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 the quarter ended June 30, 2003
Commission file number 0-24000
ERIE INDEMNITY COMPANY
| PENNSYLVANIA | 25-0466020 | |
|
|
||
| (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) |
| (814) 870-2000 | ||
| Registrant’s telephone number, including area code |
| Not applicable | ||
| 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—64,089,906 shares as of July 17, 2003.
Class B Common Stock, no par value, with a stated value of $70 per share—2,878 shares as of July 17, 2003.
The common stock is the only class of stock the Registrant is presently authorized to issue.
INDEX
ERIE INDEMNITY COMPANY
PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements (Unaudited) | |
| Consolidated Statements of Financial Position—June 30, 2003 and December 31, 2002 | ||
| Consolidated Statements of Operations—Three months and six months ended June 30, 2003 and 2002 | ||
| Consolidated Statements of Comprehensive Income—Six months ended June 30, 2003 and 2002 | ||
| Consolidated Statements of Cash Flows—Six months ended June 30, 2003 and 2002 | ||
| Notes to Consolidated Financial Statements—June 30, 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 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 | 2003 | 2002 | ||||||||
| (Unaudited) | ||||||||||
INVESTMENTS |
||||||||||
Fixed maturities at fair value
(amortized cost of $725,437 and
$675,876, respectively) |
$ | 784,566 | $ | 708,068 | ||||||
Equity securities at fair value (cost of $162,564
and $175,593, respectively) |
196,570 | 194,078 | ||||||||
Limited partnerships (cost of $94,625 and
$85,709, respectively) |
101,189 | 91,046 | ||||||||
Real estate mortgage loans |
5,248 | 5,567 | ||||||||
Total investments |
$ | 1,087,573 | $ | 998,759 | ||||||
Cash and cash equivalents |
139,820 | 85,712 | ||||||||
Accrued investment income |
10,528 | 10,892 | ||||||||
Premiums receivable from Policyholders |
268,074 | 239,704 | ||||||||
Prepaid federal income tax |
1,737 | 12,000 | ||||||||
Reinsurance recoverable from Erie Insurance
Exchange on unpaid losses |
630,070 | 577,917 | ||||||||
Ceded unearned premiums to Erie
Insurance Exchange |
87,195 | 71,091 | ||||||||
Note receivable from Erie Family Life
Insurance Company |
15,000 | 15,000 | ||||||||
Other receivables from Erie Insurance
Exchange and affiliates |
211,147 | 180,041 | ||||||||
Reinsurance recoverable non-affiliates |
461 | 232 | ||||||||
Deferred policy acquisition costs |
23,844 | 21,713 | ||||||||
Property and equipment |
14,549 | 14,378 | ||||||||
Equity in Erie Family Life Insurance Company |
59,434 | 48,545 | ||||||||
Prepaid pension |
54,034 | 40,352 | ||||||||
Other assets |
47,871 | 41,340 | ||||||||
Total assets |
$ | 2,651,337 | $ | 2,357,676 | ||||||
(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 | 2003 | 2002 | |||||||||
| (Unaudited) | |||||||||||
LIABILITIES |
|||||||||||
Unpaid losses and loss adjustment expenses |
$ | 780,837 | $ | 717,015 | |||||||
Unearned premiums |
439,214 | 393,091 | |||||||||
Commissions payable and accrued |
148,812 | 135,311 | |||||||||
Securities lending collateral |
55,072 | 43,916 | |||||||||
Accounts payable and accrued expenses |
65,865 | 39,139 | |||||||||
Deferred income taxes |
29,149 | 12,618 | |||||||||
Dividends payable |
12,258 | 12,250 | |||||||||
Employee benefit obligations |
18,967 | 16,964 | |||||||||
Total liabilities |
$ | 1,550,174 | $ | 1,370,304 | |||||||
SHAREHOLDERS’ EQUITY |
|||||||||||
Capital Stock |
|||||||||||
Class A common, stated value $.0292 per
share; authorized 74,996,930 shares; 67,488,000
and 67,440,000 shares issued, respectively;
64,085,106 and 64,037,106 shares outstanding,
respectively |
$ | 1,968 | $ | 1,967 | |||||||
Class B common, convertible at a rate of 2,400
Class A shares for one Class B share, stated
value $70 per share; 2,880 and 2,900 shares
authorized, issued and outstanding, respectively |
202 | 203 | |||||||||
Additional paid-in capital |
7,830 | 7,830 | |||||||||
Accumulated other comprehensive income |
76,631 | 38,685 | |||||||||
Retained earnings |
1,116,392 | 1,040,547 | |||||||||
Total contributed capital and retained earnings |
$ | 1,203,023 | $ | 1,089,232 | |||||||
Treasury stock, at cost 3,402,894 shares
in 2003 and 2002 |
(101,860 | ) | (101,860 | ) | |||||||
Total shareholders’ equity |
$ | 1,101,163 | $ | 987,372 | |||||||
Total liabilities and shareholders’ equity |
$ | 2,651,337 | $ | 2,357,676 | |||||||
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 | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
OPERATING REVENUE: |
||||||||||||||||||
Management fee revenue |
$ | 232,737 | $ | 206,575 | $ | 439,983 | $ | 384,827 | ||||||||||
Premiums earned |
47,219 | 40,434 | 92,401 | 77,653 | ||||||||||||||
Service agreement revenue |
6,863 | 7,776 | 13,347 | 15,118 | ||||||||||||||
Total operating revenue |
$ | 286,819 | $ | 254,785 | $ | 545,731 | $ | 477,598 | ||||||||||
OPERATING EXPENSES: |
||||||||||||||||||
Cost of management operations |
$ | 170,087 | $ | 147,504 | $ | 324,460 | $ | 276,296 | ||||||||||
Losses and loss expenses incurred |
39,364 | 34,050 | 76,864 | 63,387 | ||||||||||||||
Policy acquisition and other underwriting
expenses |
14,135 | 12,430 | 27,487 | 23,927 | ||||||||||||||
Total operating expenses |
223,586 | 193,984 | 428,811 | 363,610 | ||||||||||||||
OTHER INCOME AND EXPENSES: |
||||||||||||||||||
Net investment income |
$ | 14,219 | $ | 14,133 | $ | 28,538 | $ | 26,837 | ||||||||||
Net realized gains (losses) on investments |
3,376 | (5,801 | ) | 3,969 | (4,581 | ) | ||||||||||||
Equity in (losses) earnings of limited
partnerships |
(1,420 | ) | 2,221 | (2,746 | ) | 307 | ||||||||||||
Total other income and expenses |
$ | 16,175 | $ | 10,553 | $ | 29,761 | $ | 22,563 | ||||||||||
Income before income taxes and equity in
earnings of Erie Family Life Insurance Co. |
$ | 79,408 | $ | 71,354 | $ | 146,681 | $ | 136,551 | ||||||||||
Less: provision for income taxes |
26,522 | 23,730 | 48,982 | 45,441 | ||||||||||||||
Equity in earnings of Erie Family Life Insurance
Company, net of tax |
$ | 1,572 | $ | 202 | $ | 2,659 | $ | 917 | ||||||||||
Net income |
$ | 54,458 | $ | 47,826 | $ | 100,358 | $ | 92,027 | ||||||||||
Net income per share (basic and diluted) |
$ | 0.77 | $ | 0.67 | $ | 1.41 | $ | 1.29 | ||||||||||
Weighted average shares outstanding |
70,997 | 71,144 | 70,997 | 71,162 | ||||||||||||||
Dividends declared per share: |
||||||||||||||||||
Class A |
$ | 0.19 | $ | 0.17 | $ | 0.38 | $ | 0.34 | ||||||||||
Class B |
28.50 | 25.50 | 57.00 | 51.00 | ||||||||||||||
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 | ||||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||
Net Income |
$ | 54,458 | $ | 47,826 | $ | 100,358 | $ | 92,027 | |||||||||||
Unrealized gains (losses) on securities: |
|||||||||||||||||||
Unrealized holding gains (losses) arising
during period |
46,747 | (10,591 | ) | 62,348 | (24,182 | ) | |||||||||||||
Less: (Gains) losses included in net income |
(3,376 | ) | 5,801 | (3,969 | ) | 4,581 | |||||||||||||
Net unrealized holding gains (losses)
arising during period |
43,371 | (4,790 | ) | 58,379 | (19,601 | ) | |||||||||||||
Income tax (expense) benefit related to
unrealized gains (losses) |
(15,180 | ) | 1,676 | (20,433 | ) | 6,860 | |||||||||||||
Net appreciation (depreciation) of investments |
28,191 | (3,114 | ) | 37,946 | (12,741 | ) | |||||||||||||
Minimum pension liability adjustment |
0 | 0 | 0 | 4,315 | |||||||||||||||
Less: Tax benefit related to pension
liability adjustment |
0 | 0 | 0 | (1,510 | ) | ||||||||||||||
Net pension liability adjustment |
0 | 0 | 0 | 2,805 | |||||||||||||||
Other comprehensive income (loss), net of tax |
28,191 | (3,114 | ) | 37,946 | (9,936 | ) | |||||||||||||
Comprehensive income |
$ | 82,649 | $ | 44,712 | $ | 138,304 | $ | 82,091 | |||||||||||
See Notes to Consolidated Financial Statements.
6
ERIE INDEMNITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Six Months Ended | Six Months Ended | |||||||||||
| June 30, 2003 | June 30, 2002 | |||||||||||
| (Dollars in thousands) | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||||||
Management fee received |
$ | 405,448 | $ | 344,106 | ||||||||
Service agreement fee received |
13,347 | 15,118 | ||||||||||
Premiums collected |
97,480 | 81,323 | ||||||||||
Net investment income received |
30,845 | 26,980 | ||||||||||
Dividends received from Erie Family Life |
858 | 858 | ||||||||||
Salaries and wages paid |
(58,934 | ) | (68,328 | ) | ||||||||
Commissions paid to Agents |
(222,733 | ) | (180,283 | ) | ||||||||
General operating expenses paid |
(40,555 | ) | (33,749 | ) | ||||||||
Losses and loss adjustment expenses paid |
(65,425 | ) | (57,107 | ) | ||||||||
Underwriting and acquisition costs paid |
(30,764 | ) | (28,023 | ) | ||||||||
Income taxes paid |
(38,036 | ) | (28,296 | ) | ||||||||
Net cash provided by operating activities |
$ | 91,531 | $ | 72,599 | ||||||||