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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, 1998
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: 67,007,500 Class A shares and
3,070 Class B shares of Common Stock outstanding on February 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1998 (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 27, 1999 are incorporated by reference
into Part III of this Form 10-K Report.
1
INDEX
PART ITEM NUMBER AND CAPTION PAGE
I Item 1. Business 3
I Item 2. Properties 13
I Item 3. Legal Proceedings 13
I Item 4. Submission of Matters to a
Vote of Security Holders 13
II Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters 14
II Item 6. Selected Consolidated Financial Data 14
II Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14
II Item 8. Financial Statements and Supplementary
Data 14
II Item 9. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosures 14
III Item 10. Directors and Executive Officers
of the Registrant 15
III Item 11. Executive Compensation 17
III Item 12. Security Ownership of Certain
Beneficial Owners and Management 17
III Item 13. Certain Relationships and Related
Transactions 17
IV Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 19
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 75.3% of the Company's consolidated revenues in 1998. 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, 52.2% of whose capital stock is owned by the Exchange,
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, 1998, the Company had 3,227 full-time
employees. Of that total, 1,588 full-time employees provide claims-specific
services exclusively for the Exchange and 89 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,
1998, the Erie Insurance Group conducted business in nine states and the
District of Columbia through approximately 1,200 agencies with approximately
5,400 agents.
3
CORPORATE ORGANIZATION CHART AT DECEMBER 31, 1998
ERIE INDEMNITY COMPANY - Incorporated: April 17, 1925 (PA)
Total Capital Stock: 75,000,000 @ no par value (74,996,930 shares
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 reciprocal Insurance Exchange)
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 - Incorporated 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% of 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, 1998 operated in nine states and the District of Columbia. Erie
Insurance Group's business consists primarily of private passenger automobile,
homeowners, commercial multi-peril, workers compensation and commercial
automobile insurance business written in Pennsylvania, Ohio, 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 risks 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