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
| 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
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.
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
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.
3
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.
4
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.
5
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.
6
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.
7
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.
8
ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
All dollar amounts are in thousands
NOTE A — BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the 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 | ||||||||||||||