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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

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

      Yes o                     No   x

Aggregate market value of voting stock of non-affiliates: There is no active market for the Class B voting stock and no Class B voting stock has been sold in the last year upon which a price could be established.

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date: 64,061,106 Class A shares and 2,890 Class B shares of Common Stock outstanding on February 28, 2003.

DOCUMENTS INCORPORATED BY REFERENCE:

1.		Portions of the Registrant’s Annual Report to Shareholders for the fiscal year ended December 31, 2002 (the “Annual Report”) are incorporated by reference into Parts I, II and III of this Form 10-K Report.
2.		Portions of the Registrant’s Proxy Statement relating to the Annual Meeting of Shareholders to be held April 29, 2003 are incorporated by reference into Parts I and III of this Form 10-K Report.

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INDEX

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PART I

Item 1. Business

     Erie Indemnity Company (the “Company”) is a Pennsylvania corporation which operates predominantly as a provider of sales, underwriting and policy issuance services to the Erie Insurance Exchange (the “Exchange”). The Company has served since 1925 as attorney-in-fact for the policyholders of the Exchange. Management fees earned in the capacity as attorney-in-fact comprised 77% of total Company revenue in 2002. The Company also operates as a property and casualty insurer through its wholly-owned subsidiaries, Erie Insurance Company, Erie Insurance Property and Casualty Company, and Erie Insurance Company of New York. The Exchange and its property and casualty subsidiary, Flagship City Insurance Company (“Flagship”), and the Company’s three property and casualty subsidiaries (collectively, the “Property and Casualty Group”) write personal and commercial lines property and casualty coverages exclusively through over 8,400 independent agents and pool their underwriting results. The Company also owns 21.6% of the common stock of Erie Family Life Insurance Company (“EFL”), an affiliated life insurance company of which the Exchange owns 53.5%. Together with the Exchange, the Company and its subsidiaries and affiliates operate collectively as the “Erie Insurance Group”.

     The Property and Casualty Group underwrites a broad line of personal and commercial coverages. Insurance products are marketed primarily in the Midwest, Mid-Atlantic and Southeast regions through independent agents comprising approximately 1,800 insurance agencies. The Property and Casualty Group is licensed to do business in sixteen states and in the District of Columbia and at December 31, 2002, operated in eleven states and the District of Columbia. Twenty-three branch offices are maintained throughout the eleven contiguous states in which the Property and Casualty Group does business. The Property and Casualty Group also underwrites voluntary assumed reinsurance business.

     As of December 31, 2002, the Company had over 4,000 full-time employees, of which 1,978 provide claims specific services exclusively for the Property and Casualty Group and 145 perform general services exclusively for EFL. Both the Exchange and EFL reimburse the Company monthly for the cost of these services. None of the Company’s employees is covered by a collective bargaining agreement. As evidenced by a recently completed culture survey completed by an international human resources consulting firm, the Company’s relationship with its employees continues to be good.

Information About Business Segments

     Reference is made to Note 15 of the “Notes to the Consolidated Financial Statements” included in the Annual Report for information as to total revenue and net income attributable to the three business segments (management operations, insurance underwriting operations and investment operations) in which the Company is engaged.

Management Operations

     The Company recognizes management fees due from the Exchange as income when the premiums are written because at that time the Company has performed substantially all of the services required to be performed, including sales, underwriting and policy issuance activities, but currently such fees are not paid to the Company by the Exchange until it collects the premiums. Historically, due to policy renewal and sales patterns, management fees earned are greater in the second and third quarters of the calendar year. While loss and loss adjustment expenses are not entirely predictable, historically such costs have been greater during the third and fourth quarters, influenced by the weather in the geographic regions, including the Midwest, Mid-Atlantic and Southeast regions, where the Property and Casualty Group operates. Management fees recorded from the Exchange account for approximately 77% of the Company’s revenues in 2002.

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     The management fee rate charged to the Exchange is set by the Company’s Board of Directors. The Company’s Board of Directors may change the management fee rate at its discretion. However, the maximum fee level which can be charged the Exchange, is limited by the agreement between each policyholder of the Exchange and the Company to 25% of the affiliated assumed premiums (the Property and Casualty Group, excluding the Exchange) and direct premiums written by the Exchange. The Board considers several factors in determining the management fee rate, including the relative financial position of the Exchange and the Company and the long-term capital needs of the Exchange to ensure its continued growth, competitiveness, and superior financial strength. From 1999 through December 31, 2002, the management fee rate charged the Exchange has been at its maximum permitted level of 25%. In December 2002, the Board voted to lower the management fee rate to 24% beginning January 1, 2003.

     All premiums collected, less the management fee paid to the Company, are retained by the Exchange for the purpose of paying losses, loss adjustment expenses, investment expenses and other miscellaneous expenses including insurance-related taxes, licenses and fees, certain information technology costs covered under a technology cost-sharing agreement, and for other purposes that are to the benefit of the policyholders.

     The Company receives a service agreement fee from the Exchange, at the rate of 7% of voluntary assumed written premium as compensation for the management and administration of its voluntary assumed reinsurance business from non-affiliated insurers. Service agreement revenue is earned when reinsurance premiums are earned because the services required to be performed by the Company are completed over the terms of the related treaties. The Company’s Board of Directors approved a reduction in the service fee rate from 7% to 6% beginning January 1, 2003.

     The Company also collects service charges from Policyholders for providing extended payment terms on policies written by the Property and Casualty Group. Service charges which are flat dollar charges for each installment billed beyond the first installment, are recognized when each additional billing is rendered to the policyholder.

     Both the service charges and service agreement fees are included in service agreement revenue in the Consolidated Statements of Operations.

     The cost of management operations includes all independent agent commission expenses as well as personnel and benefit costs, underwriting and policy issuance costs and other administrative expenses of the Company.

     The largest component of the cost of management operations is the cost of independent agent commissions and other incentive programs for the Company’s independent agents. Included in commission costs is the cost of scheduled commissions earned on premiums written, agency contingency awards based on the three-year average underwriting profitability of the business written with the Property & Casualty Group, accelerated commissions earned by start-up agencies and promotional incentives to agents.

     Personnel and benefit costs related to the sales, underwriting and issuance of policies and the administrative staff of the Company are the second largest component of the cost of management operations. Expenses other than personnel and benefit costs related to the underwriting and issuance of new business vary with the number of new policies. Underwriting reports, printing, postage and other cost of materials necessary for the underwriting and issuance of policies are included in the cost of management operations.

     Additional costs are incurred for general administrative expenses of the Company including the cost of office facilities, travel, telephone and communication costs, the cost of data processing and information technology and

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other miscellaneous expenses. Beginning in 2001, Erie Insurance Group initiated the eCommerce program and committed to new information technology infrastructure expenditures as part of the program. The Company’s share of these eCommerce infrastructure expenditures are included in the cost of management operations. Non-infrastructure costs of the eCommerce program which are subject to the technology cost-sharing agreement are included in the insurance underwriting operations segment.

     The Company’s management operations are affected by factors such as competition, insurance industry market conditions and changes in insurance distribution systems as well as general economic and investment conditions.

Insurance Underwriting Operations

     The Company’s property and casualty insurance subsidiaries participate in the underwriting results of the Exchange via a pooling arrangement under which the Exchange has a 94.5% participation in the underwriting results of the Property and Casualty Group. The Company’s property and casualty insurance subsidiaries, the Erie Insurance Company and the Erie Insurance Company of New York, have a 5.5% participation. As such, the Company has an interest in the underwriting profitability of the business written as well as the volume of premium written. An excess of loss reinsurance agreement between the Exchange, Erie Insurance Company and Erie Insurance Company of New York limits the amount of sustained ultimate net losses in any applicable accident year for the Erie Insurance Company and the Erie Insurance Company of New York. The excess of loss reinsurance agreement is excluded from the pooling arrangement.

Industry

     One of the distinguishing features of the property and casualty insurance industry is that in general its products are priced before its costs are known, as premium rates are generally determined before losses are reported. Current prices must be established from forecasts of the ultimate costs expected to arise from exposures underwritten during the coverage period when the rates are applied. Changes in statutory, “regulatory” and case law can significantly affect the liabilities associated with known risks after the insurance contract is in place. Property and casualty insurance companies’ ability to increase prices in response to declines in profitability are limited by the large number of competitors and the similarity of products offered, as well as regulatory constraints.

     The profitability of the property and casualty insurance business is influenced by many external factors some of which include rate competition, the severity and frequency of claims, terrorist actions, natural disasters, state regulation of premium rates, and other areas of competition, defaults of reinsurers, investment market conditions, general business conditions, court decisions that define and may expand the extent of coverage and the amount of compensation due for injuries and losses.

     Inflation also affects the loss costs of property and casualty insurers and, as a consequence, insurance rates. Insurance premiums are established before losses and loss adjustment expenses and the extent to which inflation may impact such expenses, are known. Consequently, in establishing premium rates, the Company attempts to anticipate the potential impact of inflation.

Lines of Business

     The Property and Casualty Group underwrites direct insurance business as well as assumed reinsurance business. The Property and Casualty Group underwrites a broad range of insurance. In 2002, personal lines comprised 70.5% of direct written premium revenue of the Property & Casualty Group while commercial lines constituted the remaining 29.5%. The core products in the

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personal lines are private passenger automobile (74.6%) and homeowners (22.3%) while the core commercial lines consist principally of multi-peril (38.7%), automobile (28.9%) and workers’ compensation (29.2%). In 2002, property lines comprised 94.7% of the assumed written premium revenue of the Property and Casualty Group while liability lines constituted the remaining 5.3%.

     See “Selected Segment Information” contained in the Annual Report, for the distribution of direct premiums written by the Property and Casualty Group.

Reinsurance

     The Property and Casualty Group conducts business in only 11 states and the District of Columbia, primarily in the Mid-Atlantic, Midwestern and Southeastern portions of the United States. A substantial portion of the business is private passenger and commercial automobile, homeowners and workers’ compensation insurance in Ohio, Maryland, Virginia and particularly, Pennsylvania. As a result, a single catastrophic occurrence or destructive weather pattern could materially adversely affect the results of operations and surplus position of the members of the Property and Casualty Group. Common catastrophe events include hurricanes, earthquakes, tornadoes, wind and hail storms, fires and explosions. Since 1993, the Property and Casualty Group had not purchased catastrophe reinsurance because Company management concluded the benefits of such coverage were outweighed by the costs of the coverage in light of the Exchange’s substantial surplus position and its ratio of net premiums written to surplus. The lower surplus levels of the Exchange, along with increasing catastrophe risk exposure as a result of accelerating policy growth, have resulted in management’s decision to purchase catastrophe reinsurance coverage. Effective January 1, 2003, the Property and Casualty Group entered into a reinsurance treaty to mitigate the future potential catastrophe loss exposure. The agreement is a property catastrophe reinsurance treaty that provides coverage of up to 95% of a loss of $415 million in excess of the Property and Casualty Group’s loss retention of $115 million per occurrence.

     Reference is also made to Note 12 of the “Notes to Consolidated Financial Statements” contained in the Annual Report for the year ended December 31, 2002, incorporated herein by reference, for a complete discussion of reinsurance transactions.

Combined Ratios

     The combined ratio is a standard industry measurement of the results of property and casualty insurance underwriting operations. The statutory combined ratio is the sum of the ratio of incurred losses and loss adjustment expenses to net premiums earned (“loss ratio”), the ratio of underwriting expenses incurred to net premiums written (“expense ratio”) and, the ratio of dividends to policyholders to net premiums earned (“dividend ratio”). The generally accepted accounting principles (“GAAP”) combined ratio is calculated in the same manner except that it is based on GAAP reported amounts and the denominator for each component is net premiums earned. A combined ratio under 100% generally indicates an underwriting profit; a combined ratio over 100% generally indicates an underwriting loss before contemplation of the time value of money. Investment income, federal income taxes and other non-underwriting income or expense are not reflected in the combined ratio. The profitability of the Property and Casualty Group is a function of income and expense from both its underwriting and investment operations.

     The ratios shown in the table below for the Company’s property and casualty insurance subsidiaries Erie Insurance Company and Erie Insurance Company of New York, are prepared in accordance with GAAP and with the National Association of Insurance Commissioners (NAIC) Codified Statutory Accounting Practices (“SAP”). The NAIC Codified SAP contain a provision allowing for prescribed or permitted accounting practices to be determined by each states’

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insurance commissioner. Accordingly, such discretion will continue to allow prescribed or permitted accounting practices that may differ from state to state.

     The 2002 loss ratio reflected continued prior accident year adverse loss development. In 2002, fourth quarter adjustments to strengthen reserves and increases in catastrophe losses on direct business were offset slightly by the effect of premium rate increases. The increased loss ratio in 2001 compared to 2000 resulted from increased loss severity in the Company’s private passenger automobile and workers’ compensation lines of business, combined with unaffiliated assumed voluntary reinsurance losses from the September 11th terrorist attack on the World Trade Center. The 2002 and 2001 expense and dividend ratio includes the Company’s share of expenses related to the eCommerce initiative, which account for 2.4 points and 1.0 points, respectively.

Investment Operations

     The Company’s primary invested assets include fixed maturities, equity securities and limited partnerships that constitute 30.0%, 8.2% and 3.9%, of total assets, respectively. Investment operations include investment income and realized gains and losses generated by those assets of the Company’s management and insurance underwriting operations. Investment operations performance is evaluated based on appreciation of assets and overall rate of return. Reference is made to Note 3 of the “Notes to Consolidated Financial Statements” contained in the Annual Report for the year ended December 31, 2002, incorporated herein by reference for a complete discussion of investment operations.

Financial Condition—Investments

     The Company’s investment strategy takes a long-term perspective emphasizing investment quality, diversification and investment returns providing for liquidity to meet the short and long-term commitments of the Company. Investments are managed on a total return approach that focuses on current income and capital appreciation. The Company’s investment portfolio, at market value, increased to $998.8 million at December 31, 2002, which represents 42.4% of total assets. Investment income reflected on the Consolidated Statements of Operations is affected by shifts in the types of investments in the portfolio, changes in interest rates and other factors. Net investment income was $55.4 million in 2002 compared to $49.9 million in 2001 and $48.4 million in 2000.

     The Company reviews the investment portfolio to evaluate positions that might have incurred 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. Reference is made to the Financial Condition section of the “Management’s Discussion and Analysis” contained in the Annual Report for the year ended December 31, 2002 incorporated

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herein by reference, for a complete discussion of the investment impairment policy.

     If the Company’s policy for determining the recognition of impaired positions were different, the Company’s Consolidated Statements of Financial Position and Statements 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 also has a 21.6% common stock interest in EFL of $48.5 million at December 31, 2002, which is accounted for under the equity method of accounting. EFL, which was organized in 1967 as a Pennsylvania-domiciled life insurance company, has an A.M. Best and Company Inc. (“A.M. Best”) rating of A+ (Superior). EFL is primarily engaged in the business of underwriting and selling non-participating individual and group life insurance policies, including universal life, disability income and individual and group annuity products in ten states and the District of Columbia.

     Reference is made to the Financial Condition section of the “Management’s Discussion and Analysis” contained in the Annual Report for the year ended December 31, 2002 incorporated herein by reference, for a complete discussion of investments.

Financial Ratings

     The financial status of the Company is not rated, however, its property/casualty insurance subsidiaries are rated by rating agencies. Insurance companies are rated by rating agencies to provide insurance consumers and investors with meaningful information on specific insurance companies. Higher ratings generally indicate financial stability and a strong ability to pay claims. The ratings are generally based upon factors relevant to policyholders and are not directed toward return to investors.

     Each member of the Property and Casualty Group currently has an A++ (“Superior”) rating from A.M. Best. A++ is the highest rating that A.M. Best gives to insurance companies, and represents a superior ability to meet ongoing obligations to policyholders. In evaluating an insurer’s financial and operating performance, A.M. Best reviews the insurer’s profitability, leverage and liquidity as well as the insurer’s book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its loss reserves and the experience and competency of its management. Each member of the Property and Casualty Group also has a rating of Api (“Strong”) from Standard & Poors. A rating of “A” means that the insurer has strong financial security characteristics. The subscript “pi” means the rating was based on publicly available information of the Exchange. Management believes that financial ratings are among many important factors in marketing the Property and Casualty Group’s insurance to its agents and customers.

Competition

     The markets in which the Property and Casualty Group operates are highly competitive. Property and casualty insurers generally compete on the basis of customer service, price, brand recognition, coverages offered, claim handling ability, financial stability and geographic coverage. In addition, because the insurance products of the Property and Casualty Group are marketed exclusively through independent insurance agents, these agents have the opportunity to represent more than one company. The Property and Casualty Group, thus, potentially faces competition within its appointed agencies based on product, price and service relationships.

     Market competition bears directly on the price charged for insurance products and services subject to the regulatory limitations. Growth is driven by

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a company’s ability to provide insurance services at a price that is reasonable and acceptable to the customer. In addition, the marketplace is affected by available capacity of the insurance industry. Industry surplus expands and contracts primarily in conjunction with profit levels generated by the industry. Growth is a product of a company’s ability to retain existing customers and to attract new customers, as well as movement in the average premium per policy charged by the Property and Casualty Group. The Property and Casualty Group has been able to raise prices or maintain current premium rates to gain competitive advantage in the insurance marketplace as a result of the current favorable market conditions in both commercial and personal property and casualty lines, which are generally referred to within the industry as “hard market conditions.” Hard market conditions are characterized by increasing premium rates, more stringent underwriting standards and a need for additional capital in the industry.

     The Erie Insurance Group, has followed several strategies which management believes will result in long-term underwriting performance which exceeds those of the property and casualty industry in general. First, the Erie Insurance Group employs an underwriting philosophy and product mix targeted to produce a Property and Casualty Group–wide underwriting profit, i.e., a combined ratio of less than 100% on a long-term basis, through careful risk selection and rational pricing. The careful selection of risks allows for lower claims frequency and loss severity, thereby enabling insurance to be offered at favorable prices.

     Second, Erie Insurance Group’s management focuses on consistently providing superior service to policyholders and agents that is reflected in its policy retention and new policy growth rates. Policy retention (the percentage of existing policyholders who renew their policies) remained excellent at 91.2%, 90.9% and 91.0% for the years ended December 31, 2002, 2001 and 2000, respectively, for all lines of business combined. Continued improvement in new policy growth drove the gains experienced in the Property and Casualty Group’s direct written premium. Policies in force increased 12.8% to 3.5 million in 2002 from 3.1 million in 2001 and 8.5% in 2001 from 2.9 million in 2000. See “Selected Segment Information” contained in the Annual Report for policy in force counts and retention rates for the Property and Casualty Group.

     Third, the Erie Insurance Group’s business model is designed to provide the advantages of localized marketing and claims servicing with the economies of scale from centralized accounting, administrative, underwriting, investment, information management and other support services.

     Finally, the Company carefully selects the independent agencies that represent the Property and Casualty Group. The Property and Casualty Group seeks to be the lead insurer with its agents in order to enhance the agency relationship and the likelihood of receiving the most desirable underwriting opportunities from its agents. The Company has ongoing, direct communications with the agency force. Agents have access to a number of Company-sponsored venues designed to promote sharing of ideas, concerns and suggestions with the senior management of the Property and Casualty Group with the goal of improving communications and service. These efforts have resulted in outstanding agency penetration and the ability to sustain long-term agency partnerships.

Reserves

     Loss reserves are established to account for the estimated ultimate costs of loss and loss adjustment expenses for claims that have been reported but not yet settled and claims that have been incurred but not yet reported. The estimated loss reserve for reported claims is based primarily upon a case-by-case evaluation of the type of risk involved and knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss. Estimates of reserves for unreported claims and loss settlement

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expenses are determined on the basis of costs, trends and reviews of historical reserving results.

     The Property and Casualty Group establishes loss and loss expense reserves for the Property and Casualty Group and for all states as a whole for various lines of business groupings. Bulk and incurred but not reported reserves are allocated to each company, state, and line of business. The Property and Casualty Group reviews the insurance laws of all states in which it operates, not just domiciliary states, to ensure that carried loss and loss adjustment expense reserves meet requirements. The statutory annual statements filed by the companies comprising the Property and Casualty Group contain actuarial opinions as to reserve adequacy as required by the states in which the Property and Casualty Group does business.

     The loss and loss adjustment expense reserves are computed in accordance with accepted loss reserving standards and principles for the purpose of making a reasonable provision for all unpaid loss and loss expense obligations under the terms of the Property and Casualty Group’s policies and agreements. However, the process of estimating the liability for unpaid losses and loss adjustment expenses is inherently judgmental and can be influenced by factors subject to variation. Possible sources of variation include claim frequency and severity, changing rates of inflation as well as changes in other economic conditions, judicial trends and legislative changes. It is unlikely that future losses and loss adjustment expenses will develop exactly as projected. The Property and Casualty Group continually refines reserves as experience develops and new information becomes known. The Property and Casualty Group reflects adjustments to reserves in the results of operations in the periods in which the estimates are changed. With the exception of reserves relating to certain workers’ compensation cases, which have been discounted at 2.5% in 2002 and 2001, loss reserves are not discounted.

     Adverse development of losses from prior accident years results in higher calendar year loss ratios and reduced calendar year underwriting results. To the extent prior year reserve deficiencies are indicative of deteriorating underlying loss trends and are material, the Property and Casualty Group’s pricing of affected lines of business would be increased to the extent permitted by state departments of insurance. Management also reviews trends in loss developments in order to determine if adjustments, such as reserve strengthening, are appropriate. Any adjustments considered necessary are reflected in current results of operations.

     The Company is addressing loss trends by controlling exposure growth, improving underwriting risk selection, instituting programs to control loss severity and obtaining additional premium on risks through rate increases. Pricing actions have been taken since 2001 to increase premiums charged to Property and Casualty Group policyholders. The Property and Casualty Group has also issued and is implementing more restrictive underwriting standards, the criteria under which policyholders are selected or renewed and premium rates are determined. Restricting underwriting standards will affect the number of new policyholders eligible for coverage with the Property and Casualty Group as well as the number eligible to renew and the terms of renewal. Taken together, pricing actions and restricting underwriting standards are designed to improve the overall underwriting result of the Property and Casualty Group. These actions will also reduce the growth rate of the Property and Casualty Group’s new and renewal premium and could adversely affect policy retention rates currently experienced by the Property and Casualty Group. To the extent the premium growth rate of the Property and Casualty Group direct written premiums is impacted by these actions, the growth in the Company’s management fee revenue will be proportionately affected.

     For a reconciliation of beginning and ending property and casualty unpaid losses and loss adjustment expense reserves for each of the last three

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years, see Note 9 of the “Notes to Consolidated Financial Statements” contained in the Annual Report for the year ended December 31, 2002, incorporated herein by reference.

     The following table sets forth the development of the Company’s property and casualty subsidiaries’ reserves for unpaid losses and loss adjustment expenses from 1993 through 2002.

Property and Casualty Subsidiaries of Erie Indemnity Company

Reserves for Unpaid Losses and Loss Adjustment Expenses