ITEM 1. BUSINESS
Erie Family Life Insurance Company (hereinafter referred to as "The Company", the "Company" or "Erie Family Life") was incorporated in the Commonwealth of Pennsylvania on May 23, 1967 and commenced business on September 1, 1967. The Company is primarily engaged in the business of underwriting and selling non-participating individual and group life insurance policies, including universal life. Erie Family Life also sells individual and group annuities. Erie Family Life is owned 21.6 % by Erie Indemnity Company and 52.2% by Erie Insurance Exchange. The remaining stock is held by the public, predominantly agents and employees of Erie Indemnity Company.
Erie Indemnity Company is a Pennsylvania business corporation formed in 1925 to be the attorney-in-fact for Erie Insurance Exchange, a Pennsylvania-domiciled reciprocal insurance exchange. The Erie Indemnity Company's principal business activity consists of management of the Exchange. The Erie Indemnity Company also is engaged in the property/casualty insurance business through its wholly owned subsidiaries, Erie Insurance Company (Erie Insurance Co.), Erie Insurance Company of New York (Erie NY) and Erie Insurance Property & Casualty Company (Erie P&C) and through its management of Flagship City Insurance Company (Flagship), a subsidiary of the Erie Insurance Exchange. Together with the Erie Insurance Exchange, the Erie Indemnity Company and its subsidiaries and affiliates, including Erie Family Life, operate collectively under the name "Erie Insurance Group."
Products
The Company's portfolio of life insurance includes the usual forms of permanent life, endowment and term policies, including whole life, family income, mortgage and decreasing term, group, and universal life insurance. In terms of face value, new life business issued in 1997 had a ratio of 4:1 of term insurance to whole life insurance coverage.
Life insurance premiums and annuity deposits have been the primary sources of cash inflows for the Company.
Classes of Life Insurance Percentage of Total Sales
For the year ended December 31,
Certain elements of revenue and expense reflect the requirements of Financial Accounting Standard (FAS) 97. FAS 97 prescribes a uniform method by which life insurance companies record certain long-term contracts, specifically annuities, universal life, and other interest sensitive products. This method involves separating the premium income into the "premium" portion (shown in revenue) which represents insurance protection purchased, and the "deposit" portion, which represents funds to be held at interest for future uses. Under this standard, the "deposit" portion of the premium received is accounted for using methods applicable to comparable "interest bearing obligations" of other types of financial institutions.
Structured settlement annuities sold to affiliate companies represented $17,780,582 in annuity deposits in 1997, $13,504,953 in 1996 and $22,018,313 in 1995. Also included in the annuity deposits are annuity contracts purchased by the Erie Insurance Group Retirement Plan for Employees. These annuity contracts purchased totaled $1,992,060 in 1997, $4,894,042 in 1996 and $6,024,125 in 1995.
Classes of Deposits Total Deposits
For the year ended December 31,
The Company reinsures with other insurance companies the portion of the insurance coverage above acceptable retentions. Beginning January 1, 1995, the retention limit on an acceptable risk was increased to $300,000 on each individual life policy written. Prior to January 1, 1995, the limit was $225,000.
The Company reinsures under a number of different reinsurance agreements. The primary purpose of this reinsurance is to enable the Company to write a policy in an amount larger than the risk it is willing to assume for itself. The secondary purposes are to receive commissions on the reinsurance ceded and in some instances to participate in the profits of the reinsured business by way of an "experience rating refund."
Marketing
The Company markets its products through independent agents throughout Pennsylvania, Maryland, Virginia, West Virginia, Ohio, Indiana, Tennessee, North Carolina and the District of Columbia. The policies sold are evaluated by the Company's Underwriting Department which selects or declines applicants for insurance. Premium on policies which are accepted may be standard or rated, depending on the nature of the risk.
Competition
The Company operates in a highly competitive industry which consists of numerous stock and mutual life insurance companies. A large number of established insurance companies compete in states in which the Company transacts business and many of these companies offer more diversified lines of insurance coverage and have substantially greater financial resources than does the Company. Competition is based primarily on price, product features, availability of insurance products and the financial strength of the Company.
Insurance Regulation
The Company is subject to supervision and regulation by the insurance departments of the states in which it does business. Although the extent of the regulation varies from state to state, generally the supervisory agencies are vested with broad administrative powers relating to the granting and revocation of licenses to transact business, regulation of trade practices, licensing of agents, approval of policy forms, deposits of security for the benefits of policy owners and investments and maintenance of specified reserves and capital, all designed primarily for the protection of policy owners. In accordance with the rules of the National Association of Insurance Commissioners, the Company is examined periodically by one or more of the state supervisory agencies. The latest such examination of the Company was conducted by the Pennsylvania Insurance Department and covered the five years ended December 31, 1995.
The Commonwealth of Pennsylvania has adopted the minimum risk-based capital requirements on domestic insurance companies that were developed by the National Association of Insurance Commissioners (NAIC). The formulas for determining the amount of risk-based capital specify various weighing factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. These formulas determine a ratio of the company's regulatory total adjusted capital to its authorized control level risk-based capital, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The NAIC levels and ratios are as follows:
Ratio of Total Adjusted Capital to NAIC Required Authorized Control Level Risk-Based Regulatory Event Capital (Less Than or Equal to)
Company action level 2 (or 2.5 with negative trends) Regulatory action level 1.5 Authorized control level 1 Mandatory control level .7
Erie Family Life has regulatory total adjusted capital of $91 million and a ratio of total adjusted capital to authorized control level risk-based capital of 6:1 at December 31, 1997. The Company's ratios significantly exceed the minimum NAIC risk-based capital requirements.
Life Reserves
The Company establishes and maintains actuarial reserves to meet its obligations on life insurance policies and annuities. These reserves are amounts which, with additions from premiums to be received on outstanding policies and with interest on such reserves compounded annually at certain assumed rates, are calculated to be sufficient to meet policy obligations at death or maturity in accordance with the mortality tables employed when the policies are issued.
Reserves for life insurance and income-paying annuity future policy benefits have been computed primarily by the net level premium method with assumptions as to anticipated mortality, withdrawals, lapses and investment yields. Deferred annuity future policy benefit liabilities have been established at accumulated values without reduction for surrender charges. Reserves for universal life and investment contracts are based on the contract account balance, if future benefit payments in excess of the account balance are not guaranteed, or the present value of future benefit payments when such payments are guaranteed. Variations are inherent in such calculations due to the estimates and assumptions necessary in the calculations. Interest rate assumptions for non-interest sensitive life insurance range from 3.5% to 4% on policies issued in 1980 and prior years and 6% to 7.25% on policies issued in 1981 and subsequent years. Mortality and withdrawal assumptions are based on tables typically used in the industry.
Annuities are subject to varying interest rates determined at the discretion of the Company subject to certain minimums. During 1997, annuity deposits earned interest at rates ranging from 5.00% to 6.25%. Management believes the fair value of annuity and universal life deposits approximates the amounts recorded in the financial statements, since these obligations are generally subject to fluctuating interest rates.
Employees
Services of eighty-one full-time Employees are provided through Erie Indemnity Company. All employees are salaried and ten are officers. These Employee expenses along with other operating expenses are paid by the Erie Indemnity Company and reimbursed on a monthly basis. None of the Employees are covered by collective bargaining agreements and the Company believes its Employee relations are good.
Other Data
The Company's Lapse Rate for 1997 was 9.0%.
Reinsurance Profitability - Not Applicable.
New Types of Insurance - Not Applicable.
Total Insurance In Force for the last five years Net of Reinsurance was:
1997 - $ 10,754,141,000 1996 - $ 9,646,962,000 1995 - $ 8,370,940,000 1994 - $ 7,481,537,000 1993 - $ 6,428,223,000
ITEM 2.
ITEM 2. PROPERTIES
The Company owns no real property and no tangible personal property used in the operation of its business except office supplies and forms. The Company does, however, own real property for investment purposes as described under ITEM 1 INVESTMENTS. The executive and administrative offices of the Company are located in the headquarters office of Erie Insurance Group in Erie, Pennsylvania. The Company pays other members of the group an amount determined by an arm's length agreement for office space and for the use of facilities, equipment and services.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceedings other than ordinary routine litigation incidental to its business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote to shareholders during the fourth quarter of 1997.
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Currently there is no market on which the Company's stock is traded. The Company had 1,145 recordholders of Common Stock at December 31, 1997.
Date Dividends Declared Date Dividends Paid Dividends per Share*
February 29, 1996 April 1, 1996 .125 May 1, 1996 July 1, 1996 .125 June 17, 1996 October 1, 1996 .125 September 17, 1996 January 2, 1997 .125 March 5, 1997 April 1,1997 .135 April 29, 1997 July 1, 1997 .135 June 17, 1997 October 1, 1997 .135 September 15, 1997 January 2, 1998 .135
*Adjusted to reflect a three-for-one stock split which was effective May 2, 1996.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in "Selected Financial Data" on Page 14 of the Company's 1997 Annual Report is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION
The information set forth on pages 15 through 22 of the Company's 1997 Annual Report is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The 1997 Financial Statements and the Company's independent auditor's report on pages 24 through 32 of the Company's 1997 Annual Report are incorporated herein by reference, as is the unaudited information set forth in the Notes to the Financial Statements under the caption "Unaudited Quarterly Summary of Operations" on page 32.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The Company is a member of an insurance holding company system pursuant to Pennsylvania law under which insurance companies are required to have nominating, audit and executive compensation committees composed solely of directors who are not officers, employees or controlling shareholders of the Company or any entity controlling the Company. Insurance companies can satisfy this requirement if the insurance company is controlled by an insurer or a publicly held corporation that has committees that comply with this requirement. Erie Indemnity Company, holder of 21.6% of the Company's stock directly and 52.2% of the Company's stock as attorney-in-fact for Erie Insurance Exchange, has committees which meet these requirements.
The following table sets forth the compensation paid by the Company during each of the three fiscal years ended December 31, 1997, 1996, and 1995, to the chief executive officer of the Company and the four other most highly compensated executive officers of the Company during 1997 for services rendered in all capacities to the Company, Erie Indemnity Company, Erie Insurance Exchange (the "Exchange") and their subsidiaries and affiliates.
Annual Compensation
Name and Other Annual All Other(2) Principal Position Year Salary Bonus(1) Compensation Compensation
Stephen A. Milne 1997 $539,462 $174,697 $ 1,014 $ 66,219 Chief Executive 1996 467,305 39,351 1,014 26,020 Officer 1995 245,611 26,623 927 39,993
Jan R. Van Gorder 1997 $321,032 $103,469 $ 2,268 $ 26,263 Executive Vice 1996 312,555 25,433 1,014 26,431 President, Secretary 1995 296,095 26,725 1,029 29,625 & General Counsel
John J. Brinling, 1997 $214,395 $ 68,733 $ 2,268 $ 27,209 Jr., Executive 1996 202,126 34,652 946 24,098 Vice President of 1995 184,104 20,853 877 28,837 EFL
Philip A. Garcia 1997 $160,703 $ 58,744 $ 383 $ 4,470 Executive Vice 1996 142,255 9,039 332 3,966 President & Chief 1995 132,617 7,905 201 3,114 Financial Officer(3)
Dennis M. Geib 1997 $166,533 $ 52,127 $ 1,943 $ 4,094 Senior Vice 1996 158,261 10,157 1,900 4,072 President 1995 148,365 8,868 1,841 3,300
(1) The amounts indicated in the bonus column above represent amounts earned by the named executives during 1997 under the Company's annual incentive plan. The purpose of the annual incentive plan is to promote the best interests of the Erie Insurance Group while enhancing shareholder value of the Company by basing a portion of selected employees' compensation on the performance of such employee and the Company. Performance measures are established by the Executive Compensation Committee based on the attainment of individual performance goals and Company financial goals compared to a selected peer group.
(2) Amounts shown include matching contributions made by the Company pursuant to the Company's Employee Savings Plan, premiums paid by the Company on behalf of the named individuals on the Split Dollar Plan insurance policies and miscellaneous expense reimbursements. For the year 1997, contributions made to the Employee Savings Plans amounted to $12,194, $8,676, $6,432, $4,470, and $4,094 on behalf of Messrs. Milne, Van Gorder, Brinling, Garcia and Geib, respectively. For the year 1996, contributions to the Employee Savings Plan amounted to $11,729, $8,689, $6,026, $3,966, and $4,072 on behalf of Messrs. Milne, Van Gorder, Brinling, Garcia and Geib. For the year 1995, contributions made to the Employee Savings Plan amounted to $5,424, $6,849, $4,910, $3,114, and $3,300 on behalf of Messrs. Milne, Van Gorder, Brinling, Garcia and Geib, respectively. Premiums paid during 1997 for Split Dollar Life insurance policies for Messrs. Milne, Van Gorder, Brinling, Garcia and Geib, respectively, are as follows: $51,531, $17,587, $17,700, $-0- and $-0-. Premiums paid during 1996 for Split Dollar Life insurance policies for Messrs. Milne, Van Gorder, Brinling, Garcia and Geib, respectively, are as follows: $14,291, $17,742, $18,072, $-0- and $-0-. Premiums paid during 1995 for Split Dollar Life insurance policies for Messrs. Milne, Van Gorder, Brinling, Garcia and Geib are as follows: $28,786, $17,420, $18,144, $-0- and $-0-. The Company is entitled to recover the premiums from any proceeds paid on such Split Dollar Life insurance policies and has retained a collateral interest in each policy to the extent of the premiums paid with respect to such policies. For the year 1997, miscellaneous expense reimbursements amounted to $2,494, $-0-, $3,077, $-0- and $-0- for Messrs. Milne, Van Gorder, Brinling, Garcia and Geib. For the year 1996, no miscellaneous expenses were incurred for Messrs. Milne, Van Gorder, Brinling, Garcia and Geib. For the year 1995, miscellaneous expense reimbursements amounted to $5,783, $5,356, $5,783, $-0- and $-0- for Messrs. Milne, Van Gorder, Brinling, Garcia and Geib, respectively.
(3) Mr. Garcia became Executive Vice President and Chief Financial Officer on October 2, 1997.
Agreements with Executive Officers
Upon the recommendation of the Executive Compensation Committee of the Company's Board of Directors the Company entered into employment agreements in December, 1997 with the following four senior executive officers of the Company: John J. Brinling, Jr., Executive Vice President of the Company; Stephen A. Milne, President and Chief Executive Officer; Philip A. Garcia, Executive Vice President and Chief Financial Officer of the Company, and Jan R. Van Gorder, Senior Executive Vice President, Secretary and General Counsel of the Company. The employment agreements have the following principal terms:
(a) For Mr. Milne a four year term expiring in December, 2001 and for the other executives a two year term expiring in December, 1999, unless the agreement is theretofore terminated in accordance with its terms, with or without cause, or due to the disability or death of the officer or notice of non-renewal is given by the Company or the executive 30 days before any anniversary date;
(b) A minimum annual base salary at least equal to the executive's annual base salary at the time the agreement was executed, subject to periodic review to reflect the executive's performance and responsibilities, competitive compensation levels and the impact of inflation;
(c) The eligibility of the executive under the Company's incentive compensation programs and employee benefit plans;
(d) The establishment of the terms and conditions upon which the executive's employment may be terminated by the Company and the compensation of the executive in such circumstances. The agreements provide generally, among other things, that if the employment of an executive is terminated without Cause (as defined in the agreement) by the Company or by the executive for Good Reason (as defined in the agreement) then the executive shall be entitled to receive an amount equal to the sum of: (i) three times his highest annual base salary during the preceding three years plus an amount equal to the total of the executive's highest awards during the preceding three years under the Company's bonus and other short-term incentive compensation plans; (ii) any award or other compensation to which the executive is entitled under any of the Company's incentive compensation programs and employee benefit plans as well as for the continuing participation, for a period of three years following termination, in all life, medical and dental insurance programs and other benefit plans to the extent the executive and his dependents were eligible to participate in such programs immediately prior to his termination; and (iii) accrued benefits under the Company's Supplemental Executive Retirement Plan become immediately vested and nonforfeitable.
(e) Provisions relating to confidentiality and non-disclosure following an executive's termination; and
(f) An agreement by the executive not to compete with the Company for a period of one year following his termination, unless his termination was without Cause.
Stock Options and Stock Appreciation Rights
The Company does not have a stock option plan, nor has it ever granted any stock option or stock appreciation right to any of the persons named in the Summary Compensation Table.
The Company has established a Long-Term Incentive Plan that is designed to enhance the growth and profitability of the Company by providing the incentive of long term rewards to key employees who are capable of having a significant impact on the performance of the Company; to attract and retain employees of outstanding competence and ability; and to further align the interest of such employees with those of shareholders of the Company. Each of the named executives has been granted awards of phantom share units under the Company's Long-Term Incentive Plan based upon a target award calculated as a percentage of the executives' base salary. The total value of any phantom share units will be determined at the end of the performance period based upon the growth in the Company's retained earnings. Each executive will then be entitled to receive shares of restricted Class A Common Stock of the Company equal to the dollar value of the phantom share units at the end of the performance period. The vesting period for the restricted Class A common shares issued to each executive is three years after the end of the performance period. If an executive ceases to be an employee prior to the end of the performance period, the executive forfeits all phantom share units awarded. If an executive ceases to be an employee prior to the end of the vesting period, the executive forfeits all unvested restricted shares previously granted.
(1) There is no maximum payout limitation for a specific performance period. However, the maximum value of phantom share units that may be earned by any named executive in any year shall not exceed $500,000.
Pension Plan
The following table sets forth the estimated total annual benefits payable upon retirement at age 65 under the Erie Insurance Group Retirement Plan for Employees and the Supplemental Employee Retirement Plan.
PENSION PLAN TABLE
Years of Service Remuneration 15 20 25 30 35 - -------------------------------------------------------------------------- $ 200,000 60,000 80,000 100,000 120,000 120,000 250,000 75,000 100,000 125,000 150,000 150,000 300,000 90,000 120,000 150,000 180,000 180,000 350,000 105,000 140,000 175,000 210,000 210,000 400,000 120,000 160,000 200,000 240,000 240,000 450,000 135,000 180,000 225,000 270,000 270,000 500,000 150,000 200,000 250,000 300,000 300,000 550,000 165,000 220,000 275,000 330,000 330,000 600,000 180,000 240,000 300,000 360,000 360,000 650,000 195,000 260,000 325,000 390,000 390,000 700,000 210,000 280,000 350,000 420,000 420,000 750,000 225,000 300,000 375,000 450,000 450,000
The compensation covered by such plan is the base salary reported in the Summary Compensation Table.
Under the pension plan, credited years of service is capped at 30 years. Credited years of service for each of the individuals named in the Summary Compensation Table is as follows: Stephen A. Milne - 21 years, Jan R. Van Gorder - - 17 years, John J. Brinling, Jr. - 30 years, Philip A. Garcia - 17 years and Dennis Geib - 17 years.
The benefits under such plan are computed on the basis of straight-life annuity amounts and a life annuity with a ten-year certain benefit. The benefits listed in the Pension Plan Table are not subject to deduction for Social Security or other offset amounts. The information in the foregoing table does not reflect certain limitations imposed by the Internal Revenue Code of 1986, as amended (the "Code"). Beginning in 1994, the Code prohibits the inclusion of earnings in excess of $150,000 per year (adjusted periodically for cost-of-living increases) in the average earnings used to calculate benefits. The Code also limits the maximum annual pension (currently $130,000, but adjusted periodically for cost-of-living increases) that can be paid to each eligible employee. A Supplemental Employee Retirement Plan for senior management is in effect which provides benefits in excess of the earnings limitations imposed by the Internal Revenue Code of 1986 (as amended) similar to these provided to all other full time employees as if the IRS limitations were not in effect. These benefits are incorporated into the Pension Plan Table.
Director Compensation
The annual retainer for directors of all members of the Group, including the Company, is $25,000, plus $1,500 for each meeting attended and $1,500 for each committee meeting attended plus an additional $2,000 per year for each committee chairperson. In addition, all directors are reimbursed for their expenses incurred in attending meetings. Officers of the Company who serve as directors are not compensated separately for attendance at meetings of the Board of Directors and its committees. The total amount allocated to the Company for directors fees in 1997 was $111,068. Director Petersen also is compensated pursuant to a consulting arrangement as disclosed in Item 13.
Compensation Committee Interlocks and Insider Participation
The Executive Compensation Committee (the "Committee") of the Company presently consists of Peter B. Bartlett, Chairman, J. Ralph Borneman, Jr., Seth E. Schofield and Harry H. Weil. No member of the Committee is a former or current officer or employee of the Company or any of its affiliates. Furthermore, no executive officer of the Company serves as a member of a compensation committee of another entity one of whose executive officers serves on the Committee of the Company or as a director of the Company, nor does any executive officer of the Company serve as a director of another entity, one of whose executive officers serves on the Committee of the Company. Mr. Borneman is the President and a principal shareholder of Body-Borneman Associates, Inc., Body-Borneman, Inc. and Body-Borneman, Ltd., all of which are independent insurance agencies representing a number of insurers, including the Company and its insurance affiliates.
Report of the Executive Compensation Committee of the Company
The Committee is charged with the duty of recommending to the Board of Directors the compensation of the three highest paid officers of the Company and such other officers as are determined by the Board of Directors, recommending to the Board of Directors all forms of bonus compensation including incentive programs that would be appropriate for the Company and to undertake such other responsibilities as may be delegated to it by the Board of Directors. The Board has authorized the Compensation Committee to consider the compensation of the four highest paid officers, including the CEO. The Committee is composed of four directors who are not officers or employees of the Company or any of its affiliates. The purpose of the Committee is to determine the level and composition of compensation that is sufficient to attract and retain top quality executives for the Company.
The objectives of the executive compensation practices are to (1) attract, reward and retain key executive talent and (2) to motivate executive officers to perform to the best of their abilities and to achieve short-term and long-term corporate objectives that will contribute to the overall goal of enhancing stockholder and policyholder value. To that end, compensation comparisons are made to benchmark positions at other insurers in terms of compensation levels and composition of the total compensation mix.
Under federal tax laws, the Company is not allowed a federal income tax deduction for compensation, under certain circumstances, paid to certain executive officers to the extent that compensation exceeds $1 million per officer in any fiscal year. No officer of the Company has received compensation in excess of $1 million in any fiscal year to date. The Compensation Committee may consider adopting policies with respect to this limitation on deductibility when appropriate.
The Committee reviewed the salary ranges and base salaries of the four highest paid executives including the Chief Executive Officer, in 1997. The Committee has position descriptions for the four highest paid executives of the Company, including the Chief Executive Officer, which define the responsibilities and duties of each position. The position descriptions also delineate the functional areas of accountability and the qualifications and skills required to perform such responsibilities and duties. The Committee then reviews the salary ranges for the Chief Executive Officer and the other three highest paid senior executives, comparing the ranges to third party data compiled for similar positions with other property and casualty insurers. In reviewing the salary ranges for the four highest paid executives, including the Chief Executive Officer, the Committee references Sibson's Management Compensation Survey published annually by Sibson & Company, Inc., which summarizes compensation data for more than 100 insurance companies. The data is reported by position and by company asset size and by premium volume. The unique aspects of each position, its duties and responsibilities, the effect on the performance of the Company, the number of employees supervised directly and other criteria are also considered in setting the base salaries. The Committee also secured the services of Towers Perrin, a nationally recognized consulting firm with specific expertise in the insurance industry to make recommendations regarding executive compensation.
The level of compensation for each executive reflects his or her skills, experience and job performance. Normally, base salary will not be less than the minimum for the salary range established for each position. Executives with a broader range of skills, experience and consistently high performance with the Company may receive compensation above the midpoint for the established salary range.
Compensation for the Chief Executive Officer consists primarily of salary, annual incentive and long-term incentive payments, and minor perquisites which amount to less than 10% of the Chief Executive Officer's salary and bonus. The Board approved adoption of an annual incentive plan and long-term incentive plan for senior executives of the Company as recommended by the Executive Compensation Committee at its meeting of March 11, 1997. The purpose of the annual incentive plan is to promote the best interests of the Company and to promote the attainment of significant business objectives for the Company by basing a portion of the executives' compensation on the attainment of both premium growth and underwriting profitability goals. The annual incentive plan will be paid in cash only.
Annual Incentive Plan target award levels, expressed as a percent of base salary, are established annually by the Executive Compensation Committee and approved by the Board of Directors. Payments under the Annual Incentive Plan are based on a combination of individual executive performance and company performance.
The Long-Term Incentive Program, which was approved by shareholders April 29, 1997, is designed to maximize returns to stockholders by linking executive compensation to the overall profitability of the Company. Target award amounts, expressed as a percentage of base salary, are determined by comparisons to peer companies and approved by the Executive Compensation Committee and the Board of Directors.
Performance factors applicable to the Company, such as property and casualty insurance loss ratios, investment portfolio returns, overall company profitability, as well as other factors are considered in evaluating the Chief Executive Officer's performance. Such performance factors were considered in approving Mr. Milne's 1997 compensation.
Compensation of the next three most highly compensated individuals is determined by the Committee and is based upon the factors and processes enumerated, i.e., a determination of a salary range based upon market data and evaluation of the executive with respect to the executive's job description and his or her position within the salary range.
Compensation of the next highest paid executives (other than the four highest paid executives) is based upon the Company's established standard compensation policies and is not determined by the Committee.
Erie Indemnity Company Executive Compensation Committee:
Peter B. Bartlett, Chairman J. Ralph Borneman, Jr. Seth E. Schofield Harry H. Weil
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of 2/28/98
(a) Name & Address Shares of Beneficial Beneficially Percent of Owner Owned Class
Erie Indemnity Company 2,043,900(1) 21.6%(1) 100 Erie Insurance Place Direct Erie, PA 16530
Erie Insurance Exchange 4,932,900(1) 52.2%(1) 100 Erie Insurance Place Direct Erie, PA
(b) Shares beneficially owned directly or indirectly by all Directors and Officers:
Name & Address Shares of Beneficial Beneficially Percent of Owner Owned Class
Peter B. Bartlett 0 -- 65 Egbert Street Bay Head, NJ 08742
Samuel P. Black, III 132,397 1.40% 1091 Dutch Road Fairview, PA 16415
J. Ralph Borneman 1,536 .02% 160 N. Funk Road Boyertown, PA 19512
Patricia A. Goldman 100 -- 3026 1/2 Q Street, NW Washington, DC 20007
Susan Hirt Hagen 300 -- 5727 Grubb Rd. Erie, PA 16506
Thomas B. Hagen 154,482 1.63% 5727 Grubb Rd. Erie, PA 16506
F. William Hirt 167,034 1.77% 3270 Kingston Court Erie, PA 16506
Dr. Irvin H. Kochel 6,249 .07% 4637 Reese Road Erie, PA 16510
(b) Shares beneficially owned directly or indirectly by all Directors and Officers:
Name & Address Shares of Beneficial Beneficially Percent of Owner Owned Class
Edmund J. Mehl 12,150 .13% 504 Frontier Dr. Erie, PA 16505
Stephen A. Milne 200 -- 100 Culbertson Drive Lake City, PA 16423
John M. Petersen 89,141 .94% 124 Voyageur Dr. Erie, PA 16505
Seth E. Schofield 0 -- 8600 South Ocean Drive #1106 Jensen Beach, FL 34957
Jan R. Van Gorder 75 -- 6796 Manchester Beach Road Fairview, PA 16415
Harry H. Weil 100 -- 7 Foxwood Drive Pittsburgh, PA 15238
John J. Brinling, Jr. 1,260 .01% 1522 Sumner Drive Erie, PA 16505
Robert H. Dreyer 600 .01% 465 Hawthorne Trace Fairview, PA 16415
Philip Alan Garcia 1,275 .01% 786 Stockbridge Drive Erie, PA 16505
Timothy G. NeCastro 0 -- 124 West 37th Street Erie, PA 16508
Douglas F. Ziegler 270 -- 378 Ridgeview Drive Erie, PA 16505
Officers and directors as a group (19 persons) 567,169(2) 6.00%(2)
(1) The Exchange is a reciprocal insurance exchange controlled by its subscribers, each of whom has designated Erie Indemnity Company as such subscriber's attorney-in-fact for certain purposes, including Indemnity's holding of Common Stock of the Company. 76.2% of the outstanding voting stock of Erie Indemnity Company is owned beneficially by a trust established by H. O. Hirt, the father of F. William Hirt and Susan H. Hagen and the father-in-law of Thomas B. Hagen. Mr. Hirt and Mrs. Hagen are beneficiaries of the trust and are co-trustees with Mellon Bank, N.A. An additional 13.4% of the Erie Indemnity Company voting stock is beneficially owned by Samuel P. Black, III.
(2) Includes direct and indirect beneficial ownership and shares owned by and with spouses.
(c) There are no contractual arrangements known to the Company which may result in a change in control of the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors Black and Borneman are officers and principal shareholders of insurance agencies which receive insurance commissions in the ordinary course of business from Erie Family Life and its affiliates in accordance with such companies standard commission schedules and agents' contracts. Such payments to the agencies for commissions written on insurance policies from the property and casualty affiliated insurers and Erie Family Life Insurance Company amounted to $2,540,612 and $626,760 for the Body-Borneman Agency and the Black and Associates Agency respectively. Of these amounts, the Company paid commissions of $108,845 to the Body-Borneman Agency and $58,668 to the Black and Associates Agency in 1997.
Director Mehl is the retired Chairman and Chief Executive Officer of Dispatch Printing, Inc., a company owned by his family members. Payments for printing services from the company, and its affiliates, to Dispatch Printing, Inc. amounted to $65,507 in 1997.
Director and former President and CEO, and previous Chief Investment Officer of the Erie Insurance Group of Companies, John M. Petersen, who retired as an employee of the Company on December 31, 1995, entered into a consulting arrangement with the Company effective January 2, 1996. Under the terms of the arrangement, the Company engaged Mr. Petersen as a consultant to furnish the Company, the Erie Insurance Exchange, and Erie Indemnity Company and its pension trust, with investment services with respect to their investments in common stocks. As compensation for services rendered by Mr. Petersen, a fee of .15 of 1 percent, on an annualized basis, of the total fair market value of the common stock under management, is paid to Mr. Petersen. The Company also pays for all necessary and reasonable expenses related to Mr. Petersen's consulting services performed under this arrangement. The compensation paid to Mr. Petersen, under this arrangement in 1997, was $2,836,883 of which $30,393 was allocated to the Company.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following financial statements of the Company and the report of independent certified public accountants are incorporated herein by reference to pages 24 through 32 in the Company's annual report to shareholders for the year ended December 31, 1997.
Independent Auditor Report Statements of Financial Position - December 31, 1997 and 1996 Statements of Operations for the years ended December 31, 1997, 1996 and 1995 Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 Notes to Financial Statements
(2) The following financial statement schedules are included in this report on FORM 10-K:
Page
Independent Auditors' Report on Schedules 25
Schedule I - Summary of Investments other than investments in related parties 26
Schedule V - Supplementary Insurance Information 27
Schedule VI - Reinsurance 28
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted.
(3) Exhibits:
Exhibit Number Description of Exhibit
10.1 1997 Annual Incentive Plan of Erie Indemnity Company
10.2 Erie Indemnity Company Long-Term Incentive Plan
10.3 Employment Agreement dated December 16, 1997 by and between Erie Indemnity Company and Stephen A. Milne
10.4 Employment Agreement dated December 16, 1997 by and between Erie Indemnity Company and Jan R. Van Gorder
10.5 Employment Agreement dated December 16, 1997 by and between Erie Indemnity Company and Philip A. Garcia
10.6 Employment Agreement dated December 16, 1997 by and between Erie Indemnity Company and John J. Brinling, Jr.
13 1997 Annual Report to Security Holders. Reference is made to the Annual Report furnished to the Commission, herewith.
27 Financial Data Schedule
All exhibits for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted.
(b) No reports on Form 8-K have been filed or were required to be filed during the last quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 11, 1998 ERIE FAMILY LIFE INSURANCE COMPANY (Registrant)
Principal Officers
/s/ Stephan A. Milne Stephen A. Milne, President and C.E.O.
/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/ Peter B. Bartlett /s/ Irvin H. Kochel Peter B. Bartlett Dr. Irvin H. Kochel
/s/ Samuel P. Black, III /s/ Edmund J. Mehl Samuel P. Black, III Edmund J. Mehl
/s/ J. Ralph Borneman /s/ Stephen A. Milne J. Ralph Borneman Stephen A. Milne
/s/ Patricia A. Goldman /s/ John M. Petersen Patricia A. Goldman John M. Petersen
/s/ Susan Hirt Hagen /s/ Seth E. Schofield Susan Hirt Hagen Seth E. Schofield
/s/ Thomas B. Hagen /s/ Jan R. Van Gorder Thomas B. Hagen Jan R. Van Gorder
/s/ F. William Hirt /s/ Harry H. Weil F. William Hirt Harry H. Weil
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Shareholders Erie Family Life Insurance Company
We have audited the statements of financial position of Erie Family Life Insurance Company (Company) as of December 31, 1997 and 1996 and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997, as contained in the 1997 annual report, incorporated by reference in the annual report on Form 10-K for the year ended December 31, 1997. 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 generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material respects, the financial position of Erie Family Life Insurance Company as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. 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.
Erie, Pennsylvania February 17, 1998
SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
SCHEDULE V - SUPPLEMENTARY INSURANCE INFORMATION
SCHEDULE V - SUPPLEMENTARY INSURANCE INFORMATION (CONTINUED)
SCHEDULE VI - REINSURANCE
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Sequentially Exhibit Numbered Number Description of Exhibit Page
10.1 1997 Annual Incentive Plan of Erie Indemnity Company 30
10.2 Erie Indemnity Company Long-Term Incentive Plan 35
10.3 Employment Agreement dated December 16, 1997 by and between Erie Indemnity Company and Stephen A. Milne 45
10.4 Employment Agreement dated December 16, 1997 by and between Erie Indemnity Company and Jan R. Van Gorder 62
10.5 Employment Agreement dated December 16, 1997 by and between Erie Indemnity Company and Philip A. Garcia 79
10.6 Employment Agreement dated December 16, 1997 by and between Erie Indemnity Company and John J. Brinling, Jr. 96
13 1997 Annual Report to Security Holders. Reference is made to the Annual Report furnished to the Commission, herewith. 113
27 Financial Data Schedule 148