ITEM 1. BUSINESS
Erie Family Life Insurance Company (hereinafter referred to as 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 nonparticipating individual and group life insurance policies, including universal life. Erie Family Life also sells individual and group annuities. During the last quarter of 2000, the Company issued its first disability income product. This product is designed to protect the Policyholder's mortgage if the insured becomes disabled by providing the owner with income to maintain home mortgage payments for the duration of the loan. Erie Family Life's common stock is owned by Erie Indemnity Company (21.6%) and by Erie Insurance Exchange (53.5%). The remaining stock is held by the public, predominantly by directors, 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 the 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 permanent life, endowment and term policies, including whole life, mortgage and decreasing term, group, and universal life insurance. In terms of face value, new life business issued in 2000 and 1999 had a ratio of 8:1 and 5:1, respectively, of term insurance to whole life insurance coverage. Contributing to the increased ratio of term to whole life insurance face value was the introduction of the Company's new life insurance product in late 1999, the ERIE Flagship Term. This new insurance product is designed for sale of face amounts of $300,000 and above.
Life insurance premiums and annuity deposits have been the primary sources of cash inflows for the Company.
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.
The Erie Insurance Group affiliated property and casualty insurance companies periodically purchase annuities from the Company in connection with the structured settlement of claims. Structured settlement annuities sold to affiliated property/casualty companies totaled $16,167,642, $23,312,225 and $17,883,171 in 2000, 1999, and 1998, respectively. Also included in the annuity deposits are annuity contracts purchased by the Erie Insurance Group Retirement Plan for Employees. These annuity contracts totaled $5,626,892 in 2000, $5,321,738 in 1999 and $6,413,460 in 1998.
Annuity product offerings compete with other available investment products including, but not limited to, common and preferred stocks, bonds, mutual funds and other instruments. The Company's ability to attract policyholders depends in large part on the relative attractiveness of its products compared to those other available products. Factors such as the interest rate environment and the performance of the stock market influence this ability.
The Company reinsures a portion of its business 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 Company 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." The Company currently reinsures with other insurance companies the portion of the insurance coverage above acceptable retentions. The retention limits on an acceptable risk is $300,000 per life for individual and group coverage. For its disability income product, the Company has a 50% coinsurance agreement with its reinsurer. For its Erie Flagship Term product, the Company has a 50% coinsurance agreement with a maximum retention of $300,000 with its reinsurers.
Marketing
The Company markets its products through independent agents in ten jurisdictions. The 2000 statutory direct premium revenue for those jurisdictions is made up of: Pennsylvania (66.69%), Maryland (7.03%), Ohio (6.88%), Virginia (6.58%), North Carolina (3.54%), West Virginia (3.21%), Indiana (2.85%), Tennessee (.94%), Illinois (.38%), and the District of Columbia (.06%). The policies sold are evaluated by the Company's Underwriting Department which accepts or declines applicants for insurance. Premium on policies which are accepted may be standard or rated, depending on the nature of the risk.
In the third quarter 2001, the ERIE Insurance Group will expand its marketing territory into the state of Wisconsin. In Wisconsin, the Company intends to write all lines of life, health and annuity products it currently offers.
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.
Federal legislative initiatives on financial services reform, begun in 1997, culminated in the enactment of Senate Bill 900, the Financial Services Modernization Act, which significantly changes the way insurance companies, banks and securities firms are regulated. The elimination of some regulatory barriers to banks entering the insurance market, privacy initiatives concerning the consumer data held by financial institutions and the interjection of federal government agencies into the traditionally state-regulated insurance industry may materially change the ground rules under which insurance products are marketed.
Additionally, current and proposed future federal measures may affect the way the life insurance industry distributes, prices, and services their products. These proposals may include possible changes to laws governing the taxation of insurance companies and life insurance products.
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 2000, deposits to individual annuities earned interest at rates ranging from 5% 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.
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 regulatory 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 securities as 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 (NAIC), the Company is examined periodically by one or more of the state supervisory agencies. The last completed examination of the Company was conducted by the Pennsylvania Insurance Department and covered the five years ended December 31, 1995. The Company has received notification from the Pennsylvania Insurance Department of its intentions to examine, in 2001, the five year period ended December 31, 2000.
The Commonwealth of Pennsylvania follows the statutory accounting practices minimum risk-based capital requirements on domestic insurance companies that were developed by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. 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.
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 $126 million and a ratio of total adjusted capital to authorized control level risk-based capital of more than 4.5:1 at December 31, 2000. The Company's ratios significantly exceed the minimum NAIC risk-based capital requirements.
In 1998, the NAIC completed a process to codify statutory accounting practices for certain insurance enterprises (Codification). These codified statutory accounting principles will be effective beginning January 1, 2001. The Codification will result in changes to the Company's statutory-basis financial statements. The impact will not be material to the Company's statutory surplus.
Employees
Services of 116 full-time Employees are provided through Erie Indemnity Company. Five of the employees are officers. Employee expenses along with other operating expenses are paid by the Erie Indemnity Company and reimbursed by the Company 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 2000 and 1999 was 8.5% and 8.0%, respectively.
Total Life Insurance In Force for the last five years Net of Reinsurance was:
2000 - $13,918,295,000 1999 - $13,031,594,000 1998 - $11,961,512,000 1997 - $10,754,141,000 1996 - $ 9,646,962,000
"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 but are not limited to: better (or worse) mortality rates, changes in insurance regulations or legislation that disadvantage the Company 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 owns real property for investment purposes as provided in Schedule I "Summary of Investments other than Investments in Related Parties." This investment property is leased to the Erie Indemnity Company. Rental income for 2000 was $308,732. 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 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 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The information set forth on page 27 of the Company's 2000 Annual Report is incorporated herein by reference.
The following sets forth the range of high and low closing prices of the Company's stock by quarter:
2000 1999 Low High Low High ----- ----- ----- ----- First Quarter 17 5/8 20 3/4 17 1/2 21 1/8
Second Quarter 17 3/8 21 18 1/2 21
Third Quarter 18 19 1/2 19 21 1/2
Fourth Quarter 16 19 20 1/8 21 15/16
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in "Selected Financial Data" on page 20 of the Company's 2000 Annual Report is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information set forth on pages 21 through 27 of the Company's 2000 Annual Report is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth on pages 25 and 26 of the Company's 2000 Annual Report is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The 2000 Financial Statements and the Company's Independent Auditors' Report on pages 29 through 43 of the Company's 2000 Annual Report are incorporated herein by reference, as is the unaudited information set forth in the Notes to the Financial Statements under the caption "Quarterly Results of Operations (Unaudited)" on pages 42 through 43.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 53.5% 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 during each of the three fiscal years ended December 31, 2000, 1999, and 1998, awarded to, earned by or paid to the Chief Executive Officer of the Company and the four other most highly compensated executive officers of the Company during 2000 for services rendered in all capacities to the Company, Erie Indemnity Company, Erie Insurance Exchange (the "Exchange") and their subsidiaries and affiliates.
(1) All amounts exhibited above are before individual income taxes. The amounts indicated in the "Bonus" column above represent amounts earned by the named executives during 2000, 1999 and 1998, under the Company's Annual Incentive Plan. The purpose of the Annual Incentive Plan is to promote the best interests of the Erie Insurance Exchange 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 the Company's financial goals compared to a selected peer group. The amounts indicated also include reimbursement for minor perquisites in the amounts of $16,708, $10,696, $9,253, $10,274 and $14,771 for Messrs. Milne, Van Gorder, Ludrof, Garcia, and Brinling, respectively.
(2) Amounts indicated in the "Other Annual Compensation" column include the taxable value of group term life insurance in excess of $50,000 and the associated tax reimbursement for the named executive officers. Amounts also include dividends paid on behalf of the Long-Term Incentive Plan.
(3) The "Restricted Stock Awards" column includes Long-Term Incentive Plan benefits awarded in February 2000 that remain restricted at December 31, 2000. The shares were valued using the share price at December 31, 2000; these values are noted in the "Summary Compensation Table". For Messrs. Milne, Van Gorder, Ludrof, Garcia, and Brinling, respectively, the number of shares awarded were: 5,467, 3,254, 1,616, 1,517 and 2,174. See "Long-Term Incentive Plan Awards in Last Fiscal Year" table for a detailed description of the Plan. Long-Term Incentive Plan dividends earned in the current year are reported in "Other Annual Compensation" when paid or in "All Other Compensation" when deferred.
(4) The "LTIP Payouts" column includes Long-Term Incentive Plan benefits awarded in February 2000 that became unrestricted at December 31, 2000. These shares were distributed in January 2001 and valued using the actual share price at the time of payment. The number of shares distributed for Messrs. Milne, Van Gorder, Ludrof, Garcia and Brinling, respectively, were: 1,507, 897, 445, 506 and 346. Messr. Brinling deferred the distribution of 543 shares; these shares were valued using the share price as of December 31, 2000.
(5) Amounts shown in the "All Other Compensation" column 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 life insurance policies, expenses for spousal travel, and deferred dividends and related earnings. For the year 2000, contributions made to the Employee Savings Plan amounted to $20,143, $10,736, $8,214, $7,831 and $7,456, on behalf of Messrs. Milne, Van Gorder, Ludrof, Garcia and Brinling, respectively. For the year 1999, contributions made to the Employee Savings Plan amounted to $14,308, $9,084, $6,365, $6,461 and $7,145 on behalf of Messrs. Milne, Van Gorder, Ludrof, Garcia and Brinling, respectively. For the year 1998, contributions made to the Employee Savings Plan amounted to $15,507, $10,391, $5,444, $6,559 and $7,911 on behalf of Messrs. Milne, Van Gorder, Ludrof, Garcia and Brinling, respectively. Premiums paid during 2000 for split dollar life insurance policies for Messrs. Milne, Van Gorder, Ludrof, Garcia, and Brinling, respectively, were: $50,132, $17,310, $6,674, $6,978 and $17,634. Premiums paid during 1999 for split dollar life insurance policies for Messrs. Milne, Van Gorder, Ludrof, Garcia and Brinling, respectively, were as follows: $50,341, $17,408, $6,698, $7,014 and $17,730. Premiums paid during 1998 for split dollar life insurance policies for Messrs. Milne, Van Gorder, Ludrof, Garcia and Brinling, respectively, were as follows: $50,544, $17,496, $-0-, $14,118 and $17,820. 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. Expenses for spousal travel were $3,870, $-0-, $3,377, $-0- and $3,377, for Messrs. Milne, Van Gorder, Ludrof, Garcia and Brinling, respectively. Messr. Brinling also had deferred dividends of $881 and interest on deferred dividends of $27.
Agreements with Executive Officers
The Company has entered into employment agreements with the following senior executive officers of the Company: Stephen A. Milne, President and Chief Executive Officer of the Company; Jan R. Van Gorder, Senior Executive Vice President, Secretary and General Counsel of the Company; Philip A. Garcia, Executive Vice President and Chief Financial Officer of the Company; Jeffrey A. Ludrof, Executive Vice President of the Company and John J. Brinling, Jr., Executive Vice President of EFL. At a meeting of the Board of Directors held on December 12, 2000, the Board of Directors extended the term of each executive officer's employment agreement for one year. The employment agreements have the following principal terms:
(a) A four-year term for Mr. Milne, expiring in December 2004, and for the other executives a two-year term expiring in December 2002, 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 nonrenewal 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: (i) an amount equal to the sum of three times the executive's highest annual base salary during the preceding three years plus an amount equal to three times the total of the executive's highest award during the preceding three years under the Company's Annual Incentive Plan; (ii) any award or other compensation to which the executive is entitled under the Company's Long-Term Incentive Plan; (iii) continuing participation in any employee benefit plans for a period of three years following termination to the extent the executive and his dependents were eligible to participate in such programs immediately prior to the executive's termination; and (iv) immediate vesting and nonforfeitability of accrued benefits under the Company's Supplemental Retirement Plan for Certain Members of the Erie Insurance Group Retirement Plan for Employees ("Supplemental Employee Retirement Plan");
(e) Provisions relating to confidentiality and nondisclosure 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.
Long-Term Incentive Plan
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 interests of such employees with those of the shareholders of the Company. The Plan was approved by shareholders in 1997 as a performance-based plan under the Internal Revenue Code of 1986, as amended (the Code). 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 executive's 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 restricted shares of Class A Common Stock of the Erie Indemnity Company equal to the dollar value of the phantom share units at the end of the performance period. The vesting period for the restricted shares of Class A Common Stock 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. The following table sets forth target awards granted to the Company's five highest paid executive officers (i) for the three-year performance period 2000 through 2002, (ii) for the three-year performance period of 1999 through 2001 and (iii) for the three-year performance period of 1998 through 2000.
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 collectively, (the "Retirement Plans").
PENSION PLAN TABLE
Years of Service
Remuneration 15 20 25 30 35 - ------------------------------------------------------------------------------ $ 150,000 $ 45,000 $ 60,000 $ 75,000 $ 90,000 $ 90,000 200,000 60,000 80,000 100,000 120,000 120,000 250,000 75,000 100,000 125,000 150,000 150,000 300,000 90,000 120,000 150,000 180,000 180,000 350,000 105,000 140,000 175,000 210,000 210,000 400,000 120,000 160,000 200,000 240,000 240,000 450,000 135,000 180,000 225,000 270,000 270,000 500,000 150,000 200,000 250,000 300,000 300,000 550,000 165,000 220,000 275,000 330,000 330,000 600,000 180,000 240,000 300,000 360,000 360,000 650,000 195,000 260,000 325,000 390,000 390,000 700,000 210,000 280,000 350,000 420,000 420,000 750,000 225,000 300,000 375,000 450,000 450,000 800,000 240,000 320,000 400,000 480,000 480,000
The compensation covered by the Retirement Plans is the base salary reported in the Summary Compensation Table.
Under the Retirement Plans, 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 - 24 years, Jan R. Van Gorder - - 20 years, John J. Brinling, Jr. - 30 years, Philip A. Garcia - 20 years and Jeffrey A. Ludrof - 20 years.
The benefits under Retirement Plans 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 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 $140,000, 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 Code similar to those provided to all other full time employees as if the Code limitations were not in effect. Those benefits are incorporated into the Pension Plan Table.
Director Compensation
The annual retainer for the 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. The directors are also reimbursed for their expenses incurred in attending meetings. Officers of the Company who serve as directors are not compensated for attendance at meetings of the Board of Directors and its committees. The Erie Indemnity Company also has a deferred compensation plan for certain directors of the Company. The Company receives an allocated portion of its share of these charges. The total amount allocated to the Company in 2000 for directors fees and other charges was $131,281. 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 "Compensation Committee") of the Company presently consists of Robert C. Wilburn, Chairman, Samuel P. Black, III, J. Ralph Borneman, Jr., and Samuel P. Katz. No member of the Compensation Committee is a former or current officer or employee of the Company or any of its affiliates(1). 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 Compensation Committee, 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 Compensation Committee. 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. Mr. Black is the President, Treasurer and Secretary and a principal shareholder of Samuel P. Black & Associates, Inc., which is an independent insurance agency representing a number of insurers, including the Company and its insurance affiliates. - ---------------------------------------------------
1. J. Ralph Borneman, Jr. is an officer and a principal shareholder of the insurance agencies named herein which receive commissions in the ordinary course of business from the Company. Mr. Borneman does not qualify as an outside director for purposes of approving performance-based incentive plans as qualified under section 162(m) of the Code. Mr. Borneman has excused himself from voting on such plans as a member of the Compensation Committee.
Samuel P. Black, III is an officer of the insurance agencies named herein which receive commissions in the ordinary course of business from the Company. Mr. Black does not qualify as an outside director for purposes of approving performance-based incentive plans as qualified under section 162(m) of the Code. Mr. Black has excused himself from voting on such plans as a member of the Compensation Committee.
Report of the Executive Compensation Committee of the Company
The Compensation 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 the Compensation Committee by the Board of Directors. The Board of Directors has authorized the Compensation Committee to consider the compensation of the four highest paid officers, including the Chief Executive Officer. The Compensation Committee is currently composed of four directors who are not officers or employees of the Company or any of its affiliates. The purpose of the Compensation 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 Company's 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 shareholder value and policyholder security. 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 Section 162(m) of the Code, the Company is not allowed a federal income tax deduction for compensation, under certain circumstances, paid to certain executive officers to the extent that such compensation exceeds $1 million per officer in any fiscal year. Stephen A. Milne, President and Chief Executive Officer of the Company is the only officer of the Company who 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 Compensation Committee reviewed the salary ranges and base salaries of the four highest paid executives, including the Chief Executive Officer, in 2000. The Compensation 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 Compensation Committee then reviews the salary ranges for the Chief Executive Officer and the other three highest paid executives, comparing the ranges to third party data compiled for similar positions with other property and casualty and life insurers.
In reviewing the salary ranges for the four highest paid executives, including the Chief Executive Officer, the Compensation 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, company asset size and 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 Compensation Committee also consulted data obtained from 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 of Directors approved adoption of an annual incentive plan and long-term incentive plan for senior executives of the Company as recommended by the Executive Committee at its meeting of March 11, 1997 (the "Annual Incentive Plan" and the "Long-Term Incentive Plan," respectively). The purpose of the Annual Incentive Plan is to promote the best interests of the Exchange while enhancing shareholder value of the Company and to promote the attainment of significant business objectives for the Company and its affiliates by basing a portion of the executives' compensation on the attainment of both premium growth and underwriting profitability goals. The annual incentive awards will be paid in cash only.
Annual Incentive Plan target award levels, expressed as a percentage of base salary, are established annually by the Compensation Committee. Payments under the Annual Incentive Plan are based on a combination of individual executive performance and the performance of the Company and its affiliates.
The Long-Term Incentive Plan, which was approved by shareholders on April 27, 1997, for purposes of qualifying the plan as a performance-based plan under Section 162(m) of the Code, is designed to maximize returns to shareholders by linking executive compensation to the overall profitability of the Company and its affiliates. Target award amounts, expressed as a percentage of base salary, are determined by comparisons to peer companies and approved by the Compensation Committee.
Performance factors applicable to the Company and its affiliates, such as property and casualty insurance loss ratios, investment portfolio returns, overall 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 2000 compensation. Compensation of the next three most highly compensated individuals is determined by the Compensation 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 Compensation Committee.
The Company's Executive Compensation Committee:
Robert C. Wilburn, Chairman Samuel P. Black, III J. Ralph Borneman, Jr. Samuel P. Katz
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of 2/15/01
(a) Shares beneficially owned directly or indirectly by all affiliates:
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 5,055,562(1) 53.5%(1) 100 Erie Insurance Place Direct Erie, PA 16530
(b) Shares beneficially owned directly or indirectly by all Directors and Officers:
Name & Address Shares of Beneficial Beneficially Percent of Owner Owned Class
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
Susan Hirt Hagen 154,782 1.64% 5727 Grubb Rd. Erie, PA 16506
F. William Hirt 167,034 1.77% 3270 Kingston Court Erie, PA 16506
Stephen A. Milne 200 -- 100 Culbertson Drive Lake City, PA 16423
John M. Petersen 92,141 .98% 124 Voyageur Dr. Erie, PA 16505
Jan R. Van Gorder 75 -- 6796 Manchester Beach Road Fairview, PA 16415
(b) Shares beneficially owned directly or indirectly by all Directors and Officers:
Name & Address Shares of Beneficial Beneficially Percent of Owner Owned Class
Robert C. Wilburn 500 -- P.O. Box 376 Blairsville, PA 15717
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 A. Garcia 1,275 .01% 786 Stockbridge Drive Erie, PA 16505
Douglas F. Ziegler 570 -- 378 Ridgeview Drive Erie, PA 16505
Officers and directors as a group (12 persons) 552,370(2) 5.85%(2)
(1)The Exchange is a reciprocal insurance exchange controlled by its subscribers, each of whom has designated Erie Indemnity Company (EIC) as such subscriber's attorney-in-fact for certain purposes, including EIC's holding of Common Stock of the Company. There are two H.O. Hirt Trusts, one for the benefit of F. William Hirt and one for the benefit of Susan Hirt Hagen. Each of the H.O. Hirt Trusts is the record owner of 1,170 shares of Class B Common Stock, or 38.11% of the outstanding shares of EIC's Class B Common Stock. The trustees of the H.O. Hirt Trusts are F. William Hirt, Susan Hirt Hagen and Banker's Trust Company of New York. Mr. Hirt and Mrs. Hagen, who are brother and sister, are each the beneficial owner of 1,170 shares of Class B Common Stock held by the H.O. Hirt Trusts. An additional 13.4% of the EIC 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 Borneman and Black 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 the companies' standard commission schedules and agents' contracts. Such payments made in 2000 to the agencies for commissions written on insurance policies from the property and casualty affiliated insurers and Erie Family Life Insurance Company amounted to $3,233,667 and $454,198 for the Borneman and the Black insurance agencies, respectively. Of these amounts, the Company paid commissions of $96,583 and $8,360 to the Borneman and the Black insurance agencies, respectively.
Director Borneman, in his capacity as an insurance agent, placed a worker's compensation insurance policy covering employees of the Company with Fireman's Fund Insurance Company. Although director Borneman has received no compensation to date in connection with the placement of that policy, in the future he may be entitled to receive a commission from Fireman's Fund in accordance with Fireman's Fund's standard commission schedules and agents' contracts for placing that insurance policy.
John M. Petersen, a director and former President and Chief Executive Officer, and previous Chief Investment Officer of the Erie Insurance Group of Companies, 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 stocks 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 2000 by the Company, the Erie Insurance Exchange, the Erie Indemnity Company, and the pension trust was $120,521, $5,926,850, $145,010 and $166,372, respectively.
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 29 through 43 in the Company's annual report to shareholders for the year ended December 31, 2000.
Independent Auditors' Report Statements of Financial Position - December 31, 2000 and 1999 Statements of Operations for the years ended December 31, 2000, 1999 and 1998 Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 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 26
Schedule I - Summary of Investments other than Investments in Related Parties 27
Schedule III - Supplementary Insurance Information 28
Schedule IV - Reinsurance 30
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
3.1* Amended and Restated By-laws of Registrant
10.1** 1997 Annual Incentive Plan of Erie Indemnity Company
10.2** Erie Indemnity Company Long-Term Incentive Plan
10.3** Employment Agreement effective December 16, 1997 by and between Erie Indemnity Company and Stephen A. Milne
10.4** Employment Agreement effective December 16, 1997 by and between Erie Indemnity Company and Jan R. Van Gorder
10.5** Employment Agreement effective December 16, 1997 by and between Erie Indemnity Company and Philip A. Garcia
10.6** Employment Agreement effective December 16, 1997 by and between Erie Indemnity Company and John J. Brinling,Jr.
10.7*** Employment Agreement effective June 30, 1999 by and between Erie Indemnity Company and Jeffrey A. Ludrof
10.8*** Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Douglas F. Ziegler
10.9*** Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Stephen A. Milne
10.10*** Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Jan R. Van Gorder
10.11*** Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Philip A. Garcia
10.12*** Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and John J. Brinling
(3) Exhibits: (CONTINUED)
Exhibit Number Description of Exhibit
10.13*** Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Jeffrey A. Ludrof
10.14 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Stephen A. Milne
10.15 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Jan R. Van Gorder
10.16 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Philip A. Garcia
10.17 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Companyand John J. Brinling
10.18 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Jeffrey A. Ludrof
10.19 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Douglas F. Ziegler
13 2000 Annual Report to Shareholders. Reference is made to the Annual Report furnished to the Commission, herewith.
27 Financial Data Schedule
99.1 Audit Committee Charter
- ------------------
* 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 9, 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, 1997 that was filed with the Commission on March 11, 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, 1999 that was filed with the Commission on March 28, 2000.
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 fourth quarter ended December 31, 2000.
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 FAMILY LIFE INSURANCE 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 Family Life Insurance Company
We have audited the statements of financial position of Erie Family Life Insurance Company (Company) as of December 31, 2000 and 1999 and the related 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 financial statements referred to above present fairly, in all material respects, the financial position of Erie Family Life Insurance Company as of December 31, 2000 and 1999, and the results of its operations and its 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
EXHIBIT INDEX (Persuant to Item 601 of Regulation S-K) Sequentially Exhibit Numbered Number Description of Exhibit Page
3.1* Amended and Restated By-laws of Registrant
10.1** 1997 Annual Incentive Plan of Erie Indemnity Company
10.2** Erie Indemnity Company Long-Term Incentive Plan
10.3** Employment Agreement effective December 16, 1997 by and between Erie Indemnity Company and Stephen A. Milne
10.4** Employment Agreement effective December 16, 1997 by and between Erie Indemnity Company and Jan R. Van Gorder
10.5** Employment Agreement effective December 16, 1997 by and between Erie Indemnity Company and Philip A. Garcia
10.6** Employment Agreement effective December 16, 1997 by and between Erie Indemnity Company and John J. Brinling, Jr.
10.7*** Employment Agreement effective June 30, 1999 by and between Erie Indemnity Company and Jeffrey A. Ludrof
10.8*** Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Douglas F. Ziegler
10.9*** Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Stephen A. Milne
10.10*** Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Jan R. Van Gorder
10.11*** Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Philip A. Garcia
10.12*** Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and John J. Brinling
10.13*** Addendum to Employment Agreement effective December 15, 1999 by and between Erie Indemnity Company and Jeffrey A. Ludrof
10.14 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Stephen A. Milne 32
10.15 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Jan R. Van Gorder 33
10.16 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Philip A. Garcia 34
10.17 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and John J. Brinling 35
10.18 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Jeffrey A. Ludrof 36
10.19 Addendum to Employment Agreement effective December 15, 2000 by and between Erie Indemnity Company and Douglas F. Ziegler 37
13 2000 Annual Report to Shareholders. Reference is made to the Annual Report furnished to the Commission, herewith. 38
27 Financial Data Schedule 67
99.1 Audit Committee Charter 68
* 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 9, 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, 1997 that was filed with the Commission on March 11, 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, 1999 that was filed with the Commission on March 28, 2000.