FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 2002
Commission file number 0-24000
| ERIE INDEMNITY COMPANY |
| (Exact name of registrant as specified in its charter) |
| PENNSYLVANIA | 25-0466020 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| 100 Erie Insurance Place, Erie, Pennsylvania | 16530 | |
| (Address of principal executive offices) | (Zip Code) |
| (814) 870-2000 |
| Registrant’s telephone number, including area code |
| 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 periods 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 issuer’s classes of common stock, as of the latest practical date. |
|
Class A Common Stock, no par value, with a stated value of $.0292
per share — 63,646,296 shares as of July 17, 2002. |
||
|
Class B Common Stock, no par value, with a stated value of $70 per
share — 3,070 shares as of July 17, 2002. |
| The common stock is the only class of stock the Registrant is presently authorized to issue. |
1
INDEX
ERIE INDEMNITY COMPANY
| PART I. FINANCIAL INFORMATION | ||
| Item 1. | Financial Statements (Unaudited) | |
| Consolidated Statements of Financial Position—June 30, 2002 and December 31, 2001 | ||
| Consolidated Statements of Operations—Three and six months ended June 30, 2002 and 2001 | ||
| Consolidated Statements of Comprehensive Income—Three and six months ended June 30, 2002 and 2001 | ||
| Consolidated Statements of Cash Flows—Six months ended June 30, 2002 and 2001 | ||
| Notes to Consolidated 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 1. | Legal Proceedings | |
| Item 4. | Submission of Matters to a Vote of Security Holders | |
| Item 6. | Exhibits and Reports on Form 8-K | |
| Item 11. | Statement Regarding Computation of Per Share Earnings | |
| SIGNATURES | ||
2
PART I. FINANCIAL INFORMATION
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
| (Dollars in thousands) | ||||||||||||||
| June 30, | December 31, | |||||||||||||
| ASSETS | 2002 | 2001 | ||||||||||||
| (Unaudited) | ||||||||||||||
INVESTMENTS |
||||||||||||||
Fixed maturities at fair value
(amortized cost of $622,297 and
$543,423, respectively) |
$ | 634,205 | $ | 559,873 | ||||||||||
Equity securities at fair value (cost of $166,221
and $159,727, respectively) |
188,577 | 193,798 | ||||||||||||
Limited partnerships (cost of $87,160 and
$79,668, respectively) |
86,883 | 81,596 | ||||||||||||
Real estate mortgage loans |
5,634 | 5,700 | ||||||||||||
Total investments |
$ | 915,299 | $ | 840,967 | ||||||||||
Cash and cash equivalents |
34,367 | 88,213 | ||||||||||||
Accrued investment income |
10,628 | 9,138 | ||||||||||||
Premiums receivable from Policyholders |
224,505 | 186,175 | ||||||||||||
Prepaid federal income tax |
0 | 14,056 | ||||||||||||
Reinsurance recoverable from Erie Insurance
Exchange |
535,540 | 491,055 | ||||||||||||
Note receivable from Erie Family Life
Insurance Company |
15,000 | 15,000 | ||||||||||||
Other receivables from Erie Insurance
Exchange and affiliates |
191,068 | 149,600 | ||||||||||||
Reinsurance recoverable non-affiliates |
366 | 372 | ||||||||||||
Deferred policy acquisition costs |
20,115 | 17,018 | ||||||||||||
Property and equipment |
14,308 | 14,635 | ||||||||||||
Equity in Erie Family Life Insurance Company |
44,075 | 44,683 | ||||||||||||
Other assets |
83,058 | 64,654 | ||||||||||||
Total assets |
$ | 2,088,329 | $ | 1,935,566 | ||||||||||
| (Continued) | ||||||||||||||
See Notes to Consolidated Financial Statements.
3
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
| (Dollars in thousands) | ||||||||||||
| June 30, | December 31, | |||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | 2002 | 2001 | ||||||||||
| (Unaudited) | ||||||||||||
LIABILITIES |
||||||||||||
Unpaid losses and loss adjustment expenses |
$ | 599,143 | $ | 557,278 | ||||||||
Unearned premiums |
363,611 | 311,969 | ||||||||||
Commissions payable and accrued |
126,550 | 110,121 | ||||||||||
Accounts payable and accrued expenses |
41,492 | 46,164 | ||||||||||
Federal income tax payable |
5,123 | 0 | ||||||||||
Deferred income taxes |
6,028 | 12,945 | ||||||||||
Dividends payable |
10,906 | 10,930 | ||||||||||
Employee benefit obligations |
15,834 | 20,904 | ||||||||||
Total liabilities |
$ | 1,168,687 | $ | 1,070,311 | ||||||||
SHAREHOLDERS’ EQUITY |
||||||||||||
Capital Stock |
||||||||||||
Class A common, stated value $.0292 per
share; authorized 74,996,930 shares;
67,032,000 shares issued; 63,694,299 and
63,836,323 shares outstanding in 2002 and
2001, respectively |
$ | 1,955 | $ | 1,955 | ||||||||
Class B common, stated value $70 per
share; authorized 3,070 shares;
3,070 shares issued and outstanding |
215 | 215 | ||||||||||
Additional paid-in capital |
7,830 | 7,830 | ||||||||||
Accumulated other comprehensive income |
25,286 | 35,222 | ||||||||||
Retained earnings |
983,600 | 913,406 | ||||||||||
Total contributed capital and retained earnings |
$ | 1,018,886 | $ | 958,628 | ||||||||
Treasury stock, at cost 3,337,701 shares
in 2002 and 3,195,677 shares in 2001 |
(99,244 | ) | (93,373 | ) | ||||||||
Total shareholders’ equity |
$ | 919,642 | $ | 865,255 | ||||||||
Total liabilities and shareholders’ equity |
$ | 2,088,329 | $ | 1,935,566 | ||||||||
See Notes to Consolidated Financial Statements.
4
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| Three Months Ended | Six Months Ended | |||||||||||||||||
| June 30 | June 30 | |||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||
| (Amounts in thousands, except per share data) | ||||||||||||||||||
MANAGEMENT OPERATIONS: |
||||||||||||||||||
Management fee revenue |
$ | 206,575 | $ | 167,828 | $ | 384,827 | $ | 313,497 | ||||||||||
Service agreement revenue |
7,776 | 6,838 | 15,118 | 13,250 | ||||||||||||||
Total revenue from management operations |
$ | 214,351 | $ | 174,666 | $ | 399,945 | $ | 326,747 | ||||||||||
Cost of management operations |
147,504 | 121,562 | 276,296 | 230,443 | ||||||||||||||
Net revenue from management operations |
$ | 66,847 | $ | 53,104 | $ | 123,649 | $ | 96,304 | ||||||||||
INSURANCE UNDERWRITING OPERATIONS: |
||||||||||||||||||
Premiums earned |
$ | 40,434 | $ | 33,917 | $ | 77,653 | $ | 66,091 | ||||||||||
Losses and loss adjustment expenses incurred |
34,050 | 26,096 | 63,387 | 53,057 | ||||||||||||||
Policy acquisition and other underwriting
expenses |
12,430 | 9,607 | 23,927 | 18,358 | ||||||||||||||
Total losses and expenses |
46,480 | 35,703 | 87,314 | 71,415 | ||||||||||||||
Underwriting loss |
$ | (6,046 | ) | $ | (1,786 | ) | $ | (9,661 | ) | $ | (5,324 | ) | ||||||
INVESTMENT OPERATIONS: |
||||||||||||||||||
Net investment income |
$ | 14,133 | $ | 12,365 | $ | 26,837 | $ | 24,508 | ||||||||||
Net realized (loss) gain on investments |
(5,801 | ) | 2,013 | (4,581 | ) | 2,725 | ||||||||||||
Equity
in earnings of Erie Family Life Insurance Company |
218 | 1,442 | 986 | 2,186 | ||||||||||||||
Equity in earnings of limited partnerships |
2,221 | 2,911 | 307 | 1,508 | ||||||||||||||
Net revenue from investment operations |
$ | 10,771 | $ | 18,731 | $ | 23,549 | $ | 30,927 | ||||||||||
Income before income taxes |
$ | 71,572 | $ | 70,049 | $ | 137,537 | $ | 121,907 | ||||||||||
Provision for income taxes |
23,746 | 22,920 | 45,510 | 39,992 | ||||||||||||||
Net income |
$ | 47,826 | $ | 47,129 | $ | 92,027 | $ | 81,915 | ||||||||||
Net income per share |
$ | 0.67 | $ | 0.66 | $ | 1.29 | $ | 1.15 | ||||||||||
Weighted average shares outstanding |
71,144 | 71,388 | 71,162 | 71,402 | ||||||||||||||
Dividends declared per share: |
||||||||||||||||||
Class A |
$ | 0.17 | $ | 0.1525 | $ | 0.34 | $ | 0.305 | ||||||||||
Class B |
25.50 | 22.875 | 51.00 | 45.75 | ||||||||||||||
See Notes to Consolidated Financial Statements.
5
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| Three Months Ended | Six Months Ended | ||||||||||||||||||
| June 30 | June 30 | ||||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
Net Income |
$ | 47,826 | $ | 47,129 | $ | 92,027 | $ | 81,915 | |||||||||||
Unrealized losses on securities: |
|||||||||||||||||||
Unrealized holding (losses) gains arising
during period |
(10,591 | ) | (625 | ) | (24,182 | ) | 2,582 | ||||||||||||
Less: Losses (gains) included in net income |
5,801 | (2,013 | ) | 4,581 | (2,725 | ) | |||||||||||||
Net unrealized holding losses
arising during period |
(4,790 | ) | (2,638 | ) | (19,601 | ) | (143 | ) | |||||||||||
Income tax benefit related to
unrealized losses |
1,676 | 923 | 6,860 | 50 | |||||||||||||||
Net depreciation of investments |
(3,114 | ) | (1,715 | ) | (12,741 | ) | (93 | ) | |||||||||||
Minimum pension liability adjustment |
0 | 0 | 4,315 | 0 | |||||||||||||||
Less: Tax asset related to pension
liability adjustment |
(0 | ) | 0 | (1,510 | ) | 0 | |||||||||||||
Net pension liability adjustment |
0 | 0 | 2,805 | 0 | |||||||||||||||
Other comprehensive loss, net of tax |
(3,114 | ) | (1,715 | ) | (9,936 | ) | (93 | ) | |||||||||||
Comprehensive income |
$ | 44,712 | $ | 45,414 | $ | 82,091 | $ | 81,822 | |||||||||||
See Notes to Consolidated Financial Statements.
6
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Six Months Ended | Six Months Ended | |||||||||||
| June 30, 2002 | June 30, 2001 | |||||||||||
| (Amounts in thousands, except per share data) | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||||||
Net income |
$ | 92,027 | $ | 81,915 | ||||||||
Adjustments to reconcile net income to net
cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
1,921 | 1,533 | ||||||||||
Deferred income tax (benefit) expense |
(1,966 | ) | 2,425 | |||||||||
Amortization of deferred policy acquisition costs |
13,832 | 11,680 | ||||||||||
Equity in income of limited partnerships |
(307 | ) | (1,508 | ) | ||||||||
Realized loss (gain) on investments |
4,581 | (2,725 | ) | |||||||||
Net amortization of bond discount |
(288 | ) | (109 | ) | ||||||||
Undistributed earnings of Erie Family Life
Insurance Company |
(127 | ) | (1,389 | ) | ||||||||
Deferred compensation |
456 | 261 | ||||||||||
(Increase) decrease in accrued investment income |
(1,490 | ) | 172 | |||||||||
Increase in receivables |
(124,278 | ) | (92,250 | ) | ||||||||
Policy acquisition costs deferred |
(16,929 | ) | (13,890 | ) | ||||||||
Increase in prepaid expenses and other assets |
(18,064 | |||||||||||