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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2004 OR [   ] 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. Employer
Identification 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 X      No 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       No X 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 May 10, 2004. 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, 2004 and December 31, 2003Statements of Operations  Three months ended March 31, 2004 and 2003Statements of Comprehensive Income  Three months ended March 31, 2004 and 2003Statements of Cash Flows  Three months ended March 31, 2004 and 2003Notes to Financial Statements  March 31, 2004Item 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 6. Exhibits and Reports on Form 8-KSIGNATURESSection 302 Certification of CEOSection 302 Certification of CFOSection 906 Certification of CEO & CFO
 2




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PART I. FINANCIAL INFORMATION ERIE FAMILY LIFE INSURANCE COMPANY STATEMENTS OF FINANCIAL POSITION
 (Dollars in thousands)March 31,
    
    December 31,2004
    
    2003(Unaudited)ASSETSInvestments:Fixed maturities at fair value (amortized cost
of $1,245,569 and $1,203,607, respectively)
    
    $
    1,349,147
    
    
    $
    1,280,327Equity securities at fair value
(cost of $56,608 and $56,608, respectively)
    
    
    64,666
    
    
    
    62,948Limited partnerships(cost of $11,609 and $12,203, respectively)
    
    
    11,711
    
    
    
    12,241Real estate mortgage loans
    
    
    6,261
    
    
    
    6,305Real estate
    
    
    1,106
    
    
    
    1,127Policy loans
    
    
    10,097
    
    
    
    9,951Total investments
    
    
    1,442,988
    
    
    
    1,372,899Cash and cash equivalents
    
    
    103,936
    
    
    
    91,667Premiums receivable from policyholders
    
    
    6,924
    
    
    
    7,344Reinsurance recoverable
    
    
    2,741
    
    
    
    2,960Other receivables
    
    
    352
    
    
    
    137Accrued investment income
    
    
    18,418
    
    
    
    15,088Deferred policy acquisition costs
    
    
    100,553
    
    
    
    103,874Reserve credit for reinsurance ceded
    
    
    22,209
    
    
    
    20,758Prepaid federal income taxes
    
    
    0
    
    
    
    1,983Other assets
    
    
    10,269
    
    
    
    18,520Total assets
    
    $
    1,708,390
    
    
    $
    1,635,230See Notes to Financial Statements.
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ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION (Dollars in thousands)March 31,
    
    December 31,2004
    
    2003(Unaudited)LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Policy Liabilities and Accruals:Future policy benefits
    
    $
    111,786
    
    
    $
    108,089Policy and contract claims
    
    
    3,294
    
    
    
    3,653Annuity deposits
    
    
    948,061
    
    
    
    932,553Universal life deposits
    
    
    153,434
    
    
    
    150,421Supplementary contracts not
including life contingencies
    
    
    709
    
    
    
    579Other policyholder funds
    
    
    7,561
    
    
    
    9,856Federal income taxes payable
    
    
    522
    
    
    
    0Deferred income taxes
    
    
    57,975
    
    
    
    48,796Reinsurance premium due
    
    
    786
    
    
    
    1,875Securities lending collateral
    
    
    79,228
    
    
    
    65,495Accounts payable and accrued expenses
    
    
    22,840
    
    
    
    9,239Notes payable to Erie Indemnity Company
    
    
    40,000
    
    
    
    40,000Due to affiliates
    
    
    2,085
    
    
    
    3,442Dividends payable
    
    
    2,079
    
    
    
    1,985Total liabilities
    
    
    1,430,360
    
    
    
    1,375,983Shareholders 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
    
    
    59,569
    
    
    
    44,537Retained earnings
    
    
    214,051
    
    
    
    210,300Total shareholders equity
    
    
    278,030
    
    
    
    259,247Total liabilities and shareholders equity
    
    $
    1,708,390
    
    
    $
    1,635,230See Notes to Financial Statements.
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ERIE FAMILY LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS (Unaudited)
 Three Months Ended
    
    Three Months EndedMarch 31, 2004
    
    March 31, 2003(Dollars in thousands, except per share data)Revenues:Net Policy Revenue:Life premiums
    
    $
    13,112
    
    
    $
    12,242Group life and other premiums
    
    
    867
    
    
    
    847Total net policy revenue
    
    
    13,979
    
    
    
    13,089Net investment income
    
    
    18,755
    
    
    
    18,584Net realized gains on investments
    
    
    2,848
    
    
    
    2,162Equity in earnings of limited partnerships
    
    
    155
    
    
    
    280Other income
    
    
    318
    
    
    
    177Total revenues
    
    
    36,055
    
    
    
    34,292Benefits and Expenses:Death benefits
    
    
    4,904
    
    
    
    3,841Interest on annuity deposits
    
    
    10,910
    
    
    
    9,935Interest on universal life deposits
    
    
    1,736
    
    
    
    1,779Surrender and other benefits
    
    
    320
    
    
    
    273Increase in future life policy benefits
    
    
    2,247
    
    
    
    1,788Amortization of deferred policy
acquisition costs
    
    
    1,283
    
    
    
    3,315Commissions
    
    
    542
    
    
    
    1,341General expenses
    
    
    3,878
    
    
    
    3,064Taxes, licenses and fees
    
    
    834
    
    
    
    677Total benefits and expenses
    
    
    26,654
    
    
    
    26,013Income before income taxes
    
    
    9,401
    
    
    
    8,279Provision for federal income taxes (benefit):Current
    
    
    2,487
    
    
    
    3,725Deferred
    
    
    1,084
    
    
    (
    852
    )Total provision for federal income taxes
    
    
    3,571
    
    
    
    2,873Net income
    
    $
    5,830
    
    
    $
    5,406Net income per share
    
    $
    0.62
    
    
    $
    0.57Dividends declared per share
    
    $
    0.22
    
    
    $
    0.21See Notes to Financial Statements.
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ERIE FAMILY LIFE INSURANCE COMPANY STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
 Three Months Ended
    
    Three Months EndedMarch 31, 2004
    
    March 31, 2003(Dollars in thousands)Net income
    
    $
    5,830
    
    
    $
    5,406Unrealized gains on securities:Unrealized holding gains arising
during period, net of related offsets
    
    
    25,974
    
    
    
    17,691Less: Gains included in net income
    
    (
    2,848
    )
    
    (
    2,162
    )Net unrealized holding gains arising
during period, net of related offsets
    
    
    23,126
    
    
    
    15,529Income tax expense related to
unrealized gains
    
    
    8,094
    
    
    
    5,435Unrealized appreciation of
investments, net of taxes
    
    
    15,032
    
    
    
    10,094Comprehensive income
    
    $
    20,862
    
    
    $
    15,500See Notes to Financial Statements.
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ERIE FAMILY LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS (Unaudited)
 Three Months Ended
    
    Three Months EndedMarch 31, 2004
    
    March 31, 2003(Dollars in thousands)CASH FLOWS USED IN OPERATING ACTIVITIES:Premiums collected
    
    $
    10,790
    
    
    $
    10,341Net investment income received
    
    
    16,480
    
    
    
    14,478Miscellaneous income
    
    
    318
    
    
    
    177Benefits to policyholders
    
    (
    18,870
    )
    
    (
    16,031
    )Commissions paid to agents
    
    (
    1,340
    )
    
    (
    3,948
    )Salaries and wages paid
    
    (
    3,326
    )
    
    (
    3,038
    )General operating expenses paid
    
    (
    4,183
    )
    
    (
    3,883
    )Taxes, licenses and fees paid
    
    (
    1,291
    )
    
    (
    1,175
    )Income taxes recovered (paid)
    
    
    19
    
    
    (
    14
    )Net cash used in operating activities
    
    (
    1,403
    )
    
    (
    3,093
    )CASH FLOWS USED IN INVESTING ACTIVITIES:Purchase of investments:Fixed maturities
    
    (
    70,733
    )
    
    (
    182,931
    )Equity securities
    
    
    0
    
    
    (
    5,590
    )Limited partnerships
    
    (
    5
    )
    
    (
    650
    )Sales/maturities of investments:Sales of fixed maturities
    
    
    49,784
    
    
    
    76,777Calls/maturities of fixed maturities
    
    
    3,530
    
    
    
    29,032Equity securities
    
    
    0
    
    
    
    3,154Limited partnerships
    
    
    800
    
    
    
    1,617Increase in collateral from securities lending
    
    
    13,733
    
    
    
    32,519Net mortgage loans
    
    
    44
    
    
    
    300Net policy loans
    
    (
    146
    )
    
    (
    54
    )Net cash used in investing activities
    
    (
    2,993
    )
    
    (
    45,826
    )CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:Annuity and supplementary
contract deposits and interest
    
    
    33,603
    
    
    
    72,153Annuity and supplementary
contract surrenders and withdrawals
    
    (
    17,966
    )
    
    (
    12,318
    )Universal life deposits and interest
    
    
    4,820
    
    
    
    5,093Universal life surrenders
    
    (
    1,807
    )
    
    (
    1,251
    )Dividends paid to shareholders
    
    (
    1,985
    )
    
    (
    1,985
    )Net cash provided by financing activities
    
    
    16,665
    
    
    
    61,692Net increase in cash and cash equivalents
    
    
    12,269
    
    
    
    12,773Cash and cash equivalents at beginning of period
    
    
    91,667
    
    
    
    97,022Cash and cash equivalents at end of period
    
    $
    103,936
    
    
    $
    109,795See Notes to Financial Statements.
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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 accrual) considered
necessary for a fair presentation have been included. Operating results for
the three-month period ended March 31, 2004 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2004. 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, 2003 as filed with the Securities and Exchange Commission on March
8, 2004. NOTE B  RECLASSIFICATIONS Certain amounts previously reported in the 2003 financial statements have been
reclassified to conform to the current periods presentation. Such
reclassifications did not impact earnings or total Shareholders Equity. NOTE C  INVESTMENTS At March 31, 2004 and 2003, 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. 8




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE C  INVESTMENTS (Continued) The following is a summary of available-for-sale securities: Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    EstimatedCost
    
    Gains
    
    Losses
    
    Fair ValueMarch 31, 2004Fixed Maturities:Bonds:U.S. treasuries and
government agencies
    
    $
    67,161
    
    
    $
    2,697
    
    
    $
    0
    
    
    $
    69,858Public utilities
    
    
    147,103
    
    
    
    13,532
    
    
    
    73
    
    
    
    160,562U.S. banks, trusts
and insurance companies
    
    
    168,522
    
    
    
    13,361
    
    
    
    148
    
    
    
    181,735U.S. industrial and miscellaneous
    
    
    540,176
    
    
    
    51,226
    
    
    
    163
    
    
    
    591,239Mortgage-backed
    
    
    158,604
    
    
    
    6,360
    
    
    
    79
    
    
    
    164,885Asset-backed
    
    
    8,023
    
    
    
    478
    
    
    
    0
    
    
    
    8,501Foreign
    
    
    148,964
    
    
    
    16,194
    
    
    
    147
    
    
    
    165,011Total bonds
    
    
    1,238,553
    
    
    
    103,848
    
    
    
    610
    
    
    
    1,341,791Redeemable preferred stock
    
    
    7,016
    
    
    
    340
    
    
    
    0
    
    
    
    7,356Total fixed maturities
    
    
    1,245,569
    
    
    
    104,188
    
    
    
    610
    
    
    
    1,349,147Equity Securities:Nonredeemable preferred stock:Public utilities
    
    
    1,864
    
    
    
    121
    
    
    
    0
    
    
    
    1,985U.S. banks, trusts
and insurance companies
    
    
    13,909
    
    
    
    2,361
    
    
    
    0
    
    
    
    16,270U.S. industrial and miscellaneous
    
    
    17,119
    
    
    
    2,321
    
    
    
    0
    
    
    
    19,440Foreign
    
    
    23,716
    
    
    
    3,255
    
    
    
    0
    
    
    
    26,971Total equity securities
    
    
    56,608
    
    
    
    8,058
    
    
    
    0
    
    
    
    64,666Total available-for-sale securities
    
    $
    1,302,177
    
    
    $
    112,246
    
    
    $
    610
    
    
    $
    1,413,813
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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE C  INVESTMENTS (Continued) Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    EstimatedCost
    
    Gains
    
    Losses
    
    Fair ValueDecember 31, 2003Fixed Maturities:Bonds:U.S. treasuries and
government agencies
    
    $
    61,176
    
    
    $
    1,543
    
    
    $
    37
    
    
    $
    62,682Public utilities
    
    
    141,154
    
    
    
    10,377
    
    
    
    528
    
    
    
    151,003U.S. banks, trusts
and insurance companies
    
    
    158,731
    
    
    
    9,358
    
    
    
    836
    
    
    
    167,253U.S. industrial and miscellaneous
    
    
    547,363
    
    
    
    41,077
    
    
    
    776
    
    
    
    587,664Mortgage-backed
    
    
    145,394
    
    
    
    3,622
    
    
    
    182
    
    
    
    148,834Asset-backed
    
    
    5,032
    
    
    
    330
    
    
    
    0
    
    
    
    5,362Foreign
    
    
    137,741
    
    
    
    13,314
    
    
    
    933
    
    
    
    150,122Total bonds
    
    
    1,196,591
    
    
    
    79,621
    
    
    
    3,292
    
    
    
    1,272,920Redeemable preferred stock
    
    
    7,016
    
    
    
    391
    
    
    
    0
    
    
    
    7,407Total fixed maturities
    
    
    1,203,607
    
    
    
    80,012
    
    
    
    3,292
    
    
    
    1,280,327Equity Securities:Nonredeemable preferred stock:Public utilities
    
    
    1,864
    
    
    
    136
    
    
    
    0
    
    
    
    2,000U.S. banks, trusts
and insurance companies
    
    
    13,909
    
    
    
    1,921
    
    
    
    0
    
    
    
    15,830U.S. industrial and miscellaneous
    
    
    17,119
    
    
    
    1,775
    
    
    
    20
    
    
    
    18,874Foreign
    
    
    23,716
    
    
    
    2,528
    
    
    
    0
    
    
    
    26,244Total equity securities
    
    
    56,608
    
    
    
    6,360
    
    
    
    20
    
    
    
    62,948Total available-for-sale securities
    
    $
    1,260,215
    
    
    $
    86,372
    
    
    $
    3,312
    
    
    $
    1,343,275
 Realized gains and losses on the sales 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 realizable
value. The impairments are made on an individual security basis and are
recorded as a component of net realized gains on investments in the Statements
of Operations. The components of net realized gains on investments as reported in the
Statements of Operations are included below. There were no impairment charges
recorded in the first quarter of 2004. Included in the first quarter of 2003 gross realized losses are impairment
charges of $3.5 million related to fixed maturities. 10




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE C  INVESTMENTS (Continued) Three Months Ended
    
    Three Months EndedMarch 31, 2004
    
    March 31, 2003Fixed maturities:Gross realized gains
    
    $
    2,975
    
    
    $
    7,004Gross realized losses
    
    (
    127
    )
    
    (
    4,833
    )Net realized gains
    
    
    2,848
    
    
    
    2,171Equity securities:Net realized losses
    
    
    0
    
    
    (
    9
    )Net realized gains on investments
    
    $
    2,848
    
    
    $
    2,162
 The gross unrealized losses at March 31, 2004 span the various investment
categories of fixed
maturities and equity securities. The gross unrealized losses are aged as
follows: Estimated
    
    NumberUnrealized
    
    Amortized
    
    Fair
    
    ofLoss
    
    Cost
    
    Value
    
    HoldingsSix months or less
    
    ($
    70
    )
    
    $
    23,231
    
    
    $
    23,161
    
    
    
    9Six to 12 months
    
    (
    498
    )
    
    
    34,710
    
    
    
    34,212
    
    
    
    15Greater than 18 months
    
    (
    42
    )
    
    
    4,711
    
    
    
    4,669
    
    
    
    2($
    610
    )
    
    $
    62,652
    
    
    $
    62,042
    
    
    
    26
 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. Securities lending collateral
is recorded by the Company as a liability. The proceeds from the collateral
are invested in cash and short-term investments and are reported on the
Statements of Financial Position as cash and cash equivalents. 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, 2004
and 2003, related to this program totaled $28 and $21, respectively. The Company had loaned securities with a market value of $77.5 million and
$64.1 million and secured collateral of $79.2 million and $65.5 million at
March 31, 2004 and December 31, 2003, respectively. The Company records the
loaned securities on its Statements of Financial Position as part of its
invested assets. The Company has incurred no losses on the loan program since
the programs inception. 11




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE C  INVESTMENTS (Continued) Limited partnerships at March 31, 2004 include U.S. and foreign real estate and
mezzanine debt investments. Real estate limited partnerships represent 91.0%,
while mezzanine debt limited partnerships represent 9.0%, of the total carrying
value at March 31, 2004. These partnerships are recorded using the
equity method. 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
    
    Three Months EndedMarch 31, 2004
    
    March 31, 2003Mezzanine debt
    
    $
    20
    
    
    ($
    88
    )Real estate
    
    
    135
    
    
    
    368$
    155
    
    
    $
    280
 NOTE D  DEFERRED POLICY ACQUISITION COST (DAC) ASSET The Company incurs significant costs in connection with acquiring new business.
Many of these acquisition costs, which vary with and are primarily related to
the production of new business, are deferred as an asset and amortized over a
period of time. The Company periodically reviews the DAC asset to determine if
it continues to be recoverable from future income. 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 DAC on traditional life insurance products is amortized in relation to
estimated gross premiums in accordance with FAS 60. The DAC on the annuity and
universal life products is amortized in relation to estimated gross profits in
accordance with FAS 97. In the third quarter of 2003 the Company began adjusting the unamortized
balance of DAC for the impact on estimated future gross profits as if net
unrealized appreciation and depreciation on investments had been realized as of
the balance sheet date. The impact of this adjustment, net of tax, is included
in Accumulated Other Comprehensive Income in Shareholders Equity. As of March
31, 2004, the adjustment to DAC resulting from this change in unrealized
investment gains was $20.1 million. The amount charged to Accumulated Other
Comprehensive Income was $13.1 million, net of $7.0 million of tax. During the first quarter of 2004, management of EFL, in response to the
material weakness in internal control over accounting for DAC that was reported
in the Companys 2003 Annual Report on Form 10-K, continued its evaluation of
its DAC accounting processes. See Item 4 of Part I of this Form 10-Q report
for further discussion of this matter. 12




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE E  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. The Company does not sell variable universal life
products. 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. GroupThree Months EndedMarch 31, 2004
    
    TraditionalLife
    
    UniversalLife
    
    FixedAnnuities
    
    Life &Other
    
    CorporateAccount
    
    TotalTotal policy revenue, net of
reinsurance
    
    $
    9,644
    
    
    $
    3,468
    
    
    $
    0
    
    
    $
    867
    
    
    $
    0
    
    
    $
    13,979Total investment-related
and other income
    
    
    1,850
    
    
    
    2,474
    
    
    
    15,208
    
    
    
    51
    
    
    
    2,493
    
    
    
    22,076Total revenues
    
    
    11,494
    
    
    
    5,942
    
    
    
    15,208
    
    
    
    918
    
    
    
    2,493
    
    
    
    36,055Less: Total benefits and
expenses
    
    
    10,271
    
    
    
    2,747
    
    
    
    13,146
    
    
    
    490
    
    
    
    0
    
    
    
    26,654Income before taxes
    
    $
    1,223
    
    
    $
    3,195
    
    
    $
    2,062
    
    
    $
    428
    
    
    $
    2,493
    
    
    $
    9,401Three Months Ended
March 31, 2003Total policy revenue, net of
reinsurance
    
    $
    8,963
    
    
    $
    3,279
    
    
    $
    1
    
    
    $
    846
    
    
    $
    0
    
    
    $
    13,089Total investment-related
and other income
    
    
    1,892
    
    
    
    2,386
    
    
    
    14,846
    
    
    
    41
    
    
    
    2,038
    
    
    
    21,203Total revenues
    
    
    10,855
    
    
    
    5,665
    
    
    
    14,847
    
    
    
    887
    
    
    
    2,038
    
    
    
    34,292Less: Total benefits and
expenses
    
    
    9,406
    
    
    
    4,309
    
    
    
    11,488
    
    
    
    810
    
    
    
    0
    
    
    
    26,013Income before taxes
    
    $
    1,449
    
    
    $
    1,356
    
    
    $
    3,359
    
    
    $
    77
    
    
    $
    2,038
    
    
    $
    8,279
 13




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE F  REINSURANCE The Company has entered into various reinsurance treaties for the purpose of
ceding the excess of life insurance face amounts over Company established
retention limits. 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. The Company considers all of its
reinsurance assets to be collectible; therefore, no allowance has been
established for uncollectible amounts. Generally, the Companys retention limit is $300 per life for individual
coverage. For its two newest products, ERIE Flagship Term2 and ERIE Target
Term, 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 $300 retention limit. For its disability
income product, the Company has a 50% quota share agreement with its reinsurer.
As of March 31, 2004 and 2003, $10.0 billion and $7.4 billion, respectively,
of life insurance in force was ceded to other companies. The Companys most
significant reinsurance business is with Generali USA Reassurance Company,
which reinsures a portion of the Companys life and accident and health
business. At March 31, 2004, the amount of in-force life insurance ceded to
Generali totaled approximately $5.8 billion. 14




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE F  REINSURANCE (Continued) The effect of ceded reinsurance in the Statements of Operations is as follows: Three Months Ended
    
    Three Months EndedMarch 31, 2004
    
    March 31, 2003Revenues:Direct policy revenue
    
    $
    18,023
    
    
    $
    16,400Policy revenue ceded
    
    (
    4,044
    )
    
    (
    3,311
    )Net policy revenue
    
    
    13,979
    
    
    
    13,089Net investment income
    
    
    18,755
    
    
    
    18,584Net realized gains on investments
    
    
    2,848
    
    
    
    2,162Equity in earnings of limited
partnerships
    
    
    155
    
    
    
    280Other income
    
    
    318
    
    
    
    177Total revenues
    
    $
    36,055
    
    
    $
    34,292Benefits and expenses:Death benefits
    
    $
    6,626
    
    
    $
    5,207Reinsurance recoveries
    
    (
    1,722
    )
    
    (
    1,366
    )Net death benefits
    
    
    4,904
    
    
    
    3,841Interest on deposits and
other policyholder benefits
    
    
    12,966
    
    
    
    11,987Increases in future life policy benefits
    
    
    3,698
    
    
    
    3,126Reinsurance reserve credits
    
    (
    1,451
    )
    
    (
    1,338
    )Net increases in future life policy
benefits
    
    
    2,247
    
    
    
    1,788Amortization of deferred policy
acquisition costs
    
    
    1,283
    
    
    
    3,315Commissions
    
    
    2,163
    
    
    
    2,895Reinsurance commission allowance
    
    (
    1,621
    )
    
    (
    1,554
    )Net commissions
    
    
    542
    
    
    
    1,341General expenses, taxes, licenses
and fees
    
    
    4,712
    
    
    
    3,741Total benefits and expenses
    
    $
    26,654
    
    
    $
    26,013Income before income taxes
    
    $
    9,401
    
    
    $
    8,279
 15




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE G  NOTES PAYABLE TO ERIE INDEMNITY COMPANY The Company has a $15,000 surplus note payable to Erie Indemnity Company (EIC).
This note bears an annual interest rate of 6.45%. Interest on the surplus
note is scheduled to be paid semi-annually, subject to prior approval of the
Pennsylvania Insurance Commissioner. The note is payable on demand on or after
December 31, 2005, subject to prior approval by the Pennsylvania Insurance
Commissioner. The Company accrued interest of $0.2 million on this note during
the first quarter of 2004 and 2003. During the third quarter of 2003, the Company issued a $25,000 surplus note to
EIC in exchange for $25,000 in cash. This surplus note bears an annual
interest rate of 6.70% and is scheduled to be paid semi-annually, subject to
prior approval of the Pennsylvania Insurance Commissioner. The surplus note is
payable on demand on or after December 31, 2018, subject to prior approval by
the Pennsylvania Insurance Commissioner. The Company accrued interest of $0.4
million on this note during the first quarter of 2004. NOTE H  SUPPLEMENTARY DATA ON CASH FLOWS A reconciliation of net income to net cash used in operating activities as
presented in the Statements of Cash Flows is as follows: Three Months Ended
    
    Three Months EndedMarch 31, 2004
    
    March 31, 2003(Dollars in thousands)CASH FLOWS USED IN OPERATING ACTIVITIES:Net income
    
    $
    5,830
    
    
    $
    5,406Adjustments to reconcile net income to net cash
used in operating activities:Amortization of deferred policy acquisition costs
    
    
    1,283
    
    
    
    3,315Other amortization
    
    
    246
    
    
    
    120Deferred federal income tax expense (benefit)
    
    
    1,084
    
    
    (
    852
    )Realized gains on investments
    
    (
    2,848
    )
    
    (
    2,162
    )Equity in earnings of limited partnerships
    
    (
    155
    )
    
    (
    280
    )Decrease in premium and other receivables
    
    
    204
    
    
    
    1,028Increase in accrued investment income
    
    (
    3,330
    )
    
    (
    4,654
    )Policy acquisition costs deferred
    
    (
    3,476
    )
    
    (
    5,922
    )Increase in other assets
    
    (
    95
    )
    
    
    0Increase in reinsurance recoverables and reserve credits
    
    (
    1,232
    )
    
    (
    958
    )Decrease in prepaid federal income taxes
    
    
    2,506
    
    
    
    3,711Increase in future policy benefits and claims
    
    
    3,338
    
    
    
    3,323Decrease in other policyholder funds
    
    (
    2,296
    )
    
    (
    2,768
    )Decrease in reinsurance premium due
    
    (
    1,089
    )
    
    (
    985
    )Decrease in accounts payable and due to affiliates
    
    (
    1,373
    )
    
    (
    1,415
    )Net cash used in operating activities
    
    ($
    1,403
    )
    
    ($
    3,093
    )
 NOTE I  COMMITMENTS The Company has outstanding commitments to invest up to $1.5 million in real
estate limited partnerships at March 31, 2004. These commitments will be
funded as required through the end of the respective investment periods, which
typically span 3 to 5 years. 16




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited) (Continued) NOTE J  STATUTORY INFORMATION The minimum statutory capital and surplus requirements under Pennsylvania law
for stock life insurance companies (Section 386 of the Pennsylvania Insurance
Company Law) amounts to $1,650. In addition, the Company is subject to certain
risk based capital surplus requirements. The Companys total statutory capital
and surplus significantly exceed these minimum requirements. 17




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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 17,
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, 2003 as filed with the Securities and Exchange Commission on
March 8, 2004. FINANCIAL OVERVIEW Net income increased to $5.8 million, or $0.62 per share, in the first quarter
of 2004, compared to $5.4 million, or $0.57 per share, for the first quarter of
2003. An increase in policy revenues was principally responsible for this
growth. REVENUES Analysis of Policy Revenue Total net policy revenue increased 6.8% to $14.0 million in the first quarter
of 2004 from $13.1 million during the same period in 2003. Contributing to
this growth was an increase in net premiums on traditional life insurance
products. Net premiums on traditional life insurance policies increased $0.9
million, or 9.5%, to $10.3 million for the quarter ended March 31, 2004. Total
policies in force on traditional life insurance products increased 6.6% to
203,840 at March 31, 2004, compared to 191,257 at March 31, 2003. Although total net premiums are up in 2004, sales of new traditional policies
declined in the first quarter of 2004 when compared to the same period in 2003.
Direct new premiums on traditional life insurance policies were down 10.5% to
$2.4 million for the quarter ended March 31, 2004, from $2.7 million for the
quarter ended March 31, 2003. The decline in new premiums was offset by a
significant increase in direct renewal premiums. Direct renewal premiums on
traditional life insurance policies increased 19.7%, to $11.5 million for the
quarter ended March 31, 2004 from $9.6 million during the same period in 2003 Analysis of Investment-related Income Net investment income increased $0.2 million to $18.8 million in the first
quarter of 2004 from $18.6 million for the same period in 2003. The slight
increase in net investment income for the first quarter of 2004 compared to the
same period in 2003 is due in part to lower yielding fixed income securities. Net realized capital gains on investments were $2.8 million in the first
quarter of 2004, compared to net realized capital gains of $2.2 million in the
first quarter of 2003. There were no impairment charges included in net
realized gains in the first quarter of 2004. In the first quarter of 2003, the
Company recognized impairment charges of $3.5 million for write-downs of fixed
maturity investments deemed to have incurred other-than-temporary impairments
in value. 18




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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 compared
to market indices is presented below: Two year period endedMarch 31, 2004(Pre-tax annualized returns) (1)Erie Family Life Insurance Company indices:Fixed maturities
    
    
    11.59
    %Preferred stock
    
    
    15.33Other indices:Lehman Brothers U.S. Aggregate
    
    
    8.50
    %S & P 500 Composite Index
    
    
    .82
 (1) Includes income, realized and unrealized gains and losses. BENEFITS AND EXPENSES Analysis of Policy-related Benefits and Expenses Net death benefits on life insurance policies increased $1.1 million or 27.7%
in the first quarter of 2004 to $4.9 million. Random fluctuations in death
benefits incurred can be expected when mortality results are measured over a
short time period due to the small number of claims involved. These short-term
fluctuations can influence quarterly or annual results without impacting
long-term profitability. Management believes its underwriting philosophy and
practices are sound. Interest expense incurred on deposits increased $0.9 million, or 8.0%, to $12.6
million in the first quarter of 2004 from $11.7 million in the first quarter of
2003. This increase can be attributed to the growth of annuities on deposit.
At March 31, 2004, the balance of annuity deposits totaled $948.1 million,
compared to $863.5 million at March 31, 2003, an increase of 9.8%. The Company
has lowered its credited interest rates during the last two years to reflect
the current market conditions. Interest was credited on annuity and universal
life deposits in 2004 and 2003 at the following rates: Annuity
    
    Universal LifeDeposits
    
    DepositsJanuary 1, 2003  February 24, 2003
    
    4.00% - 4.80%
    
    5.25% - 6.00%February 25, 2003  March 10, 2003
    
    3.75 - 4.70
    
    5.25 - 6.00March 11, 2003  May 14, 2003
    
    3.75 - 4.70
    
    5.00 - 5.75May 15, 2003  June 1, 2003
    
    3.50 - 4.70
    
    5.00 - 5.75June 2, 2003  July 9, 2003
    
    3.50 - 4.70
    
    4.75 - 5.50July 10, 2003  March 31, 2004
    
    3.00 - 4.70
    
    4.25 - 5.00
 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 $2.2 million in the first quarter of
2004, 19




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF FINANCIAL OPERATIONS (Continued) compared to $1.8 million in the first quarter of 2003, an increase of 25.6%.
The increase in reserves is a result of the success of the Companys newest
traditional life insurance products, ERIE Target Term and ERIE Flagship Term2.
These products are largely responsible for the growth in life insurance in
force which, at March 31, 2004, has grown to $27.7 billion, compared to
approximately $24.3 billion at March 31, 2003. Amortization of deferred policy acquisition costs (DAC) decreased $2.0 million
to $1.3 million in the first quarter of 2004 when compared to the same period
in 2003. During the first quarter of 2003, the Company recorded amortization
based on the results of a recoverability analysis done for the year ended
December 31, 2002 that indicated that higher levels of DAC amortization were
necessary. An updated analysis of recoverability during the fourth quarter of
2003 and first quarter 2004 supported lower DAC amortization which was
reflected in first quarter 2004 DAC based on updated estimates of
recoverability. In addition, during the first quarter of 2004 a reduction in amortization of
$0.6 million was recorded as a result of unlocking of interest spreads and
premium tax assumptions and updating estimated gross profit calculations to
include the impact of realized gains and losses under FAS 97. Analysis of Other Expenses Direct commissions to independent agents include new and renewal commissions,
production bonuses and promotional incentives. 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 second-year commissions qualify for deferral
as DAC. For the first quarter of 2004, net commission expense decreased $0.8
million to $0.5 million, compared to $1.3 million for the first quarter of
2003. This decrease is primarily attributable to the decline in annuity sales.
Annuity premiums for the quarter ended March 31, 2004 were $14.3 million,
compared to $55.7 million for the same period in 2003. Commissions and bonuses
on these premiums, net of DAC, were $0.3 million and $0.7 million for the
periods ended March 31, 2004 and 2003, respectively. General expenses, net of DAC, increased $0.8 million, or 26.6%, to $3.9 million
for the first quarter of 2004, compared to $3.1 million for the same period in
2003. General expenses include wages and salaries, employee benefits, data
processing expenses, 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, wages, salaries and employee benefits of
underwriting personnel, and salaries, employee benefits and bonuses paid to
sales employees for the production of life and annuity business. The increase in general expenses is partially the result of an increase in
Information Technology resources of the Erie Insurance Group
allocated to the Company for ongoing systems projects. 20




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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, 2004, the Companys investment portfolio
consisting of cash, investment grade bonds and investment grade preferred
stock, totaled more than $1.5 billion, or 86.4% of total assets. These
resources provide the liquidity the Company requires to meet known and
unforeseen demands on its funds. The Company continually reviews the investment portfolio to evaluate positions
that might incur other-than-temporary declines in value. For investment
holdings, general economic conditions and/or conditions specifically affecting
the underlying issuer or its industry, including downgrades by the major rating
agencies, are considered in evaluating impairment in value. In addition to
specific factors, other factors considered in the Companys review of
investment valuation are the length of time the market value is below cost and
the amount the market value is below cost. For fixed maturity and preferred stock investments, the Company individually
analyzes all positions with emphasis on those that, in managements opinion,
have declined significantly below cost. The Company considers market
conditions, industry characteristics and the fundamental operating results of
the issuer to determine if declines in value are due to changes in interest
rates, changes relating to
a decline in credit quality, or other issues affecting the investment.
Positions that have incurred significant market price declines for extended
periods, in which the creditworthiness of the issuer or other factors indicate
a decline that is other-than-temporary, are recognized as impaired and
reflected as a charge to the Companys operations. If the Companys policy for determining the recognition of impaired positions
were different, 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. 21




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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 meet the payment of
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 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. Generally, 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
and commissions to agents. The Companys liquidity position remains strong as
investments and cash and cash equivalents increased by $82.4 million during the
first three months of 2004 to $1.5 billion. 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 $25.8 million in the
first quarter of 2004 and $65.5 million in the first quarter of 2003. 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 began to slow during the second half of 2003 as
the Company lowered its credited interest rates and the equity market improved. The Companys current commitments for expenditures as of March 31, 2004 are
primarily for policy death benefits, policy surrenders and withdrawals, general
operating expenses, federal income taxes, and dividends to shareholders. In
addition, the Company has outstanding commitments to invest up
to $1.5 million in real estate limited partnerships at March 31, 2004. 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 $10.0 million committed line of credit and letter
agreement with PNC Bank, N.A. 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, 2004 and December 31, 2003, securities held
as collateral on the committed line of credit totaled $15.2 million and $15.1
million, respectively. At March 31, 2004 and December 31, 2003, there were no
borrowings on this line of credit. 22




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF FINANCIAL OPERATIONS (Continued) FACTORS THAT MAY AFFECT FUTURE RESULTS Agent Compensation In 2003, management of the Erie Insurance Group made a commitment to focus on
property/casualty underwriting profitability. One of the changes made to
accomplish this goal was to revamp the agency compensation program, including
making several changes to the Companys commission and bonus structure.
Effective December 16, 2003, the Company implemented a reduction in the
commissions paid on annuities and restructured the bonus program, including
life insurance bonuses. These bonuses, which had been in place for nearly 20 years, were designed to
incent agents to sell the
Companys products when the life insurance product portfolio was limited and
less competitive
with industry leaders. Today, with the introduction of new products, the
Companys portfolio is more competitive and flexible. The Company believes the
new commission structure provides competitive levels of compensation and will
recognize and reward superior life insurance production. While the level of
paid commissions may vary in the short-term, management does not expect the
commission expense levels to vary materially since the majority of these
expenses are capitalized as deferred policy acquisition costs. Changes in the
life commission and bonus structures could affect the growth in sales of life
and annuity products by ERIE agencies. Products with Interest Rate Guarantees Several of the Companys annuity and universal life products offer guaranteed
interest rates to policyholders. In response to the current interest rate
environment, the Company has reduced the credited interest rates to
historically low levels. Certain products are now at the minimum interest rates
guaranteed under these policy forms. If the interest rates on fixed income securities continue to decline, the
interest rates available in the marketplace may be insufficient to produce
target profit margins or, in extreme situations, could produce negative profit
margins on annuity and universal life deposits. Effective July 10, 2003, the Company revised its current deferred annuity
products to lower interest rate guarantees on newly issued policies to 1.5% in
all policy years. This change has been approved in all states in which the
Company operates. Annuity contracts issued between February 25, 2003 and July 9, 2003 have a
guaranteed interest rate of 3.0%. Contract forms issued before February 2003
have a stepped-down guaranteed interest
rate structure. The guaranteed interest rates and approximate current 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
    %
    
    $
    312,2856-10
    
    
    4.5
    
    
    
    4.0
    
    
    
    111,840Over 10
    
    
    4.5
    
    
    
    3.5
    
    
    
    119,931All Years
    
    
    3.0
    
    
    
    3.0
    
    
    
    31,740All Years
    
    
    1.5
    
    
    
    1.5
    
    
    
    13,852
 23




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF FINANCIAL OPERATIONS (Continued) The Company has some ability to restrict new deposits on its universal life and
annuity policy contracts. New deposits can be limited under the terms of the
Companys universal life and annuity contracts as follows:  
    
    Universal life products provide for planned premium amounts.
Additional unplanned premium payments may be made at any time during
the insureds lifetime and before the end of the payment period. The
amounts of such payments must be acceptable to the Company and be
within IRS guidelines. Policies in force at March 31, 2004 have an
annualized planned premium of $30.2 million.
    
    Flexible premium deferred annuity (FPDA) contracts allow the
Company to limit deposits to a maximum of $25,000 per year. The
Company began limiting deposits to the contractual maximum effective
July 10, 2003 on products with interest rate guarantees exceeding
3.0% to
insure that overall product interest spreads are maintained.
Currently, there are 23,263 FPDA contracts in force, of which 20,433
have guarantees in excess of 3.0%. No additional payments are
permitted on single premium deferred annuity contracts. During the first quarter of 2004, the average rate credited on flexible premium
deferred annuity and universal life account values was 4.18% and 4.58%,
respectively. The current coupon yield on fixed maturities matched against
universal life and annuity products at March 31, 2004, is 6.0%. 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. 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. 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. 24




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF FINANCIAL OPERATIONS (Continued) Introduction of ERIEConnection® In 2001, the Erie Insurance Group, including the Company, began the development
of several eCommerce initiatives in support of the Groups business model of
distributing insurance products exclusively through independent agents. These
initiatives include customer interaction systems that are intended to improve
service and efficiency, as well as result in increased sales. The implementation of the new system will require a significant investment in
training and orientation for the independent agency force. During
implementation, as agency resources are dedicated to learning the new system,
sales of new business could be adversely affected over the short term. The
amount of lost sales will correlate to the timing and duration of the systems
rollout effort as well as the number and types of system issues encountered.
Precise measurement of the impact on sales is not estimable. 
 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 2003 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 2003 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 2003 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 2004 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. 25




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ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of March 31, 2004, the Company conducted an evaluation, under the
supervision and with the participation of the Companys management, including
its Chief Executive Officer and its Chief Financial Officer, of 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 of 1934). Based on this evaluation, the Companys Chief
Executive Officer and Chief Financial Officer concluded that, except for the
previously disclosed material weakness relating to the Companys accounting for
deferred acquisition costs (DAC), the Companys disclosure controls and
procedures as of March 31, 2004 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 2003, the Company identified a weakness in
internal control over the processes used to determine the recorded amount of
DAC and related DAC amortization. The Companys independent auditors, Ernst &
Young, LLP, in conjunction with its audit of the Companys 2003 financial
statements, characterized this weakness as a material weakness, as defined in
Statement on Auditing Standards No. 60. The material weakness was communicated
to the Companys management and the Audit Committee of the Board. The
Companys management, under the direction of its Chief Executive Officer and
its Chief Financial Officer, and in collaboration with the Audit Committee of
the Board, has developed a plan to correct this weakness in internal control
during 2004. The plan entails implementation of improved procedures and
controls over periodic DAC computations and balances, ongoing evaluation of
underlying assumptions, monitoring of DAC trends and ratios and the
installation of improved valuation systems. The plan has been reviewed with,
and progress is being monitored by the Audit Committee of the Board and Company
management, including the Chief Executive Officer and the Chief Financial
Officer. The Company has made substantive progress in correcting the material weakness
during the first quarter of 2004. An independent consulting actuary has been
engaged to provide oversight over the team of internal actuarial and accounting
personnel performing the evaluation process. This independent consulting
actuary is providing direction and guidance in evaluating past practices and in
implementing procedures and controls regarding actuarial functions. While the evaluation continues, the Company has already effected certain
improvements to its DAC accounting procedures. For example, actuarial and
financial personnel have developed management reports to enable management to
better monitor DAC trends and ratios. These reports are reviewed along with the
Companys monthly financial statements, which increase transparency in
understanding the periodic results of operations. The Company has also
finalized negotiations to purchase a new valuation system. Management
evaluated the software packages of multiple potential vendors to determine the
package most suitable for the Company from a user and technical standpoint and
selected a package in April of 2004. Installation of this new system will begin
in the second quarter of 2004 and is expected to extend through year-end. During the evaluation of DAC accounting practices, the Company has identified
adjustments to its previously issued financial statements that would require
restatement if the evaluation were complete and no further adjustments were
identified through the completion of the evaluation. The adjustments identified
through the date of this filing would reduce reported shareholders equity by
approximately 26




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ITEM 4. CONTROLS AND PROCEDURES (Continued) $5 million or 2% of shareholders equity at March 31, 2004 and December 31,
2003 and reduce reported DAC by approximately $8 million or 8% of the DAC asset
at March 31, 2004 and December 31, 2003. Certain of these adjustments affect
previously reported DAC through direct charges to shareholders equity
while others would require adjustments to previously reported results of
operations. The adjustments identified to date are not believed by management
to be material to the Companys results of operations for the first quarter of
2004 or for the years ended December 31, 2003, 2002 or 2001. The Company is
continuing its evaluation of DAC accounting practices and may identify
additional adjustments to the Companys financial statements that when
considered with the adjustments identified to date may or may not result in the
restatement of the Companys previously issued financial statements. The interim financial statements contained in a Form 10-Q are required to be
reviewed under Statement on Auditing Standards No. 100, Interim Financial
Information, (SAS 100), by an independent public accountant pursuant to Rule
10-01(d) of the Securities and Exchange Commissions Regulation S-X. The
Company is completing its analysis of DAC and believes such review will be
completed in the second quarter of 2004, at which time the SAS 100 review will
be completed. Changes in Internal Control Over Financial Reporting There have been significant changes in the Companys internal controls as part
of the ongoing evaluation of DAC accounting and reporting described immediately
above. Management considers these changes to be an important series of steps
toward remediation of the material weakness in internal control also described
above. While management does not believe the material weakness has
been fully
remediated at the date of this report, management believes the planned process
that is underway will correct the weakness in the months ahead. 27




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PART II. OTHER INFORMATION 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 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
 Reports on Form 8-K On February 25, 2004, the Company filed a report on Form 8-K, reporting under
Item 12, that a press release had been issued reporting the Companys earnings
for the quarter and year ended December 31, 2003. On March 5, 2004, the Company filed a report on Form 8-K, reporting under Item
5, that a dividend had been declared at its March 2, 2004 board meeting. 28




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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. Erie Family Life Insurance Company(Registrant)Date: May 13, 2004
    
    /s/ Jeffrey A. Ludrof(Jeffrey A. Ludrof, President & CEO)/s/ Philip A. Garcia(Philip A. Garcia, Executive Vice President & CFO)
 29