Item 1. Business
Erie Indemnity Company (the "Company") is a Pennsylvania corporation formed in 1925 to be the attorney-in-fact for Erie Insurance Exchange (the "Exchange"), a Pennsylvania-domiciled reciprocal insurance exchange. The Company's principal business activity consists of management of the affairs of the Exchange with fees from the Exchange accounting for approximately 74% of the Company's consolidated revenues. The Company also participates in the property/casualty insurance business through its three wholly owned subsidiaries, Erie Insurance Company ("Erie Insurance Co."), Erie Insurance Company of New York ("Erie NY") and Erie Insurance Property and Casualty Company ("Erie P&C") and through its management of the Flagship City Insurance Company ("Flagship"), a subsidiary of the Exchange. The Company and Exchange also own a 21.6% and 53.5% common stock interest, respectively, in Erie Family Life Insurance Company ("EFL"), an affiliated life insurance company. Together with the Exchange, the Company and its subsidiaries and affiliates operate collectively under the name Erie Insurance Group("The ERIE").
The ERIE is a regional insurance group that underwrites a broad line of personal and commercial coverages. Insurance products are marketed primarily in the Mid-Atlantic and Northeast regions through approximately 6,800 independent agents comprising approximately 1,400 insurance agencies. The property/casualty insurers managed by the Company are licensed to do business in sixteen states and in the District of Columbia and at December 31, 2000, operated in ten states and the District of Columbia. In the third quarter 2001, The ERIE intends to write all lines of insurance in its newest state, Wisconsin. Branch offices are maintained throughout the ten contiguous states in which the Company does business.
As of December 31, 2000, the Company had 3,440 full-time employees, of which 1,694 provide claims specific services exclusively for the property/casualty insurance companies of The ERIE and 116 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. The Company believes that its relationship with its employees is good.
The Company's wholly-owned subsidiaries, Erie Insurance Co. and Erie NY, participate in an intercompany pooling agreement with the Exchange. The pooling agreement provides for the Exchange to assume all premiums and losses, including related asset and liability amounts, from all property/casualty affiliates of The ERIE. This pooling agreement further provides for Erie Insurance Co. and Erie NY to share proportionately in the results of all of The ERIE's property/casualty insurance operations. Erie Insurance Co.'s and Erie NY's proportionate share of the reinsurance pool are 5.0 percent and 0.5 percent, respectively.
Information About Business Segments
Reference is made to Note 14 of the Notes to the Consolidated Financial Statements included in the Annual Report, page 46 for information as to total revenue and net income attributable to the two business segments (management operations and property/casualty insurance operations) in which the Company is engaged.
Management Operations
For services performed in its role as attorney-in-fact for the Policyholders of the Exchange, the Company charges the Exchange a management fee computed as a percentage of the affiliated assumed(Erie Insurance Co., Erie NY, Erie P&C and Flagship) and direct premiums written by the Exchange. The management fee is compensation for: (a) acting as attorney-in-fact for the Exchange, (b) managing the business and affairs of the Exchange, and (c) paying certain general administrative expenses not part of the settlement of losses or the management of investments.
The Company's Board of Directors may change the management fee at its discretion. However, the maximum fee level which can be charged the Exchange, is limited by the agreement between the Exchange and the Company (or its property/casualty affiliates), to 25 percent of the affiliated assumed and direct written premium. 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, which ultimately benefits The ERIE.
The management fee charged the Exchange was set at the following rates:
January 1, 1998 to December 31, 1998 24.25 percent January 1, 1999 to December 31, 2000 25.00 percent
In December 2000, the Board voted to maintain the 25 percent management fee rate for all of 2001.
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 and for other purposes that are to the benefit of the shareholders. The Company pays certain loss adjustment and investment expenses on behalf of the Exchange and is reimbursed fully for these expenses by the Exchange.
The Company receives a service agreement fee from the Exchange as compensation for the management and administration of voluntary assumed reinsurance business from non-affiliated insurers. The fee of 7% of voluntary reinsurance premiums assumed from non-affiliated insurers is compensation for accounting and operating expenses in connection with the administration of this business.
The Company collects service charges from policyholders for providing extended payment terms on policies written by the insurers managed by the Company. These charges, as well as the service agreement fee described above are included in service agreement revenue in the Consolidated Statements of Operations.
Property/Casualty Insurance Operations
Industry
One of the distinguishing features of the property/casualty insurance industry in general is that 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. This unique pricing environment affects the financial statements primarily through the loss reserves. Changes in statutory, "regulatory" and case law can significantly affect the liabilities associated with known risks after the insurance contract is in place. Property/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/casualty insurance business can be influenced by many external factors some of which include rate competition, the severity and frequency of claims, 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.
Lines of Business
The property/casualty insurers managed by the Company underwrite a broad range of insurance for risks of all sizes. In 2000, personal lines comprised 74.3% of direct and affiliated assumed premium revenue while commercial lines constituted the remaining 25.7%. The core products in the personal lines are private passenger automobile (75.8%) and homeowners (21.5%) while the core commercial lines consist principally of multi-peril (36.1%), automobile (31.4%) and workers compensation (28.9%).
See "Selected Segment Information" contained on page 28 of the Annual Report for the distribution of direct premiums written for The ERIE.
Reinsurance
Reference is made to Note 12 of the "Notes to Consolidated Financial Statements" contained in the Annual Report for the year ended December 31, 2000, page 44 through 45 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/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. Investment income, federal income taxes and other non-underwriting income or expense are not reflected in the combined ratio. The profitability of The ERIE 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/casualty insurance subsidiaries Erie Insurance Co. and Erie NY, are prepared in accordance with GAAP and with statutory accounting practices ("SAP") prescribed or permitted by state insurance authorities.
Combined Ratios Year Ended December 31, 2000 1999 1998 ------ ------ ------
GAAP Combined Ratio 108.4% 103.0% 99.5% ===== ===== =====
Statutory operating ratios: Loss ratio 80.1 74.6 70.4 Expense and dividend ratio 28.2 28.2 28.6 ----- ----- -----
Statutory Combined Ratio 108.3% 102.8% 99.0% ===== ===== =====
Increased loss severity in the Company's private passenger automobile as well as in commercial lines, combined with adverse development on assumed reinsurance losses from 1999 European windstorms, contributed to the increased combined ratio in 2000 compared to 1999.
Seasonal Factors
The Company's management fee is earned when premiums are written. Historically, due to policy renewal and sales patterns, writings are strongest 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 where the Company and affiliated property/casualty insurers operate.
Financial Condition-Investments
The Company's investment strategy takes a long-term perspective emphasizing investment quality, diversification and superior investment returns while also 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 $810,815,025 at December 31, 2000, which represents 48.2% 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, including net realized gains on investments, was $65,368,162 in 2000 compared to $58,089,690 in 1999, and $45,711,491 in 1998. Limited partnership income increased $4,092,360 to $4,733,285 in 2000 predominantly as the result of the $29,125,820 increase in limited partnership investments during the year. Fixed income and real estate limited partnerships, which comprise 69 percent of the total limited partnerships, produce a predictable earnings stream while private equity limited partnerships, which comprise 31 percent of the total limited partnerships, tend to provide a less predictable earnings stream.
Included in investments is a 21.6% common stock interest in EFL of $5,491,946 at December 31, 2000, 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 and individual and group annuity products in ten states and the District of Columbia. EFL most recently introduced its first accident and health product, disability income, in 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations", on pages 20 through page 22 of the Annual Report for the year ended December 31, 2000 for additional discussion.
Financial Ratings
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.
The Exchange, Flagship, Erie Insurance Co., Erie P&C and Erie NY all have current ratings of A++ (Superior) from A.M. Best with respect to their financial strength and claims-paying ability. 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. Management believes that this A.M. Best rating of A++ (Superior) is an important factor in marketing The ERIE's property/casualty insurance to its agents and customers.
Competition
The property/casualty markets in which the Company operates are highly competitive. Property/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 ERIE are marketed exclusively through independent insurance agents, most of which represent more than one company, The ERIE faces competition to retain qualified independent agencies and commonly competes for business within each agency.
Market competition bears directly on the price charged for insurance products and services provided within the insurance regulatory framework. Growth is driven by 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. Surplus expands and contracts primarily in conjunction with profit levels generated by the industry. Growth is evaluated based on 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 Company.
The Company, in managing the property/casualty insurers of The ERIE, has followed several strategies which the management of the Company believes have resulted in underwriting performance which exceed those of the property/casualty industry in general. First, the Company employs an underwriting philosophy and product mix targeted to produce an Erie Insurance Group-wide underwriting profit, i.e., a combined ratio of less than 100%, through careful risk selection, adequate pricing and prompt fair claims settlement practices. The careful selection of risks allows for lower claims frequency and loss severity, thereby enabling insurance to be offered at favorable prices. The Company, as well as the property/casualty industry, experienced increased loss severity in private passenger automobile and in commercial lines in 2000. This caused the loss and loss adjustment expense to outpace premiums earned. The Company's SAP combined ratio was 108.3 in 2000, better than the projected industry wide ratio of 110.3. Second, management focuses on consistently providing superior service to policyholders and agents in both underwriting and claims handling. The ERIE's ability to provide superior customer service is reflected in the Group policy retention and new policy growth rates. Policy growth in 2000 when compared to the same period in 1999 was strong as policy retention rates and new policy growth improved. Policies in force increased 6.5% to 2,865,553 from 2,689,849 in 1999 and 5.1% in 1999 from 2,558,730 in 1998. Policy retention (the percentage of existing policyholders who renew their policies) was 91.0%, 90.5% and 89.9% for the years ended December 31, 2000, 1999 and 1998 respectively. See "Selected Segment Information" contained on page 28 of the Annual Report for policy in force counts and retention rates for The ERIE.
Third, the Company maintains a business model 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, a careful agent selection process exists in which The ERIE seeks to be the lead underwriter 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 its agency force. Agents have a number of company sponsored venues including an Agents Advisory Council forum which shares ideas, concerns and suggestions with the senior management of the ERIE annually 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 expenses are determined on the basis of historical information by line of business as adjusted to current conditions. Inflation is implicitly provided for in the reserving function through analysis of costs, trends and reviews of historical reserving results.
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 Company continually refines reserves as experience develops and new information becomes known. The Company 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 2000, 1999 and 1998, loss reserves are not discounted.
For a reconciliation of beginning and ending property/casualty unpaid losses and loss adjustment expense reserves for each of the last three years, see Note 9 of the Notes to Consolidated Financial Statements contained in the Annual Report page 43.
The following table sets forth the development of the Company's net reserves for unpaid losses and loss adjustment expenses from 1994 through 2000. The table has been computed on a statutory basis without reflecting the estimated salvage and subrogation to be recovered on these losses in the future (See following discussion in "Financial Regulation" section).
Adverse development on loss reserves established for the year ended December 31, 1999 was the result of an increase in loss severity experienced by the Company on its direct business and additional losses on its voluntary assumed reinsurance business related to the December 1999 European windstorms. The top line shows the estimated liability that was recorded at the end of each of the indicated years for all current and prior year unpaid losses and loss expenses. The upper portion of the table shows re-estimations of the original recorded reserve as of the end of each successive year. The estimate is increased or decreased as payments are made and more information becomes known about the development of remaining unpaid claims. The lower portion of the table shows the cumulative amount paid in succeeding years for losses incurred prior to the Statement of Financial Position date. The cumulative deficiency or redundancy represents the aggregate amount by which original estimates of reserves as of that year-end have changed in subsequent years. An excess in reserves means that reserves established in prior years exceeded actual losses and loss adjustment expenses or were reevaluated at less than the originally reserved amount. A deficiency in reserves means that the reserves established in prior years were less than actual losses and loss adjustment expenses or were reevaluated at more than the originally reserved amount.
Government Regulation
The property/casualty insurers managed by the Company are subject to supervision and regulation in the states in which they transact business. The primary purpose of such supervision and regulation is the protection of policyholders. The extent of such regulation varies, but generally derives from state statutes which delegate regulatory, supervisory and administrative authority to state insurance departments. Accordingly, the authority of the
state insurance departments includes the establishment of standards of solvency which must be met and maintained by insurers, the licensing to do business of insurers and agents, the nature of the limitations on investments, the approval of premium rates for property/casualty insurance, the provisions which insurers must make for current losses and future liabilities, the deposit of securities for the benefit of policyholders, the approval of policy forms, notice requirements for the cancellation of policies and the approval of certain changes in control. In addition, many states have enacted variations of competitive rate-making laws which allow insurers to set certain premium rates for certain classes of insurance without having to obtain the prior approval of the state insurance department. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies.
The Company's property/casualty insurance subsidiaries may be required, under the solvency or guarantee laws of the various states in which they are licensed, to pay assessments to fund policyholder losses or liabilities of insolvent insurance companies. Depending on state law, insurers can be assessed an amount that is generally equal to between 1% and 2% of premiums written for the relevant lines of insurance in that state each year to pay the claims of an insolvent insurer. Certain states permit these assessments, or a portion thereof, to be recorded as an offset to future premium taxes. The property/casualty insurers managed by the Company have made accruals for their portion of assessments related to such insolvencies based upon the most current information furnished by the guaranty associations.
The Company's property/casualty insurers are also required to participate in various involuntary insurance programs for automobile insurance, as well as other property and casualty lines, in states in which such companies operate. These involuntary programs provide various insurance coverages to individuals or other entities that otherwise are unable to purchase such coverage in the voluntary market. These programs include joint underwriting associations, assigned risk plans, fair access to insurance requirements ("FAIR") plans, reinsurance facilities and windstorm plans. Legislation establishing these programs generally provides for participation in proportion to voluntary writings of related lines of business in that state. Generally, state law requires participation in such programs as a condition to doing business in that state. The loss ratio on insurance written under involuntary programs has traditionally been greater than the loss ratio on insurance in the voluntary market; however, the impact of these involuntary programs on the property/casualty insurers managed by the Company has been immaterial.
Pennsylvania regulations limit the amount of dividends EFL can pay its shareholders and limit the amount of dividends the Erie Insurance Co. and Erie Insurance Property and Casualty Company can pay to the Company, while New York state regulates the amount of dividends Erie NY can pay to the Company. The limitations are fully described and reference is made herein to Note 13 of the "Notes to Consolidated Financial Statements" contained in pages 45 through 46 in the Annual Report for the year ended December 31, 2000, incorporated by reference.
Financial Regulation
The Company's property/casualty insurance subsidiaries are required to file financial statements prepared using SAP with state regulatory authorities. The adjustments necessary to reconcile the Company's property/casualty insurance subsidiaries' net income and shareholders' equity prepared in accordance with SAP to net income and shareholders' equity prepared in accordance with GAAP are as follows:
Net Income ------------------------------- Year Ended December 31, ------------------------------- 2000 1999 ------------- -------------- (in thousands)
SAP amounts.................................... $ 5,091 $ 9,546 Adjustments: Deferred policy acquisition costs....................................... 1,798 542 Deferred income taxes........................ 32 226 Federal alternative minimum tax credit recoverable...................... 188 0 Salvage and subrogation...................... 221 158 Incurred premium adjustment.................. ( 798) ( 542) Other........................................ 10 ( 59) ------------ ------------ GAAP amounts................................... $ 6,542 $ 9,871 ============ ============
In 1998, the National Association of Insurance Commissioners ("NAIC") completed a process to codify SAP for certain insurance enterprises ("Codification"). These codified statutory accounting principles will be effective January 1, 2001. The Codification will result in changes to the Company's SAP financial statements only. The most significant change will be the recording of statutory deferred taxes which will result in an increase to statutory surplus of the Company's property/casualty insurance subsidiaries of $4,940 as of January 1, 2001.
The NAIC has adopted risk-based capital ("RBC") standards that require insurance companies to calculate and, report statutory capital and surplus needs based on a formula measuring underwriting, investment and other business risks inherent in an individual company's operations. These RBC standards have not affected the operation of the Company as each of the property/casualty insurance subsidiaries and affiliates has statutory capital and surplus in excess of RBC requirements.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Certain forward-looking statements contained herein involve risks and uncertainties. Many factors could cause future results to differ materially from those discussed. Examples of such factors include variations in catastrophe losses due to changes in weather patterns or other natural causes; changes in insurance regulations or legislation that disadvantage the members of the Group in the marketplace and recession, economic conditions or stock market changes affecting pricing or demand for insurance products or ability to generate investment income. Growth and profitability have been and will be potentially materially affected by these and other factors.
Item 2.
Item 2. Properties
The Company and its subsidiaries, the Exchange and its subsidiary, Flagship, and EFL share a corporate home office complex in Erie, Pennsylvania which contains 358,202 square feet and is owned by the Exchange. At December 31, 2000 in addition to the Erie branch office, the Company also operated 21 additional field offices in 10 states. Of these sites, 16 provide both agency support and claims services and are referred to as "Branch Offices", while the remaining 5 provide only claims services and are considered "Claims Offices".
The Company owns three of its field offices. Three field offices are owned by and leased from the Exchange. The annual rent expense incurred by the Company for the field offices and home office complex totaled $10,702,752 in 2000. One office is owned by and leased from EFL at an annual rental in 2000 of $308,732. The remaining 14 offices are leased from various unaffiliated parties at an aggregate annual rental in 2000 of approximately $1,556,473. Total rent and operating expenses for all office space occupied by the Company in 2000 was $18,203,686, of which $10,947,913, or approximately 60%, was reimbursed for office space used by it's affiliates.
Item 3.
Item 3. Legal Proceedings
Information concerning the legal proceedings of the Company is incorporated by reference to the section "Legal Proceedings" in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders to be held on April 24, 2001 to be filed with the Securities and Exchange Commission within 120 days of December 31, 2000 (the "Proxy Statement")
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of 2000.
PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
Reference is made to "Market Price of and Dividends on the Common Stock and Related Shareholder Matters" on page 48 of the Annual Report for the year ended December 31, 2000, incorporated herein by reference, for information regarding the high and low sales prices for the Company's stock and additional information regarding such stock of the Company.
As of February 28, 2001, there were approximately 1,149 beneficial shareholders of record of the Company's Class A non-voting common stock and 27 beneficial shareholders of record of the Company's Class B voting common stock.
On March 13, 2001, the Board of Directors approved the recommendation of the Executive Committee to terminate the Stock Redemption Plan. The Plan had entitled estates of qualified shareholders to cause the Company to redeem shares of stock of the Company at a price equal to the fair market value of the stock at the time of redemption, subject to certain limitations. No shares were ever redeemed under the Plan.
Of the 64,847,751 shares of the Company's Class A common stock outstanding as of February 28, 2001, approximately 22,042,432 shares are freely transferable without restriction or further registration under the Securities Act of 1933 (the Act), as amended unless purchased by affiliates of the Company as that terms is defined in Rule 144 under the Act. The 42,013,891 remaining outstanding shares of Class A common stock (the Restricted Shares) are held by the Company's directors, executive officers and their affiliates and are restricted securities that are eligible to be sold publicly pursuant to an effective registration statement under the Act or in accordance with the applicable exemption, including Rule 144, from the registration requirements under the Act. The Company is unable to estimate the amount of Restricted Shares that may be sold under Rule 144 since this amount will depend in part on the price for the Class A common stock, the personal circumstances of the sellers and other factors. Sales of a substantial number of Restricted Shares in the public market, or the availability of such shares, could adversely affect the price of the Class A common stock.
In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated for purposes of Rule 144) who beneficially has owned Restricted Shares for at least two years, including affiliates of the Company, is entitled to sell within any three-month period a number of shares that does not exceed the greater of: (1) one percent of the number of shares of Class A common stock then outstanding, or (2) the average weekly trading volume of the Class A common stock in The NASDAQ Stock MarketSM during the four calendar weeks preceding the date on which notice of sale is filed with the SEC. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. However, a person (or persons whose shares are aggregated for purposes of Rule 144) who is deemed not to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who beneficially has owned the Restricted Shares for at least three years at the time of sale, would be entitled to sell such shares under Rule 144(k) without regard to the aforesaid limitations.
Item 6.
Item 6. Selected Consolidated Financial Data
Reference is made to "Selected Consolidated Financial Data" on page 15 of the Annual Report for the year ended December 31, 2000, incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 16 through 26 of the Annual Report for the year ended December 31, 2000, incorporated herein by reference.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosure about Market Risk
Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 22 through 23 of the Annual Report for the year ended December 31, 2000, incorporated herein by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
Reference is made to the "Consolidated Financial Statements" included on pages 29 through 33 and to the "Quarterly Results of Operations" contained in the "Notes to Consolidated Financial Statements" on page 47 of the Annual Report for the year ended December 31, 2000, incorporated herein by reference.
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosures
None.
PART III
Item 11.
Item 11. Executive Compensation
The answer to this item is incorporated by reference to the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 24, 2001, except for the Performance Graph, which has not been incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The answer to this item is incorporated by reference to the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 24, 2001.
Item 13.
Item 13. Certain Relationships and Related Transactions
Since the formation of the Company and the Exchange in 1925, the Company, as the attorney-in-fact appointed by the policyholders of the Exchange, has managed the property/casualty insurance operations of the Exchange. The Company's operations are interrelated with the operations of the Exchange, and the Company's results of operations are largely dependent on the success of the Exchange.
The Company believes that its various transactions with the Exchange and EFL are fair and reasonable and have been on terms no less favorable to the Company than the terms that approximate those which could have been negotiated with an independent third party.
Reference is made to Note 10 of the "Notes to Consolidated Financial Statements" on pages 43 through 44 of the Annual Report for the year ended December 31, 2000, incorporated herein by reference, for a complete discussion of related party transactions.
Information with respect to certain relationships with Company directors is incorporated by reference to the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 24, 2001.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial statements, financial statement schedules and exhibits filed:
(1) Consolidated Financial Statements
Page* ---- Erie Indemnity Company and Subsidiaries:
Independent Auditors' Report on the Consolidated Financial Statements............................. 29 Consolidated Statements of Operations for the three years ended December 31, 2000, 1999 and 1998.............................. 30 Consolidated Statements of Financial Position as of December 31, 2000 and 1999 ................................................... 31 Consolidated Statements of Cash Flows for the three years ended December 31, 2000, 1999 and 1998.............................. 32 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 2000, 1999 and 1998.............................. 33 Notes to Consolidated Financial Statements...................... 34
(2) Financial Statement Schedules Page ---- Erie Indemnity Company and Subsidiaries:
Report of Independent Auditors on Schedules.................... 30 Schedule I. Summary of Investments - Other than Investments in Related Parties...................................... 31 Schedule IV. Reinsurance...................................... 32 Schedule VI. Supplemental Information Concerning Property/Casualty Insurance Operations......................... 33
All other schedules have been omitted since they are not required, not applicable or the information is included in the financial statements or notes thereto.
* Refers to the respective page of Erie Indemnity Company's 2000 Annual Report to Shareholders. The "Consolidated Financial Statements" and "Notes to Consolidated Financial Statements and Auditors' Report" thereon on pages 29 to 47 are incorporated by reference. With the exception of the portions of such Annual Report specifically incorporated by reference in this Item and Items 1, 5, 6, 7, 7a and 8, such Annual Report shall not be deemed filed as part of this Form 10-K Report or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934.
(3) Exhibits
Exhibit Number Description of Exhibit
3.1* Articles of Incorporation of Registrant
3.2** Amended and Restated By-laws of Registrant
3.3## Amended and Restated By-laws of Registrant dated March 9, 1999
4A* Form of Registrant's Class A Common Stock certificate
4B* Form of Registrant's Class B Common Stock certificate
10.1*** Retirement Plan for Employees of Erie Insurance Group, effective as of December 31, 1989
10.2*** Restatement of Supplemental Retirement Plan for Certain Members of the Erie Insurance Group Retirement Plan for Employees, effective as of January 1,
10.3*** Deferred Compensation Plan of Registrant
10.4*** Retirement Plan for Outside Directors of Registrant, effective as of January 1, 1991
10.5*** Employee Savings Plan of Erie Insurance Group, effective as of April 1, 1992
10.6*** Amendment to Employee Savings Plan of Erie Insurance Group
10.7*** Supplemental 401(k) Plan of Erie Insurance Group effective as of January 1, 1994
10.8*** Service Agreement dated January 1, 1989 between Registrant and Erie Insurance Company
10.9*** Service Agreement dated June 21, 1993 between Registrant and Erie Insurance Property & Casualty Company
10.10*** Service Agreement dated June 21, 1993 between Registrant and Flagship City Insurance Company
10.11*** Reinsurance Pooling Agreement dated January 1, 1992 between Erie Insurance Company and Erie Insurance Exchange
Exhibit Number Description of Exhibit
10.12*** Form of Subscriber's Agreement whereby policyholders of Erie Insurance Exchange appoint Registrant as their Attorney-in-Fact
10.13* Stock Redemption Plan of Registrant dated December 14, 1989
10.14* Stock Purchase Agreement dated December 20, 1991, between Registrant and Erie Insurance Exchange relating to the capital stock of Erie Insurance Company
10.15** Property Catastrophe Excess of Loss Reinsurance Agreement dated January 1, 1994 between Erie Insurance Exchange and Erie Insurance Co.
10.16**** Stock Redemption Plan of Registrant as restated December 12, 1995
10.17**** Property Catastrophe Excess of Loss Reinsurance Agreement dated January 1, 1995 between Erie Insurance Exchange and Erie Insurance Company of New York
10.18**** Service Agreement dated January 1, 1995 between Registrant and Erie Insurance Company of New York
10.19***** Consulting Agreement for Investing Services dated January 2, 1996 between Erie Indemnity Company and John M. Petersen
10.20***** Agreement dated April 29, 1994 between Erie Indemnity Company and Thomas M. Sider
10.21****** Aggregate Excess of Loss Reinsurance Agreement effective January 1, 1997 between Erie Insurance Exchange, by and through its Attorney-in-Fact, Erie Indemnity Company and Erie Insurance Company and its wholly-owned subsidiary Erie Insurance Company of New York
10.22# 1997 Annual Incentive Plan of Erie Indemnity Company
10.23# Erie Indemnity Company Long-Term Incentive Plan
10.24# Employment Agreement dated December 16, 1997 by and between Erie Indemnity Company and Stephen A. Milne
10.25# Employment Agreement dated December 16, 1997 by and between Erie Indemnity Company and Jan R. Van Gorder
Exhibit Number Description of Exhibit
10.26# Employment Agreement dated December 16, 1997 by and between Erie Indemnity Company and Philip A. Garcia
10.27# Employment Agreement effective December 16, 1997 by and between Erie Indemnity Company and John J. Brinling, Jr.
10.28### Employment Agreement effective June 30, 1999 by and between Erie Indemnity Company and Jeffrey A. Ludrof
10.29### Employment Agreement effective December 15, 1999 By and between Erie Indemnity Company and Douglas F. Ziegler
10.30### Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Stephen A. Milne
10.31### Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Jan R. Van Gorder
10.32### Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Philip A. Garcia
10.33### Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and John J. Brinling, Jr.
10.34### Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Jeffry A. Ludrof
10.35 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Stephen A. Milne
10.36 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Jan R. Van Gorder
10.37 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Philip A. Garcia
10.38 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and John J. Brinling, Jr.
10.39 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Jeffry A. Ludrof
10.40 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Douglas F. Ziegler
11 Statement re computation of per share earnings
13 2000 Annual Report to Shareholders. Reference is made to the Annual Report furnished to the Commission, herewith.
21 Subsidiaries of Registrant
27 Financial Data Schedule
99.1## Report of the Special Committee to the Board of Directors
* Such exhibit is incorporated by reference to the like numbered exhibit in Registrant's Form 10 Registration Statement Number 0-24000 filed with the Securities and Exchange Commission on May 2, 1994. ** Such exhibit is incorporated by reference to the like numbered exhibit in Registrant's Form 10/A Registration Statement Number 0-24000 filed with the Securities and Exchange Commission on August 3, 1994. *** Such exhibit is incorporated by reference to the like titled but renumbered exhibit in Registrant's Form 10 Registration Statement Number 0-24000 filed with the Securities and Exchange Commission on May 2, 1994. **** Such exhibit is incorporated by reference to the like titled exhibit in the Registrant's Form 10-K annual report for the year ended December 31, 1995 that was filed with the Commission on March 25, 1996. ***** Such exhibit is incorporated by reference to the like titled exhibit in the Registrant's Form 10-K/A amended annual report for the year ended December 31, 1995 that was filed with the Commission on April 25, 1996. ****** Such exhibit is incorporated by reference to the like titled exhibit in the Registrant's Form 10-K annual report for the year ended December 31, 1996 that was filed with the Commission on March 21, 1997. # Such exhibit is incorporated by reference to the like titled exhibit in the Registrant's Form 10-K annual report for the year ended December 31, 1997 that was filed with the Commission on March 25, 1998. ## Such exhibit is incorporated by reference to the like titled exhibit in the Registrant's Form 10-K annual report for the year ended December 31, 1998 that was filed with the Commission on March 30, 1999. ### Such exhibit is incorporated by reference to the like titled exhibit in the Registrant's Form 10-K annual report for the year ended December 31, 1999 that was filed with the Commission on March 23, 2000.
(b) Reports on Form 8-K:
During the quarter ended December 31, 2000, The Company did not file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 13, 2001 ERIE INDEMNITY COMPANY (Registrant)
Principal Officers
/s/ Stephen A. Milne Stephen A. Milne, President and CEO
/s/ Jan R. Van Gorder Jan R. Van Gorder, Executive Vice President, Secretary & General Counsel
/s/ Philip A. Garcia Philip A. Garcia, Executive Vice President & CFO
/s/ Timothy G. NeCastro Timothy G. NeCastro, Senior Vice President & Controller
Board of Directors
/s/ Samuel P. Black, III /s/ Claude C. Lilly, III Samuel P. Black, III Claude C. Lilly, III
/s/ J. Ralph Borneman, Jr. /s/ Stephen A. Milne J. Ralph Borneman, Jr. Stephen A. Milne
/s/ Patricia Garrison-Corbin Patricia Garrison-Corbin Henry N. Nassau
/s/ John M. Petersen Susan Hirt Hagen John M. Petersen
/s/ F. William Hirt /s/ Jan R. Van Gorder F. William Hirt Jan R. Van Gorder
/s/ Samuel P. Katz /s/ Robert C. Wilburn Samuel P. Katz Robert C. Wilburn
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders Erie Indemnity Company
We have audited the consolidated statements of financial position of Erie Indemnity Company and subsidiaries (Company) as of December 31, 2000 and 1999 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000, as contained in the 2000 annual report, incorporated by reference in the annual report on Form 10-K for the year ended December 31, 2000. In connection with our audits of the financial statements, we also have audited the financial statement schedules, as listed in the accompanying index. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Erie Indemnity Company and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ Brown, Schwab, Bergquist & Co. Brown, Schwab, Bergquist & Co.
Erie, Pennsylvania February 5, 2001
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
*Workers compensation incurred but not reported (IBNR) loss and loss adjustment reserves were discounted at 2.5% in 2000,1999 and 1998.
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Sequentially Exhibit Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ 3.1* Articles of Incorporation of Registrant
3.2** Amended and Restated By-laws of Registrant
3.3## Amended and Restated By-laws of Registrant dated March 9, 1999
4A* Form of Registrant's Class A Common Stock certificate
4B* Form of Registrant's Class B Common Stock certificate
10.1*** Retirement Plan for Employees of Erie Insurance Group, effective as of December 31, 1989
10.2*** Restatement of Supplemental Retirement Plan for Certain Members of the Erie Insurance Group Retirement Plan for Employees, effective as of January 1,
10.3*** Deferred Compensation Plan of Registrant
10.4*** Retirement Plan for Outside Directors of Registrant, effective as of January 1, 1991
10.5*** Employee Savings Plan of Erie Insurance Group, effective as of April 1, 1992
10.6*** Amendment to Employee Savings Plan of Erie Insurance Group
10.7*** Supplemental 401(k) Plan of Erie Insurance Group effective as of Janaury 1, 1994
10.8*** Service Agreement dated January 1, 1989 between Registrant and Erie Insurance Company
10.9*** Service Agreement dated June 21, 1993 between Registrant and Erie Insurance Property & Casualty Company
10.10*** Service Agreement dated June 21, 1993 between Registrant and Flagship City Insurance Company
10.11*** Reinsurance Pooling Agreement dated January 1, 1992 between Erie Insurance Company and Erie Insurance Exchange
Sequentially Exhibit Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ 10.12*** Form of Subscriber's Agreement whereby policyholders of Erie Insurance Exchange appoint Registrant as their Attorney-in-Fact
10.13* Stock Redemption Plan of Registrant dated December 14, 1989
10.14* Stock Purchase Agreement dated December 20, 1991, between Registrant and Erie Insurance Exchange relating to the capital stock of Erie Insurance Company
10.15** Property Catastrophe Excess of Loss Reinsurance Agreement dated January 1, 1994 between Erie Insurance Exchange and Erie Insurance Co.
10.16**** Stock Redemption Plan of Registrant restated as of December 12, 1995
10.17**** Property Catastrophe Excess of Loss Reinsurance Agreement dated January 1, 1995 between Erie Insurance Exchange and Erie Insurance Company of New York
10.18**** Service Agreement dated January 1, 1995 between Registrant and Erie Insurance Company of New York
10.19***** Consulting Agreement for Investing Services dated January 2, 1996 between Erie Indemnity Company and John M. Petersen
10.20***** Agreement dated April 29, 1994 between Erie Indemnity Company and Thomas M. Sider
10.21****** Aggregate Excess of Loss Reinsurance Agreement effective January 1, 1997 between Erie Insurance Exchange, by and through its Attorney-in-Fact, Erie Indemnity Company and Erie Insurance Company and its wholly-owned subsidiary Erie Insurance Company of New York
10.22# 1997 Annual Incentive Plan of Erie Indemnity Company
10.23# Erie Indemnity Company Long-Term Incentive Plan
10.24# Employment Agreement dated December 16, 1997 by and between Erie Indemnity Company and Stephen A. Milne
10.25# Employment Agreement dated December 16, 1997 by and between Erie Indemnity Company and Jan R. Van Gorder
Sequentially Exhibit Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ 10.26# Employment Agreement dated December 16, 1997 by and between Erie Indemnity Company and Philip A. Garcia
10.27# Employment Agreement effective December 16, 1997 by and between Erie Indemnity Company and John J. Brinling, Jr.
10.28### Employment Agreement effective June 30, 1999 by and between Erie Indemnity Company and Jeffrey A. Ludrof
10.29### Employment Agreement effective December 15, 1999 By and between Erie Indemnity Company and Douglas F. Ziegler
10.30### Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Stephen A. Milne
10.31### Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Jan R. Van Gorder
10.32### Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Philip A. Garcia
10.33### Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and John J. Brinling, Jr.
10.34### Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Jeffry A. Ludrof
10.35 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Stephen A. Milne 39
10.36 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Jan R. Van Gorder 40
10.37 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Philip A. Garcia 41
10.38 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and John J. Brinling, Jr. 42
10.39 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Jeffry A. Ludrof 43
10.40 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Douglas F. Ziegler 44
Sequentially Exhibit Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ 11 Statement re computation of per share earnings 45
13 2000 Annual Report to Shareholders. Reference is made to the Annual Report furnished to the Commission, herewith. 46-94
21 Subsidiaries of Registrant 95
27 Financial Data Schedule 96
99.1## Report of the Special Committee to the Board of Directors
* Such exhibit is incorporated by reference to the like numbered exhibit in Registrant's Form 10 Registration Statement Number 0-24000 filed with the Securities and Exchange Commission on May 2, 1994. ** Such exhibit is incorporated by reference to the like numbered exhibit in Registrant's Form 10/A Registration Statement Number 0-24000 filed with the Securities and Exchange Commission on August 3, 1994. *** Such exhibit is incorporated by reference to the like titled but renumbered exhibit in Registrant's Form 10 Registration Statement Number 0-24000 filed with the Securities and Exchange Commission on May 2, 1994. **** Such exhibit is incorporated by reference to the like titled exhibit in the Registrant's Form 10-K annual report for the year ended December 31, 1995 that was filed with the Commission on March 25, 1996. ***** Such exhibit is incorporated by reference to the like titled exhibit in the Registrant's Form 10-K/A amended annual report for the year ended December 31, 1995 that was filed with the Commission on April 25, 1996. ****** Such exhibit is incorporated by reference to the like titled exhibit in the Registrant's Form 10-K annual report for the year ended December 31, 1996 that was filed with the Commission on March 21, 1997. # Such exhibit is incorporated by reference to the like titled exhibit in the Registrant's Form 10-K annual report for the year ended December 31, 1997 that was filed with the Commission on March 25, 1998. ## Such exhibit is incorporated by reference to the like titled exhibit in the Registrant's Form 10-K annual report for the year ended December 31, 1998 that was filed with the Commission on March 30, 1999. ### Such exhibit is incorporated by reference to the like titled exhibit in the Registrant's Form 10-K annual report for the year ended December 31, 1999 that was filed with the Commission on March 23, 2000.