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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, 1996
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, no par value
Class B Common Stock, no par value
(Tile 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: 67,032,000 Class A shares and
3,070 Class B shares of Common Stock outstanding on February 28, 1997.
1
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's Annual Report to shareholders for the fiscal
year ended December 31, 1996 (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 29, 1997 are incorporated by reference
into Part III of this Form 10-K Report.
INDEX
PART ITEM NUMBER AND CAPTION PAGE
I Item 1. Business 3
I Item 2. Properties 18
I Item 3. Legal Proceedings 18
I Item 4. Submission of Matters to a
Vote of Security Holders 18
II Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters 19
II Item 6. Selected Consolidated Financial Data 19
II Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 19
II Item 8. Financial Statements and Supplementary
Data 19
II Item 9. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosures 19
III Item 10. Directors and Executive Officers
of the Registrant 20
III Item 11. Executive Compensation 22
III Item 12. Security Ownership of Certain
Beneficial Owners and Management 22
III Item 13. Certain Relationships and Related
Transactions 22
IV Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 25
2
PART I
Item 1. Business
Erie Indemnity Company (the "Company") is a Pennsylvania business
corporation formed in 1925 to be the attorney-in-fact for Erie Insurance
Exchange (the "Exchange"), a Pennsylvania-domiciled reciprocal insurance
exchange. The Company's principal business activity consists of management of
the Exchange, and management fees received from the Exchange accounted for
approximately 76.3% of the Company's consolidated revenues in 1996. The Company
is also engaged in the property/casualty insurance business through its wholly
owned subsidiaries, Erie Insurance Company (Erie Insurance Co.), Erie Insurance
Company of New York (Erie NY) and Erie Insurance Property & Casualty Company
(Erie P&C) and through its management of Flagship City Insurance Company
(Flagship), a subsidiary of the Exchange. In addition, the Company holds
investments in both affiliated and unaffiliated entities, including a 21.6%
common stock interest in Erie Family Life Insurance Company (EFL), an affiliated
life insurance company, accounted for under the equity method of accounting.
Together with the Exchange, the Company and its subsidiaries and affiliates
operate collectively under the name "Erie Insurance Group". See the chart on the
following page which details the organization of the Erie Insurance Group.
As of December 31, 1996, the Company had 3,107 full-time
employees. Of that total, 1,490 full-time employees provide claims-specific
services exclusively for the Exchange and 74 full-time employees perform general
services exclusively for EFL. Both the Exchange and EFL reimburse the Company
monthly for 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.
Management Operations
The Exchange, which commenced operations in 1925, underwrites a
broad line of personal and commercial property and casualty insurance coverages,
including automobile, homeowners, commercial multi-peril and workers'
compensation. Erie Insurance Co. was organized in 1972 as a stock casualty
insurance company to supplement the lines of business written by the Exchange,
and was acquired by the Company from the Exchange as of December 31, 1991. Since
January 1, 1992, Erie Insurance Co. and the Exchange have participated in an
intercompany reinsurance pool whereby the parties share proportionately in the
results of the property/casualty insurance operations conducted by Erie
Insurance Co. and the Exchange. Effective January 1, 1995, Erie NY began
participating in this intercompany reinsurance pool whereby Erie Insurance Co.
maintained its 5% participation in the pool and Erie NY assumed a .5%
participation in the pool thus reducing the Exchange's participation in the pool
from 95% to 94.5% at that date. Flagship was organized in 1992 as a stock
casualty insurance company to conduct the Exchange's residual automobile market
business. Erie P&C was organized in 1993 to conduct Erie Insurance Group's
business in West Virginia and to write workers' compensation insurance in
Pennsylvania. Erie NY was purchased in 1994 to conduct Erie Insurance Group's
business in New York State together with Erie Insurance Company. At December 31,
1996, the Erie Insurance Group conducted business in nine states and the
District of Columbia through approximately 1,045 agencies with approximately
4,626 agents, respectively.
3
CORPORATE ORGANIZATION CHART
ERIE INDEMNITY COMPANY - Incorporated: April 17, 1925 (PA)
Total Capital Stock: 75,000,000 @ no par value (74,996,930 share
Class A, 3,070 shares Class B)
Shares Outstanding: 67,032,000 (Class A), 3,070 (Class B)
ERIE INSURANCE EXCHANGE - Began Operation: April 20, 1925
(A reciprocval Insurance Exvhange)
EI HOLDING CORP. - Incorporated: September 28, 1990 (DE)
Total Capital Stock: 100 @ $1.00 par value
Shares Outstanding: 100
EI SERVICE CORP. - Incorporated December 15, 1982 (PA)
Total Capital Stock: 100 @ $1.00 par value
Shares Outstanding: 100
ERIE INSURANCE COMPANY - Incorporated September 11, 1972 (PA)
Total Capital Stock: 23,500 @ $100 par value
Shares Outstanding: 23,500
ERIE INSURANCE COMPANY OF NEW YORK - Incorporated September 15, 1885 (NY)
Total Capital Stock: 23,500 @ $100 par value
Shares Outstanding: 23,500
ERIE INSURANCE PROPERTY & CASUALTY COMPANY - Incorporates January 19, 1993 (PA)
Total Capital Stock: 23,500 @ $100 par value
Shares Outstanding: 23,500
FLAGSHIP CITY INSURANCE COMPANY - Incorporated January 22, 1992 (PA)
Total Capital Stock: 23,500 @ $100 par value
Shares Outstanding: 23,500
ERIE FAMILY LIFE INSURANCE COMPANY - Incorporated May 23, 1967 (PA)
Total Capital Stock: 15,000,000 @ $.40 par value
Shares Outstanding: 9,450,000
The Erie Indemnity Company is the Attorney-in-Fact for the Erie Insurance
Exchange. EI Holding Corp., EI Service Corp., Erie Insurance Company and Erie
Insurance Property & Casualty Company are owned 100% by the Erie Indemnity
Company. The Erie Insurance Company of New York is 100% owned by the Erie
Insurance Company. The Flagship City Insurance Company is 100% owned by the
Erie Insurance Exchange. The Erie Indemnity Company owns 21.6% or the
outstanding stock of the Erie Family Life Insurance Company while the Erie
Insurance Exchange owns 52.2% of the outstanding stock of the Erie Family Life
Insurance Company.
4
Property/Casualty Insurance Operations
One of the distinguishing features of the property/casualty
insurance industry is that its products generally are priced before its costs
are known, as premium rates usually are determined before losses are reported.
Changes in statutory and case law can dramatically affect the liabilities
associated with known risks after the insurance contract is in place. The number
of competitors and the similarity of products offered, as well as regulatory
constraints, limit the ability of property/casualty insurance companies to
increase prices in response to declines in profitability.
The profitability of the property/casualty insurance business is
generally subject to many factors, including rate competition, the severity and
frequency of claims, natural disasters, state regulation of premium rates,
defaults of reinsurers, interest rates, general business conditions, regulatory
measures and court decisions that define and may expand the extent of coverage
and the amount of compensation due for injuries and losses. Historically, the
overall financial performance of the property/casualty insurance industry has
tended to fluctuate in cyclical market patterns. A typical market cycle has been
composed of a period of heightened premium rate competition and depressed
underwriting performance, often referred to as a "soft market", followed by a
period of constricted industry capital and underwriting capacity, increasing
premium rates and underwriting performance, often referred to as a "hard
market". During a soft market, competitive conditions can result in premium
rates which are inadequate and therefore unprofitable and underwriting terms and
conditions which are not as favorable to a property/casualty insurer as during
hard markets.
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 Erie Insurance Group's
property/casualty insurance to its agents and customers and that insurance
carriers with the higher ratings have some competitive advantage. A.M. Best's
classifications are A++ and A+ (Superior), A and A- (Excellent), B++ and B+
(Very Good), B and B- (Good), C++ and C+ (Fair), C and C- (Marginal), D (Below
Minimum Standards) and E and F (Liquidation). According to A.M. Best, a
"Superior" rating is assigned to those companies which, in A.M. Best's opinion,
have achieved superior overall performance when compared to the standards
established by A.M. Best and have a very strong ability to meet their
obligations to policyholders over a long period. A.M. Best's ratings are based
upon factors relevant to policyholders and are not directed towards the
protection of investors.
The property/casualty insurers managed by the Company are
licensed to do business in 15 states and in the District of Columbia, and at
December 31, 1996 operated in nine states and the District of Columbia although
the Erie Insurance Group's business consisted primarily of private passenger and
commercial automobile and homeowners insurance business written in Pennsylvania,
Ohio, West Virginia, Maryland and Virginia.
5
The Company, in managing the property/casualty insurers of the
Erie Insurance Group, has followed several strategies which the management of
the Company believes have resulted in underwriting results which are better than
those of the property and casualty industry in general. The principal strategies
employed by the Company in managing these insurers are:
o An underwriting philosophy and product mix designed to
produce an Erie Insurance Group-wide underwriting profit,
i.e., a combined ratio of less than 100%, through careful
risk selection and adequate pricing. The careful selection
of risk allows for lower claims frequency and loss
severity, thereby enabling insurance to be offered at
favorable prices.
o A focus on providing consistent, high quality service to
policyholders and agents in both underwriting and claims
handling.
o A business concept designed to provide the advantages of
localized marketing, underwriting and claims servicing
with the economies of scale from centralized accounting,
administrative, investment, data processing and other
support services.
o A careful agent selection process, in which Erie Insurance
Group 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.
Life Insurance Operations
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 eight states and the District of Columbia. At December
31, 1996, on a Generally Accepted Accounting Principles (GAAP) basis, EFL had
assets of $741 million and shareholders' equity of $133 million. At December 31,
1996, of EFL's total liabilities of $608 million, insurance and annuity reserves
accounted for $570 million and a note payable to the Company amounted to $15
million. Of EFL's investment portfolio of $660 million at December 31, 1996,
cash and short-term investments accounted for $6 million, available-for-sale
securities were $632 million, real estate was $2 million, policy loans were $4
million, mortgages accounted for $9 million and other invested assets were $7
million.
Financial Information About Industry Segments
Reference is made to Note 13 of the Notes to the Consolidated
Financial Statements included in the Annual Report, page 33 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.
6
Lines of Business
The Erie Insurance Group property/casualty insurers managed by
the Company write both personal and commercial lines of business. The commercial
lines consist primarily of commercial automobile, commercial multi-peril and
workers' compensation insurance. The personal lines consist primarily of
automobile and homeowners insurance. A description of these types of insurance
follows:
Commercial
o Automobile -- policies that provide protection to
businesses against liability for bodily injury and
property damage arising from automobile accidents, and
provide protection against loss from damage to automobiles
owned by the insured business.
o Multi-peril -- policies that provide protection to
businesses against many perils, usually combining
liability and physical damage coverages.
o Workers' compensation -- policies purchased by employers
to provide benefits to employees for injuries sustained
during employment. The extent of coverage is established
by the workers' compensation laws of each state.
Personal
o Private passenger automobile -- policies that provide
protection against liability for bodily injury and
property damage arising from automobile accidents, and
provide protection against loss from damage to automobiles
owned by the insured.
o Homeowners -- policies that provide coverage for damage to
residences and their contents from a broad range of
perils, including fire, lightning, windstorm and theft.
These policies also cover liability of the insured arising
from injury to other persons or their property while on
the insured's property and under other specified
conditions.
See "Selected Market and Geographic Information" contained on page
22 of the Annual Report for direct premiums written by jurisdiction and line of
business in addition to statutory loss and loss adjustment expense ratios by
line of business.
The property/casualty insurers managed by the Company are required
to participate in involuntary insurance programs for automobile insurance, as
well as other property and casualty lines, in states in which such companies
operate. 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 requires
all companies that write lines covered by these programs to provide coverage
(either directly or through reinsurance) for insureds who cannot
7
obtain insurance in the voluntary market. The legislation creating these
programs usually allocates a pro rata portion of risks attributable to such
insureds to each company on the basis of direct premiums written or the
exposures insured. 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.
Combined Ratios
The following table sets forth for the periods indicated the
combined ratio of Erie Insurance Co. and Erie NY, prepared in accordance with
statutory accounting principles (SAP) prescribed or permitted by state insurance
authorities and the combined ratio of Erie Insurance Co. and Erie NY prepared in
accordance with GAAP. The combined ratio is a traditional measure of
underwriting profitability. When the combined ratio is under 100%, underwriting
results are generally considered profitable. Conversely, when the combined ratio
is over 100% underwriting results are generally considered unprofitable. The
combined ratio does not reflect investment income, federal income taxes or other
non-operating income or expense. The operating income of Erie Insurance Co. and
Erie NY is dependent upon income from both underwriting operations and
investments.
Year Ended
December 31,
1996 1995
GAAP combined ratio........................ 111.4% 104.0%
====== ======
Statutory operating ratios:
Loss ratio............................... 83.3 75.9
Expense ratio............................ 26.4 26.0
Dividend ratio........................... 1.0 1.1
----- -----
Statutory combined ratio................. 110.7% 103.0%
====== ======
Industry statutory combined ratio(1)....... 107.0% 106.5%
====== ======
- - - ---------------
(1) Source: A.M. Best
The Company's wholly owned subsidiary, Erie Insurance Company,
participates in an intercompany reinsurance pooling agreement with the Exchange.
This reinsurance pooling agreement provides for Erie Insurance Company to share
proportionately in the results of all property/casualty insurance operations of
the Exchange and its subsidiaries. Since the inception of this pooling agreement
on January 1, 1992, Erie Insurance Company's proportionate share of the
reinsurance pool has been 5 percent.
As mentioned previously, on January 1, 1995, the Exchange began
retroceding to the Erie Insurance Company of New York, as part of the existing
intercompany reinsurance pooling arrangement, .5 percent of its total direct
8
and assumed writings. Erie Insurance Company maintained its 5 percent
participation in the reinsurance pool which, when combined with the .5 percent
participation of the Erie Insurance Company of New York, results in a 5.5
percent participation level for the Company's affiliates in 1995. As a result of
the increased participation of the Company's subsidiaries in the reinsurance
pooling agreement in 1995, the Company's premiums, losses and expenses were 10
percent more than they would have been had the level of participation remained
the same.
For the calendar years 1996 and 1995, the Company incurred
underwriting losses from its insurance underwriting operations in the amount of
$11,579,211, and $3,737,618, respectively. The 1996 underwriting results of the
Company's wholly-owned subsidiaries, Erie Insurance Company and Erie Insurance
Company of New York, were impacted negatively by severe winter weather in the
first quarter of 1996 and catastrophe losses experienced from Hurricane Fran in
the eastern United States, particularly North Carolina, and other storm-related
catastrophe losses elsewhere in our operating territories during the third
quarter of 1996. Losses resulting from these catastrophes were about $8.1
million in 1996 or about $.07 per share, after federal income taxes. The
majority of these losses were property losses on homeowners and commercial
property lines of business. Milder weather during 1995 resulted in better
underwriting results for the property/casualty companies of the Erie Insurance
Group when compared to 1996.
Reserves
Loss reserves are estimates of the amounts the insurer expects to
pay to claimants at a given point in time, based on facts and circumstances then
known. It can be expected that the ultimate claims liability will exceed or be
less than such estimates. Reserves are based on estimates of future trends and
claims severity, judicial theories of liability and other factors. Management
believes that the reserves currently established by the Company are adequate to
cover the eventual cost of the claims liability of the property and casualty
insurers managed by the Company. However, during the loss adjustment period,
additional facts regarding individual claims may become known, and consequently
it often becomes necessary to refine and adjust the estimates of liability.
Adjustments are reflected in operating results in the year in which the changes
in the estimates of liability are made.
In establishing the liability for unpaid losses and loss
adjustment expenses related to asbestos-related illnesses and toxic waste
cleanup, management considers facts currently known and the current state of the
law and coverage litigation. Liabilities are recognized for known claims
(including the cost of related litigation) when sufficient information has been
developed to indicate the involvement of a specific insurance policy, and
management can reasonably estimate its liability. In addition, liabilities have
been established to cover additional exposures on both known and unasserted
claims.
The establishment of appropriate reserves is an inherently
uncertain process, and there can be no assurance that the ultimate liability
will not exceed the loss and loss adjustment expense reserves of the property
and casualty insurers managed by the Company. An increase in these reserves
would
9
have an adverse effect on the results of operations and financial condition of
the property/casualty insurers managed by the Company. As is the case for
virtually all property/casualty insurance companies, the Company has found it
necessary, in the past, to revise, in non-material amounts, estimated future
liabilities as reflected in the loss and loss adjustment expense reserves of the
property/casualty insurers managed by the Company, and further adjustments could
be required in the future.
On the basis of the Company's internal procedures, which analyze
the Company's experience with similar cases and historical trends such as
reserving patterns, loss payments, pending levels of unpaid claims and product
mix, as well as court decisions and economic conditions, management believes
adequate provision has been made for the loss and loss adjustment expense
reserves of the Company's property/casualty insurers managed by the Company.
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 significant.
The following table sets forth the development of reserves for
unpaid losses and loss adjustment expenses for the business of the Company's
property/casualty subsidiaries on a GAAP basis for 1993, 1994, 1995 and 1996.
Year Ended December 31,
1996 1995 1994 1993
-------- -------- -------- ------
(in thousands)
Reserve for unpaid losses and
loss adjustment expense..................... $386,425 $357,334 $344,824 $353,939
========
Liability as of:
One year later.............................. 351,684 327,283 323,996
Two years later............................. 332,821 322,883
--------
Three years later........................... 332,771
--------
Cumulative deficiency (excess)............... ( 5,650) ( 12,003) ( 21,168)
======= ======= =======
Cumulative amount of liability
paid through:
One year later............................. $132,649 $134,044 $140,667
======== ======== ========
Two years later............................ $200,024 $214,818
======== ========
Three years later.......................... $247,339
========
See Note 7 of the Notes to Consolidated Financial Statements
contained in the Annual Report page 32 for discussion of the development of such
reserves and activity contained in the unpaid loss and loss adjustment expense
reserves for the three years ended December 31, 1996, 1995 and 1994.
10
Reinsurance
Effective January 1, 1994, the insurers managed by the Company
have discontinued all ceded reinsurance treaties, other than with affiliated
insurers, due to the strong surplus position of the insurers managed by the
Company, the cost of reinsurance and the low ratio of the premium writings of
the insurers managed by the Company to their surplus. The Company does not
believe this discontinuance of reinsurance treaties will have a material adverse
effect, over the long-term, on the results of operations of the insurance
companies managed by the Company because of the strong surplus positions of the
companies, the cost savings to be realized from the discontinuance of the
reinsurance treaties and the low ratio of writings to surplus of those
companies. However, the absence of such treaties could have an adverse effect on
the results of operations of the insurance companies managed by the Company in a
given year, if the frequency or severity of claims were substantially higher
than historical averages because of an unusual event during a short-term period.
Although the Company experienced significant winter storm losses in 1996 and
1994, the Company would not have recognized substantial recoveries from these
discontinued treaties had they been in effect during the year. The insurers
managed by the Company continue to maintain facultative reinsurance on certain
individual property/casualty risks.
Effective January 1, 1997, Erie Insurance Company and Erie
Insurance Company of New York placed in effect an all lines aggregate excess of
loss reinsurance agreement with the Exchange that supersedes the prior
catastrophe excess of loss reinsurance agreement between the parties. Under the
new agreement, Erie Insurance Company and Erie Insurance Company of New York
reinsure their net retained share of the intercompany reinsurance pool such that
once Erie Insurance Company and Erie Insurance Company of New York have
sustained ultimate net losses that exceed an amount equal to 72.5 percent of
Erie Insurance Company and Erie Insurance Company of New York's net premiums
earned, the Exchange will be liable for 95 percent of the amount of such excess
up to but not exceeding an amount equal to 95 percent of 15 percent of Erie
Insurance Company and Erie Insurance Company of New York's net premiums earned.
Losses equal to 5 percent of the net ultimate net loss in excess of the
retention under the contract are retained net by Erie Insurance Company and Erie
Insurance Company of New York. The annual premium for this reinsurance treaty is
1.01 percent of the net premiums earned by Erie Insurance Company and Erie
Insurance Company of New York during the term of this agreement subject to a
minimum premium of $800,000. This reinsurance treaty is excluded from the
intercompany reinsurance pooling agreement. This reinsurance agreement replaces
the earlier reinsurance agreements between the Company and Erie Insurance
Company and Erie Insurance Company of New York, which are described below.
In 1995 and 1996, Erie Insurance Company of New York had in effect
a property catastrophe excess of loss reinsurance agreement with the Exchange
whereby Erie Insurance Company of New York reinsures its net retained share of
the intercompany reinsurance pool such that once Erie Insurance Company of New
York has sustained an ultimate net loss of $250,000 by reason of its .5 percent
share of the results of the intercompany reinsurance pool, the Exchange was
liable for the amount of the ultimate net loss for the Company's
11
net retained share of the intercompany reinsurance pool in excess of $250,000
for a limit of liability to the Exchange of $2,250,000 for each occurrence. The
annual premium for this reinsurance treaty with the Exchange was $150,000 in
1996. This reinsurance treaty was excluded from the intercompany reinsurance
pooling agreement.
In 1994, 1995 and 1996, Erie Insurance Company had in effect a
property catastrophe excess of loss reinsurance agreement with the Exchange
whereby Erie Insurance Company reinsured its net retained share of the
intercompany reinsurance pool such that once Erie Insurance Company has
sustained an ultimate net loss of $10,000,000 by reason of its 5 percent share
of the results of the intercompany reinsurance pool, the Exchange was liable for
the amount of the ultimate net loss for the Company's net retained share of the
intercompany reinsurance pool in excess of $10,000,000 for a limit of liability
to the Exchange of $25,000,000 for each occurrence. The annual premium for this
reinsurance treaty with the Exchange was $274,170 in 1996. This reinsurance
treaty was excluded from the intercompany reinsurance pooling agreement.
See the chart on the following page for information concerning
inter-company reinsurance among the property/casualty insurers managed by the
Company.
12
Erie Insurance Group
Inter-Company Reinsurance Chart
As of December 31, 1996
Source of Business:
The Erie Insurance Company, Erie Insurance Company of New York, Flagship City
Insurance Company and Erie Insurance Porperty & Casualty Company cede 100% of
their business to the Erie Insurance Exchange. This is considered the group's
Intercompany Reinsurance pool of business.
Allocation of Business:
The Erie Insurance Exchange then retrocedes 5% of the pool to the Erie Insurance
Company and .5% of the pool to the Erie Insurance Company of New York. The
Erie Insurance Exchange retains the remaining 94.5% of the pool.
13
Competition
The property/casualty insurance industry is extremely competitive
on the basis of both price and service. There are numerous companies competing
for this business in the geographic areas where Erie Insurance Group operates,
many of which are substantially larger and have greater financial resources than
Erie Insurance Group. Competition may take the form of lower prices, broader
coverage, greater product flexibility or higher quality services. In addition,
because the insurance products of Erie Insurance Group are marketed exclusively
through independent insurance agencies, most of which represent more than one
company, Erie Insurance Group faces competition to retain qualified independent
agencies and competes for business in each agency.
Regulation
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, 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. 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 states in which the property/casualty insurers managed by the
Company operate have guaranty fund laws under which insurers doing business in
such states can be assessed on the basis of premiums written by the insurer in
that state in order to fund policyholder liabilities of insolvent insurance
companies. Under these laws in general, an insurer is subject to assessments,
depending upon its market share of a given line of business, to assist in the
payment of policyholder claims against insolvent insurers. 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. During the five years ended December 31,
1996, the amount of such insolvency assessments paid by the property/casualty
insurers managed by the Company was not material.
The amount of dividends that the Company's Pennsylvania-domiciled
property/casualty insurance subsidiaries, Erie Insurance Co. and Erie P&C, can
pay without the prior approval of the Pennsylvania Insurance Commissioner is
limited by Pennsylvania regulations to not more than the greater of: (a) ten
14
percent of its surplus as to policyholders reported on its last annual
statement, or (b) the net income as reported on its last annual statement. The
amount of dividends that the Company's New York-domiciled property/casualty
subsidiary, Erie NY, can pay without the prior approval of the New York
Superintendent of Insurance is limited to the lesser of: (a) ten percent of its
surplus as to policyholders as reported on its last annual statement, or (b) one
hundred percent of its adjusted net investment income during such period. As of
December 31, 1996, amounts available for payment of dividends to the Company in
1997 without the prior approval of the Pennsylvania Insurance Commissioner were
$4,840,332 from Erie Insurance Co. and $471,888 from Erie P&C. The amount
available without prior approval of the New York Superintendent of Insurance was
$688,107 as of December 31, 1996. No dividends were paid to the Company by its
property/casualty insurance subsidiaries in 1996. See also Note 12 of the Notes
to Consolidated Financial Statements contained in the Annual Report, page 33.
15
Financial Regulation
The Company's property/casualty insurance subsidiaries are
required to file financial statements prepared using SAP with state regulatory
authorities. SAP differs from GAAP primarily in the recognition of revenue and
expense. The adjustments necessary to reconcile the Company's property/ casualty
insurance subsidiaries' net income and shareholders' equity determined by using
SAP to net income and shareholders' equity determined in accordance with GAAP
are as follows:
Net Income
Year Ended
December 31,
-------------------------------------
1996 1995
-------- --------
(in thousands)
SAP amounts.................................. $ 1,806 $ 4,345
Adjustments:
Deferred policy acquisition
costs..................................... 529 1,344
Deferred income taxes...................... 677 355
Salvage and subrogation.................... (104) 614
Incurred premium adjustment................ (529) (1,344)
Amortization of goodwill................... (619) (104)
Consolidating eliminations
and adjustments........................... (1) 3
------- -------
GAAP amounts................................. $ 1,759 $ 5,213
======= =======
Shareholders' Equity
As of December 31,
1996 1995 1994
-------- -------- --------
(in thousands)
SAP amounts.................................. $53,154 $51,179 $46,716
Adjustments:
Deferred policy acquisition
costs..................................... 9,541 9,012 7,668
Deferred income taxes...................... 4,478 3,847 3,738
Salvage and subrogation.................... 2,863 2,967 2,353
Statutory reserves......................... 1 5
Incurred premium adjustment................ (9,541) (9,012) (7,668)
Unrealized gains (losses)
under FAS115, net of
deferred taxes............................ 3,005 4,584 (1,384)
Amortization of goodwill................... (619) (104)
Consolidating eliminations
and adjustments........................... 50 192 149
------- ------- -------
GAAP amounts................................. $62,931 $62,666 $51,577
======= ======= =======
16
In 1994, Pennsylvania imposed minimum risk-based capital
requirements for property/casualty insurance companies as developed by the NAIC.
Risk-based capital 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 formulas for determining the
amount of risk-based capital specify various weighing factors that are applied
to financial balances or various levels of activity based on the perceived
degree of risk. Regulatory compliance is determined by the ratio of the
Company's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level risk-based capital, as defined by the NAIC. The NAIC
provides for four different levels of regulatory action with respect to
statutory annual statements for the calendar year 1994 and thereafter. The NAIC
levels and ratios are as follows:
Ratio of Total Adjusted Capital to
NAIC Required Authorized Control Level Risk-Based
Regulatory Event Capital (Less Than or Equal To)
Company Action Level 2 (or 2.5 with negative trends)
Regulatory Action Level 1.5
Authorized Control Level 1
Mandatory Control Level .7
At the "Company Action Level", the insurer must submit a
comprehensive plan to the regulatory authority which discusses proposed
corrective actions to improve its capital position. At the "Regulatory Action
Level", the regulatory authority will perform a special examination of the
insurer and issue an order specifying corrective actions that must be taken. At
the "Authorized Control Level", the regulatory authority is authorized (although
not mandated) to take regulatory control of the insurer. At the "Mandatory
Control Level", the regulatory authority must take regulatory control of the
insurer. Regulatory control may lead to rehabilitation or liquidation of an
insurer.
Calculations using the NAIC formula and the Company's property/
casualty insurance subsidiaries' statutory financial statements as of December
31, 1996 indicate that the ratio of total adjusted capital of such companies to
their authorized control level risk-based capital requirements was substantially
above its requirements as such ratio of all companies was in excess of four to
one (4:1) at December 31, 1996.
Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995: Statements contained herein expressing the beliefs of
management such as those expressed regarding the adequacy of reserves for future
claim payments, the effect of the discontinuance of reinsurance treaties, and
the resolution of legal proceedings and the other statements contained herein
which are not historical facts, are forward looking statements that involve
risks and uncertainties. These risks and uncertainties include but are not
limited to: legislature, regulatory and judicial changes and pronouncements, the
impact of competitive products and pricing, product development, geographic
spread of risk, weather and weather-related events, other types of catastrophic
events, investment increases and decreases and technological difficulties and
advancements.
17
Item 2. Properties
The Company and its subsidiaries, the Exchange and its
subsidiaries and EFL share a corporate home office complex in Erie,
Pennsylvania. The complex contains 545,880 square feet, and is owned by the
Exchange. At December 31, 1996, the Company also operated 19 field offices in
eight states. Of these offices, 15 provide both agency support and claims
services and are referred to as "Branch Offices", while the remaining four
provide only claims services and are considered "Claims Offices".
The Company owns three of its field offices. Three other offices
are owned by and leased from the Exchange. The rent for the home office and the
three field offices paid to the Exchange totaled $10,949,306 in 1996. One office
is owned by and leased from EFL at an annual rental in 1996 of $423,120. The
remaining ten offices are leased from various unaffiliated parties at an
aggregate annual rental in 1996 of approximately $1,061,731. The Company is
reimbursed by its affiliates for a percentage of the rent for office space used
by its affiliates, which reimbursement was approximately 51% in 1996.
Item 3. Legal Proceedings
The Registrant is not involved in any material pending legal
proceedings other than ordinary routine litigation incidental to its business.
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 1996.
18
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 36 of the Annual Report
for the year ended December 31, 1996 for information regarding the high and low
sales prices for the registrant's stock and additional information regarding
such stock of the Company.
As of February 28, 1997, there were approximately 4,586
beneficial shareholders of the Company's Class A non-voting common stock and 28
beneficial shareholders of the Company's Class B voting common stock.
Item 6. Selected Consolidated Financial Data
Reference is made to "Selected Consolidated Financial Data" on page
9 of the Annual Report for the year ended December 31, 1996.
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 10 through 21 of the
Annual Report for the year ended December 31, 1996.
Item 8. Financial Statements and Supplementary Data
Reference is made to the "Consolidated Financial Statements"
included on pages 24 through 27 and to the "Quarterly Financial Data" contained
in the Notes to Consolidated Financial Statements on page 33 of the Annual
Report for the year ended December 31, 1996.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosures
None.
19
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 6 through 10 of the Company's
proxy statement relating to the annual meeting of shareholders to be held on
April 29, 1997.
(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 12/31/96 Erie Insurance Group
President & Chief Executive Officer
Stephen A. Milne 48 President, Chief Executive Officer and a
Director of the Company, EFL and Erie
Insurance Co. since February 12, 1996 and
President and Chief Executive Officer of
Flagship, Erie P&C, and Erie NY since March
19, 1996; Executive Vice President -
Insurance Operations of the Company, Erie
Insurance Co., Flagship, Erie P&C, and Erie
NY January 11, 1994 - February 12, 1996.
Owner, Bennett-Damascus Insurance Agency
March 1991-December 31, 1993; Senior Vice
President-Agency Division, the Company,
EFL, and Erie Insurance Co. 1988 - 1991;
Director Flagship and Erie P&C 1996 -
present; Director, Erie NY 1994 - present.
Executive Vice Presidents
Thomas M. Sider 47 Executive Vice President and Chief
Financial Officer since 1993; Senior Vice
President and Controller 1982 - 1993
Jan R. Van Gorder, Esq. 49 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.
Senior Vice Presidents
John C. Bender 51 Senior Vice President since 1992; Vice
President 1983 - 1992
20
Age Principal Occupation for Past
as of Five Years and Positions with
Name 12/31/96 Erie Insurance Group
Eugene C. Connell 42 Senior Vice President since 1990; Vice
President 1988 - 1990
Philip A. Garcia 40 Senior Vice President and Controller since
1993; Vice President 1988 - 1993
Dennis M. Geib 53 Senior Vice President since 1990; Vice
President 1986 - 1990
Elaine A. Lamm 58 Senior Vice President since 1990; Vice
President 1988 - 1990
George R. Lucore 46 Senior Vice President since March, 1995.
Regional Vice President 1993 - March 1995;
Assistant Vice President 1988 - 1993
Jeffrey A. Ludrof 37 Senior Vice President since 1994; Regional
Vice President 1993-1994; Assistant Vice
President 1989-1993
David B. Miller 42 Senior Vice President since August 1996;
Independent Insurance Agent 1991 - 1996;
Vice President 1989 - 1991
James R. Roehm 48 Senior Vice President since 1991; Vice
President 1987 - 1991
Douglas F. Ziegler 46 Senior Vice President, Treasurer and Chief
Investment Officer since 1993; Vice
President and Managing Director of Treasury
Administration 1988 - 1993
Regional Vice Presidents
B. Crawford Banks 60 Regional Vice President since 1993; Vice
President 1988 - 1993
Douglas N. Fitzgerald 40 Regional Vice President since 1993; Vice
President 1987 - 1993
Terry L. Hamman 42 Regional Vice President since May, 1995;
Assistant Vice President 1993 - May, 1995
Managing Director
Michael S. Zavasky 44 Vice President and Managing Director of
Reinsurance since 1990; Vice President
1988 - 1990
21
Item 11. Executive Compensation
The answer to this item is incorporated by reference to pages 12
through 20 of the Company's proxy statement dated April 1, 1997 relating to the
annual meeting of shareholders to be held on April 29, 1997, 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 3
through 5 of the Company's proxy dated April 1, 1997 relating to the annual
meeting of shareholders to be held on April 29, 1997.
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 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 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. Such
percentage was 23% from July 1, 1990 to June 30, 1991 and was 25% from July 1,
1991 through March 31, 1995. Such percentage was 24.5% as decided by the Board
of Directors beginning April 1, 1995 through March 31, 1996. The Board elected
to change such percentage to 24% for the period April 1, 1996 through December
31, 1996. Further, the Board voted to maintain the 24% management fee rate for
all of 1997. 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, the establishing and
monitoring of loss reserves, oversight of reinsurance transactions, investment
management, 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 surplus and
taxes. For the five years ended December 31, 1996, 1995, 1994, 1993 and 1992 the
amounts paid by the Exchange to the Company were $447,973,516, $424,404,971,
$407,275,573, $375,038,960 and $337,551,358, respectively.
22
The Company receives a fee of 7 percent of voluntary reinsurance
premiums assumed from non-affiliated insurers as compensation for the management
and administration of this business on behalf of the Exchange. Prior to the
service agreement on non-affiliated assumed reinsurance, which was effective
January 1, 1995, the Company received a management fee based on premiums written
and was responsible for the payment of brokerage commissions. Service agreement
revenue from the management of non-affiliated assumed reinsurance business grew
15.1 percent to $5,069,140 in 1996 from $4,401,232 in 1995.
The Company's subsidiary, Erie Insurance Co., has participated
in a reinsurance pool with the Exchange since January 1, 1992 whereby Erie
Insurance Co. transfers, or "cedes" to the Exchange all of its direct premiums
written and the Exchange retrocedes to Erie Insurance Co. a 5% participation of
the pooled business, which also includes all of the property and casualty
insurance business of the Exchange. All premiums, losses, loss adjustment
expenses and other underwriting expenses are prorated among the parties on the
basis of their participation in the pool. The pooling agreement does not legally
discharge Erie Insurance Co. from its primary liability for the full amount of
the policies ceded. However, it makes the Exchange liable to Erie Insurance Co.
to the extent of the business ceded. The pooling agreement provides that it may
be amended or terminated at the end of any calendar year by agreement of the
parties. Effective January 1, 1995, the pooling agreement was amended to provide
that the Exchange's share of the pool be reduced from 95% to 94.5% and that Erie
Insurance Co. and Erie NY have a 5.5% share of the pool. Prior to January 1,
1992, all property/casualty insurance business of Erie Insurance Co. was
reinsured 100% with the Exchange under the terms of a quota share reinsurance
treaty. Erie P&C and Flagship, a subsidiary of the Exchange, reinsure 100% of
their property/casualty insurance business with the Exchange under the terms of
quota share reinsurance treaties with the Exchange.
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 $742,772, $1,235,722 and $583,263 for the
years ended December 31, 1996, 1995 and 1994, respectively, and the reserves
held by EFL at December 31, 1996 for such annuities were approximately
$5,175,280. 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
$4,894,042, $6,024,125 and $8,880,714 for the years ended December 31, 1996,
1995 and 1994, respectively. The annuities purchased in 1994 included annuities
for those individuals that retired from the Company or its subsidiaries in 1993
and 1994. The reserves held by EFL for all such annuities were approximately
$32,812,000 at December 31, 1996.
On December 29, 1995, EFL issued a surplus note to the Company
in return for a cash (or cash equivalent) sum of $15 million. The note bears an
annual interest rate of 6.45% and all payments of interest and principal of the
note may be repaid only out of unassigned surplus of EFL and are subject to the
prior approval of the Pennsylvania Insurance Commissioner. Interest on the
surplus note is scheduled to be paid quarterly. 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 1996, EFL
received approval for the payment of interest totaling $967,500, which was paid
to the Company by EFL at December 31, 1996.
23
Director and former CEO and President, and previous Chief
Investment Officer of the Erie Insurance Group of Companies, John M. Petersen,
who retired as an employee of the Company on December 31, 1995, entered into a
consulting arrangement with the Company effective January 2, 1996. Under the
terms of the arrangement, the Company engaged Mr. Petersen as a consultant to
furnish the Company and its pension trust, the Exchange, and EFL, with
investment services with respect to their investments in common stock. As
compensation for services to be rendered by Mr. Petersen, a fee of .15 of 1
percent, on an annualized basis, of the total fair market value of the common
stock under management, will be paid to Mr. Petersen. The Company also will pay
for all necessary and reasonable expenses related to Mr. Petersen's consulting
services performed under this arrangement. The amount paid Mr. Petersen pursuant
to this arrangement in 1996 was $2,078,758.
Directors Black and Borneman are officers and principal
shareholders of insurance agencies which receive insurance commissions in the
ordinary course of business from the insurance companies managed by the Company
in accordance with such companies' standard commission schedules and agents'
contracts.
Reference is also made to Item 2 hereof.
24
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:
Report of Independent Auditors.................................... 23
Consolidated Statements of Operations
for the three years ended
December 31, 1996, 1995 and 1994.............................. 24
Consolidated Statements of Financial
Position as of December 31, 1996
and 1995........................................................ 25
Consolidated Statements of Cash Flows
for the three years ended
December 31, 1996, 1995 and 1994.............................. 26
Consolidated Statements of Shareholders'
Equity for the three years ended
December 31, 1996, 1995 and 1994.............................. 27
Notes to Consolidated Financial Statements........................ 28
(2) Financial Statement Schedules
Page
Erie Indemnity Company and Subsidiaries:
Report of Independent Auditors on Schedules....................... 31
Schedule I. Summary of Investments - Other
than Investments in Related
Parties........................................ 32
Schedule IV. Reinsurance......................................... 33
Schedule VI. Supplemental Information
Concerning Property/Casualty
Insurance Operations........................... 34
All other schedules have been omitted since they are not required,
not applicable or the information is included in the financial statements or
notes thereto.
* Refers to the respective page of Erie Indemnity Company's 1996 Annual Report
to Shareholders. The Consolidated Financial Statements and Notes to Consolidated
Financial Statements and Auditors' Report thereon on pages 23 to 33 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
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.
25
(3) Exhibits
Exhibit
Number Description of Exhibit
3.1* Articles of Incorporation of Registrant
3.2** Amended and Restated By-laws of Registrant
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
26
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
11 Statement re computation of per share
earnings
13 1996 Annual Report to Security Holders.
Reference is made to the Annual Report
furnished to the Commission, herewith.
21 Subsidiaries of Registrant
27 Financial Data Schedule
28 Information from Reports Furnished to State
Insurance Regulatory Authorities
27
Exhibit
Number Description of Exhibit
28# Analysis of Losses and Loss Expenses --
Schedule P of the 1996 Annual Statement of
Erie Insurance Company
28# Analysis of Losses and Loss Expenses --
Schedule P of the 1996 Annual Statement of
Erie Insurance Property & Casualty Company
28# Analysis of Losses and Loss Expenses --
Schedule P of the 1996 Annual Statement of
Erie Insurance Company of New York
* Such exhibit is incorporated by reference to the like numbered exhibit
in Registrant's Form 10 Registration Statement Number 0-24000 filed
with the Securities and Exchange Commission on May 2, 1994.
** Such exhibit is incorporated by reference to the like numbered exhibit
in Registrant's Form 10/A Registration Statement Number 0-24000 filed
with the Securities and Exchange Commission on August 3, 1994.
*** Such exhibit is incorporated by reference to the like titled but
renumbered exhibit in Registrant's Form 10 Registration Statement
Number 0-24000 filed with the Securities and Exchange Commission on May
2, 1994.
**** Such exhibit is incorporated by reference to the like titled exhibit in
the Registrant's Form 10-K annual report for the year ended December
31, 1995 that was filed with the Commission on March 25, 1996.
***** Such exhibit is incorporated by reference to the like titled exhibit in
the Registrant's Form 10-K/A amended annual report for the year ended
December 31, 1995 that was filed with the Commission on April 25, 1996.
# Such exhibit is being filed under FORM SE pursuant to Rule 202 of
Regulation S-T.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1996, Registrant did not file any
reports on Form 8-K.
28
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.
ERIE INDEMNITY COMPANY
(Registrant)
Date: March 11, 1997 By: /s/ F. William Hirt
F. William Hirt, Chairman of the Board
By: /s/ Stephen A. Milne
Stephen A. Milne, President & CEO
By: /s/ Thomas M. Sider
Thomas M. Sider, Executive Vice President
& Chief Financial Officer
By: /s/ Philip A. Garcia
Philip A. Garcia, Senior Vice President
& Controller
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Date: March 11, 1997 By: /s/ Peter B. Bartlett
Peter B. Bartlett, Director
Date: March 11, 1997 By: /s/ Samuel P. Black, Jr.
Samuel P. Black, Jr., Director
Date: March 11, 1997 By: /s/ J. Ralph Borneman, Jr.
J. Ralph Borneman, Jr., Director
Date: March 11, 1997 By: /s/ Patricia A. Goldman
Patricia A. Goldman, Director
Date: March 11, 1997 By: /s/ Susan Hirt Hagen
Susan Hirt Hagen, Director
Date: March 11, 1997 By: /s/ Thomas B. Hagen
Thomas B. Hagen, Director
29
Date: March 11, 1997 By: /s/ F. William Hirt
F. William Hirt, Chairman of the Board
Date: March 11, 1997 By: /s/ Irvin H. Kochel
Dr. Irvin H. Kochel, Director
Date: March 11, 1997 By: /s/ Stephen A. Milne
Stephen A. Milne, Director
Date: March 11, 1997 By: /s/ Edmund J. Mehl
Edmund J. Mehl, Director
Date: March 11, 1997 By: /s/ John M. Petersen
John M. Petersen, Director
Date: March 11, 1997 By: /s/ Seth E. Schofield
Seth E. Schofield, Director
Date: March 11, 1997 By: /s/ Jan R. Van Gorder
Jan R. Van Gorder, Director, Sr. Executive
Vice President, Secretary & General
Counsel
Date: March 11, 1997 By: /s/ Harry H. Weil
Harry H. Weil, Director
30
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders
Erie Indemnity Company
We have audited the consolidated statements of financial position of Erie
Indemnity Company and subsidiaries (Company) as of December 31, 1996 and 1995
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996, as
contained in the 1996 annual report, incorporated by reference in the annual
report on Form 10-K for the year ended December 31, 1996. 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, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 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 18, 1997
31
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1996
Cost or Amount at which
Amortized Fair Shown in the
Type of Investment Cost Value Balance Sheet
(In Thousands)
Available-for-Sale Securities
Common Stocks
U.S. Industrial and
Miscellaneous $ 37,003 $ 50,045 $ 50,045
Non-Redeemable Preferred Stocks
Public Utilities 10,652 10,821 10,821
U.S. Banks, Trusts and
Insurance Companies 44,106 45,868 45,868
U.S. Industrial and
Miscellaneous 24,309 24,884 24,884
Fixed Maturities
U.S. Treasuries 12,000 12,140 12,140
Foreign Governments 1,988 2,007 2,007
Obligations of State and
Political Subdivisions 28,127 29,408 29,408
Special Revenue 136,950 142,209 142,209
Public Utilities 7,238 7,380 7,380
U.S. Industrial and
Miscellaneous 114,790 117,032 117,032
-------------------------------------------------
Total Available-for-Sale
Securities $ 417,163 $ 441,794 $ 441,794
-------------------------------------------------
Real Estate Mortgage Loans $ 7,294 $ 7,294 $ 7,294
Other Invested Assets 7,010 7,010 7,010
-------------------------------------------------
Total Investments $ 431,467 $ 456,098 $ 456,098
-------------------------------------------------
32
SCHEDULE IV - REINSURANCE
Percentage
Ceded to Assumed of Amount
Gross Other From Other Net Assumed
Amount Companies Companies Amount to Net
December 31, 1996
Premiums for the year
Property and Liability Insurance $321,735,580 $324,617,961 $104,392,140 $101,509,759 102.8%
------------------------------------------------------------------------------------------------
December 31, 1995
Premiums for the year
Property and Liability Insurance $289,801,421 $293,132,397 $ 96,205,277 $ 92,874,301 103.6%
------------------------------------------------------------------------------------------------
December 31, 1994
Premiums for the year
Property and Liability Insurance $266,091,231 $269,153,771 $ 81,138,460 $ 78,075,920 103.9%
------------------------------------------------------------------------------------------------
33
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
Deferred
Policy Reserves for Discount, if
Acquisition Unpaid Loss & LAE any deducted Unearned
Costs Expenses from reserves Premiums
@ 12/31/96
Consolidated P&C Entities $ 9,540,998 $386,425,019 $ 0 $216,938,069
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
----------------------------------------------------------------------------------
Total $ 9,540,998 $386,425,019 $ 0 $216,938,069
----------------------------------------------------------------------------------
@ 12/31/95
Consolidated P&C Entities $ 9,011,734 $357,334,127 $ 0 $202,806,574
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
----------------------------------------------------------------------------------
Total $ 9,011,734 $357,334,127 $ 0 $202,806,574
----------------------------------------------------------------------------------
@ 12/31/94
Consolidated P&C Entities $ 7,667,652 $344,823,708 $ 0 $177,301,657
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
----------------------------------------------------------------------------------
Total $ 7,667,652 $344,823,708 $ 0 $177,301,657
----------------------------------------------------------------------------------
34
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (CONTINUED)
Loss and Loss Adjustment Expense
Net Incurred Related to
Earned Investment (1) (2)
Premiums Income Current Year Prior Years
---------------------------------------------------------------------------
@ 12/31/96
Consolidated P&C Entities $101,509,759 $ 11,031,742 $ 85,311,000 $ (240,000)
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------
Total $101,509,759 $ 11,031,742 $ 85,311,000 $ (240,000)
---------------------------------------------------------------------------
@ 12/31/95
Consolidated P&C Entities $ 92,874,301 $ 10,342,751 $ 73,145,000 $ (2,210,000)
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------
Total $ 92,874,301 $ 10,342,751 $ 73,145,000 $ (2,210,000)
---------------------------------------------------------------------------
@ 12/31/94
Consolidated P&C Entities $ 78,075,920 $ 8,033,792 $ 68,694,000 $ (4,767,000)
Unconsolidated P&C Entities 0 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0 0
---------------------------------------------------------------------------
Total $ 78,075,920 $ 8,033,792 $ 68,694,000 $ (4,767,000)
---------------------------------------------------------------------------
35
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (CONTINUED)
Amortization
of Deferred Net
Policy Loss & LAE Premiums
Acquistion Costs Paid Written
----------------------------------------------------------
@ 12/31/96
Consolidated P&C Entities $ 18,909,000 $ 79,208,000 $105,020,049
Unconsolidated P&C Entities 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0
----------------------------------------------------------
Total $ 18,909,000 $ 79,208,000 $105,020,049
----------------------------------------------------------
@ 12/31/95
Consolidated P&C Entities $ 17,041,000 $ 60,827,000 $100,561,533
Unconsolidated P&C Entities 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0
----------------------------------------------------------
Total $ 17,041,000 $ 60,827,000 $100,561,533
----------------------------------------------------------
@ 12/31/94
Consolidated P&C Entities $ 14,908,000 $ 60,401,000 $ 81,369,411
Unconsolidated P&C Entities 0 0 0
Proportionate share of
registrant & subsidiaries 0 0 0
----------------------------------------------------------
Total $ 14,908,000 $ 60,401,000 $ 81,369,411
----------------------------------------------------------
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
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
36
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
10.12*** Form of Subscriber's Agreement whereby
policyholders of Erie Insurance Exchange
appoint Registrant as their
attorney-in-fact
10.13* Stock Redemption Plan of Registrant dated
December 14, 1989
10.14* Stock Purchase Agreement dated December 20,
1991, between Registrant and Erie Insurance
Exchange relating to the capital stock of
Erie Insurance Company
10.15** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1,
1994 between Erie Insurance Exchange
and Erie Insurance Co.
10.16**** Stock Redemption Plan of Registrant
restated as of December 12, 1995
10.17**** Property Catastrophe Excess of Loss
Reinsurance Agreement dated January 1, 1995
between Erie Insurance Exchange and Erie
Insurance Company of New York
10.18**** Service Agreement dated January 1, 1995
between Registrant and Erie Insurance
Company of New York
10.19***** Consulting Agreement for Investing Services
dated January 2, 1996 between Erie Indemnity
Company and John M. Petersen
10.20***** Agreement dated April 29, 1994 between Erie
Indemnity Company and Thomas M. Sider
10.21 Aggregate Excess of Loss Reinsurance Agreement
effective January 1, 1997 between Erie Insurance
Exchange, by and through its Attorney-in-Fact,
Erie Indemnity Company and Erie Insurance Company
and its wholly owned subsidiary Erie Insurance
Company of New York
11 Statement re computation of per share
earnings
13 1996 Annual Report to Security Holders.
Reference is made to the Annual Report
furnished to the Commission, herewith.
21 Subsidiaries of Registrant
27 Financial Data Schedule
37
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
28 Information from Reports Furnished to State
Insurance Regulatory Authorities
28# Analysis of Losses and Loss Expenses --
Schedule P of the 1996 Annual Statement of
Erie Insurance Company
28# Analysis of Losses and Loss Expenses --
Schedule P of the 1996 Annual Statement of
Erie Insurance Property & Casualty Company
28# Analysis of Losses and Loss Expenses --
Schedule P of the 1996 Annual Statement of
Erie Insurance Company of New York
* Such exhibit is incorporated by reference to the like numbered exhibit
in Registrant's Form 10 Registration Statement Number 0-24000 filed
with the Securities and Exchange Commission on May 2, 1994.
** Such exhibit is incorporated by reference to the like numbered exhibit
in Registrant's Form 10/A Registration Statement Number 0-24000 filed
with the Securities and Exchange Commission on August 3, 1994.
*** Such exhibit is incorporated by reference to the like titled but
renumbered exhibit in Registrant's Form 10 Registration Statement
Number 0-24000 filed with the Securities and Exchange Commission on May
2, 1994.
**** Such exhibit is incorporated by reference to the like titled exhibit in
the Registrant's Form 10-K annual report for the year ended December
31, 1995 that was filed with the Commission on March 25, 1996.
***** Such exhibit is incorporated by reference to the like titled exhibit in
the Registrant's Form 10-K/A amended annual report for the year ended
December 31, 1995 that was filed with the Commission on April 25, 1996.
# Such exhibit is being filed under FORM SE pursuant to Rule 202 of
Regulation S-T.
38