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Table of Contents

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 March 31, 2003

OR

o   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

(Exact name of registrant as specified in its charter)
     
PENNSYLVANIA   25-1186315
 
(State or other jurisdiction of
incorporation or organization)		   (I.R.S. Employer
Identification No.)
     
100 Erie Insurance Place, Erie, Pennsylvania   16530
 
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (814) 870-2000

Not applicable

Former name, former address and former fiscal year, if changed since last report

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  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

           Yes  o             No  x

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 April 18, 2003.

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
STATEMENTS OF FINANCIAL POSITION
STATEMENTS OF COMPREHENSIVE INCOME
STATEMENTS OF CASH FLOWS
STATEMENTS OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATIONS
CERTIFICATIONS
Exhibit 99.1

Table of Contents

INDEX

ERIE FAMILY LIFE INSURANCE COMPANY

PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements (Unaudited)

  Statements of Financial Position — March 31, 2003 and December 31, 2002
 
  Statements of Operations — Three months ended March 31, 2003 and 2002
 
  Statements of Comprehensive Income — Three months ended March 31, 2003 and 2002
 
  Statements of Cash Flows — Three months ended March 31, 2003 and 2002
 
  Notes to Financial Statements — March 31, 2003

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Item 4.    Controls and Procedures

PART II.  OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

SIGNATURES

OFFICER CERTIFICATIONS

2

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PART I. FINANCIAL INFORMATION

ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION

                     
        (Dollars in thousands)        
        March 31,   December 31,
ASSETS   2003   2002
   
 
        (Unaudited)        
                 
Invested Assets:
                
 
Fixed Maturities at fair value (amortized cost of $1,069,127 and $986,137, respectively)
   $ 1,136,671     $ 1,039,367  
 
Equity Securities at fair value (cost of $68,498 and $66,072, respectively)
     72,226       68,749  
 
Limited Partnerships (cost of $15,665 and $16,352, respectively)
     15,530       16,053  
 
Real Estate
     1,189       1,210  
 
Policy Loans
     9,571       9,516  
 
Real Estate Mortgage Loans
     6,876       7,175  
 
    
     
 
   
Total Invested Assets
   $ 1,242,063     $ 1,142,070  
 
Cash and Cash Equivalents
     109,795       97,022  
 
Premiums Receivable from Policyholders
     5,994       6,225  
 
Reinsurance Recoverable
     1,332       1,713  
 
Other Receivables
     690       1,486  
 
Accrued Investment Income
     18,007       13,353  
 
Deferred Policy Acquisition Costs
     106,672       104,065  
 
Reserve Credit for Reinsurance Ceded
     15,461       14,123  
 
Prepaid Federal Income Taxes
     0       2,674  
 
Other Assets
     12,998       6,888  
 
    
     
 
   
Total Assets
   $ 1,513,012     $ 1,389,619  
 
    
     
 

See notes to financial statements.

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ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION

                       
          (Dollars in thousands)
          March 31,   December 31,
LIABILITIES AND SHAREHOLDERS’ EQUITY   2003   2002
   
 
          (Unaudited)        
                   
Liabilities:
                
 
Policy Liabilities and Accruals:
                
   
Future Policy Benefits
   $ 97,369     $ 94,243  
   
Policy and Contract Claims
     2,559       2,362  
   
Annuity Deposits
     863,507       803,675  
   
Universal Life Deposits
     139,393       135,551  
   
Supplementary Contracts Not Including Life Contingencies
     629       625  
 
Other Policyholder Funds
     11,567       14,335  
 
Federal Income Taxes Payable
     1,036       0  
 
Deferred Income Taxes
     46,160       41,577  
 
Reinsurance Premium Due
     607       1,591  
 
Securities Lending Collateral
     74,188       41,669  
 
Accounts Payable and Accrued Expenses
     19,088       9,673  
 
Note Payable to Erie Indemnity Company
     15,000       15,000  
 
Due to Affiliates
     1,962       2,886  
 
Dividends Payable
     1,985       1,985  
 
    
     
 
     
Total Liabilities
   $ 1,275,050     $ 1,165,172  
 
    
     
 
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
     46,239       36,145  
 
Retained Earnings
     187,313       183,892  
 
    
     
 
     
Total Shareholders’ Equity
   $ 237,962     $ 224,447  
 
    
     
 
     
Total Liabilities and Shareholders’ Equity
   $ 1,513,012     $ 1,389,619  
 
    
     
 

See notes to financial statements.

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ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS (Unaudited)

                       
          (Dollars in thousands, except per share data)
          Three Months Ended   Three Months Ended
          March 31, 2003   March 31, 2002
         
 
Revenues:
                
 
Net Policy Revenue:
                
 
Life Premiums
   $ 12,242     $ 11,579  
 
Group Life and Other Premiums
     847       750  
 
    
     
 
     
Total Net Policy Revenue
   $ 13,089     $ 12,329  
 
Net Investment Income
     18,584       14,510  
 
Net Realized Gains on Investments
     2,162       2,054  
 
Equity in Earnings of Limited Partnerships
     280       1,069  
 
Other Income
     177       244  
 
    
     
 
     
Total Revenues
   $ 34,292     $ 30,206  
 
    
     
 
Benefits and Expenses:
                
 
Death Benefits
   $ 3,841     $ 3,500  
 
Interest on Annuity Deposits
     9,935       9,541  
 
Interest on Universal Life Deposits
     1,779       1,763  
 
Surrender and Other Benefits
     273       268  
 
Increase in Future Life Policy Benefits
     1,788       2,565  
 
Amortization of Deferred Policy Acquisition Costs
     3,315       1,612  
 
Commissions
     1,341       944  
 
General Expenses
     3,064       2,695  
 
Taxes, Licenses and Fees
     677       612  
 
    
     
 
   
Total Benefits and Expenses
   $ 26,013     $ 23,500  
 
    
     
 
Income before Income Taxes
   $ 8,279     $ 6,706  
Provision for Federal Income Tax (Benefit):
                
 
Current
     3,725       1,847  
 
Deferred
     (852 )     473  
 
    
     
 
   
Total Provision for Federal Income Tax
     2,873       2,320  
 
    
     
 
Net Income
   $ 5,406     $ 4,386  
 
    
     
 
Net Income Per Share (Basic and Diluted)
   $ 0.57     $ 0.46  
 
    
     
 
Dividends Declared Per Share
   $ 0.21     $ 0.21  
 
    
     
 

See notes to financial statements.

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ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

                     
        (Amounts in thousands)
        Three Months Ended   Three Months Ended
        March 31, 2003   March 31, 2002
       
 
Net income
   $ 5,406     $ 4,386  
Unrealized Gains (Losses) on Securities:
                
 
Unrealized Holding Gains (Losses) Arising During Period
     17,691       (13,882 )
 
Less: Gains Included in Net Income
     (2,162 )     (2,054 )
 
    
     
 
   
Net Unrealized Holding Gains (Losses) Arising During Period
   $ 15,529     $ (15,936 )
 
    
     
 
Income Tax Expense (Benefit) Related to Unrealized Gains (Losses)
     5,435       (5,577 )
 
    
     
 
Unrealized Appreciation (Depreciation) of Investments, net of Tax
   $ 10,094     $ (10,359 )
 
    
     
 
Comprehensive Income (Loss)
   $ 15,500     $ (5,973 )
 
    
     
 

See notes to financial statements.

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ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (Unaudited)

                     
        (Dollars in thousands)
        Three Months Ended   Three Months Ended
        March 31, 2003   March 31, 2002
       
 
Cash flows from operating activities:
                
Net income
   $ 5,406     $ 4,386  
Adjustments to reconcile net income to net cash provided by operating activities:
                
 
Net amortization of bond and mortgage premium (discount)
     37       (58 )
 
Amortization of deferred policy acquisition costs
     3,315       1,612  
 
Real estate depreciation
     21       21  
 
Software amortization
     62       62  
 
Deferred federal income tax (benefit) expense
     ( 852 )     473  
 
Realized gains on investments
     ( 2,162 )     (2,054 )
 
Equity in earnings of limited partnerships
     (280 )     (1,069 )
Decrease in premiums receivable
     230       82  
Decrease (increase) in other receivables
     798       (598 )
Increase in accrued investment income
     (4,654 )     (4,390 )
Increase in policy acquisition costs deferred
     (5,922 )     (4,662 )
(Increase) decrease in other assets
     (6,173 )     446  
(Increase) decrease in reinsurance recoverables and reserve credits
     (958 )     1,660  
Decrease in prepaid federal income taxes
     3,711       1,833  
Increase in future policy benefits and claims
     3,323       2,553  
(Decrease) increase in other Policyholder funds
     (2,768 )     1,315  
Decrease in reinsurance premium due
     (985 )     (1,319 )
Increase (decrease) in accounts payable and due to affiliates
     8,492       (1,727 )
 
    
     
 
   
Net cash provided by (used in) operating activities
   $ 641     $ (1,434 )
 
    
     
 
Cash flows from investing activities:
                
Purchase of investments:
                
 
Fixed maturities
   $ (192,838 )   $ (106,771 )
 
Equity securities
     (5,590 )     (12,426 )
 
Mortgage loans
     (1,500 )     0
 
Limited partnerships
     (650 )     (4,937 )
Sales/maturities of investments:
                
 
Sales of fixed maturities
     82,950       22,630  
 
Calls/maturities of fixed maturities
     29,032       40,399  
 
Equity securities
     3,154       7,544  
 
Limited partnerships
     1,617       2,421  
Increase (decrease) in collateral from securities lending
     32,519       (10,013 )
Principal payments received on mortgage loans
     1,800       45  
Loans made to Policyholders
     (463 )     (437 )
Payments received on policy loans
     409       224  
 
    
     
 
   
Net cash used in investing activities
   $ (49,560 )   $ (61,321 )
 
    
     
 

See notes to financial statements.

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ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (Unaudited) (Continued)

                     
        (Dollars in thousands)
        Three Months Ended   Three Months Ended
        March 31, 2003   March 31, 2002
       
 
Cash flows from financing activities:
                
Annuity and supplementary contract deposits and interest
   $ 72,153     $ 40,486  
Annuity and supplementary contract surrenders and withdrawals
     (12,318 )     (9,992 )
Universal life deposits and interest
     5,093       4,563  
Universal life surrenders
     (1,251 )     (1,183 )
Dividends paid to Shareholders
     (1,985 )     (1,843 )
 
    
     
 
   
Net cash provided by financing activities
   $ 61,692     $ 32,031  
 
    
     
 
Net increase (decrease) in cash and cash equivalents
     12,773       (30,724 )
Cash and cash equivalents at beginning of year
     97,022       159,462  
 
    
     
 
Cash and cash equivalents at end of quarter
   $ 109,795     $ 128,738  
 
    
     
 
Supplemental disclosures of cash flow information:
                
Cash paid during the period for:
                
 
Interest
   $ 52     $ 52  
 
Income taxes
     14       14  

See notes to financial statements.

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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 three-month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. 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, 2002 as filed with the Securities and Exchange Commission on March 27, 2003.

NOTE B — INVESTMENTS

At March 31, 2003 marketable equity securities consist of nonredeemable preferred stock while fixed maturities consist of bonds, notes and redeemable preferred stock. The Company sold its entire common stock portfolio in the fourth quarter of 2002. Management considers all fixed maturities and marketable equity securities available-for-sale. 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
       
 
 
 
March 31, 2003
                                
Fixed Maturities:
                                
Bonds:
                                
 
U.S. Treasuries and Government Agencies
   $ 52,142     $ 1,983     $ 0     $ 54,125  
 
Special Revenue
     61,863       3,230       0       65,093  
 
Public Utilities
     110,111       7,883       489       117,505  
 
U.S. Banks, Trusts and Insurance Companies
     211,561       13,818       376       225,003  
 
U.S. Industrial and Miscellaneous
     518,134       38,424       3,037       553,521  
 
Foreign
     108,268       7,441       1,776       113,933  
 
    
     
     
     
 
   
Total Bonds
     1,062,079       72,779       5,678       1,129,180  
Redeemable Preferred Stock
     7,048       459       16       7,491  
 
    
     
     
     
 
   
Total Fixed Maturities
   $ 1,069,127     $ 73,238     $ 5,694     $ 1,136,671  
 
    
     
     
     
 

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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE B — INVESTMENTS (Continued)

                                       
                  Gross   Gross
          Amortized   Unrealized   Unrealized   Estimated
          Cost   Gains   Losses   Fair Value
         
 
 
 
Equity Securities:
                                
Nonredeemable Preferred Stock:
                                
 
U.S. Banks, Trusts and Insurance Companies
   $ 9,826     $ 406     $ 0     $ 10,232  
 
U.S. Industrial and Miscellaneous
     11,871       766       62       12,575  
 
Foreign
     46,801       3,173       555       49,419  
 
    
     
     
     
 
   
Total Equity Securities
   $ 68,498     $ 4,345     $ 617     $ 72,226  
 
    
     
     
     
 
     
Total Available-for-Sale Securities
   $ 1,137,625     $ 77,583     $ 6,311     $ 1,208,897  
 
    
     
     
     
 
December 31, 2002
                                
Fixed Maturities:
                                
Bonds:
                                
 
U.S. Treasuries and Government Agencies
   $ 51,268     $ 2,607     $ 0     $ 53,875  
 
Special Revenue
     41,010       2,376       0       43,386  
 
Public Utilities
     103,695       5,567       1,421       107,841  
 
U.S. Banks, Trusts and Insurance Companies
     180,503       11,751       334       191,920  
 
U.S. Industrial and Miscellaneous
     501,206       33,305       4,479       530,032  
 
Foreign
     99,624       5,947       2,393       103,178  
 
    
     
     
     
 
   
Total Bonds
     977,306       61,553       8,627       1,030,232  
Redeemable preferred stock
     8,831       304       0       9,135  
 
    
     
     
     
 
   
Total fixed maturities
   $ 986,137     $ 61,857     $ 8,627     $ 1,039,367  
 
    
     
     
     
 
Equity Securities:
                                
Nonredeemable Preferred Stock:
                                
 
U.S. Banks, Trusts and Insurance Companies
   $ 7,016     $ 211     $ 0     $ 7,227  
 
U.S. Industrial and Miscellaneous
     11,872       773       0       12,645  
 
Foreign
     47,184       2,496       803       48,877  
 
    
     
     
     
 
   
Total Equity Securities
   $ 66,072     $ 3,480     $ 803     $ 68,749  
 
    
     
     
     
 
     
Total Available-for-Sale Securities
   $ 1,052,209     $ 65,337     $ 9,430     $ 1,108,116  
 
    
     
     
     
 

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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE B — 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. The impairments 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. Included in the March 31, 2003 gross realized losses on fixed maturities are impairment charges totaling $3,445. These charges relate primarily to investments in the energy, real estate and insurance sectors.

                     
        Three Months Ended   Three Months Ended
        March 31, 2003   March 31, 2002
       
 
Fixed maturities:
                
 
Gross realized gains
   $ 7,004     $ 969  
 
Gross realized losses
     4,833       10  
 
    
     
 
   
Net realized gains
   $ 2,171     $ 959  
 
    
     
 
Equity securities:
                
 
Gross realized gains
   $ 0     $ 1,102  
 
Gross realized losses
     9       7  
 
    
     
 
   
Net realized (losses) gains
   $ (9 )   $ 1,095  
 
    
     
 
Net realized gains on investments
   $ 2,162     $ 2,054  
 
    
     
 

The Company participates in a securities lending program whereby certain securities from its portfolio are loaned to other institutions for short periods of time. A fee is paid to the Company by the borrower in return. Company policy requires collateral equal to 102% of the fair value of the loaned securities. The Company maintains full ownership rights to the securities loaned and continues to earn interest on them. In addition, the Company has the ability to sell the securities while they are on loan. The Company has an indemnification agreement with the lending agent in the event a borrower becomes insolvent or fails to return securities. Securities lending collateral is recorded by the Company as a liability. The proceeds from the collateral are invested in cash and short-term investments and are reported on the Statements of Financial Position as cash and cash equivalents. The Company shares a portion of the interest on these short-term investments with the borrower. Revenue received for the quarters ended March 31, 2003 and 2002, related to this program totaled $21 and $35, respectively.

The Company had loaned securities with a market value of $72,590 and $37,499 and secured collateral of $74,188 and $38,946 at March 31, 2003 and 2002, respectively. The Company maintains the loaned securities on its Statements of Financial Position as part of its invested assets. The Company has incurred no losses on the loan program since the program’s inception.

Limited partnerships at March 31, 2003 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.

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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE B — INVESTMENTS (Continued)

The components of equity in earnings of limited partnerships as reported on the Statements of Operations are as follows:

                 
    Three Months Ended   Three Months Ended
    March 31, 2003   March 31, 2002
   
 
Fixed Income
   $ (88 )   $ 53  
Real Estate
     368       1,016  
 
    
     
 
 
   $ 280     $ 1,069  
 
    
     
 

NOTE C — SEGMENT INFORMATION

The Company offers a range of products and services, but operates as one reportable life insurance segment. The Company’s Traditional Life insurance line includes permanent life, endowment life, term life and whole life policies. The Universal Life line includes all fixed universal life products sold by the Company. Variable universal life products are not sold by the Company. The Fixed Annuities line includes fixed ordinary deferred annuities, tax advantaged deferred annuities, annuities in pay-out and structured settlements. Neither variable nor equity indexed annuity products are sold by the Company. The Group Life and Other line includes group life insurance and disability income products. The Corporate Account line includes investment income earned from surplus not specifically allocable 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 lines and the common stock, limited partnership and remaining fixed maturity investments support the Corporate Account. Because the Company sold its entire common stock portfolio at the end of 2002, a larger percentage of the fixed maturity portfolio will support the Corporate Account in 2003 and future periods.

                                                     
                                Group                
Three Months Ended   Traditional   Universal   Fixed   Life &   Corporate        
March 31, 2003   Life   Life   Annuities   Other   Account   Total
 
 
 
 
 
 
Total policy revenue, net of reinsurance
   $ 8,963     $ 3,279     $ 1     $ 846     $ 0     $ 13,089  
Total investment-related and other income
     1,892       2,386       14,846       41       2,038       21,203  
 
    
     
     
     
     
     
 
   
Total revenues
   $ 10,855     $ 5,665     $ 14,847     $ 887     $ 2,038     $ 34,292  
 
    
     
     
     
     
     
 
Less: Total benefits and expenses
     9,406       4,309       11,488       810       0       26,013  
 
    
     
     
     
     
     
 
 
Income from operations, before taxes
   $ 1,449     $ 1,356     $ 3,359     $ 77     $ 2,038     $ 8,279  
 
    
     
     
     
     
     
 

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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE C — SEGMENT INFORMATION (Continued)

                                                     
                                Group                
Three Months Ended   Traditional   Universal   Fixed   Life &   Corporate        
March 31, 2002   Life   Life   Annuities   Other   Account   Total
 
 
 
 
 
 
Total policy revenue, net of reinsurance
   $ 8,589     $ 2,987     $ 1     $ 752     $ 0     $ 12,329  
Total investment-related and other income
     1,583       2,067       10,786       44       3,397       17,877  
 
    
     
     
     
     
     
 
   
Total revenues
   $ 10,172     $ 5,054     $ 10,787     $ 796     $ 3,397     $ 30,206  
 
    
     
     
     
     
     
 
Less: Total benefits and expenses
     8,573       4,013       10,068       846       0       23,500  
 
    
     
     
     
     
     
 
 
Income (loss) from operations, before taxes
   $ 1,599     $ 1,041     $ 719     $ (50 )   $ 3,397     $ 6,706  
 
    
     
     
     
     
     
 

NOTE D — 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 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 coverage. For its two newest products, ERIE Flagship Term2 and ERIE Target Term, the Company reinsures 50% and 90%, respectively, with unaffiliated reinsurers, subject to the Company’s $300 retention limit. For its disability income product, the Company has a 50% coinsurance agreement with its reinsurer. As of March 31, 2003, and 2002, $7.4 billion and $4.8 billion, respectively, of life insurance in force was ceded to other companies. The Company’s most significant reinsurance business is with Business Men’s Assurance Company of America (BMA), which reinsures a portion of the Company’s life and accident and health business. At March 31, 2003, the amount of in-force life insurance ceded to BMA totaled approximately $4.5 billion.

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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE D — REINSURANCE (Continued)

The effect of ceded reinsurance in the Statements of Operations is as follows:

                     
        Three Months Ended   Three Months Ended
        March 31, 2003   March 31, 2002
       
 
Revenues:
                
 
Direct policy revenue
   $ 16,400     $ 13,986  
 
Policy revenue ceded
     3,311       1,657  
 
    
     
 
 
Net policy revenue
     13,089       12,329  
 
Net investment income
     18,584       14,510  
 
Net realized gains on investments
     2,162       2,054  
 
Equity in earnings of limited partnerships
     280       1,069  
 
Other income
     177       244  
 
    
     
 
   
Total revenues
   $ 34,292     $ 30,206  
 
Benefits and expenses:
                
 
Death benefits
   $ 5,207     $ 3,865  
 
Reinsurance recoveries
     1,366       365  
 
    
     
 
 
Net death benefits
     3,841       3,500  
 
Interest on deposits and other Policyholder benefits
     11,987       11,572  
 
Increases in future life policy benefits
     3,126       2,545  
 
Reinsurance reserve (credits) charges
     (1,338 )     20  
 
    
     
 
 
Net increases in future life policy benefits
     1,788       2,565  
 
Amortization of deferred policy acquisition costs
     3,315       1,612  
 
Commissions
     2,895       1,694  
 
Reinsurance commission allowance
     1,554       750  
 
    
     
 
 
Net commissions
     1,341       944  
 
General expenses, taxes, licenses and fees
     3,741       3,307  
 
    
     
 
   
Total benefits and expenses
   $ 26,013     $ 23,500  
 
    
     
 
   
Income before income taxes
   $ 8,279     $ 6,706  
 
    
     
 

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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (Continued)

NOTE E — COMMITMENTS

The Company has outstanding commitments to invest up to $3.4 million in limited partnerships at March 31, 2003. These commitments will be funded as required through the end of the respective investment periods, which typically span 3 to 5 years.

NOTE F — 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.

NOTE G — NOTE PAYABLE TO ERIE INDEMNITY COMPANY

The Company has a $15,000 surplus note payable to the Erie Indemnity Company (EIC). This note bears an annual interest rate of 6.45%. Interest on the surplus note is scheduled to be paid semi-annually, subject to approval of the Pennsylvania Insurance Commissioner. The note will be payable on demand on or after December 31, 2005. The Company accrued interest of $242 in the first quarter of 2003 and 2002 which is payable to EIC.

The Company intends to issue an additional surplus note to EIC during the second quarter of 2003 in an amount not to exceed $25,000 in exchange for $25,000 in cash upon the approval of the Pennsylvania Insurance Department. All payments of interest and principal on this second note may be paid only out of unassigned surplus of EFL and are subject to prior approval by the Pennsylvania Insurance Commissioner. This note is being issued to strengthen the surplus of the Company.

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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, 2002 as filed with the Securities and Exchange Commission on March 27, 2003.

FINANCIAL OVERVIEW

Net income increased to $5.4 million, or $0.57 per share, in the first quarter of 2003, compared to $4.4 million or $0.46 per share, for the first quarter of 2002, an increase of 23.3%. Contributing to this growth were increases in policy revenue and net investment income.

Net income, excluding net realized capital gains and related federal income taxes increased to $4.0 million, or $0.42 per share, in the first quarter of 2003 compared to $3.1 million, or $0.32 per share, for the same period in 2002, an increase of 31.1%. Increases in policy revenue and net investment income during the quarter were partially offset by a decrease in equity in earnings of limited partnerships and an increase in amortization of deferred acquisition costs (DAC).

The table below reconciles the Company’s GAAP-basis net income to net income excluding net realized gains and related income taxes. Management believes this measure assists the financial statement reader in interpreting and evaluating the financial results of the Company by removing the effects of non-recurring gains and losses from investment sales, which could significantly impact the Company’s financial results from one period to another based on the timing of investment sales and resulting gains or losses.

                     
        Three months ended
        March 31,
       
        2003   2002
       
 
Net income
   $ 5,406     $ 4,386  
 
Net realized gains on investments
     (2,162 )     (2,054 )
 
Income tax expense on realized gains
     757       719  
 
    
     
 
   
Realized gains net of income tax expense
   $ (1,405 )   $ (1,335 )
 
    
     
 
   
Net income excluding net realized gains and related income taxes
   $ 4,001     $ 3,051  
 
    
     
 

REVENUES

Analysis of Policy Revenue

Total net policy revenue increased $0.8 million, or 6.2%, to $13.1 million in the first quarter of 2003, from $12.3 million during the same period in 2002. Contributing to this growth was an increase in net premiums on traditional life insurance policies of 13.3% to $9.4 million for the quarter ended March 31, 2003. Total policies in force on traditional life insurance products increased 9.4% to 191,257 at March 31, 2003, compared to 174,863 at March 31, 2002.

Sales of the Company’s newest traditional life products – ERIE Target Term and Erie Flagship Term2, continue to rise. These products, along with Erie Flagship Term2’s predecessor, Erie Flagship Term, generated direct premiums totaling $4.8 million and $2.5 million during the quarters ended March 31, 2003 and 2002, respectively. Net premiums for these products, which are heavily reinsured, totaled $1.7 million and $1.2 million for the three months ended March 31, 2003 and 2002, respectively.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Analysis of Investment-related Income

Net investment income increased $4.1 million, or 28.1%, to $18.6 million in the first quarter of 2003 from $14.5 million for the same period in 2002. The increase in net investment income for the first quarter of 2003 compared to similar periods in 2002 is related to larger invested balances in 2003, compared to 2002, partially offset by lower yields in 2003 due to lower interest rates.

Net realized gains on investments were $2.2 million in the first quarter of 2003, compared to $2.1 million in the first quarter of 2002. Net realized gains for the first quarter of 2003 were net of $3.4 million of impairment charges. There were no impairment charges in the first quarter of 2002. The first quarter 2003 impairment charges were from investments primarily in the energy, real estate and insurance sectors.

The Company recorded earnings in limited partnerships of $0.3 million in the first quarter of 2003, compared to earnings of $1.1 million during the same period in 2002. The 2003 decrease in partnership earnings relates to decreased earnings on real estate partnerships in 2003.

The Company’s performance of its fixed maturities and preferred stock compared to market indices is presented below:

         
    Two years ended
    March 31, 2003
(Pre-tax annualized returns)
   
Fixed maturities
     9.53 %
Preferred stock
     12.05 %
Other indices:
        
Lehman Brothers Global Aggregate Bond Index – Unhedged
     11.03 %

BENEFITS AND EXPENSES

Analysis of Policy-related Benefits and Expenses

Net death benefits on life insurance policies increased 9.7% in the first quarter of 2003 to $3.8 million from $3.5 million for the same period in 2002. 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 $0.4 million, or 3.6%, to $11.7 million in the first quarter of 2003 from $11.3 million in the first quarter of 2002. Annuity and universal life deposits

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

continue to increase. However, the interest expense on these deposits increased only slightly due to the interest rates credited on these deposits being lowered in 2003 and 2002. The interest rates credited on annuity and universal life deposits in 2003 and 2002 were at the following rates:

                 
    Annuity   Universal Life
    Deposits   Deposits
   
 
January 1, 2002 – February 19, 2002
     5.00% - 6.00 %     6.00% - 6.75 %
February 20, 2002 – October 7, 2002
     4.75% - 5.50 %     5.50% - 6.25 %
October 8, 2002 – December 2, 2002
     4.25% - 5.00 %     5.25% - 6.00 %
December 3, 2002 – February 24, 2003
     4.00% - 4.80 %     5.25% - 6.00 %
February 25, 2003 – March 10, 2003
     3.75% - 4.70 %     5.25% - 6.00 %
March 11, 2003 – March 31, 2003
     3.75% - 4.70 %     5.00% - 5.75 %

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. Future life policy benefits totaled $1.8 million in the first quarter of 2003, compared to $2.6 million in the first quarter of 2002. March 2002 included $0.9 million in adjustments to reflect a reduction in the reserve credit for rated business and the new term products.

Amortization of deferred policy acquisition costs increased $1.7 million to $3.3 million in the first quarter of 2003. Throughout the year the Company evaluates the recoverability of the DAC asset for new issues using an actuarial model that allocates actual expenses to the various lines and comparing them to assumed, or expected, expenses. Unrecoverable deferred costs are expensed in the period of determination. In the first quarter of 2003, a charge of $0.4 million was recorded to expense unrecoverable deferred costs.

Analysis of Other Expenses

General expenses and commissions increased $0.8 million, or 21.0%, to $4.4 million for the first quarter 2003, compared to $3.6 million for the same period in 2002. General 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 DAC. Such expenses include 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.

General expenses, net of DAC, increased $0.4 million, or 13.7%, to $3.1 million for the quarter ended March 31, 2003. This increase is the result of a contribution to the supplemental employee retirement plan for a recently retired executive of the Company.

Direct commissions to independent Agents 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, are deferrable as DAC. Most first-year and incentive commissions and some second-year commissions qualify for deferral as DAC. For the first quarter of 2003, net commission expense increased $0.4 million to $1.3 million, compared to $0.9 million for the first quarter of 2002. This increase can be attributed to the growth in annuity sales. Flexible premium deferred annuity commissions, a portion of which have been capitalized as commissions in the DAC, have increased $1.3 million to $1.6 million in 2003 from $0.3 million for the three months ended March 31, 2002.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

Investments

The Company’s investment strategies 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.

The Company’s invested assets are sufficiently liquid to meet commitments to our Policyholders. At March 31, 2003, the Company’s investment portfolio consisting of cash, investment grade bonds and investment grade preferred stock, totaled more than $1.2 billion or 83% of total assets. These resources provide the liquidity the Company requires to meet known and unforeseen demands on its funds.

The Company continually reviews the investment portfolio to evaluate positions that might incur other-than-temporary declines in value. For investment holdings, general economic conditions and/or conditions specifically affecting the underlying issuer or its industry, including downgrades by the major rating agencies, are considered in evaluating impairment in value. In addition to specific factors, other factors considered in 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 fixed maturity and preferred stock investments, the Company individually analyzes all positions with emphasis on those that 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 declines in value are 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 declines 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. The first quarter 2003 impairments of $3.4 million were previously discussed in the “Analysis of Investment–related Income” section and are related to impairments of 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 price risk and credit 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 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.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 for each policy based upon factors such as 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 for each policy based on the amount of Policyholder deposits (less applicable insurance and expense charges) plus interest earned on those deposits. Life insurance and annuity reserves are supported primarily by the Company’s long-term, fixed-income investments as the underlying policy reserves are generally also of a long-term nature.

Financial Ratings

Insurance companies are rated by rating agencies to provide insurance consumers and investors with meaningful information on the rated companies. Higher ratings generally indicate financial stability and a stronger ability to pay claims. The ratings are generally based upon factors relevant to Policyholders and are not directed toward return to investors.

The Company’s rating from A.M. Best was lowered from A+ (Superior) to A (Excellent) in March 2003. The A (Excellent) rating places the Company in the top 17% of more than 1,000 individual insurers or groups of insurers rated and continues to affirm the Company’s strong financial position. The Company also has a rating of B+ (Good) from Weiss Ratings, Inc. The B+ rating means that the Company offers good financial security and has the resources necessary to deal with a variety of adverse conditions.

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 three months ended March 31, 2003 was $0.6 million. The Company’s liquidity position remains strong as invested assets and cash and cash equivalents increased by more than $112.8 million during the first quarter of 2003 to $1.4 billion.

Annuity and universal life deposits, which do not appear as revenue on the Statement of Operations, 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 revenue. Annuity and universal life deposits were $65.5 million in the first quarter of 2003 and $33.7 million in the first quarter of 2002. The increased volatility in the equity markets has continued to help drive annuity sales.

The Company’s current commitments for expenditures as of March 31, 2003 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 $3.4 million in its real estate limited partnerships at March 31, 2003. 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 March 31, 2003 and 2002, there were no borrowings on this line of credit.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FACTORS THAT MAY AFFECT FUTURE RESULTS

Products with Interest Rate Guarantees

Several of the Company’s annuity and universal life products offer guaranteed interest rates to Policyholders. In response to the current interest rate environment, the Company has recently reduced the credited interest rates to historically low levels. Certain products are now within 5 basis points of the minimum interest rates guaranteed under these policies.

If the interest rates on fixed income securities continue to decline, the interest rates available in the marketplace may be insufficient to produce our current target profit margins or, in extreme situations, could produce negative profit margins on annuity and universal life deposits. In this situation, new policy issuance and new money received on existing contracts could be restricted.

The Company has filed a revision to current deferred annuity products to lower interest rate guarantees on newly issued policies to 3.0% in all policy years. The change has been approved and implemented in all states in which the Company is licensed. The Company has filed additional revisions to lower the interest rate guarantees on new deferred annuity products even further.

The Company has limited ability in its universal life and annuity policy contracts to restrict new deposits on existing contracts. New deposits are limited under the terms of the Company’s universal life and annuity contracts as follows:

  •   Universal life products provide for planned premium amounts. Additional unplanned premium payments may be made at any time during the insured’s life and before the end of the payment period. The amounts of such payments must be acceptable to the Company and be within IRS guidelines. Policies in force at March 31, 2003, have an estimated annualized planned premium of approximately $28.1 million.
 
  •   Flexible premium deferred annuity contracts allow the Company to limit deposits to a maximum of $25,000 per year. There are currently over 21,000 contracts in force.

The recovery of acquisition costs previously capitalized on annuity and universal life products is dependent on the future profitability of this business. Reduced investment margins over an extended period of time could affect the recoverability of the deferred policy acquisition asset.

During the first quarter of 2003, the average rates credited on flexible premium deferred annuities and universal life deposits were 4.7% and 5.5%, respectively. The current coupon yield on fixed maturities matched against our universal life and annuity products at March 31, 2003, was 6.5%.

Investment Market Conditions

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.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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’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. capital 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 2002 Annual Report on Form 10-K. The risks associated with interest rate guarantees on our universal life and annuity products are discussed in the Report on Form 10-K in Factors That May Affect Future Results on page 27. 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.

The Company also has exposure to credit risk through its portfolios of fixed maturity securities, preferred stock, mortgage loans and to a lesser extent short-term investments. This risk is defined as the potential loss in market value resulting from adverse changes in the borrower’s ability to repay the debt. The Company’s objective is to earn competitive returns by investing in a diversified portfolio of securities. The Company manages this risk by performing up front underwriting analysis and regular reviews by its investment staff. The fixed maturity investments are also maintained between minimum and maximum percentages of invested assets.

“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995: Certain forward-looking statements contained herein involve risks and uncertainties. These statements include certain discussions relating to underwriting, premium and investment income volume, business strategies, profitability and business relationships and the Company’s other business activities during 2003 and beyond. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “project,” “predict,” “potential” and similar expressions. These forward-looking statements reflect the Company’s current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that may cause results to differ materially from those anticipated in those statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict.

ITEM 4.  CONTROLS AND PROCEDURES

Within 90 days prior to the date of filing of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of this evaluation.

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PART II.  OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

Exhibits

     
Exhibit    
Number   Description of Exhibit
 
99.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes–Oxley Act of 2002

Reports on Form 8-K

On February 25, 2003, the Company filed a report on Form 8-K, reporting under Item 5, that a press release had been issued reporting the Company’s earnings for the quarter and year ended December 31, 2002.

On March 3, 2003, the Company filed a report on Form 8-K, reporting under Item 4, that effective March 3, 2003, Ernst & Young, LLP succeeded Malin, Bergquist & Company, LLP as the Company’s independent auditors. As mentioned in the Form 8-K, there were no disagreements with Malin, Bergquist & Company on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure during the Company’s two most recent fiscal years and throughout the date of the Form 8-K filing.

On March 27, 2003, the Company filed a report on Form 8-K/A, amending the Form 8-K filing of March 3, 2003. The amendment was filed to specify that Malin, Bergquist & Company, LLP was dismissed on March 27, 2003 as the Company’s independent auditors and that Ernst & Young, LLP was engaged as the Company’s independent auditors on March 28, 2003. Malin, Bergquist & Company, LLP’s reports on the Company’s financial statements for the past two years were unqualified and there were no disagreements on any matter of accounting principles, practices or financial statement disclosure. A consent letter was filed as an exhibit to the 8-K in which Malin, Bergquist and Company, LLP agreed with such statements.

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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
(Registrant)

Date: April 24, 2003   /s/ Jeffrey A. Ludrof
(Jeffrey A. Ludrof, President & CEO)

  /s/ Philip A. Garcia
(Philip A. Garcia, Executive Vice President & CFO)

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CERTIFICATIONS

I, Jeffrey A. Ludrof, certify that:

  1.   I have reviewed this quarterly report on Form 10-Q of Erie Family Life Insurance Company;
 
  2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
  4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
 
     
a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
     
b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
     
c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
  5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:
 
     
a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
     
b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
  6.   The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  April 24, 2003

  /s/ Jeffrey A. Ludrof
Jeffrey A. Ludrof, President & CEO

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CERTIFICATIONS

I, Philip A. Garcia, certify that:

  1.   I have reviewed this quarterly report on Form 10-Q of Erie Family Life Insurance Company;
 
  2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
  4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
 
     
a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
     
b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
     
c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
  5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:
 
     
a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
     
b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
  6.   The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  April 24, 2003

  /s/ Philip A. Garcia
Philip A. Garcia, Executive Vice President & CFO

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