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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
(NO FEE REQUIRED)
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[NO FEE REQUIRED]
For the transition period from to
Commission File Number 0-24000
ERIE INDEMNITY COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 25-0466020
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 Erie Insurance Place, Erie, Pennsylvania 16530
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (814) 870-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, stated value $.0292 per share
Class B Common Stock, stated value $70.00 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock of nonaffiliates: There is no active
market for the Class B voting stock and no Class B voting stock has been sold in
the last year upon which a price could be established.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 64,847,751 Class A shares and
3,070 Class B shares of Common Stock outstanding on February 29, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1999 (the "Annual Report") are incorporated by
reference into Parts I, II and IV of this Form 10-K Report.
2. Portions of the Registrant's Proxy Statement relating to the Annual
Meeting of Shareholders to be held April 25, 2000 are incorporated by
reference into Parts I and III of this Form 10-K Report.
1
INDEX
PART ITEM NUMBER AND CAPTION PAGE
-------- ----------------------- ----
I Item 1. Business 3
I Item 2. Properties 14
I Item 3. Legal Proceedings 14
I Item 4. Submission of Matters to a
Vote of Security Holders 14
II Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters 15
II Item 6. Selected Consolidated Financial Data 15
II Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16
II Item 7a. Quantitative and Qualitative Disclosure
about Market Risk 16
II Item 8. Financial Statements and Supplementary
Data 16
II Item 9. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosures 16
III Item 10. Directors and Executive Officers
of the Registrant 17
III Item 11. Executive Compensation 18
III Item 12. Security Ownership of Certain
Beneficial Owners and Management 18
III Item 13. Certain Relationships and Related
Transactions 19
IV Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 21
2
PART I
Item 1. Business
Erie Indemnity Company (the "Company") is a Pennsylvania
corporation formed in 1925 to be the attorney-in-fact for Erie Insurance
Exchange (the "Exchange"), a Pennsylvania-domiciled reciprocal insurance
exchange. The Company's principal business activity consists of management of
the affairs of the Exchange with fees from the Exchange accounting for
approximately 74% of the Company's consolidated revenues. The Company also
participates in the property/casualty insurance business through its three
wholly owned subsidiaries, Erie Insurance Company ("Erie Insurance Co."), Erie
Insurance Company of New York ("Erie NY") and Erie Insurance Property and
Casualty Company ("Erie P&C") and through its management of the Flagship City
Insurance Company ("Flagship"), a subsidiary of the Exchange. The Company and
Exchange also own a 21.6% and 53.2% common stock interest, respectively, in Erie
Family Life Insurance Company ("EFL"), an affiliated life insurance company.
Together with the Exchange, the Company and its subsidiaries and affiliates
operate collectively under the name Erie Insurance Group(The ERIE).
The ERIE is a regional insurance group that underwrites a broad
line of personal and commercial coverages. Insurance products are marketed
primarily in the Mid-Atlantic and Northeast regions through approximately 6,100
independent agents comprising approximately 1,300 insurance agencies. The
property/casualty insurers managed by the Company are licensed to do business in
fifteen states and in the District of Columbia and at December 31, 1999,
operated in ten states and the District of Columbia. Branch offices are
maintained throughout the ten contiguous states in which the Company does
business.
As of December 31, 1999, the Company had 3,282 full-time
employees, of which 1,584 provide claims specific services exclusively for the
property/casualty insurance companies of The ERIE and 107 perform general
services exclusively for EFL. Both the Exchange and EFL reimburse the Company
monthly for the cost of these services. None of the Company's employees is
covered by a collective bargaining agreement. The Company believes that its
relationship with its employees is good.
History of The ERIE
The Exchange, which commenced operations in 1925, underwrites a
broad line of personal and commercial property and casualty insurance coverages.
The Erie Insurance Co. was organized in 1972 as a property/casualty insurance
company to supplement the lines of business of the Exchange. On December 3,
1991, the Company acquired the Erie Insurance Co. from the Exchange. Flagship
was organized in 1992 as a property/casualty insurance company to conduct the
Exchange's residual automobile market business. Erie P&C was organized in 1993
to conduct The ERIE's business in West Virginia and to write workers'
compensation insurance in Pennsylvania. Erie NY was purchased in 1994 to conduct
The ERIE's business in New York State together with Erie Insurance Co.
The Company's wholly-owned subsidiaries, Erie Insurance Company
and Erie Insurance Company of New York, participate in an intercompany pooling
arrangement with the Exchange. The pooling arrangement provides for the Exchange
to assume all premiums and losses, including related asset and liability
amounts, from all property/casualty affiliates of The ERIE. This pooling
arrangement further provides for Erie Insurance Company and Erie Insurance
Company of New York to share proportionately in the results of all of The ERIE's
property/casualty insurance operations. Erie Insurance Company's and Erie
Insurance Company of New York's proportionate share of the reinsurance pool is
5.0 percent and 0.5 percent, respectively.
3
Information About Industry Segments
Reference is made to Note 14 of the Notes to the Consolidated
Financial Statements included in the Annual Report, page 48 for information as
to revenues, net income and identifiable assets attributable to the three
business segments (management operations, property/casualty insurance operations
and life insurance operations) in which the Company is engaged.
Management Operations
For services performed in its role as attorney-in-fact for the
Policyholders of the Exchange, the Company charges the Exchange a management fee
computed as a percentage of the affiliated assumed(Erie Insurance Co., Erie NY,
Erie P&C and Flagship) and direct premiums written by the Exchange. The
management fee is compensation for: (a) acting as attorney-in-fact for the
Exchange, (b) managing the business and affairs of the Exchange, and (c) paying
certain general administrative expenses, including sales commissions, salaries,
Employee benefits, taxes, rent, depreciation, data processing expenses and other
expenses not part of the settlement of losses or the management of investments.
The Company's Board of Directors may change the management fee at
its discretion. However, the maximum fee level which can be charged the
Exchange, is limited by the agreement between the Exchange and the Company (or
its property/casualty affiliates), to 25 percent of the affiliated assumed and
direct written premium. The Board considers several factors in determining the
management fee rate, including the relative financial position of the Exchange
and the Company and the long-term capital needs of the Exchange in order to
foster growth, competitiveness, and maintain its superior financial strength.
The management fee rate charged the Exchange was set at the
following rates:
January 1, 1997 to December 31, 1997 24.00 percent
January 1, 1998 to December 31, 1998 24.25 percent
January 1, 1999 to December 31, 1999 25.00 percent
The Board voted to maintain the 25 percent management fee rate for all of 2000.
All premiums collected, less the management fee paid to the
Company, are retained by the Exchange for the purpose of paying losses, loss
adjustment expenses, investment expenses and other miscellaneous expenses
including taxes, licenses and fees. The Company pays certain loss adjustment and
investment expenses on behalf of the Exchange and is reimbursed fully for these
expenses by the Exchange.
The Company receives a service agreement fee from the Exchange as
compensation for the management and administration of voluntary assumed
reinsurance business from non-affiliated insurers. The fee of 7% of voluntary
reinsurance premiums assumed from non-affiliated insurers is compensation for
accounting and operating expenses in connection with the administration of this
business.
The Company collects service charges from policyholders as
reimbursement for the costs incurred by the Company in providing extended
payment terms on policies written by the insurers managed by the Company. These
charges are included in service agreement revenue in the Consolidated Statements
of Operations.
4
Property/Casualty Insurance Operations
Industry
One of the distinguishing features of the property/casualty
insurance industry in general is that its products are priced before its costs
are known, as premium rates are generally determined before losses are reported.
Current prices must be established from forecasts of the ultimate costs expected
to arise from exposures underwritten during the coverage period when the rates
are applied. This unique pricing environment affects the financial statements
primarily through the loss reserves. Changes in statutory, "regulatory" and case
law can significantly affect the liabilities associated with known risks after
the insurance contract is in place. Property/casualty insurance companies'
ability to increase prices in response to declines in profitability are limited
by the large number of competitors and the similarity of products offered, as
well as regulatory constraints.
The profitability of the property/casualty insurance business can
be influenced by many external factors some of which include rate competition,
the severity and frequency of claims, natural disasters, state regulation of
premium rates, and other areas of competition defaults of reinsurers, investment
market conditions, general business conditions, court decisions that define and
may expand the extent of coverage and the amount of compensation due for
injuries and losses.
Lines of Business
The property/casualty insurers managed by the Company underwrite a
broad range of insurance for risks of all sizes. In 1999, personal lines
comprised 76.1% of direct and affiliated assumed premium revenue while
commercial lines constituted the remaining 23.9%. The core products in the
personal lines are private passenger automobile (78.2%) and homeowners (20.6%)
while the core commercial lines consist principally of automobile (30.7%),
multi-peril (34.7%) and workers compensation (27.2%).
See "Selected Market and Geographic Information" contained on page
31 of the Annual Report for the Company's 5.5% share of direct and affiliated
assumed premiums written by jurisdiction and line of business in addition to
statutory loss and loss adjustment expense ratios by line of business for the
Company's wholly-owned subsidiaries.
Reinsurance
Reference is made to Note 12 of the Notes to Consolidated Financial
Statements contained in the Annual Report for the year ended December 31, 1999
pages 46 to 47 incorporated herein by reference for a complete discussion of
reinsurance transactions.
5
Combined Ratios
The combined ratio is a standard industry measurement of the
results of property/casualty insurance underwriting operations. The statutory
combined ratio is the sum of the ratio of incurred losses and loss adjustment
expenses to net premiums earned ("loss ratio"), the ratio of underwriting
expenses incurred to net premiums written ("expense ratio") and, the ratio of
dividends to policyholders to net premiums earned ("dividend ratio"). The
generally accepted accounting principles ("GAAP") combined ratio is calculated
in the same manner except that it is based on GAAP reported amounts and the
denominator for each component is net premiums earned. A combined ratio under
100% generally indicates an underwriting profit; a combined ratio over 100%
generally indicates an underwriting loss. Investment income, federal income
taxes and other non-underwriting income or expense are not reflected in the
combined ratio. The profitability of The ERIE is a function of income and
expense from both its underwriting and investment operations.
The ratios shown in the table below for the Company's
property/casualty insurance subsidiaries Erie Insurance Co. and Erie NY, are
prepared in accordance with GAAP and with statutory accounting practices ("SAP")
prescribed or permitted by state insurance authorities.
Combined Ratios
Year Ended December 31,
1999 1998 1997
------ ------ -----
GAAP Combined Ratio 103.0% 99.5% 102.1%
===== ==== =====
Statutory operating ratios:
Loss ratio 74.6 70.4 74.1
Expense and dividend ratio 28.2 28.6 27.5
----- ----- -----
Statutory Combined Ratio 102.8% 99.0% 101.6%
===== ===== =====
Catastrophe losses incurred from wind storms in Denmark and France through the
Company's reinsurance business, as well as losses incurred from Hurricane Floyd
through the Company's direct writings, contributed to the increased combined
ratio in 1999 compared to 1998. Loss cost severity-management programs
introduced by the Company, combined with mild weather conditions and a generally
favorable claims environment, led to the improved combined ratio in 1998, when
compared to 1997.
Seasonal Factors
The Company's management fee is earned when premiums are written.
Historically, due to policy renewal and sales patterns, writings are strongest
in the second and third quarters of the calendar year. While loss and loss
adjustment expenses are not entirely predictable, historically such costs have
been greater during the third and fourth quarters, influenced by the weather in
the geographic regions where the Company and affiliated property/casualty
insurers operate.
6
Investment Operations
The Company's investment strategy takes a long-term perspective
emphasizing investment quality, diversification and superior investment returns
while also providing for liquidity to meet the short and long-term commitments
of the Company. Investments are managed on a total return approach that focuses
on current income and capital appreciation. The Company's investment portfolio,
at market value, increased to $748,250,917 at December 31, 1999, which
represents 49.3% of total assets. Investment income is affected by shifts in the
types of investments in the portfolio, changes in interest rates and other
factors. Net investment income, including net realized gains on investments, was
$58,730,615 in 1999, compared to $45,769,884 in 1998 and $38,747,247 in 1997.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations, on pages 22 through page 24 of the Annual Report for the year ended
December 31,1999 for additional discussion.
The Company's property/casualty insurance subsidiaries' investment
portfolio must comply with applicable laws and regulations which prescribe the
kind, quality and concentration of investments.
Included in investments is a 21.6% common stock interest in EFL
which is accounted for under the equity method of accounting. EFL, which was
organized in 1967 as a Pennsylvania-domiciled life insurance company, has an
A.M. Best rating of A+ (Superior). EFL is primarily engaged in the business of
underwriting and selling non-participating individual and group life insurance
policies, including universal life and individual and group annuity products in
nine states and the District of Columbia. At December 31, 1999, on a Generally
Accepted Accounting Principles (GAAP) basis, EFL had assets of $955 million and
shareholders' equity of $171 million. At December 31, 1999, of EFL's total
liabilities of $784 million, insurance and annuity reserves accounted for $741
million and a note payable to the Company amounted to $15 million. Of EFL's
investment portfolio of $817 million at December 31, 1999, available-for-sale
securities accounted for $771 million, real estate was $1 million, policy loans
were $7 million, mortgage loans accounted for $10 million and other invested
assets were $28 million.
Financial Ratings
Insurance companies are rated by rating agencies to provide
insurance consumers and investors with meaningful information on specific
insurance companies. Higher ratings generally indicate financial stability and a
strong ability to pay claims. The ratings are generally based upon factors
relevant to policyholders and are not directed toward return to investors.
The Exchange, Flagship, Erie Insurance Co., Erie P&C and Erie NY
all have current ratings of A++ (Superior) from A.M. Best with respect to their
financial strength and claims-paying ability. In evaluating an insurer's
financial and operating performance, A.M. Best reviews the insurer's
profitability, leverage and liquidity as well as the insurer's book of business,
the adequacy and soundness of its reinsurance, the quality and estimated market
value of its assets, the adequacy of its loss reserves and the experience and
competency of its management. Management believes that this A.M. Best rating of
A++ (Superior) is an important factor in marketing The ERIE's property/casualty
insurance to its agents and customers.
7
Competition
The property/casualty markets in which the Company operates are
highly competitive. Property/casualty insurers generally compete on the basis of
customer service, price, brand recognition, coverages offered, claim handling
ability, financial stability and geographic coverage. In addition, because the
insurance products of The ERIE are marketed exclusively through independent
insurance agents, most of which represent more than one company, The ERIE faces
competition to retain qualified independent agencies and commonly competes for
business within each agency.
Market competition bears directly on the price charged for
insurance products and services provided within the insurance regulatory
framework. Growth is driven by a company's ability to provide insurance services
at a price that is reasonable and acceptable to the customer. In addition, the
marketplace is affected by available capacity of the insurance industry. Surplus
expands and contracts primarily in conjunction with profit levels generated by
the industry. Growth is evaluated based on a company's ability to retain
existing customers and to attract new customers as well as movement in the
average premium charged by the Company.
Although the 1999 market cycle continued to be soft (a period of
heightened premium rate competition and depressed underwriting performance) the
industry remains strongly capitalized.
The Company, in managing the property/casualty insurers of The
ERIE, has followed several strategies which the management of the Company
believes have resulted in underwriting results which exceed those of the
property/casualty industry in general. First, the Company employs an
underwriting philosophy and product mix targeted to produce an Erie Insurance
Group-wide underwriting profit, i.e., a combined ratio of less than 100%,
through careful risk selection, adequate pricing and prompt fair claims
settlement practices. The careful selection of risks allows for lower claims
frequency and loss severity, thereby enabling insurance to be offered at
favorable prices. During 1998, pricing actions were initiated by The ERIE that
reduced private passenger automobile rates with general across-the-board
reductions as well as a new discount program for drivers with favorable
experience. The intent of the program was to help retain profitable automobile
customers who deserve a price break and enhance the attractiveness of The ERIE's
products to new customers. During 1999, the property/casualty insurers of The
Group experienced modest premium growth. The 1998 rate reductions resulted in a
decrease in premiums, which was offset by new policy growth and an increase in
policy retention rates. Policy growth in 1999 when compared to the same period
in 1998 was strong as policy retention rates and new policy growth improved.
Policies in force increased 5.1% to 2,689,849 at December 31, 1999 from
2,588,730 policies in force at December 31, 1998. Policy retention (the
percentage of current policyholders that have renewed their policy) was 91.6%
and 90.7% for the years ended December 31, 1999 and 1998, respectively, for
private passenger automobile policies. The overall policy retention rate for The
ERIE was 90.1% and 89.4% for the years ended December 31, 1999 and 1998,
respectively. On October 1, 1999, additional rate reductions of approximately
$25 million in private passenger automobile insurance became effective in
several jurisdictions. These reductions will be realized as policies renew in
the next 12 months.
Second, management focuses on consistently providing superior
service to policyholders and agents in both underwriting and claims handling.
8
Third, the Company maintains a business model designed to provide
the advantages of localized marketing and claims servicing with the economies of
scale from centralized accounting, administrative, underwriting, investment,
information management and other support services.
Finally, a careful agent selection process exists in which The
ERIE seeks to be the lead underwriter with its agents in order to enhance the
agency relationship and the likelihood of receiving the most desirable
underwriting opportunities from its agents. The Company has ongoing, direct
communications with its agency force. An Agents Advisory Council forum shares
ideas, concerns and suggestions with the senior management of the ERIE annually
with the goal of improving communications and service. These efforts have
resulted in outstanding agency penetration and the ability to sustain long-term
agency partnerships.
Reserves
Loss reserves are established to account for the estimated
ultimate costs of loss and loss adjustment expenses for claims that have been
reported but not yet settled and claims that have been incurred but not yet
reported. The estimated loss reserve for reported claims is based primarily upon
a case-by-case evaluation of the type of risk involved and knowledge of the
circumstances surrounding each claim and the insurance policy provisions
relating to the type of loss. Estimates of reserves for unreported claims and
loss settlement expenses are determined on the basis of historical information
by line of insurance as adjusted to current conditions. Inflation is implicitly
provided for in the reserving function through analysis of costs, trends and
reviews of historical reserving results.
The process of estimating the liability for unpaid losses and loss
expenses is inherently judgmental and can be influenced by factors subject to
variation. Possible sources of variation include claim frequency and severity,
changing rates of inflation as well as changes in other economic conditions,
judicial trends and legislative changes. It is unlikely that future losses and
loss expenses will develop exactly as projected. The Company continually refines
reserves as experience develops and new information becomes known. The Company
reflects adjustments to reserves in the results of operations in the periods in
which the estimates are changed. With the exception of reserves relating to
certain workers compensation cases, which have been discounted at 2.5%, loss
reserves are not discounted.
For a reconciliation of beginning and ending property/casualty
unpaid losses and loss adjustment expense reserves for each of the last three
years, see Note 9 of the Notes to Consolidated Financial Statements contained in
the Annual Report page 45. Differences between reserves reported in the
Company's financial statements prepared on the basis of GAAP and financial
statements prepared on the basis of SAP are not material.
9
The following table sets forth the development of net reserves for
unpaid losses and loss adjustment expenses from 1995 through 1999.
Year Ended December 31,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ------------
(in thousands)
Reserve for unpaid
losses and loss
adjustment expense................... $ 432,895 $ 426,165 $ 413,409 $ 389,425 $ 357,334
===========
Liability as of:
One year later....................... 414,348 412,189 395,308 351,684
------------
Two years later...................... 398,442 399,337 363,273
------------
Three years later.................... 389,107 374,050
------------
Four years later..................... 368,758
-------------
Cumulative (excess)
deficiency ........................ ( 11,817) ( 14,967) ( 318) 11,424
======== ========= ===== ========
Cumulative amount of liability paid through:
One year later...................... $ 145,385 $ 136,940 $ 142,425 $ 132,649
============ ============ ============ =============
Two years later..................... $ 211,522 $ 213,252 $ 200,171
============ ============ =============
Three years later................... $ 251,135 $ 236,758
============ =============
Four years later.................... $ 256,981
=============
The top line shows the estimated liability that was recorded at the end of each
of the indicated years for all current and prior year unpaid losses and loss
expenses. The upper portion of the table shows re-estimations of the original
recorded reserve as of the end of each successive year. The estimate is
increased or decreased as payments are made and more information becomes known
about the severity of remaining unpaid claims. The lower portion of the table
shows the cumulative amount paid in succeeding years for losses incurred prior
to the Statement of Financial Position date. The cumulative deficiency or
redundancy represents the aggregate amount by which original estimates of
reserves as of that year-end have changed in subsequent years. A redundancy in
reserves means that reserves established in prior years exceeded actual losses
and loss adjustment expenses or were reevaluated at less than the originally
reserved amount. A deficiency in reserves means that the reserves established in
prior years were less than actual losses and loss adjustment expenses or were
reevaluated at more than the originally reserved amount.
Government Regulation
The property/casualty insurers managed by the Company are subject
to supervision and regulation in the states in which they transact business. The
primary purpose of such supervision and regulation is the protection of
policyholders. The extent of such regulation varies, but generally derives from
state statutes which delegate regulatory, supervisory and administrative
authority to state insurance departments. Accordingly, the authority of the
state insurance departments includes the establishment of standards of solvency
which must be met and maintained by insurers, the licensing to do business of
insurers and agents, the nature of the limitations on investments, the approval
of premium rates for property/casualty insurance, the provisions which insurers
must make for current losses and future liabilities, the deposit of securities
for the benefit of policyholders, the approval of policy forms, notice
requirements for the cancellation of policies and the approval of certain
changes in control. In addition, many states have enacted variations of
competitive rate-making laws which allow insurers to set certain premium rates
for certain classes of insurance without having to obtain the prior approval of
the state insurance
10
department. State insurance departments also conduct periodic examinations of
the affairs of insurance companies and require the filing of annual and other
reports relating to the financial condition of insurance companies.
The Company's property/casualty insurance subsidiaries may be
required, under the solvency or guarantee laws of the various states in which
they are licensed, to pay assessments to fund policyholder losses or liabilities
of insolvent insurance companies. Depending on state law, insurers can be
assessed an amount that is generally equal to between 1% and 2% of premiums
written for the relevant lines of insurance in that state each year to pay the
claims of an insolvent insurer. Certain states permit these assessments, or a
portion thereof, to be recorded as an offset to future premium taxes. The
property/casualty insurers managed by the Company have made accruals for their
portion of assessments related to such insolvencies based upon the most current
information furnished by the guaranty associations. Reflected in the
Consolidated Statements of Operations were $30,915, $1,222,958 and $171,557 for
these insolvencies for the years ended December 31, 1999, 1998 and 1997,
respectively. Assessments in 1998 were affected by two large insurer
insolvencies in Pennsylvania and Ohio.
The Company's property/casualty insurers are also required to
participate in various involuntary insurance programs for automobile insurance,
as well as other property and casualty lines, in states in which such companies
operate. These involuntary programs provide various insurance coverages to
individuals or other entities that otherwise are unable to purchase such
coverage in the voluntary market. These programs include joint underwriting
associations, assigned risk plans, fair access to insurance requirements
("FAIR") plans, reinsurance facilities and windstorm plans. Legislation
establishing these programs generally provides for participation in proportion
to voluntary writings of related lines of business in that state. Generally,
state law requires participation in such programs as a condition to doing
business in that state. The loss ratio on insurance written under involuntary
programs has traditionally been greater than the loss ratio on insurance in the
voluntary market; however, the impact of these involuntary programs on the
property/casualty insurers managed by the Company has been immaterial.
Pennsylvania regulations limit the amount of dividends EFL can pay
its shareholders and limit the amount of dividends the Company's
property/casualty insurance subsidiaries can pay to the Company. The limitations
are fully described and reference is made herein to Note 13 of the Notes to
Consolidated Financial Statements contained in pages 47 to 48 in the Annual
Report for the year ended December 31, 1999, incorporated by reference.
11
Financial Regulation
The Company's property/casualty insurance subsidiaries are
required to file financial statements prepared using SAP with state regulatory
authorities. The adjustments necessary to reconcile the Company's
property/casualty insurance subsidiaries' net income and shareholders' equity
prepared in accordance with SAP to net income and shareholders' equity prepared
in accordance with GAAP are as follows:
Net Income
--------------------------------------------
Year Ended
--------------------------------------------
December 31,
1999 1998
------------- -------------
(in thousands)
SAP amounts.................................... $ 9,546 $ 14,663
Adjustments:
Deferred policy acquisition
costs....................................... 542 580
Deferred income taxes........................ 226 ( 1,855)
Federal alternative minimum
tax credit recoverable...................... 0 795
Salvage and subrogation...................... 158 12
Incurred premium adjustment.................. ( 542) ( 580)
Other........................................ ( 59) ( 3)
------------ ------------
GAAP amounts................................... $ 9,871 $ 13,612
============ ============
Shareholders' Equity
-------------------------------------------
As of December 31,
-------------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
SAP amounts.................................... $ 81,709 $ 74,348 $ 60,628
Adjustments:
Deferred policy acquisition
costs....................................... 11,405 10,863 10,284
Deferred income taxes........................ 3,350 4,143 5,998
Salvage and subrogation...................... 3,128 2,970 2,957
Statutory reserves........................... 2,656 2,619 1,823
Incurred premium adjustment.................. ( 11,405) ( 10,863) ( 10,284)
Unrealized gains net of
deferred taxes.............................. 38 7,653 6,697
Federal alternative minimum
tax credit recoverable...................... 0 ( 1,020) ( 1,815)
Other........................................ ( 3) 0 8
------------ ------------ ------------
GAAP amounts................................... $ 90,878 $ 90,713 $ 76,296
============ ============ ============
12
The National Association of Insurance Commissioners has adopted
risk-based capital (RBC) standards that require insurance companies to calculate
and, report statutory capital and surplus needs based on a formula measuring
underwriting, investment and other business risks inherent in an individual
company's operations. These RBC standards have not affected the operation of the
Company as each of the property/casualty insurance subsidiaries has statutory
capital and surplus in excess of RBC requirements.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995: Statements contained herein expressing the beliefs of management and, such
as those contained in the section titled "Investment Operations" and elsewhere
herein, the other statements which are not historical facts contained in this
report, are forward-looking statements that involve risks and uncertainties.
These risks and uncertainties include but are not limited to: pricing, product
development, geographic spread of risk, weather and weather-related events,
other types of catastrophic events, and technological difficulties and
advancements.
13
Item 2. Properties
The Company and its subsidiaries, the Exchange and its subsidiary
and EFL share a corporate home office complex in Erie, Pennsylvania which
contains 358,202 square feet and is owned by the Exchange. At December 31, 1999
in addition to the Erie branch office, the Company also operated 20 additional
field offices in 10 states. Of these sites, 16 provide both agency support and
claims services and are referred to as "Branch Offices", while the remaining 4
provide only claims services and are considered "Claims Offices".
The Company owns three of its field offices. Three field offices
are owned by and leased from the Exchange. The annual rent expense incurred by
the Company for the field offices and home office complex totaled $10,319,616 in
1999. One office is owned by and leased from EFL at an annual rental in 1999 of
$302,676. The remaining 13 offices are leased from various unaffiliated parties
at an aggregate annual rental in 1999 of approximately $1,537,884. The Company
is reimbursed by its affiliates for a percentage of the rent and expenses for
office space used by its affiliates, which was approximately $670,000 in 1999.
Item 3. Legal Proceedings
Reference is made to "Legal Proceedings" on pages 31 through 41 of
the Company's proxy statement, incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
14
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Reference is made to "Market Price of and Dividends on the Common
Equity and Related Shareholder Matters" on page 51 of the Annual Report for the
year ended December 31, 1999, incorporated herein by reference, for information
regarding the high and low sales prices for the Company's stock and additional
information regarding such stock of the Company.
As of February 29, 2000, there were approximately 1,236 beneficial
shareholders of record of the Company's Class A non-voting common stock and 27
beneficial shareholders of record of the Company's Class B voting common stock.
Of the 64,847,751 shares of the Company's Class A common stock
outstanding as of February 29, 2000, approximately 22,682,956 shares are freely
transferable without restriction or further registration under the Securities
Act of 1933 (the Act), as amended unless purchased by affiliates of the Company
as that terms is defined in Rule 144 under the Act. The 42,164,795 remaining
outstanding shares of Class A common stock (the Restricted Shares) are held by
the Company's directors, executive officers and their affiliates and are
restricted securities that are eligible to be sold publicly pursuant to an
effective registration statement under the Act or in accordance with the
applicable exemption, including Rule 144, from the registration requirements
under the Act. The Company is unable to estimate the amount of Restricted Shares
that may be sold under Rule 144 since this amount will depend in part on the
price for the Class A common stock, the personal circumstances of the sellers
and other factors. Sales of a substantial number of Restricted Shares in the
public market, or the availability of such shares, could adversely affect the
price of the Class A common stock.
In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated for purposes of Rule 144) who beneficially
has owned Restricted Shares for at least two years, including affiliates of the
Company, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of: (1) one percent of the number of shares of
Class A common stock then outstanding, or (2) the average weekly trading volume
of the Class A common stock in The NASDAQ Stock MarketSM during the four
calendar weeks preceding the date on which notice of sale is filed with the SEC.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. However, a person (or persons whose shares are aggregated for purposes
of Rule 144) who is deemed not to have been an affiliate of the Company at any
time during the 90 days preceding a sale, and who beneficially has owned the
Restricted Shares for at least three years at the time of sale, would be
entitled to sell such shares under Rule 144(k) without regard to the aforesaid
limitations.
Item 6. Selected Consolidated Financial Data
Reference is made to "Selected Consolidated Financial Data" on
page 17 of the Annual Report for the year ended December 31, 1999, incorporated
herein by reference.
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 18 through 29 of the
Annual Report for the year ended December 31, 1999, incorporated herein by
reference.
Item 7a. Quantitative and Qualitative Disclosure about Market Risk
Reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on page 24 of the Annual Report
for the year ended December 31, 1999, incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
Reference is made to the "Consolidated Financial Statements"
included on pages 33 through 36 and to the "Quarterly Results of Operations"
contained in the "Notes to Consolidated Financial Statements" on page 49 of the
Annual Report for the year ended December 31, 1999, incorporated herein by
reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosures
None.
16
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) The answer to this item, with respect to directors of the
Registrant, is incorporated by reference to pages 9 through 17 of the Company's
Proxy Statement relating to the Annual Meeting of Shareholders to be held on
April 25, 2000.
(b) Certain information as to the executive officers of the
Company is as follows:
Age Principal Occupation for Past
as of Five Years and Positions with
Name 12/31/99 Erie Insurance Group
- --------------------------------------------------------------------------------
President & Chief Executive Officer
Stephen A. Milne 51 President, Chief Executive Officer and a Director of the Company, EFL and
Erie Insurance Co. since 1996 and President and Chief Executive Officer of
Flagship, Erie P&C and Erie NY since 1996; Executive Vice President - Insurance
Operations of the Company, Erie Insurance Co., Flagship, Erie P&C and
Erie NY 1994 - 1996. Director Flagship and Erie P&C 1996 - present; Director,
Erie NY 1994 - present.
Executive Vice Presidents
Jan R. Van Gorder, Esq. 52 Senior Executive Vice President, Secretary and General Counsel of the Company,
EFL and Erie Insurance Co. since 1990, and of Flagship and Erie P&C since
1992 and 1993, respectively, and of Erie NY since April 1994; Senior Vice
President, Secretary and General Counsel of the Company, EFL and Erie Insurance
Co. for more than five years prior thereto; Director, the Company, EFL, Erie
Insurance Co., Erie NY, Flagship and Erie P&C.
Philip A. Garcia 43 Executive Vice President and Chief Financial Officer since 1997; Senior
Vice President and Controller 1993 - 1997. Director, the Erie NY, Flagship and
Erie P&C.
Jeffrey A. Ludrof 40 Executive Vice President since June 16, 1999; Senior Vice President 1994 - 1999;
Regional Vice President 1993 - 1994.
17
Age Principal Occupation for Past
as of Five Years and Positions with
Name 12/31/99 Erie Insurance Group
- --------------------------------------------------------------------------------
Senior Vice Presidents
Eugene C. Connell 45 Senior Vice President since 1990.
Michael J. Krahe 46 Senior Vice President since 1999; Vice President 1994 - 1999.
Elaine A. Lamm 61 Senior Vice President since 1990.
George R. Lucore 49 Senior Vice President since March 1995;Regional Vice President 1993 - March 1995.
David B. Miller 45 Senior Vice President since August 1996; Independent Insurance Agent 1991 - 1996.
Timothy G. NeCastro 39 Senior Vice President and Controller since November 1997; Department Manager -
Internal Audit November 1996 - 1997.
James R. Roehm 51 Senior Vice President since 1991.
Barry P. Stiles 50 Senior Vice President since 1999; Vice President 1993 - 1999.
Michael S. Zavasky 47 Senior Vice President since April 1998; Vice President and Managing Director of
Reinsurance 1990 - April 1998.
Douglas F. Ziegler 49 Senior Vice President, Treasurer and Chief Investment Officer since 1993.
Regional Vice Presidents
B. Crawford Banks 63 Regional Vice President since 1993.
Douglas N. Fitzgerald 43 Regional Vice President since 1993.
Terry L. Hamman 45 Regional Vice President since May 1995; Assistant Vice President 1993 - May 1995.
18
Item 11. Executive Compensation
The answer to this item is incorporated by reference to pages 18
through 28 of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held on April 25, 2000, except for the Performance Graph,
which has not been incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The answer to this item is incorporated by reference to pages 4
through 8 of the Company's Proxy Statement relating to the Annual Meeting of
Shareholders to be held on April 25, 2000.
19
Item 13. Certain Relationships and Related Transactions
Since the formation of the Company and the Exchange in 1925, the
Company, as the attorney-in-fact appointed by the policyholders of the Exchange,
has managed the property/casualty insurance operations of the Exchange. The
Company's operations are interrelated with the operations of the Exchange, and
the Company's results of operations are largely dependent on the success of the
Exchange.
The Company believes that its various transactions with the
Exchange and EFL, which are summarized herein, are fair and reasonable and have
been on terms no less favorable to the Company than the terms that approximate
those which could have been negotiated with an independent third party.
Pursuant to the Subscribers Agreement by which the Company serves
as attorney-in-fact for the Exchange, the Company's Board of Directors
establishes periodically an annual management fee for the Company's services as
attorney-in-fact which may not exceed 25% of the direct and affiliated assumed
written premiums of the Exchange. The Company's Board of Directors has the
ability to establish the percentage charged at its discretion within these
parameters. The management fee rate was 24% for all of 1997. Beginning January
1, 1998 through December 31, 1998, the management fee charged the Exchange was
24.25%. The Company's Board of Directors elected to change the management fee
rate to 25% beginning January 1, 1999 through December 31, 1999. The Board
elected to maintain the 25% management fee rate for all of 2000. The activities
performed by the Company as attorney-in-fact for the Exchange include insurance
underwriting, policy issuance, policy exchange and cancellation, processing of
invoices for premiums, oversight of reinsurance transactions, payment of
insurance commissions to insurance agents, compliance with rules and regulations
of supervisory authorities and monitoring of legal affairs. The Company is
obligated to conduct these activities at its own expense, and realizes profits
or losses depending upon whether its costs of providing such services is less
than the amount it receives from the Exchange, in which case the Company has a
profit from acting as attorney-in-fact, or greater, in which case the Company
has a loss from such activities. The Exchange, however, bears the financial
responsibility for the payment of insurance losses, loss adjustment expenses,
investment expenses, legal expenses, assessments, damages, licenses, fees,
establishment of reserves and taxes. For the three years ended December 31,
1999, 1998 and 1997, the management fees were $513,375,281, $489,147,394 and
$467,602,283, respectively.
Service agreement revenue totaled $15,440,862, $13,878,922 and
$7,026,373 for the years ended December 31, 1999, 1998 and 1997, respectively.
Service agreement revenue is derived from two sources. First, the Company
receives service charges from Policyholders for providing extended payment terms
on policies written by The ERIE. Service charges totaled $7,282,621, $7,163,895
and $2,011,181 for the years ended December 31, 1998, 1998 and 1997,
respectively. Second, service income is received from the Exchange as
compensation for the management and administration of voluntary assumed
reinsurance from non-affiliated insurers. The Company receives a 7.0% service
fee on the premiums from the business. These fees totaled $8,158,241, $6,715,026
and $5,015,192, respectively, on net voluntary assumed reinsurance premiums of
$116,546,294, $95,928,945 and $71,645,599 for the years ended December 31, 1999,
1998 and 1997, respectively.
The Company's subsidiaries, Erie Insurance Co. and Erie NY,
participate in a reinsurance pooling arrangement with the Exchange. Erie P&C and
Flagship reinsure 100% of their property/casualty insurance business with the
Exchange under the terms of quota share reinsurance treaties with the Exchange.
20
The Company and the Exchange periodically purchase annuities from
EFL for use in connection with the structured settlement of insurance claims.
The Company's share of such purchases, through its subsidiaries, Erie Insurance
Co. and Erie NY, amounted to $1,282,172, $983,574 and $977,932 for the years
ended December 31, 1999, 1998 and 1997, respectively, and the reserves held by
EFL at December 31, 1999 for such annuities were approximately $8,245,620. In
addition, the Erie Insurance Group Retirement Plan for Employees has, from time
to time, purchased individual annuities from EFL for each retired vested
employee or beneficiary receiving benefits. Such purchases amounted to
$5,321,738, $6,413,460 and $1,992,060 for the years ended December 31, 1999,
1998 and 1997, respectively. The reserves held by EFL for all such annuities
were approximately $42,130,596 at December 31, 1999.
In 1995, EFL issued a surplus note to the Company for $15 million.
The note bears an annual interest rate of 6.45% and all payments of interest and
principal of the note may be repaid only out of unassigned surplus of EFL and
are subject to the prior approval of the Pennsylvania Insurance Commissioner.
Interest on the surplus note is scheduled to be paid semi-annually. The note
will be payable on demand on or after December 31, 2005. Payment of principal
and/or interest is subordinated to payment of all other liabilities of EFL.
During 1999, 1998 and 1997, EFL paid the Company interest totaling $967,500 each
year.
Information with respect to certain relationships with Company
directors is incorporated by reference to pages 30 through 31 of the Company's
Proxy Statement relating to the Annual Meeting of Shareholders to be held on
April 25, 2000.
21
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial statements, financial statement schedules and exhibits
filed:
(1) Consolidated Financial Statements
Page*
----
Erie Indemnity Company and Subsidiaries:
Independent Auditors' Report on the
Consolidated Financial Statements............................. 32
Consolidated Statements of Operations
for the three years ended
December 31, 1999, 1998 and 1997.............................. 33
Consolidated Statements of Financial
Position as of December 31, 1999
and 1998 ................................................... 34
Consolidated Statements of Cash Flows
for the three years ended
December 31, 1999, 1998 and 1997.............................. 35
Consolidated Statements of Shareholders'
Equity for the three years ended
December 31, 1999, 1998 and 1997.............................. 36
Notes to Consolidated Financial Statements...................... 37
(2) Financial Statement Schedules
Page
----
Erie Indemnity Company and Subsidiaries:
Report of Independent Auditors on Schedules....................
Schedule I. Summary of Investments - Other
than Investments in Related
Parties...................................... 28
Schedule IV. Reinsurance...................................... 29
Schedule VI. Supplemental Information
Concerning Property/Casualty
Insurance Operations......................... 30
All other schedules have been omitted since they are not required, not
applicable or the information is included in the financial statements or notes
thereto.
* Refers to the respective page of Erie Indemnity Company's 1999 Annual Report
to Shareholders. The Consolidated Financial Statements and Notes to Consolidated
Financial Statements and Auditors' Report thereon on pages 32 to 49 are
incorporated by reference. With the exception of the portions of such Annual
Report specifically incorporated by reference in this Item and Items 1, 5, 6, 7,
7a and 8, such Annual Report shall not be deemed filed as part of this Form 10-K
Report or otherwise subject to the liabilities of Section 18 of the Securities
Exchange Act of 1934.
22
(3) Exhibits
Exhibit
Number Description of Exhibit
3.1* Articles of Incorporation of Registrant
3.2** Amended and Restated By-laws of Registrant
3.3## Amended and Restated By-laws of Registrant
dated March 9, 1999
4A* Form of Registrant's Class A Common
Stock certificate
4B* Form of Registrant's Class B Common
Stock certificate
10.1*** Retirement Plan for Employees of Erie
Insurance Group, effective as of
December 31, 1989
10.2*** Restatement of Supplemental Retirement
Plan for Certain Members of the Erie
Insurance Group Retirement Plan for
Employees, effective as of January 1,
1990
10.3*** Deferred Compensation Plan of
Registrant
10.4*** Retirement Plan for Outside Directors
of Registrant, effective as of
January 1, 1991
10.5*** Employee Savings Plan of Erie Insurance
Group, effective as of April 1, 1992
10.6*** Amendment to Employee Savings Plan of
Erie Insurance Group
10.7*** Supplemental 401(k) Plan of Erie Insurance
Group effective as of January 1, 1994
10.8*** Service Agreement dated January 1, 1989
between Registrant and Erie Insurance
Company
10.9*** Service Agreement dated June 21, 1993
between Registrant and Erie Insurance
Property & Casualty Company
10.10*** Service Agreement dated June 21, 1993
between Registrant and Flagship City
Insurance Company
10.11*** Reinsurance Pooling Agreement dated
January 1, 1992 between Erie Insurance
Company and Erie Insurance Exchange
23
Exhibit
Number Description of Exhibit
10.12*** Form of Subscriber's Agreement whereby
policyholders of Erie Insurance Exchange
appoint Registrant as their
Attorney-in-Fact
10.13* Stock Redemption Plan of Registrant dated
December 14, 1989
10.14* Stock Purchase Agreement dated December 20,
1991, between Registrant and Erie Insurance
Exchange relating to the capital stock of
Erie Insurance Company
10.15** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1,
1994 between Erie Insurance Exchange
and Erie Insurance Co.
10.16**** Stock Redemption Plan of Registrant as
restated December 12, 1995
10.17**** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1, 1995
between Erie Insurance Exchange and Erie
Insurance Company of New York
10.18**** Service Agreement dated January 1, 1995
between Registrant and Erie Insurance
Company of New York
10.19***** Consulting Agreement for Investing Services
dated January 2, 1996 between Erie Indemnity
Company and John M. Petersen
10.20***** Agreement dated April 29, 1994 between Erie
Indemnity Company and Thomas M. Sider
10.21****** Aggregate Excess of Loss Reinsurance Agreement effective
January 1, 1997 between Erie Insurance Exchange, by and
through its Attorney-in-Fact, Erie Indemnity Company and Erie
Insurance Company and its wholly-owned subsidiary Erie
Insurance Company of New York
10.22# 1997 Annual Incentive Plan of Erie Indemnity
Company
10.23# Erie Indemnity Company Long-Term Incentive Plan
10.24# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Stephen A.
Milne
10.25# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Jan R. Van
Gorder
24
Exhibit
Number Description of Exhibit
10.26# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Philip A.
Garcia
10.27# Employment Agreement effective December 16, 1997 by
and between Erie Indemnity Company and John J.
Brinling, Jr.
10.28 Employment Agreement effective June 30, 1999 by
and between Erie Indemnity Company and Jeffrey A.
Ludrof
10.29 Employment Agreement effective December 15, 1999 by
and between Erie Indemnity Company and Douglas F.
Ziegler
10.30 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and Stephen A. Milne
10.31 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and Jan R. Van Gorder
10.32 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and Philip A. Garcia
10.33 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and John J. Brinling
10.34 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and Jeffrey A. Ludrof
11 Statement re computation of per share
earnings
13 1999 Annual Report to Shareholders.
Reference is made to the Annual Report
furnished to the Commission, herewith.
21 Subsidiaries of Registrant
27 Financial Data Schedule
99.1## Report of the Special Committee to the
Board of Directors
* Such exhibit is incorporated by reference to the like numbered
exhibit in Registrant's Form 10 Registration Statement
Number 0-24000 filed with the Securities and Exchange Commission on
May 2, 1994.
** Such exhibit is incorporated by reference to the like numbered
exhibit in Registrant's Form 10/A Registration Statement Number
0-24000 filed with the Securities and Exchange Commission on August
3, 1994.
25
*** Such exhibit is incorporated by reference to the like titled but
renumbered exhibit in Registrant's Form 10 Registration Statement
Number 0-24000 filed with the Securities and Exchange Commission on
May 2, 1994.
**** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1995 that was filed with the Commission on March 25,
1996.
***** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K/A amended annual report for the year
ended December 31, 1995 that was filed with the Commission on April
25, 1996.
****** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1996 that was filed with the Commission on March 21,
1997.
# Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1997 that was filed with the Commission on March 25,
1998.
## Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1998 that was filed with the Commission on March 30,
1999.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1999, The Company did not file any
reports on Form 8-K.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 7, 2000 ERIE INDEMNITY COMPANY
(Registrant)
Principal Officers
/s/ Stephen A. Milne
Stephen A. Milne, President and CEO
/s/ Jan R. Van Gorder
Jan R. Van Gorder, Executive Vice President, Secretary & General Counsel
/s/ Philip A. Garcia
Philip A. Garcia, Executive Vice President & CFO
/s/ Timothy G. NeCastro
Timothy G. NeCastro, Senior Vice President & Controller
Board of Directors
/s/ Peter B. Bartlett /s/ Martin J. Lippert
Peter B. Bartlett Martin J. Lippert
/s/ Samuel P. Black, III /s/ Stephen A. Milne
Samuel P. Black, III Stephen A. Milne
/s/ J. Ralph Borneman /s/ John M. Petersen
J. Ralph Borneman John M. Petersen
/s/ Patricia A. Goldman /s/ Jan R. Van Gorder
Patricia A. Goldman Jan R. Van Gorder
/s/ Harry H. Weil
Susan Hirt Hagen Harry H. Weil
/s/ F. William Hirt /s/ Robert C. Wilburn
F. William Hirt Robert C. Wilburn
/s/ Gwendolyn S. King
Gwendolyn S. King
27
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders
Erie Indemnity Company
We have audited the consolidated statements of financial position of Erie
Indemnity Company and subsidiaries (Company) as of December 31, 1999 and 1998
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1999, as
contained in the 1999 annual report, incorporated by reference in the annual
report on Form 10-K for the year ended December 31, 1999. In connection with our
audits of the financial statements, we also have audited the financial statement
schedules, as listed in the accompanying index. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Erie Indemnity
Company and subsidiaries as of December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with 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.
/s/ Brown Schwab Bergquist & Co.
Erie, Pennsylvania
February 11, 2000
28
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1999
Cost or Amount at which
Amortized Fair Shown in the
Type of Investment Cost Value Balance Sheet
- --------------------------------------------------------------------------------------------------------------
(In Thousands)
Available-for-sale securities
Fixed maturities:
U.S. treasuries & government agencies $ 11,029 $ 11,051 $ 11,051
States & political subdivisions 52,064 53,118 53,118
Special revenues 120,170 122,096 122,096
Public utilities 20,909 20,318 20,318
U.S. industrial & miscellaneous 232,458 227,176 227,176
Foreign 21,593 20,743 20,743
Redeemable Preferred Stocks 31,171 31,020 31,020
Equity securities:
Common stock:
U.S. banks, trusts & insurance
companies $ 3,887 $ 7,156 $ 7,156
U.S. industrial & miscellaneous 56,035 103,132 103,132
Foreign industrial & miscellaneous 4,948 5,511 5,511
Non-redeemable preferred stock:
U.S. banks, trusts & insurance
companies 38,708 36,694 36,694
U.S. industrial & miscellaneous 61,109 56,662 56,662
Foreign industrial & miscellaneous 6,808 6,228 6,228
--------- --------- ---------
Total Available-for-Sale
Securities $660,889 $ 700,905 $ 700,905
-------- --------- ---------
Real Estate Mortgage Loans $ 8,230 $ 8,230 $ 8,230
Other Invested Assets $ 37,398 $ 39,116 $ 39,116
-------- --------- ---------
Total Investments $706,517 $ 748,251 $ 748,251
======== ========= =========
29
SCHEDULE IV - REINSURANCE
Percentage
Ceded to Assumed of amount
Other from Other Net Assumed
Direct Companies Companies Amount to Net
--------------------------------------------------------------------------------------------------
December 31,1999
Premiums for the year
Property and Liability Insurance $351,227,872 $356,608,390 $122,604,391 $117,223,873 104.6%
--------------------------------------------------------------------------------------------------
December 31,1998
Premiums for the year
Property and Liability Insurance $338,162,409 $343,051,100 $117,828,137 $112,939,446 104.3%
--------------------------------------------------------------------------------------------------
December 31,1997
Premiums for the year
Property and Liability Insurance $334,771,551 $340,165,100 $112,743,217 $107,349,668 105.0%
--------------------------------------------------------------------------------------------------
30
SCHEDULE VI - SUPPLMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
(in thousands)
Deferred
Policy Reserves for Discount, if
Acquisition Unpaid Loss & LAE any deducted Unearned
Costs Expenses from reserves Premiums
---------------------------------------------------------------------------------
@ 12/31/99
Consolidated P&C Entities $ 11,405 $432,895 $ 1,377 $236,525
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $ 11,405 $432,895 $ 1,377 $236,525
---------------------------------------------------------------------------------
@ 12/31/98
Consolidated P&C Entities $ 10,863 $426,165 $ 1,562 $229,057
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $ 10,863 $426,165 $ 1,562 $229,057
---------------------------------------------------------------------------------
@ 12/31/97
Consolidated P&C Entities $ 10,283 $413,409 $ 0 $219,211
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $ 10,283 $413,409 $ 0 $219,211
---------------------------------------------------------------------------------
31
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (CONTINUED)
(in thousands)
Loss and Loss Adjustment Expenses
Net Incurred Related to
Earned Investment (1) (2)
Premiums Income Current Year Prior Years
---------------------------------------------------------------------------------
@ 12/31/99
Consolidated P&C Entities $117,224 $ 16,765 $ 88,422 $ (703)
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $117,224 $ 16,765 $ 88,422 $ (703)
---------------------------------------------------------------------------------
@ 12/31/98
Consolidated P&C Entities $112,939 $ 16,887 $ 80,637 $ (746)
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $112,939 $ 16,887 $ 80,637 $ (746)
---------------------------------------------------------------------------------
@ 12/31/97
Consolidated P&C Entities $107,350 $ 13,569 $ 77,345 $ 2,625
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------------
Total $107,350 $ 13,569 $ 77,345 $ 2,625
---------------------------------------------------------------------------------
32
SCHEDULE VI - SUPPLEMETAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (CONTINUED)
(in thousands)
Amortization
of Deferred Net
Policy Loss & LAE Premiums
Acquisition Costs Paid Written
------------------------------------------------------
@ 12/31/99
Consolidated P&C Entities $ 22,507 $ 84,192 $118,426
Unconsolidated P&C Entities 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0
------------------------------------------------------
Total $ 22,507 $ 84,192 $118,426
------------------------------------------------------
@ 12/31/98
Consolidated P&C Entities $ 21,357 $ 77,933 $115,094
Unconsolidated P&C Entities 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0
------------------------------------------------------
Total $ 21,357 $ 77,933 $115,094
------------------------------------------------------
@ 12/31/97
Consolidated P&C Entities $ 20,103 $ 75,343 $110,282
Unconsolidated P&C Entities 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0
------------------------------------------------------
Total $ 20,103 $ 75,343 $110,282
------------------------------------------------------
33
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
3.1* Articles of Incorporation of Registrant
3.2** Amended and Restated By-laws of Registrant
3.3## Amended and Restated By-laws of Registrant
dated March 9, 1999
4A* Form of Registrant's Class A Common
Stock certificate
4B* Form of Registrant's Class B Common
Stock certificate
10.1*** Retirement Plan for Employees of Erie
Insurance Group, effective as of
December 31, 1989
10.2*** Restatement of Supplemental Retirement
Plan for Certain Members of the Erie
Insurance Group Retirement Plan for
Employees, effective as of January 1,
1990
10.3*** Deferred Compensation Plan of
Registrant
10.4*** Retirement Plan for Outside Directors
of Registrant, effective as of
January 1, 1991
10.5*** Employee Savings Plan of Erie Insurance
Group, effective as of April 1, 1992
10.6*** Amendment to Employee Savings Plan of
Erie Insurance Group
10.7*** Supplemental 401(k) Plan of Erie Insurance
Group effective as of Janaury 1, 1994
10.8*** Service Agreement dated January 1, 1989
between Registrant and Erie Insurance
Company
10.9*** Service Agreement dated June 21, 1993
between Registrant and Erie Insurance
Property & Casualty Company
10.10*** Service Agreement dated June 21, 1993
between Registrant and Flagship City
Insurance Company
10.11*** Reinsurance Pooling Agreement dated
January 1, 1992 between Erie Insurance
Company and Erie Insurance Exchange
34
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
10.12*** Form of Subscriber's Agreement whereby
policyholders of Erie Insurance Exchange
appoint Registrant as their
Attorney-in-Fact
10.13* Stock Redemption Plan of Registrant dated
December 14, 1989
10.14* Stock Purchase Agreement dated December 20,
1991, between Registrant and Erie Insurance
Exchange relating to the capital stock of
Erie Insurance Company
10.15** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1,
1994 between Erie Insurance Exchange
and Erie Insurance Co.
10.16**** Stock Redemption Plan of Registrant
restated as of December 12, 1995
10.17**** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1, 1995
between Erie Insurance Exchange and Erie
Insurance Company of New York
10.18**** Service Agreement dated January 1, 1995
between Registrant and Erie Insurance
Company of New York
10.19***** Consulting Agreement for Investing Services
dated January 2, 1996 between Erie Indemnity
Company and John M. Petersen
10.20***** Agreement dated April 29, 1994 between Erie
Indemnity Company and Thomas M. Sider
10.21****** Aggregate Excess of Loss Reinsurance Agreement effective
January 1, 1997 between Erie Insurance Exchange, by and
through its Attorney-in-Fact, Erie Indemnity Company and Erie
Insurance Company and its wholly-owned subsidiary Erie
Insurance Company of New York
10.22# 1997 Annual Incentive Plan of Erie Indemnity
Company
10.23# Erie Indemnity Company Long-Term Incentive Plan
10.24# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Stephen A.
Milne
10.25# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Jan R. Van
Gorder
35
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
10.26# Employment Agreement dated December 16, 1997 by
and between Erie Indemnity Company and Philip A.
Garcia
10.27# Employment Agreement effective December 16, 1997 by
and between Erie Indemnity Company and John J.
Brinling, Jr.
10.28 Employment Agreement effective June 30, 1999 by
and between Erie Indemnity Company and Jeffrey A.
Ludrof 38
10.29 Employment Agreement effective December 15, 1999 by
and between Erie Indemnity Company and Douglas F.
Ziegler 53
10.30 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and Stephen A. Milne 69
10.31 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and Jan R. Van Gorder 70
10.32 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and Philip A. Garcia 71
10.33 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and John J. Brinling 72
10.34 Addendum to Employment Agreement effective
December 15, 1999 by and between Erie Indemnity
Company and Jeffrey A. Ludrof 73
11 Statement re computation of per share
earnings 74
13 1999 Annual Report to Shareholders.
Reference is made to the Annual Report
furnished to the Commission, herewith. 75-123
21 Subsidiaries of Registrant 124
27 Financial Data Schedule 125
99.1## Report of the Special Committee to the
Board of Directors
* Such exhibit is incorporated by reference to the like numbered
exhibit in Registrant's Form 10 Registration Statement
Number 0-24000 filed with the Securities and Exchange Commission on
May 2, 1994.
** Such exhibit is incorporated by reference to the like numbered
exhibit in Registrant's Form 10/A Registration Statement Number
0-24000 filed with the Securities and Exchange Commission on August
3, 1994.
36
*** Such exhibit is incorporated by reference to the like titled but
renumbered exhibit in Registrant's Form 10 Registration Statement
Number 0-24000 filed with the Securities and Exchange Commission on
May 2, 1994.
**** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1995 that was filed with the Commission on March 25,
1996.
***** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K/A amended annual report for the year
ended December 31, 1995 that was filed with the Commission on April
25, 1996.
****** Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1996 that was filed with the Commission on March 21,
1997.
# Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1997 that was filed with the Commission on March 25,
1998.
## Such exhibit is incorporated by reference to the like titled exhibit
in the Registrant's Form 10-K annual report for the year ended
December 31, 1998 that was filed with the Commission on March 30,
1999.
37