UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2002
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 2-39458
ERIE FAMILY LIFE INSURANCE COMPANY
| PENNSYLVANIA | 25-1186315 | |
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| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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| 100 Erie Insurance Place, Erie, Pennsylvania | 16530 | |
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| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (814) 870-2000
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 the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date: 9,450,000 shares of Common Stock outstanding on July 15, 2002.
1
INDEX
ERIE FAMILY LIFE INSURANCE COMPANY
PART I. FINANCIAL INFORMATION
| Item 1. Financial Statements (Unaudited) | |||
| Statements of Financial Position — June 30, 2002 and December 31, 2001 | |||
| Statements of Operations — Three and six months ended June 30, 2002 and 2001 | |||
| Statements of Comprehensive Income – Three and six months ended June 30, 2002 and 2001 | |||
| Statements of Cash Flows — Six months ended June 30, 2002 and 2001 | |||
| Notes to Financial Statements — June 30, 2002 | |||
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | ||
PART II. OTHER INFORMATION
| Item 6. Exhibits and Reports on Form 8-K | ||
| SIGNATURES | ||
2
PART I. FINANCIAL INFORMATION
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
| (Dollars in thousands) | ||||||||||
| June 30, | December 31, | |||||||||
| 2002 | 2001 | |||||||||
| (Unaudited) | ||||||||||
ASSETS |
||||||||||
Invested Assets: |
||||||||||
Fixed Maturities at fair value (amortized cost
of $849,614 and $718,500, respectively) |
$ | 863,478 | $ | 730,270 | ||||||
Equity Securities at fair value
(cost of $92,183 and $86,758, respectively) |
101,561 | 103,675 | ||||||||
Limited Partnerships
(cost of $16,879 and $18,691, respectively) |
16,651 | 18,249 | ||||||||
Real Estate |
1,251 | 1,293 | ||||||||
Policy Loans |
9,306 | 8,879 | ||||||||
Real Estate Mortgage Loans |
7,268 | 7,357 | ||||||||
Total Invested Assets |
$ | 999,515 | $ | 869,723 | ||||||
Cash and Cash Equivalents |
49,841 | 110,503 | ||||||||
Premiums Receivable from Policyholders |
5,516 | 5,089 | ||||||||
Reinsurance Recoverable |
365 | 1,775 | ||||||||
Other Receivables |
736 | 374 | ||||||||
Accrued Investment Income |
12,575 | 11,520 | ||||||||
Deferred Policy Acquisition Costs |
97,886 | 92,015 | ||||||||
Reserve Credit for Reinsurance Ceded |
12,877 | 12,120 | ||||||||
Prepaid Federal Income Taxes |
0 | 8,508 | ||||||||
Other Assets |
13,017 | 8,856 | ||||||||
Total Assets |
$ | 1,192,328 | $ | 1,120,483 | ||||||
See notes to financial statements.
3
ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION
| (Dollars in thousands) | ||||||||||||
| June 30, | December 31, | |||||||||||
| 2002 | 2001 | |||||||||||
| (Unaudited) | ||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||||
Liabilities: |
||||||||||||
Policy Liabilities and Accruals: |
||||||||||||
Future Life Policy Benefits |
$ | 91,135 | $ | 85,673 | ||||||||
Policy and Contract Claims |
2,081 | 1,950 | ||||||||||
Annuity Deposits |
696,240 | 636,850 | ||||||||||
Universal Life Deposits |
128,656 | 121,560 | ||||||||||
Supplementary Contracts Not |
||||||||||||
Including Life Contingencies |
640 | 605 | ||||||||||
Other Policyholder Funds |
10,254 | 7,974 | ||||||||||
Federal Income Taxes Payable |
30 | 0 | ||||||||||
Deferred Income Taxes |
28,046 | 31,807 | ||||||||||
Reinsurance Premium Due |
511 | 1,741 | ||||||||||
Accounts Payable and Accrued Expenses |
11,725 | 7,412 | ||||||||||
Note Payable to Erie Indemnity Company |
15,000 | 15,000 | ||||||||||
Due to Affiliates |
2,244 | 2,309 | ||||||||||
Dividends Payable |
3,969 | 1,843 | ||||||||||
Total Liabilities |
$ | 990,531 | $ | 914,724 | ||||||||
Shareholders’ Equity: |
||||||||||||
Common Stock, $.40 Par Value Per Share;
Authorized 15,000,000 Shares; 9,450,000
Shares Issued and Outstanding |
$ | 3,780 | $ | 3,780 | ||||||||
Additional Paid-In Capital |
630 | 630 | ||||||||||
Accumulated Other Comprehensive Income |
14,959 | 18,359 | ||||||||||
Retained Earnings |
182,428 | 182,990 | ||||||||||
Total Shareholders’ Equity |
$ | 201,797 | $ | 205,759 | ||||||||
Total Liabilities and Shareholders’ Equity |
$ | 1,192,328 | $ | 1,120,483 | ||||||||
See notes to financial statements.
4
| (Dollars in thousands, except per share data) | ||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||
| June 30 | June 30 | |||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||
Revenues: |
||||||||||||||||||
Policy Revenue: |
||||||||||||||||||
Life Premiums |
$ | 12,772 | $ | 11,213 | $ | 24,351 | $ | 21,528 | ||||||||||
Group and Other Premiums |
746 | 648 | 1,497 | 1,329 | ||||||||||||||
Total Policy Revenue |
$ | 13,518 | $ | 11,861 | $ | 25,848 | $ | 22,857 | ||||||||||
Investment Income |
16,998 | 15,865 | 31,508 | 30,574 | ||||||||||||||
Equity in Earnings of Limited Partnerships |
2,513 | 1,767 | 3,582 | 802 | ||||||||||||||
Net Realized Losses on Investments |
(7,698 | ) | (1,067 | ) | (5,644 | ) | (473 | ) | ||||||||||
Other Income |
177 | 178 | 420 | 370 | ||||||||||||||
Total Revenues |
$ | 25,508 | $ | 28,604 | $ | 55,714 | $ | 54,130 | ||||||||||
Benefits and Expenses: |
||||||||||||||||||
Death Benefits |
$ | 3,928 | $ | 1,956 | $ | 7,428 | $ | 5,284 | ||||||||||
Interest on Annuity Deposits |
9,416 | 8,789 | 18,958 | 17,146 | ||||||||||||||
Interest on Universal Life Deposits |
1,836 | 1,677 | 3,598 | 3,332 | ||||||||||||||
Surrender and Other Benefits |
298 | 330 | 565 | 467 | ||||||||||||||
Increase in Future Life Policy Benefits |
2,141 | 1,449 | 4,706 | 3,137 | ||||||||||||||
Amortization of Deferred Policy Acquisition Costs |
2,410 | 2,192 | 4,021 | 3,838 | ||||||||||||||
Commissions |
518 | 318 | 1,463 | 911 | ||||||||||||||
General Expenses |
2,809 | 2,724 | 5,504 | 5,067 | ||||||||||||||
Taxes, Licenses and Fees |
614 | 527 | 1,227 | 1,045 | ||||||||||||||
Total Benefits and Expenses |
$ | 23,970 | $ | 19,962 | $ | 47,470 | $ | 40,227 | ||||||||||
Income Before Income Taxes |
$ | 1,538 | $ | 8,642 | $ | 8,244 | $ | 13,903 | ||||||||||
Provision for Federal Income Tax (Benefit): |
||||||||||||||||||
Current |
2,936 | 2,627 | 4,782 | 4,533 | ||||||||||||||
Deferred |
(2,404 | ) | 358 | (1,930 | ) | 272 | ||||||||||||
Total Provision for Federal Income Tax |
532 | 2,985 | 2,852 | 4,805 | ||||||||||||||
Net Income |
$ | 1,006 | $ | 5,657 | $ | 5,392 | $ | 9,098 | ||||||||||
Net Income Per Share |
$ | 0.11 | $ | 0.60 | $ | 0.57 | $ | 0.96 | ||||||||||
Dividends Declared Per Share |
$ | 0.42 | $ | 0.39 | $ | 0.63 | $ | 0.585 | ||||||||||
See notes to financial statements.
5
| (Amounts in thousands) | ||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||
| June 30 | June 30 | |||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||
Net Income |
$ | 1,006 | $ | 5,657 | $ | 5,392 | $ | 9,098 | ||||||||||
Unrealized Gains (Losses) on Securities: |
||||||||||||||||||
Unrealized Holding Gains (Losses) Arising
During Period |
3,007 | 1,452 | (10,875 | ) | 10,808 | |||||||||||||
Plus: Losses Included in Net Income |
7,698 | 1,067 | 5,644 | 473 | ||||||||||||||
Net Unrealized Holding Gains (Losses)
Arising During Period |
$ | 10,705 | $ | 2,519 | $ | (5,231 | ) | $ | 11,281 | |||||||||
Income Tax (Expense) Benefit Related to
Unrealized Gains (Losses) |
(3,747 | ) | (881 | ) | 1,831 | (3,948 | ) | |||||||||||
Unrealized Appreciation (Deprecation) of
Investments, Net of Tax |
$ | 6,958 | $ | 1,638 | $ | (3,400 | ) | $ | 7,333 | |||||||||
Comprehensive Income |
$ | 7,964 | $ | 7,295 | $ | 1,992 | $ | 16,431 | ||||||||||
See notes to financial statements.
6
ERIE FAMILY LIFE INSURANCE
COMPANY
STATEMENTS OF CASH FLOWS (Unaudited)
| (Dollars in thousands) | |||||||||||
| Six Months Ended | Six Months Ended | ||||||||||
| June 30, 2002 | June 30, 2001 | ||||||||||
Cash flows from operating activities: |
|||||||||||
Net income |
$ | 5,392 | $ | 9,098 | |||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
|||||||||||
Net amortization of bond and mortgage
(discount) premium |
(138 | ) | 94 | ||||||||
Amortization of deferred policy acquisition costs |
4,021 | 3,838 | |||||||||
Real estate depreciation |
41 | 41 | |||||||||
Software amortization |
125 | 125 | |||||||||
Deferred federal income tax (benefit) expense |
(1,930 | ) | 272 | ||||||||
Realized losses on investments |
5,644 | 473 | |||||||||
Equity in earnings of limited partnerships |
(3,582 | ) | (802 | ) | |||||||
Increase in premiums receivable |
(426 | ) | (146 | ) | |||||||
Increase in other receivables |
(362 | ) | (82 | ) | |||||||
Increase in accrued investment income |
(1,056 | ) | (315 | ) | |||||||
Increase in policy acquisition costs deferred |
(9,892 | ) | (6,501 | ) | |||||||
Increase in other assets |
(4,286 | ) | (547 | ) | |||||||
Decrease (increase) in reinsurance recoverables
and reserve credits |
653 | (772 | ) | ||||||||
Decrease (increase) in prepaid federal income taxes |
8,538 | (115 | ) | ||||||||
Increase in future policy benefits and claims |
5,593 | 3,265 | |||||||||
Increase in other Policyholder funds |
2,281 | 559 | |||||||||
Decrease in reinsurance premium due |
(1,231 | ) | (179 | ) | |||||||
Increase (decrease) in accounts payable and due to affiliates |
4,248 | (502 | ) | ||||||||
Net cash provided by operating activities |
$ | 13,633 | $ | 7,804 | |||||||
Cash flows from investing activities: |
|||||||||||
Purchase of investments: |
|||||||||||
Fixed maturities |
$ | (275,561 | ) | $ | (87,905 | ) | |||||
Equity securities |
(20,817 | ) | (9,531 | ) | |||||||
Limited partnerships |
(5,499 | ) | (2,608 | ) | |||||||
Sales/maturities of investments: |
|||||||||||
Sales of fixed maturities |
72,764 | 52,436 | |||||||||
Calls/maturities of fixed maturities |
66,108 | 32,086 | |||||||||
Equity securities |
16,712 | 8,643 | |||||||||
Limited partnerships |
9,643 | 853 | |||||||||
Principal payments received on mortgage loans |
90 | 853 | |||||||||
Loans made to Policyholders |
(991 | ) | (1,095 | ) | |||||||
Payments received on policy loans |
562 | 491 | |||||||||
Net cash used in investing activities |
$ | (136,989 | ) | $ | (5,777 | ) | |||||
See notes to financial statements.
7
ERIE FAMILY LIFE INSURANCE
COMPANY
STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
| (Dollars in thousands) | ||||||||||
| Six Months Ended | Six Months Ended | |||||||||
| June 30, 2002 | June 30, 2001 | |||||||||
Cash flows from financing activities: |
||||||||||
Annuity and supplementary
contract deposits and interest |
$ | 81,704 | $ | 46,977 | ||||||
Annuity and supplementary
contract surrenders and withdrawals |
(22,279 | ) | (26,971 | ) | ||||||
Universal life deposits and interest |
9,422 | 9,480 | ||||||||
Universal life surrenders |
(2,326 | ) | (2,365 | ) | ||||||
Dividends paid to Shareholders |
(3,827 | ) | (3,544 | ) | ||||||
Net cash provided by financing activities |
$ | 62,694 | $ | 23,577 | ||||||
Net (decrease) increase in cash and cash equivalents |
(60,662 | ) | 25,604 | |||||||
Cash and cash equivalents at beginning of year |
110,503 | 17,955 | ||||||||
Cash and cash equivalents at end of quarter |
$ | 49,841 | $ | 43,559 | ||||||
Supplemental disclosures of cash flow information: |
||||||||||
Cash paid (refunded) during the year for: |
||||||||||
Interest |
$ | 588 | $ | 588 | ||||||
Income taxes |
(3,755 | ) | 4,648 | |||||||
See notes to financial statements.
8
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
All dollar amounts are in thousands
NOTE A — BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2001.
NOTE B — RECLASSIFICATION
Certain amounts, as previously reported in the 2001 financial statements, have been reclassified to conform to the current year’s financial statement presentation.
NOTE C — INVESTMENTS
Management considers all fixed maturities and marketable equity securities available-for-sale. Marketable equity securities consist primarily of common and non-redeemable preferred stock while fixed maturities consist of bonds and notes. Management determines the appropriate classification of fixed maturities at the time of purchase and reevaluates such designation as of each statement of financial position date. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of Shareholders’ equity.
The following is a summary of available-for-sale securities:
| Gross | Gross | |||||||||||||||||
| Amortized | Unrealized | Unrealized | Estimated | |||||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||||
June 30, 2002 |
||||||||||||||||||
Fixed Maturities: |
||||||||||||||||||
Bonds: |
||||||||||||||||||
U.S. Treasuries and Government
Agencies |
$ | 48,222 | $ | 1,149 | $ | 6 | $ | 49,365 | ||||||||||
Public Utilities |
82,457 | 1,884 | 853 | 83,488 | ||||||||||||||
U.S. Banks, Trusts and Insurance
Companies |
173,138 | 6,672 | 456 | 179,354 | ||||||||||||||
U.S. Industrial and Miscellaneous |
468,914 | 13,006 | 7,625 | 474,295 | ||||||||||||||
Foreign |
76,883 | 2,094 | 2,001 | 76,976 | ||||||||||||||
Total Fixed Maturities |
$ | 849,614 | $ | 24,805 | $ | 10,941 | $ | 863,478 | ||||||||||
9
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE C — INVESTMENTS (Continued)
| Gross | Gross | ||||||||||||||||||
| Amortized | Unrealized | Unrealized | Estimated | ||||||||||||||||
| Cost | Gains | Losses | Fair Value | ||||||||||||||||
Equity Securities: |
|||||||||||||||||||
Common Stock: |
|||||||||||||||||||
U.S. Banks, Trusts and Insurance
Companies |
$ | 982 | $ | 0 | $ | 52 | $ | 930 | |||||||||||
U.S. Industrial and Miscellaneous |
24,126 | 9,641 | 1,315 | 32,452 | |||||||||||||||
Public Utilities |
416 | 0 | 178 | 238 | |||||||||||||||
Foreign |
1,257 | 340 | 571 | 1,026 | |||||||||||||||
Non-redeemable Preferred Stock: |
|||||||||||||||||||
U.S. Banks, Trusts and Insurance
Companies |
7,410 | 232 | 0 | 7,642 | |||||||||||||||
U.S. Industrial and Miscellaneous |
15,429 | 760 | 0 | 16,189 | |||||||||||||||
Foreign |
42,563 | 1,438 | 917 | 43,084 | |||||||||||||||
Total Equity Securities |
$ | 92,183 | $ | 12,411 | $ | 3,033 | $ | 101,561 | |||||||||||
Total Available-for-Sale
Securities |
$ | 941,797 | $ | 37,216 | $ | 13,974 | $ | 965,039 | |||||||||||
December 31, 2001 |
|||||||||||||||||||
Fixed Maturities: |
|||||||||||||||||||
Bonds: |
|||||||||||||||||||
U.S. Treasuries and Government
Agencies |
$ | 26,239 | $ | 423 | $ | 139 | $ | 26,523 | |||||||||||
Special Revenue |
8,028 | 352 | 0 | 8,380 | |||||||||||||||
Public Utilities |
71,906 | 1,803 | 925 | 72,784 | |||||||||||||||
U.S. Banks, Trusts and Insurance
Companies |
136,259 | 3,425 | 583 | 139,101 | |||||||||||||||
U.S. Industrial and Miscellaneous |
419,325 | 9,354 | 3,500 | 425,179 | |||||||||||||||
Foreign |
56,743 | 1,794 | 234 | 58,303 | |||||||||||||||
Total Fixed Maturities |
$ | 718,500 | $ | 17,151 | $ | 5,381 | $ | 730,270 | |||||||||||
Equity Securities: |
|||||||||||||||||||
Common Stock: |
|||||||||||||||||||
U.S. Banks, Trusts and Insurance
Companies |
$ | 5,332 | $ | 809 | $ | 17 | $ | 6,124 | |||||||||||
U.S. Industrial and Miscellaneous |
30,605 | 15,996 | 413 | 46,188 | |||||||||||||||
Public Utilities |
417 | 0 | 57 | 360 | |||||||||||||||
Non-redeemable Preferred Stock: |
|||||||||||||||||||
U.S. Industrial and Miscellaneous |
8,603 | 712 | 0 | 9,315 | |||||||||||||||
Foreign |
41,801 | 1,306 | 1,419 | 41,688 | |||||||||||||||
Total Equity Securities |
$ | 86,758 | $ | 18,823 | $ | 1,906 | $ | 103,675 | |||||||||||
Total Available-for-Sale
Securities |
$ | 805,258 | $ | 35,974 | $ | 7,287 | $ | 833,945 | |||||||||||
10
ERIE FAMILY LIFE INSURANCE
COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE C — INVESTMENTS (Continued)
Realized gains and losses on the sales of investments are recognized in income on the specific identification method. Investments that have declined in value below cost and for which the decline is considered to be other-than-temporary by management are written down to estimated realizable value. Such write-downs are made on an individual security basis and are recorded as a component of net realized gains (losses) on investments in the Statements of Operations.
The components of net realized gains on investments as reported on the Statements of Operations are included below. The securities written down during 2002 were in the telecommunication industry segment. The securities written down during 2001 were in the transportation industry segment.
| Three Months Ended | Six Months Ended | ||||||||||||||||
| June 30 | June 30 | ||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||||||
Realized gains: |
|||||||||||||||||
Fixed maturities |
$ | 2,658 | $ | 1,475 | $ | 3,626 | $ | 1,800 | |||||||||
Equity securities |
2,229 | 119 | 3,331 | 608 | |||||||||||||
Limited partnerships |
453 | 0 | 453 | 0 | |||||||||||||
Other |
45 | 25 | 45 | 32 | |||||||||||||
Total gains |
$ | 5,385 | $ | 1,619 | $ | 7,455 | $ | 2,440 | |||||||||
Realized losses: |
|||||||||||||||||
Fixed maturities |
$ | 400 | $ | 1,038 | $ | 409 | $ | 1,041 | |||||||||
Equity securities |
2,005 | 63 | 2,012 | 253 | |||||||||||||
Limited partnerships |
1,703 | 0 | 1,703 | 0 | |||||||||||||
Other |
0 | 35 | 0 | 69 | |||||||||||||
Total losses |
$ | 4,108 | $ | 1,136 | $ | 4,124 | $ | 1,363 | |||||||||
Impairment charges: |
|||||||||||||||||
Fixed maturities |
$ | 8,975 | $ | 1,550 | $ | 8,975 | $ | 1,550 | |||||||||
Net realized losses on investments |
$ | (7,698 | ) | $ | (1,067 | ) | $ | (5,644 | ) | $ | (473 | ) | |||||
The Company participates in a securities lending program whereby certain securities from its portfolio are loaned to other institutions for short periods of time through a lending agent. The Company maintains control over the securities. The borrower of the securities is not permitted to sell or replace the security on loan. A fee is paid to the Company by the borrower. Revenue received for the six months ended June 30, 2002 and 2001, related to this program totaled $46 and $34, respectively. Collateral, comprised of cash and government securities, that exceeds the market value of the loaned securities, is maintained by the lending agent. The Company has an indemnification agreement with the lending agent in the event a borrower becomes insolvent or fails to return securities. The Company had loaned securities with a market value of $27.1 million and $40.5 million and secured collateral of $28.0 million and $41.5 million at June 30, 2002 and 2001, respectively. The Company maintains the loaned securities on its Statements of Financial Position as part of its invested assets.
Limited partnerships at June 30, 2002 include U.S. and foreign real estate and fixed income investments. These partnerships are recorded using the equity method, which approximates the Company’s share of the carrying value of the partnership. The Company has not guaranteed any of the partnership liabilities.
11
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE C — INVESTMENTS (Continued)
During the fourth quarter 2001, the Company sold its private equity limited partnerships to the Erie Insurance Exchange, recognizing a gain of $1,144 at the time of sale based on the September 30, 2001 financial statements provided by the limited partnerships. During the second quarter of 2002, actual valuation data was received from these partnerships and the sales price of the partnerships was adjusted to the actual value of the partnership at the date of sale (December 31, 2001). This resulted in the recognition of $1,250 of net realized losses during the quarter.
The components of equity in earnings of limited partnerships as reported on the Statements of Operations are as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30 | June 30 | |||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||
Fixed Income |
$ | 116 | $ | 40 | $ | 169 | $ | 45 | ||||||||
Real Estate |
2,397 | 292 | 3,413 | 559 | ||||||||||||
Private Equity |
0 | 1,435 | 0 | 198 | ||||||||||||
| $ | 2,513 | $ | 1,767 | $ | 3,582 | $ | 802 | |||||||||
NOTE D — FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values of financial instruments have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in developing the estimates of fair value. Accordingly, these estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. Certain financial instruments, including insurance contracts other than financial guarantees and investment contracts, are exempt from fair value disclosure requirements. The following methods and assumptions were used by the Company in estimating the fair value of each class of financial instrument for which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amounts approximate their fair value.
Fixed maturities and equity securities: Fair values were based on quoted market prices, where available, or dealer quotations.
Limited partnerships: Fair values of the fixed income limited partnerships were provided to the Company by the partnership. Real estate limited partnership fair values approximate carrying value.
Policy loans and real estate mortgage loans: For policy loans and real estate mortgage loans, carrying value is representative of estimated fair value.
Trading assets and trading liabilities: The carrying value of these assets and liabilities arising in the ordinary course of business approximates their fair values.
Annuity deposits: Included in this category are annuity deposit contracts. The Company retains the right to change interest rates subject to a one year guaranteed interest rate and a minimum interest rate provided in the policy. As a result, the carrying value of these contracts approximates their fair value. These annuity deposits totaled $542,904 at June 30, 2002.
12
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE D — FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Annuity deposits include structured settlements, contracts that the Policyholder cannot surrender at any time and for which the interest rate is fixed for the duration of the contract. Fair values of these contracts were estimated using discounted projected cash flows based upon interest rates currently being offered for similar contracts with the same remaining maturities. At June 30, 2002, the carrying value of structured settlements totaled $153,336 while the estimated fair value of these contracts totaled $157,869.
Universal life deposits: The Company retains the right to change interest rates on its universal life deposits subject to a minimum interest rate provided in the policy. As a result, the carrying value of these contracts approximates their fair value.
NOTE E — SEGMENT INFORMATION
The Company’s portfolio of traditional insurance includes permanent life, endowment and term policies, including whole life. The Group and Other category presented in the table below includes group life insurance and disability income products. The Corporate category includes investment income earned from surplus not specifically attached to any one product type. Investment related income is allocated based on the assumption that the fixed maturities and preferred stock portfolios support the insurance product segments and the common stock and limited partnership investments support the corporate line. The loss recorded in the annuity segment for the three and six months ended June 30, 2002 is a direct result of the impairment charges recognized on fixed maturities during the second quarter of 2002.
| Three Months Ended | Universal | Group & | ||||||||||||||||||||||||
| June 30, 2002 | Traditional | Life | Annuities | Other | Corporate | Total | ||||||||||||||||||||
Total policy revenue, net of
reinsurance |
$ | 9,680 | $ | 3,092 | $ | 1 | $ | 745 | $ | 0 | $ | 13,518 | ||||||||||||||
Total investment-related
and other income |
1,015 | 1,329 | 7,012 | 28 | 2,606 | 11,990 | ||||||||||||||||||||
Total revenues |
$ | 10,695 | $ | 4,421 | $ | 7,013 | $ | 773 | $ | 2,606 | $ | 25,508 | ||||||||||||||
Less: Total benefits and
expenses |
9,034 | 3,829 | 10,579 | 528 | 0 | 23,970 | ||||||||||||||||||||
Income (loss) before taxes |
$ | 1,661 | $ | 592 | $ | (3,566 | ) | $ | 245 | $ | 2,606 | $ | 1,538 | |||||||||||||
| Six Months Ended | ||||||||||||||||||||||||||
| June 30, 2002 | ||||||||||||||||||||||||||
Total policy revenue, net of
reinsurance |
$ | 18,272 | $ | 6,079 | $ | 2 | $ | 1,495 | $ | 0 | $ | 25,848 | ||||||||||||||
Total investment-related
and other income |
2,597 | 3,396 | 17,798 | 72 | 6,003 | 29,866 | ||||||||||||||||||||
Total revenues |
$ | 20,869 | $ | 9,475 | $ | 17,800 | $ | 1,567 | $ | 6,003 | $ | 55,714 | ||||||||||||||
Less: Total benefits and
expenses |
17,607 | 7,842 | 20,647 | 1,374 | 0 | 47,470 | ||||||||||||||||||||
Income (loss) before taxes |
$ | 3,262 | $ | 1,633 | $ | (2,847 | ) | $ | 193 | $ | 6,003 | $ | 8,244 | |||||||||||||
13
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE E — SEGMENT INFORMATION (Continued)
| Three Months Ended | Universal | Group & | ||||||||||||||||||||||||
| June 30, 2001 | Traditional | Life | Annuities | Other | Corporate | Total | ||||||||||||||||||||
Total policy revenue, net of
reinsurance |
$ | 8,559 | $ | 2,654 | $ | 7 | $ | 641 | $ | 0 | $ | 11,861 | ||||||||||||||
Total investment-related
and other income |
1,590 | 1,934 | 10,540 | 39 | 2,640 | 16,743 | ||||||||||||||||||||
Total revenues |
$ | 10,149 | $ | 4,588 | $ | 10,547 | $ | 680 | $ | 2,640 | $ | 28,604 | ||||||||||||||
Less: Total benefits and
expenses |
6,551 | 3,380 | 9,312 | 719 | 0 | 19,962 | ||||||||||||||||||||
Income (loss) before taxes |
$ | 3,598 | $ | 1,208 | $ | 1,235 | $ | (39 | ) | $ | 2,640 | $ | 8,642 | |||||||||||||
| Six Months Ended | ||||||||||||||||||||||||||
| June 30, 2001 | ||||||||||||||||||||||||||
Total policy revenue, net of
reinsurance |
$ | 16,193 | $ | 5,335 | $ | 8 | $ | 1,321 | $ | 0 | $ | 22,857 | ||||||||||||||
Total investment-related
and other income |
3,209 | 3,879 | 21,235 | 78 | 2,872 | 31,273 | ||||||||||||||||||||
Total revenues |
$ | 19,402 | $ | 9,214 | $ | 21,243 | $ | 1,399 | $ | 2,872 | $ | 54,130 | ||||||||||||||
Less: Total benefits and
expenses |
13,779 | 7,482 | 18,142 | 824 | 0 | 40,227 | ||||||||||||||||||||
Income before taxes |
$ | 5,623 | $ | 1,732 | $ | 3,101 | $ | 575 | $ | 2,872 | $ | 13,903 | ||||||||||||||
NOTE F — REINSURANCE
The Company has entered into various reinsurance treaties for the purpose of ceding the excess of life insurance over Company established retention limits. Reinsurance contracts do not relieve the Company from its obligations to Policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk to minimize its exposure to significant losses from reinsurer insolvencies. The Company considers all of its reinsurance assets to be collectible, therefore, no allowance has been established for uncollectible amounts.
Generally, the Company’s retention limit is $300 per life for individual and $200 per life for group coverage. For its disability income product, the Company also has a 50% coinsurance agreement with its reinsurer. In 2001, the Company introduced two new products, ERIE Flagship Term2 and ERIE Target Term. These products are reinsured 50% and 90%, respectively, with unaffiliated reinsurers.
14
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)
NOTE F — REINSURANCE (Continued)
Policy revenues, benefits and expenses reflected in the Statements of Operations have been reduced by the following amounts due to reinsurance cessions:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30 | June 30 | |||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||
Policy revenue |
$ | 2,706 | $ | 1,976 | $ | 4,331 | $ | 3,422 | ||||||||
Death benefits |
300 | 224 | 665 | 766 | ||||||||||||
Increase in future life policy benefits |
777 | 676 | 757 | 1,024 | ||||||||||||
Commissions |
1,732 | 828 | 2,482 | 1,677 | ||||||||||||
NOTE G — COMMITMENTS
The Company has outstanding commitments to invest up to $5.4 million in limited partnerships at June 30, 2002. These commitments will be funded as required through the end of the respective investment periods, which typically span 3 to 5 years and expire through 2005. At June 30, 2002, all of the commitments relate to limited partnerships that invest in real estate activities.
NOTE H — STATUTORY INFORMATION
The minimum statutory capital and surplus requirements under Pennsylvania law for stock life insurance companies (Section 386 of the PA Insurance Code) amounts to $1,650. The Company’s total statutory capital and surplus well exceeded these minimum requirements, totaling $97,414 at June 30, 2002.
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the historical financial information and related notes found on pages 3 through 15, herein, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission on March 15, 2002.
FINANCIAL OVERVIEW
Net income decreased to $1,005,734, or $.11 per share, in the second quarter of 2002, compared to $5,657,782, or $.60 per share, for the second quarter of 2001. Increases in policy revenue were offset by realized capital losses on investments due to impairment charges taken by the Company in addition to increases in death benefits in the second quarter. For the six months ended June 30, 2002 net income decreased to $5,391,588, or $.57 per share, compared to $9,098,425, or $.96 per share for the same period in 2001. An increase of $5,170,167 in realized losses on investments was the principal reason for the year-to-date decline in earnings.
Operating income (net income, excluding net realized capital losses and related federal income taxes) totaled $6,009,359, or $.64 per share, in the second quarter 2002 compared to $6,351,615, or $.67 per share, for the same period in 2001, a decrease of 5.4%. For the six months ended June 30, 2002 operating income decreased 3.7% to $9,059,985, or $.96 per share, from $9,406,214, or $1.00 per share during the six months ended June 30, 2001. Contributing to this decrease for the six-month period was a $2,143,909 increase in net death benefits paid on life insurance policies.
REVENUES
Analysis of Policy Revenue
Total policy revenue increased $1,657,784, or 14.0%, to $13,518,325 in the second quarter of 2002, from $11,860,541 during the same period in 2001. Contributing to this growth was an increase in direct premiums on traditional life insurance policies of 17.8% to $11,556,905 for the quarter ended June 30, 2002. Total policies in force on traditional life insurance products increased 6.2% to 178,563 at June 30, 2002, compared to 168,156 at June 30, 2001. Total policy revenue increased $2,990,133, or 13.1%, to $25,847,451 for the six months ended June 30, 2002.
In the third quarter of 2001 the Company rolled out its two newest traditional life insurance products – ERIE Target Term and ERIE Flagship Term2. The ERIE Target Term product has a minimum face amount of $100,000 and offers rate guarantees for 10 years on all plans. Under the reinsurance treaty for this new product, the reinsurer assumes 90% of all insurance up to $3,000,000 (the Company’s retention limit is $300,000) and assumes all insurance above that amount. The ERIE Flagship Term2, now Erie Family Life’s most comprehensive term insurance plan for individuals desiring substantial coverage, also offers a minimum face amount of $100,000 and replaced the ERIE Flagship Term product for new policy sales after October 1, 2001. Under the reinsurance treaty for this product, the reinsurer assumes 50% of all insurance up to $600,000 (the Company’s retention limit is $300,000) and assumes all insurance above that amount. The ERIE Flagship Term, ERIE Flagship Term2 and ERIE Target Term products, before consideration of reinsurance ceded, contributed $3,349,758 and $1,475,413 to total life premiums for the three months ended June 30, 2002 and 2001.
16
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Analysis of Investment-related Income
Net investment income increased $1,132,963, or 7.1%, to $16,998,189 in the second quarter of 2002 from $15,865,226 for the same period in 2001. For the six months ended June 30, 2002, net investment income increased $933,937, or 3.1%, to $31,507,917. A decline in yields from the fixed income portfolio of the Company in the first quarter of 2002, due to lower interest rates, resulted in slower growth in investment income.
Net realized losses on investments were $7,697,884 in the second quarter of 2002, compared to $1,067,436 in the second quarter of 2001, an increase of $6,630,448. These losses were primarily the result of $8,974,830 in impairment charges on fixed maturity investments. Included in the 2002 realized losses are $4,839,260 of impairment charges relating to securities of the WorldCom Group. In addition to the impairment charges, a $1,250,075 loss adjustment reflecting the actual market value of the limited partnerships sold to the Erie Insurance Exchange in December, 2001 is included in the second quarter 2002 results. For the six months ended June 30, 2002, net realized losses were $5,643,688, compared to $473,521 in 2001.
The Company recorded earnings in limited partnerships of $2,512,604 in the second quarter of 2002, compared to $1,767,075 during the same period in 2001. The year-to-date earnings in limited partnerships increased to $3,581,747 in 2002 from $802,197 in 2001. The 2002 increase in earnings is the result of a more stable income stream generated from these investments in 2002, which is characteristic of the types of limited partnerships now owned by the Company compared to those owned a year ago.
BENEFITS AND EXPENSES
Analysis of Policy-related Benefits and Expenses
Net death benefits on life insurance policies increased $1,971,704 in the second quarter of 2002 to $3,927,885. For the six months ended June 30, 2002, death benefits on life insurance policies increased $2,143,909, or 40.1%, to $7,428,069. Random fluctuations in death benefits incurred can be expected when mortality results are measured over a short time period due to the small number of claims involved. These short-term fluctuations can influence quarterly or annual results without impacting long-term profitability. Management believes that its underwriting philosophy and practices are sound.
Interest expense incurred on deposits increased $785,107, or 7.5%, to $11,251,992 in the second quarter of 2002 from $10,466,885 in the second quarter of 2001. This increase is primarily the result of an increase in new annuity deposits and a decrease in annuity surrenders during the twelve month period ended June 30, 2002, when compared to the twelve month period ended June 30, 2001. In 2001, the interest rate credited on annuity deposits ranged from 5.0% to 6.25% and the rate credited on universal life deposits ranged from 6.0% to 6.75%. During the first quarter of 2002, interest rates were lowered on both annuity and universal life deposits in response to decreasing new money investment yields. For 2002, the new interest rate credited on annuity deposits ranged from 4.75% to 5.5% and the new rate credited on universal life deposits ranged from 5.5% to 6.25%.
The liability for future life policy benefits is computed considering various factors such as anticipated mortality, future investment yields, withdrawals and anticipated credit for reinsurance. The increase in future life policy benefits totaled $2,140,681 in the second quarter of 2002, compared to $1,448,884 in the second quarter of 2001, an increase of 47.8%.
17
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Analysis of Other Expenses
Total operating expenses, excluding taxes, licenses and fees, increased $284,535, or 9.4%, to $3,327,285 for the second quarter 2002, compared to $3,042,750 for the same period in 2001. Certain operating expenses of the Company are paid by the Erie Indemnity Company, the management Company of the Erie Insurance Exchange, and reimbursed monthly by the Company. Additionally, a portion of the Erie Insurance Group common overhead expenses attributable to the Company are also reimbursed monthly. These expenses comprise the majority of the Company’s general expenses.
General expenses, a component of total operating expenses, include wages and salaries, Employee benefits, data processing expenses, occupancy expenses and other office and general administrative expenses of the Company. Certain general expenses of the Company, related to the acquisition and underwriting of new policies, are deferred as policy acquisition costs (DAC). Medical inspection and exam fees related to new business production, wages, salaries and Employee benefits of underwriting personnel, and salaries, employee benefits and bonuses paid to branch sales Employees for the production of life and annuity business, are all deferred.
General expenses, net of DAC, increased 3.1%, to $2,809,247 for the quarter ended June 30, 2002. For the six months ended June 30, 2002, net general expenses increased 8.6%, to $5,503,953. Expenses relating to an increase in Company staffing levels, including salaries, benefits and office equipment, contributed to this year-to-date increase. In addition, in 2002, the Company is being allocated a portion of the expenses relating to the Erie Insurance Group’s eCommerce program launched in June 2001. These expenses totaled approximately $149,000 in 2002 and will continue to be incurred as the project develops.
Another component of total operating expenses is commissions to independent Agents. Direct commission costs include new and renewal commissions, production bonuses and promotional incentives to Agents. These direct commission expenses are reported on the Statements of Operations net of commissions received from reinsurers. The reported expense is also affected by the amount of commission expenses capitalized as DAC. Commissions, which vary with and are related primarily to the production of new business, have been deferred and are capitalized as DAC. Most first-year and incentive commissions and some second-year commissions qualify for deferral as DAC. For the second quarter of 2002, net commission expense increased $199,544 to $518,038, compared to $318,494 for the second quarter of 2001. For the six months ended June 30, 2002, commission expense increased $551,094 to $1,462,527. Renewal commissions, very little of which is eligible for the DAC, are up $188,000 in 2002.
FINANCIAL CONDITION
Investments
The Company’s investment strategies are designed and portfolios are structured to match the features of the life insurance and annuity products sold by the Company. Annuities and life insurance policies are long-term products, therefore, the Company’s investment strategy takes a long-term perspective emphasizing investment quality, diversification, and superior investment returns. The Company’s investments are managed on a total return approach that focuses on current income and capital appreciation.
18
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Company’s invested assets are sufficiently liquid to meet commitments to our Policyholders. At June 30, 2002, the Company’s investment portfolio consisting of cash, investment grade bonds, common stock and preferred stock, totaled slightly more than $1 billion or 84.0% of total assets. These resources provide the liquidity the Company requires to meet known and unforeseen demands on its funds.
The Company reviews the investment portfolio to evaluate positions that might incur other-than-temporary declines in value. For all investment holdings, general economic conditions and/or conditions specifically affecting the underlying issuer or its industry are considered in evaluating impairment in value. In addition to specific factors, the primary factors considered in the Company’s review of investment valuation are the length of time the market value is below cost and the amount the market value is below cost.
For common equity securities where the decline in market value is more than 20% below cost for a period exceeding six months, there is a strong indication of other-than-temporary impairment. Under these circumstances the Company considers market conditions, industry characteristics and the fundamental operating results of the issuer before deciding whether to sell the investment at a loss, to recognize an impairment charge to operations or to do neither. For common equity securities that have declined more than 20% below cost for a period exceeding twelve months, the position is presumed impaired and is either sold or recognized as impaired in the Statements of Operations. There were no impairments recognized in the second quarters of 2002 or 2001 related to equity security investments.
For fixed maturity investments, the Company individually analyzes all positions whose market value have declined more than 20% below cost. The Company considers market conditions, industry characteristics and the fundamental operating results of the issuer to determine if the decline is due to changes in interest rates, changes relating to a decline in credit quality, or other issues affecting the investment. Positions that have incurred market price decline of over 20% for a period greater than six months where the creditworthiness of the issuer or other factors indicate a decline that is other-than-temporary are either sold or recognized as impaired and reflected as a charge to the Company’s operations. As previously discussed in the “Analysis of Investment — related Income” section, the total impairments of $8,974,830 recognized in the second quarter of 2002 related to fixed maturity investments.
If the Company’s policy for determining the recognition of impaired positions were different, the Company’s Statements of Financial Position and Results of Operations could be significantly impacted. Management believes its investment valuation philosophy and accounting practices result in appropriate and timely measurement of value and recognition of impairment.
The Company’s investments are subject to certain risks, including interest rate and price risk. The Company monitors exposure to interest rate risk through periodic reviews of asset and liability positions. Estimates of cash flows and the impact of interest rate fluctuations relating to the investment portfolio are monitored regularly. The Company’s portfolio of marketable equity securities, which is carried on the Statements of Financial Position at estimated fair value, has exposure to price risk, the risk of potential loss in estimated fair value resulting from an adverse change in prices. The Company’s objective is to earn competitive relative returns by investing in a diverse portfolio of high-quality, liquid securities. Portfolio characteristics are analyzed regularly and market risk is actively managed through a variety of techniques. Portfolio holdings are diversified across industries and concentrations in any one company or industry are limited by parameters established by Company management and the Board of Directors.
19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Reserve Liabilities
The Company’s primary commitment is its obligation to meet the payment of future policy benefits under the terms of its life insurance and annuity contracts. To meet these future obligations, the Company establishes life insurance reserves based upon the type of policy, the age of the insured, and the number of years the policy has been in force. The Company also establishes annuity and universal life reserves based on the amount of Policyholder deposits (less applicable policy charges) plus interest earned on those deposits. These life insurance and annuity reserves are supported primarily by the Company’s long-term, fixed-income investments, as the underlying policy reserves are generally also of a long-term nature.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company’s ability to secure enough cash to meet its contractual obligations and operating needs. Generally, insurance premiums are collected prior to claims and benefit disbursements and these funds are invested to provide necessary cash flows in future years. The Company’s major sources of cash are life insurance premiums and investment income. The net positive cash flow is used to fund Company commitments and to build the investment portfolio, thereby increasing future investment returns. Net cash provided by operating activities for the six months ended June 30, 2002 was $13,633,062 compared to $7,803,741 for the six months ended June 30, 2001. The Company’s liquidity position remains strong as invested assets and cash and cash equivalents increased by more than $69 million during the six months of 2002 to $1.05 billion.
Annuity and universal life deposits, which do not appear as revenue on the financial statements, are a source of funds. These deposits do not involve a mortality or morbidity risk and are accounted for using methods applicable to comparable “interest-bearing obligations” of other types of financial institutions. This method of accounting records deposits as a liability rather than as a revenue. Annuity and universal life deposits were $34,825,450 in the second quarter of 2002 and $19,290,029 in the second quarter of 2001. The increased volatility in the equity markets has continued to help increase annuity sales as well as stem the flow of annuity surrenders. Surrenders on annuities decreased 9.4% for the quarter ended June 30, 2002, compared to the same period last year.
The Company’s current commitments for expenditures as of June 30, 2002 are primarily for policy death benefits, policy surrenders and withdrawals, general operating expenses, federal income taxes, and dividends to Shareholders. In addition, the Company has outstanding commitments to invest up to $5.4 million in its real estate limited partnerships at June 30, 2002. All Company commitments are met by cash flows from policy revenue, annuity and universal life deposits and investment income. Management believes its cash flow from operations and its liquid assets and marketable securities will also enable the Company to meet any foreseeable cash requirements. As an added measure of liquidity, the Company has arranged for a $10 million line of credit with a commercial bank. At June 30, 2002 and 2001, there were no borrowings on this line of credit.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Interest Rate Environment
The Company’s deposit-type products compete with a wide variety of
investment options. Among other factors affecting the investment decisions
of Policyholders and potential Policyholders are general investment market
conditions, particularly the market interest rate environment. Changes in
interest rates affect pricing and the relative attractiveness of
interest-sensitive investment options, which bears directly on the
ability of the Company to attract new Policyholders and retain
existing holders of annuity, universal life and certain permanent
life insurance products.
20
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Terrorist Actions
The Company is exposed to direct losses arising from possible future terrorist actions. Additionally, current and future proposed federal measures might affect the way the life insurance industry handles losses from potential future terrorist actions. These measures may include the establishment of a federal reinsurance program for losses from terrorist actions and possible changes to the tax laws governing the taxation of insurance companies. The Company may have possible exclusions that would arise from future potential terrorist actions.
The Company’s substantial portfolio of equity and fixed income investments could also be affected by potential future terrorist actions which may affect the level of economic activity as well as investor confidence in the U.S securities markets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s exposure to market risk is primarily related to fluctuations in prices and interest rates. Quantitative and qualitative disclosures about market risk resulting from changes in prices and interest rates are included in Item 7A. in the Company’s 2001 Annual Report on Form 10-K. There have been no material changes in such risks or the Company’s periodic reviews of asset and liability positions during the six months ended June 30, 2002. The information contained in the Investments section of Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.
“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995: Certain forward-looking statements contained herein involve risks and uncertainties. Many factors could cause future results to differ materially from those discussed. Examples of such factors include but are not limited to: better (or worse) mortality rates, terrorist actions, changes in insurance regulations or legislation that disadvantage the Company in the marketplace and recession, economic conditions or stock market changes affecting pricing or demand for insurance products or ability to generate investment income and returns. Growth and profitability have been, and will be, potentially materially affected by these and other factors.
21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the three-month period ended June 30, 2002.
22
SIGNATURES
Pursuant to the requirements 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 Family Life Insurance Company | ||
|
|
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| (Registrant) | ||
| Date: July 23, 2002 | /s/ Jeffrey A. Ludrof | |
|
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| (Jeffrey A. Ludrof, President & CEO) | ||
| /s/ Philip A. Garcia | ||
|
|
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| (Philip A. Garcia, Executive Vice President & CFO) |
23