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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________
to ___________ Commission file number 2-39458 ERIE FAMILY LIFE
INSURANCE COMPANY  PENNSYLVANIA
    

25-1186315(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. EmployerIdentification No.)100 Erie Insurance Place, Erie, Pennsylvania
    
    
    16530(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code (814) 870-2000 Not applicable 
  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ     No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Securities Exchange Act of 1934). Yes
o     No
þ Indicate the number of shares outstanding of each of the Registrants classes of common stock, as
of the
latest practicable date: 9,450,000 shares of Common Stock outstanding on April 15, 2005.   1




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INDEX ERIE FAMILY LIFE INSURANCE COMPANY  
 PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Statements of Financial Position  March 31, 2005 and December 31, 2004Statements of Operations  Three months ended March 31, 2005 and 2004Statements of Comprehensive Income  Three months ended March 31, 2005 and 2004Statements of Cash Flows  Three months ended March 31, 2005 and 2004Notes to Financial Statements  March 31, 2005Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures About Market RiskItem 4.
    
    Controls and ProceduresPART II. OTHER INFORMATIONItem 1.
    
    Legal ProceedingsItem 6.
    
    ExhibitsSIGNATURESExhibit 31.1Exhibit 31.2Exhibit 32
  2




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PART I.  FINANCIAL INFORMATION 
 ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION (Dollars in thousands)March 31,
    
    
    December 31,ASSETS
    
    2005
    
    
    2004(Unaudited)Investments:Fixed maturities at fair value (amortized cost
of $1,318,068 and $1,297,913, respectively)
    
    $
    1,359,516
    
    
    $
    1,366,898Equity
securities at fair value (cost of $59,891 and $59,426, respectively)
    
    
    65,912
    
    
    
    66,375Limited
partnerships (cost of $14,640 and $15,234, respectively)
    
    
    15,560
    
    
    
    15,467Real estate mortgage loans
    
    
    6,077
    
    
    
    6,124Real estate
    
    
    1,023
    
    
    
    1,044Policy loans
    
    
    10,854
    
    
    
    10,671Total investments
    
    
    1,458,942
    
    
    
    1,466,579Cash and cash equivalents
    
    
    22,721
    
    
    
    22,446Premiums receivable from policyholders
    
    
    7,315
    
    
    
    7,876Reinsurance recoverable
    
    
    1,797
    
    
    
    2,527Other receivables
    
    
    426
    
    
    
    319Accrued investment income
    
    
    19,305
    
    
    
    16,031Deferred policy acquisition costs
    
    
    118,886
    
    
    
    111,409Reserve credit for reinsurance ceded
    
    
    30,491
    
    
    
    29,420Prepaid federal income taxes
    
    
    0
    
    
    
    789Other assets
    
    
    5,123
    
    
    
    4,044Total assets
    
    $
    1,665,006
    
    
    $
    1,661,440
 See Accompanying Notes to Financial Statements. 3




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ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION (Dollars in thousands)March 31,
    
    
    December 31,LIABILITIES AND SHAREHOLDERS EQUITY
    
    2005
    
    
    2004(Unaudited)Liabilities:Policy Liabilities and Accruals:Future life and accident and health policy benefits
    
    $
    128,247
    
    
    $
    124,016Policy and contract claims
    
    
    4,551
    
    
    
    3,153Annuity deposits
    
    
    997,869
    
    
    
    984,870Universal life deposits
    
    
    166,717
    
    
    
    163,489Supplementary contracts not
including life contingencies
    
    
    705
    
    
    
    702Other policyholder funds
    
    
    7,091
    
    
    
    6,048Federal income taxes payable
    
    
    1,472
    
    
    
    0Deferred income taxes
    
    
    40,158
    
    
    
    48,066Reinsurance premium due
    
    
    907
    
    
    
    2,581Accounts payable and accrued expenses
    
    
    11,531
    
    
    
    10,581Notes payable to Erie Indemnity Company
    
    
    40,000
    
    
    
    40,000Due to affiliates
    
    
    4,716
    
    
    
    4,327Dividends payable
    
    
    2,079
    
    
    
    2,079Total liabilities
    
    
    1,406,043
    
    
    
    1,389,912Shareholders Equity:Common stock, $.40 par value per share;
authorized 15,000,000 shares; 9,450,000
shares issued and outstanding
    
    
    3,780
    
    
    
    3,780Additional paid-in capital
    
    
    630
    
    
    
    630Accumulated other comprehensive income
    
    
    25,217
    
    
    
    39,252Retained earnings
    
    
    229,336
    
    
    
    227,866Total shareholders equity
    
    
    258,963
    
    
    
    271,528Total liabilities and shareholders equity
    
    $
    1,665,006
    
    
    $
    1,661,440
 See Accompanying Notes to Financial Statements. 4




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ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended
    
    
    Three Months EndedMarch 31, 2005
    
    
    March 31, 2004(Dollars in thousands, except per share data)RevenuesNet Policy Revenue:Life premiums
    
    $
    13,502
    
    
    $
    13,112Group life and other premiums
    
    
    906
    
    
    
    867Total net policy revenue
    
    
    14,408
    
    
    
    13,979Net investment income
    
    
    20,306
    
    
    
    19,472Net realized (losses) gains on investments
    
    (
    1,353
    )
    
    
    2,848Equity in earnings of limited partnerships
    
    
    604
    
    
    
    155Other income
    
    
    177
    
    
    
    318Total revenues
    
    
    34,142
    
    
    
    36,772Benefits and ExpensesDeath benefits
    
    
    3,430
    
    
    
    4,904Interest on annuity deposits
    
    
    11,027
    
    
    
    10,910Interest on universal life deposits
    
    
    1,795
    
    
    
    1,736Interest on surplus notes and
other affiliate interest
    
    
    712
    
    
    
    717Surrender and other benefits
    
    
    337
    
    
    
    320Increase in future life policy benefits
    
    
    3,160
    
    
    
    2,247Amortization of deferred policy
acquisition costs
    
    
    2,254
    
    
    
    228Commissions
    
    
    400
    
    
    
    542General expenses
    
    
    4,611
    
    
    
    3,878Taxes, licenses and fees
    
    
    956
    
    
    
    834Total benefits and expenses
    
    
    28,682
    
    
    
    26,316Income before income taxes
    
    
    5,460
    
    
    
    10,456Provision for income taxes
    
    
    1,911
    
    
    
    3,940Net income
    
    $
    3,549
    
    
    $
    6,516Net income per share
    
    $
    0.38
    
    
    $
    0.69Dividends declared per share
    
    $
    0.22
    
    
    $
    0.22
 See Accompanying Notes to Financial Statements. 5




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ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended
    
    
    Three Months EndedMarch 31, 2005
    
    
    March 31, 2004(Dollars in thousands)Net income
    
    $
    3,549
    
    
    $
    6,516Unrealized (losses) gains on securities:Unrealized holding (losses) gains arising
during period, net of offsets to shadow
deferred acquisition costs
    
    (
    22,945
    )
    
    
    25,873Less: losses (gains) included in net income
    
    
    1,353
    
    
    (
    2,848
    )Net unrealized holding (losses) gains arising
during period, net of offsets to shadow
deferred acquisition costs
    
    (
    21,592
    )
    
    
    23,025Income tax benefit (expense) related to
unrealized (losses) gains
    
    
    7,557
    
    
    (
    8,059
    )Unrealized (depreciation) appreciation of
investments, net of taxes
    
    (
    14,035
    )
    
    
    14,966Comprehensive (loss) income
    
    ($
    10,486
    )
    
    $
    21,482
 See Accompanying Notes to Financial Statements. 6




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ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended
    
    
    Three Months EndedMarch 31, 2005
    
    
    March 31, 2004(Dollars in thousands)CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES:Premiums collected
    
    $
    14,232
    
    
    $
    10,790Net investment income received
    
    
    17,406
    
    
    
    16,480Miscellaneous income
    
    
    177
    
    
    
    318Benefits to policyholders
    
    (
    15,470
    )
    
    (
    18,870
    )Commissions paid to agents
    
    (
    469
    )
    
    (
    1,340
    )Salaries and wages paid
    
    (
    4,277
    )
    
    (
    3,326
    )General operating expenses paid
    
    (
    4,434
    )
    
    (
    4,131
    )Taxes, licenses and fees paid
    
    (
    1,416
    )
    
    (
    1,291
    )Interest paid
    
    (
    51
    )
    
    (
    52
    )Income taxes recovered
    
    
    0
    
    
    
    19Net cash provided by (used in) operating activities
    
    
    5,698
    
    
    (
    1,403
    )CASH FLOWS USED IN INVESTING ACTIVITIES:Purchase of investments:Fixed maturities
    
    (
    72,713
    )
    
    (
    70,733
    )Equity securities
    
    (
    464
    )
    
    
    0Limited partnerships
    
    (
    1,390
    )
    
    (
    5
    )Sales/maturities of investments:Sales of fixed maturities
    
    
    35,803
    
    
    
    49,784Calls/maturities of fixed maturities
    
    
    16,734
    
    
    
    3,530Limited partnerships
    
    
    2,592
    
    
    
    800Increase in collateral from securities lending
    
    
    0
    
    
    
    13,733Net mortgage loans
    
    
    47
    
    
    
    44Net policy loans
    
    (
    183
    )
    
    (
    146
    )Net cash used in investing activities
    
    (
    19,574
    )
    
    (
    2,993
    )CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:Annuity and supplementary
contract deposits and interest
    
    
    30,702
    
    
    
    33,603Annuity and supplementary
contract surrenders and withdrawals
    
    (
    17,700
    )
    
    (
    17,966
    )Universal life deposits and interest
    
    
    4,749
    
    
    
    4,820Universal life surrenders
    
    (
    1,521
    )
    
    (
    1,807
    )Dividends paid to shareholders
    
    (
    2,079
    )
    
    (
    1,985
    )Net cash provided by financing activities
    
    
    14,151
    
    
    
    16,665Net increase in cash and cash equivalents
    
    
    275
    
    
    
    12,269Cash and cash equivalents at beginning of period
    
    
    22,446
    
    
    
    91,667Cash and cash equivalents at end of period
    
    $
    22,721
    
    
    $
    103,936
 See Accompanying Notes to Financial Statements. 7




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE A  BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and in conformity with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Operating results for
the three-month period ended March 31, 2005 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2005. For further information, refer to the financial
statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2004 as filed with the Securities and Exchange Commission on February 24, 2005. NOTE B  RECLASSIFICATIONS Certain amounts previously reported in the 2004 financial statements have been reclassified to
conform to the current periods presentation. Such reclassification did not impact earnings or
total Shareholders Equity. NOTE C  EARNINGS PER SHARE Earnings per share amounts are based on the weighted average number of common shares outstanding
during each of the respective periods. 8




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) NOTE D  INVESTMENTS At March 31, 2005 and 2004, marketable equity securities consist of nonredeemable preferred
stock while fixed maturities consist of bonds, notes and redeemable preferred stock.
Management considers all fixed maturities as available-for-sale. Management determines the
appropriate classification of fixed maturities at the time of purchase and reevaluates such
designation as of each statement of financial position date. Available-for-sale securities are
stated at fair value, with the unrealized gains and losses, net of deferred federal income
taxes, reported as a separate component of Comprehensive Income and Shareholders Equity. The following is a summary of available-for-sale securities: (in thousands)
    
    
    
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedMarch 31, 2005
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed maturitiesBonds:U.S. treasuries and government agencies
    
    $
    55,118
    
    
    $
    478
    
    
    $
    449
    
    
    $
    55,147Public utilities
    
    
    168,127
    
    
    
    8,377
    
    
    
    1,083
    
    
    
    175,421U.S. banks, trusts and insurance companies
    
    
    205,760
    
    
    
    7,467
    
    
    
    1,952
    
    
    
    211,275U.S. industrial and miscellaneous
    
    
    568,811
    
    
    
    24,396
    
    
    
    4,211
    
    
    
    588,996Mortgage-backed securities
    
    
    156,229
    
    
    
    2,215
    
    
    
    1,738
    
    
    
    156,706Asset-backed securities
    
    
    10,720
    
    
    
    215
    
    
    
    132
    
    
    
    10,803Foreign
    
    
    146,287
    
    
    
    9,343
    
    
    
    1,340
    
    
    
    154,290Total bonds
    
    
    1,311,052
    
    
    
    52,491
    
    
    
    10,905
    
    
    
    1,352,638Redeemable preferred stock
    
    
    7,016
    
    
    
    47
    
    
    
    185
    
    
    
    6,878Total fixed maturities
    
    
    1,318,068
    
    
    
    52,538
    
    
    
    11,090
    
    
    
    1,359,516Equity securitiesNonredeemable preferred stock:U.S. banks, trusts and insurance companies
    
    
    19,909
    
    
    
    1,785
    
    
    
    0
    
    
    
    21,694U.S. industrial and miscellaneous
    
    
    18,801
    
    
    
    1,771
    
    
    
    1
    
    
    
    20,571Foreign
    
    
    21,181
    
    
    
    2,474
    
    
    
    8
    
    
    
    23,647Total equity securities
    
    
    59,891
    
    
    
    6,030
    
    
    
    9
    
    
    
    65,912Total fixed maturities and equity securities
    
    $
    1,377,959
    
    
    $
    58,568
    
    
    $
    11,099
    
    
    $
    1,425,428
 9




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE D  INVESTMENTS (Continued) (in thousands)
    
    
    
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedDecember 31, 2004
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed maturitiesBonds:U.S. treasuries and government agencies
    
    $
    60,126
    
    
    $
    1,048
    
    
    $
    98
    
    
    $
    61,076Public utilities
    
    
    160,516
    
    
    
    11,313
    
    
    
    219
    
    
    
    171,610U.S. banks, trusts and insurance companies
    
    
    193,461
    
    
    
    9,148
    
    
    
    709
    
    
    
    201,900U.S. industrial and miscellaneous
    
    
    566,633
    
    
    
    34,721
    
    
    
    976
    
    
    
    600,378Mortgage-backed securities
    
    
    157,289
    
    
    
    3,713
    
    
    
    609
    
    
    
    160,393Asset-backed securities
    
    
    10,946
    
    
    
    348
    
    
    
    77
    
    
    
    11,217Foreign
    
    
    141,926
    
    
    
    12,080
    
    
    
    686
    
    
    
    153,320Total bonds
    
    
    1,290,897
    
    
    
    72,371
    
    
    
    3,374
    
    
    
    1,359,894Redeemable preferred stock
    
    
    7,016
    
    
    
    94
    
    
    
    106
    
    
    
    7,004Total fixed maturities
    
    
    1,297,913
    
    
    
    72,465
    
    
    
    3,480
    
    
    
    1,366,898Equity securitiesNonredeemable preferred stock:U.S. banks, trusts and insurance companies
    
    
    19,909
    
    
    
    2,078
    
    
    
    2
    
    
    
    21,985U.S. industrial and miscellaneous
    
    
    18,801
    
    
    
    1,873
    
    
    
    0
    
    
    
    20,674Foreign
    
    
    20,716
    
    
    
    3,000
    
    
    
    0
    
    
    
    23,716Total equity securities
    
    
    59,426
    
    
    
    6,951
    
    
    
    2
    
    
    
    66,375Total fixed maturities and equity securities
    
    $
    1,357,339
    
    
    $
    79,416
    
    
    $
    3,482
    
    
    $
    1,433,273
 Realized gains and losses on the sale of investments are recognized in income using the specific
identification method. Investments that have declined in value below cost and for which the
decline is considered to be other-than-temporary by management are written down to estimated net
realizable value. The impairments are made on an individual security basis and are recorded as a component of net
realized (losses) gains on investments in the Statements of Operations. 10




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE D  INVESTMENTS (Continued) The components of net realized (losses) gains on investments as reported in the Statements of
Operations are included below. Included in the first quarter of 2005 realized losses are
impairment charges of $1.5 million related to a fixed maturity in the automotive industry. There
were no impairment charges recorded in the first quarter of 2004. (in thousands)
    
    Three Months Ended
    
    
    Three Months EndedMarch 31, 2005
    
    
    March 31, 2004Fixed maturities:Gross realized gains
    
    $
    1,083
    
    
    $
    2,930Gross realized losses
    
    (
    2,441
    )
    
    (
    93
    )Net realized (losses) gains
    
    (
    1,358
    )
    
    
    2,837Equity securities:Gross realized gains
    
    
    7
    
    
    
    11Gross realized losses
    
    (
    2
    )
    
    
    0Net realized gains
    
    
    5
    
    
    
    11Net realized (losses) gains on
investments
    
    ($
    1,353
    )
    
    $
    2,848
 Fixed maturities and equity securities in a gross unrealized loss position at March 31, 2005 are as
follows. Data is provided by length of time securities were in a gross unrealized loss position. Less than 12 months
    
    
    12 months or longer
    
    
    Total(in thousands)
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesFixed maturitiesU.S.
treasuries and government agencies
    
    $
    35,491
    
    
    $
    419
    
    
    $
    1,968
    
    
    $
    30
    
    
    $
    37,459
    
    
    $
    449Public utilities
    
    
    41,297
    
    
    
    716
    
    
    
    9,429
    
    
    
    367
    
    
    
    50,726
    
    
    
    1,083U.S. banks, trusts and insurance
companies
    
    
    60,653
    
    
    
    1,131
    
    
    
    20,125
    
    
    
    821
    
    
    
    80,778
    
    
    
    1,952U.S. industrial and miscellaneous
    
    
    137,976
    
    
    
    3,166
    
    
    
    24,007
    
    
    
    1,045
    
    
    
    161,983
    
    
    
    4,211Mortgage-backed securities
    
    
    75,574
    
    
    
    1,161
    
    
    
    18,169
    
    
    
    577
    
    
    
    93,743
    
    
    
    1,738Asset-backed securities
    
    
    0
    
    
    
    0
    
    
    
    2,860
    
    
    
    132
    
    
    
    2,860
    
    
    
    132Foreign
    
    
    29,397
    
    
    
    503
    
    
    
    17,294
    
    
    
    837
    
    
    
    46,691
    
    
    
    1,340Total bonds
    
    
    380,388
    
    
    
    7,096
    
    
    
    93,852
    
    
    
    3,809
    
    
    
    474,240
    
    
    
    10,905Redeemable preferred stock
    
    
    4,681
    
    
    
    185
    
    
    
    0
    
    
    
    0
    
    
    
    4,681
    
    
    
    185Total fixed maturities
    
    
    385,069
    
    
    
    7,281
    
    
    
    93,852
    
    
    
    3,809
    
    
    
    478,921
    
    
    
    11,090Equity securitiesNonredeemable preferred stock
    
    
    2,998
    
    
    
    9
    
    
    
    0
    
    
    
    0
    
    
    
    2,998
    
    
    
    9Total equity securities
    
    
    2,998
    
    
    
    9
    
    
    
    0
    
    
    
    0
    
    
    
    2,998
    
    
    
    9Total fixed maturities and
equity securities
    
    $
    388,067
    
    
    $
    7,290
    
    
    $
    93,852
    
    
    $
    3,809
    
    
    $
    481,919
    
    
    $
    11,099
 11




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE D  INVESTMENTS (Continued) No investments in an unrealized loss position at March 31, 2005 had experienced a decline in market
value that was considered by management to be significant and other-than-temporary based on Company
policy. There were no market conditions, industry characteristics or fundamental operating results
of a specific issuer that suggested other-than-temporary impairment of any of these investments
held at March 31, 2005. The Company participates in a securities lending program whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. A fee is paid to the Company
by the borrower. Company policy requires collateral equal to 102% of the fair value of the loaned
securities. The Company maintains full ownership rights to the securities loaned and continues to
earn interest on them. In addition, the Company has the ability to sell the securities while they
are on loan. The Company has an indemnification agreement with the lending agent in the event a
borrower becomes insolvent or fails to return securities. The Company shares a portion of the
interest received on these short-term investments with the lending agent. Revenue received for the
three months ended March 31, 2005 and 2004, related to this program totaled $10,025 and $27,821,
respectively. The Company had no loaned securities at March 31, 2005 or December 31, 2004. The
Company has incurred no losses on the loan program since the programs inception. Limited partnerships at March 31, 2005 include U.S. and foreign real estate and mezzanine debt
investments. Real estate limited partnerships represent 93%, while mezzanine debt limited
partnerships represent 7%, of the total carrying value at March 31, 2005. These partnerships are
recorded using the equity method, which is the Companys share of the carrying value of the
partnership. The Company has not guaranteed any of the partnership liabilities. The components of equity in earnings of limited partnerships as reported in the Statements of
Operations are as follows: Three Months Ended(in thousands)
    
    March 31,2005
    
    
    2004Mezzanine Debt
    
    $
    0
    
    
    $
    20Real Estate
    
    
    604
    
    
    
    135$
    604
    
    
    $
    155
  NOTE E  DEFERRED POLICY ACQUISITION COSTS (DAC) ASSETThe Company incurs significant costs in connection with acquiring new business, principally
commissions and policy issue and underwriting expenses. Acquisition costs, which vary with and are
primarily related to the production of new business, are deferred as an asset and amortized over
the estimated lives of the policies. At each balance sheet date, the Company evaluates the value of
this asset in light of historical and expected future gross premiums or profits on its insurance
and annuity products.In accordance with Financial Accounting Standard (FAS) 60, Accounting and Reporting by Insurance
Enterprises, the DAC related to traditional life insurance products is amortized in proportion to
expected premium revenues over the premium-paying period of related policies using assumptions
consistent with those used in computing policy liability reserves. Assumptions used for a specific
issue year are locked-in; therefore, amortization in subsequent years is not adjusted for
changing assumptions. 12




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE E  DEFERRED POLICY ACQUISITION COSTS ASSET (Continued) In accordance with FAS 97, Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, the DAC
related to universal life products and deferred annuities is amortized in relation to the expected
gross profits from projected investment, mortality and expense margins and surrender charges of the
policies over a specified period. This specified period is 30 years for universal life and 20
years for deferred annuities. Both historical and anticipated investment returns, including
realized gains and losses, from the investment of policyholder funds are considered in determining
the amortization of deferred policy acquisition costs. Generally accepted accounting principles
require that changes in expected future gross profits on the annuity and universal life products
cause the DAC amortization rate to be revised retroactively, or unlocked, to the date of policy
issuance. The cumulative change in DAC related to prior periods is recognized as a component of
the current periods DAC amortization, along with DAC amortization associated with the actual gross
profits of the current period. Lower actual gross profits in a period would typically result in
less DAC amortization in that period, whereas higher actual gross profits would result in more
amortization in the period. However, if lower gross profits were expected to continue into the
future, additional amortization of the existing DAC asset may occur. During the first quarter of 2005, the Company unlocked certain assumptions based on the results of
an expense study. As a result of unlocking these expense assumptions, the DAC asset was increased
and the amortization of DAC was decreased by $0.4 million. In addition, during its annual review
of actual experience to assumptions used, the Company trued up certain items in the first quarter
of 2005 resulting in a $0.5 million increase in the DAC amortization. The Company periodically reviews the DAC asset to determine if it continues to be recoverable from
future premiums or profits. If less than the full amount of DAC is determined to be recoverable, a
portion of such costs are expensed at the time of determination. The amount of DAC considered
recoverable could be reduced in the near term if the estimate of future gross premiums or profits
were to be reduced. The amount of DAC amortization may be revised if any of the estimates discussed
above are revised. In accordance with FAS 97, DAC is adjusted for the impact of unrealized gains or losses on
investments as if these gains or losses had been realized, with corresponding credits or charges
included in accumulated other comprehensive income. NOTE F  SEGMENT INFORMATION The Company offers a range of products and services, but operates as one reportable life insurance
segment. The Companys Traditional Life insurance line includes permanent life, endowment life,
term life and whole life policies. The Universal Life line includes all fixed universal life
products sold by the Company. Variable universal life products are not sold by the Company. The
Fixed Annuities line includes fixed ordinary deferred annuities, tax advantaged deferred annuities,
annuities in pay-out and structured settlements. Neither variable nor equity indexed annuity
products are sold by the Company. The Group Life and Other line includes group life insurance and
disability income products. The Corporate Account line includes investment income earned from
surplus not specifically allocable to any one product type. Investment-related income is allocated
based on the assumption that the fixed maturities and preferred stock portfolios support the
insurance product lines and the limited partnership and remaining fixed maturity investments
support the Corporate Account. 13




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE F  SEGMENT INFORMATION (Continued) (in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    GroupThree Months Ended
    
    Traditional
    
    
    Universal
    
    
    Fixed
    
    
    Life &
    
    
    CorporateMarch 31, 2005
    
    Life
    
    
    Life
    
    
    Annuities
    
    
    Other
    
    
    Account
    
    
    TotalTotal policy revenue, net of
reinsurance
    
    $
    9,995
    
    
    $
    3,507
    
    
    $
    0
    
    
    $
    906
    
    
    $
    0
    
    
    $
    14,408Net investment and other
income
    
    
    1,745
    
    
    
    2,304
    
    
    
    14,168
    
    
    
    57
    
    
    
    2,813
    
    
    
    21,087Net realized losses on
investments
    
    (
    117
    )
    
    (
    146
    )
    
    (
    943
    )
    
    (
    4
    )
    
    (
    143
    )
    
    (
    1,353
    )Total revenues
    
    
    11,623
    
    
    
    5,665
    
    
    
    13,225
    
    
    
    959
    
    
    
    2,670
    
    
    
    34,142Less: Total benefits and
expenses
    
    
    10,133
    
    
    
    4,651
    
    
    
    13,131
    
    
    
    690
    
    
    
    77
    
    
    
    28,682Income before taxes
    
    $
    1,490
    
    
    $
    1,014
    
    
    $
    94
    
    
    $
    269
    
    
    $
    2,593
    
    
    $
    5,460
 GroupThree Months Ended
    
    Traditional
    
    
    Universal
    
    
    Fixed
    
    
    Life &
    
    
    CorporateMarch 31, 2004
    
    Life
    
    
    Life*
    
    
    Annuities*
    
    
    Other
    
    
    Account
    
    
    TotalTotal policy revenue, net of
reinsurance
    
    $
    9,644
    
    
    $
    3,468
    
    
    $
    0
    
    
    $
    867
    
    
    $
    0
    
    
    $
    13,979Net investment and other
income
    
    
    1,669
    
    
    
    2,253
    
    
    
    13,724
    
    
    
    45
    
    
    
    2,254
    
    
    
    19,945Net realized gains on
investments
    
    
    243
    
    
    
    295
    
    
    
    1,986
    
    
    
    7
    
    
    
    317
    
    
    
    2,848Total revenues
    
    
    11,556
    
    
    
    6,016
    
    
    
    15,710
    
    
    
    919
    
    
    
    2,571
    
    
    
    36,772Less: Total benefits and
expenses
    
    
    10,357
    
    
    
    2,877
    
    
    
    12,513
    
    
    
    491
    
    
    
    78
    
    
    
    26,316Income before taxes
    
    $
    1,199
    
    
    $
    3,139
    
    
    $
    3,197
    
    
    $
    428
    
    
    $
    2,493
    
    
    $
    10,456
   *
    
    The March 31, 2004 universal life benefits and expenses were reduced by $1.8 million, and the
fixed annuities benefits and expenses were increased by $0.1 million, for the unlocking of certain
assumptions related to the amortization of the DAC. NOTE G  REINSURANCE The Company has entered into various reinsurance treaties for the purpose of ceding certain
portions of life insurance according to established guidelines. Reinsurance contracts do not
relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their
obligations could result in losses to the Company. Management believes all of its reinsurance
assets are collectible; therefore, no allowance has been established for uncollectible amounts. Included in the reinsurance treaties are provisions for expense allowances to be provided to the
Company by the reinsurer. These allowances are intended to help offset policy acquisition and
maintenance costs incurred by the Company. The rate of reimbursement varies by plan and in some
cases by reinsurer. The Company put in place a new ceded arrangement for new issues under certain
of its Target Term plans 14




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE G  REINSURANCE
(Continued) as of January 1, 2005. This change did not have a material impact on the first quarter 2005
financial results nor is it expected to have a material impact on the Companys financial
statements in future periods. The Companys retention limit is $0.3 million per life for individual coverage. For its ERIE
Flagship Term2
and ERIE Target Term products, the Company has first dollar quota share treaties with several
unaffiliated reinsurers. The Company reinsures 50% and 90% of the ERIE Flagship Term2 and ERIE
Target Term
products, respectively, subject to the Companys $0.3 million retention limit. For its
disability income product, the Company has a 50% quota share agreement with its reinsurer. As
of March 31, 2005 and 2004, $12.6 billion and $10.0 billion, respectively, of life insurance in
force was ceded to other companies. The Companys most significant reinsurance relationship is
with Generali USA Reassurance Company (Generali), which reinsures a portion of the Companys
life and accident and health business. At March 31, 2005 and 2004, the amount of in-force life
insurance ceded to Generali totaled approximately $6.9 billion and $5.8 billion, respectively. The effect of ceded reinsurance to the financial statement lines contained in the Statements of
Operations is as follows: (in thousands)
    
    Three Months Ended
    
    
    Three Months EndedMarch 31, 2005
    
    
    March 31, 2004Direct policy revenue
    
    $
    19,286
    
    
    $
    18,023Policy revenue ceded
    
    (
    4,878
    )
    
    (
    4,044
    )Net policy revenue
    
    $
    14,408
    
    
    $
    13,979Death benefits
    
    $
    5,059
    
    
    $
    6,626Reinsurance recoveries
    
    (
    1,629
    )
    
    (
    1,722
    )Net death benefits
    
    $
    3,430
    
    
    $
    4,904Increases in future life policy benefits
    
    $
    4,231
    
    
    $
    3,698Reinsurance reserve credits
    
    (
    1,071
    )
    
    (
    1,451
    )Net increases in future life policy
benefits
    
    $
    3,160
    
    
    $
    2,247Commissions
    
    $
    2,162
    
    
    $
    2,163Reinsurance commission allowance
    
    (
    1,762
    )
    
    (
    1,621
    )Net commissions
    
    $
    400
    
    
    $
    542
 The net increase in future
life policy benefits in the first quarter of 2005 includes a $0.7 million charge to earnings related
to an adjustment made to correct previously recorded reinsurance reserve credits, reflecting
refinements in the method used to calculate these credits. NOTE H  NOTES
PAYABLE TO ERIE INDEMNITY COMPANY The Company has $40 million due to Erie Indemnity Company (EIC) in the form of two surplus notes.
The notes may be repaid only out of unassigned surplus of the Company. The first note, in the
amount of $15 million, bears an annual interest rate of 6.45%. Interest on the note is scheduled to
be paid semi-annually. The note is payable on demand on or after December 31, 2005. It is probable
that EIC will allow the Company to repay this note through issuance of a new note with a later
maturity date. Both principal and interest payments are subject to prior approval by the
Pennsylvania Insurance Commissioner. Interest expense on this note totaled $0.2 million in the
first quarter of 2005 and 2004. 15




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued)  NOTE H  NOTES PAYABLE TO ERIE INDEMNITY COMPANY
(Continued)The second note was issued in 2003 for an additional $25 million. This surplus note bears an annual
interest rate of 6.70% and is scheduled to be paid semi-annually. The surplus note is payable on
demand on or after December 31, 2018. Both principal and interest payments are subject to prior
approval by the Pennsylvania Insurance Commissioner. Interest expense on this note totaled $0.4
million in the first quarter of 2005 and 2004.NOTE I  SUPPLEMENTARY DATA ON CASH FLOWSA reconciliation of net income to net cash provided by operating activities as presented in the
Statements of Cash Flows is as follows: (in thousands)
    
    Three Months Ended
    
    
    Three Months EndedMarch 31, 2005
    
    
    March 31, 2004CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES:Net income
    
    $
    3,549
    
    
    $
    6,516Adjustments to reconcile net income to net cash
used in operating activities:Amortization of deferred policy acquisition costs
    
    
    2,254
    
    
    
    228Other amortization
    
    
    232
    
    
    
    246Deferred federal income tax (benefit) expense
    
    (
    350
    )
    
    
    1,453Realized losses (gains) on investments
    
    
    1,353
    
    
    (
    2,848
    )Equity in earnings of limited partnerships
    
    (
    604
    )
    
    (
    155
    )Decrease in premium and other receivables
    
    
    454
    
    
    
    204Increase in accrued investment income
    
    (
    3,274
    )
    
    (
    3,330
    )Policy acquisition costs deferred
    
    (
    3,547
    )
    
    (
    3,476
    )Decrease (increase) in other assets
    
    
    2
    
    
    (
    95
    )Increase in reinsurance recoverables and reserve credits
    
    (
    341
    )
    
    (
    1,232
    )Decrease in prepaid federal income taxes
    
    
    2,261
    
    
    
    2,506Increase in future policy benefits and claims
    
    
    5,629
    
    
    
    3,338Increase (decrease) in other policyholder funds
    
    
    1,043
    
    
    (
    2,296
    )Decrease in reinsurance premium due
    
    (
    1,674
    )
    
    (
    1,089
    )Decrease in accounts payable and due to affiliates
    
    (
    1,289
    )
    
    (
    1,373
    )Net cash provided by (used in) operating activities
    
    $
    5,698
    
    
    ( $
    1,403
    )
 NOTE J  COMMITMENTS
AND CONTINGENCIES The Company has outstanding commitments to invest up to $15.2 million in limited partnerships at
March 31, 2005. These commitments will be funded as required through the end of the respective
investment periods, which typically span 3 to 5 years. The Company is involved in
litigation arising in the ordinary course of business. In the opinion of management, the effects, if any, of such litigation are not expected to be material to the
Companys financial condition, cash flows or operations. NOTE K  STATUTORY
INFORMATION The minimum statutory capital and surplus requirements under Pennsylvania law for stock life
insurance companies (Section 386 of the Pennsylvania Insurance Code) amounts to $1.65 million. The
Companys total statutory capital and surplus well exceeded these minimum requirements. Bonds having a fair value of $2.1 million at March 31, 2005 and December 31, 2004, were on deposit
with various regulatory authorities as required by law. The carrying value of these bonds are not
material for separate disclosure on the Companys Statement of Financial Position and are included
with fixed maturities. 16




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL
OPERATIONS The following discussion and analysis should be read in conjunction with the historical financial
information and related notes found on pages 3 through 16, and Managements Discussion and Analysis
of Financial Condition and Results of Operations contained in the Companys Annual Report on Form
10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission on
February 24, 2005. FINANCIAL
OVERVIEW Net income decreased to $3.5 million, or $0.38 per share, in the first quarter of 2005, compared to
$6.5 million, or $0.69 per share, for the first quarter of 2004. The $3.0 million decrease in the
first quarter 2005 earnings was primarily the result of a $4.2 million change in realized gains and
losses on investments. Realized losses totaled $1.4 million during the first quarter of 2005,
compared to realized gains of $2.8 million during the first quarter of 2004. A $2.0 million
increase in DAC amortization expense in 2005 also contributed to the reduction in net income from
the first quarter of 2004. REVENUES Analysis of Policy Revenue Total net policy revenue increased 3.1%, to $14.4 million in the first quarter of 2005 from $14.0
million during the same period in 2004. Although total net premiums are up in 2005, new
traditional policies issued declined in the first quarter of 2005 when compared to the same period
in 2004. Direct new premiums on traditional life insurance policies decreased 7.4% to $2.3 million
for the quarter ended March 31, 2005, from $2.4 million for the quarter ended March 31, 2004. Analysis of Investment-related Income Net investment income increased $0.8 million to $20.3 million in the first quarter of 2005 when
compared to the same period in 2004. The increase in net investment income for the first quarter
of 2005 is due in part to a moderate increase in the size of the investment portfolio and a slight
improvement in yields on invested assets. Net realized capital losses on investments were $1.4 million in the first quarter of 2005, compared
to net realized capital gains of $2.8 million in the first quarter of 2004. The net realized losses
for the first quarter of 2005 includes an impairment charge of $1.5 million. This impairment
charge was from a fixed maturity investment in the automotive industry. 17




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL
OPERATIONS (Continued) The Companys performance of its fixed maturities and preferred stock portfolios compared to market
indices is presented below. Annualized returns are shown pre-tax and include investment income,
realized and unrealized gains and losses. Two year period endedMarch 31, 2005Erie Family Life Insurance Company indices:Fixed maturities
    
    
    5.75%Preferred stock
    
    
    8.94Other indices:Lehman Brothers U.S. Aggregate
    
    
    3.25%
 BENEFITS AND EXPENSES Analysis of Policy-related Benefits and Expenses Net death benefits on life insurance policies decreased 30.1% in the first quarter of 2005 to $3.4
million from the first quarter of 2004. Random fluctuations in death benefits incurred are
expected especially when mortality results are measured over a short period of time due to the
small number of claims. These short-term fluctuations can influence quarterly or annual results
without impacting long-term profitability. Management believes its underwriting philosophy and
practices are sound. The liability for future life policy benefits is computed considering various factors such as
anticipated mortality, future investment yields, withdrawals and anticipated credit for reinsurance
ceded. Increase in future life policy benefits net of reinsurance ceded totaled $3.2 million in
the first quarter of 2005 compared to $2.2 million in the first quarter of 2004, an increase of
40.6%. This increase includes a $0.7 million charge related to an adjustment made to correct
previously recorded reinsurance reserve credits, reflecting refinements in the method used to
calculate these credits. Amortization of deferred policy acquisition costs increased to $2.3 million in the first quarter of
2005, from $0.2 million during the same period in 2004. In accordance with FAS 97, the Company
periodically evaluates certain assumptions in use to determine DAC and corresponding amortization
related to its interest sensitive products. During the first quarter of 2005, the Company unlocked
certain assumptions on its universal life and annuity products based on the results of an expense
study. As a result of unlocking these expense assumptions, the DAC asset was increased and the
amortization of DAC was decreased by $0.4 million. In addition, during its annual review of actual
experience to assumptions used, the Company trued up certain items in the first quarter of 2005
resulting in a $0.5 million increase in the DAC amortization. During the first quarter of 2004,
the Company unlocked assumptions relating to interest rate spreads on its interest sensitive
products. As a result of unlocking these assumptions, the DAC asset was increased and the
amortization of DAC was decreased by $1.7 million during the first quarter of 2004. 18




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
FINANCIAL OPERATIONS (Continued) Analysis of Other Expenses Direct commissions to independent agents include new and renewal commissions and production
bonuses. These direct commission expenses are reported on the Statements of Operations net of
commissions received from reinsurers. The reported expense is also affected by the amount of
commission expenses capitalized as DAC. Commissions, which vary with and are related primarily to
the production of new business, are deferrable as DAC. Most first-year and incentive commissions
and some renewal commissions qualify for deferral as DAC. For the first quarter of 2005, the
commission expense totaled $0.4 million, compared to $0.5 million for the first quarter of 2004.
This decrease is partially attributable to the decline in annuity sales. Annuity premiums for the
period ended March 31, 2005 were $19.7 million, compared to $22.7 million for the same period in
2004. Commissions and bonuses on these premiums, net of DAC, were $0.2 million and $0.3 million for
the periods ended March 31, 2005 and 2004, respectively. General expenses, net of DAC, increased $0.7 million from the first quarter of 2004, to $4.6
million for the first quarter of 2005. General expenses include wages and salaries, employee
benefits, data processing expenses, professional fees, occupancy expenses and other office and
general administrative expenses of the Company. Certain general expenses of the Company related to
the acquisition and underwriting of new policies are deferred as DAC. Such expenses include medical
inspection and exam fees related to new business production and salaries, wages and employee
benefits of underwriting personnel. The increase in general expenses includes professional
consulting fees related to the strengthening of internal accounting controls, increases in
information technology costs and costs associated with the implementation of new actuarial
valuation systems. In addition, in January 2005 the amount allocated to the Company for the
salaries and benefits of various members of executive management of the Erie Insurance Group
increased due to an increased amount of effort dedicated to Company issues. 19




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL
OPERATIONS (Continued) FINANCIAL CONDITION Investments The Companys investment strategies provide that portfolios are structured to match the features of
the life insurance and annuity products sold by the Company. Annuities and life insurance policies
are long-term products; therefore, the Companys investment strategy takes a long-term perspective
emphasizing investment quality, diversification and superior investment returns. The Companys
investments are managed on a total return approach that focuses on current income and capital
appreciation. The Companys invested assets are sufficiently liquid to meet commitments to its
policyholders. At March 31, 2005, the Companys investment portfolio consisting of cash,
investment grade bonds and investment grade preferred stock, totaled more than $1.4 billion, or
84.8% of total assets. These resources provide the liquidity the Company requires to meet known
and unforeseen demands on its funds. All investments are evaluated monthly for other-than-temporary impairment loss. Some factors
considered in evaluating whether or not a decline in fair value is other-than-temporary include: 1)
the extent and duration to which fair value is less than cost, 2) historical operating performance
and financial condition of the issuer, 3) near term prospects of the issuer and its industry, 4)
specific events that occurred affecting the issuer, including a ratings downgrade, and 5) the
Companys ability and intent to retain the investment for a period of time sufficient to allow for
a recovery in value. An investment which is deemed impaired is written down to its estimated net
realizable value. For all investments except limited partnerships, the impairment charge is
included as a realized loss in the Statements of Operations. For limited partnerships, the
impairment charge is included as a component of equity in earnings of limited partnerships in the
Statements of Operations. If the Companys policy for determining the recognition of impaired positions were changed, the
Companys Results of Operations could be significantly impacted. Management believes its investment
valuation philosophy and accounting practices result in appropriate and timely measurement of value
and recognition of impairment. The Companys investments are subject to certain risks, including interest rate price risk and
credit risk. The Company monitors exposure to interest rate risk through periodic reviews of asset
and liability positions. Estimates of cash flows and the impact of interest rate fluctuations
relating to the investment portfolio are monitored regularly. The Companys objective is to earn
competitive relative returns by investing in a diverse portfolio of high-quality, liquid
securities. Portfolio characteristics are analyzed regularly and market risk is actively managed
through a variety of techniques. Portfolio holdings are diversified across industries, and
concentrations in any one company or industry are limited by parameters established by Company
management and the Board of Directors. 20




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL
OPERATIONS (Continued) Reserve Liabilities The Companys primary commitment is its obligation to pay future policy benefits under the terms of
its life insurance and annuity contracts. To meet these future obligations, the Company
establishes life insurance reserves based upon the type of policy, the age, gender and risk class
of the insured and the number of years the policy has been in force. The Company also establishes
annuity and universal life reserves based on the amount of policyholder deposits (less applicable
insurance and expense charges) plus interest earned on those deposits. Life insurance and annuity
reserves are supported primarily by the Companys long-term, fixed income investments as the
underlying policy reserves are generally also of a long-term nature. LIQUIDITY AND CAPITAL RESOURCES Liquidity is a measure of the Companys ability to secure enough cash to meet its contractual
obligations and operating needs. Insurance premiums are collected prior to claims and benefit
disbursements and these funds are invested to provide necessary cash flows in future years. The
Companys major sources of cash from operations are life insurance premiums and investment income.
Major cash outflows from operations are for benefits to policyholders, commissions to agents and
salaries, wages and operating expenses. The net positive cash flow from operations is used to fund
Company commitments and to build the investment portfolio, thereby increasing future investment
returns. Net cash provided by operating activities for the three months ended March 31, 2005 was
$5.7 million. With investments and cash and cash equivalents totaling approximately $1.5 billion
at March 31, 2005, the Companys liquidity position remains strong. Annuity and universal life deposits, which do not appear as revenue on the Statement of Operations,
are a source of funds. These deposits do not involve a mortality or morbidity risk and are
accounted for using methods applicable to comparable interest-bearing obligations of other types of
financial institutions. This method of accounting records deposits as a liability rather than as
revenue. Annuity and universal life deposits were $22.6 million in the first quarter of 2005 and
$25.8 million in the first quarter of 2004. The Companys ability to attract deposits depends in
large part on the relative attractiveness of its products compared to other investment
alternatives. Annuity deposits have slowed during recent years as the equity market has improved. All Company commitments are met by cash flows from policy revenue, annuity and universal life
deposits and investment income. Management believes its cash flow from operations and its liquid
assets and marketable securities will also enable the Company to meet any foreseeable cash
requirements. Also available as a source of funds to the Company is a $10 million committed line
of credit with a commercial bank. The Company may use extensions of credit from the bank to fund
working capital needs of the Company and for other general corporate purposes. At March 31, 2005
and December 31, 2004, securities held as collateral on the committed line of credit totaled $15.1
million. At March 31, 2005 and December 31, 2004, there were no borrowings on this line of credit. The Companys $15 million surplus note due to EIC is payable on demand on or after December 31,
2005. It is probable that EIC will allow the Company to repay this note through issuance of a new
note with a later maturity date. Interest payments on this note, totaling $0.5 million each, are
paid in June and December of each year. 21




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL
OPERATIONS (Continued) For a complete discussion of the fixed contractual obligations see Managements Discussion and
Analysis of Financial Condition and Results of Operations contained in the Annual Report on
Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange
Commission on February 24, 2005. FACTORS THAT MAY AFFECT FUTURE RESULTS Products with Interest Rate Guarantees The Companys annuity and universal life contracts contain provisions that guarantee interest rates
will not decrease below certain levels. If the interest rates earned on the Companys investments
become insufficient to meet targeted interest spreads because of these minimum guarantees, profit
margins on annuity and universal life deposits will decrease or in extreme situations could turn
negative. The Company revised its deferred annuity products in 2003 to lower interest rate guarantees on
newly issued policies to 1.5% in all policy years. The guaranteed interest rates and approximate
deposit liabilities for deferred annuity products with credited interest rates subject to change by
the Company are as follows: Initial
    
    CurrentPolicy
    
    Guaranteed
    
    Guaranteed
    
    DepositYears
    
    Interest Rate
    
    Interest Rate
    
    Liabilities(in thousands)1-5
    
    4.5%
    
    4.5%
    
    $
    253,6916-10
    
    4.5
    
    4.0
    
    
    114,083Over 10
    
    4.5
    
    3.5
    
    
    188,487All Years
    
    3.0
    
    3.0
    
    
    32,462All
Years
    
    1.5
    
    1.5
    
    
    38,685
 The Company has some ability to restrict new deposits on its universal life and annuity contracts.
New deposits can be limited to planned premium amounts under the terms of the Companys universal
life contracts. Deposits are limited also by IRS guidelines. Flexible premium deferred annuity
(FPDA) contracts allow the Company to limit deposits to a maximum of $25,000 per year. Market Conditions for Competing Products The Companys deposit-type products compete with a wide variety of investment options. Among other
factors affecting the investment decisions of policyholders and potential policyholders are general
investment market conditions, particularly the market interest rate environment and the performance
of the equity markets. Changes in interest rates affect pricing and the relative attractiveness of
interest-sensitive investment options, which bears directly on the ability of the Company to
attract new policyholders and retain existing holders of annuity, universal life and certain
permanent life insurance products. Investment Risk The Company is exposed to
interest rate risk through its fixed maturities portfolio. As
interest rates rise, impairment charges could be recognized in future
periods. Additionally, the emerging authoritative guidance on
the determination of when an investment is impaired and whether the
impairment is other than temporary, could result in significant
impairments being recognized in future periods. Reinsurance The Company put in place a new ceding arrangement for new issues under certain of its Target Term
plans as of January 1, 2005. Allowances under this new arrangement are not as favorable as those
under the arrangement in place through 2004. Increased reinsurance costs (reduced expense
allowances) on this product will reduce the profitability of the Companys traditional life line of
business. This line of business, however, is expected to remain profitable. Changes in the
products, prices, or features of the Companys term product portfolio may be necessary in order to
return the profitability of this portfolio to desired levels. 22




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF FINANCIAL
OPERATIONS (Continued) Financial Ratings The combination of Company growth and declines in investment returns exposes the Company to reduced
statutory surplus levels. Surplus levels are an important element of the rating process used by
such agencies as A.M. Best and Standard & Poors, which are industry-accepted measures of an
insurance companys financial health and ability to meet ongoing obligations to policyholders.
These ratings are a factor in establishing the competitive position of insurance companies. The Companys rating from A.M. Best is A (Excellent). The A (Excellent) rating continues to affirm
the Companys strong financial position indicating that the Company has an excellent ability to
meet its ongoing obligations to policyholders. The Company is also rated by Standard & Poors, but
this rating is based solely on public information. Standard & Poors rates the Companys Api,
strong. The Company also has a rating of B (Good) from Weiss Ratings, Inc. According to Weiss
Ratings, the B rating indicates that the Company offers good financial security and has the
resources necessary to deal with a variety of adverse conditions. If the Company were to incur reductions in statutory surplus for an extended period of time, the
ratings of the Company may be downgraded. Future downgrades in these or other ratings would reduce
the competitive position of the Company by making it more difficult to attract business in the
highly competitive life insurance industry. In such circumstances, the Company may need to take
measures to increase surplus levels in order to maintain adequate ratings. The Company may increase
surplus through a variety of means, including the issuance of additional surplus notes. Implementation of new valuation system In 2004, the Company implemented a new valuation system for its statutory and tax reserves on
traditional products. As a result, adjustments were made to conform reserve estimates of the old
system to the estimates from the new system. The Company plans to implement the new valuation
system for GAAP reserving on traditional products in the second quarter of 2005. In implementing
the new GAAP valuation system for traditional products, the Company is refining its GAAP reserving
methods, assumptions and calculations. The impact of the refined reserving assumptions on the
recorded reserves cannot be estimated at this time. Introduction of ErieConnection® In 2001, the Erie Insurance Group began a comprehensive program of eCommerce initiatives in support
of the Erie Insurance Groups agency force and back office policy underwriting, issuance and
administration for property/casualty business. The first major component of the eCommerce program
(network and desktop hardware deployment) was completed during 2002. The Erie Insurance Group has spent $180.4 million on the eCommerce program through March 2005.
Target delivery dates established in 2002 have generally not been met as management has devoted
increased effort to quality assurance efforts to ensure that the rollout creates only minimal
business disruption. While functional as a personal lines rating and policy administration system, ErieConnectionagency
interface has generally not met the Companys or agents expectations for ease of use. The Company
has postponed further deployment of the system until such usability issues are resolved. Estimates
of the costs to improve the agency interface for ease of use needed to facilitate future deployment
and the timetable for deployment are currently being developed. 23




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Companys exposure to market risk is primarily related to fluctuations in prices and interest
rates. Quantitative and qualitative disclosures about market risk resulting from changes in prices
and interest rates are included in Item 7A in the Companys 2004 Annual Report on Form 10-K. The
risks associated with interest rate guarantees on the Companys universal life and annuity products
are discussed in the Companys Annual Report on Form 10-K for 2004 in Factors That May Affect
Future Results. The information contained in the Investments section of Managements Discussion
and Analysis of Financial Condition and Results of Operations in the Companys 2004 Annual Report
on Form 10-K is incorporated herein by reference. The Company also has exposure to credit risk through its portfolios of fixed maturity securities,
preferred stock, mortgage loans, and to a lesser extent, short-term investments. This risk is
defined as the potential loss in market value resulting from adverse changes in the borrowers
ability to repay the debt. The Companys objective is to earn competitive returns by investing in a
diversified portfolio of securities. The Company manages this risk by performing up front
underwriting analysis and regular reviews by its investment staff. The fixed maturity investments
are also maintained between minimum and maximum percentages of invested assets. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995:Certain
forward-looking statements contained herein involve risks and uncertainties. These statements
include certain discussions relating to underwriting, premium and investment income volume,
business strategies, profitability and business relationships and the Companys other business
activities during 2005 and beyond. In some cases, you can identify forward-looking statements by
terms such as may, will, should, could, would, expect, plan, intend, anticipate,
believe, estimate, project, predict, potential and similar expressions. These
forward-looking statements reflect the Companys current views about future events, are based on
assumptions and are subject to known and unknown risks and uncertainties that may cause results to
differ materially from those anticipated in those statements. Many of the factors that will
determine future events or achievements are beyond our ability to control or predict. 24




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ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of March 31, 2005, the Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including its Chief Executive Officer and Chief
Financial Officer, the effectiveness of the design and operation of the Companys disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act). Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer
concluded that, except as described in the following paragraph, the Companys disclosure controls
and procedures as of March 31, 2005 are effective for gathering, analyzing and disclosing the
information the Company is required to disclose in reports it files under the Securities Exchange
Act of 1934, within the time periods specified in the Securities and Exchange Commissions rules
and forms. In its Form 10-K Annual Report for 2004, the Company reported a weakness in internal control over
the information systems and processes used to record actuarially determined amounts and disclosures
in the financial statements. The Company has also concluded it does not have sufficient qualified
actuarial resources to assure timely review and detection of errors in actuarially determined
information. The Companys independent registered public accounting firm, Ernst & Young LLP, in
conjunction with their audit of the Companys 2004 financial statements, characterized this
weakness as a material weakness, as defined under standards established by the Public Company
Accounting Oversight Board (United States), which they have communicated to Company management and
the Audit Committee of the Board of Directors. As reported in its 2004 Form 10-K, management developed a plan in collaboration with the Audit
Committee of the Board to correct this weakness in internal control during 2005. The plan entails
implementation of improved procedures and controls over systems and procedures underlying actuarial
computations and balances. The plan also entails an enhanced oversight structure over actuarial
functions supporting financial reporting. The plan has been reviewed with, and progress is being
monitored by, Ernst & Young LLP, the Audit Committee of the Board, and Company management including
the Chief Executive Officer and Chief Financial Officer. The Company has made progress in correcting the weakness in control during the first quarter of
2005, including adding qualified actuarial resources to prepare and review actuarially determined
information. In addition, the Company is in the process of installing new actuarial valuation
systems that will improve the information systems used to determine the recorded actuarial amounts.
Certain of these systems are expected to be functional for reporting under generally accepted
accounting principles in the second quarter of 2005. Changes in Internal Control Over Financial Reporting Other than the improvements made as discussed above, there have been no significant changes in the
Companys internal controls or in other factors that could significantly affect internal controls
subsequent to the date of managements evaluation. 25




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PART II.  OTHER INFORMATION 
 ITEM I. LEGAL PROCEEDINGS A civil class action lawsuit was filed in April of 2003 in the Court of Common Pleas of
Philadelphia County, Pennsylvania. Erie Family Life Insurance Company (Company) is the named
defendant in the lawsuit. The Company issued a life insurance policy to the plaintiff. The class
action Complaint alleges that the Company charged and collected annual premium for the first year,
but did not provide 365 days of insurance coverage. The Complaint alleges that the policy forms
and applications used by the Company do not disclose that a portion of the first premium will
cover a period of time during which the Company does not provide insurance coverage. The Complaint contains four counts. In Count I, Plaintiff alleges that the conduct of the Company
violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law. Count II of the
Complaint alleges a cause of action for breach of contract. Count III alleges that the Company
breached its duty of good faith and fair dealing. In Count IV of the Complaint, Plaintiff asserts
a cause of action for unjust enrichment and/or restitution. The Company answered the Complaint and
denied liability on all counts. In early 2004, the parties reached an agreement to settle this lawsuit. Under the Settlement
Agreement, the Company agreed to provide supplemental life insurance coverage to qualifying class
members in an amount equal to 4.62% of the face value of the underlying policy for a period of 180
days. On April 30, 2004, Plaintiff filed a Motion for Preliminary Approval of Settlement
Agreement. After the filing of the Motion for Preliminary Approval, Plaintiff and the Company
agreed the Company would pay attorneys fees in an amount up to $150,000, and to reimburse certain
litigation costs and expenses in an amount up to $15,000. The Court preliminarily reviewed the proposed settlement. As a result of conferences with the
Court, the parties engaged in further settlement negotiations. The parties entered into an Amended
and Re-Stated Class Action Settlement Agreement. On March 11, 2005, Plaintiff filed a Motion for
Preliminary Approval of the Amended and Re-Stated Class Action Settlement Agreement. The Amended and Re-Stated Class Action Settlement Agreement provides qualifying class members the
option of choosing the supplemental life insurance coverage, discussed above, or a cash payment.
Qualifying class members who select the cash payment option shall receive a maximum of one cash
payment of $10.67 for each policy, irrespective of number of purchasers and/or owners of the
policy. If a qualifying class member does not submit a cash payment selection form within the
timeframe set forth in the Amended and Re-Stated Class Action Settlement Agreement, the qualifying
class member shall automatically receive the supplemental life insurance coverage. The Company
agrees to pay attorneys fees in an amount up to $150,000, and will reimburse administrative costs
and expenses in an amount up to $14,000. It is too early to assess the probable outcome or the purported amount of damages of this civil
class action lawsuit. The Company believes it has meritorious, legal and factual defenses to the
lawsuit and these defenses will be vigorously pursued if a settlement is not finalized. 26




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ITEM 6. EXHIBITS Exhibits ExhibitNumber
    
    Description of Exhibit31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
200232
    
    Statements of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 27




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SIGNATURES Pursuant to the requirements 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: April 27, 2005
    
    Erie Family Life Insurance
Company(Registrant)/s/ Jeffrey A. Ludrof(Jeffrey A. Ludrof, President & CEO)
 
/s/ Philip A. Garcia
(Philip A. Garcia, Executive Vice President & CFO)
 28