents, records or other information relevant to the claim and to submit any written comments, documents, or records relating to the claim to the Administrator. | ||
| (ii) | The Administrator, within sixty (60) days after the request for review, or in special circumstances, such as where the Administrator in its sole discretion holds a hearing, within one hundred twenty (120) days of the request for review, will submit its decision in writing. Such decision shall |
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| take into account all comments, documents, records and other information properly submitted by the Claimant, whether or not such information was considered in the original claim determination. The decision on review will be binding on all parties, will be written in a manner calculated to be understood by the Claimant, will contain specific reasons for the decision and specific references to the pertinent Plan provisions upon which the decision is based, will indicate that the Claimant may review, upon request and free of charge, all documents, records or other information relevant to the claim and on and after January 1, 2002, will contain a statement of the Claimant’s right to bring a civil action under Section 502(a) of ERISA. | |||
| (iii) | If a Claimant fails to file a claim or request for review in the manner and in accordance with the time limitations specified herein, such claim or request for review shall be waived, and the Claimant shall thereafter be barred from again asserting such claim. |
| (c) | Determination by the Administrator Conclusive. The Administrator’s determination of factual matter relating to Participants, Beneficiaries and alternate payees including, without limitation, a Participant’s Credited Service, Service and any other factual matters, shall be conclusive. The Administrator and the Company and its respective officers and directors shall be entitled to rely upon all tables, valuations, certificates and reports furnished by an actuary, any accountant for the Plan, the Trustee or any investment managers and upon opinions given by any legal counsel for the Plan insofar as such reliance is consistent with ERISA. The actuary, the Trustee and other service providers may act and rely upon all information reported to them by the Administrator and/or the Company and need not inquire into the accuracy thereof nor shall be charged with any notice to the contrary. |
| 3.9 | Exhaustion of Administrative Remedies. | |
| The exhaustion of the claims review procedure is mandatory for resolving every claim and dispute arising under the Plan. As to such claims and disputes: |
| (a) | No claimant shall be permitted to commence any civil action to recover Plan benefits or to enforce or clarify rights under the Plan under Section 502 or Section 510 of ERISA or under any other provision of law, whether or not |
15
| statutory, until the claims review procedure set forth herein has been exhausted in its entirety; and | |||
| (b) | In any such civil action all explicit and all implicit determinations by the Administrator (including, but not limited to, determinations as to whether the claim, or a request for a review of a denied claim, was timely filed) shall be afforded the maximum deference permitted by law. |
| 3.10 | Deadline to File Civil Action. | |
| No civil action to recover Plan benefits or to enforce or clarify rights under the Plan under Section 502 or Section 510 of ERISA or under any other provision of law, whether or not statutory, may be brought by any claimant on any matter pertaining to the Plan unless the civil action is commenced in the proper forum before the earlier of: |
| (a) | Thirty months after the claimant knew or reasonably should have known of the principal facts on which the claim is based; or | ||
| (b) | Eighteen months after the claimant has exhausted the claims review procedure. |
| 3.11 | Waiver of Participation | |
| It is the purpose of this Plan to provide for the accrual of retirement benefits for all Covered Employees. Notwithstanding the foregoing, any Covered Employee may waive participation in this Plan by executing a Waiver of Participation on a form provided by the Administrator for such purpose. Any Waiver of Participation shall be effective for the Plan Year in which it is executed and shall be irrevocable. During any Plan Year for which a Waiver of Participation is in effect, no Service, Credited Service or Compensation shall be recognized under the Plan for the Employee and the Employee shall be considered as other than a Covered Employee.. |
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ARTICLE IV — SERVICE PROVISIONS
| 4.1 | Service | |
| Service shall be used to determine a Participant’s vested rights under the Plan. An Employee shall receive Service for the period of time between his Date of Hire and his Date of Severance, provided that no Service shall be received for the period of continued absence between the first and second anniversary of the date of first absence from work by reason of a Maternity or Paternity Absence. Service shall be counted for full years only. Service shall include any prior periods of Service that are reinstated in accordance with Section 4.3 below. Service shall include any Period of Severance which has continued for less than one year. | ||
| Notwithstanding the foregoing, Service (but not Credited Service) shall include periods of absence granted under The Family and Medical Leave Act of 1993, to the extent of the minimum service credit required by said Act. | ||
| 4.2 | Credited Service | |
| Credited Service shall be used to compute the amount of a Participant’s benefit and to determine a Participant’s eligibility for an early retirement and a disability retirement under the Plan. Credited Service shall be based on Service but shall not include (i) any period of Service in which a Participant is not a Covered Employee, and (ii) any Period of Severance; provided, however, that a Participant’s Credited Service shall include that Credited Service accumulated during the period in which the Participant is eligible for a disability retirement pension (as determined under Sections 5.3, 6.3 and 7.2 hereof). Solely for purposes of computing the amount of a Participant’s benefit under Section 6.1 and subject to the foregoing provisions of this Section, Credited Service shall include a year of credit for any fraction of a year of Service. | ||
| 4.3 | Loss and Reinstatement of Service | |
| In the event a Participant incurs a Date of Severance prior to his becoming eligible for a retirement benefit or deferred vested pension under the Plan, he shall be deemed to receive a distribution equal to the actuarial equivalent value of the entire vested pension earned through his Date of Severance. In such a case, the Participant shall lose his Service and Credited Service and his Accrued Pension shall be forfeited as of such date of deemed distribution. If such individual is subsequently reemployed as a Covered Employee, the individual, after again completing one year of Service, shall be |
17
| considered a Plan Participant retroactively as of such date of reemployment and have his forfeited Service, Credited Service and Accrued Pension reinstated if his last Period of Severance is less than the greater of: |
| (a) | five years, or | ||
| (b) | the Participant’s forfeited Service (including any periods of Service previously reinstated under the provisions of this Section 4.3 or its predecessor). |
| 4.4 | Transfer To Other Employment | |
| Upon the transfer of a Participant covered by the Plan to other employment with an Employer or Affiliate whereby he ceases to be a Covered Employee hereunder, his Accrued Pension based on his Credited Service and Final Average Earnings as of the transfer date shall be frozen and Credited Service shall cease to accrue for purposes of the Plan. In the event such Participant remains in the employment of an Employer until such time as, except for such transfer, he would have met the age, service and/or other eligibility requirements for any pension under the Plan, such frozen Accrued Pension shall become payable in accordance with the appropriate provisions of the Plan as in effect on the date of transfer. | ||
| 4.5 | Transfer From Other Employment | |
| Upon transfer or retransfer of an individual from other employment with an Employer or Affiliate such that the individual becomes a Covered Employee hereunder, his years of Service as otherwise computed under this Article IV will include the period of his employment with an Employer or Affiliate prior to such transfer or retransfer for the purpose of meeting the vesting requirements under this Plan; provided, however, that only years of Credited Service acquired while employed as a Covered Employee covered under this Plan shall be used to compute the amount of any pension under this Plan. |
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ARTICLE V — ELIGIBILITY FOR PENSIONS
| 5.1 | Normal Retirement | |
| A Participant whose employment with an Employer and all Affiliates is terminated when or after he attains Normal Retirement Age shall be eligible for a normal retirement pension in the amount as provided in Section 6.1 hereof. A Participant’s right to his normal retirement pension shall be nonforfeitable upon the attainment of his Normal Retirement Age provided he is an Employee on such date. A Participant continuing in employment with an Employer after his Normal Retirement Date in a capacity such that he completes 40 or more Hours of Service per month will be provided with a notice incorporating the substance of the notification described in Section 2530.203-3(b)(4) of the Code of Federal Regulations. Such notice shall include a statement that the Participant’s pension will be suspended and permanently withheld for months in which he completes 40 or more Hours of Service. Any benefit accrual earned by a Participant for any given Plan Year ending on or after the date on which the Participant attains Normal Retirement Age shall be reduced (but not below zero) by the amount of any actuarial adjustment which may be required in connection with a delay in payment of a Participant’s normal retirement benefit or the suspension of benefits otherwise payable after the Participant attains Normal Retirement Age. | ||
| 5.2 | Early Retirement | |
| A Participant with 15 or more years of Credited Service whose employment with an Employer and all Affiliates is terminated when or after he reaches the age of 55 but prior to the attainment of his Normal Retirement Age, shall be eligible for an early retirement pension in the amount as provided in Section 6.2 hereof. | ||
| 5.3 | Disability Retirement | |
| A Participant whose status as a Covered Employee is terminated due to his Total and Permanent Disability after 15 or more years of Credited Service and who is eligible for and receiving disability benefits under the Erie Insurance Group Long Term Disability Income Benefits Program shall be eligible for a disability retirement pension in an amount as provided in Section 6.3 hereof beginning at his Normal Retirement Date or later disability retirement date providing he remains subject to a Total and Permanent Disability and receives said disability income benefits continuously through his Normal Retirement Age or later disability retirement date. |
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| 5.4 | Vesting | |
| A Participant with 5 years or more of Service and whose employment with an Employer and all Affiliates is terminated at a time when he is ineligible for any retirement pension under the Plan shall be eligible for a deferred vested pension as computed under Section 6.4. | ||
| If a Participant is reemployed as a Covered Employee by an Employer after having qualified for a deferred vested pension in accordance with this Section 5.4, such Participant shall retain his right to receive such deferred vested pension and he shall be reinstated with the Service and Credited Service to which he was entitled at the time of his prior termination of employment. Any benefits to which the Participant may be entitled upon his subsequent retirement or termination of employment shall be reduced actuarially, as provided in Section 7.4, to reflect any deferred vested pension benefits paid prior to reemployment. |
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ARTICLE VI — AMOUNT OF PENSIONS
| 6.1 | Normal Retirement Pension | |
| Subject to the provisions of Articles VII and X, the monthly pension of a Participant who is eligible for a normal retirement pension under the provisions of Section 5.1 (as stated in the form of a life annuity) shall be one-twelfth (1/12) of the result obtained by multiplying the sum of (a) and (b) by (c), where: |
| (a) | equals 1.0% of the Participant’s Final Average Earnings not in excess of Social Security Covered Compensation; | ||
| (b) | equals 1.5% of the Participant’s Final Average Earnings in excess of Social Security Covered Compensation; and | ||
| (c) | equals the Participant’s Credited Service not in excess of 30 years. |
| In no event shall the overall permitted disparity limits of Section 1.401(l)-5 of the Income Tax Regulations be exceeded. | ||
| 6.2 | Early Retirement Pension | |
| Subject to the provisions of Articles VII and X, the monthly early retirement pension of a Participant eligible for an early retirement pension under the provisions of Section 5.2 shall be, at the option of the Participant, either (a) or (b) as set forth below: |
| (a) | A deferred pension, commencing as of the Participant’s Normal Retirement Date, equal to the amount of pension, determined under Section 6.1, to which he is entitled based upon his Credited Service and Final Average Earnings as of his date of early retirement and the level of Social Security Covered Compensation in effect on such date. | ||
| (b) | An immediate pension, commencing as of any month following the month in which such Participant retires early, determined as provided in (a) above, but reduced by 1/4 of 1 percent for each complete calendar month up to 60 such months and by 3/8ths of 1 percent for each complete calendar month in excess of 60 months, by which his early retirement pension commencement date precedes his Normal Retirement Date. |
| 6.3 | Disability Retirement Pension | |
| Subject to the provisions of Articles VII and X, a Participant eligible for disability benefits under the provisions of Section 5.3 shall receive a disability retirement pension beginning as of his Normal Retirement Date. Such disability retirement pension shall be in an amount determined in accordance with Section 6.1 assuming that: |
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| (a) | Service and Credited Service are granted for each calendar year (and part thereof) during which he continues to be subject to a Total and Permanent Disability, and | ||
| (b) | his Compensation continues unchanged from the calendar year including his date of disability to the calendar year including his Normal Retirement Age, and | ||
| (c) | his Social Security Covered Compensation is based on the level in effect at the time he becomes disabled. |
| 6.4 | Deferred Pension Upon Termination of Service | |
| Subject to the provisions of Articles VII and X, the monthly pension, commencing as of Normal Retirement Date, of a former Covered Employee whose employment with an Employer and Affiliates has terminated after he has become eligible for a deferred vested pension in accordance with Section 5.4, shall be equal to the pension such Participant would have been entitled to under Section 6.2(a) as of his termination of employment, multiplied by a vesting percentage determined in accordance with the table immediately below: |
| Years of Service | Vesting Percentage | |||
Less than 5 |
0 | % | ||
5 or more |
100 | % | ||
| Except as otherwise provided under Section 8.1, any Participant having less than five years of Service at the time of his death or other termination of employment with the Employers or an Affiliate shall have no vested rights under this Plan and neither he nor his Spouse or Beneficiary shall be entitled to any benefits under this Plan. | ||
| A former Covered Employee who is eligible for a deferred vested pension and who is credited with 15 or more years of Credited Service may elect (by written application) to commence his deferred vested pension in a reduced amount at any time between the ages of 55 and 65, in which case the monthly pension amount as determined above shall be reduced in accordance with the provisions of subsection (b) of Section 6.2 based on the number of months that his Annuity Starting Date precedes his Normal Retirement Date. |
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| 6.5 | Increase in Pension for Certain Retired Participants |
| (a) | Notwithstanding the foregoing provisions of this Article VI and effective for Plan payments made on or after January 1, 1996, the monthly pension payable to a Qualified Pensioner (or to the Beneficiary of a Qualified Pensioner) shall be increased by the greater of five percent (5%) or twenty dollars ($20.00). For purposes of this subsection (a), a “Qualified Pensioner” means a Participant who retired under the normal retirement, early retirement, or disability retirement provisions of the Plan prior to January 1, 1994. | ||
| (b) | Notwithstanding the foregoing provisions of this Article VI and effective for Plan payments made on or after January 1, 1999, the monthly pension payable to a Qualified Pensioner (or to the Beneficiary of a Qualified Pensioner) shall be increased by the greater of four percent (4%) or fifteen dollars ($15.00). For purposes of this subsection (b), a “Qualified Pensioner” means a Participant who retired under the normal retirement, early retirement, or disability retirement provisions of the Plan and commenced Plan payment prior to January 1, 1997. |
| 6.6 | Offset of Accruals by Plan Distributions | |
| In the event distribution of benefits commence to an employed Participant pursuant to Section 7.10 or for any other reason after the employed Participant has attained his Normal Retirement Age, any increase in the Participant’s monthly benefit which accrues in any Plan Year in which such distribution is made shall be reduced (but not below zero) by the Actuarial Equivalent of total Plan benefit distributions made to such Participant by the close of such Plan Year. | ||
| 6.7 | Non-Duplication of Benefits |
| (a) | There shall be no duplication of any retirement benefit or deferred vested pension benefit payable under this Plan, and any pension or retirement benefit payable under any other qualified defined benefit pension, retirement, or similar plan to which an Employer or predecessor Employer of the particular Participant has contributed, based upon the same period of service. Unless such other benefits are clearly intended to be in addition to benefits under this Plan, the Administrator shall make or cause to be made appropriate adjustments in the retirement benefit or deferred vested pension benefit payable under this Plan in respect to any Participant to carry out the provisions of this paragraph. |
23
| (b) | No benefit shall be payable to any Participant under more than one Section of the Plan for the same period of time. No retirement benefit or deferred vested pension benefit shall be paid to any Participant while he is receiving benefits under a long-term disability benefit contract or plan to which an Employer or Affiliate has contributed. |
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ARTICLE VII — COMMENCEMENT AND DURATION OF PENSIONS
| 7.1 | Normal and Early Retirement Pensions |
| (a) | Any normal or early retirement pension shall be payable to a retired Participant who has applied therefor in accordance with the rules established by the Administrator, commencing as of the later of the Participant’s Normal Retirement Date or the first day of the month next following the date as of which the Participant makes proper application to commence retirement payments. A Participant who is eligible for an early retirement pension may elect payment prior to Normal Retirement Date and receive a reduced pension under the provisions of Section 6.2. Subject to Sections 7.10(b) and 11.12, a Participant who fails to elect such payment as provided in this Section 7.1 will be deemed to have made an election to defer distribution. | ||
| (b) | Subject to Sections 7.8 and 7.10, a normal or early retirement pension shall be payable monthly for the remaining life of such retired Participant. The last payment to the retired Participant under this form shall be for the month in which the death of such retired Participant occurs. However, if the retired Participant duly accepted the Automatic Surviving Spouse’s Pension as set forth in Section 7.5 or elected an optional form of pension in Section 7.7 and is receiving his retirement pension pursuant to such election, then any pension payments to him and his surviving Spouse or Beneficiary shall be as set forth in Section 7.5 or 7.7, whichever applicable. |
| 7.2 | Disability Retirement Pension | |
| A disability retirement pension shall be payable to a disabled Participant who has applied therefor in accordance with the rules established by the Administrator, commencing as of the Participant’s Normal Retirement Date or later disability retirement date (or, if later, commencing as of the first day of the month next following the date as of which application for the disability retirement pension was made), provided the Participant has remained continuously disabled (within the meaning of Section 5.3) up to his Normal Retirement Date or later disability retirement date. | ||
| To ascertain whether a Participant retains his eligibility for a disability retirement pension, the Participant may be required by the Administrator to submit to a medical examination at any time prior to his Normal Retirement Age, but not more often than semi-annually. If it is determined by the Administrator that the Participant is no longer |
25
| disabled (within the meaning of Section 5.3) on the basis of such an examination, or that he has engaged or is engaging in gainful employment (except for purposes of rehabilitation approved by the Administrator), or that prior to his Normal Retirement Age he ceases to be eligible for disability benefits under the Social Security Act, then his eligibility for a disability retirement pension will end and, his Credited Service accumulated to that time shall be reinstated, whether or not the Participant returns to employment as a Covered Employee. Such Participant shall be eligible for a retirement or deferred vested pension, based on such Credited Service, under the provisions of Section 5.1, 5.2, or 5.4. | ||
| If a participant who is disabled (within the meaning of Section 5.3) chooses to begin a retirement or deferred vested pension prior to his Normal Retirement Date and prior to a determination by the Administration that he is no longer disabled, the retirement or deferred vested pension shall be based on the Participant’s Credited Service as of his termination of employment due to disability. | ||
| In the event a Participant who is otherwise eligible for a disability retirement pension refuses to submit to a medical examination as required by the Administrator, all his rights to a disability retirement pension hereunder shall cease until he submits to such examination. | ||
| Subject to Section 7.8, a disability pension shall be payable monthly for the remaining life of such retired Participant. The last payment to the retired Participant under this form shall be for the month in which the death of such retired Participant occurs. However, if the Participant duly accepted the Automatic Surviving Spouse’s Pension as set forth in Section 7.5 or elected an optional form of pension in Section 7.7 and is receiving his retirement pension pursuant to such election, then any pension payments to him and his surviving Spouse or Beneficiary shall be as set forth in Section 7.5 or 7.7, whichever applicable. |
| 7.3 | Deferred Vested Pension | |
| A deferred vested pension shall be payable to a Participant who has met the criteria provided in Section 5.4 and who has applied therefore in accordance with rules established by the Administrator, commencing as of the later of the Participant’s Normal Retirement Date, or the first day of the month next following the date as of which the Participant makes proper application to commence payment. A Participant |
26
| who has at least 15 years of Credited Service as of his termination of employment may elect to commence payment as of the first day of any month between the age of 55 and his Normal Retirement Date in accordance with an eligible Participant’s election to receive a reduced amount under the provisions of Section 6.4. Subject to Sections 7.10(b) and 11.12, a Participant who fails to elect payment as provided in this Section 7.3 will be deemed to have made an election to defer distribution. Subject to Section 7.8, a deferred vested pension shall be payable monthly for the remaining life of the Participant. The last payment to the Participant under this form shall be for the month in which the death of such Participant occurs. However, if the Participant duly elected the Automatic Surviving Spouse’s Pension as set forth in Section 7.5 or elected an optional form of pension in Section 7.7 and is receiving his deferred vested pension pursuant to such election, then any pension payments to him and his surviving Spouse or Beneficiary shall be as set forth in Section 7.5 or 7.7, whichever applicable. | ||
| 7.4 | Reemployment of a Retired Participant | |
| The pension payable to any Participant receiving retirement benefits or deferred vested pension benefits shall cease and be permanently withheld if and when such Participant is reemployed by an Employer; provided, however, that no pension shall be withheld by the Plan pursuant to this Section 7.4 for any month during which such reemployed Participant has been employed in a classification which is not covered under the Plan or during which such Participant fails to complete 40 or more Hours of Service. In addition, no payment shall be withheld by the Plan pursuant to this Section 7.4 unless the Plan notifies the reemployed Participant that his benefits are suspended by personal delivery or first class mail before or during the first calendar month in which the Plan withholds payments. Such notification shall contain a description of the specific reasons why benefit payments are being suspended, a general description of the Plan provisions relating to the suspension of payments, a copy of such provisions, and a statement to the effect that applicable Department of Labor regulations may be found in Section 2530.203-3 of the Code of Federal Regulations. In addition, the suspension notification shall inform the reemployed Participant of the Company’s procedure for affording a review of the suspension of benefits. | ||
| The retirement or deferred vested pension shall resume with the month following subsequent retirement or termination of employment. Any retirement or deferred vested pension payable upon such subsequent retirement or termination shall be determined as provided in Article VI on the basis of the Participant’s Credited Service, Final Average |
27
| Earnings and Social Security Covered Compensationat the time of his subsequent retirement or termination; provided, however, that such retirement or deferred vested pension shall be reduced by the actuarial equivalent of the retirement or deferred vested pension benefits, if any, that the Participant received prior to the suspension of payment as provided hereunder. Notwithstanding the foregoing, in no event shall a Participant’s retirement or deferred vested pension payable following his subsequent retirement or termination be less than that retirement or deferred vested pension payable to the Participant prior to his reemployment. In the determination of the Final Average Earnings of a Participant who is reemployed and who again becomes an active Participant, the thirty-six month period to be considered shall be the number of months in such period of reemployment prior to his subsequent date of retirement or termination, plus such number of months immediately prior to his earlier retirement or termination as shall total thirty-six months. | ||
| 7.5 | Automatic Surviving Spouse’s Pension | |
| A married Participant who is eligible to commence payments pursuant to the normal, early or disability retirement provisions of the Plan or pursuant to the deferred vested pension provisions of the Plan and whose benefit may not be paid under the provisions of Section 7.8 shall automatically be deemed to have elected, at the commencement dates otherwise specified herein, an immediate monthly pension during his lifetime with the provision that, following his death, a monthly survivor’s pension equal to 50 percent of his reduced pension shall be payable to his surviving Spouse during the further lifetime of the Spouse (the “Automatic Surviving Spouse’s Pension”). Such pension shall be actuarially equivalent to an immediate single life annuity. The automatic election provided in this Section 7.5 shall become effective as of the Participant’s Annuity Starting Date. | ||
| An unmarried Participant who retires pursuant to the normal, early or disability retirement provisions of the Plan or pursuant to the deferred vested pension provisions of the Plan and whose benefit may not be paid under the provisions of Section 7.8 shall automatically be deemed to have elected a monthly pension payable for his lifetime as a single life annuity. | ||
| A Participant may prevent the automatic election provided in this Section 7.5 at any time within the “applicable election period” (as hereafter defined) by executing a specific written rejection of such an election on a form approved by the Administrator |
28
| and filing it with the Administrator; provided that such rejection shall not take effect unless the Participant’s Spouse, if applicable, consents to such rejection in accordance with Section 7.6 of the Plan. Any election to revoke the Automatic Surviving Spouse’s Pension and any Spouse’s consent thereto must specify the particular optional form of benefit elected by the Participant and, if applicable, must state the specific non-Spouse Beneficiary or Beneficiaries (including any class of Beneficiaries or any contingent Beneficiaries) who may be entitled to any benefits upon the Participant’s death. Any subsequent change in optional form of benefit or in a non-Spouse Beneficiary selected shall be valid only if accompanied by the written and witnessed consent of the Participant’s Spouse in the manner described in Section 7.6. | ||
| During the period beginning no more than 180 days and ending no less than 30 days prior to the Participant’s Annuity Starting Date, the Administrator shall furnish to the Participant a written general description of the automatic election provided in this Section 7.5. The general description shall include a written explanation of the Participant’s and Spouse’s rights under the Automatic Surviving Spouse’s Pension, including the availability and effect of the election to reject the Automatic Surviving Spouse’s Pension. Such description shall also provide information as to the material features of the optional forms of benefit as well as a brief explanation of their relative values as compared to the Automatic Surviving Spouse’s Pension. In addition, in the event the Participant’s Annuity Starting Date is prior to his attainment of Normal Retirement Age, such description shall inform the Participant of his right to defer commencement of the Plan distribution (including, for Plan Years beginning after December 31, 2006, a description of the consequences of failing to defer commencement). A Participant may make and revoke his written rejection of an Automatic Surviving Spouse’s Option at any time and any number of times within the “applicable election period”. The “applicable election period” shall commence 180 days prior to the Participant’s Annuity Starting Date and shall end on the Participant’s Annuity Starting Date. Distribution to the Participant may commence after seven days have elapsed from the date the Administrator provides the written description provided that the Participant has received information that clearly indicates his right to at least 30 days to consider the contents of the description, the Participant affirmatively elects distribution and any required spousal consent is satisfied. | ||
| A Participant who retires pursuant to the normal, early or disability retirement provisions of the Plan or pursuant to the deferred vested pension provisions of the Plan |
29
| and who is entitled, under such provisions, to a pension with a lump sum actuarial equivalent value not in excess of $5,000 shall receive his pension in accordance with Section 7.8 hereof. |
| 7.6 | Requirement for Spouse Consent | |
| Any election of a married Participant under Sections 7.5 and 7.7 (other than an election to revoke a rejection of the Automatic Surviving Spouse’s Pension under Section 7.5) shall require the consent of the Participant’s Spouse unless it is established to the satisfaction of the Administrator that the consent required under this Section 7.6 may not be obtained: |
| (a) | because there is no Spouse or because the Spouse cannot be located, | ||
| (b) | because the Participant is legally separated from the Spouse, | ||
| (c) | because the Participant has been abandoned by his Spouse (within the meaning of local law) and such Participant has a court order to that effect, or | ||
| (d) | because of such other circumstances as the Secretary of the Treasury may by regulations prescribe. |
| Any consent by a Spouse shall be in writing acknowledging the effect of such election or revocation and witnessed by a notary public or such Plan representatives as may be designated for this purpose by the Administrator. Any Spouse’s consent (or establishment that the Spouse’s consent may not be obtained) shall be effective only with respect to such Spouse. |
| 7.7 | Optional Forms of Pensions | |
| In lieu of a benefit in the form of payment determined in Section 7.5, a Participant may, with the consent of his Spouse as described in Section 7.6, elect an actuarially equivalent benefit described below. This election is effective as of a Participant’s Annuity Starting Date. |
| (a) | Option A: 10-Year Certain and Life Option — A reduced monthly retirement income is payable to the Participant during his remaining lifetime, and upon his death prior to receiving payment for a period equivalent to 120 months, monthly payments of the same reduced amount will be made to his Beneficiary until the number of monthly payments made to the Beneficiary, when added to the number of monthly payments made to the Participant, is equivalent to 120 monthly payments. | ||
| (b) | Option B: 15-year Certain and Life Option — A reduced monthly retirement income is payable to the Participant during his remaining lifetime, and upon his |
30
| death prior to receiving payment for a period equivalent to 180 months, monthly payments of the same reduced amount will be made to his Beneficiary until the number of monthly payments made to the Beneficiary, when added to the number of monthly payments made to the Participant, is equivalent to 180 monthly payments. | |||
| (c) | Option C: 50% Joint and Survivor Option — a reduced monthly retirement income is payable to the Participant for his remaining lifetime, and upon his death, monthly income of 50% of such reduced monthly income previously paid to the Participant shall be paid to his Beneficiary for as long thereafter as that person shall live. | ||
| (d) | Option D: 75% Joint and Survivor Option — effective for Plan Years beginning after December 31, 2007, a reduced monthly retirement income is payable to the Participant for his remaining lifetime, and upon his death, monthly income of 75% of such reduced monthly income previously paid to the Participant shall be paid to his Beneficiary for as long thereafter as that person shall live. | ||
| (e) | Option E: 100% Joint and Survivor Option — a reduced monthly retirement income is payable to the Participant for his remaining lifetime, and upon his death, monthly income of 100% of such reduced monthly income previously paid to the Participant shall be paid to his Beneficiary for as long thereafter as that person shall live. | ||
| (f) | Option F: Joint and Survivor Pop-Up Option — a reduced monthly retirement income is payable to the Participant for his remaining lifetime, and upon his death, monthly income of either 50% or 100% (as elected by the Participant) of such reduced monthly income previously paid to the Participant shall be paid to the Participant’s Spouse for as long thereafter as such Spouse shall live; provided, however, that in the event the Spouse of the Participant predeceases the Participant and such Spouse’s death occurs within 60 months of the Participant’s Annuity Starting Date, the provisions of Section 7.12 shall apply. Notwithstanding any provision of the Plan to the contrary (i) the Joint and Survivor Pop-Up Option shall be available only with respect to a Participant who has retired under the normal retirement provisions of Section 5.1 or the early retirement provisions of Section 5.2, and (ii) actuarial equivalence of a benefit payable under the Joint and Survivor Pop-Up Option shall be determined under Section 11.6; provided, however, that in the event an annuity contract is purchased from an insurance company with respect to such benefit, actuarial equivalence shall thereafter be determined by reference to the specific annuity |
31
| contract which will be purchased by the Plan to provide the monthly retirement income payable under this form of payment. |
| Election of these options must be made during the applicable election period described in Section 7.5. Except to the extent otherwise provided under Section 8.4, if either the Participant or his Beneficiary dies after the election of an option is made but before the Annuity Starting Date such option will not become effective. If the Beneficiary shall die after commencement of the joint and survivor pension, but before the death of the retired Participant, the Participant shall continue to receive the reduced pension payable in accordance with such option. An option may be cancelled by the Participant prior to the Annuity Starting Date. The effect of such cancellation shall be to reinstate the life annuity specified in Section 7.1, 7.2 or 7.3, whichever applicable, or, if the Participant is married, the Automatic Surviving Spouse’s Pension under Section 7.5 (in which case any subsequent option election must satisfy the requirements of Section 7.5). Except to the extent expressly permitted under the Plan, no election regarding an optional form of payment may be made by a Participant following the Participant’s Annuity Starting Date. If the Beneficiary designated by a Participant in connection with the election of an optional form of benefit is not the Spouse of the Participant, then the election shall be effective only if the minimum distribution incidental benefit requirements of Section 1.401(a)(9)-6 of the Income Tax Regulations are satisfied with respect to such distribution. |
| 7.8 | Payment of Small Pension |
| (a) | Notwithstanding any provision of the Plan to the contrary, if the actuarial equivalent present value of any retirement benefit, deferred vested pension or survivor benefit does not exceed $5,000 such benefit shall be paid as soon as practicable in a lump sum equal to such present value. No lump sum payments shall be made if the actuarial equivalent present value of the benefit is in excess of this threshold. | ||
| (b) | Effective for any distribution to a Participant under this Section 7.8 on and after March 28, 2005, the lump sum payment described above shall be made on the conditions that the Participant is alive as of the applicable Annuity Starting Date and, except as otherwise provided in this subsection (b), that the Participant affirmatively elects payment in cash or as a Direct Rollover (as defined in Section 7.11). No further election or consent shall be required or permitted with respect to such distribution. Effective for any distribution to a Participant under this Section 7.8 on and after February 1, 2006, if the Participant fails to affirmatively |
32
| elect payment in cash or as a Direct Rollover within the 60-day period following the Administrator’s distribution of the Direct Rollover explanation and election, as applicable to a benefit with an actuarial equivalent present value in excess of $1,000, the Administrator shall direct distribution of the lump sum payment in the form of a Direct Rollover to an individual retirement plan or annuity selected by the Administrator. If the actuarial equivalent present value of the retirement benefit or deferred vested pension does not exceed $1,000 as of the applicable Annuity Starting Date and the Participant fails to make a cash/Direct Rollover election within such 60-day period, the Plan shall pay such benefit in the form of an actuarial equivalent cash lump sum as soon as practicable following the expiration of such 60-day period. | |||
| (c) | The actuarial equivalent present value of a retirement benefit, deferred vested pension or survivor benefit shall be calculated and paid on the basis of the “applicable mortality table”, as defined in Section 417(e)(3)(B) of the Code, and the “applicable interest rate”, as defined in Section 417(e)(3)(C) of the Code, for the second calendar month preceding the month in which the distribution is payable (and, for Plan Years beginning before December 31, 2012, reflecting the phase-in applicable under Section 417(e)(3)(D) of the Code); provided, however, that in the event the Alternative Present Value (as hereinafter defined) of the applicable benefit is a larger amount, such larger amount shall be paid (provided such Alternative Present Value calculation does not exceed $5,000). For purposes of this Section 7.8, the “Alternative Present Value” of a retirement benefit, deferred vested pension or survivor benefit shall be based on the Accrued Pension earned by the Participant at the earlier of his termination of employment, or December 30, 1995, determined by using the UP-1984 mortality table (reflecting a one-year setback for Participants and a two-year setback for Beneficiaries) and a 6% interest rate. | ||
| (d) | The provisions of this Section 7.8 shall likewise apply to any Participant who terminates his employment with an Employer and all Affiliates prior to his completion of such period of Service as is required for a deferred vested pension under the Plan. In such case the terminated Participant shall be deemed to receive a lump sum distribution of the actuarial equivalent present value of his entire vested pension as of his date of termination of employment. Subject to Section 7.9 hereof, a Participant who receives a distribution (or deemed distribution) under this Section 7.8 shall lose his Credited Service (and Service, in the case of a deemed distribution) under the Plan, shall forfeit his nonvested Accrued Pension |
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| and shall no longer be considered a Participant hereunder after such date of distribution (or deemed distribution). |
| 7.9 | Repayment of Cashout on Reemployment | |
| Notwithstanding any provision of Section 7.8 to the contrary, in the event a Participant described in Section 7.8 receives a distribution described thereunder and is subsequently reemployed by an Employer as a Covered Employee, such Participant’s Credited Service and Accrued Pension earned before his termination of employment shall be reinstated for all purposes of the Plan if the Participant repays to the Plan the full amount of his distribution with interest, compounded annually from the date of distribution to December 30, 1988 at the rate of five percent (5%) per annum and from December 31, 1988 to the date of repayment at the rate determined for each Plan Year within such period under Section 411(c)(2)(C) of the Code. With respect to a former Participant who has been deemed to receive a distribution of his entire vested pension upon his termination of employment in accordance with Section 7.8(d), such individual shall be deemed to have repaid such distribution, with interest, as of his date of rehire and such Participant’s Service, Credited Service and Accrued Pension earned before his termination of employment shall be reinstated as of such date. For purposes of the foregoing, the period in which the Participant’s repayment or deemed repayment must occur shall end on the earlier of the fifth anniversary of the Participant’s reemployment or the date on which the Participant’s Period of Severance extends to five consecutive years. | ||
| 7.10 | Delay in Commencement of Pension Payments |
| (a) | Unless the Participant otherwise elects, payment of any pension under the provisions of this Article VII shall commence as of a date that is no later than 60 days after the later of the close of the Plan Year during which a Participant: (i) attains his Normal Retirement Age or, (ii) terminates his employment with an Employer and Affiliates. A Participant who has terminated employment with an Employer and Affiliates may not affirmatively elect to defer payment of any retirement or deferred vested benefit beyond the Participant’s Normal Retirement Date. Notwithstanding the foregoing and subject to Sections 7.10(b) and 11.12, the failure of a Participant, surviving Spouse or Beneficiary to properly complete and file the required application materials shall be deemed to be an election to defer commencement of payment. No payment under the Plan will be increased on account of any delay in payment due to a Participant’s or Beneficiary’s failure |
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| to properly file the required application forms or to otherwise accept such payment. No payment to an alternate payee under a qualified domestic relations order may be made before the affected Participant’s earliest retirement age under the Code. |
| (b) | Notwithstanding any inconsistent provision of the Plan and effective January 1, 2003, all distributions under the Plan shall be made in accordance with Code Section 401(a)(9), including the incidental death benefit requirement of Code Section 401(a)(9)(G), and Sections 1.401(a)(9)-1 through 1.401(a)(9)-9 of the Income Tax Regulations. Specifically, distribution of the Participant’s interest shall: |
| (i) | be completed no later than the Required Beginning Date; or | ||
| (ii) | commence not later than the Required Beginning Date with distribution to the Participant made over the life of the Participant or joint lives of the Participant and a designated Beneficiary or a period not longer than the life of the Participant or joint lives of the Participant and a designated Beneficiary. |
| For purposes of this Section 7.10, Required Beginning Date shall mean April 1 of the calendar year following the later of the calendar year in which the Participant attains age 701/2 or the calendar year in which the Participant terminates employment or retires; provided, however, if the Participant is a five-percent owner (as defined in Section 416 of the Code), the Required Beginning Date shall be April 1 of the calendar year following the calendar year in which the Participant attains age 701/2, regardless of the date that the five-percent owner terminates employment or retires. In the case of a Participant who terminates employment or retires in a calendar year after the calendar year in which he attains age 701/2 and who has not commenced payments as of the first day of such later calendar year, the Plan benefit accrued by the Participant shall be actuarially increased, to the extent required by regulations, to take into account the period (commencing on the April 1st of the calendar year following the calendar year in which the Participant attains age 701/2 and ending on the date payment commences) during which the Participant did not receive any benefits under the Plan; provided, however, that such actuarial increase, to the extent permitted by regulations, shall reduce the benefit accrual otherwise occurring during such period. |
| (c) | In the event that a Participant dies prior to the date that distribution commences: |
35
| (i) | any portion of the Participant’s interest that is not payable to a designated Beneficiary shall be distributed not later than the end of the calendar year which includes the fifth anniversary of the date of the Participant’s death; and | ||
| (ii) | any portion of the Participant’s interest that is payable to a designated Beneficiary shall be distributed in accordance with subsection (i) above or over the life of the designated Beneficiary (or over a period not extending beyond the life expectancy of the Beneficiary), commencing not later than the end of the calendar year following the calendar year of the Participant’s death or, if the Beneficiary is the Participant’s surviving Spouse, commencing not later than the last day of the later of the calendar year in which the Participant would have attained age 701/2 or the calendar year following the calendar year which includes the date of the Participant’s death. |
| (d) | In the event that a Participant dies after distribution of his interest has begun, but prior to distribution of his entire interest, the remaining portion of such interest shall be distributed in a method that is at least a rapid as the method in effect at the date of the Participant’s death. |
| 7.11 | Direct Rollover of Eligible Rollover Distributions. |
| Notwithstanding any provision of the Plan to the contrary, a Distributee may elect, subject to provisions adopted by the Administrator which shall be consistent with income tax regulations, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover to such plan. The Administrator shall notify a Distributee of his right to elect a Direct Rollover. Such notice shall be provided to the Distributee between 30 days and 180 days prior to the Distributee’s Annuity Starting Date. A Distributee’s affirmative election to make or not make a Direct Rollover may be implemented by the Administrator less than 30 days after the Distributee receives such notice of his Direct Rollover rights, but only if the Administrator notifies the Distributee that he has the right to consider the decision of whether or not to elect a Direct Rollover for up to 30 days. For purposes of this Section: |
| (a) | The term “Distributee” shall mean an Employee or former Employee. In addition, such an individual’s surviving Spouse or such an individual’s Spouse or former Spouse who is an alternate payee within the meaning of Section 414(p)(8) of the Code are Distributees with respect to the interest of the Spouse or former Spouse. |
36
| With respect to distributions made on or after December 31, 2009, a Distributee shall also include an Employee’s or former Employee’s Beneficiary who is not the Employee’s or former Employee’s Spouse. | |||
| (b) | The term “Eligible Rollover Distribution” shall mean any distribution of all or any portion of the balance to the credit of the Distributee other than: (i) any distribution that is one of a series of substantially equal periodic payments made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and his Beneficiary, or for a specified period of ten years or more; (ii) any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and, (iii) any portion of a hardship withdrawal. In addition, a portion of a distribution shall not fail to be an Eligible Rollover Distribution merely because the portion consists of after-tax employee contributions which are not includible in gross income. However, such portion may be paid only to an individual retirement account or annuity described in Section 408(a) or (b) of the Code, respectively, or (for distributions on and after January 1, 2008) to a Roth IRA described in Section 408A of the Code, to a qualified trust defined in Section 401(a) of the Code, or to an annuity contract described in Section 403(b) of the Code provided such account, annuity, IRA, trust or annuity contract agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible. | ||
| An Eligible Rollover Distribution with respect to a Distributee who is not the Employee’s or former Employee’s Spouse must be made by a direct trustee-to-trustee transfer. | |||
| (c) | The term “Eligible Retirement Plan” shall mean an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity described in Section 403(a) of the Code, an annuity described in Section 403(b) of the Code, an eligible plan under Section 457(b) of the Code which is maintained by a state or a political subdivision of a state and which agrees to separately account for amounts transferred, a qualified trust described in Section 401(a) of the Code, and for periods on and after January 1, 2008, a Roth IRA under Section 408A of the Code, that accepts the Distributee’s Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution: (i) that includes after-tax employee contributions, an Eligible Retirement Plan is an individual retirement account or |
37
| annuity described in Section 408(a) or (b) of the Code, or a qualified defined contribution plan or annuity described in Section 401(a) or 403(a) of the Code that agrees to separately account for such Eligible Rollover Distributions, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible, (ii) that includes a Designated Roth Account, an Eligible Retirement Plan is an individual retirement plan described in Section 408A of the Code or a qualified defined contribution plan described in Section 401(a) of the Code that agrees to separately account for such Eligible Rollover Distribution, including separately accounting for the portion of such distribution which is includible in gross income and the potion of such distribution which is not so includible, and (iii) that is made on behalf of a Distributee who is not the Employee’s or former Employee’s Spouse, an Eligible Retirement Plan shall mean an individual retirement account described in Section 408(a) of the Code or an individual retirement annuity described in Section 408(b) of the Code established for the purpose of receiving a distribution on behalf of a Beneficiary, which will be treated as an inherited IRA pursuant to Section 402(c)(11) of the Code. | |||
| (d) | The term “Direct Rollover” shall mean a payment by the Plan to the Eligible Retirement Plan specified by the Distributee. |
| 7.12 | Change to Pension Payments in Connection with Qualifying Event. |
| (a) | In the event an Eligible Retiree (as hereinafter defined) experiences a Qualifying Event (as hereinafter defined), the provisions of this Section 7.12 shall apply, provided that the Eligible Retiree furnishes the Administrator with reasonable notice of the Qualifying Event within 120 days of the Qualifying Event and provides such further information applicable hereunder as the Administrator may reasonably require. For purposes of this Section: |
| (i) | “Eligible Retiree” shall mean a Participant who has retired under the normal retirement provisions of Section 5.1 or the early retirement provisions of Section 5.2 and who, as of his Annuity Starting Date, was either: |
| (A) | legally married and commencing receipt of his retirement income in the form of an Automatic Surviving Spouse’s Pension (as defined in Section 7.5), under the 100% Joint and Survivor Option (with |
38
| his Spouse as Beneficiary thereunder) or under the Joint and Survivor Pop-Up Option; or | |||
| (B) | unmarried and commencing receipt of his retirement income in the normal form of benefit provided under Section 7.1 (a life annuity). |
| (ii) | “Qualifying Event” shall mean an event described in (A), (B) or (C) below: |
| (A) | The Spouse of an Eligible Retiree who is receiving retirement income under the Joint and Survivor Pop-Up Option under Section 7.7(e) predeceases the Eligible Retiree and such Spouse’s death occurs within 60 months of the Eligible Retiree’s Annuity Starting Date; | ||
| (B) | The marital status of an Eligible Retiree who is receiving retirement income under any of the forms of payment described in subparagraph (a)(i)(A) of this Section 7.12 changes within 120 months of his Annuity Starting Date due to the Eligible Retiree’s divorce, marital dissolution, or legal separation; or | ||
| (C) | The marital status of an Eligible Retiree who is described under subparagraph (a)(i)(B) of this Section 7.12 changes and within 120 months of his Annuity Starting Date due to the Eligible Retiree’s marriage. |
| (iii) | “Qualifying Event Election Period” shall mean the 90-day period beginning on the date on which the Eligible Retiree timely notifies the Administrator of a Qualifying Event, as provided in Section 7.12(a) above. | ||
| (iv) | The determination of an Eligible Retiree’s marital status and the determination of whether a divorce, marital dissolution or legal separation has occurred shall be made on the basis of the laws of the Commonwealth of Pennsylvania unless preempted by federal law. |
| (b) | In the event of the occurrence of a Qualifying Event described in subparagraphs (a)(ii)(A) or (a)(ii)(B) of this Section 7.12, and contingent upon the Eligible Retiree’s timely notification to the Administrator, the retirement income payable |
39
| to the affected Eligible Retiree shall revert to the normal form of benefit provided under Section 7.1 (a life annuity) as of the first day of the month following the expiration of the Qualifying Event Election Period; provided, however, that: |
| (i) | The amount of such monthly life annuity shall be the actuarial equivalent of the Eligible Retiree’s benefit, determined as of the time of calculation hereunder, under the form of payment in effect as of his Annuity Starting Date; provided, however, that such monthly amount shall not exceed the amount of the monthly life annuity which the Eligible Retiree was entitled to as of his Annuity Starting Date; and | ||
| (ii) | In the case of a Qualifying Event described in subparagraph (a)(ii)(B) of this Section 7.12, the Spouse or ex-Spouse of the Eligible Retiree, as part of the division of marital property (or other determination which is not subject to modification under state law), expressly waives all interest in the Eligible Retiree’s pension under the Plan and such waiver is incorporated into a document which satisfies the formal requirements of a “Qualified Domestic Relations Order” as defined in Section 414(p) of the Code; and | ||
| (iii) | In the case of a Qualifying Event described in subparagraph (a)(ii)(B) of this Section 7.12, the Spouse or ex-Spouse of the Eligible Retiree shall secure such proof of insurability as the Administrator may require, in its discretion. |
| (c) | In the case of any Qualifying Event described in subparagraph (a)(ii)(C) of this Section 7.12 and contingent upon the Eligible Retiree’s timely notification to the Administrator, the affected Eligible Retiree shall be permitted to elect, within the Qualifying Event Election Period, to receive his future retirement income from the Plan in one of the forms of payment described in paragraphs (c), (d), or (e) of Section 7.7 (a 50% or 100% Joint and Survivor Option or a 50% or 100% Joint and Survivor Pop-Up Option) with his Spouse as Beneficiary thereunder; provided, however, that: |
| (i) | Payments under any elected form of payment shall commence as of the first day of the month next following the month in which the Eligible Retiree makes full and complete application to the Administrator in accordance with rules established by the Administrator (such |
40
| commencement date referred to herein as the “Adjusted Commencement Date”); and | |||
| (ii) | Payments under any elected form of payment shall be the actuarial equivalent of the Eligible Retiree’s benefit, determined as of the time of calculation hereunder, under the form of payment in effect as of his Annuity Starting Date; provided, however, that such monthly amount shall not exceed the amount of the monthly benefit under the elected form of payment which the Eligible Retiree was entitled to as of his Annuity Starting Date; and | ||
| (iii) | The Eligible Retiree shall secure such proof of insurability of the Eligible Retiree and/or the Eligible Retiree’s Spouse as the Administrator may require, in its discretion; and | ||
| (iv) | The provisions of Sections 7.5 and 7.6 hereof shall apply with respect to any Eligible Retiree who is married as of the Adjusted Commencement Date and, for purposes of such Sections and Section 7.7, the Adjusted Commencement Date shall be deemed the Annuity Starting Date for the elected form of payment described in this Section 7.12(c); and | ||
| (v) | In no event shall more than one election be made under this Section 7.12(c) by an Eligible Retiree with respect to any single Qualifying Event nor shall this Section 7.12 be applicable more than twice with respect to any Eligible Retiree, Section 7.12(c), irrespective of the number of Qualifying Events affecting such Eligible Retiree; and | ||
| (vi) | A Participant’s status as an Eligible Retiree must be independently satisfied with respect to each Qualifying Event (substituting, where applicable, the Adjusted Commencement Date for the Annuity Starting Date under Section 7.12(a)(i)). |
41
ARTICLE VIII — DEATH BENEFITS
| 8.1 | Death Prior to Retirement or Severance | |
| Upon the death of a Participant prior to his Date of Severance, his surviving Spouse, if any, shall receive a monthly surviving Spouse’s benefit under the assumption that the Participant had retired the day prior to his death with an Accrued Pension under the Plan as determined in accordance with the provisions of Section 6.2(a), and under the further assumption that the automatic election of a surviving Spouse’s benefit pursuant to subsection 7.5 was in effect at the time of death. Such surviving Spouse benefit shall commence as of the first day of the month following the Participant’s death, shall be unreduced for early commencement and shall be payable for the lifetime of the surviving Spouse. | ||
| For purposes of Sections 8.1, 8.2 and 8.3, the interest that is payable to the Participant’s surviving Spouse shall be distributed over a period not in excess of the life expectancy of such surviving Spouse and shall commence no later than the December 31 of the calendar year in which the Participant would have attained age 65 (or the December 31 of the calendar year immediately following the calendar year of the Participant’s death, if later). | ||
| 8.2 | Death Prior to Commencement of Early or Disability Pensions | |
| Upon the death of a Participant after his Date of Severance, and prior to his Annuity Starting Date and while the Participant is awaiting the commencement of payment of either: (1) an early retirement pension pursuant to Section 6.2(a) above, or (2) a disability pension after attainment of age 55 but prior to the attainment of his Normal Retirement Date, his surviving Spouse, if any, shall receive a monthly surviving Spouse’s benefit under the assumption that the Participant had retired the day prior to his death with an Accrued Pension under the Plan as determined in accordance with the provisions of Section 6.2(a), and under the further assumption that the automatic election of a surviving Spouse’s benefit pursuant to subsection 7.5 was in effect at the time of death. Following proper application, such surviving Spouse’s benefit shall commence as of the first day of the month following the Participant’s death unless the surviving Spouse elects a later commencement date. Subject to Sections 7.10(c) and 11.12, a surviving Spouse who fails to make proper application for payment will be deemed to have made an election to defer distribution. Such surviving Spouse’s benefit |
42
| shall be reduced for early commencement in accordance with the provisions of Section 6.2(b) and shall be payable for the lifetime of the surviving Spouse. | ||
| Upon the death of a disabled Participant who is awaiting commencement of his pension at his Normal Retirement Date and who has not incurred his Date of Severance at the time of his death, his surviving Spouse, if any, shall receive a monthly surviving Spouse’s benefit determined under the provisions of Section 8.1. | ||
| If a Participant incurs his Date of Severance when eligible for a disability retirement pension under Section 5.3 and at a time during which he is receiving long term disability benefits under the Erie Insurance Group Long Term Disability Income Benefits Program, then service to date of death will be included for benefit purposes. | ||
| 8.3 | Death Prior to Commencement of Vested Pensions | |
| If a vested former Participant who has at least one Hour of Service on or after December 31, 1976, and who has been married for at least one year on his date of death, dies on or after August 23, 1984 but prior to his Annuity Starting Date, then his surviving Spouse shall be provided with a preretirement survivor annuity determined as follows: |
| (a) | in the case of a Participant who dies after the date on which the Participant attained his Earliest Retirement Age as though such Participant had retired on the day before the Participant’s date of death, with an immediate benefit determined under the provisions of Section 6.2(a) and payable under the Automatic Surviving Spouse’s Pension in Section 7.5 of the Plan, or | ||
| (b) | in the case of a Participant who dies on or before the date on which the Participant would have attained his Earliest Retirement Age, as though such Participant had: |
| (i) | separated from Service on his Date of Severance, | ||
| (ii) | survived to his Earliest Retirement Age, | ||
| (iii) | retired with an immediate benefit determined under the provisions of Section 6.4 and payable under the Automatic Surviving Spouse’s Option in Section 7.5 of the Plan at the Earliest Retirement Age, and | ||
| (iv) | died on the day after the day on which such Participant would have attained the Earliest Retirement Age. |
| Following proper application, a monthly surviving Spouse’s benefit shall commence under this Section 8.3 as of the first day of the month following the later of the month of |
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| the Participant’s death or the month in which the Participant would have attained his Earliest Retirement Age under the Plan unless the surviving Spouse elects a later commencement date (which shall not be later than the Participant’s Normal Retirement Date. Subject to Section 7.10(a) and 11.12, a surviving Spouse who fails to make proper application for payment will be deemed to have made an election to defer distribution. Such surviving Spouse’s benefit shall be reduced for early commencement in accordance with Section 6.2(b) and shall be payable thereafter for the remainder of the surviving Spouse’s lifetime. | ||
| 8.4 | Effect of Valid Joint and Survivor Election | |
| Notwithstanding the foregoing, in the event a Participant described in Section 8.1, 8.2 or 8.3 above has made a valid election of either Option D or Option E under Section 7.7 and names his Spouse as Beneficiary thereunder, or a valid election of a 100% Joint and Survivor Pop-Up Option under Section 7.7, the amount of the surviving Spouse’s benefit under Section 8.1, 8.2 or 8.3 shall be based on the survivor percentage applicable to the Participant’s elected option. | ||
| 8.5 | Death on or After Annuity Starting Date | |
| Upon the death of a Participant on or after his Annuity Starting Date, payments, if any, to a Beneficiary shall be made in accordance with the form of benefit in effect on the date of the Participant’s death. If the Beneficiary of the deceased Participant is entitled to receive the remaining certain period payments from the 10-Year or 15-Year Certain and Life forms of payment, the Administrator shall instruct the Trustee to pay to such Beneficiary the actuarial equivalent value of the monthly payments to which the Beneficiary is entitled in a single sum. Actuarial equivalence for this purpose shall be determined under the assumptions set forth in Section 7.8. If the Beneficiary under such form of payment is the surviving Spouse of the deceased Participant, then any amounts payable may be converted to an actuarially equivalent life annuity to such Spouse provided the Spouse requests payment in such form. Notwithstanding the foregoing, in all events the deceased Participant’s remaining interest in the Plan shall be distributed at least as rapidly as under the form of distribution in operation as of the date of the Participant’s death. |
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| 8.6 | Death Benefit for Vested Participants Who Terminated After September 1, 1974 and Prior to August 23, 1984 | |
| Any vested former Participant who terminated after September 1, 1974 and prior to August 23, 1984 and whose benefits are not in pay status as of August 23, 1984 is to be provided with the right to elect to receive such benefits reduced and payable in the form of a qualified 50% joint and survivor annuity as defined by ERISA and the Internal Revenue Code as in effect prior to August 23, 1984, including the right to revoke such coverage without spousal consent if such former Participant: |
| (a) | completed at least one Hour of Service under the Plan after September 1, 1974, and | ||
| (b) | survives to his Annuity Starting Date. |
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ARTICLE IX — TRUST FUND AND THE TRUSTEE
| 9.1 | Trust Fund |
| (a) | The Company has executed a Trust Agreement with a Trustee under the terms of which a Trust Fund will be established for the purpose of receiving and holding contributions made by the Company as well as interest and other income on investments of such funds, and for the purpose of paying the pensions and other benefits provided by the Plan and paying any expenses incident to the operation of the Plan or Trust Fund as otherwise provided herein. The Trustee is to manage and operate the Trust Fund and to receive, hold, invest and reinvest the funds of the Trust. | ||
| (b) | The Company may modify the Trust Agreement as provided therein to accomplish the purpose of the Plan. The Administrator may remove any Trustee and may select any successor trustee. Pensions under the Plan may alternatively be provided through the purchase of annuity contracts issued by an insurance company. In lieu of a Trust Agreement and Trust Fund, the Company may utilize a contract or contracts of insurance for the purpose of receiving and holding contributions made by the Company and for the purpose of paying pensions and other benefits provided by the Plan, and in such event the references hereunder to “Trust Agreement”, “Trustee” and “Trust Fund” shall be deemed to be references to “Insurance Contract”, “Insurance Carrier” and “Insured Fund” respectively. | ||
| (c) | The Administrator may select an independent investment manager to invest any portion of the Trust Fund in each of the various funds. Such investment manager shall be either registered as an investment manager under the Investment Adviser’s Act of 1940, a bank, a mutual fund, or an insurance company, and as required by the Administrator, shall acknowledge in writing that he is a fiduciary with respect to the Plan. | ||
| (d) | The Administrator shall perform such duties relating to the operation of the Trust Fund as it deems appropriate and shall perform the duties specified in this Section 9.1. | ||
| The Administrator shall have the following responsibilities: |
| (i) | to appoint and remove Trustees; | ||
| (ii) | to appoint investment managers; | ||
| (iii) | to select investment funds or other investments under the Plan; | ||
| (iv) | to allocate the duties and procedures for the Trustee and investment managers; |
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| (v) | to establish an investment philosophy and goals for each of the investment managers; | ||
| (vi) | to monitor the Trustee with respect to servicing the Trust Fund in a fiduciary capacity; and | ||
| (vii) | to monitor the investment managers including, without limitation, their investment philosophies, goals, and rates of return. |
| The Administrator may, from time-to-time, designate another person to carry out any of the Administrator’s responsibilities under this Section 9.1. The person so designated will have full authority, or such limited authority as the Administrator may specify, to take such actions as are necessary or appropriate to carry out the duties delegated by the Administrator. |
| 9.2 | Irrevocability | |
| The Trust Fund shall be used to pay pensions and other benefits as provided in the Plan and, as provided in Section 9.6, those reasonable expenses, taxes and fees incurred in the administration of the Plan and Trust Fund which are not paid directly by the Company. No part of the principal or income of the fund shall be used for or diverted to purposes other than those provided in the Plan and no part of the Trust Fund shall revert to the Company for the benefit of the Company, except as permitted under Sections 9.3, 11.4 and 12.2 hereof. | ||
| 9.3 | Contributions by the Company | |
| The Company will pay to the Trustee, subject to all the other provisions of the Plan, such amounts as its Board determines, authorizes and directs; provided that as a minimum contribution, the Company intends to pay to the Trustee such amounts as may be necessary to meet the minimum funding standards established under the Employee Retirement Income Security Act of 1974. The Company also intends to pay all expenses incident to the operation of the Plan that are not paid directly from the Trust Fund. Any forfeitures arising from the severance of employment or death of a Participant, or for any other reason, shall be used to reduce the contributions of the Company under the Plan and shall not be applied to increase the pensions or benefits any Participant would otherwise receive under the Plan at any time prior to the termination of the Plan. | ||
| Payments made to meet the minimum funding standards established under ERISA shall, to the maximum extent permitted by valid provisions of ERISA, be in complete |
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| discharge of the financial obligation of the Company under this Plan. The pension benefits of the Plan shall, subject to valid provisions of ERISA, be only such as can be provided by the assets of the Trust and there shall be no further liability or obligation on any Employer to make any further contributions to the Trust for any reason. Except as prescribed by valid provisions of ERISA, the Company does not guarantee continuity of payment of any benefits under the Plan. The Company does not, in any event, guarantee that its contributions or the Trust Fund will be sufficient to provide the benefits hereunder. All rights of Participants and Beneficiaries, and of any person claiming under any Participant or Beneficiary, shall be enforceable only against the Trust Fund, except as ERISA may otherwise provide. | ||
| Notwithstanding any provisions of the Plan to the contrary, each contribution made by the Company shall be conditioned upon the deductibility of the contribution under Section 404 of the Code. If the deduction of all or part of the contribution is disallowed, the contribution shall, to the extent disallowed, be repaid to the Company within one year after the date of disallowance. A contribution also may be repaid to the Company, within one year after the date made, to the extent it exceeded the full funding limitation or otherwise was made in error because of a mistake in fact. Amounts returned under this Section 9.3 shall recognize any net losses attributable to the returned contribution but shall not include any net earnings thereon. | ||
| 9.4 | Contributions By Participants | |
| No Participant shall be required or allowed to make any contribution to the Trust Fund established under the Plan. | ||
| 9.5 | Benefits Payable Only From Trust Fund | |
| Payment of benefits under the Plan to Participants and Beneficiaries will be made only by the Trustee from the funds or securities held by the Trust and/or the annuity contract or contracts held by the Trust. Except as may be provided by law, no liability for the payment of benefits to Participants or their Beneficiaries hereunder shall be imposed upon the Company, any Employer or the officers or shareholders of the Company or any Employer, and there shall be no liability or obligation on the part of the Company or any Employer, to make any further contributions in the event of termination of the Plan. |
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| 9.6 | Plan Expenses | |
| All reasonable expenses, taxes and fees of the Plan, the Administrator and the Trustee incurred in the administration of the Plan and Trust Fund shall be paid from the Trust Fund; provided, however, that the obligation of the Trust Fund to pay such expenses, taxes and fees shall cease to exist to the extent that the same are paid, at the discretion of the Company, by the Employers. |
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ARTICLE X — BENEFIT LIMITATIONS
| 10.1 | Maximum Limitation Under Section 415(b) of the Code (Effective January 1, 2008) This Section 10.1 is intended to comply with Section 415(b) of the Code, the terms of which are incorporated herein by reference and this Section shall be so construed. Any provisions of the Plan to the contrary notwithstanding, benefits accrued and benefits payable under the Plan shall be subject to the following limitations, effective for limitation years on or after July 1, 2007: |
| (a) | In no event shall the annual benefit accrued, distributed or otherwise payable to any Participant exceed the Section 415 limit described in subsection (b). To the extent necessary to comply with Section 411(b) of the Code, if the benefit the Participant would otherwise accrue in a limitation year would produce an annual benefit in excess of the Section 415 limit described in subsection (b), the benefit will be limited (or the rate of accrual reduced) to a benefit that does not exceed such limit. |
| (b) | The Section 415 limit is the lesser of (i) and (ii) below: |
| (i) | The dollar limitation set forth in Section 415(b)(1)(A) of the Code, or | ||
| (ii) | 100% of the Participant’s average annual Test Compenstion for the three consecutive calendar years (or, if his period of employment is less than three years, for his entire period of employment) as a Participant during which he received the greatest aggregate Test Compensation. |
| (c) | In no event shall the limitations in subsection (b) be less than $10,000 if the Participant has not at any time participated in a defined contribution plan maintained by the Employer. | ||
| (d) | For purposes of the maximum limitation of this Article, all qualified defined benefit plans (whether or not terminated) maintained by an Employer or any Affiliate shall be treated as a single plan. For purposes of applying the limitations of Section 415, the terms “Employer” and “Affiliate” shall be construed in light of Sections 414(b) and 414(c) of the Code, as modified by Section 415(h) of the Code. | ||
| (e) | The dollar limitation described in paragraph (b)(i) above shall be increased by the cost of living adjustment factor prescribed by the Secretary of the Treasury under Section 415(d) of the Code. Such adjustment factor shall be applied to Participants and to such items as the Secretary of the Treasury shall prescribe. | ||
| (f) | If the benefit payable to a Participant commences prior to age 62, the dollar limitation specified under paragraph (b)(i) above as adjusted by subsection (e) |
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| shall be the lesser of: (A) the dollar limitation specified under paragraph (b)(i) above as adjusted by subsection (e) multiplied by the ratio of the annual amount of the straight life annuity commencing at his Annuity Starting Date, over the annual amount of the straight life annuity commencing at age 62 (both determined without regard to the limitations of Section 415 of the Code), or (B) such limit, after the application of an actuarially equivalent reduction from age 62 to his age as of his Annuity Starting Date, using a 5% interest rate assumption and the applicable mortality table under Section 417(e)(3)(B) of the Code. No adjustment shall be made to reflect the probability of a Participant’s death after the Annuity Starting Date and before age 62. |
| (g) | If the benefit payable to a Participant commences after age 65, the dollar limitation specified under paragraph (b)(i) above as adjusted by subsection (e) shall be the lesser of : (A) the dollar limitation specified under paragraph (b)(i) above as adjusted by subsection (e) multiplied by the ratio of the annual amount of the immediately commencing straight life annuity payable to the Participant (ignoring accruals after age 65) using the actuarial adjustments in Section 11.6 over the annual amount of the straight life annuity that would have been payable at age 65, or (B) the dollar limitation specified under paragraph (b)(i) above as adjusted by subsection (e) actuarially increased using a 5% interest rate assumption and the applicable mortality table under Section 417(e)(3)(B) of the Code. The probability of the Participant dying after age 65 and before the age at which the payment of benefits would commence shall not be taken into account in increasing the dollar limitation under this subsection (g). | ||
| (h) | The annual benefit is a retirement benefit under the Plan which is payable annually in the form of a single life annuity. |
| (i) | If the benefit payable to a Participant is not in the normal form of payment nor in the form of a qualified joint and survivor annuity, and it is not payable in a form to which Section 417(e)(3) of the Code applies, then the maximum annual amount determined under subsection (b) above shall be adjusted such that it is the greater of: |
| (A) | the actuarially equivalent straight life annuity commencing at the same Annuity Starting Date as the form of benefit payable to the Participant using the Plan’s factors for determining actuarial equivalence, and | ||
| (B) | the actuarially equivalent straight life annuity commencing at the same Annuity Starting Date as the form of benefit payable to the Participant using an interest rate of 5% and the applicable mortality table under Section 417(e)(3)(B) of the Code. |
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| (ii) | If the benefit is payable in a form to which Code Section 417(e)(3) applies, the actuarially equivalent straight life annuity benefit shall be the greatest of: |
| (A) | the annual amount of the straight life annuity commencing at the Annuity Starting Date that has the same actuarial present value as the particular form of benefit payable, computed using the Plan’s factors for determining actuarial equivalence; | ||
| (B) | the annual amount of the straight life annuity commencing at the Annuity Starting Date that has the same actuarial present value as the particular form of benefit payable, computed using a 5.5% interest assumption and the applicable mortality table under Section 417(e)(3)(B) of the Code; or | ||
| (C) | the annual amount of the straight life annuity commencing at the Annuity Starting Date that has the same actuarial present value as the particular form of benefit payable, computed using the applicable interest rate under Section 417(e)(3)(C) of the Code and the applicable mortality table specified in Revenue Ruling 2001-62, divided by 1.05. |
| (iii) | Notwithstanding the foregoing, for a benefit that has an Annuity Starting Date in 2004 or 2005, the actuarially equivalent straight life annuity benefit shall be the greater of: |
| (A) | the annual amount of the straight life annuity commencing at the Annuity Starting Date that has the same actuarial present value as the particular form of benefit payable, computed using the Plan’s actuarial equivalence factors; or | ||
| (B) | the annual amount of the straight life annuity commencing at the Annuity Starting Date that has the same actuarial present value as the particular form of benefit payable, computed using a 5.5% interest assumption and the applicable mortality table for the distribution under Treasury Regulation Section 1.417(e)-1(d)(2). Benefits with an Annuity Starting Date in 2004 shall be calculated in accordance with the requirements of Notice 2004-78, the terms of which are hereby incorporated by reference. |
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| (i) | If the Participant has completed less than 10 years of Plan participation, the dollar limitation determined under paragraph (b)(i) above shall be adjusted by multiplying such amount by a fraction, the numerator of which is the Participant’s number of years of Plan participation (or parts thereof) and the denominator of which is 10. |
| (j) | If the Participant has completed less than 10 years of Credited Service, the maximum amount determined under paragraph (b)(ii) and subsection (c) (without regard to paragraph (b)(i) above) shall be adjusted by multiplying such amount by a fraction, the numerator of which is the Participant’s number of years of Credited Service (or parts thereof) and the denominator of which is 10. | ||
| (k) | In no event shall the provisions of subsection (i) or subsection (j) above reduce the limitations in subsection (b) to an amount less than one tenth of such limitations, determined without regard to the provisions of subsection (i) and (j). | ||
| (l) | For purposes of applying the benefit limitations set forth herein, the “limitation year” shall be the calendar year. |
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ARTICLE XI — MISCELLANEOUS PROVISIONS
| 11.1 | Plan Non-Contractual | |
| No Participant or Beneficiary shall have any right or interest under the Plan unless and until he becomes entitled thereto as provided in the Plan. The adoption and maintenance of the Plan shall not be deemed to constitute a contract between an Employer and any Employee. Inclusion in the Plan will not affect an Employer’s right to discharge or otherwise discipline Employees and membership in the Plan will not give any Employee the right to be retained in the service of an Employer nor any right or claim to a pension or other benefit unless such right is specifically granted under the terms of the Plan. |
| 11.2 | Non-Alienation of Retirement Rights or Benefits |
| (a) | Except as provided in Section 11.2(b) or 11.2(c), no benefit payable under the Plan shall be subject in any manner to anticipation, sale, transfer, assignment, pledge, encumbrance, security interest or charge, and any action by way of anticipating, alienating, selling, transferring, assigning, pledging, encumbering, charging or granting a security interest in the same shall be void and of no effect; nor shall any such benefit be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the person entitled to such benefit. |
| (b) | Section 11.2(a) shall not apply to the creation, assignment, or recognition of a right to any benefit payable pursuant to a qualified domestic relations order as defined in Section 414(p) of the Code. The Administrator shall establish reasonable procedures to determine the status of domestic relations orders and to administer distributions under such orders which are deemed to be qualified domestic relations orders. Such procedures shall be in writing shall comply with the provisions of Section 414(p) of the Code and shall be incorporated into this plan document. To the extent that, because of a qualified domestic relations order, more than one individual is to be treated as a surviving Spouse, the total amount payable from the Plan as a result of the death of a Participant shall not exceed the amount that would be payable from the Plan if there were only one surviving Spouse. | ||
| (c) | Notwithstanding the provisions of Section 11.2(a), the Plan may offset any portion of the Accrued Pension of a Participant or the Participant’s Beneficiary against a claim of the Plan arising: |
54
| (i) | as a result of the Participant’s or Beneficiary’s conviction of a crime involving the Plan; or | ||
| (ii) | with regard to the Participant’s or Beneficiary’s violation of ERISA’s fiduciary provisions upon: |
| (A) | the entry of any civil judgment, consent order, or decree against the Participant or Beneficiary; or | ||
| (B) | the execution of any settlement agreement between the Participant or Beneficiary and the Department of Labor or Pension Benefit Guaranty Corporation. |
| 11.3 | Payment of Pension to Others | |
| In the event that the Administrator shall find that any Participant or Beneficiary to whom a pension is payable, is unable to care for his affairs because of illness, accident or incapacity, any payment due (unless prior claim therefor shall have been made by a duly qualified guardian or other legal representative) may, in the discretion of the Administrator, be paid to the Spouse, parent, child, brother or sister of such Participant or Beneficiary or to any other person deemed by the Administrator to be maintaining or responsible for the maintenance of such Participant or Beneficiary. Any such payment shall be a payment for the account of the Participant or Beneficiary and shall be a complete discharge of any liability of the Plan and any Employer therefor. |
| 11.4 | Prohibition Against Reversion | |
| Except as provided in Section 9.2 hereof, in no event shall any funds held in the Trust Fund revert to the Company or be diverted to purposes other than the exclusive benefit of Participants or their Beneficiaries prior to the satisfaction of all liabilities under the Plan; provided, however, that in the event the Plan is terminated, if, after all plan liabilities are satisfied, there remains a balance in the Fund as a result of actuarial error, such balance shall be returned to the Company. |
| 11.5 | Merger, Transfer of Assets or Liabilities | |
| The Company may merge or consolidate the Plan with, transfer assets and liabilities of the Plan to, or receive a transfer of assets and liabilities from, any other plan without the consent of any other Employer or other person, if such transfer is effected in accordance with applicable law and if such other plan meets the requirements of Code Sections 401(a) and 501(a), permits such transfer or the receipt of such transfer and, with respect to liabilities to be transferred from this Plan to such other plan, satisfies the |
55
| requirements of Code Sections 411(d)(6) and 417. This Plan may not be merged or consolidated with any other plan, nor may any assets or liabilities of this Plan be transferred to any other plan, unless the terms of the merger, consolidation or transfer are such that each Participant in the Plan would, if the Plan were terminated immediately after such merger, consolidation or transfer, receive a pension having a value equal to or greater than the pension he would have been entitled to receive if this Plan had terminated immediately prior to the merger, consolidation or transfer. |
| 11.6 | Actuarial Equivalence | |
| Any determination of actuarial equivalence required by the provisions of this Plan, when not otherwise specified in the Plan, shall be made on the basis of the mortality table referenced in IRS Revenue Ruling 2001-62, (GAR ’94) with an annual interest rate of 6%. |
| 11.7 | Change of Vesting Schedule | |
| If the Plan’s vesting schedule is amended or if the Plan is deemed amended by an automatic change to or from a Top-Heavy Plan vesting schedule (Section 13.3), each Participant with at least three years of Service with an Employer may elect, within a reasonable period after the adoption of the amendment or change, to have his nonforfeitable pension computed under the Plan without regard to such amendment or change. | ||
| The period during which the election may be made shall commence at the date the amendment is adopted or deemed to be made and shall end on the latest of: |
| (a) | 60 days after the amendment is adopted; | ||
| (b) | 60 days after the amendment becomes effective; or |
| (c) | 60 days after the Participant is issued written notice of the amendment by the Administrator. |
| Notwithstanding the foregoing provisions of this Section 11.7, the vested interest of any Participant on the date such amendment is effective shall not be less than his vested interest under the Plan as in effect immediately prior to the effective date of such change. |
| 11.8 | Controlled Group | |
| For purposes only of determining eligibility to participate in the Plan and eligibility for any pension (but not the amount thereof) under the Plan, all employment with an |
56
| Employer or an Affiliate shall be deemed to be employment with an Employer in computing Hours of Service and Service. | ||
| 11.9 | Severability | |
| If any provision of this Plan is held to be invalid or unenforceable, such determination shall not affect the other provisions of this Plan. In such event, this Plan shall be construed and enforced as if such provision had not been included herein. | ||
| 11.10 | Employer Records | |
| The records of a Participant’s Employer shall be presumed to be conclusive of the facts concerning his employment or non-employment, Service, Credited Service and Compensation unless shown beyond a reasonable doubt to be incorrect. | ||
| 11.11 | Application of Plan Provisions | |
| This Plan shall be binding on all Participants and their Spouses and Beneficiaries and upon heirs, executors, administrators, successors, and assigns of all persons having an interest herein. The provisions of the Plan in no event shall be considered as giving any such person any legal or equitable right against the Company, an Employer or an Affiliate, any of its officers, employees, directors, or shareholders, or against the Trustee, except such rights as are specifically provided for in the Plan or hereafter created in accordance with the terms of the Plan. | ||
| 11.12 | Missing Participants and Beneficiaries. | |
| Notwithstanding Section 7.10, if a Participant who has left employment with the Company and Affiliates (or a surviving Spouse or Beneficiary who is eligible for a death benefit or survivor benefit) has failed to file an application for benefits within 120 days after attainment of the Participant’s Normal Retirement Date, the Administrator shall treat the Participant’s retirement benefit and vested Accrued Pension (or the surviving Spouse’s or Beneficiary’s death benefit or survivor benefit) as forfeited; provided, however, that such retirement benefit, Accrued Pension, death benefit or survivor benefit shall be reinstated retroactive to the commencement date set forth below upon the subsequent filing of a completed application with the Administrator and shall commence within ninety (90) days after such application is filed. For purposes of this Section 11.12, the commencement date shall be the later of: |
| (a) | the Participant’s Normal Retirement Date; and |
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| (b) | the date on which the Participant terminated employment with the Employer and Affiliates. |
| No payment under the Plan will be increased on account of any delay in payment due to a Participant’s, surviving Spouse’s or Beneficiary’s failure to properly file the required application forms furnished by the Administrator or to otherwise accept such payments. |
| 11.13 | IRC 414(u) Compliance Provision |
| Notwithstanding any provision of the Plan to the contrary, contributions, benefits and service credit with respect to qualified military service shall be provided in accordance with Section 414(u) of the Code. |
| (a) | As provided by Section 414(u) of the Code, “qualified military service” means service in the uniformed services (as defined in Chapter 54 of Title 38, United Stated Code) by an individual if the individual is qualified under such chapter to reemployment rights with the Company or an Affiliate following such military service. |
| (b) | “USERRA” means the Uniformed Services Employment and Reemployment Rights Act of 1994 as amended. | ||
| (c) | If an individual returns to employment with the Company or an Affiliate following a period of qualified military service under circumstances such that the individual has reemployment rights under USERRA, and the individual reports for said reemployment within the time frame required by USERRA, the following provisions shall apply: |
| (i) | The qualified military service shall be recognized as Credited Service and Service to the same extent as it would have been if the individual had remained continuously employed with the Company or an Affiliate rather than leaving active employment to go into qualified military service. | ||
| (ii) | Compensation shall be determined by the Company consistent with the requirements of USERRA, and shall reflect the Company’s best estimate of the earnings the individual would have received but for the qualified military service. |
| (d) | If a Participant fails to return to employment with the Company or an Affiliate on account of the Participant’s death in qualified military service on or after January 1, 2007, the surviving Spouse of such Participant shall be eligible to receive any death benefit provided under the Plan as if the Participant had returned to employment as a Covered Employee immediately prior to his death and then terminated employment on account of his death. |
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| (e) | If a Participant fails to return to employment with the Company or an Affiliate on account of either the Participant’s incurring a disability in qualified military service or the Participant’s death in qualified military service, the Participant (or the surviving Spouse of the Participant, in the event of the Participant’s death) shall be eligible for a benefit under the Plan determined by using the Credited Service the Participant would have had hereunder had the Participant returned to employment as a Covered Employee immediately prior to his date of disability or death and then terminated employment on the date of his disability or death. | ||
| (f) | The foregoing provisions are intended to provide the benefits required by USERRA and the Heroes Earnings Assistance and Relief Tax Act of 2008, and are not intended to provide any other benefits. This section shall be construed consistently with said intent. |
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ARTICLE XII — AMENDMENT AND TERMINATION
| 12.1 | Amendment and Termination of the Plan | |
| The Company hopes and expects to continue the Plan, but expressly reserves the right at any time and from time to time, without the consent of Participants: |
| (a) | to reduce or discontinue payments to the Plan; | ||
| (b) | to terminate the Plan; | ||
| (c) | to amend the Plan, retroactively or otherwise, in such manner as it may deem necessary or advisable in order to qualify the Plan and any trust established in conjunction therewith under the provisions of Sections 401(a) and 501(a) of the Code, or any similar Code provisions from time to time in effect; | ||
| (d) | to amend the Plan in any other respect, provided, however, that no such amendment shall forfeit or diminish the interest of any Participant in the Trust Fund to the extent that such interest has become vested in such Participant, except as may be permitted under the Code or ERISA. |
| Any such amendment to or termination of this Plan shall be evidenced by a written instrument adopted by the Board; provided, however, that the Administrator may adopt such amendments as shall fall within the limited amendment authority contained in the Administrator’s charter. Any such written instrument shall recite at which time the amendments contained therein shall become effective. |
| Promptly after an amendment of this Plan shall have become effective, the Company, or Administrator, as the case may be, shall cause a copy of such amendment to be filed with the Administrator and with the Trustee. The Administrator shall take such steps as it may deem appropriate and reasonable to communicate the amendment to Participants. |
| 12.2 | Administration of the Plan in Case of Termination | |
| Upon termination of the Plan, as determined by the Pension Benefit Guaranty Corporation, the assets of the Trust Fund shall be liquidated and distributed in accordance with Section 4044 of ERISA and applicable regulations issued thereunder. In the event of the termination of the Plan or a partial termination of the Plan, the rights of all affected Participants to Accrued Pensions determined as of the date of such termination or partial termination, to the extent funded, or as further adjusted by the Pension Benefit Guaranty Corporation as of such date, shall be nonforfeitable. Notwithstanding the foregoing, upon Plan termination, the benefit of any Highly |
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| Compensated Employee shall be limited to a benefit that is nondiscriminatory under Section 401(a)(4) of the Code. |
| Upon termination of the Plan, after the satisfaction of all liabilities of the Plan to its Participants, Beneficiaries and surviving Spouses, the Company shall receive any remaining amount resulting from any variations between actual requirements and actuarially expected requirements. |
| 12.3 | Internal Revenue Service Limitations |
| (a) | Except in such cases where the circumstances described in subsection (b) apply, the annual payments under the Plan to any one (1) of the twenty-five (25) highest paid Highly Compensated Employees (and Highly Compensated former Employees), ranked by Test Compensation, shall not exceed the sum of: |
| (i) | those payments that would be made on behalf of such Employee under a single life annuity that is the Actuarial Equivalent of the sum of the Employee’s Accrued Pension and the Employee’s Other Benefits (as defined in subsection (c) below) under the Plan; and | ||
| (ii) | those payments the Employee is entitled to receive under a social security supplement. |
| (b) | The provisions of subsection (a) above shall not apply if: |
| (i) | after payment of all such benefits to an Employee described in subsection (a), the value of Plan assets equals or exceeds 110% of the value of current liabilities (as defined in Code Section 412(l)(7) under the Plan; | ||
| (ii) | the value of all such benefits to an Employee described in subsection (a) above is less than one percent of the value of current liabilities under the Plan prior to the payment of all such benefits to such Employee; or | ||
| (iii) | the value of all such benefits to an Employee described in subsection (a) does not exceed $5,000 or such other amount as may be prescribed under Section 411(a)(11)(A) of the Code as the maximum amount that may be paid out without the Participant’s consent. |
| (c) | For purposes of this Section 12.3, “Other Benefits” shall include any loan in excess of the amounts set forth in Code Section 72(p)(2)(A), any periodic income, any withdrawal values payable to a living Employee and any death benefits not provided for by insurance on the Employee’s life. “Other Benefits” for this purpose shall not include any social security supplements. |
61
ARTICLE XIII — TOP-HEAVY PROVISIONS
| 13.1 | General | |
| Notwithstanding any provision of this Plan to the contrary, the provisions of this Article XIII shall apply with respect to any Plan Year provided the Plan is a Top-Heavy Plan (as defined in Section 13.2(c) below) for such Plan Year. |
| 13.2 | Definitions Relating to Top-Heavy Provisions | |
| For purposes of this Article XIII: |
| (a) | “Key Employee” means any Employee (including any deceased Employee) who at any time during the Plan Year that includes the determination date was an officer of the Employer having annual Test Compensation greater than $130,000 (as adjusted under Section 416(i)(1) of the Code for Plan Years beginning after December 31, 2002), a five percent (5%) owner of the Employer, or a one percent (1%) owner of the Employer having annual Test Compensation of more than $150,000 (as adjusted under Section 416(i)(1) of the Code for Plan Years beginning after December 31, 2002). The determination of who is a key employee will be made in accordance with Section 416(i)(1) of the Code and the applicable regulations and other guidance of general applicability issued thereunder. | ||
| (b) | “Determination Date” means, with respect to any Plan Year, the last day of the immediately preceding Plan Year. | ||
| (c) | “Top-Heavy Plan” means a plan where, as of the Determination Date, the present value of the cumulative accrued benefits (including any part of any accrued benefit distributed in the five-year period ending on the Determination Date) under the Plan for Key Employees exceeds sixty percent (60%) of the present value of the cumulative accrued benefits (including any part of any accrued benefit distributed in the five-year period ending on the Determination Date) under the Plan for all Employees. The present values of accrued benefits and the amounts of account balances of an Employee as of the Determination Date shall be increased by the distributions made with respect to the Employee under the Plan and any plan aggregated with the Plan under Section 416(g)(2) of the Code during the one-year period ending on the Determination Date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the Plan under Section 416(g)(2)(A)(i) of the Code. In the case of a distribution made for |
62
| a reason other than severance from employment, death or disability, this provisions shall be applied by substituting “five-year period” for “one-year period”. However, the accrued benefits of any individual who has not performed services for the Employer or any Affiliate during the one-year period ending on the Determination Date shall not be taken into account. |
| (i) | If this Plan is in a Required Aggregation Group, each Plan of an Employer required to be in such group will be a Top-Heavy Plan if such group is a Top-Heavy Group. | ||
| (ii) | If this Plan is in a Permissive Aggregation Group which is not a Top-Heavy Group, no Plan of an Employer in such group will be a Top-Heavy Plan. |
| (d) | “Required Aggregation Group” means: |
| (i) | each plan of an Employer in which a Key Employee is a participant (regardless of whether the plan has terminated), and | ||
| (ii) | each other plan of an Employer which enables a plan in which a Key Employee is a participant to meet the requirements of Internal Revenue Code Sections 401(a)(4) or 410. |
| (e) | “Permissive Aggregation Group” means any plan of an Employer which is not part of the Required Aggregation Group, but is treated as if it were at the option of the Company, provided such group continues to meet the requirements of Internal Revenue Code Sections 401(a)(4) and 410. | ||
| (f) | “Top-Heavy Group” means any Required or Permissive Aggregation Group, if as of the Determination Date, the sum of the present value of cumulative accrued benefits for Key Employees under all defined benefit plans included in such Group and the aggregate of the accounts of Key Employees under all defined contribution plans included in such Group exceeds sixty percent (60%) of the similar sum determined for all Employees. |
| (g) | “Present Value of Accrued Benefits” shall be determined as of the most recent valuation date within a twelve-month period ending on the Determination Date, but for the purposes of determining whether this Plan is a Top-Heavy Plan, shall not include: |
| (i) | Any rollover contribution initiated by the Employee. | ||
| (ii) | Any accrued benefit or account attributable to an Employee who is not a Key Employee, but who was a Key Employee in any prior Plan Year. To the extent that a Key Employee is deemed to be a Key Employee if he meets the definition of Key Employee within any of the four (4) |
63
| preceding Plan Years, this provision shall apply following the end of such period of time. |
| (iii) | Any accrued benefit or account attributable to any individual who has not performed any services for an Employer at any time during the five-year period ending on the Determination Date. |
| Solely for purposes of determining if the Plan is a Top Heavy Plan as described above, the Present Value of Accrued Benefits shall be determined by using the single accrual method which is used for all plans of the Company and of any Affiliate. If no such single method exists, benefits shall be determined as if they accrued not more rapidly than the lowest accrued rate permitted under Section 411(b)(1)(C) of the Code. |
| (h) | “Valuation Date” means December 31. |
| (i) | “Non-Key Employee” means any Employee who is not a Key Employee. |
| 13.3 | Top-Heavy Plan Vesting Requirements |
| (a) | For any Plan Year in which the Plan is a Top-Heavy Plan, the following vesting schedule will apply to benefits derived from Employer contributions. The nonforfeitable interest in a Participant’s accrued benefit will be determined as follows: |
| Years of Service | Nonforfeitable Percentage of Accrued Benefit | |||
0 but less than 2 |
0 | % | ||
2 but less than 3 |
20 | % | ||
3 but less than 4 |
40 | % | ||
4 but less than 5 |
60 | % | ||
5 or more |
100 | % | ||
| This Section 13.3 does not apply to any Participant who does not have an Hour of Service after the Plan becomes a Top-Heavy Plan. |
| (b) | If the vesting schedule under the Plan shifts in or out of the above schedule due to determination of whether or not the Plan is a Top-Heavy Plan, such shift shall be an amendment to the vesting schedule and Section 11.7 shall apply. |
| 13.4 | Top-Heavy Plan Minimum Benefit Requirements |
| (a) | For any Plan Year in which the Plan is determined to be a Top-Heavy Plan, each Non-Key Employee Participant who has completed a year of service will accrue a minimum annual benefit (derived from Employer contributions and expressed |
64
| as a life annuity beginning at Normal Retirement Age and determined without regard to any Social Security contribution or benefit). |
| (b) | Such accrual of a minimum annual benefit will be the lesser of: |
| (i) | Two percent (2%) of the Participant’s highest average compensation for the five consecutive years during which the Participant had the greatest compensation from the Employer multiplied by the years of service as defined in (c) below, or |
| (ii) | Twenty percent (20%) times the Participant’s highest average compensation for the five consecutive years during which the Participant had the greatest compensation from an Employer. |
| (c) | (i) For the purpose of the accrual of minimum annual benefit, year of service shall mean a year of Credited Service as defined in Article IV, but will exclude years when the Plan was not a Top-Heavy Plan for any Plan Year ending during such year of Credited Service, as well as years of Credited Service in a Plan Year beginning before December 31, 1984. Notwithstanding the above, each Non-Key Employee Participant who has completed 1,000 Hours of Service in a year in which the Plan is a Top-Heavy Plan shall be entitled to the minimum annual benefit regardless of the level of such Non-Key Employee’s compensation. |
| (ii) | The compensation required to be taken into account for purposes of this Section 13.4 is Test Compensation; provided, however, that such compensation shall not exceed the adjusted annual limitation in effect for the given year (as set forth in Section 2.11) and compensation in years after the close of the last Plan Year in which the Plan is a Top-Heavy Plan shall be disregarded. |
| (d) | Notwithstanding any other provision of the Plan, an Employee shall be a Participant for the purposes of this Section 13.4, and a Participant shall be entitled to an accrual under this Section 13.4, even if he would not otherwise be entitled to receive an accrual or would have received a lesser accrual for the year because the Non-Key Employee Participant is not employed on a specified date. | ||
| (e) | If the annual retirement pension payable under the Plan to a Participant who has accrued a minimum annual benefit under this Article XIII commences at a date other than at Normal Retirement Age, such Participant shall receive at least an amount that is the actuarial equivalent of the minimum annual benefit commencing at Normal Retirement Age as provided under this Section 13.4 using a five percent (5%) interest rate assumption for such determination. If the |
65
| annual retirement pension payable to a Participant who has accrued a minimum annual benefit under this Article XIII is in a form other than a single life annuity, such Participant shall receive an amount that is not less than the minimum annual benefit as otherwise provided in this Section 13.4 adjusted to be the actuarial equivalent of a single life annuity commencing at the same age using the provisions of Section 11.6 of the Plan for such determination. | |||
| (f) | In the case of Employees covered under both this Plan and any other plan maintained by an Employer, this Plan will provide the top heavy minimum benefit which shall be offset by the benefit, if any, provided under such other plans. |
| 13.5 | Limited Application of this Article. | |
| The sole purpose of this Article is to comply with Section 416 of the Code and the terms of this Article shall be interpreted, applied, and if and to the extent necessary, shall be deemed modified so as to satisfy solely the minimum requirements of Section 416 of the Code and the regulations promulgated with respect thereto. |
66
ARTICLE XIV — JURISDICTION
| 14.1 | Jurisdiction | |
| The provisions of the Plan shall be construed in accordance with ERISA, the Code, and, where not superseded by ERISA, the laws of the Commonwealth of Pennsylvania. |
Executed at Erie, Pennsylvania, this 23 day of December
, 2010.
| ERIE INDEMNITY COMPANY |
||||
| By: | /s/ Terrence W. Cavanaugh | |||
| Title: | President & CEO | |||
67
Exhibit 10.125
ERIE INSURANCE GROUP
EMPLOYEE SAVINGS PLAN
As Amended and Restated
Effective as of January 1, 2010
Effective as of January 1, 2010
INTRODUCTION
The Erie Indemnity Company (the “Company”) adopted the Erie Insurance Group Employee Savings Plan
(the “Plan”) effective January 1, 1989. The Company has subsequently amended the Plan from time to
time and last amended and restated the Plan effective as of January 1, 2006.
This amendment and restatement of the Plan shall constitute an amendment, restatement and
continuation of the Plan. This amendment and restatement is generally effective as of January 1,
2010. However, certain provisions of this amendment and restatement are effective as of some other
date. The provisions of this amendment and restatement with stated effective dates prior to
January 1, 2010, shall be deemed to amend the corresponding provisions, if any, of the Plan as in
effect before this amendment and restatement and all amendments thereto as of such dates. Events
occurring before the applicable effective date of any provision of this amendment and restatement
shall be governed by the applicable provision of the Plan as in effect on the date of the event.
The purpose of the Plan is to provide a pre-tax long term savings vehicle for eligible employees
and to provide participants with an opportunity to contribute toward additional retirement security
according to the provisions of Sections 401(a), 401(k) and 402A of the Internal Revenue Code of
1986, as amended.
TABLE OF CONTENTS
| Page | ||||
INTRODUCTION ARTICLE ONE — DEFINITIONS |
||||
1.1 Administrator or Plan Administrator |
1 | |||
1.2 Affiliate |
1 | |||
1.3 Beneficiary |
1 | |||
1.4 Board |
1 | |||
1.5 Catch-Up Contribution |
1 | |||
1.6 Code |
1 | |||
1.7 Company |
1 | |||
1.8 Compensation |
1 | |||
1.9 Covered Employee |
2 | |||
1.10 Elective Deferral |
2 | |||
1.11 Eligible Applicant |
2 | |||
1.12 Employee |
2 | |||
1.13 Employer(s) |
2 | |||
1.14 Erie Indemnity Stock |
2 | |||
1.15 Erie Indemnity Stock Fund |
2 | |||
1.16 ERISA |
2 | |||
1.17 Highly Compensated |
3 | |||
1.18 Hour of Service |
3 | |||
1.29 Interactive Electronic Communication |
3 | |||
1.20 Leased Employee |
3 | |||
1.21 Normal Retirement Date |
4 | |||
1.22 Notice |
4 | |||
1.23 Participant |
4 | |||
1.24 Plan |
4 | |||
1.25 Plan Year |
4 | |||
1.26 Qualified Domestic Relations Order or QDRO |
4 | |||
1.27 Rollover Contribution |
5 | |||
1.28 Roth Catch-Up Contribution |
5 | |||
1.29 Roth Elective Deferral |
5 | |||
1.30 Roth Rollover Contribution |
5 | |||
1.31 Safe Harbor Matching Contribution |
5 | |||
1.32 Spousal Consent |
5 | |||
1.33 Spouse |
6 | |||
1.34 Tax Deferred Catch-Up Contribution |
6 | |||
1.35 Tax Deferred Contribution |
6 | |||
1.36 Test Compensation |
6 | |||
1.37 Total Account |
6 | |||
1.38 Trust Agreement |
7 | |||
1.39 Trust Fund |
7 | |||
| Page | ||||
1.40 Trustee |
8 | |||
1.41 Valuation Date |
8 | |||
1.42 Year of Eligibility Service |
8 | |||
ARTICLE TWO
— PARTICIPATION |
||||
2.1 Participation |
9 | |||
2.2 Rehired Employees |
9 | |||
2.3 Employment Transfers |
9 | |||
ARTICLE THREE — EMPLOYER CONTRIBUTIONS
|
||||
3.1 Elective Deferrals |
11 | |||
3.2 Dollar Limitation on Elective Deferrals |
11 | |||
3.3 Catch-Up Contribution |
13 | |||
3.4 Safe Harbor Matching Contributions |
13 | |||
3.5 Source of Employer Contributions |
15 | |||
3.6 Investment of Employer Contributions |
15 | |||
3.7 Recovery of Contributions |
15 | |||
3.8 Other Provisions Relating to Employer Contributions |
16 | |||
ARTICLE FOUR — ROLLOVER CONTRIBUTIONS
|
||||
4.1 Rollover Contributions |
17 | |||
4.2 Vesting of Rollover Contributions |
17 | |||
ARTICLE FIVE — PARTICIPANT ACCOUNTS AND VALUATION OF FUNDS
|
||||
5.1 Establishment of Participant Accounts |
18 | |||
5.2 Valuation Date Adjustments |
18 | |||
5.3 Investment Elections |
18 | |||
5.4 Erie Indemnity Stock Fund |
20 | |||
5.5 Temporary Suspension of Certain Administrative Activities |
22 | |||
ARTICLE SIX — VESTING & DISTRIBUTIONS
|
||||
6.1 Vesting |
23 | |||
6.2 Distributions Upon Retirement, or Other Termination of Employment |
23 | |||
6.3 Payment of Amounts Distributed |
25 | |||
6.4 Direct Rollovers |
27 | |||
ARTICLE SEVEN — WITHDRAWALS AND LOANS
|
||||
7.1 Withdrawals Generally |
29 | |||
7.2 Hardship Withdrawal |
29 | |||
7.3 Safe Harbor Distribution |
30 | |||
7.4 Hardship Withdrawal Priority |
30 | |||
7.5 Modifications to Hardship Withdrawal Standards |
31 | |||
7.6 In-Service Withdrawals for Reasons Other than Hardship |
31 | |||
7.7 Availability of Loans |
32 | |||
7.8 Terms and Conditions of Participant Loans |
33 | |||
7.9 Loan Accounts |
35 | |||
ARTICLE EIGHT — THE TRUST FUND |
||||
| Page | ||||
8.1 Trust Agreement |
36 | |||
8.2 Appointment of Independent Accountants |
36 | |||
8.3 Appointment of Investment Manager |
36 | |||
8.4 Role of Administrator in Operation of the Trust Fund |
36 | |||
8.5 Voting of Erie Indemnity Stock |
37 | |||
ARTICLE NINE — ADMINISTRATION OF THE PLAN
|
||||
9.1 The Administrator |
38 | |||
9.2 Powers of Administrator |
38 | |||
9.3 Delegation of Duties |
40 | |||
9.4 Conclusiveness of Various Documents |
40 | |||
9.5 Actions to be Uniform |
40 | |||
9.6 Liability and Indemnification |
41 | |||
ARTICLE TEN — CLAIMS PROCEDURE
|
||||
10.1 Claims Review Procedure |
42 | |||
10.2 Original Claim |
42 | |||
10.3 Review of Denied Claim |
42 | |||
10.4 Determination by the Administrator Conclusive |
43 | |||
10.5 Exhaustion of Administrative Remedies |
43 | |||
10.6 Deadline to File Civil Action |
43 | |||
ARTICLE ELEVEN — MISCELLANEOUS
|
||||
11.1 Non-Alienation of Benefits |
45 | |||
11.2 Risk to Participants and Source of Payments |
46 | |||
11.3 Expenses |
46 | |||
11.4 Rights of Participants |
46 | |||
11.5 Statement of Accounts |
46 | |||
11.6 Designation of Beneficiary |
47 | |||
11.7 Payment to Incompetents |
47 | |||
11.8 Authority to Determine Payee |
48 | |||
11.9 Severability |
48 | |||
11.10 Employer Records |
48 | |||
11.11 Limitation on Contributions |
48 | |||
11.12 IRC 414(u) Compliance Provision |
50 | |||
ARTICLE TWELVE — AMENDMENT, TERMINATION OR MERGER OF THE PLAN
|
||||
12.1 Right to Amend |
52 | |||
12.2 Right to Terminate |
52 | |||
12.3 Merger, Transfer of Assets or Liabilities |
53 | |||
ARTICLE THIRTEEN — TOP HEAVY PROVISIONS
|
||||
13.1 Top Heavy Provisions Inapplicable |
54 | |||
ARTICLE ONE
DEFINITIONS
As used in this Plan, the following terms shall have the following meanings unless a different
meaning is clearly required by the context. Any terms herein used in the masculine shall be read
and construed in the feminine where they would so apply and any terms used in the singular shall be
read and construed in the plural if so applicable.
| 1.1 | “Administrator” or “Plan Administrator” means the administrative committee described in Article Nine. |
| 1.2 | “Affiliate” means any other employer which, together with the Company, is a member of a controlled group of corporations or of a commonly controlled trade or business (as defined in Code Sections 414(b) and (c) and as modified, where appropriate, by Code Section 415(h)) or of an affiliated service group (as defined in Code Section 414(m)) or other organization described in Code Section 414(o). Each such Affiliate shall be treated as an Affiliate only during such period as it is or was an Affiliate as defined above. |
| 1.3 | “Beneficiary” means any person who, by reason of a designation made by a Participant under Plan procedures or by operation of the Plan, is or will be entitled to receive any amount or benefit hereunder upon the death of such Participant. Any attempt to designate a person as Beneficiary hereunder by means other than that permitted under the Plan shall be void and have no effect. |
| 1.4 | “Board” means the Board of Directors of the Company. |
| 1.5 | “Catch-Up Contribution” means, with respect to a given Participant, the total amount of the Participant’s Tax Deferred Catch-Up Contributions and the Participant’s Roth Catch-Up Contributions. |
| 1.6 | “Code” means the Internal Revenue Code of 1986, as amended from time to time. |
| 1.7 | “Company” means Erie Indemnity Company, a corporation organized and existing under the laws of Pennsylvania. |
| 1.8 | “Compensation” for any period means the rate of base salary or the wages paid by an Employer to an Employee during the period. For this purpose, the “rate of base salary or the wages paid” shall exclude Form W-2 income in the form of overtime compensation, bonuses, commissions, deferred compensation plan payments or severance pay under any severance benefit plan, but shall include Form W-2 income paid as a lump sum in lieu of merit increase and compensation excluded from Form W-2 income because of salary reduction agreements in connection with plans described in Sections 125, 132(f)(4) or 401(k) of the Code or resulting from deferred compensation contracts for the Plan Year in question. Compensation shall exclude any differential wage payments made on behalf of a Covered Employee who is on military leave. Effective for each Plan Year beginning on and after December 31, 1989, in no event shall the amount of Compensation taken into account under the Plan exceed the adjusted annual limitation permitted under Section 401(a)(17) of the Code for such Plan Year. Such adjusted annual |
- 1 -
| limitation shall be, for each Plan Year beginning on and after December 31, 2001, $200,000 (as adjusted for cost-of-living increases in accordance with Section 401(a)(17)(B) of the Code. However, for the sole purpose of computing Plan contributions that are based on an Employee’s percentage of Compensation election, such adjusted annual limitation may be ignored; provided, the Employee does not receive a higher allocation of any type of contribution than the Employee could have received under the Plan had the adjusted annual limitation been considered. | ||
| 1.9 | “Covered Employee” means any Employee of an Employer, excluding any such Employee whose employment is governed by the terms of a collective bargaining agreement under which retirement benefits were the subject of good faith bargaining. | |
| Notwithstanding any provision of the Plan to the contrary, any individual who an Employer determines to be a contract employee, independent contractor, leased employee (including a Leased Employee as defined hereunder), leased owner, leased manager, shared employee or person working under a similar classification shall not become a Covered Employee hereunder, regardless of whether any such individual is ultimately determined to be a common law employee, unless and until the Employer shall otherwise determine. An Employee shall be considered a Covered Employee only during such period in which the individual satisfies the requirements defined above. | ||
| 1.10 | “Elective Deferral” means, with respect to a given Participant, the total amount of the Participant’s Tax Deferred Contributions and the Participant’s Roth Elective Deferrals. |
| 1.11 | “Eligible Applicant” means a Participant who is actively employed with the Company or an Affiliate; provided, however, that for purposes of Sections 7.1 through 7.6, an Eligible Applicant shall also include a Participant who is on a disability leave of absence. |
| 1.12 | “Employee” means any common-law employee of an Employer or an Affiliate; provided, however, that for purposes of Section 1.17 “Employee” shall include any self-employed individual performing services for an Employer or Affiliate who is treated as an employee under Section 401(c)(1) of the Code. |
| 1.13 | “Employer(s)” means the Company, Erie Family Life Insurance Company, Erie Insurance Exchange, Erie Insurance Company, EI Holding Corp., EI Service Corp., Erie Insurance Company of New York, Erie Insurance Property & Casualty Company, Flagship City Insurance Company and any other Affiliate which may adopt this Plan. |
| 1.14 | “Erie Indemnity Stock” means the Class A common stock of the Company which is a qualifying employer security within the meaning of Section 407(d)(5) of ERISA. |
| 1.15 | “Erie Indemnity Stock Fund” means the investment fund described in Section 5.4. |
| 1.16 | “ERISA” means the Employee Retirement Income Security Act of 1974, as amended. |
| 1.17 | “Highly Compensated” means any Employee who is a more than five percent (5%) owner of an Employer or earned $110,000 or more in Test Compensation from the Employer in the lookback |
- 2 -
| year; provided, however, that such $110,000 figure shall be adjusted for cost of living at the same time and in the same manner as determined under Code Section 415(d). | ||
| 1.18 | “Hour of Service” shall include the following: |
| (a) | Each hour for which an Employee is directly or indirectly paid or entitled to payment from an Employer or an Affiliate as an Employee for the performance of duties during an applicable computation period (these hours must be credited to the Employee in the computation period during which the duties were performed and not when paid, if different); and | ||
| (b) | Each hour for which back pay, irrespective of mitigation of damages, has been awarded or agreed to by an Employer or an Affiliate (these hours must be credited in the computation period or periods to which the award or agreement pertains rather than that in which the payment, award or agreement was made); and | ||
| (c) | Each hour for which an Employee is directly or indirectly paid or entitled to payment from an Employer or an Affiliate for reasons, such as vacation, sickness or disability, other than for the performance of duties (these hours shall be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor regulations which are incorporated herein by reference). |
| 1.19 | “Interactive Electronic Communication” means a communication between a Participant or Beneficiary and the person or entity designated by the Administrator to perform recordkeeping and other administrative services on behalf of the Plan pursuant to a system maintained by such person or entity and communicated to each Participant and Beneficiary whereby each such individual may make elections and exercise options as described herein with respect to all or a portion of his Total Account through the use of such system and a personal identification number. If a Participant or Beneficiary (i) consents to participate in Interactive Electronic Communication procedures adopted by the Administrator and (ii) acknowledges that actions taken by him through the use of his personal identification number pursuant to the Interactive Electronic Communication procedure constitute his signature for purposes of initiating transactions such as investment option changes, and increases, decreases, and suspensions of Elective Deferrals, the Participant or Beneficiary, as the case may be, will be deemed to have given his written consent and authorization to any such action resulting from the use of the Interactive Electronic Communication system by the Participant or Beneficiary. |
| 1.20 | “Leased Employee” means any person (other than an Employee of an Employer) who pursuant to an agreement between the Employer and any other person (“leasing organization”) has performed services for the Employer (or for the Employer and related persons determined in accordance with Section 414(n)(6) of the Code) on a substantially full-time basis for a period of at least one year and such services are performed under primary direction or control by the recipient. Except as provided below, any person satisfying the foregoing criteria shall be treated as an Employee. Contributions or benefits provided a Leased Employee by the leasing organization which are attributable to services performed for the Employer shall be treated as provided by the Employer. |
- 3 -
| Notwithstanding the foregoing, a Leased Employee shall not be considered an Employee of an Employer if: (i) such Leased Employee is covered by a money purchase pension plan providing: (1) a nonintegrated employer contribution rate of at least 10 percent of compensation, (2) immediate participation, and (3) full and immediate vesting; and (ii) Leased Employees do not constitute more than 20 percent of the Employer’s non-Highly Compensated workforce. | ||
| 1.21 | “Normal Retirement Date” means the first day of the month next following the month in which the Participant attains age 65 (his “Normal Retirement Age”). |
| 1.22 | “Notice” means, unless otherwise specifically provided herein, (i) written Notice on an appropriate form provided by the Administrator that is, in the discretion of the Administrator, properly completed and executed by the party giving such Notice and which is delivered by hand or by mail to the Administrator or to such party designated by the terms of the Plan or by the Administrator to receive the Notice, or (ii) Notice by Interactive Electronic Communication to the person or entity designated by the Administrator to perform recordkeeping and other administrative services on behalf of the Plan. The form of Notice satisfactory in any given circumstance under the Plan shall be determined by the Administrator, in its discretion, and shall be applied uniformly to all Participants and Beneficiaries. Notice to any party as provided herein shall be deemed to be given when it is actually received (either physically or by Interactive Electronic Communication, as the case may be) by the party to whom such Notice is given. |
| 1.23 | “Participant” means any Covered Employee who participates in the Plan as provided in Section 3.1 (an “active” Participant) or Section 4.1, and further, shall include any current or former Covered Employee who has suspended his Elective Deferrals or has terminated or retired if such individual has a vested Total Account balance maintained on his behalf under the Plan. |
| 1.24 | “Plan” means this Erie Insurance Group Employee Savings Plan as herein set forth with all amendments, modifications and supplements hereafter made. |
| 1.25 | “Plan Year” means the calendar year. |
| 1.26 | “Qualified Domestic Relations Order” or “QDRO” means any judgment, decree or order (including approval of a property settlement agreement) which is made pursuant to a State Domestic Relations Law (including a community property law) and which: |
| (a) | relates to provision of child support, alimony payments, or marital property rights of a Spouse, former Spouse, child or other dependent of a Participant; |
| (b) | recognizes or creates an alternate payee’s right to, or assigns to an alternate payee the right to receive all or a portion of the benefits payable with respect to a Participant under this Plan; and |
| (c) | clearly specifies: |
| (i) | name and last known address of the Participant and of each alternate payee; |
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| (ii) | the amount, percentage, or manner in which such could be determined, of the Participant’s benefits to be paid to such alternate payee by the Plan; |
| (iii) | the number of payments or time periods the QDRO covers; and |
| (iv) | each plan to which the QDRO applies. |
| A QDRO cannot require the Plan to provide a type or form of benefit, or any option not otherwise provided by the Plan, nor can it require the Plan to provide increased benefits. A QDRO cannot require payment to an alternate payee by virtue of a previous QDRO. | ||
| A written procedure will be established to determine the qualified status of domestic relations orders and to administer distributions thereunder. | ||
| 1.27 | “Rollover Contribution” means the Rollover Contribution or Roth Rollover Contribution made by a Covered Employee pursuant to Section 4.1. |
| 1.28 | “Roth Catch-Up Contribution” means, effective with respect to pay periods ending on or after January 1, 2007, or such later date as the Administrator shall determine, that portion of the Employer contribution made pursuant to Section 3.3 that is, at the election of the Participant, includible in the Participant’s gross income at the time the contribution is made. |
| 1.29 | “Roth Elective Deferral” means, effective with respect to pay periods ending on or after January 1, 2007, or such later date as the Administrator shall determine, the Employer contribution made pursuant to a Participant’s election under Section 3.1(a) to contribute a stated percentage, from one percent (1%) to one hundred percent (100%) of his future Compensation in lieu of receiving such amount directly in cash and to have such amount contributed to a Designated Roth Account maintained on his behalf under the Plan. A Roth Elective Deferral shall be includible in the Participant’s gross income at the time of deferral and shall be irrevocably designated as a Roth Elective Deferral by the Participant in his election. |
| 1.30 | “Roth Rollover Contribution” means that portion of a Covered Employee’s Rollover Contribution that is attributable to a designated Roth account under an eligible retirement plan. |
| 1.31 | “Safe Harbor Matching Contribution” means the Employer contribution made pursuant to Section 3.4. |
| 1.32 | “Spousal Consent” means a written consent given by a Participant’s Spouse to a Participant’s designation of a specified Beneficiary or Beneficiaries (including the designation of any class of Beneficiaries or any contingent Beneficiaries) under Section 11.6(a). Any Spousal Consent shall be effective only with respect to such Spouse. Such consent shall be duly witnessed by a Plan representative or a notary public and shall acknowledge the effect on the Spouse of the Participant’s election. The Participant may revoke, without limitation, any such designation without the need for Spousal Consent. Any new designation will require a new Spousal Consent. The requirement for Spousal Consent may be waived by the Administrator if it is established that there is no Spouse, the Spouse cannot be located, the Participant has a court order evidencing a |
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| legal separation from or abandonment by the Spouse, or for such other circumstances as shall be prescribed by applicable law. | ||
| 1.33 | “Spouse” means, with respect to any Participant, an individual who is the Participant’s spouse as defined under 1 U.S.C. Section 7 or other applicable federal law. |
| 1.34 | “Tax Deferred Catch-Up Contribution” means that portion of the Employer contribution made pursuant to Section 3.3 that is, at the election of the Participant, not includible in the Participant’s gross income at the time the contribution is made. |
| 1.35 | “Tax Deferred Contribution” means the Employer contribution made pursuant to a Participant’s election under Section 3.1(a) to reduce his future taxable Compensation by a stated percentage, from one percent (1%) to one hundred percent (100%), in lieu of receiving such amount directly in cash and to have such amount contributed to a Tax Deferred Account maintained on his behalf under the Plan. A Tax Deferred Contribution shall not be includable in the Participant’s gross income at the time of deferral. |
| 1.36 | “Test Compensation” means, for any Plan Year, an Employee’s compensation, reported under Sections 6041 and 6051 of the Code on Form W-2, as paid by an Employer or an Affiliate for the calendar year ending with or within such Plan Year, including any amounts contributed pursuant to a salary reduction election on behalf of a Covered Employee to a plan described in Sections 125, 132(f)(4), 402(e)(3), 402(h)(1)(B), 403(b), or 457(b) of the Code for the period in question. Effective January 1, 2009, Test Compensation shall include any differential wage payments, as defined in Section 3401(h) of the Code, that are paid by an Employer during a period of qualified military service as defined in Section 414(u) of the Code. Test Compensation in any given year shall not exceed the adjusted annual limitation in effect for such year (as set forth in Section 1.8), provided that such limitation shall not be applied in determining the status of an Employee as a Highly Compensated Employee. To the extent permitted under regulations and other guidance promulgated by the Internal Revenue Service, the Company may elect to determine Test Compensation on a basis other than that provided above. |
| 1.37 | “Total Account” means the total amounts held under the Plan for a Participant, consisting of the following accounts: |
| (a) | “Designated Roth Account” the portion of the Participant’s Total Account consisting of Roth Elective Deferrals plus (minus) any investment earnings (losses) on such contributions and less any distributions or withdrawals made from this account in accordance with Articles Six and Seven, respectively. |
| (b) | “Employer Account” the portion of the Participant’s Total Account consisting of employer matching contributions made under the Plan with respect to Plan Years beginning before January 1, 2001, plus (minus) any investment earnings (losses) on such contributions and less any distributions or withdrawals made from this account in accordance with Articles Six and Seven, respectively. |
| (c) | “Rollover Account” the portion of the Participant’s Total Account consisting of Rollover Contributions other than that portion of any Rollover Contribution that is attributable to a |
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| Roth Rollover Contribution plus (minus) any investment earnings (losses) on such contributions and less any distributions or withdrawals made from this account in accordance with Articles Six and Seven, respectively. | |||
| (d) | “Roth Catch-Up Account” the portion of the Participant’s Total Account consisting of Roth Catch-Up Contributions plus (minus) any investment earnings (losses) on such contributions and less any distributions or withdrawals made from this account in accordance with Article Six and Seven, respectively. |
| (e) | “Roth Rollover Account” the portion of the Participant’s Total Account consisting of Roth Rollover Contributions plus (minus) any investment earnings (losses) on such contributions and less any distributions or withdrawals made from this account in accordance with Article Six and Seven, respectively. |
| (f) | “Safe Harbor Matching Account” the portion of the Participant’s Total Account consisting of Safe Harbor Matching Contributions, plus (minus) any investment earnings (losses) on such contributions and less any distributions made from this account in accordance with Article Six. |
| (g) | “Tax Deferred Account” the portion of the Participant’s Total Account consisting of Tax Deferred Contributions plus (minus) any investment earnings (losses) on such contributions and less any distributions or withdrawals made from this account in accordance with Articles Six and Seven, respectively. |
| (h) | “Tax Deferred Catch-Up Account” the portion of the Participant’s Total Account consisting of Tax Deferred Catch-Up Contributions plus (minus) any investment earnings (losses) on such contributions and less any distributions or withdrawals made from this account in accordance with Article Six and Seven, respectively |
| 1.38 | “Trust Agreement” means the Trust Agreement between the Company and a Trustee as provided in Section 8.1, together with all amendments, modifications and supplements thereto. |
| 1.39 | “Trust Fund” means the fund established under the terms of the Trust Agreement for the purpose of holding and investing the assets of the Plan. The Trust Fund shall consist of such investment funds or vehicles as the Administrator may, in its discretion, designate from time to time and may include such investments as may be selected by a Participant or Beneficiary under a self-directed “open option” arrangement authorized by the Administrator. | |
| Nothing herein shall prohibit the Trust Fund from holding reasonable amounts of Plan assets in cash or cash equivalents in any fund or vehicle offered under the Plan. The portion of the Trust Fund to be invested in the various funds or vehicles shall be determined by Participant investment elections made pursuant to Article Five. The Administrator may, in its discretion, offer additional investment funds or vehicles to all Participants and may cease to offer any investment fund or vehicle at such time as it deems appropriate. | ||
| For period prior to June 1, 2009 or such later date as the Administrator, in its discretion, shall provide, and except as otherwise indicated, the Trust Fund shall be deemed to include that portion |
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| of a Total Account which a Participant and Beneficiary elects to invest in a group annuity contract provided by the Erie Family Life Insurance Company. | ||
| 1.40 | “Trustee” means the Trustee or Trustees acting as such under the Trust Agreement, including any successor or successors. |
| 1.41 | “Valuation Date” means the close of business as of each business day. |
| 1.42 | “Year of Eligibility Service” means an “Eligibility Computation Period” in which an Employee completes at least 1,000 Hours of Service. | |
| The “Eligibility Computation Period” with respect to an Employee shall mean the 12 consecutive month period that begins on the first day on which the Employee is credited with an Hour of Service in the employment of an Employer or Affiliate (“Employment Commencement Date”) and ends on the first anniversary thereof, and each Plan Year thereafter beginning with the Plan Year that includes the first anniversary of the Employee’s Employment Commencement Date. In the event an Employee completes 1,000 Hours of Service during the Eligibility Computation Period that begins on his Employment Commencement Date and completes 1,000 Hours of Service during the Eligibility Computation Period that begins on the January 1 that next follows his Employment Commencement Date, such Employee shall be credited with two Years of Eligibility Service. |
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ARTICLE TWO
PARTICIPATION
| 2.1 | Participation |
| (a) | Any Employee shall be eligible to participate in the Plan on the first day of a pay period, provided he is a Covered Employee and is actively employed by an Employer on such date and, provided further, that he makes proper application for participation within a reasonable time prior to the start of such pay period by furnishing Notice in accordance with procedures established by the Administrator and communicated to Covered Employees. |
| (b) | Notwithstanding the foregoing, any Covered Employee who is compensated on an hourly basis and who is classified by an Employer as other than a regular hourly employee shall be eligible to participate in the Plan on the January 1 or July 1 coincident with or next following such Employee’s completion of each of the following requirements, provided he remains a Covered Employee as of such January 1 or July 1: |
| (i) | His attainment of age 21 years; and |
| (ii) | His completion of one Year of Eligibility Service. |
| If the Employee is not a Covered Employee on the date he otherwise would have become eligible to participate in the Plan, such Employee shall automatically become eligible to participate in the Plan upon his return to employment as a Covered Employee. |
| 2.2 | Rehired Employees | |
| An Employee who had been an “active” Participant in the Plan, who terminates his employment and is subsequently re-employed may become eligible to participate in the Plan under Section 3.1 on the first day of any pay period following re-employment, provided he is a Covered Employee and is actively employed by an Employer on such date and, provided further, that he makes proper application for participation within a reasonable time prior to the start of such pay period by furnishing Notice in accordance with procedures established by the Administrator and communicated to Covered Employees. |
| 2.3 | Employment Transfers |
| (a) | Upon the transfer of a Covered Employee to other employment with an Employer or Affiliate whereby he ceases to be a Covered Employee hereunder, such individual’s ability to have Elective Deferrals made to the Plan on his behalf (and to receive Safe Harbor Matching Contributions) with respect to Compensation earned on and after this date of transfer shall cease and such Participant shall be considered an “inactive” Participant under the Plan. |
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| (b) | Upon the transfer of an individual from other employment with an Employer or Affiliate such that the individual becomes a Covered Employee hereunder, such individual shall be eligible to participate in the Plan as provided in Section 2.1 hereof. |
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ARTICLE THREE
EMPLOYER CONTRIBUTIONS
| 3.1 | Elective Deferrals |
| (a) | Each Covered Employee who is eligible to participate in the Plan and who has elected to become a Participant (in accordance with Article Two) may, at the time of making application to become a Participant, elect to make Elective Deferrals in a fixed, whole percentage, from one percent (1%) to one hundred percent (100%) of Compensation otherwise payable to such Covered Employee in future pay periods. Such election shall be made in accordance with procedures adopted by the Administrator and communicated to Participants. In all events, a Participant will be permitted to (i) begin making Elective Deferrals, (ii) change an existing election to made Elective Deferrals, and (iii) cease making Elective Deferrals at least once each Plan Year. | ||
| Subject to the limitations set forth in Sections 3.2 and 11.11, Elective Deferrals shall be made pursuant to the Participant’s election and shall be designated as either Tax Deferred Contributions or Roth Elective Deferrals in accordance with such election; providing however, that the Administrator, in its discretion may authorize at any time a suspension or reduction of Elective Deferrals, or any part thereof, with respect to any Participant. Elective Deferrals shall be withheld by the Participant’s Employer each pay period by regular payroll deduction in accordance with the Employer’s payroll withholding procedures and shall be credited to the Participant’s Tax Deferred Account or Designated Roth Account as of the date the contributions are received by the Trustee or otherwise deposited in the Trust Fund. Such contributions shall be deposited in the Trust Fund as soon as such amounts can reasonably be segregated from the Employer’s general assets. | |||
| (b) | Elective Deferrals constitute Employer contributions under the Plan and are intended to qualify as elective contributions under Sections 401(k) and 402A of the Code. Elective Deferrals may be made only with respect to an amount which the Participant could otherwise elect to receive in cash and which is not currently available to the Participant as of the date an election specified in this Section 3.1 is made. In the event a Participant has no Compensation for any payroll period, no Elective Deferral may be made for such period. |
| 3.2 | Dollar Limitation on Elective Deferrals |
| (a) | Any provision of this Plan to the contrary notwithstanding, no Employer shall be permitted, during any calendar year, to make, with respect to such calendar year, Elective Deferrals on behalf of a Participant under the Plan (when combined with the Participant’s elective deferrals under any other plans, contracts, or arrangements) that will exceed the limitation in affect for such year under Section 402(g)(1) of the Code, as adjusted in accordance with Section 402(g)(4) of the Code. Make-up contributions on account of qualified military service under Section 414(u) of the Code shall not be recognized as elective deferrals for purposes of this section. |
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| (b) | In the event any amount of Elective Deferrals for a calendar year exceeds the limitation applicable under this Section 3.2 for such calendar year, such excess amount (hereafter described for purposes of this Section, as “Excess Deferrals”), as adjusted for any income or loss allocable thereto in accordance with regulations, shall to the extent possible be distributed to such Participant, as provided in subparagraphs (i), (ii), (iii) and (iv) below: |
| (i) | At a date not later than the March 1st of the calendar year immediately following the calendar year to which such Excess Deferrals are attributable, any Participant to whom this Section 3.2 applies may notify, in writing, the Administrator by submitting a form as may be provided by the Administrator which shall specify the amount of the Participant’s Excess Deferrals for the given calendar year and shall contain a certified statement by the Participant indicating that if such amount is not distributed, such Excess Deferrals will exceed the limit imposed on the Participant by Section 402(g) of the Code for the year in which the Elective Deferrals occurred. | ||
| Notwithstanding the foregoing and solely for the purpose of facilitating a distribution of Excess Deferrals as required by regulation, in the event a Participant has Excess Deferrals in a given year calculated by taking into account his Elective Deferrals hereunder and his elective deferrals under any other plan, contract, or arrangement maintained by an Employer or Affiliate, the Participant will be deemed to have notified the Administrator in the manner provided in this subparagraph. | |||
| (ii) | At a date not later than the April 15 of the calendar year immediately following the calendar year to which such Excess Deferrals are attributable, the Plan may distribute to the Participant the amount of the Excess Deferrals allocated to the Plan as adjusted for any income or loss allocable to such excess. Any Excess Deferrals distributed pursuant to this subparagraph that have not previously been included in income are to be included in the gross income of the Participant for the year to which such Excess Deferrals relate. Any income that is allocable to Excess Deferrals (as determined in accordance with rules promulgated by the Secretary of the Treasury or his delegate) that is distributed pursuant to this subparagraph is to be included in the gross income of the Participant for the year in which such amount is distributed. In making a distribution as permitted under this Section, the Administrator shall first allocate the Excess Deferral to any Roth Elective Deferrals for such year and shall allocate the Excess Deferral to Tax Deferred Contributions only to the extent the Excess Deferral exceeds such Roth Elective Deferrals. The Administrator shall designate the distribution as that consisting of Excess Deferrals within the meaning of Section 402(g)(1) of the Code. Any distribution of less than the entire amount of Excess Deferrals plus income or loss attributable to such deferral contributions shall be treated as a pro rata distribution of such excess deferral contributions and income/loss. No corrective distribution under this Section shall be recognized for purposes of determining whether the minimum distribution requirements of Section 401(a)(9) of the Code are satisfied with respect to any Participant. |
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| (iii) | Any distribution in accordance with this Section 3.2 shall be made without regard to any notice or consent otherwise required under Sections 411(a)(11) or 417 of the Code. |
| 3.3 | Catch-Up Contributions |
| (a) | A Participant who is a Covered Employee and who is age 50 or older at any time during a given Plan Year shall be eligible to elect to make a Tax Deferred Catch-Up Contribution for such Plan Year or, for Plan Years beginning on and after January 1, 2007, a Roth Catch-Up Contribution for such Plan Year. Such election shall be made, and may be changed prospectively, in accordance with procedures adopted by the Administrator and communicated to Covered Employees. | ||
| (b) | A Catch-Up Contribution is an Employer contribution that is actually made on behalf of a Participant described in Section 3.3(a) whose Elective Deferrals for the give Plan Year are otherwise limited as provided in Section 3.2. and that is in an amount that does not exceed the dollar limit under Section 414(v)(2)(B)(i) of the Code, as adjusted in accordance with Section 414(v)(2)(C) of the Code. A Catch-Up Contribution is not taken into account for purposes of the limitations provided in Sections 3.2 and 11.11 of the Plan and the Plan shall not be treated as failing the requirements identified in Section 414(v)(3) of the Code, as applicable, by reason of such Catch-Up Contributions. |
| 3.4 | Safe Harbor Matching Contributions |
| (a) | The Employer shall contribute an amount to the Trust Fund equal to the sum of those amounts individually determined with respect to each Participant, as follows: |
| (i) | One hundred percent (100%) of the Elective Deferrals made with respect to the Participant during such pay period which do not exceed three percent (3%) of the Participant’s Compensation during such pay period; and | ||
| (ii) | Fifty percent (50%) of the Elective Deferrals made with respect to the Participant during such pay period which exceed three percent (3%), but do not exceed five percent (5%), of the Participant’s Compensation during such pay period. |
| Such contributions shall be designated as Safe Harbor Matching Contributions and shall be 100% vested and nonforfeitable when made. The Employer shall make Safe Harbor Matching Contributions as soon as practicable following the end of the pay period to which they relate and such contributions shall be credited to Participants’ Safe Harbor Matching Accounts as of the date they are received by the Trustee or otherwise deposited in the Trust Fund. Notwithstanding the foregoing provisions, Catch-Up Contributions shall be treated as Elective Deferrals under this Section 3.4 solely to the extent a Participant’s Elective Deferrals (exclusive of Catch-Up Contributions) for a given Plan Year do not equal or exceed five percent (5%) of the Participant’s Compensation during the Plan Year and provided that any such inclusion of Catch-Up Contributions in Elective Deferrals will not cause the amount of Elective Deferrals that are recognized for purposes |
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| of the Safe Harbor Matching Contribution formula to exceed five percent (5%) of the Participant’s Compensation during the Plan Year. The Safe Harbor Matching Contribution made on behalf of each Participant shall be adjusted as of the last day of a Plan Year to ensure that the actual Safe Harbor Matching Contribution made equals the appropriate percentages set forth in this Section 3.4(a), as determined on the Plan Year basis. |
| (b) | Effective with respect to each Plan Year in which the provisions of Section 3.4 are applicable, the Administrator shall provide Notice during the “Safe Harbor Notice Period” (as hereinafter defined) to each Covered Employee who is eligible to participate in the Plan during such Plan Year. Such Notice shall describe the following: |
| (i) | The formula used to determine the Safe Harbor Matching Contribution to be made on behalf of such Employee for such Plan Year; | ||
| (ii) | Any requirements that such Employee must satisfy to become entitled to receive such contributions; | ||
| (iii) | The type and amount of Compensation that may be deferred under the Plan as Elective Deferrals and Catch-Up Contributions; | ||
| (iv) | The procedures for making or changing an election to make Elective Deferrals and Catch-Up Contributions, including the periods available for making or changing such elections; | ||
| (v) | The withdrawal and vesting provisions applicable to contributions under the Plan; and | ||
| (vi) | A means by which Covered Employees may easily obtain additional information about the Plan. |
| For purposes hereof, the “Safe Harbor Notice Period” shall mean a period beginning 90 days before the first day of the applicable Plan Year and ending 30 days before the first day of the applicable Plan Year; provided, however, with respect to a Covered Employee who becomes eligible to participate in the Plan during a given Plan Year in which the provisions of Section 3.4 are applicable, the “Safe Harbor Notice Period” shall begin 90 days before the day such Employee may first participate in the Plan and shall end on the day such Employee may first participate in the Plan. | |||
| (c) | The Employer elects to treat the Plan as automatically satisfying the nondiscrimination in amount of employer contribution requirements of Section 401(a)(4) of the Code. Notwithstanding any provision of this Section 3.4 to the contrary, the Employer reserves the right to suspend future Safe Harbor Matching Contributions at any time provided that the procedures for implementing such suspension are consistent with Section 1.401(k)-3(g) of the Income Tax Regulations. |
| 3.5 | Source of Employer Contributions |
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| (a) | The Employer shall make all contributions to the Plan without regard to current or accumulated net profits. Notwithstanding the foregoing, for purposes of Sections 401(a)(27) and 401(k) of the Code, the Plan shall continue to be considered a profit sharing plan. Effective January 1, 2007, this Plan is also intended to be a qualified Roth contribution program under Section 402A of the Code. All Employer contributions shall be made in cash and shall be conditioned on the deductibility of the contribution. | ||
| (b) | Any provision of the Plan to the contrary notwithstanding, the total Employer contribution made with respect to any Plan Year, when added to any other contributions made by the Employer to a plan qualified under Section 401(a) of the Code, shall not exceed such amount which is deductible for such Plan Year pursuant to Sections 404(a)(3) or 404(a)(7) of the Code. In any event, all contributions for a Plan Year shall be paid within the regular or extended time for filing the Employer’s federal income tax return for the fiscal year which includes the Plan Year end. |
| 3.6 | Investment of Employer Contributions | |
| The Employer contributions made on behalf of a Participant shall be invested by the Trustee in accordance with the Participant’s election under Sections 5.3(a) and 5.4(a). | ||
| 3.7 | Recovery of Contributions | |
| Except as provided in this Section 3.7, the assets of the Plan shall never inure to the benefit of an Employer or Affiliate and shall be held for the exclusive purpose of providing benefits under the Plan and defraying reasonable expenses of the Plan. However, no provision of this Plan shall: |
| (a) | prohibit the return of a contribution to an Employer or a Participant within one year after payment if such contribution was made by a mistake of fact; or | ||
| (b) | prohibit the return of a contribution that is determined to be nondeductible (to the extent disallowed as a deduction); |
| provided, however, in the case of the return of a contribution which was made as a result of a mistake of fact, the amount which shall be returned is the excess of the amount contributed over the amount which would have been contributed had the mistake of fact not occurred. Further, in the case of the return of a contribution that is determined to be nondeductible, and in the case of a contribution made as the result of a mistake of fact, earnings attributable to the excess contribution may not be returned, but losses attributable thereto must reduce the amount to be returned. Further, in both such cases, if the withdrawal of the amount attributable to the mistaken or nondeductible contribution would cause the balance of the account of any Participant to be reduced to less than the balance which would have been in the account had the mistaken or nondeductible amount not been contributed, then the amount to be returned to the Employer will be limited so as to avoid such reduction. | ||
| 3.8 | Other Provisions Relating to Employer Contributions |
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| (a) | Except as otherwise provided in accordance with procedures adopted by the Administrator and communicated to applicable Participants, a Participant may as of any time: |
| (i) | suspend the Elective Deferrals and/or Catch-Up Contributions being made on his behalf; | ||
| (ii) | increase or decrease the rate of Elective Deferrals and/or Catch-Up Contributions made on his behalf or have such contributions resumed after a period of suspension; | ||
| (iii) | change the allocation of the Elective Deferrals made on his behalf from Tax Deferred Contributions to Roth Elective Deferrals, or vice versa; or | ||
| (iv) | change the allocation of the Catch-Up Contributions made on his behalf from Tax Deferred Catch-Up Contributions to Roth Catch-Up Contributions, or vice versa. |
| Such suspension or change in rate or allocation shall be effective as of the first day of the pay period next following the date the Participant delivers Notice of the same to the Administrator, provided such Notice is delivered to the Administrator in such time as to allow the Administrator a reasonable period within which to act on the election contained therein. | |||
| During any period of suspension, regardless of the length of its duration, the Participant’s Account shall be maintained in accordance with the procedure set forth in Article Five. | |||
| (b) | In the event Safe Harbor Matching Contributions have been made with respect to Elective Deferrals that are subsequently determined to fail to meet the annual dollar limitation specified in Section 3.2(a) (and if such Excess Deferrals are distributed pursuant to Section 3.2(b)), such Safe Harbor Matching Contributions (and any income or loss attributable thereto determined in accordance with regulations) shall be forfeited and applied to reduce future Safe Harbor Matching Contributions. |
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ARTICLE FOUR
ROLLOVER CONTRIBUTIONS
| 4.1 | Rollover Contributions |
| (a) | Under such rules and procedures as the Administrator may establish, any Covered Employee may make a cash Rollover Contribution to this Plan of all or a portion of the amount received by the Covered Employee in the form of an eligible rollover distribution from an eligible retirement plan (as such terms are defined in Section 6.4); provided, however, that the Plan shall not accept (i) a rollover of after-tax employee contributions; (ii) a rollover from an individual retirement account or annuity that is other than a conduit IRA, as determined by the Administrator, or (iii) a rollover from such other source, and/or under such circumstances, as the Administrator, in its discretion, shall determine to be ineligible. Effective January 1, 2007, that portion of a Rollover Contribution that is attributable to a designated Roth account under an eligible retirement plan shall be accepted provided it meets the other requirements of this section and is made as a direct rollover to a Roth Rollover Account hereunder. Such Roth Rollover Contribution shall be subject to separate accounting, including accounting for the amount of such contribution not includable in income. Any portion of a Rollover Contribution that is not a Roth Rollover Contribution and that is accepted by the Administrator shall be allocated to a Rollover Account established on behalf of the Covered Employee. No Rollover Contribution may be made to the Plan unless the Covered Employee had demonstrated to the Administrator’s satisfaction that the contribution satisfies the conditions for tax-free rollover treatment under the applicable provisions of the Code. | ||
| (b) | In the event the Administrator has reasonably concluded that an amount may be accepted by the Plan as a Rollover Contribution under Section 4.1(a) but later determines that all or a portion of such amount fails to satisfy the provisions of Section 4.1(a), the Administrator shall cause such ineligible amount and related investment earnings to be distributed to the Covered Employee (or, if applicable, Beneficiary) as soon as administratively feasible. |
| 4.2 | Vesting of Rollover Contributions |
| Amounts contributed under Section 4.1 hereof shall at all times be 100% vested. |
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ARTICLE FIVE
PARTICIPANT ACCOUNTS AND VALUATION OF FUNDS
| 5.1 | Establishment of Participant Accounts |
| (a) | There shall be established and maintained for each Participant a Total Account. A Total Account may consist of the following accounts: |
| (i) | a Tax Deferred Account; | ||
| (ii) | a Safe Harbor Matching Account; | ||
| (iii) | an Employer Account; | ||
| (iv) | a Rollover Account; | ||
| (v) | a Tax Deferred Catch-Up Account; | ||
| (vi) | for periods on and after January 1, 2007, a Designated Roth Account; | ||
| (vii) | for periods on and after January 1, 2007, a Roth Catch-Up Account; and | ||
| (viii) | for periods on and after January 1, 2007, a Roth Rollover Account. |
| (b) | Within each of the accounts listed in Section 5.1(a) that are applicable to a given Participant, separate records shall be kept of the portion, if any, of each account invested in each investment fund or vehicle then offered under the Plan. The Administrator may adopt rules, consistent with income tax regulations, that designate certain accounts as constituting a separate contract for purposes of Section 72 of the Code. |
| 5.2 | Valuation Date Adjustments | |
| As of each Valuation Date, each Participant’s balance in his various accounts shall be adjusted in accordance with the valuation procedure adopted by the Administrator. | ||
| 5.3 | Investment Elections |
| (a) | When a Covered Employee submits his application to become a Participant, he shall give Notice regarding the investment of contributions to be made on his behalf under the Plan. Such Notice shall be provided to the Administrator or its designee within such time and in accordance with such means as are designated by the Administrator and communicated to Participants and Covered Employees. Subject to such procedural rules as may be established by the Administrator from time-to-time, such Notice shall specify, in 1% increments from 0% to 100%, the percentage of each applicable contribution source which is to be invested in each investment option then made available. |
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| A Participant may change the investment elections made under this Section 5.3(a) at any time by giving Notice to the Administrator or its designee within such time and in accordance with such means as are designated by the Administrator and communicated to Participants and Covered Employees. Such Notice of change shall be subject to the procedural specifications set forth above (and, if applicable, subject to the limitations set forth in Section 5.4) and, except as may otherwise be provided in the Trust Agreement, shall be effective with respect to contributions received by the Trustee (or otherwise deposited into the Trust Fund) as of the Valuation Date on which the Notice is received or as of the next following Valuation Date, in accordance with procedures established by the Administrator, and communicated to Participants and Covered Employees. | |||
| A Covered Employee making a Rollover Contribution shall give Notice regarding the investment of such contribution. Such Notice shall be delivered on or prior to the date the Rollover Contribution is effective and shall specify, in 1% increments from 0% to 100%, the percentage of the Rollover Contribution to be invested in each investment option which is then made available for the investment of Rollover Contributions. | |||
| (b) | Each Participant and Beneficiary shall have the opportunity to change the manner in which the Total Account maintained on his behalf under the Plan is invested. Such opportunity shall be exercised by giving Notice to the Administrator or its designee within such time and in accordance with such means as are designated by the Administrator and communicated to Participants, Covered Employees and affected Beneficiaries. Subject to such procedural rules as may be established by the Administrator from time-to-time, such Notice shall specify, in a whole dollar amount or in 1% increments from 0% to 100%, the dollar amount, or percentage, of the Total Account maintained on behalf of the Participant or Beneficiary which is to be invested in each investment option then made available. Except as may otherwise be set forth in the Trust Agreement, such Notice shall be effective as of the Valuation Date on which the Notice is received by the Trustee or as of the next following Valuation Date, in accordance with procedures established by the Administrator and communicated to Participants, Covered Employees and affected Beneficiaries. Notwithstanding any provision of this paragraph (b) to the contrary, (i) the election under this Section 5.3(b) shall be subject to any contractual limitations imposed on the direct transfer of assets between given investment funds or such other reasonable limitation on exchanges as may be agreed to between the Administrator and the person or entity designated by the Administrator to perform administrative services on behalf of the Plan (ii) the election under this Section 5.3(b) shall be subject to any regulatory restrictions on transfers, as determined by the Administrator, in its discretion, (iii) prior to March 1, 2009 or such later date as the Administrator, in its discretion shall provide, in no event shall any portion of the Total Account maintained on behalf of a Participant or Beneficiary in the Erie Family Life Group Annuity Fund be transferred to any other investment fund and (iv) in no event shall any portion of the Total Account maintained on behalf of a Participant be transferred to the Erie Indemnity Stock Fund. | ||
| (c) | Any investment elections or changes in elections under this Section 5.3 may be limited or delayed by the Administrator or Trustee, if, in the judgment of such party, giving |
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| immediate effect to such elections would adversely affect the Total Account balances of a significant number of Participants. | |||
| (d) | In the event a Participant’s, Covered Employee’s or Beneficiary’s investment election under the Plan is incomplete, the Participant, Covered Employee or Beneficiary will be deemed to have chosen to invest in such default fund as is set forth in the Trust Agreement or as otherwise determined by the Administrator. | ||
| (e) | Any investment election or deemed investment election under the Plan shall remain in effect until changed by an election under this Section. Notwithstanding any provision of this Article Five to the contrary, the Administrator, in its discretion, may offer such investment options to Participants and Beneficiaries as it deems appropriate and may cease to offer any such options as it deems appropriate. In the event the Administrator decides to discontinue offering an investment option under the Plan, those Participants on whose behalf Total Accounts are being maintained that are invested in the discontinued investment option may be required, at the discretion of the Administrator, to have affected amounts consolidated with (or “mapped” to) a replacement investment option selected by the Administrator or may be provided an opportunity to designate, from such selection of investment options as may be offered by the Administrator, an investment option or options as a replacement for the investment option being discontinued. Any such designation by a Participant shall be made in accordance with paragraph (b) above. If a Participant who is affected by the discontinuation of an investment option fails to make any replacement designation offered in this paragraph (e), the Participant’s interest in such discontinued fund, shall be consolidated with (or “mapped” to) such replacement investment option selected by the Administrator, in its discretion. Any changes under this paragraph (e) shall take effect as of such times and under such rules as shall be established by the Administrator. | ||
| (f) | Each Participant, Covered Employee and Beneficiary is solely responsible for the selection of his investment option. The Trustee, the Administrator, the Employer, and the directors, officers, supervisors and other employees of the Employer are not empowered to advise a Participant, Covered Employee or Beneficiary as to the manner in which any portion of his Total Account shall be invested. The fact that an investment option is available under the Plan shall not be construed as a recommendation for investment in that investment option. |
| 5.4 | Erie Indemnity Stock Fund | |
| The provisions of this Section shall become applicable to the extent to which Participants’ and Beneficiaries’ Employer Accounts and/or Safe Harbor Matching Accounts under the Plan are invested in the Erie Indemnity Stock Fund. |
| (a) | The Administrator shall make available under the Plan an investment fund which shall consist exclusively of Erie Indemnity Stock; provided, however, that in the discretion of the Trustee, within guidelines set by the Administrator, a portion of such fund may be held in short-term interest-bearing investments or cash pending purchase of Erie Indemnity Stock and to provide sufficient liquidity for exchanges out of the fund, |
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| withdrawals and loans. Such investment fund shall be referred to as the “Erie Indemnity Stock Fund.” Except as otherwise provided in this Section 5.4, a Participant shall be permitted to invest all or a portion of the Safe Harbor Matching Contributions, made on his behalf in the Erie Indemnity Stock Fund in accordance with the provisions of Section 5.3. A Participant shall not be permitted to invest any portion of the Elective Deferrals or Catch-Up Contributions made on his behalf in the Erie Indemnity Stock Fund nor shall any Participant or Covered Employee be permitted to invest any portion of a Rollover Contribution in the Erie Indemnity Stock Fund. No Participant, Covered Employee or Beneficiary may transfer any portion of the Total Account maintained on his behalf to the Erie Indemnity Stock Fund. For purposes of implementing Participant investment elections under Section 5.3, or a Participant’s or Beneficiary’s distribution election under Section 6.3, the Trustee may, in its discretion, purchase or sell Erie Indemnity Stock on the open market or by privately-negotiated transaction; provided however, that any such purchase or sale shall be made only in exchange for fair market value as determined by the Trustee and, provided further that, no commission shall be charged to or paid by the Plan with respect to any purchase or sale of Erie Indemnity Stock between the Plan and a party in interest (as defined in Section 3(14) of ERISA). Any distributions, dividends or other income received by the Trustee with respect to the Erie Indemnity Stock Fund shall be reinvested by the Trustee in the Erie Indemnity Stock Fund. | |||
| (b) | The restrictions contained in this paragraph (b) shall apply to that portion of the Employer Accounts and/or Safe Harbor Matching Accounts maintained on behalf of Participants or Beneficiaries which are invested in the Erie Indemnity Stock Fund and, if and to the extent necessary, any election made by a Participant or Beneficiary under the Plan shall be deemed modified to be consistent with this paragraph (b). | ||
| Notwithstanding the provisions of Section 5.4 and Articles Seven and Fourteen: |
| (i) | No Participant or Beneficiary shall, on the basis of material nonpublic information with respect to the Company or its affiliates, make an election permitted by that Section or those Articles if (1) such election would result in an exchange into or out of, loans from, withdrawals from, or an increase or decrease in the amount of contributions to the Erie Indemnity Stock Fund, and (2) the transaction resulting from such election is prohibited by Rule 10b-5. | ||
| (ii) | No officer shall make an election permitted by that Section or those Articles if such election would result in a transaction involving the Erie Indemnity Stock Fund which is not an exempt transaction pursuant to Rule 16b-3. |
| For purposes of this paragraph (b), the terms “Rule 10b-5” and “Rule 16b-3” shall mean the rules, as amended, having those designations promulgated by the United States Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, and the terms “affiliate” and “officer” shall have the meanings set forth in Rule 12b-2 and Rule 16a-1(f), respectively, both as so promulgated and amended. |
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| (c) | Notwithstanding anything in this Article Five to the contrary, Participants and Beneficiaries shall have the right, and be notified of such right, to diversify the portions of their Total Account which are invested in the Erie Indemnity Stock Fund, as required under Section 401(a)(35) of the Code and Section 101(m) of ERISA. Any limitations established by the Administrator related to contributions and/or transfers into or out of the Erie Indemnity Stock Fund shall comply with the divestiture requirements of Section 401(a)(35) of the Code and related guidance. |
| 5.5 | Temporary Suspension of Certain Administrative Activities | |
| In the event of a change in the investment options available under the Plan, a change in vendors providing services to the Plan, or a change in the Plan’s administrative procedures, the Administrator may establish procedures for temporarily suspending certain activities under the Plan, as the Administrator may determine are necessary or appropriate, in its discretion. Such temporary suspension shall be conditioned upon any notification to Participants required by law. The activities that may be suspended include, but are not limited to, changes in Elective Deferrals, Rollover Contributions, investment elections or transfers, distributions, in-service withdrawals and loans. |
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ARTICLE SIX
VESTING & DISTRIBUTIONS
| 6.1 | Vesting | |
| A Participant shall be fully vested in all contributions made and investment earnings credited under the provisions of the Plan. | ||
| 6.2 | Distributions Upon Retirement or Other Termination of Employment |
| (a) | Subject to the provisions of paragraph (b) below, upon the termination of a Participant’s employment with the Company and Affiliates for any reason, the Participant (or, if the Participant is deceased, his Beneficiary) shall be paid the entire vested Total Account maintained on behalf of the Participant as provided in subparagraph (i), (ii) or (iii) below: |
| (i) | If the vested Total Account exceeds $3,500 as of the determination date chosen by the Administrator or its designee, the Participant (or Beneficiary) may elect, in such manner as provided by the Administrator or its designee, to either take or commence an immediate distribution of such vested Total Account in a form permitted under Section 6.3 or to defer receipt of the same until a later date, but not beyond the end of the calendar year in which the Participant attains age 70-1/2 and not beyond such other required commencement date under Section 401(a)(9) of the Code. The failure of any terminated Participant (or terminated Participant’s Beneficiary) to make an election with respect to a vested Total Account in excess of the $3,500 threshold shall be deemed an election by the Participant (or Beneficiary) to defer receipt of such vested Total Account. A Participant or Beneficiary who elects (or is deemed to have elected) to defer receipt of the vested Total Account may request a distribution of the vested Total Account in a form permitted under Section 6.3 at a subsequent date permitted under Section 401(a)(9) of the Code. Pending distribution of his Total Account, such Participant or Beneficiary shall be permitted to change the manner in which such Total Account is invested in accordance with Section 5.3(b). | ||
| (ii) | If the vested Total Account does not exceed $3,500 as of the
determination date chosen by the Administrator or its designee and such
determination date precedes January 1, 2007, such vested Total Account shall be
paid in a lump sum to the Participant or Beneficiary. Such payment shall be made
as soon as practicable following the Participant’s (or Beneficiary’s) election to
take payment in cash or as a direct rollover and shall be made in accordance with
such election. If a Participant fails to make an affirmative election to receive
cash or make a direct rollover within 60 days of being apprised of his
distribution options, distribution of the lump sum shall be made as a direct rollover to an individual retirement account selected by the Administrator unless the vested Total Account as of the determination date is $1,000 or less, in which case distribution of the lump sum shall be made to the Participant in cash. If a Beneficiary fails to make an affirmative election to receive cash or, if eligible, make a direct rollover within 60 days of being apprised of his distribution |
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| options, distribution of the lump sum shall be made to the Beneficiary in cash. | |||
| (iii) | If the vested Total Account does not exceed $3,500 as of the determination date chosen by the Administrator or its designee and such determination date is on or after January 1, 2007, such vested Total Account shall be paid in a lump sum to the Participant (or Beneficiary) on the conditions that the Participant (or Beneficiary) is alive as of the applicable payment date and, except as otherwise provided in this subparagraph (iii), that the Participant (or Beneficiary) affirmatively elects payment in cash or as a direct rollover. If the vested Total Account maintained on behalf of the Participant (or Beneficiary) does not exceed $1,000 as of the applicable determination date and the Participant (or Beneficiary) fails to make an affirmative election to receive cash or make a direct rollover within 60 days of being apprised of his distribution options, the Plan shall pay such vested Total Account to the Participant (or Beneficiary) as a lump sum in cash. | ||
| (iv) | For purposes of this Section 6.2(a), the value of a vested Total Account shall be determined with regard to that portion, if any, that is attributable to a Rollover Contribution (and earnings allocated thereon). |
| (b) | The Administrator or its designee shall notify a Participant or Beneficiary of his election right under Section 6.2(a) and, in the case of a Participant who may defer payment of the vested portion of his Total Account in accordance with Section 6.2(a), of his right to defer payment and, for Plan Years beginning after December 31, 2006, a description of the consequences of a failure to defer payment. Such notification shall be provided to the Participant or Beneficiary not less than 30 days and not more than 180 days before payment is made; provided, however, that a Participant or Beneficiary may affirmatively elect to be paid the vested Total Account being maintained on his behalf within 30 days after the Participant or Beneficiary received the notice described in this Section 6.2(b). | ||
| (c) | A Participant who returns to employment with the Employer on a full or part-time basis prior to distribution of his vested Total Account under paragraph (a) shall be deemed to have cancelled his distribution election as of his date of reemployment. | ||
| (d) | All payments made pursuant to this Article Six shall be based on the Participant’s vested Total Account balance on the Valuation Date as of which payment is made. Payment shall be made from the accounts comprising the Participant’s (or Beneficiary’s) Total Account and from the investment funds in which such Total Account is invested in such order of priority as the Administrator, pursuant to a uniform and nondiscriminatory policy, shall direct. |
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| 6.3 | Payment of Amounts Distributed |
| (a) | Distributions to a Participant or Beneficiary may be paid in the form of: |
| (i) | a lump sum; | ||
| (ii) | monthly, quarterly or annual installments that will provide a fixed amount per pay period; or | ||
| (iii) | monthly, quarterly or annual installments that will provide substantially equal payments over a fixed period that is not in excess of the lesser of fifteen (15) years or the recipient’s life expectancy, as determined by the Administrator as of the date the payments begin. | ||
| A Participant or Beneficiary who has elected payment in an installment form under Section 6.3(a)(ii) or (iii) may elect, at some future date, to have the balance of the vested Total Account maintained on his behalf paid in the form of a lump sum. Except as provided in the preceding sentence, a Participant or Beneficiary may not change his elected form of distribution following the date Plan payments begin. A Participant who returns to employment with the Employer on a full or part-time basis following commencement of an installment form of distribution shall be deemed to have cancelled his distribution election as of his date of reemployment. In no event may distributions from the Plan be made in the form of an annuity. |
| (b) | A distributee who is receiving payment in the form of a lump sum shall elect to have that portion of his Employer Account and Safe Harbor Matching Account which is invested in the Erie Indemnity Stock Fund paid either (i) in whole units of Erie Indemnity Stock (with fractional units being distributed in cash) or (ii) in cash. The election of a Participant or Beneficiary under this Section 6.3(b) shall be made in connection with the Participant’s or Beneficiary’s lumps sum election under Section 6.2. In the event distribution is made in the form of installments or is made in the form of a lump sum, but such lump sum is paid in the absence of a Participant’s or Beneficiary’s distribution election, that portion of an Employer Account and Safe Harbor Matching Account which is invested in the Erie Indemnity Stock Fund at the time of distribution shall be paid in cash. | ||
| (c) | Notwithstanding any inconsistent provision of the Plan and effective January 1, 2003, all distributions under the Plan shall be made in accordance with Code Section 401(a)(9), including the incidental death benefit requirement of Code Section 401(a)(9)(G), and Treasury Regulations Sections 1.401(a)(9)-1 through 1.401(a)(9)-9. Specifically, distribution of the Participant’s interest shall: |
| (i) | be completed no later than the required beginning date; or | ||
| (ii) | commence not later than the required beginning date with distribution to the Participant made over the life of the Participant or joint lives of the Participant and a designated Beneficiary or a period not longer than the life of the Participant or joint lives of the Participant and a designated Beneficiary. |
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| For purposes of this Section 6.3, “required beginning date” shall mean April 1 of the calendar year following the later of the calendar year in which the Participant attains age 701/2 or the calendar year in which the Participant terminates employment or retires; provided, however, if the Participant is a five-percent owner (as defined in Code Section 416), the required beginning date shall be April 1 of the calendar year following the calendar year in which the Participant attains age 701/2, regardless of the date that the five-percent owner terminates employment or retires. | |||
| Notwithstanding the foregoing, unless the Participant elects otherwise, distribution of benefits under Section 6.2 will begin no later than the 60th day after the latest of the close of the Plan Year in which: |
| (i) | the Participant attains age 65; | ||
| (ii) | occurs the fifth anniversary of the Plan Year in which the Participant commenced participant in the Plan; or | ||
| (iii) | the Participant terminated employment with the Company and Affiliates. |
| (d) | In the event that a Participant dies prior to the date that distribution commences: |
| (i) | any portion of the Participant’s interest that is not payable to a designated Beneficiary shall be distributed not later than the end of the calendar year which includes the fifth anniversary of the date of the Participant’s death; and | ||
| (ii) | any portion of the Participant’s interest that is payable to a designated Beneficiary shall be distributed in accordance with subparagraph (i) above or over the life of the designated Beneficiary (or over a period not extending beyond the life expectancy of the Beneficiary), commencing not later than the end of the calendar year following the calendar year of the Participant’s death or, if the Beneficiary is the Participant’s surviving Spouse, commencing not later than the last day of the later of the calendar year in which the Participant would have attained age 701/2, or the calendar year following the calendar year which includes the date of the Participant’s death. |
| (e) | In the event a Participant dies after distribution of his interest has begun, but prior to distribution of his entire interest, the remaining portion of such interest shall be distributed, at the election of the Participant’s Beneficiary, in a lump sum or in a method that is at least as rapid as the method being used at the date of the Participant’s death. | ||
| (f) | Notwithstanding Sections 6.3(c), (d) or (e) of the Plan, a Participant or Beneficiary who would have been required to receive required minimum distributions for 2009 but for the enactment of Section 401(a)(9)(H) of the Code (“2009 RMDs”), and who would have satisfied that requirement by receiving distributions that are (i) equal to the 2009 RMDs or (ii) one or more payments in a series of substantially equal distributions (that include the 2009 RMDs) made at least annually and expected to last for the life (or life expectancy) of |
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| the Participant, the joint lives (or life expectancy) of the Participant and the Participant’s Beneficiary, or for a period of at least 10 years (“Extended 2009 RMDs”), will receive those distributions for 2009 unless the Participant or Beneficiary chooses not to receive such distributions. Participants and Beneficiaries described in the preceding sentence will be given the opportunity to elect to stop receiving the distributions described in the preceding sentence. | |||
| For purposes of Section 6.4 of the Plan, 2009 RMDs and Extended 2009 RMDs will also be treated as eligible rollover distributions in 2009. |
| 6.4 | Direct Rollovers |
| (a) | A distributee may elect, subject to provisions adopted by the Administrator which shall be consistent with income tax regulations, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. The Administrator shall notify a distributee of his right to elect a direct rollover; such notice shall be furnished to the distributee between 30 days and 180 days prior to the date as of which the distributee is to receive a distribution from the Plan, provided that the distributee may affirmatively elect a distribution or direct rollover to occur within 30 days after the furnishing of such notice. | ||
| (b) | Definitions. |
| (i) | Eligible Rollover Distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee other than (A) any distribution that is one of a series of substantially equal periodic payments made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and his designated Beneficiary, or for a specified period of ten (10) years or more; (B) any distribution to the extent such distribution is required under Code Section 401(a)(9); and (C) any portion of a hardship withdrawal. In addition, a portion of a distribution shall not fail to be an eligible rollover distribution merely because the portion consists of after-tax employee contributions which are not includible in gross income. However, such portion may be paid only to an individual retirement account or annuity described in Code Sections 408(a) or (b), respectively, or (for distributions on and after January 1, 2008) to a Roth IRA described in Section 408A of the Code, to a qualified trust defined in Section 401(a) of the Code, or to an annuity contract described in Section 403(b) of the Code provided such account, annuity, IRA, trust or annuity contract agrees to separately account for amounts so transferred, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible. | ||
| An eligible rollover distribution with respect to a distributee who is not the Employee’s or former Employee’s Spouse must be made by a direct trustee-to-trustee transfer. |
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| (ii) | Eligible Retirement Plan: An eligible retirement plan is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity described in Code Section 403(a), an annuity contract described in Code Section 403(b), an eligible plan under Code Section 457(b) which is maintained by a state or a political subdivision of a state, and which agrees to separately account for amounts transferred, a qualified trust described in Code Section 401(a), and for periods on and after January 1, 2008, a Roth IRA under Code Section 408A, that accepts the distributee’s eligible rollover distribution. However, in the case of an eligible rollover distribution: (A) that includes after-tax employee contributions, an eligible retirement plan is an individual retirement account or annuity described in Code Section 408(a) or (b), or a qualified defined contribution plan described in Code Sections 401(a) or 403(a) that agrees to separately account for such eligible rollover distributions, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so includible, (B) that includes a Designated Roth Account, an eligible retirement plan is an individual retirement plan described in Code Section 408A or a qualified defined contribution plan described in Code Section 401(a) that agrees to separately account for such eligible rollover distribution, including separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is part not so includible, and (C) that is made on behalf of a distributee that is not the Employee’s or former Employee’s Spouse, an eligible retirement plan shall mean an individual retirement account described in Code Section 408(a) or an individual retirement annuity described in Code Section 408(b) established for the purpose of receiving a distribution on behalf of a Beneficiary, which will be treated as an inherited IRA pursuant to Code Section 402(c)(11). | ||
| (iii) | Distributee: A distributee includes an Employee or former Employee. In addition, the Employee’s or former Employee’s surviving Spouse and the Employee’s or former Employee’s Spouse or former Spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are distributees with regard to the interest of the Spouse or former Spouse. With respect to distributions made on or after July 1, 2007, a distributee shall also include an Employee’s Beneficiary who is not the Employee’s Spouse. | ||
| (iv) | Direct Rollover: A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. |
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ARTICLE SEVEN
WITHDRAWALS AND LOANS
| 7.1 | Withdrawals Generally |
| An Eligible Applicant may make written application to the Administrator for withdrawal of a portion of his account balance without terminating his employment, but only in such amounts and under such conditions as specified in this Article Seven. All such applications for a withdrawal made by an Eligible Applicant shall be approved or denied by the Administrator in accordance with a uniform, non-discriminatory policy and such action by the Administrator shall be final. |
| 7.2 | Hardship Withdrawal |
| Upon proper written application of an Eligible Applicant in such form as the Administrator may specify, the Administrator may permit the Eligible Applicant to withdraw in cash the portion of the balance of his Total Account representing his Rollover Account (if applicable), his Roth Rollover Account (if applicable), his Employer Account and his Elective Deferrals and Catch-Up Contributions without earnings thereon, provided that the reason for such withdrawal is to enable the Eligible Applicant to meet unusual or special situations in his financial affairs resulting in immediate and heavy financial needs of the Eligible Applicant and, provided further, that the Administrator must be satisfied that any withdrawal hereunder is not in excess of the amount necessary to meet the immediate and heavy financial need and that such need cannot be met from other resources of the Eligible Applicant. The amount available for withdrawal shall be based on the balances of the applicable accounts (and the Elective Deferrals made) as of the Valuation Date on which payment is made. Amounts required to meet the following items are deemed to be for immediate and heavy financial needs: |
| (a) | payments necessary to prevent the eviction of the Eligible Applicant from, or foreclosure of the mortgage on, his principal residence; |
| (b) | expenses for medical care described in Code Section 213(d) incurred by the Eligible Applicant, his Spouse, his children, or his dependents as defined in Code Section 152, or necessary for these persons to obtain medical care described in Section 213(d) of the Code; | ||
| (c) | costs directly related to the purchase of an Eligible Applicant’s principal residence; | ||
| (d) | payment of tuition, related educational fees and room and board expenses, for the next 12 months of post-secondary education for the Eligible Applicant, his Spouse, his children, or his dependents (as defined in Code Section 152 without regard to Code Sections 152(b)(1), (b)(2), and (d)(1)(B)); or | ||
| (e) | payments for burial or funeral expenses for the Eligible Applicant’s deceased parent, his Spouse, his children, or his dependents as defined in Code Section 152, without regard to |
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| Code Section 152(d)(1)(B) of the Code; or | |||
| (f) | expenses for the repair of damage to the Eligible Applicant’s principal residence that would qualify for a casualty deduction under Code Section 165 (determined without regard to whether the loss exceeds 10% of adjusted gross income). |
| 7.3 | Safe Harbor Distribution |
| A distribution shall be deemed necessary to satisfy an immediate and heavy financial need of an Eligible Applicant if all of the following requirements are satisfied: | |||
| (a) | the distribution is not in excess of the amount of the immediate and heavy financial need of the Eligible Applicant including any amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from such distribution; | ||
| (b) | the Eligible Applicant has obtained all other forms of distribution and nontaxable loans currently available from all plans maintained by an Employer; and | ||
| (c) | the Eligible Applicant is suspended from making Elective Deferrals to the Plan until the first day of the pay period occurring six full months after the effective date of the withdrawal. |
| 7.4 | Hardship Withdrawal Priority |
| (a) | A hardship withdrawal pursuant to Section 7.2 shall be made from the Total Account maintained on behalf of an Eligible Applicant in the order of priority set forth in this Section 7.4. That portion of a Eligible Applicant’s Total Account which is of a lower priority shall be withdrawn only after those portions of the Total Account which are of higher priority have been completely withdrawn: |
| (i) | Designated Roth Account (excluding earnings); | ||
| (ii) | Roth Catch-Up Account (excluding earnings); | ||
| (iii) | Roth Rollover Account; | ||
| (iv) | Rollover Account; | ||
| (v) | Employer Account; | ||
| (vi) | Tax-Deferred Catch-Up Account (excluding earnings); and | ||
| (vii) | Tax-Deferred Account (excluding earnings). |
| In no event shall a hardship withdrawal be taken from the Safe Harbor Matching Account maintained on behalf of an Eligible Applicant. |
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| (b) | Subsequent to the determination under paragraph (a), withdrawals shall be made out of those investment options in which the applicable account is invested according to the withdrawal hierarchy designated by the Administrator and communicated to Participants. |
| 7.5 | Modifications to Hardship Withdrawal Standards |
| The Company shall have full discretionary authority to modify the provisions of Sections 7.2, 7.3 and 7.4 provided that any modifications shall be evidenced by a writing approved by the Plan Administrator, shall be consistently applied to all pending and future applications as of the date of the modification and shall not operate so as to reduce or eliminate any benefit protected under Section 411(d)(6) of the Code that has accrued as of the date of such modifications. |
| 7.6 | In-Service Withdrawals for Reasons Other than Hardship |
| Upon proper written application of an Eligible Applicant in such form as the Administrator may specify, the Administrator shall permit the Eligible Applicant to withdraw all or a portion of the Total Account maintained on his behalf as provided in this Section 7.6. |
| (a) | Subject to the provisions of paragraphs (c) through (f) below, an Eligible Applicant on whose behalf a Rollover Account is maintained may elect to withdraw all or a portion of such account without regard to whether the Eligible Applicant has attained a given age or completed a given period of service with the Company or other Employer. | ||
| (b) | Subject to the provisions of paragraph (c) through (f) below, an Eligible Applicant who has attained age 59-1/2 may elect to withdraw all or a portion of the Total Account maintained on his behalf. | ||
| (c) | A withdrawal under this Section 7.6 shall be effective as of the date set forth in the Eligible Applicant’s application for withdrawal, as approved by the Plan Administrator. The Administrator shall endeavor to cause the payment of the withdrawal to be made on, or as soon as practicable following, such effective date. |
| (i) | The amount available for withdrawal will be based on the balance(s) of the Eligible Applicant’s applicable accounts or sub-accounts on the Valuation Date as of which the payment of the withdrawal is made. | ||
| (ii) | Withdrawals shall be made from the applicable accounts and sub-accounts maintained under the Plan on behalf of the Eligible Applicant in such order as the Administrator, pursuant to a uniform and nondiscriminatory policy, shall direct and communicate to Eligible Applicants. | ||
| (iii) | Withdrawals shall be made from the investment funds maintained under the Plan in such order as the Administrator, pursuant to a uniform and nondiscriminatory policy, shall direct and communicate to Eligible Applicants. | ||
| (iv) | Withdrawals may be paid in the form of a cash payment and/or as a direct rollover at the election of the Eligible Applicant. However, to the extent all or a portion of |
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| the applicable account(s) of an Eligible Applicant subject to the withdrawal election are invested in the Erie Indemnity Stock Fund, the Eligible Applicant may elect to receive the withdrawal either (A) in whole units of Erie Indemnity Stock (with fractional units distributed in cash) or (B) in cash. | |||
| (v) | The minimum amount of withdrawal under this Section 7.6 shall be the lesser of (A) $500 and (B) the balance(s) of the applicable account(s) of the Eligible Applicant from which a withdrawal is requested under paragraphs (a) and/or (b) above. |
| (d) | Notice shall be provided to an Eligible Applicant in connection with any withdrawal and such Notice shall be consistent with rules promulgated by the Secretary of the Treasury or his delegate. | ||
| (e) | The Administrator, in its discretion, may provide that a reasonable administrative fee be charged to an Eligible Applicant who elects a withdrawal under this Section 7.6. Any such administrative fee shall be pursuant to a uniform and nondiscriminatory policy that is communicated to Eligible Applicants. | ||
| (f) | The Company shall have full discretionary authority to modify the provisions of this Section 7.6 provided that any modification shall be evidenced by a writing approved by the Administrator, shall be consistently applied to all pending and future applications as of the date of the modification and shall not operate so as to reduce or eliminate any benefit protected under Section 411(d)(6) of the Code that has accrued as of the date of such modification. |
| 7.7 | Availability of Loans |
| Subject to the provisions of Sections 7.7, 7.8 and 7.9, an Eligible Applicant may apply for a loan from the Plan. Any such application shall be approved or denied by the Administrator in accordance with a uniform, non-discriminatory policy and such action by the Administrator shall be final. All loans approved shall be effective as of the “loan effective date” (as hereinafter defined) provided the loan application was submitted to the Administrator within a reasonable time (as determined by the Administrator) prior to the loan effective date. All loans shall be made only in consideration of adequate security. For purposes hereof the term “loan effective date” shall mean the date, mutually agreed upon by the Participant and the Administrator, on which the loan shall be considered effective. |
| The Administrator may establish rules governing the granting of loans, provided (i) that such rules are not inconsistent with the provisions of Sections 7.7, 7.8 and 7.9, (ii) that any such rules adopted by the Administrator shall be described in the documents supporting the loan transaction and (iii) that loans are made available to all Eligible Applicants on a reasonably equivalent basis and are not made available to Eligible Applicants who are Highly Compensated in an amount greater than the amount made available to other Eligible Applicants. |
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| 7.8 | Terms and Conditions of Participant Loans |
| (a) | Amount of Loan. At the time the loan is made, the principal amount of the loan, when added to all other outstanding loans of the Participant from the Plan and any other qualified plan of an Employer and Affiliates, shall not exceed the lesser of: |
| (i) | $50,000, as reduced by the excess, if any, of the Eligible Applicant’s highest outstanding loan balance from the Plan during the one-year period ending on the day before the date such new loan is secured over the outstanding balance of loans from the Plan on the date such loan is made; or |
| (ii) | one-half of the current value of the Total Account maintained on behalf of the Eligible Applicant under the Plan. |
| The current value of a Total Account shall be determined as of the Valuation Date on which the Eligible Applicant initiates the loan process by providing Notice to the Administrator or its designee. No loan shall be made in an amount less than $1,000. Any loan amount shall be made in accordance with Section 7.9. | |||
| (b) | Application for Loan. The Eligible Applicant must give the Administrator adequate written notice, as determined by the Administrator, of the requested amount and desired time for receiving a loan. | ||
| (c) | Length of Loan. The Eligible Applicant and the Administrator shall arrange for the repayment of a Plan loan. The period of repayment shall not exceed five years from the date the loan is made. All repayment schedules (whether by payroll withholding or otherwise) shall commence as of the next administratively feasible pay period following the disbursement of the loan and shall provide for substantially level amortization of principal and interest. An Eligible Applicant who is on a military leave of absence may elect to extend the term of the loan by the length of such absence. In all other cases, an Eligible Applicant who is on a leave of absence or who terminates employment with the Company and Affiliates must make principal and interest payments in the amount and on such dates as otherwise due. In the event such payments are not made the maturity of the loan shall be accelerated and the outstanding principal amount of the loan, together with all accrued interest, shall be deemed immediately due and distributable at such date or dates as the Administrator deems reasonable and as may be specified by applicable law and regulation. Except as otherwise permitted in Income Tax Regulations, in no event shall the date of deemed distribution extend beyond the end of the calendar quarter next following the calendar quarter in which the payment was not made. | ||
| (d) | Prepayment. The Eligible Applicant shall be permitted to repay the loan in total as of any date prior to maturity without penalty. | ||
| (e) | Note. The loan shall be evidenced by a promissory note executed by the Eligible Applicant and delivered to the Administrator. The Eligible Applicant will agree to execute any other documents (e.g., payroll withholding forms) that may be necessary or appropriate to effect the loan. |
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| (f) | Interest. All loans shall be considered investments of the Trust and interest shall be charged on the loan at the rate set by the Administrator as of the loan effective date. Such rate, applicable to loans effective in a given calendar quarter, shall be the prime lending rate as determined by the Administrator as of the last business day of the previous calendar quarter, plus 100 basis points, provided that such interest rate may be limited in accordance with law during a period of qualifying military service. | ||
| (g) | Security. Subject to the extent required under regulations promulgated by the Secretary of Labor or his delegate, a Plan loan shall be secured by an assignment of the Eligible Applicant’s right, title and interest in that portion of his Total Account under the Plan as shall adequately secure the loan, provided such security shall not exceed one-half of the current value of the Eligible Applicant’s vested Total Account. The Administrator may also require such additional collateral as may be deemed necessary to adequately secure repayment of the loan. | ||
| (h) | Default. The Administrator shall take reasonable steps to secure repayment of any loan granted hereunder in accordance with its terms; however, when the Administrator declares a loan to an Eligible Applicant to be in default, the outstanding balance of the loan, together with unpaid, accrued interest, shall be deemed a lien against the Total Account maintained on behalf of the Eligible Applicant. The Administrator shall take such reasonable steps as it shall deem necessary or appropriate to eliminate the default before causing an offset distribution to be made with respect to the Eligible Applicant for the purpose of fully amortizing the loan outstanding; however, should the loan remain in default after these administrative procedures are taken, the Administrator will consider the entire amount of the loan outstanding (including all accrued interest to date) as a distribution as of the first date, on or following the administrative procedures, on which the Eligible Applicant has a distributable event and will process the Total Account of the Eligible Applicant accordingly. | ||
| (j) | Other Terms and Conditions. The Administrator shall fix such other terms and conditions of the loan as it deems necessary to comply with legal requirements, to maintain the qualification of the Plan and Trust Fund under Code Section 401(a), to exempt the loan transaction from the prohibited transaction rules of under Code Section 4975, or to prevent the treatment of the loan for tax purposes as a distribution to the Eligible Participant. The Administrator may fix other terms and conditions of the loan, not inconsistent with the provisions of this Article Fourteen. | ||
| (k) | No Prohibited Transactions. No loan shall be made unless such loan is exempt from the tax imposed on prohibited transactions by Code Section 4975 or would be exempt from such tax (if the Eligible Participant were a disqualified person as defined in Section 4975(e)(2) of the Code) by reason of Code Section 4975(d)(1). |
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| 7.9 | Loan Accounts |
| A loan made by the Plan to a Eligible Applicant in accordance with Sections 7.7 and 7.8 shall be from the Total Account maintained on behalf of such Eligible Applicant and from the investment funds in which such Total Account is invested in such order of priority as the Administrator, pursuant to a uniform and nondiscriminatory policy, shall direct. Payments of principal and interest on loans shall be paid over to the Trustee as soon as possible after each payroll deduction or other repayment and shall be credited to the Total Account of the Eligible Applicant as of the date the repayments are received by the Trustee. An Eligible Applicant’s loan repayments will be credited to such individual’s Total Account in such manner as determined by the Administrator and communicated to Eligible Applicants. The Administrator shall have the authority to establish other reasonable rules, not inconsistent with the provisions of the Plan, governing the establishment and maintenance of loan accounts. |
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ARTICLE EIGHT
THE TRUST FUND
| 8.1 | Trust Agreement |
| The Company has entered into a Trust Agreement for the purpose of holding assets of the Trust Fund. The Trust Agreement provides, among other things, that all funds received by the Trustee thereunder shall be held, administered, invested and distributed by the Trustee, and that no part of the corpus or income of the Trust Fund held by the Trustee shall be used for, or diverted to, purposes other than for the exclusive benefit of Participants or their Beneficiaries. The Administrator may remove such Trustee or any successor Trustee, and any Trustee or any successor Trustee may resign. Upon removal or resignation of a Trustee, the Administrator shall appoint a successor Trustee. |
| The Administrator shall have authority to direct that there shall be more than one Trustee under the Trust Agreement and to determine the portion of the assets under the Trust Agreement to be held by each such Trustee. If such action is taken, the Administrator shall designate the additional Trustee or Trustees, and each Trustee shall hold and invest and keep records with respect to the portion of such assets held by it. |
| 8.2 | Appointment of Independent Accountants |
| The Company may select a firm of independent public accountants to examine and report on the financial position and the results of the operations of the Trust Fund created under the Plan, at such times as it deems proper and/or necessary. |
| 8.3 | Appointment of Investment Manager |
| The Administrator may select an independent investment manager to invest the portion of the Trust Fund in each of the various funds. Such investment manager shall be either registered as an investment manager under the Investment Adviser’s Act of 1940, a bank, a mutual fund or an insurance company, and as required by the Administrator, shall acknowledge in writing that he is a fiduciary with respect to the Plan. |
| 8.4 | Role of Administrator in Operation of the Trust Fund |
| The Administrator shall perform such duties relating to the operation of the Trust Fund as it deems appropriate and shall perform the duties specified in this Section 8.4. |
| The Administrator shall have the following responsibilities: |
| (a) | to appoint and remove Trustees; | ||
| (b) | to appoint investment and fund managers; |
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| (c) | to allocate the duties and procedures for the Trustee and investment fund managers; | ||
| (d) | to select investment funds or other investments to offer under the Plan; | ||
| (e) | to establish an investment philosophy and goals for each of the investment and fund managers; | ||
| (f) | to monitor the Trustee with respect to servicing the Trust Fund in a fiduciary capacity; and | ||
| (g) | to monitor the investment and fund managers including, without limitation, their investment philosophies, goals, and rates of return. |
| The Administrator may, from time-to-time, designate another person to carry out any of the Administrator’s responsibilities under this Section 8.4. The person so designated will have full authority, or such limited authority as the Administrator may specify, to take such actions as are necessary or appropriate to carry out the duties delegated by the Administrator |
| 8.5 | Voting of Erie Indemnity Stock |
| (a) | Each Participant or Beneficiary who has an Employer Account or Safe Harbor Matching Account maintained under the Plan on his behalf with an investment in the Erie Indemnity Stock Fund shall have the powers and responsibilities set forth in this Section 8.5. | ||
| (b) | Prior to each meeting of the Class A shareholders of the Company during which a vote of Class A shares is to be taken, the Company shall cause to be sent to each person described in Section 8.5(a), a copy of the proxy solicitation material for such meeting, together with a form requesting confidential voting instructions for the voting of Erie Indemnity Stock held in the Erie Indemnity Stock Fund in proportion to the number of shares or units of the Erie Indemnity Stock Fund held in such person’s Employer Account. Upon receipt of such a person’s instructions, the Trustee shall then vote in person, or by proxy, such Erie Indemnity Stock as so instructed. | ||
| (c) | Instructions received from the persons described in Section 8.5(a) by the Trustee regarding the voting of Erie Indemnity Stock held in the Erie Indemnity Stock Fund shall be held in strictest confidence and shall not be divulged to any other person, including directors, officers or employees of the Company, or any Affiliate, except as otherwise required by law. | ||
| (d) | Except as otherwise set forth in the Trust Agreement, the Trustee shall vote Erie Indemnity Stock which represents those shares or units of the Erie Indemnity Stock Fund for which the Trustee does not receive affirmative direction from Participants and Beneficiaries in the same proportion as the Trustee votes those shares of Erie Indemnity Stock held in the Erie Indemnity Stock Fund for which it has received voting instructions. |
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ARTICLE NINE
ADMINISTRATION OF THE PLAN
| 9.1 | The Administrator |
| The Plan shall be administered by a committee that shall act as Plan Administrator. The initial members of the administrative committee have been appointed by the Board. However, such initial members, and any subsequent members of the administrative committee shall serve at the pleasure of the Executive Council of the Company. Any individual who is a member of the administrative committee may resign by delivering his written resignation to the Executive Council of the Company. In the event of the death, resignation or removal of a member of the administrative committee, such Executive Council shall fill the vacancy. In making the appointment, the Executive Council shall not be limited to any particular person or group, and nothing herein contained shall be construed to prevent any Participant, director, officer, employee or shareholder of the Employers from serving as a member of the administrative committee. Members of the administrative committee will not be compensated from the Trust Fund for services performed in such capacity, but the Company will reimburse such individual for expenses reasonably incurred by them in such capacity. The Administrator shall be the “named fiduciary” for purposes of ERISA; provided, however, that Participants and Beneficiaries with Employer Accounts under the Plan shall be considered “named fiduciaries” solely to the extent of those fiduciary duties and responsibilities which are directly related to the exercise of voting rights with respect to Plan interests invested in the Erie Indemnity Stock Fund (and not to other aspects of Plan operation and/or administration). |
| Appointment by the Executive Council of the Company shall be evidenced in writing executed on behalf of the Executive Council. Copies of such writings shall be delivered to the Trustee and to such other persons as may require such notice. |
| 9.2 | Powers of Administrator |
| The Administrator will have full power to administer the Plan in all of its details, subject, however, to the requirements of ERISA. This power shall include having the sole and absolute discretion to interpret and apply the provisions of the Plan, to determine the rights and status hereunder of any individual, to decide disputes arising under the Plan, and to make any determinations and findings of fact with respect to benefits payable hereunder and the persons entitled thereto as may be required for any purpose under the Plan. Without limiting the generality of the above, the Administrator is hereby granted the following authority which it shall discharge in its sole and absolute discretion in accordance with Plan provisions as interpreted by the Administrator: |
| (a) | To make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan, including the modification of the claims procedure under Article Ten in accordance with any regulations issued under Section 503 of ERISA. | ||
| (b) | To interpret the Plan. |
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| (c) | To decide all questions concerning the Plan and the eligibility of any person to participate in the Plan, his period of participation and/or service under the Plan, his date of birth, the value of the Total Account, or any part thereof, maintained on behalf of the person and the rights of any person to receive a distribution from the Plan and the amount of such distribution. | ||
| (d) | To determine the character and amount of Tax Deferred Contributions, Roth Elective Deferrals, Tax Deferred Catch-Up Contributions, Roth Catch-Up Contributions and Safe Harbor Matching Contributions to be made on behalf of any Participant in accordance with the provisions of the Plan. | ||
| (e) | To identify the proper payee of any portion of a Total Account, to authorize the payment of Plan benefits and to direct cessation of benefit payments. | ||
| (f) | To appoint, employ or engage such other agents, counsel, accountants, consultants and actuaries as may be required to assist in administering the Plan. | ||
| (g) | To establish procedures to determine whether a domestic relations order is a qualified domestic relations order within the meaning of Section 414(p) of the Code, to determine under such procedures whether a domestic relations order is a qualified domestic relations order and whether a putative alternate payee otherwise qualifies for benefits hereunder, to inform the parties to the order as to the effect of the order, and to direct the Trustee to hold in escrow or pay any amounts so directed to be held or paid by the order. | ||
| (h) | To obtain from the Employers, Employees, Participants, Spouses and Beneficiaries such information as shall be necessary for the proper administration of the Plan. | ||
| (i) | To perform all reporting and disclosure requirements imposed upon the Plan by ERISA, the Code or any other lawful authority. | ||
| (j) | To ensure that procedures are established which are sufficient to safeguard the confidentiality of information relating to the purchase, holding, and sale of Erie Indemnity Stock held in the Erie Indemnity Stock Fund and the exercise of shareholder rights with respect to Erie Indemnity Stock held in the Erie Indemnity Stock Fund and to ensure such procedures are being followed. | ||
| (k) | To appoint and remove an independent fiduciary for the purpose of carrying out activities relating to any situations which the Administrator determines involves an unreasonable potential for undue Employer influence with regard to the direct or indirect exercise of shareholder rights with respect to Erie Indemnity Stock holdings in the Erie Indemnity Stock Fund. | ||
| (l) | To take such steps as it, in its discretion, considers necessary and/or appropriate to remedy an inequity under the Plan that results from incorrect information received or communicated or as the consequence of administrative error including, but not limited to, recouping benefit overpayments. | ||
| (m) | To correct any defect, reconcile any inconsistency or supply any omission under the Plan. |
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| (n) | To delegate its powers and duties to others in accordance with Section 9.3. | ||
| (o) | To exercise such other authority and responsibility as is specifically assigned to it under the terms of the Plan or the provisions of the Administrator’s charter and to perform any other acts necessary to the performance of its powers and duties. | ||
| (p) | To determine if and when Participants and Beneficiaries must be notified of any temporary suspension, limitation or restriction of their ability to execute various transactions under the Plan (including any notice required by Section 101(i) of ERISA) and to determine the content and method of distribution of any such notification. |
| The Administrator at its discretion may either request the Company or direct the Fund to pay for any or all services rendered by the Trustee, any investment manager, and by persons appointed, employed or engaged under Section 9.2(f) or under the terms of the Trust Agreement. |
| The Administrator’s interpretations, decisions, computations and determinations under this Section 9.2 which are made in good faith will be final and conclusive upon the Employers, all Participants and all other persons concerned. Any action taken by the Administrator with respect to the rights or benefits of any person under the Plan shall be revocable by the Administrator as to payments or distributions not theretofore made, pursuant to such action, from the Trust Fund; and appropriate adjustments may be made in future payments or distributions to a Participant, Spouse or Beneficiary to offset any excess payment or underpayment previously made to such Participant, Spouse or Beneficiary from the Trust Fund. No ruling or decision of the Administrator in any one case shall create a basis for a retroactive adjustment in any other case prior to the date of a written filing of each specific claim. |
| 9.3 | Delegation of Duties |
| The Administrator may, from time to time, designate any person to carry out any of the responsibilities of the Administrator. The person so designated will have full authority, or such limited authority as the Administrator may specify, to take such actions as are necessary or appropriate to carry out the duties delegated by the Administrator. |
| 9.4 | Conclusiveness of Various Documents |
| The Administrator and the Company and its directors and officers will be entitled to rely upon all tables, valuations, certificates and reports furnished by any actuary, accountant, counsel or other expert appointed, employed or engaged by the Administrator or the Company. |
| 9.5 | Actions to be Uniform |
| Any discretionary actions to be taken under the Plan by the Administrator will be nondiscriminatory and uniform with respect to all persons similarly situated. |
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| 9.6 | Liability and Indemnification |
| To the full extent allowed by law, the Administrator shall not incur any liability to any Participant or Beneficiary, or to any other person, by reason of any act or failure to act on the part of the Administrator if such act or omission is not the result of the Administrator’s gross negligence, willful misconduct or exercise of bad faith. To the full extent allowed by law, the Company agrees to indemnify the Administrator against all liability and expenses (including reasonable attorney’s fees and other reasonable expenses) occasioned by any act or omission to act if such act or omission is not the result of the Administrator’s gross negligence, willful misconduct or exercise of bad faith. Neither this Section 9.6 nor any other provision of this Plan shall be applied to invalidate, modify, or limit in any respect any contract, agreement, or arrangement for indemnifying or insuring the Administrator against, or otherwise limiting, such liability or expense, or for settlement of such liability, to the extent such contract, agreement, or arrangement is not precluded by the terms of Section 410 of ERISA. |
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ARTICLE TEN
CLAIMS PROCEDURE
| 10.1 | Claims Review Procedure |
| The Administrator shall be responsible for the claims procedure under the Plan. An application for a distribution, withdrawal or loan under the Plan shall be considered a claim for purposes of this Article Ten. |
| 10.2 | Original Claim |
| In the event a claim of any Participant, Beneficiary, alternate payee, or other person (hereinafter referred to in this Section as the “Claimant”) for a benefit is partially or completely denied, the Administrator shall give, within ninety (90) days after receipt of the claim (or if special circumstances, made known to the Claimant, require an extension of time for processing the claim, within one hundred eighty (180) days after receipt of the claim), written notice of such denial to the Claimant. Such notice shall set forth, in a manner calculated to be understood by the Claimant, the specific reason or reasons for the denial (with reference to pertinent Plan provisions upon which the denial is based); an explanation of additional material or information, if any, necessary for the Claimant to perfect the claim; a statement of why the material or information is necessary; a statement of the Claimant’s right to bring a civil action under Section 502(a) of ERISA; and an explanation of the Plan’s claims review procedure, including the time limits applicable to such procedure | ||
| 10.3 | Review of Denied Claim |
| (a) | A Claimant whose claim is partially or completely denied shall have the right to request a full and fair review of the denial by a written request delivered to the Administrator within sixty (60) days of receipt of the written notice of claim denial, or within such longer time as the Administrator, under uniform rules, determines. In such review, the Claimant or his duly authorized representative shall have the right to review, upon request and free of charge, all documents, records or other information relevant to the claim and to submit any written comments, documents, or records relating to the claim to the Administrator. | ||
| (b) | The Administrator, within sixty (60) days after the request for review, or in special circumstances, such as where the Administrator in its sole discretion holds a hearing, within one hundred twenty (120) days of the request for review, will submit its decision in writing. Such decision shall take into account all comments, documents, records and other information properly submitted by the Claimant, whether or not such information was considered in the original claim determination. The decision on review will be |
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| binding on all parties, will be written in a manner calculated to be understood by the Claimant, will contain specific reasons for the decision and specific references to the pertinent Plan provisions upon which the decision is based, will indicate that the Claimant may review, upon request and free of charge, all documents, records or other information relevant to the claim and will contain a statement of the Claimant’s right to bring a civil action under Section 502(a) of ERISA. |
| (c) | If a Claimant fails to file a claim or request for review in the manner and in accordance with the time limitations specified herein, such claim or request for review shall be waived, and the Claimant shall thereafter be barred from again asserting such claim. |
| 10.4 | Determination by the Administrator Conclusive | |
| The Administrator’s determination of factual matters relating to Participants, Beneficiaries and alternate payees shall be conclusive. The Administrator and the Company and its respective officers and directors shall be entitled to rely upon all tables, valuations, certificates and reports furnished by any accountant for the Plan, the Trustee or any investment managers and upon opinions given by any legal counsel for the Plan insofar as such reliance is consistent with ERISA. The Trustee and other service providers may act and rely upon all information reported to them by the Administrator and/or the Company and need not inquire into the accuracy thereof nor shall be charged with any notice to the contrary. |
| 10.5 | Exhaustion of Administrative Remedies. | |
| The exhaustion of the claims review procedure is mandatory for resolving every claim and dispute arising under the Plan. As to such claims and disputes: |
| (a) | No claimant shall be permitted to commence any civil action to recover Plan benefits or to enforce or clarify rights under the Plan under Section 502 or Section 510 of ERISA or under any other provision of law, whether or not statutory, until the claims review procedure set forth herein has been exhausted in its entirety; and | ||
| (b) | In any such civil action all explicit and all implicit determinations by the Administrator (including, but not limited to, determinations as to whether the claim, or a request for a review of a denied claim, was timely filed) shall be afforded the maximum deference permitted by law. |
| 10.6 | Deadline to File Civil Action. |
| No civil action to recover Plan benefits or to enforce or clarify rights under the Plan under Section 502 or Section 510 of ERISA or under any other provision of law, whether or not |
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| statutory, may be brought by any claimant on any matter pertaining to the Plan unless the civil action is commenced in the proper forum before the earlier of: |
| (a) | Thirty months after the claimant knew or reasonably should have known of the principal facts on which the claim is based; or | ||
| (b) | Eighteen months after the claimant has exhausted the claims review procedure. |
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ARTICLE ELEVEN
MISCELLANEOUS
| 11.1 | Non-Alienation of Benefits |
| (a) | Except as provided in Section 11.1(b) or 11.1(c), no benefit payable under the Plan shall be subject in any manner to anticipation, sale, transfer, assignment, pledge, encumbrance, security interest or charge, and any action by way of anticipating, alienating, selling, transferring, assigning, pledging, encumbering, charging or granting a security interest in the same shall be void and of no effect; nor shall any such benefit be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the person entitled to such benefit. | ||
| (b) | Section 11.1(a) shall not apply to the creation, assignment, or recognition of a right to any benefit payable pursuant to a Qualified Domestic Relations Order. The Administrator shall establish reasonable procedures to determine the status of domestic relations orders and to administer distributions under such orders which are deemed to be Qualified Domestic Relations Orders. Such procedures shall be in writing and shall comply with the provisions of Section 414(p) of the Code. To the extent that, because of a Qualified Domestic Relations Order, more than one individual is to be treated as a surviving Spouse, the total amount payable from the Plan as a result of the death of a Participant shall not exceed the amount that would be payable from the Plan if there were only one surviving Spouse. | ||
| (c) | Notwithstanding the provisions of Section 11.1(a), the Plan may offset any portion of the Total Account maintained on behalf of a Participant or Beneficiary against a claim of the Plan arising: |
| (i) | as a result of the Participant’s or Beneficiary’s conviction of a crime involving the Plan; or | ||
| (ii) | with regard to the Participant’s or Beneficiary’s violation of ERISA’s fiduciary provisions upon: |
| (A) | the entry of any civil judgment, consent order, or decree against the Participant or Beneficiary; or | ||
| (B) | the execution of any settlement agreement between the Participant and the Department of Labor or Pension Benefit Guaranty Corporation. |
| The provisions of this Section 11.1(c) shall apply only to orders, judgments, decrees and settlements issued or entered into which expressly provide for such offset. |
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| 11.2 | Risk to Participants and Source of Payments | |
| Each Participant assumes all risk in connection with any decrease in the value of any investment fund in the Trust Fund, and the Trust Fund shall be the sole source of any payments to be made to Participants or their Beneficiaries as a result of any right specifically granted under the terms of the Plan. | ||
| 11.3 | Expenses | |
| Subject to any restriction applicable under Section 5.4(a), brokerage fees, transfer taxes and other expenses incurred by the Trustee in connection with the purchase or sale of securities may be added to the cost of such securities or deducted from the proceeds thereof, as the case may be. Earnings credited to accounts invested in mutual funds shall be net of direct fund management expenses. Pursuant to a uniform and nondiscriminatory policy adopted by the Administrator in its discretion and communicated to eligible Participants and Beneficiaries, fees and other expenses associated with specific voluntary Plan transactions may be assessed directly against the Total Account maintained on behalf of the Participant or Beneficiary participating in such transaction. | ||
| All other costs and expenses incurred in administering the Plan shall be paid by the Company or an Employer, unless the Administrator authorizes the payment of such expenses from the Trust Fund. | ||
| 11.4 | Rights of Participants | |
| No Participant or Beneficiary shall have any right or interest under the Plan unless and until he becomes entitled thereto as provided in the Plan. The adoption and maintenance of the Plan shall not be deemed to constitute a contract between an Employer and any Employee or Participant. Inclusion in the Plan will not affect an Employer’s right to discharge or otherwise discipline Employees and membership in the Plan will not give any Employee the right to be retained in the service of an Employer nor any right or claim to a benefit unless such right is specifically granted under the terms of the Plan. | ||
| The Plan shall be binding on all Participants and their Spouses and Beneficiaries and upon heirs, executors, administrators, successors, and assigns of all persons having an interest herein. The provisions of the Plan in no event shall be considered as giving any such person any legal or equitable right against the Company, an Employer or an Affiliate, any of its officers, employees, directors, or shareholders, or against the Trustee, except such rights as are specifically provided for in the Plan or created in accordance with the terms of the Plan. | ||
| 11.5 | Statement of Accounts | |
| As soon as practicable after the last day of March, June, September and December, or such other time or times as the Administrator shall designate, the Administrator shall cause to be sent to each current or former Participant a written statement of his account. |
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| 11.6 | Designation of Beneficiary |
| (a) | Each Participant shall file with the Administrator, on such form as may be provided by the Administrator, a written designation of a Beneficiary or Beneficiaries who shall receive payment of the Participant’s interest under the Plan in the event of his death. If the Participant is married, the Participant’s Beneficiary must be his Spouse (in accordance with Code Section 401(a)(11)(B)(iii)) unless Spousal Consent requirements are satisfied. In the event a Participant dies and there is no properly designated Beneficiary then living, the interest of the Participant under the Plan shall be paid in a lump sum to his surviving Spouse, or, if there is no surviving Spouse, to his estate or other successor, all as the Administrator may determine. | ||
| (b) | A Beneficiary entitled to a payment of all or a portion of a Participant’s Total Account due to the death of the Participant may disclaim his interest therein subject to the following requirements. To be eligible to disclaim, a Beneficiary must be a natural person, must not have received a distribution of all or any portion of said Total Account at the time such disclaimer is executed and delivered, and must have attained at least age twenty-one (21) years as of the date of the Participant’s death. Any disclaimer must be in writing and must be executed personally by the Beneficiary before a notary public. A disclaimer shall state that the Beneficiary’s entire interest is disclaimed or shall specify what portion thereof is disclaimed. To be effective, an original executed copy of the disclaimer must be both executed and actually delivered to the Administrator after the date of the Participant’s death but not later than one hundred eighty (180) days after the date of the Participant’s death. A disclaimer shall be irrevocable when delivered to the Administrator. A disclaimer shall be considered to be delivered to the Administrator only when actually received by the Administrator. The Administrator shall be the sole judge of the content, interpretation and validity of a purported disclaimer. Upon the filing of a valid disclaimer, the Beneficiary shall be considered not to have survived the Participant as to the interest disclaimed. A disclaimer by a Beneficiary shall not be considered to be a transfer of an interest or an assignment or alienation of benefits in violation of Section 11.1 hereof. No other form of attempted disclaimer shall be recognized by the Administrator. |
| 11.7 | Payment to Incompetents | |
| If any person entitled to receive any benefits hereunder is a minor, or is in the judgment of the Administrator, legally, physically, or mentally incapable of personally receiving and receipting for any distribution, the Administrator may instruct the Trustee to make distribution to such other person, persons or institutions who, in the judgment of the Administrator, are then maintaining or have custody of such distributee. As a condition to the issuance of such instruction for the distribution to such other person or institution, the Administrator may require such person or institution to exhibit or to secure an order, decree or judgment of a court of competent jurisdiction with respect to the incapacity of the person who would otherwise be entitled to receive the benefits. | ||
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| 11.8 | Authority to Determine Payee | |
| The determination of the Administrator as to the identity of the proper payee of any benefit under the Plan and the amount of such benefit properly payable shall be conclusive, and payment in accordance with such determination shall constitute a complete discharge of all obligations on account of such benefit. | ||
| 11.9 | Severability | |
| If any provision of this Plan is held to be invalid or unenforceable, such determination shall not affect the other provisions of this Plan. In such event, this Plan shall be construed and enforced as if such provision had not been included herein. | ||
| 11.10 | Employer Records | |
| The records of a Participant’s Employer shall be presumed to be conclusive of the facts concerning his employment or non-employment, periods of service and Compensation unless shown beyond a reasonable doubt to be incorrect. | ||
| 11.11 | Limitation on Contributions |
| (a) | In no event shall the total annual additions on behalf of a Participant under this Plan and under any other defined contribution plan or plans maintained by the Employer with respect to any limitation year exceed the lesser of $40,000 (or such dollar figure, as increased in accordance with Section 415(d) of the Code for years up to and including the given limitation year) or 100% of the Test Compensation, paid to the Participant by an Employer within such limitation year. All amounts contributed to any defined contribution plan maintained by an Employer or an Affiliate (taking into account Section 415(h) of the Code) other than any rollover contribution and any salary reduction contribution to a simplified employee pension shall be aggregated with contributions made by an Employer under this Plan in computing any Employee’s total annual additions limitation. For purposes hereof, the limitation year shall be the calendar year. | ||
| For purposes of this section, “total annual additions” for any limitation year shall mean the sum of the following: |
| (i) | Employer contributions under this Plan and under any other defined contribution plan maintained by an Employer or Affiliate; | ||
| (ii) | Reallocated forfeitures under any defined contribution plan maintained by an Employer or Affiliate; | ||
| (iii) | After-tax contributions under any other defined contribution plan maintained by an Employer or Affiliate; and | ||
| (iv) | Amounts allocated to an individual medical account, as defined in Section 415(1)(2) of the Code, as part of a pension or annuity plan and amounts |
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| derived from contributions paid or accrued which are attributable to post-retirement medical benefits described in Section 419A(d) of the Code, under a welfare benefit fund (as defined in Section 419(e) of the Code) maintained by an Employer or Affiliate. |
| Catch-Up Contributions under Section 3.3, make-up contributions on account of qualified military service under Section 414(u) of the Code and loan repayments under Section 7.8 shall not be recognized as annual additions for purposes of this section. | |||
| (b) | In the event that a Participant’s total annual additions for any limitation year exceed the limitations of Section 11.11(a) because of a reasonable error in estimating the Participant’s Compensation, a reasonable error in determining the amount of Elective Deferrals that a Participant may make within the limitations of paragraph (a) above or due to such other facts and circumstances as the Commissioner of Internal Revenue finds justifiable, the excess amount shall be eliminated and/or the error corrected in a manner prescribed under the IRS Employee Plans Compliance Resolution System. | ||
| (c) | Notwithstanding anything herein to the contrary, in no event shall Test Compensation, for purposes of this Section 11.11, include severance pay. However, the following types of remuneration, if includible for purposes of Test Compensation as described in paragraph (a) above, shall be taken into account only if paid by the later of the date that is 2-1/2 months after the date of severance from employment with an Employer or the end of the limitation year that includes the date of severance from employment with the Employer, if the amounts would have been included in compensation had they been paid before the severance from employment date: |
| (i) | The payment for services rendered during the Participant’s regular working hours, or for services outside of the Participant’s regular working hours such as overtime or shift differential, commissions, bonuses or other similar payments that would have been paid had the Participant not incurred a severance from employment. | ||
| (ii) | Payments of unused accrued bona fide sick, vacation or other leave provided the Participant would have been able to use the leave if employment had continued, or payments from a nonqualified unfunded deferred compensation plan, provided the payment would have been paid had the Participant not incurred a severance from employment and such payment would have been includible in gross income had such payment been made. | ||
| (iii) | If the Employer continues to provide remuneration to a Participant due to the Participant’s disability or to a Participant who is not performing services because of qualified military service, as defined in Code Section 414(u), in an amount that is not in excess of that which would have been payable to the Participant as compensation had the Participant not entered qualified military service, such amounts will be included in Test Compensation for purposes of this Section. |
| (d) | The sole purpose of this Section is to comply with the formal requirements of Section 415(c) of the Code and the terms of this Section shall be interpreted, applied and if and to |
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| the extent necessary, shall be deemed modified so as to satisfy solely the minimum requirements of Section 415(c) of the Code and the regulations promulgated with respect thereto. |
| 11.12 | IRC 414(u) Compliance Provision | |
| Notwithstanding any provision of the Plan to the contrary, contributions, benefits and service credit with respect to qualified military service (as hereinafter defined) shall be provided in accordance with Section 414(u) of the Code. |
| (a) | As provided by Section 414(u) of the Code, “qualified military service” means service in the uniformed services (as defined in Chapter 43 of Title 38, United States Code) by an individual if he is qualified under such chapter to reemployment rights with the Company or an Affiliate following such military service. | ||
| (b) | “USERRA” means the Uniformed Services Employment and Reemployment Rights Act of 1994, as amended. | ||
| (c) | If an individual returns to employment with the Company or an Affiliate following a period of qualified military service under circumstances such that he has reemployment rights under USERRA, and the individual reports for said reemployment within the time frame required by USERRA, the following provisions apply: |
| (i) | The Employee may elect to have “make up” Elective Deferrals made on his behalf following his period of qualified military service to the extent he could have made Elective Deferrals had he remained a Covered Employee under the Plan during his qualified military service. To the extent such “make up” Elective Deferrals are made by the Employee within such period as provided by law, such contributions shall be matched under this Plan according to the same conditions and at the same rate as the Elective Deferrals would have been matched had they actually been made during the period of qualified military service. | ||
| (ii) | The period of qualified military service shall be recognized for purposes of determining Years of Eligibility Service under the Plan to the same extent it would have been had the Employee remained continuously employed with the Company or an Affiliate rather than leaving active employment to go into qualified military service. | ||
| (iii) | Compensation and Test Compensation shall be determined for the individual during the period of qualified military service. The amount of Compensation and Test Compensation shall be determined by the Company consistent with the requirements of the USERRA, and shall reflect the Company’s best estimate of the earnings the individual would have received but for the qualified military service. |
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| (iv) | Notwithstanding the foregoing, investment earnings or losses applicable to any contributions hereunder shall be credited only with respect to periods following the actual deposit of such contributions. |
| (d) | The Plan shall comply with the provisions of the Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”), which amended certain provisions of USERRA. |
| (i) | If a Participant dies while performing qualified military service and such death occurs on or after January 1, 2007, the Participant’s Beneficiary shall receive the same benefits under the Plan as if the Participant had returned to employment as a Covered Employee immediately prior to his death and then terminated employment on account of his death. | ||
| (ii) | A Participant performing qualified military service on or after March 1, 2009 for a period of at least 30 days and who has not incurred a severance from employment may elect to withdraw in cash all or a portion of his Tax Deferred Account. Such a Participant shall be suspended from making Elective Deferrals to the Plan until the first day of the pay period occurring six full months after the effective date of the withdrawal. | ||
| (iii) | Effective March 1, 2011, a Participant who is called to qualified military service for a period in excess of 179 days, or for an indefinite period, and who has not incurred a severance from employment, may elect to withdraw in cash all or a portion of his Tax Deferred Account. | ||
| (iv) | A withdrawal under this Section 11.12(d) must be effective during a Participant’s period of qualified military service and before the Participant has otherwise incurred a severance from employment with the Employer and Affiliates. | ||
| (v) | The provisions of Sections 7.6(c) through 7.6(f) shall apply to the withdrawals under this Section 11.12(d), substituting “Participant” for “Eligible Applicant” thereunder. |
| (e) | The foregoing provisions are intended to provide the benefits required by USERRA and the HEART Act, and are not intended to provide any other benefits. This Section shall be construed consistent with said intent. |
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ARTICLE TWELVE
AMENDMENT, TERMINATION OR MERGER OF THE PLAN
| 12.1 | Right to Amend | |
| The Company reserves the right at any time or times to modify or amend the Plan; provided, however, that no such modification or amendment shall be made which would: |
| (a) | increase the duties or liabilities of the Trustee without its written consent; or | ||
| (b) | impermissibly divest a Participant of any portion of his Total Account hereunder that has accrued to him prior to the effective date of such amendment; or | ||
| (c) | cause or permit any portion of the Trust Fund to be converted to or become the property of the Company; or | ||
| (d) | cause any portion of the Trust Fund to be used for purposes other than the exclusive benefit of the Participants or their Beneficiaries; |
| unless such modification or amendment is necessary or appropriate to enable the Plan or Trust Fund to qualify under Section 401 of the Code, as amended from time to time, or to retain for the Plan or Trust Fund such qualified status. | ||
| Any such modification or amendment to this Plan shall be evidenced by a written instrument adopted by the Board; provided, however, that the Administrator may adopt such amendments as shall fall within the limited amendment authority contained in the Administrator’s charter. Any such written instrument shall recite at which time the amendments contained therein shall become effective. | ||
| Promptly after an amendment to this Plan shall have become effective, the Company, or Administrator, as the case may be, shall cause a copy of such amendment to be filed with the Administrator and with the Trustee. The Administrator shall take such steps as it may deem appropriate and reasonable to communicate the amendment to Participants. | ||
| 12.2 | Right to Terminate |
| (a) | Although it is the expectation of the Company that it will continue the Plan as a permanent retirement program for the benefit of the Employees eligible hereunder, the Company reserves the right at any time, by action of its Board, at its sole discretion, to terminate the Plan in whole or in part. There shall be no liability or obligation on the part of an Employer to make any further contributions to the Trust Fund in the event of the termination of the Plan. | ||
| (b) | Notwithstanding anything to the contrary contained herein, Trustee’s fees and other expenses incident to the operation and management of the Plan incurred after the |
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| termination of the Plan may, at the discretion of the Company, be paid from assets of the Trust Fund that are not part of any Participant’s Total Account. | |||
| (c) | In the event of the termination of the Plan in whole or in part or in the event of the complete discontinuance of Employer contributions under the Plan, each affected Participant’s interest in the Trust Fund shall become 100% vested and shall be nonforfeitable. |
| 12.3 | Merger, Transfer of Assets or Liabilities | |
| The Company may merge or consolidate the Plan with, transfer assets and liabilities of the Plan to, or receive a transfer of assets and liabilities from, any other plan without the consent of any other Employer or other person, if such transfer is effected in accordance with applicable law and if such other plan meets the requirements of Code Sections 401(a) and 501(a), permits such transfer or the receipt of such transfer and, with respect to liabilities to be transferred from this Plan to such other plan, satisfies the requirements of Code Sections 411(d)(6). This Plan may not be merged or consolidated with any other plan, nor may any assets or liabilities of this Plan be transferred to any other plan, unless the terms of the merger, consolidation or transfer are such that each Participant in the Plan would, if the Plan were terminated immediately after such merger, consolidation or transfer, receive a benefit equal to or greater than the benefit he would have been entitled to receive if this Plan had terminated immediately prior to the merger, consolidation or transfer. |
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ARTICLE THIRTEEN
TOP HEAVY PROVISIONS
| 13.1 | Top Heavy Provisions Inapplicable | |
| The Plan is a cash or deferred arrangement described in Section 416(g)(4)(H) of the Code and, as a result, is deemed to not be a top heavy plan. |
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| Executed at Erie, Pennsylvania, this 23 day of December, 2010. |
| ERIE INDEMNITY COMPANY |
||||
| By: | /s/ Terrence W. Cavanaugh | |||
| Title: President & CEO | ||||
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Exhibit 10.126
Agreement dated January 13, 2010, by and between Erie Indemnity Company and George R. Lucore.
AGREEMENT
This
AGREEMENT (the “Agreement”), dated as of the 13th day of January 2010, is by
and between ERIE INDEMNITY COMPANY, a Pennsylvania corporation with its principal
place of business at 100 Erie Insurance Place, Erie, Pennsylvania 16530 (together with its
subsidiaries and affiliated companies, referred to hereinafter as the “Company”), and
GEORGE R. LUCORE of 928 Lord Road, Fairview, PA 16415 (the “Employee”).
RECITALS:
WHEREAS, the Employee is employed as Executive Vice President — Field Operations
of the Company; and
WHEREAS, the Company and the Employee desire to memorialize in this Agreement
the Employee’s retirement and related termination of his employment with the Company, and to
completely resolve all matters arising out of his employment and termination of that
employment.
NOW, THEREFORE, in consideration of the promises and mutual covenants contained
herein, and intending to be legally bound hereby, the Employee and the Company agree as
follows:
1. Effective Date; Payments Conditioned on General Releases.
(a) Except for Section 2 below, which shall be effective upon signing of this
Agreement by the Employee, all of the other terms of this Agreement shall not become effective
or enforceable until the seven (7) calendar day revocation period referred to in Section 6(d)
below has expired without the Employee revoking this Agreement as set forth in Section 6(d).
(b) Furthermore, the consideration described in Sections 4(b), (c) and (d)
below shall not be owing and payable to the Employee unless and until: (i) this Agreement has
become effective as provided in Section 1(a) above, and (ii) the Employee’s employment is not
terminated before the end of the Transition Period (as defined in Section 2(c) below), and (iii)
within twenty-one (21) calendar days after the termination of the Employee’s employment
including termination by resignation or retirement, the Employee: (A) executes a second waiver
and release in the form attached to this Agreement as Exhibit A, except that the second waiver
and release shall be effective as of the date of termination of the Employee’s employment
including termination by resignation or retirement, and (B) the second seven (7) calendar day
revocation period for the second waiver and release expires without the Employee revoking the
second waiver and release as set forth in Section 6(e) below.
2. Resignation as Officer; Retirement; and Termination of Employment.
(a) The Employee hereby resigns from his position as Executive Vice
President — Field Operations of Erie Indemnity Company and each of its subsidiaries and
affiliated companies, effective as of 11:59 p.m. Erie time on March 31, 2010, and the Company
hereby accepts that resignation.
(b)The Employee hereby resigns as an employee of the Company, effective
as of 11:59 p.m. Erie time on March 31, 2010, and the Company hereby accepts that resignation.
Following his resignation, the Employee, for all purposes, shall be deemed a retired employee.
Upon his retirement, the Employee hereby also resigns as a member of all Boards of Directors of
any of the Company’s subsidiaries and affiliated companies and from any and all positions he
currently holds with any third parties as the Company’s representative or at the Company’s
request.
(c) During the period from the date of this Agreement, through March 31,
2010 (the “Transition Period”), the Employee will remain an employee of the Company with the
same officer title, job description and responsibilities, and compensation and benefits which he
currently has. The Company shall terminate the Employee’s employment during this Transition
Period only for “good cause”, with or without notice.
(d) For purposes of Section 2(c) above, the term “good cause” shall have the
following meaning: (i) the Employee’s deliberate and intentional breach of any material
provision of this Agreement, which breach the Employee shall have failed to cure within fifteen
(15) calendar days after the Employee’s receipt of written notice from the Company specifying
the nature of the Employee’s breach, (ii) the Employee’s deliberate and intentional engagement
in gross misconduct that is materially and demonstrably inimical to the best interests of the
Company, or (iii) the Employee’s conviction of, or plea of guilty or nolo contendere to,
a felony or any crime involving moral turpitude, fraud, deceit, or financial impropriety.
3. Ongoing Cooperation.
(a) During the period from April 1, 2010 through December 31, 2010, the
Employee agrees to use his best efforts to assist, advise and cooperate with the Company, if the
Company so requests, with respect to the transition of Employee’s duties and responsibilities to
others within the Company, and on issues that arose or were in any way developing during his
employment with the Company, subject to Employee’s availability given his employment, if any,
and personal obligations at that time. The level of services the Employee will perform under this
Section 3 shall be no more than 20 percent of the average level of services he performed before
his retirement, and the Company anticipates a level of services significantly below that
20 percent limit.
2
(b) During the period referred to in Section 3(a) above, the Employee shall
furnish such assistance, advice or cooperation to the Company as the Company shall reasonably
request and as is within the Employee’s reasonable capability. Such assistance, advice and
cooperation may include, but shall not be limited to, (i) consulting with the Company regarding
its relations with its independent insurance agents, (ii) attending meetings with such agents, and
(iii) preparing for, or the conduct of, any litigation, investigation or proceeding involving
matters or events which occurred during the Employee’s employment by the Company as to which the
Employee’s knowledge or testimony may be important to the Company. In connection with the
preparation for, or the conduct of, such litigation, investigation or proceeding as described in
the preceding sentence, the Employee shall promptly provide the Company with any records or other
materials in his possession that the Company shall request in connection with the defense or
prosecution of such litigation, investigation or proceeding.
(c) The Employee shall not receive any compensation for any assistance,
advice or cooperation requested by the Company under this Section 3; however, the Company
shall pay or reimburse the Employee for his travel expenses reasonably incurred in the course of
providing such assistance, advice or cooperation. The Company shall make such payment or
reimbursement within thirty (30) days of receipt of reasonable substantiating documentation
from the Employee.
4. Consideration.
(a) In consideration of the execution and performance of this Agreement by
the Employee, and subject to the remaining provisions of this Section 4, the Company shall
continue to pay the Employee his current bi-weekly salary and continue to provide existing
health and related benefits from the date of this Agreement through the date of his retirement.
(b) Assuming Employee is in compliance with the terms of this Agreement up
through October 31, 2010, he will be entitled to a special retirement payment of $400,000 from
the Company, which is an amount to which Employee is not entitled as an employee of the
Company or otherwise. Such payment will be paid on November 12, 2010.
(c) In the event of the Employee’s death before payment of the special
retirement payment described in Section 4(b) above, the Company shall pay that amount to the
beneficiary or beneficiaries of the Employee as designated by the Employee, and the
Company’s obligations under Section 4(b) shall cease; provided, however, that if the Employee has not
designated a beneficiary, or if no such designated beneficiary survives the Employee, the
Company shall pay that amount to the executor or administrator of the Employee’s estate. Such
payment shall be made within ninety (90) calendar days after the Employee’s death upon a date
determined by the Company.
(d) Assuming Employee is and remains in compliance with the terms of this
Agreement, the Company shall continue or cause to be continued the coverage of the Employee
(and the Employee’s previously covered dependents, if any) under the Company’s Health
Protection and Prescription Plan (“Health Plan”), upon substantially the same terms and
3
conditions (including the required employee contribution, if any) as apply to comparably situated
active employees, for the period from the effective date of his
retirement through his 65th
birthday (the “Covered Period”). If the Employee and his previously covered dependents, if any,
are not eligible for continued coverage under the Health Plan, they shall be covered during the
Covered Period under an individual health insurance policy, or, if applicable, to reimbursement
by the Company for their medical and prescription drug expenses, as more fully described below.
The Company’s obligation with respect to all such coverages, including any coverages
that are not provided under an insured plan, is conditioned on the Employee’s duly electing, and
then paying the cost of, COBRA coverage throughout the available COBRA continuation
coverage period. The Company shall reimburse the Employee for the cost of COBRA coverage,
to the extent it exceeds the required contribution at that time of a comparably situated active
employee. The Company shall pay such reimbursement within ninety (90) days after its receipt
of documentation of payment by the Employee, but in no event later than the end of the calendar
year following the year in which the expense was incurred.
If, after the end of the available COBRA continuation period, the continuation of any
coverage identified above is not reasonably available pursuant to the applicable insurance policy
or plan:
| (A) | The parties will cooperate and use their best efforts to obtain an individual policy that provides the Employee (and his previously covered dependents, if any) substantially equivalent coverage, and the Company will pay the premiums on any such individual policy for the Covered Period, to the extent in excess of the required employee contribution paid at that time by comparably situated active employees. | ||
| (B) | If an individual policy cannot be obtained despite the parties’ cooperative best efforts, the Company shall reimburse the Employee for any medical expense he and his previously covered dependents, if any, incur during the remainder of the Covered Period, provided that such expense would have been reimbursed by the Health Plan, and provided the Employee has paid to the Company an amount equal to the required employee contribution paid at that time by comparably situated active employees for such period. The Company shall pay such reimbursement within ninety (90) days after its receipt of reasonable documentation of the expense, but in no event later than the end of the calendar year following the year in which the expense was incurred. |
(e) All payments under this Section 4 shall be subject to applicable
deductions. For the purposes of this Agreement, “applicable deductions” shall include, but shall
not be limited to, any federal, state, or local taxes determined by the Company to be required to
be withheld from amounts paid to the Employee pursuant to this Agreement or otherwise due
from the Company and any other amounts that the Company may be legally required to deduct
from his earnings or that Employee authorizes to be deducted.
4
(f)
Except as provided in this Agreement, the Employee agrees that he is not
entitled to any other compensation including, but not limited to, salary or bonuses, perquisites,
or benefits of any kind or description from the Company, or from or under any employee benefit
plan or fringe benefit plan sponsored by the Company, other than as described in this
Section 4 and other than payment of his:
(i)
vested accrued unpaid vacation time as of the date of his retirement;
(ii)
unused sick time as of the date of his retirement for which he will be paid 20%
of his daily salary rate for each full unused sick day, up to a maximum payment of
$20,000;
(iii)
vested accrued benefits, if any, under the Erie Insurance Group Retirement
Plan for Employees;
(iv)
vested accrued benefits, if any, under the Erie Insurance Group Employee
Savings Plan;
(v) vested accrued benefits, if any, under the Erie Insurance Group Deferred
Compensation Plan;
(vi)
vested accrued benefits, if any, under the 2009 Annual Incentive Plan
(“AIP”);
(vii) vested
accrued benefits, if any, under the 2010 AIP;
(viii) vested accrued benefits, if any, under the Long-Term Incentive Plan
(“LTIP”) for each of the three-year performance periods 2007-2009, 2008-2010, 2009-2011 and 2010-2012; and
(ix) vested accrued benefits, if any, under the Supplemental Employee Retirement
Plan (“SERP”).
Any payments under any of the plans or practices listed in clauses (i) through (ix) above,
including but not limited to the AIP, the LTIP and the SERP, shall be in accordance with the
terms of such plan or practice, including the payment of any benefits on a pro rata basis, and the
Company’s decisions with respect thereto shall be final and binding on Employee.
(g) The consideration paid by the Company to the Employee pursuant to this
Agreement shall be in compromise, settlement and full satisfaction of any and all Claims, as
defined in Section 5 below, that the Employee has, or may have, against the Company or other
Releasees, as defined in Section 5 of this Agreement, arising out of the Employee’s employment
with the Company or its affiliates, the termination of such employment, and any and all matters
of any nature related to the Employee’s employment with the Company and the termination of
that employment.
5
5. Waiver and General Release.
(a) The Employee, for himself, his heirs, successors and assigns, and in
consideration of the payments to be made by the Company pursuant to Section 4 (b) and (d)
above, does hereby forever discharge and release the Company, and its corporate parents,
subsidiaries, affiliated companies, companies with common management, ownership or control,
successors, assigns, insurers and reinsurers, attorneys, and insurance agents, and all of their
officers, directors, shareholders, employees, agents and representatives, in their official and
individual capacities (collectively referred to as “Releasees”), from any and all claims, demands,
causes of action, damages, charges, complaints, grievances, expenses, compensation and remedies
which the Employee now has or may in the future have on account of, or arising out of, any matter
or thing which has happened, developed or occurred before the date of this Agreement
(collectively “Claims”) including, but not limited to, all Claims arising from the Employee’s
employment with the Company or any of its affiliated companies, the termination of such
employment, any and all relationships or dealings between the Employee and the Company or any
of the other Releasees, the termination of any such relationships and dealings, and any and all
other Claims the Employee may have against the Company or any of the other Releasees. The
Employee hereby waives any and all such Claims including, but not limited to, all charges or
complaints that were or could have been filed with any court, tribunal or governmental agency,
and any and all Claims not previously alleged including, but not limited to, any Claims under the
following: (i) Title VII of the Civil Rights Act of 1964, as amended; (ii) the Equal Pay Act of
1963; (iii) the Age Discrimination in Employment Act (ADEA), as amended; (iv) except as
otherwise provided in Section 4(f) above, the Federal Employee Retirement Income Security Act
of 1974 (ERISA), as amended; (v) the Americans With Disabilities Act (ADA), as amended; (vi)
Section 806 of the Sarbanes-Oxley Act of 2002, as amended; (vii) any other federal statutes, rules,
regulations, executive orders or guidelines of any description; (viii) any and all state statutes,
rules, regulations, executive orders or guidelines of any description under Pennsylvania law, or
the law of any other state, including, but not limited to, the Pennsylvania Human Relations Act, as
amended; the Pennsylvania Equal Pay Law; the Pennsylvania Wage Payment and Collection Law;
(ix) any and all local laws, rules, regulations, executive orders or guidelines of any description
including, but not limited to, the Erie County Human Relations Ordinance; and (x) any rule or
principle of equity or common law including, but not limited to, any Claim of defamation,
conversion, interference with a contract or business relationship, any other intentional or
unintentional tort, any Claim of loss of consortium, any Claim of harassment or retaliation, any
claim for breach of contract or implied contract, any claim for breach of covenant of good faith
and fair dealing, and any whistle-blower Claim. This release, discharge and waiver shall be
hereinafter referred to as the “Release.”
(b) The Employee specifically understands and agrees that the termination of
his employment does not violate or disregard any oral or written promise or agreement of any
nature whatsoever, express or implied. If any contract or agreement exists concerning the
employment of the Employee by the Company or the terms and conditions of such employment
or the termination of such employment, whether oral or written, express or implied, that contract
or agreement is hereby terminated and is null and void.
6
(c)
The Employee agrees that this Release may be enforced in federal, state or
local court and before any federal, state or local administrative agency or body.
(d) Nothing in the Release is intended to release any of the Employee’s vested
retirement benefits.
6. Additional Terms.
(a) The Employee represents that he has not filed or caused to be filed, and
agrees that he will not file or cause to be filed, any lawsuit of any kind in any federal, state or
local court arising out of, or relating to, his employment with the Company, the terms and
conditions of that employment, or the termination of his employment.
(b) The Employee agrees that he has not sustained any disabling personal
injury and/or occupational disease which has resulted in a loss of wage earning capacity during
his employment with the Company and that he has no personal injury and/or occupational
disease which has been contributed to, or aggravated or accelerated in a significant manner by
his employment with the Company.
(c) The Employee represents and warrants that the Company has encouraged
and advised the Employee in writing, prior to signing this Agreement, to consult with an attorney
of his choosing concerning all of the terms of this Agreement.
(d) This Agreement may be revoked by the Employee within seven (7)
calendar days after the date this Agreement is signed by the Employee, by giving written notice
of revocation to James J. Tanous, Executive Vice President, Secretary and General Counsel of
the Company at 100 Erie Insurance Place, Erie, Pennsylvania 16530,
through either hand-delivery
or via Certified or Registered U.S. Mail, postage prepaid, return receipt requested.
(e) The second waiver and release referenced in Section 1(b)(iii) above may
be revoked by the Employee within seven (7) calendar days after that second waiver and release
is signed by the Employee giving written notice of revocation to James J. Tanous, Executive
Vice President, Secretary and General Counsel of the Company at 100 Erie Insurance Place,
Erie, Pennsylvania 16530, through either hand-delivery or via Certified or Registered U.S. Mail,
postage prepaid, return receipt requested.
(f) The Employee represents and warrants that the Company has given him a
reasonable period of time of at least twenty-one (21) calendar days to consider all the terms of
this Agreement and for the purpose of consulting with an attorney, if the Employee so chooses.
A copy of this Agreement was first given to the Employee on December 22, 2009. If this
Agreement has been executed by the Employee prior to the end of the twenty-one (21) calendar
day period, the Employee represents that he has freely and willingly elected to do so.
(g) This Agreement provides the Employee sums and benefits to which he is
not entitled as an employee of the Company or otherwise.
7
(h) Nothing contained in this Agreement is intended to be an admission of
any fault, wrongdoing, or liability on the part of the Company, and nothing contained in this
Agreement may be deemed, construed, or treated in any respect as such an admission. The
Company specifically denies any fault, wrongdoing or liability toward the Employee. This
Agreement was reached by the parties for reasons deemed good and sufficient by the Company
and the Employee.
7. Non-Disparagement.
(a) The Employee agrees that he shall refrain from demeaning, criticizing or
deriding the Company, his employment experience with the Company, the products and services
of the Company and/or the Company’s shareholders, directors, officers, managers, insurance
agents and employees.
(b) The Company agrees that its officers shall refrain from demeaning,
criticizing or deriding the Employee in any way related to his employment with the Company;
provided, however, that the provisions of this Section 7(b) shall not in any way prohibit the
officers of the Company from internally discussing work-related performance issues related to
the Employee that have been, or may be, discovered during the normal business operations of the
Company.
8. Confidentiality of Information and Non-Disclosure.
(a) The Employee agrees that he will not, directly or indirectly, without the
express written approval of the Company, unless directed by applicable legal authority
(including any court of competent jurisdiction, governmental agency having supervisory
authority over the business of the Company or its subsidiaries, or any legislative or
administrative body having supervisory authority over the business of the Company or its
subsidiaries) having jurisdiction over the Employee, disclose to or use, or knowingly permit to be
so disclosed or used, for the benefit of himself, any person, corporation or other entity other
than the Company (i) any proprietary or non-public information concerning any of the Company’s
policies, practices and procedures; financial matters; customer and insurance agent relationships;
competitive status; supplier matters; internal organizational matters; current or future plans; or
other business affairs of or relating to the Company, its subsidiaries or affiliated or related
parties or any of its insurance agents; (ii) any non-public personal information concerning any of the
Company’s employees, or any of its insurance agents or customers; (iii) any proprietary
management, operational, trade, technical or other secrets or any other proprietary information or
other data of the Company, its subsidiaries or affiliated or related parties or any of its
insurance agents; or (iv) any other information related to the Company, its subsidiaries or affiliated or
related parties or any of its insurance agents, or any other information which the Employee
should reasonably believe will be damaging to the Company, its subsidiaries or affiliated or
related parties or any of its insurance agents, which has not been published and is not generally
known outside of the Company. The Employee acknowledges that all of the foregoing
8
constitutes confidential and proprietary information which is the exclusive property of the
Company.
(b) The Employee acknowledges and agrees that any breach of this Section 8
will result in immediate and irreparable harm to the Company and that the Company cannot be
reasonably or adequately compensated by damages in an action at law. In the event of a breach
by the Employee of the provisions of this Section 8, the Company shall be entitled, to the extent
permitted by law, immediately to cease to pay or provide the Employee or the Employee’s
beneficiaries any compensation or benefit being, or to be, paid or provided to the Employee
pursuant to this Agreement and also to obtain immediate injunctive relief restraining the
Employee from conduct in breach of the covenants contained in this Section 8. Nothing herein
shall be construed as prohibiting the Company from pursuing any other available remedies for
such breach, including the recovery of damages from the Employee.
9. Breach of Agreement. The Employee agrees that if he violates any of the
terms of this Agreement, the Company may pursue whatever rights it has under this Agreement,
whether in law or in equity, without affecting the validity and enforceability of the Release
contained in Section 5 above.
10. Company Property, Records, Files and Equipment. The Employee at the
request of the Company will return to the Company all Company property, records, files, and any
other Company owned equipment in his possession.
11. Confidentiality of Agreement. The Employee and the Company each agrees to
keep confidential the terms of this Agreement, and their performance hereunder, and not disclose
this information henceforth to anyone other than the United States Securities and Exchange
Commission; the United States Internal Revenue Service; state or local tax authorities; the
Employee’s family; and their respective attorneys, accountants and tax advisors, who also shall
be bound by this confidentiality obligation. The foregoing shall not prohibit or restrict such
disclosure as is required by law or may be necessary for the prosecution of claims relating to the
performance or enforcement of this Agreement. Each party agrees to provide the other party
with as much notice as possible that it has been requested or compelled to make disclosures, and
shall use their (or their counsel’s) best efforts to ensure that if any disclosure occurs, it is
done in a manner designed to maintain the confidentiality of this Agreement to the fullest extent
possible.
12. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the Commonwealth of Pennsylvania applicable to contracts
executed in and to be performed in Pennsylvania without regard to its conflicts of laws
provisions. The Company and the Employee each hereby irrevocably and unconditionally
consent to submit to the exclusive jurisdiction of the courts of the Commonwealth of
Pennsylvania located in the County of Erie, Pennsylvania, and to the United States District Court
9
for the Western District of Pennsylvania located in Erie County for any litigation arising out of,
or relating to, this Agreement or the transactions contemplated hereby. Any legal action relating
to this Agreement shall be brought in the courts of the Commonwealth of Pennsylvania located
in the County of Erie, Pennsylvania and/or in the United States District Court for the Western
District of Pennsylvania located in Erie County, and the parties irrevocably and unconditionally
waive and will not plead or claim in any such court that venue is improper or that such litigation
has been brought in an inconvenient forum.
13. Waiver. The waiver by the Company or the Employee of any breach by the other
party hereto of any provision of this Agreement shall not operate, or be construed as, a waiver of
any other or subsequent breach by a party hereto.
14. Assignment. This Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the Company, and the Company shall be obligated to require any successor to expressly acknowledge and assume its obligations hereunder. This Agreement shall
also be binding on and inure to the benefit of the Employee and his legal representatives,
executors, administrators, successors, heirs, distributees, devisees and legatees. The Employee
may not delegate any of his duties, responsibilities, obligations or positions to any other person,
and any such purported delegation by the Employee shall be void and of no force and effect.
15. Severability. Whenever possible, each provision of this Agreement shall be
interpreted in such a manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be invalid under applicable law, such provision shall be
invalid only to the extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
16. Notices. Any notices required or permitted to be given under this Agreement,
other than written notice of revocation that is governed by Section 6(d) above, shall be sufficient
if in writing, and if hand-delivered or sent by First Class, Certified or Registered U.S. Mail,
postage prepaid, return receipt requested, as follows: in the case of the Employee, to his
principal residence address at 928 Lord Road, Fairview, PA 16415 (or such other address the
Employee notifies the Company of in writing), and in the case of the Company, to James J.
Tanous, Executive Vice President, Secretary and General Counsel, 100 Erie Insurance Place,
Erie, PA 16530.
17. Entire Agreement. This Agreement constitutes the entire agreement of the
Company and the Employee relating to the subject matter hereof and supersedes any obligations
of the Company under any previous agreements or arrangements, except as otherwise provided
in this Agreement. The provisions of this Agreement may not be amended, modified, repealed,
waived, extended or discharged except by an agreement in writing signed by the party against
whom enforcement of any amendment, modification, repeal, waiver, extension or discharge is
10
sought. This Agreement may be executed in one or more counterparts (including by facsimile
signature), all of which shall be considered one and the same instrument, and shall be fully
executed when all of the counterparts have been signed by, and delivered to, each party.
18.Headings. The descriptive headings used herein are used for convenience of
reference only and shall not constitute a part of this Agreement.
THE EMPLOYEE HEREBY EXPRESSLY WARRANTS AND REPRESENTS
THAT, BEFORE ENTERING INTO THIS AGREEMENT, HE HAS BEEN GIVEN A
REASONABLE PERIOD OF TIME WITHIN WHICH TO CONSIDER ALL OF THE
PROVISIONS CONTAINED IN THIS AGREEMENT, THAT HE HAS FULLY READ,
INFORMED HIMSELF OF AND UNDERSTANDS ALL THE TERMS, CONTENTS,
CONDITIONS AND EFFECTS OF ALL PROVISIONS OF THIS AGREEMENT, AND
THAT HE CONSIDERS ALL SUCH PROVISIONS TO BE SATISFACTORY.
THE EMPLOYEE EXPRESSLY WARRANTS AND REPRESENTS THAT NO
PROMISE OR REPRESENTATION OF ANY KIND HAS BEEN MADE BY THE
COMPANY, EXCEPT THOSE EXPRESSLY STATED IN THIS AGREEMENT.
THE EMPLOYEE FURTHER EXPRESSLY WARRANTS AND REPRESENTS
THAT HE ENTERS INTO THIS AGREEMENT, KNOWINGLY AND VOLUNTARILY,
AND AFTER AN OPPORTUNITY TO REVIEW ALL OF THE TERMS, CONTENTS,
CONDITIONS AND EFFECTS OF ALL PROVISIONS OF THE AGREEMENT WITH
AN ATTORNEY OF HIS CHOOSING.
IN WITNESS WHEREOF, George R. Lucore and Erie Indemnity Company, by its duly
authorized representative, have signed this Agreement as of the date set forth above.
WITNESS:
|
GEORGE R. LUCORE | |||||
/s/ Jodi L. Cole
|
/s/ George R. Lucore | |||||
ATTEST:
|
ERIE INDEMNITY COMPANY | |||||
/s/ Brian W. Bolash
|
By: | /s/ James J. Tanous | ||||
Brian W. Bolash Assistant Secretary |
James J. Tanous Executive Vice President, Secretary and General Counsel |
11
EXHIBIT
A
A
Employee’s Second Waiver and General Release
Effective as of the date hereof, GEORGE R. LUCORE (“Employee”), for himself, his
heirs, successors and assigns, and in consideration of the payments to be made by Erie Indemnity
Company (the “Company”) pursuant to Section 4(b) and (d) of the Agreement between the
Company and Employee dated as of January 13, 2010 (the “Agreement”), does hereby forever
discharge and release the Company, and its corporate parents, subsidiaries, affiliated companies,
companies with common management, ownership or control, successors, assigns, insurers and
reinsurers, attorneys, and insurance agents, and all of their officers, directors, shareholders,
employees, agents and representatives, in their official and individual capacities (collectively
referred to as “Releasees”), from any and all claims, demands, causes of action, damages, charges,
complaints, grievances, expenses, compensation and remedies which the Employee now has or
may in the future have on account of, or arising out of, any matter or thing which has happened,
developed or occurred before the date hereof and prior to Employee’s retirement (collectively
“Claims”) including, but not limited to, all Claims arising from the Employee’s employment with
the Company or any of its affiliated companies, the termination of such employment, any and all
relationships or dealings between the Employee and the Company or any of the other Releasees,
the termination of any such relationships and dealings, and any and all other Claims the Employee
may have against the Company or any of the other Releasees. The Employee hereby waives any
and all such Claims including, but not limited to, all charges or complaints that were or could
have been filed with any court, tribunal or governmental agency, and any and all Claims not previously
alleged including, but not limited to, any Claims under the following: (i) Title VII of the Civil
Rights Act of 1964, as amended; (ii) the Equal Pay Act of 1963; (iii) the Age Discrimination in
Employment Act (ADEA), as amended; (iv) except as otherwise provided in Section 4(f) of the
Agreement, the Federal Employee Retirement Income Security Act of 1974 (ERISA), as
amended; (v) the Americans With Disabilities Act (ADA), as amended; (vi) Section 806 of the
Sarbanes-Oxley Act of 2002, as amended; (vii) any other federal statutes, rules, regulations,
executive orders or guidelines of any description; (viii) any and all state statutes, rules,
regulations, executive orders or guidelines of any description under Pennsylvania law, or the law
of any other state, including, but not limited to, the Pennsylvania Human Relations Act, as
amended; the Pennsylvania Equal Pay Law; the Pennsylvania Wage Payment and Collection Law;
(ix) any and all local laws, rules, regulations, executive orders or guidelines of any description
including, but not limited to, the Erie County Human Relations Ordinance; and (x) any rule or
principle of equity or common law including, but not limited to, any Claim of defamation,
conversion, interference with a contract or business relationship, any other intentional or
unintentional tort, any Claim of loss of consortium, any Claim of harassment or retaliation, any
claim for breach of contract or implied contract, any claim for breach of covenant of good faith
and fair dealing, and any whistle-blower Claim. This release, discharge and waiver shall be
hereinafter referred to as the “Release.”
The Employee specifically understands and agrees that the termination of his employment does not
violate or disregard any oral or written promise or agreement of any nature
12
whatsoever, express or implied. If any contract or agreement exists concerning the employment
of the Employee by the Company or the terms and conditions of such employment or the
termination of such employment, whether oral or written, express or implied, that contract or
agreement is hereby terminated and is null and void.
The Employee agrees that this Release may be enforced in federal, state or local court
and before any federal, state or local administrative agency or body.
Nothing in this Release is intended to release any of the Employee’s vested retirement
benefits.
The Employee represents and warrants that the Company has encouraged and advised the
Employee, prior to signing this Release, to consult with an attorney of the Employee’s choosing
concerning all of the terms of this Release.
This Release may be revoked by the Employee within seven (7) days after the date this
Release is signed by the Employee, by giving written notice of revocation to the General Counsel
of the Company. This Release shall not become effective or enforceable until the revocation
period has expired, and the consideration provided in Section 4(b) and (d) of the Agreement shall
not be made until after the revocation period has expired with no revocation.
The Employee represents and warrants that the Company has given the Employee a
reasonable period of time, of at least twenty-one (21) days, for the Employee to consider all the
terms of this Release and for the purpose of consulting with an attorney if the Employee so
chooses. If this Release has been executed by the Employee prior to the end of the twenty-one
(21) day period, the Employee represents that he has freely and willingly elected to do so.
This Release provides the Employee sums and benefits to which he is not otherwise
entitled as an employee of the Company.
In Witness Whereof, the Employee has signed this Release as of the 5 day of
October 2010.
| EMPLOYEE | ||||||
| /s/ George R. Lucore
|
||||||
Witnessed: |
/s/ William D. Gheres | |||||
13
Exhibit 10.127
Eleventh Amendment to Loan Documents between Erie Indemnity Company and PNC Bank, National
Association dated July 20, 2010.
| Eleventh Amendment to Loan Documents |  |
THIS
ELEVENTH AMENDMENT TO LOAN DOCUMENTS (this “Amendment”) is made as of July 20, 2010, by and
between ERIE INDEMNITY COMPANY (the “Borrower”), and PNC BANK, NATIONAL ASSOCIATION (the “Bank”).
BACKGROUND
A. The Borrower has executed and delivered to the Bank (or a predecessor which is now known by
the Bank’s name as set forth above), one or more promissory notes, letter agreements, loan
agreements, security agreements, mortgages, pledge agreements, collateral assignments, and other
agreements, instruments, certificates and documents, some or all of which are more fully described
on attached Exhibit A, which is made a part of this Amendment (collectively as amended from time to
time, the “Loan Documents”) which evidence or secure some or all of the Borrower’s obligations to
the Bank for one or more loans or other extensions of credit (the “Obligations”).
B. The Borrower and the Bank desire to amend the Loan Documents as provided for in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants herein contained and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Certain of the Loan Documents are amended as set forth in Exhibit A. Any and all references to
any Loan Document in any other Loan Document shall be deemed to refer to such Loan Document as
amended by this Amendment. This Amendment is deemed incorporated into each of the Loan Documents.
Any initially capitalized terms used in this Amendment without definition shall have the meanings
assigned to those terms in the Loan Documents. To the extent that any term or provision of this
Amendment is or may be inconsistent with any term or provision in any Loan Document, the terms and
provisions of this Amendment shall control.
2. The Borrower hereby certifies that: (a) all of its representations and warranties in the Loan
Documents, as amended by this Amendment, are, except as may otherwise be stated in this Amendment;
(i) true and correct as of the date of this Amendment, (ii) ratified and
confirmed without condition as if made anew, and (iii) incorporated into this Amendment by
reference, (b) no Event of Default or event which, with the passage of time or the giving of notice
or both, would constitute an Event of Default, exists under any Loan Document which will not be
cured by the execution and effectiveness of this Amendment, (c) no consent, approval, order or
authorization of, or registration or filing with, any third party is required in connection with
the execution, delivery and carrying out of this Amendment or, if required, has been obtained, and
(d) this Amendment has been duly authorized, executed and delivered so that it constitutes the
legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. The
Borrower confirms that the Obligations remain outstanding without defense, set off, counterclaim,
discount or charge of any kind as of the date of this Amendment.
3. The Borrower hereby confirms that any collateral for the Obligations, including liens, security
interests, mortgages, and pledges granted by the Borrower or third parties (if applicable), shall
continue unimpaired and in full force and effect, and shall cover and secure all of the Borrower’s
existing and future Obligations to the Bank, as modified by this Amendment.
4. As a condition precedent to the effectiveness of this Amendment, the Borrower shall comply with
the terms and conditions (if any) specified in Exhibit A.
5. To induce the Bank to enter into this Amendment, the Borrower waives and releases and forever
discharges the Bank and its officers, directors, attorneys, agents, and employees from any
liability, damage, claim, loss or expense of any kind that it may have against the Bank or any of
them arising out of or relating to the Obligations. The Borrower further agrees to indemnify and
hold the Bank and its officers, directors, attorneys, agents and employees harmless from any loss,
damage, judgment, liability or expense (including attorneys’ fees) suffered by or rendered against
the Bank or any of them on account of any claims arising out of or relating to the Obligations. The
Borrower further states that it has carefully read the foregoing release and indemnity, knows the
contents thereof and grants the same as its own free act and deed.
6. This Amendment may be signed in any number of counterpart copies and by the parties to this
Amendment on separate counterparts, but all such copies shall constitute one and the same
instrument. Delivery of an executed counterpart of a signature page to this Amendment by facsimile
transmission shall be effective as delivery of a manually executed counterpart. Any party so
executing this Amendment by facsimile transmission shall promptly deliver a manually executed
counterpart, provided that any failure to do so shall not affect the validity of the counterpart
executed by facsimile transmission.
7. This Amendment will be binding upon and inure to the benefit of the Borrower and the Bank and
their respective heirs, executors, administrators, successors and assigns.
8. This Amendment has been delivered to and accepted by the Bank and will be deemed to be made in
the State where the Bank’s office indicated in the Loan Documents is located. This Amendment will
be interpreted and the rights and liabilities of the parties hereto determined in accordance with
the laws of the State where the Bank’s office indicated in the Loan Documents is located, excluding
its conflict of laws rules.
9. Except as amended hereby, the terms and provisions of the Loan Documents remain unchanged, are
and shall remain in full force and effect unless and until modified or amended in writing in
accordance with their terms, and are hereby ratified and confirmed. Except as expressly provided
herein, this Amendment shall not constitute an amendment, waiver, consent or release with respect
to any provision of any Loan Document, a waiver of any default or Event of Default under any Loan
Document, or a waiver or release of any of the Bank’s rights and remedies (all of which are hereby
reserved). The Borrower expressly ratifies and confirms the waiver of jury trial provisions
contained in the Loan Documents.
WITNESS
the due execution of this Amendment as a document under seal as of the date first written
above.
| WITNESS / ATTEST: | ERIE INDEMNITY COMPANY | ||||||
| By: | /s/ Robert W. McNutt | By: | /s/ Douglas F. Ziegler | (SEAL) | |||
| Print Name: Robert W. McNutt | Print Name: Douglas F. Ziegler | ||||||
| Title: | Assistant Treasurer | Title: | Sr. VP, Treasurer & Chief Investment Officer | ||||
| (Include title only if an officer of entity signing to the right) | |||||||
| PNC BANK, NATIONAL ASSOCIATION | |||||||
| By: | /s/ James F. Stevenson | ||||||
| James F. Stevenson | |||||||
| Senior Vice President | |||||||
- 2 -
EXHIBIT A TO
ELEVENTH AMENDMENT TO LOAN DOCUMENTS
DATED AS OF JULY 20, 2010
ELEVENTH AMENDMENT TO LOAN DOCUMENTS
DATED AS OF JULY 20, 2010
| A. | The “Loan Documents” that are the subject of this Amendment include the following (as any of the foregoing have previously been amended, modified or otherwise supplemented): |
| 1. | Loan Agreement, dated January 30, 2008, between the Borrower and the Bank (the “Loan Agreement”); and | ||
| 2. | All other documents, instruments, agreements, and certificates executed and delivered in connection with the Loan Documents listed in this Section A. |
| B. | The Loan Agreement is amended as follows: |
| 1. | Section (1) as set forth in the Continuation of Addendum to the Agreement is hereby amended and restated in its entirety to read as follows: | ||
| “(1) Beginning with the fiscal quarter ending September 30, 2010, the Borrower will maintain at all times a minimum consolidated net worth of $600,000,000.00, to be measured quarterly.” |
| C. | Conditions to Effectiveness of Amendment: The Bank’s willingness to agree to the amendments set forth in this Amendment is subject to the prior satisfaction of the following conditions: |
| 1. | Execution by all parties and delivery to the Bank of this Amendment. | ||
| 2. | Payment by the Borrower to the Bank of an amendment fee in the amount of $5,000.00, on or before the date of this Amendment. |
Exhibit 10.128
Amendment to Loan Documents between Erie Indemnity Company and PNC Bank, National Association
dated December 22, 2010.
| Amendment to Loan Documents |  |
THIS AMENDMENT TO LOAN DOCUMENTS (this “Amendment”) is made as of December 22, 2010, by and between
ERIE INDEMNITY COMPANY, a Pennsylvania corporation (the “Borrower”), and PNC BANK, NATIONAL
ASSOCIATION (the “Bank”).
BACKGROUND
A. The Borrower has executed and delivered to the Bank one or more promissory notes, letter
agreements, security agreements, mortgages, pledge agreements, collateral assignments, and other
agreements, instruments, certificates and documents, some or all of which are more fully described
on attached Exhibit A, which is made a part of this Amendment (collectively as amended from time to
time, the “Loan Documents”), which evidence or secure some or all of the Borrowers’ obligations to
the Bank for one or more loans or other extensions of credit (the “Obligations”).
B. The Borrowers and the Bank desire to amend the Loan Documents as provided for in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants herein contained and intending to be
legally bound hereby, the parties hereto agree as follows:
1. Certain
of the Loan Documents are amended as set forth in Exhibit A. Any and all references to
any Loan Document in any other Loan Document shall be deemed to refer to such Loan Document as
amended by this Amendment. This Amendment is deemed incorporated into each of the Loan Documents.
Any initially capitalized terms used in this Amendment without definition shall have the meanings
assigned to those terms in the Loan Documents. To the extent that any term or provision of this
Amendment is or may be inconsistent with any term or provision in any Loan Document, the terms and
provisions of this Amendment shall control.
2. The Borrower hereby certifies that: (a) all of its representations and warranties in the Loan
Documents, as amended by this Amendment, are, except as may otherwise be stated in this Amendment:
(i) true and correct as of the date of this Amendment, (ii) ratified and confirmed without
condition as if made anew, and (iii) incorporated into this Amendment by reference, (b) no Event of
Default or event which, with the passage of time or the
giving of notice or both, would constitute an Event of Default, exists under any Loan Document
which will not be cured by the execution and effectiveness of this Amendment, (c) no consent,
approval, order or authorization of, or registration or filing with, any third party is required in
connection with the execution, delivery and carrying out of this Amendment or, if required, has
been obtained, and (d) this Amendment has been duly authorized, executed and delivered so that it
constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with
its terms. The Borrower confirms that the Obligations remain outstanding without defense, set off,
counterclaim, discount or charge of any kind as of the date of this Amendment.
3. The Borrower hereby confirms that any collateral for the Obligations including liens, security
interests, mortgages, and pledges granted by the Borrower or third parties (if applicable), shall
continue unimpaired and in full force and effect, and shall cover and secure all of the Borrower’s
existing and future Obligations to the Bank, as modified by this Amendment.
4. As a condition precedent to the effectiveness of this Amendment, the Borrower shall comply with
the terms and conditions (if any) specified in Exhibit A.
5. To induce the Bank to enter into this Amendment, the Borrower waives and releases and forever
discharges the Bank and its officers, directors, attorneys, agents, and employees from any
liability, damage, claim, loss or expense of any kind that it may have against the Bank or any of
them arising out of or relating to the Obligations. The Borrower further agrees to indemnify and
hold the Bank and its officers, directors, attorneys, agents and employees harmless from any loss,
damage, judgment, liability or expense (including attorneys’ fees) suffered by or rendered against
the Bank or any of them on account of any claims arising out of or relating to the Obligations. The
Borrower further states that it has carefully read the foregoing release and indemnity, knows the
contents thereof and grants the same as its own free act and deed.
6. This Amendment may be signed in any number of counterpart copies and by the parties to this
Amendment on separate counterparts, but all such copies shall constitute one and the same
instrument. Delivery of an executed counterpart of a signature page to this Amendment by facsimile
transmission shall be effective as delivery of a manually executed counterpart. Any party so
executing this Amendment by facsimile transmission shall promptly deliver a manually executed
counterpart, provided that any failure to do so shall not affect the validity of the counterpart
executed by facsimile transmission.
7. This Amendment will be binding upon and inure to the benefit of the Borrower and the Bank and
their respective heirs, executors, administrators, successors and assigns.
8. This Amendment has been delivered to and accepted by the Bank and will be deemed to be made in
Commonwealth of Pennsylvania. This Amendment will be interpreted and the rights and liabilities of
the parties hereto determined in accordance with the laws of the Commonwealth of Pennsylvania,
excluding its conflict of laws rules.
9. Except as amended hereby, the terms and provisions of the Loan Documents
remain unchanged, are and shall remain in full force and effect unless and until modified or
amended in writing in accordance with their terms, and are hereby ratified and confirmed. Except as
expressly provided herein, this Amendment shall not constitute an
amendment, waiver, consent or release with respect to any provision of any Loan Document, a waiver
of any default or Event of Default under any Loan Document, or a waiver or release of any of the
Bank’s rights and remedies (all of which are hereby reserved). The Borrower expressly ratifies and
confirms the confession of judgment (if applicable) and waiver of jury trial provisions contained
in the Loan Documents.
[INTENTIONALLY LEFT BLANK]
-2-
WITNESS the due execution of this Amendment as a document under seal as of the date first written
above.
| WITNESS: | Erie Indemnity Company | ||||||
| By: | /s/ Robert W. McNutt | By: | /s/ Douglas F. Ziegler | (SEAL) | |||
| Vice President Assistant Treasurer | Name: | Douglas F. Ziegler | |||||
| Title: | SVP, Treasurer and Chief Investment Officer | ||||||
| PNC Bank, National Association | |||||||
| By: | /s/ James F. Stevenson | ||||||
| Name: | James F. Stevenson | ||||||
| Title: | Senior Vice President | ||||||
EXHIBIT A TO
AMENDMENT TO LOAN DOCUMENTS
DATED DECEMBER 22, 2010
AMENDMENT TO LOAN DOCUMENTS
DATED DECEMBER 22, 2010
| A. | The “Loan Documents” that are the subject of this Amendment include the following (as any of the foregoing have previously been amended, modified or otherwise supplemented): |
| 1. | Loan Agreement, dated as of January 30, 2008, by and between the Borrower and the Bank (“Loan Agreement”); and | ||
| 2. | All other documents, instruments, agreements, and certificates executed and delivered in connection with the Loan Documents listed in this Section A. |
| B. | The Loan Agreement is amended as follows: |
| 1. | Section 3.6 of the Loan Agreement is hereby deleted in its entirety and in its stead is inserted as follows: |
| 3.6 Title to Assets. The Borrower has good and marketable title to the assets reflected on the most recent Financial Statements, free and clear of all liens and encumbrances, except for (i) current taxes and assessments not yet due and payable, (ii) assets disposed of by the Borrower in the ordinary course of business since the date of the most recent Financial Statements, (iii) those liens or encumbrances in excess of Twenty Five Million and 00/100 Dollars ($25,000,000.00) per instance, if any, specified on the Addendum, (iv) those certain equity interests sold by the Borrower pursuant to the Property & Casualty Asset Sale (as hereinafter defined), and (v) those certain equity interests sold by the Borrower pursuant to the Life Insurance Asset Sale (as hereinafter defined). |
| 2. | Section 5.5 of the Loan Agreement is hereby deleted in its entirety and in its stead is inserted as follows: |
| 5.5 Merger or Transfer of Assets. Liquidate or dissolve, or merge or consolidate with or into any person, firm, corporation or other entity, or sell, lease, transfer or otherwise dispose of all or any substantial part of its property, assets, operations or business, whether now owned or hereinafter acquired; except for (i) the sale of the equity interests in Erie Insurance Company, a Pennsylvania corporation, and Erie Insurance Property & Casualty Company, a Pennsylvania corporation, on or before December 31, 2010, to Erie Insurance Exchange, a reciprocal or inter-insurance exchange domiciled in the Commonwealth of Pennsylvania (“Exchange”), whereby Exchange will purchase such equity interests for cash consideration equal to the adjusted book value of such entities (collectively, the “Property & Casualty Asset Sale”), and (ii) the |
| sale of the equity interest in Erie Family Life Insurance Company, a Pennsylvania corporation, on or before March 31, 2011 to Exchange, whereby Exchange will purchase such equity interest for cash consideration equal to ninety-five percent (95%) of the adjusted book value of such entity (collectively, the “Life Insurance Asset Sale”) (the Property & Casualty Asset Sale and the Life Insurance Asset Sale are collectively, the “Asset Sales”). |
| 3. | Section 5.6 of the Loan Agreement is hereby deleted in its entirety and in its stead is inserted as follows: |
| 5.6 Change in Business, Management or Ownership. Make or permit any change in its form of organization or the nature of its business as carried on as of the date hereof other than the change in the nature of its business due to the sale of the business units sold in connection with the Property & Casualty Asset Sale and/or the Life Insurance Asset Sale. |
| 4. | Section (1) to the Continuation of Addendum to the Loan Agreement is hereby deleted in its entirety and in its stead is inserted as follows: |
| (1) Beginning with the fiscal quarter ending September 30, 2010, the Borrower will maintain at all times a minimum consolidated net worth of Six Hundred Million and 00/100 Dollars ($600,000,000.00), to be measured quarterly as of such date and as of each fiscal quarter ending thereafter; provided, however that (i) on and after the completion of the Property & Casualty Asset Sale, the Borrower will maintain at all times a minimum consolidated net worth of not less than Three Hundred Million and 00/100 Dollars ($300,000,000.00) as of the fiscal quarter ending December 31, 2010 and each succeeding fiscal quarter end thereafter, and (ii) on and after the completion of the Asset Sales, the Borrower will maintain at all times a minimum consolidated net worth of not less than Two Hundred Million and 00/100 Dollars ($200,000,000.00) as of the fiscal quarter ending March 31, 2011, and each succeeding fiscal quarter end thereafter. |
| 5. | All references in the Loan Documents to the “Loan Agreement” shall be deemed to mean, the Loan Agreement, dated as of January 30, 2008, by and between the Borrower and the Bank, as amended prior to December 22, 2010, and as further amended by this Amendment to Loan Documents dated December 22, 2010, by and between the Borrower and the Bank. |
| C. | Conditions to Effectiveness of Amendment: The Bank’s willingness to agree to the amendments set forth in this Amendment are subject to the prior satisfaction of the following conditions: |
| 1. | Execution by all parties and delivery to the Bank of this Amendment, and those documents identified on the Preliminary Closing Checklist, attached hereto as Schedule A, and made part hereof. | ||
| 2. | Payment by the Borrower to the Bank of an amendment fee in the amount of Five Thousand and 00/100 Dollars ($5,000.00), and the fees and expenses of the Bank’s outside counsel in connection with this Amendment. |
Exhibit 10.129
Home Office
144 East 6th Street
Erie, PA 16507
144 East 6th Street
Erie, PA 16507
LEASE AGREEMENT
THIS LEASE is made and entered into this 1st day of January, 2011, between ERIE
INSURANCE EXCHANGE, a reciprocal insurance exchange organized under the laws of Pennsylvania with
principal offices and place of business at 100 Erie Insurance Place, Erie, PA 16530, acting by and
through its attorney-in-fact, ERIE INDEMNITY COMPANY, (“Landlord”),
AND
ERIE INDEMNITY COMPANY, a Pennsylvania business corporation, with its principal offices and
place of business at 100 Erie Insurance Place, Erie, PA 16530 (“Tenant”).
PARAGRAPH 1. LEASED PREMISES DESCRIPTION AND TERM
Description
1.01. In consideration of the rents, terms, provisions and covenants of this Agreement, Landlord
hereby leases, lets and demises to Tenant approximately 558,928 square feet of rentable office
space, located in that building known as Home Office (“Building”), said Building and underlying
realty situated at 144 East 6th Street, Erie, PA 16507 (“Property”). More specifically,
such 558,928 rentable square feet includes those areas highlighted in yellow on attached Lease
Agreement Exhibit A 1 which is made a part hereof and incorporated herein. The highlighted area of
Exhibit A 1 evidences the present approximate area of the Building hereinafter referred to as
“Leased Premises” or “Premises.” Tenant shall also be entitled to the use of parking ramps and
surface parking surrounding and attached to said “Building”.
Term of Lease
1.02 The term of this Lease shall commence on January 1, 2011 (“Effective Date”) and shall
terminate on the 31st day of December, 2016, (“Original Term”).
Option to Renew
1.03. Tenant has the right to extend this Lease beyond the Original Term provided in Paragraph 1.02
on the following terms and conditions:
(a) Should Tenant fully perform all of the terms and conditions of this Lease, Tenant
may extend the term of this Lease for a period of five (5) years, (“First Option”),
to commence on January 1, 2017 and expire on December 31, 2021. However, if Tenant is
in default in the performance of any of the terms or provisions of this Lease at the
expiration date of the Original Term, the First Option shall be null and void.
Unless expressly set forth herein to the contrary, all terms, covenants, and
provisions of the Original Term shall apply to the First Option.
(b) Tenant may exercise the First Option by (i) giving Landlord notice of its
intention to do
so not later than 90 days prior to the expiration of the Original Term.
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Holdover
1.04. If Tenant holds over and continues in possession of the Leased Premises after expiration of
the term of this Lease or any extension of that term, Tenant will be deemed to be occupying the
Leased Premises on the basis of a month-to-month tenancy, subject to all of the terms and
conditions of this Lease.
PARAGRAPH 2. RENT
Fixed Minimum Rent
| 2.01. | Commencing on the Effective Date and continuing through the termination of the Original Term, Tenant agrees to pay monthly as fixed minimum rent during the term of this Lease the sum of $863,921.00 per month. Such sum includes the estimated operational cost as defined in section 2.03. Payment shall be made in advance on the first day of each month and rent for any fractional month at the beginning or end of the Lease shall be prorated on a per diem basis. Tenant shall pay, as additional rent, all other sums due and payable under this Lease on the date set forth herein by which such payments are to be made. On an annual basis, Landlords accounting shall recalculate the Fixed Minimum Rent based on the average Treasury Bill rate or discount rate. Landlords accounting shall perform this 4 months in advance of the end of the calendar year for determining the Fixed Minimum Rent for the following year. The Fixed Minimum Rent for 2011 is $7.33 per square foot. |
Operating Expenses
| 2.02 | Tenant shall also pay as additional rent Tenant’s pro rata share of the operating expenses of the Landlord for the building and/or project of which the leased premises are a part. Each year, the Landlord will notify the Tenant of the anticipated operating expenses for the coming year. Notice shall include the cost per square foot and the total monthly operating expense for such. Tenant shall pay such monthly operating expense alone with their monthly rent. The operating expenses for 2011 is $11.22 per square foot. Within four (4) months of the close of each calendar year, Landlord shall provide Tenant an accounting showing in reasonable detail all computations of additional rent due under this section for said calendar year. In the event the accounting shows that the total of the monthly payments made by Tenant exceed the amount of additional rent due from Tenant under this section, the accounting shall be accompanied by refund. In the event the accounting shows that the total of the monthly payments made by Tenant is less then the amount of additional rent due from Tenant under this section, the accounting shall be accompanied by an invoice for the additional rent. |
Definition of Operating Expenses
| 2.03 | The term “Operating Expenses” includes all expenses incurred by Landlord with respect to the maintenance and operation of the building of which leased premises are a part, including, but not limited to, the following: maintenance, repair and replacement costs; electricity, fuel, water, sewer, gas, and other utility charges; security, window washing and janitorial services; trash and snow removal; landscaping and pest control, management fees, wages and benefits payable to employees of Tenant whose duties are directly connected with the operation and maintenance of the building; all services, supplies, repairs, replacements or other expenses for maintaining and operating the building including parking and common areas; cost, including interest, amortized over its useful life, of any capital improvement made to the building by Landlord after the date of this Lease which is required under any governmental law or regulation over its useful life, of installation of any devise or other equipment which improves the operating efficiency of any system within the leased premises and thereby reduces operating expenses; all other |
2
| expenses which would generally be regarded as operating and maintenance expenses which would reasonably be amortized over a period not to exceed five (5) years; all real property taxes and installments of special assessments; and all insurance premiums Landlord is required to pay or deems necessary to pay, including public liability insurance, with respect to the building. The term “Operating Expenses” does not include the following: repairs, restoration or other work occasioned by fire, wind, the elements or other casualty; income and income paid to any employee of Landlord above the grade of property manager; any depreciation allowance or expense; or operating expenses which are the responsibility of Tenant. |
PARAGRAPH 3. USE OF PREMISES
Use of Premises
| 3.01. | Tenant will use and manage the Leased Premises solely as a business office pursuing activities which are both lawful and in compliance with all relevant zoning and other municipal ordinances. |
PARAGRAPH 4. MAINTENANCE AND SURRENDER
Maintenance and Surrender by Tenant
| 4.02. | At the termination of this Lease, Tenant shall deliver the Leased Premises in as good a condition and state of repair as at the time Landlord delivered possession to Tenant, except for reasonable wear and tear and damage by fire, flood, or other casualty. If Tenant commits waste, Landlord shall have the right, but not the obligation, to cause repairs or corrections to be made, and any reasonable costs incurred for such repairs or corrections for which Tenant is responsible under this Paragraph shall be payable by Tenant to Landlord as additional rent on the next rent installment date. |
PARAGRAPH 5. ALTERATIONS, ADDITIONS, IMPROVEMENTS, AND FIXTURES
Consent of Landlord
| 5.01. | Tenant shall not make any alterations, additions, or improvements to the Leased Premises without the prior written consent of Landlord, such consent not to be unreasonably withheld. |
Property of Landlord
| 5.02. | All alterations, additions, or improvements made by Tenant shall become the property of Landlord at the termination of this Lease. However, if Tenant so elects at such termination, Tenant shall promptly remove all alterations, additions, and improvements, and any other property placed in or on the Premises by Tenant, and Tenant shall repair any damage caused by such removal. |
Trade Fixtures
| 5.03. | Tenant has the right at all times to erect or install furniture and fixtures, provided that Tenant complies with all applicable governmental laws, ordinances, and regulations. Tenant shall remove such furniture and fixtures at the termination of this Lease. Prior to the termination of this Lease, Tenant must repair any damage caused by removal of any such furniture or fixtures. |
3
Landlord’s Right to Make Tenant’s Alterations, Additions, or Improvements
| 5.04. | Maintenance and/or construction employees of Landlord, or Landlord’s contractors, shall make all alterations, additions, or improvements to the Leased Premises which have received the prior written consent of Landlord if Landlord’s bid for such work is equal to or less than any other reasonable arms-length bid which Tenant has obtained from any other contractor. If Landlord’s bid is not accepted by Tenant because it is not the lowest responsible bid, Tenant will see that its contractor makes all such alterations, additions, or improvements in a first-class and workmanlike manner which shall be in compliance with all relevant building and safety codes and all other local, state, and federal building requirements applicable to such alterations, additions, or improvements. |
Landlord Renovations
| 5.05 | Landlord will, at its expense, install new carpeting and base, and one coat of paint on existing walls. |
PARAGRAPH 6. DAMAGE OR DESTRUCTION
Total Destruction
| 6.01. | If the Leased Premises are totally destroyed by fire, flood, or other casualty not the fault of Tenant or any person in or about the Leased Premises with the express or implied consent of Tenant, or if the Premises should be so damaged by such a cause that rebuilding or repairs cannot be completed within 90 working days, this Lease shall terminate, and rent shall be abated for the unexpired portion of this Lease, effective as of the date of written notification as provided in Paragraph 8.01. |
Partial Destruction
| 6.02. | If the Leased Premises are damaged by fire, flood, or other casualty not the fault of Tenant or any person in or about the Leased Premises with the express or implied consent of Tenant, but not to such an extent that rebuilding or repairs cannot reasonably be completed within 45 working days from the date of the commencement of the rebuilding or repairs, this Lease shall not be terminated except as provided in Subparagraphs (a) and (b). |
(a) If the partial destruction of the Leased Premises occurs prior to the final six
months of the Lease term, Landlord shall, at its sole cost and risk, proceed
immediately to rebuild or repair the damaged buildings and improvements to
substantially the condition in which they existed prior to such damage. If the
Leased Premises are untenantable in whole or in part following such damage, the rent
payable during the period in which they are untenantable shall be adjusted equitably.
In the event that Landlord should fail to complete such rebuilding or repairs within
45 working days from the date of the commencement of the rebuilding or repairs,
Tenant may terminate this Lease by written notification to Landlord. On such
notification, all rights and obligations under this Lease shall cease.
(b) If partial destruction of the Leased Premises occurs in the final six months of
any leased term, Landlord need not rebuild or repair the Premises. If Landlord
elects not to rebuild or repair the Premises and the Leased Premises are untenantable
in whole or in part following such damage, Tenant may elect to terminate the Lease or
to continue the Lease with the rent for the remainder of the Lease period adjusted
equitably.
PARAGRAPH 7. CONDEMNATION
Total Condemnation
4
| 7.01. | If the whole of the Leased Premises shall be taken by any public or quasi-public authority under the power of eminent domain, condemnation, or expropriation or in the event of a conveyance in lieu thereof, then this Lease shall terminate on the date when Tenant is required to yield possession. Rent shall abate and Tenant shall have no claim against Landlord or the condemning authority for the value of the unexpired term of this Lease. |
Partial Condemnation
| 7.02. | If any part of the Leased Premises shall be so taken or conveyed and if such partial taking or conveyance shall render the Leased Premises unsuitable for the business of the Tenant, then the term of this Lease shall cease and terminate as of the date on which possession of the Leased Premises is required to be surrendered to the condemning authority. Tenant shall have no claim against Landlord or the condemning authority for the value of any unexpired portion of this Lease. In the event such partial taking or conveyance is not extensive enough to render the Premises unsuitable for the business of Tenant, this Lease shall continue in full force and effect except that the rent shall be adjusted equitably during the unexpired portion of the Lease. |
Landlord’s Damages
| 7.03. | In the event of any condemnation or taking, whether whole or partial, the Tenant shall not be entitled to any part of the award. Tenant hereby expressly waives any right or claim to any part of such amount and assigns to Landlord any such right or claim to which Tenant might become entitled. |
Tenant’s Damages
| 7.04. | Although all damages in the event of any condemnation are to belong to the Landlord, Tenant shall have the right, to the extent that it shall not diminish the Landlord’s award, to claim and recover from the condemning authority, such compensation as may be separately awarded or recoverable by Tenant under the Eminent Domain Code in Tenant’s own right for or on account of, and limited solely to, any cost to which Tenant might be put in removing Tenant’s merchandise, furniture, fixtures, leasehold improvements, and equipment. |
PARAGRAPH 8. INDEMNITY AND PERSONAL INJURY/PROPERTY INSURANCE
Indemnity
| 8.01. | Tenant agrees to indemnify and hold Landlord harmless against any and all claims, demands, damages, costs, and expenses, including all attorneys’ fees and associated costs, arising from the conduct or management of Tenant’s business on the Leased Premises, Tenant’s use of the Leased Premises, Tenant’s presence in the Building or on the Property, or from any breach on the part of Tenant of any conditions of this Lease, or from any act or negligence of Tenant, its officers, agents, contractors, employees, sublessees, or invitees in or about the Leased Premises, Building, or Property. In case of any action or proceeding brought against Landlord by reason of any such claim, Tenant, on notice from Landlord, agrees to defend the action or proceeding. |
Personal Injury and Property Insurance
| 8.02 | Landlord shall at all times during the term of this Lease maintain a policy or policies of insurance insuring the Building against all risk of direct physical loss; provided, Landlord shall not be obligated in anyway or manner to insure any personal property (including, but not limited to, any furniture, fixtures, and equipment, |
5
| machinery, goods or supplies) of Tenant or which Tenant may have upon or within the Leased Premises or any fixtures installed by or paid for by Tenant upon or within the Leased Premises or any additional improvements which Tenant may construct on the Leased Premises. | ||
| Tenant shall, at its expense, during the term hereof, maintain public liability and property damage insurance policies with respect to the Leased Premises. Such policies shall have limits of at least $1,000,000.00 for injury or death to any one person and $3,000,000.00 for any one accident, and $1,000,000.00 with respect to damage to property. |
PARAGRAPH 9. MISCELLANEOUS
Mortgages
9.01. Tenant accepts this Lease subject to any deeds of trust, security interests, or mortgages
that might now or later constitute a lien on the Property, Building or on improvements to the
Property, Building, or the Leased Premises. Tenant must, on demand, execute any instruments,
releases, or other documents that are required by any mortgagee for the purpose of subjecting and
subordinating this Lease to the lien of any such deed of trust, security interest, or mortgage
constituting a lien on the Building or improvements in the Building or the Leased Premises,
Landlord has the right to waive the applicability of this Paragraph so that this Lease will not be
subject and subordinate to any such deed of trust, security interest, or mortgage.
Americans With Disabilities Act
9.02. Landlord agrees that at the commencement of this Lease, the Premises will comply with the
requirements of that certain federal statute known as the Americans With Disabilities Act (42
U.S.C. §12101 et seq.) and the regulations promulgated in connection therewith, as the same shall
be amended from time to time, hereinafter, collectively, the “ADA,” as and when such compliance is
required pursuant to the terms of the ADA. Tenant agrees that any alterations, additions, or
improvements which Tenant may make in the Premises during the term or any renewal or extension of
this Lease (the “Additional Improvements”), shall be so made in accordance with the terms of this
Lease and the ADA, to the extent the ADA is applicable to the Premises as of the date or dates such
alterations, additions, or improvements are in the Premises. In addition, Tenant agrees to make
any necessary alterations, additions, or improvements to remain in compliance with the ADA during
the term and any renewal or extension of this Lease as and when such compliance is required
pursuant to the terms of the ADA.
Pennsylvania Law to Apply
9.03. This Lease shall be governed by and construed in accordance with the laws of the Commonwealth
of Pennsylvania. All obligations of the parties created by this agreement are performable in Erie
County, Pennsylvania.
Legal Construction
9.04. In the event any one or more of the provisions contained in this agreement shall for any
reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity,
illegality, or unenforceability shall not affect any other provision of the agreement, and this
agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been
included in the agreement.
Amendment
9.05. No amendment, modification, or alteration of the terms of this Lease shall be binding unless
in writing,
dated subsequent to the date of this Lease, and duly executed by the Landlord and Tenant.
6
Tenant and Related References
9.06. All references herein to Tenant shall include Tenant’s officers, employees, agents, and
invitees.
Intending to be legally bound hereby, the undersigned Landlord and Tenant execute this Lease
on the day and year set forth above.
| Landlord: Erie Insurance Exchange By its Attorney-in-Fact, Erie Indemnity Company |
||||
| By: | /s/ Chip Dufala | |||
| Chip Dufala, Executive Vice President | ||||
| Erie Indemnity Company, as Attorney-in-Fact | ||||
| Tenant: Erie Indemnity Company |
||||
| By: | /s/ Cheryl Ferrie | |||
| Cheryl Ferrie, Senior Vice President | ||||
7
LEASE
BETWEEN
ERIE INSURANCE EXCHANGE
BETWEEN
ERIE INSURANCE EXCHANGE
acting by and through its attorney-
in-fact, ERIE INDEMNITY COMPANY
in-fact, ERIE INDEMNITY COMPANY
AND
ERIE INDEMNITY COMPANY
TABLE OF CONTENTS
Paragraph 1. Leased Premises Description and Term |
1 | |||
Paragraph 2. Basic Rent |
2 | |||
Paragraph 3. Use of Premises |
3 | |||
Paragraph 4. Maintenance and Surrender |
3 | |||
Paragraph 5. Alterations, Additions, Improvements, and Fixtures |
3 | |||
Paragraph 6. Damage or Destruction |
4 | |||
Paragraph 7. Condemnation |
4 | |||
Paragraph 8. Indemnity and Personal Injury/ Property Insurance |
5 | |||
Paragraph 9. Miscellaneous |
6 |
8
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement (Form S-8 No.
333-148705) pertaining to the Erie Indemnity Company 2004 Long-Term Incentive Plan, the Erie
Indemnity Company 1997 Long-Term Incentive Plan, as amended, and the Erie Indemnity Company
Deferred Compensation Plan for Outside Directors, as amended of our reports dated February 24,
2011, with respect to the consolidated financial statements and schedules of Erie Indemnity
Company, and the effectiveness of internal control over financial reporting of Erie Indemnity
Company, included in this Annual Report (Form 10-K) for the year ended December 31, 2010.
/s/ Ernst & Young, LLP
Cleveland, Ohio
February 24, 2011
February 24, 2011
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Terrence W. Cavanaugh, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Erie Indemnity Company for the year ended December 31, 2010; | |||||
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |||||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |||||
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | |||||
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors: | ||||
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: February 24, 2011
| /s/ Terrence W. Cavanaugh | ||||
| Terrence W. Cavanaugh | ||||
| President & CEO | ||||
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Marcia A. Dall, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Erie Indemnity Company for the year ended December 31, 2010; | ||||
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||||
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | ||||
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors: | ||||
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: February 24, 2011
| /s/ Marcia A. Dall | ||||
| Marcia A. Dall | ||||
| Executive Vice President & CFO | ||||
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
We, Terrence W. Cavanaugh, Chief Executive Officer of the Erie Indemnity Company (Company), and
Marcia A. Dall, Chief Financial Officer of the Company, certify, pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1350, that:
| (1) | The Annual Report on Form 10-K of the Company for the annual period December 31, 2010 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and | ||||
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. | ||||
| /s/ Terrence W. Cavanaugh | ||||
| Terrence W. Cavanaugh | ||||
| President & CEO | ||||
| /s/ Marcia A. Dall | ||||
| Marcia A. Dall | ||||
| Executive Vice President & CFO | ||||
February 24, 2011
A signed original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears in typed form
within the electronic version of this written statement required by Section 906, has been
provided to Erie Indemnity Company and will be retained by Erie Indemnity Company and furnished
to the Securities and Exchange Commission or its staff upon request.