##### 



EXHIBIT 13

SELECTED FINANCIAL DATA
(All amounts in thousands, except per share data)

|                                           |  |      |                         |      |  |      |           |      |  |      |           |  |  |   |         |  |  |   |         | 
|------------------------------------------ |  | ---- | ----------------------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | ------- |  |  | - | ------- | 
|                                           |  |      | Years Ended December 31
|                                           |  | 2002 |                         | 2001 |  | 2000 |           | 1999 |  | 1998
|OPERATING DATA                             |  |      |                         |      |  |      |           |      |  |      |           |  |  |   |         |  |  |   |         | 
|                                          
|Total net policy revenue                   |  | $    | 51,129                  |      |  | $    | 46,491    |      |  | $    | 44,537    |  |  | $ | 41,686  |  |  | $ | 38,239  | 
|Net investment & other income              |  |      | 70,765                  |      |  |      | 62,669    |      |  |      | 63,876    |  |  |   | 56,905  |  |  |   | 53,088  | 
|Net realized (losses) gains on investments |  |      | (9,610                  | )    |  |      | (19,646   | )    |  |      | 6,960     |  |  |   | 4,333   |  |  |   | 4,883   | 
|                                           |  |      |                         |      |  |      |           |      |  |      |           |  |  |   |         |  |  |   |         | 
|Total revenues                             |  | $    | 112,284                 |      |  | $    | 89,514    |      |  | $    | 115,373   |  |  | $ | 102,924 |  |  | $ | 96,210  | 
|                                           |  |      |                         |      |  |      |           |      |  |      |           |  |  |   |         |  |  |   |         | 
|Total benefits & expenses                  |  |      | 98,747                  |      |  |      | 85,327    |      |  |      | 76,550    |  |  |   | 67,998  |  |  |   | 62,269  | 
|                                           |  |      |                         |      |  |      |           |      |  |      |           |  |  |   |         |  |  |   |         | 
|Income before income taxes                 |  | $    | 13,537                  |      |  | $    | 4,187     |      |  | $    | 38,823    |  |  | $ | 34,926  |  |  | $ | 33,941  | 
|Provision for federal income taxes         |  |      | 4,697                   |      |  |      | 1,449     |      |  |      | 13,433    |  |  |   | 11,601  |  |  |   | 11,856  | 
|                                           |  |      |                         |      |  |      |           |      |  |      |           |  |  |   |         |  |  |   |         | 
|Net income                                 |  | $    | 8,840                   |      |  | $    | 2,738     |      |  | $    | 25,390    |  |  | $ | 23,325  |  |  | $ | 22,085  | 
|                                           |  |      |                         |      |  |      |           |      |  |      |           |  |  |   |         |  |  |   |         | 
|Net income per share                       |  | $    | 0.94                    |      |  | $    | 0.29      |      |  | $    | 2.69      |  |  | $ | 2.47    |  |  | $ | 2.34    | 
|                                          
|FINANCIAL POSITION                         |  |      |                         |      |  |      |           |      |  |      |           |  |  |   |         |  |  |   |         | 
|                                          
|Total assets                               |  | $    | 1,389,619               |      |  | $    | 1,169,442 |      |  | $    | 1,020,343 |  |  | $ | 954,532 |  |  | $ | 917,606 | 
|                                          
|Shareholders equity                       |  |      | 224,447                 |      |  |      | 205,759   |      |  |      | 195,720   |  |  |   | 171,103 |  |  |   | 182,531 | 
|                                          
|Book value per share                       |  |      | 23.75                   |      |  |      | 21.77     |      |  |      | 20.71     |  |  |   | 18.11   |  |  |   | 19.32   | 
|                                          
|Dividends declared per share               |  | $    | 0.84                    |      |  | $    | 0.78      |      |  | $    | 0.72      |  |  | $ | 0.66    |  |  | $ | 0.60    | 
|                                          
|Average number of shares outstanding       |  |      | 9,450                   |      |  |      | 9,450     |      |  |      | 9,450     |  |  |   | 9,450   |  |  |   | 9,450   | 

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Managements Discussion and
Analysis of Financial Condition & Results of Operations

The following discussion and analysis should be read in conjunction with the
financial statements and related notes found on pages 31-49, as they contain
important information that is helpful in evaluating the Companys operating
results and financial condition.



General

---

Erie Family Life Insurance Company (the Company) is a Pennsylvania life
insurance company formed to underwrite and sell nonparticipating individual and
group life insurance policies, including fixed universal life. The Company also
sells fixed individual and group annuities and disability income policies. The
Company markets its products through independent Agents throughout ten states
and the District of Columbia. The Company is owned 21.6 percent by Erie
Indemnity Company (EIC), 53.5 percent by Erie Insurance Exchange (Exchange) and
the remaining 24.9 percent by public shareholders. The Company, EIC and the
Exchange and its subsidiaries and affiliates operate collectively under the name
Erie Insurance Group.

Significant Transactions with Related Parties

---

The Company, EIC, and the Exchange share common facilities and services. The
costs of such common services are allocated to the Company based upon the
Companys usage. Additionally, EIC is the common paymaster for the Erie
Insurance Group. The Company reimburses EIC for its salary and benefit costs.
Operating expenses of the Company paid by EIC are reimbursed on a monthly basis.
The amount of these reimbursements for the Company totaled $23.8 million, $18.5
million and $18.6 million for 2002, 2001 and 2000, respectively. No interest is
charged or received on intercompany balances due to the timely settlement terms
and nature of the items.

Employees performing services for the Company participate in the pension and
other Employee benefit plans sponsored by EIC. Pension benefits are based on
years of service and salary. Pension costs are funded by EIC in amounts
sufficient to at least meet ERISA minimum funding requirements. The Company
reimburses EIC on a monthly basis for its share of pension costs. The Company,
through EIC, also participates in certain deferred compensation and supplemental
pension plans for certain executive and senior officers. The amounts recorded by
the Company for the deferred compensation and supplemental pension plan are
reimbursed to EIC as payments are made under these plans. Amounts allocated to
the Company from EIC for these pension and other Employee benefit plans totaled
$0.9 million, $0.5 million and $0.6 million for 2002, 2001 and 2000,
respectively.

The Erie Insurance Group affiliated property and casualty insurance companies
periodically purchase annuities from the Company in connection with the
structured settlement of claims. The reserves held for structured settlement
annuities sold to the affiliated property and casualty insurance companies
totaled $186.2 million and $171.0 million at December 31, 2002 and 2001,
respectively.

The Erie Insurance Group Retirement Plan for Employees purchases from the
Company individual annuities for some terminated vested Employees or
beneficiaries receiving benefits. These are nonparticipating annuity contracts
under which the Company has unconditionally contracted to provide specified
benefits to beneficiaries in return for a fixed premium from the plan. Annuity
deposit balances outstanding relating to pension annuities sold to the Erie
Insurance Group Retirement Plan are $47.3 million and $48.8 million at December
31, 2002 and 2001, respectively.

The Erie Insurance Group 401(k) plan for Employees includes an investment option
in a Company annuity. Annuity deposit balances outstanding relating to 401(k)
contributions from Employees are $25.1 million and $22.7 million at December 31,
2002 and 2001, respectively.

The Company has a $15.0 million surplus note payable to EIC. This note bears an
annual interest rate of 6.45 percent. Interest on the surplus note is scheduled
to be paid semi-annually, subject to approval of the Pennsylvania Insurance
Commissioner. The note will be payable on demand on or after December 31, 2005.
During 2002, 2001 and 2000, the Company paid interest to EIC totaling $1.0
million in each year.

Results of Operations

---

Financial overview

Net income increased to $8.8 million, or $0.94 per share, in 2002 from $2.7
million, or $0.29 per share, in 2001. Growth in policy revenues and reduced
levels of realized losses on investments contributed to this increase. The
decrease in realized losses on investments resulted from the sale of the
Companys common stock portfolio in 2002, which produced net realized capital
gains of $8.7 million.

Net income, excluding realized capital losses and related federal income tax
benefits, totaled $15.1 million in 2002 compared to $15.5 million in 2001.
Increases in policy revenue and net investment income in 2002 were offset by
increases in interest on deposits and amortization of DAC.

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##### 



Revenues

Analysis of policy revenue

Total net policy revenue increased by 10.0 percent to $51.1 million in 2002. Net
premiums on traditional life insurance policies increased $2.5 million, or 7.8
percent, to $34.8 million in 2002 from $32.3 million in 2001. First-year net
premiums increased 31.9 percent and contributed $1.3 million to the growth while
net renewal premiums increased 4.4 percent and contributed $1.2 million to the
growth in 2002. In addition to a sales incentive contest held for the Companys
independent Agents in 2002, the popularity of the Companys newest term
products, ERIE Flagship TermSM2 and ERIE Target
TermSM, contributed to the
increase in first-year premiums. The success of the Companys original ERIE
Flagship TermSM product was the primary reason for the increase in renewal
premiums. Policies in force on traditional products increased 9.3 percent to
187,449 in 2002 from 171,440 in 2001. Life insurance in force continues to grow,
totaling $23.2 billion at December 31, 2002, an increase of $4.3 billion, or
22.8 percent, over 2001. Life insurance in force after consideration of
reinsurance ceded increased 9.5 percent to $16.2 billion at December 31, 2002.

In the fourth quarter of 2001, the Company rolled out two new productsERIE
Target TermSM and ERIE Flagship TermSM 2. The ERIE Target
TermSM product has a minimum face amount of $100,000 and
offers a very low initial premium with rates guaranteed for 10 years
on all plans. Under the reinsurance treaty for this new product, the
reinsurer assumes 90 percent of all insurance up to $3.0 million (the
Companys retention limit is $300,000) and assumes all insurance
above that amount. The ERIE Flagship TermSM2, now Erie
Family Lifes most comprehensive term insurance plan for individuals
desiring substantial coverage, offers a minimum face amount of
$100,000 and replaced the ERIE Flagship TermSM product for
new policy sales after October 1, 2001. Under the reinsurance treaty
for this product, the reinsurer assumes 50 percent of all insurance
up to $600,000 (the Companys retention limit is $300,000) and
assumes all insurance above that amount.

Total reinsurance premiums ceded amounted to $12.3 million and $8.1 million in
2002 and 2001, respectively. The increase in ceded premiums resulted from higher
sales volume of the ERIE Target TermSM and ERIE Flagship TermSM2 plans.
The reinsurance premiums ceded on the Flagship and Target TermSM life
insurance products alone amounted to $8.7 million and $4.1 million in 2002 and
2001, respectively.

Universal life products generated premium, net of reinsurance, of $12.2 million,
$11.0 million and $10.2 million in 2002, 2001 and 2000, respectively.
Reinsurance premiums ceded on universal life policies totaled $1.1 million in
2002, 2001 and 2000. Policies in force on universal life products increased 7.2
percent to 47,769 in 2002 from 44,572 in 2001. Reinsurance arrangements for
universal life products did not change from 2001 to 2002.

Total annuity and universal life deposits, which do not appear as revenue on the
Statements of Operations, were $187.7 million, $82.0 million and $62.3 million
in 2002, 2001 and 2000, respectively. First-year and single premium annuity
deposits, excluding deposits for structured settlements and deposits for the
Erie Insurance Group Retirement Plan, increased $100.8 million to $140.6 million
in 2002 from $39.8 million in 2001. The Companys ability to attract deposits
depends in large part on the relative attractiveness of its products compared to
other investment alternatives. Generally, the volatility of the equity markets
and lower interest rates and instability in debt markets in 2002 had a positive
effect on the Companys sales of fixed annuities, which provide stable returns,
principal protection and competitive interest rates.

Analysis of investment-related income

Net investment income increased $5.1 million, or 8.3 percent, in 2002 and $1.7
million, or 2.9 percent, in 2001. The increase in net investment income for 2002
was due to higher invested balances in the Companys fixed maturities partially
offset by lower yields.

The Company recognized net realized losses on investments of $9.6 million and
$19.6 million in 2002 and 2001, respectively, and net realized gains of $7.0
million in 2000. The Company recognized realized losses in 2002 as a result of
the sale of securities and $24.7 million in charges for other-than-temporary
impairments of fixed maturities. During 2002, the Company also sold its entire
common stock portfolio in order to reduce equity price risk in its investment
portfolio. For 2002, net realized gains on the sale of common stock totaled $8.7
million. In 2001, fixed maturity investments in a loss position were sold as
part of a proactive, year-end tax selling strategy. Net realized losses from
sales of these securities totaled $18.0 million in 2001, resulting in recovery
of $6.3 million in federal income taxes paid in 1998, 1999 and 2000.

The Companys equity in earnings of limited partnerships increased to $3.7
million in 2002 from $0.7 million in 2001. Private equity net losses were $1.1
million in 2001. During the fourth quarter 2001, the Company sold its private
equity limited partnerships to the Exchange, recognizing a gain of $1.1 million
at the time of sale based on the September 30, 2001, financial statements
provided by the limited partnerships. During the second quarter of 2002, actual
valuation data was received from these partnerships and the sale price of the
partnerships was adjusted to the value of the

90



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##### 



partnership at the date of sale (December 31, 2001). Final settlement with the
Exchange, based on actual value, resulted in the recognition of $1.3 million of
net realized losses for the Company during 2002.

Benefits and expenses

Analysis of policy-related benefits
and expenses

Net death benefits on life insurance policies increased 16.6 percent in 2002 to
$15.5 million compared to $13.3 million in 2001 and $12.9 million in 2000.
Included in the 2001 death benefits is one claim amounting to $0.3 million, net
of reinsurance, related to the September 11th terrorist attack on the Pentagon
in Washington, D.C. 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 that its underwriting philosophy and practices are sound.

Interest expense incurred on deposits increased $4.8 million, or 11.4 percent,
in 2002 and $2.3 million, or 5.8 percent, in 2001. Interest rates credited on
annuity and universal life deposits were lowered in 2002 to reflect the change
in the current interest rate environment. Due to the stable returns and
principal protection offered by these products, deposits increased significantly
in 2002. At December 31, 2002, annuity deposits totaled $803.7 million, an
increase of 26.2 percent from December 31, 2001, and universal life deposits
totaled $135.6 million, an increase of 11.5 percent from December 31, 2001. The
increase in interest expense was the result of the increases in net annuity and
universal life deposits. The interest rates credited on annuity and universal
life deposits in 2002 and 2001 were at the following rates:

|                            |  |          |            |                |  |  |            |  
|--------------------------- |  | -------- | ---------- | -------------- |  |  | ---------- | -
|                            |  | Annuity  |            | Universal life
|                            |  | deposits |            | deposits      
|                           
|Jan. 1, 2001Sept. 30, 2001 |  |          | 5.25%6.25 | %              |  |  | 6.00%6.75 | %
|Oct. 1, 2001Feb. 19, 2002  |  |          | 5.00%6.00 | %              |  |  | 6.00%6.75 | %
|Feb. 20, 2002Oct. 7, 2002  |  |          | 4.75%5.50 | %              |  |  | 5.50%6.25 | %
|Oct. 8, 2002Dec. 2, 2002   |  |          | 4.25%5.00 | %              |  |  | 5.25%6.00 | %
|Dec. 3, 2002Dec. 31, 2002  |  |          | 4.00%4.80 | %              |  |  | 5.25%6.00 | %

Surrender and other benefits decreased by $0.5 million to $1.8 million in 2002
and increased by $1.4 million to $2.3 million in 2001. The decrease in 2002
resulted from changes in the Companys share of the Pennsylvania Employees Group
Life Insurance (PEGLI) pool. PEGLI is a voluntary reinsurance pool that provides
reinsurance coverage to primary insurers who insure Commonwealth of Pennsylvania
employees upon their retirement. The Companys share of the PEGLI pool benefit
expense amounted to $0.6 million in 2002, $1.0 million in 2001 and $0.4 million
in 2000. The change in the Companys share of the PEGLI pool is subject to
fluctuations inherent in the underwriting of life insurance products. Beginning
July 1, 2000, the Company stopped receiving new business from the PEGLI pool.
Information will continue to be provided to the Company on an annual basis to
determine its share of the pool assets and liabilities until the remaining
balances have run off over time. Surrender and other benefits also include life
surrender benefits, matured endowments, disability benefits and interest on
death benefits.

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. The increase in future life policy benefit
expense increased $0.8 million, or 14.2 percent, in 2002 and increased $1.3
million, or 30.5 percent, in 2001. The required reserves increased with the
success of the newest traditional life insurance products,
ERIE Target TermSM and ERIE Flagship TermSM2, and with the increase in the Companys life
insurance in force of 22.8 percent in 2002.

The amortization of deferred policy acquisition costs increased $2.6 million, or
44.8 percent, in 2002 and $0.7 million, or 13.1 percent, in 2001. At each
balance sheet date, the Company evaluates the historical and expected future
gross profits on its insurance and annuity products. Any adjustment in expected
future gross profit requires that the DAC amortization rate be revised
retroactively to the date of policy issuance. The cumulative difference 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 expense in that period. The converse
would also be true. However, if lower gross profits were to continue into the
future, additional DAC amortization of the existing DAC asset may occur.

The Company periodically reviews the DAC asset to determine if it is recoverable
from future income. If DAC is determined to be unrecoverable, such costs are
expensed at the time of determination. The amount of DAC considered realizable
would be reduced in the near term if the estimate of ultimate or future gross
profits is reduced. The amount of DAC amortization would be revised if any of
the estimates discussed above are revised. In 2002, the actual expenses on the
Companys new term plans exceeded the projected plan expenses, which resulted in
reduced gross profits on those products. As a result of the reduced gross
profits, an adjustment to increase DAC amortization of approximately $2.0
million, or $0.14 per share after taxes, was made in the fourth quarter of 2002
which reduced the DAC asset.

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Analysis of other expenses

General expenses and commissions, net of DAC additions, increased to $16.3
million in 2002 compared to $13.8 million in 2001 and $11.2 million in 2000.
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. 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 branch sales Employees for the production of life and annuity
business, are all deferrable.

General expenses, net of DAC, increased $1.1 million, or 9.4 percent, in 2002
and $2.2 million, or 24.2 percent, in 2001. Medical inspection and exam fees
increased $1.4 million to $4.4 million in 2002. These and other expenses
relating to new business are normally capitalized as DAC. However, a smaller
percentage of these expenses were capitalized in 2002 due to the anticipated
lower profit margins produced by the new ERIE Flagship TermSM, ERIE Flagship
TermSM2 and ERIE Target TermSM products.

Direct commissions to independent Agents include new and renewal commissions,
production bonuses and promotional incentives to Agents. 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.

Commission expense, net of DAC, increased $1.4 million, or 57.0 percent, to $3.8
million in 2002 from $2.4 million in 2001. First-year and incentive commissions
on traditional life insurance products increased $2.5 million to $8.9 million in
2002. As with the general expenses, a smaller percentage of these expenses were
capitalized in 2002 due to the anticipated lower profit margins produced by the
newer term products.

Taxes, licenses and fees, net of DAC, increased $1.0 million, or 47.1 percent,
to $3.2 million in 2002 from $2.1 million in 2001. The Company recognized a
charge of $0.7 million in 2002 from the write-off of a receivable due from the
Pennsylvania Life and Health Insurance Guaranty Association (PLHIGA). This
receivable was originally recorded by the Company, based on information received
from the PLHIGA, to reflect a recalculation of annuity assessments paid in
previous years. Currently, the PLHIGA recalculation of annuity assessments is
the subject of a pending dispute. The Company decided to remove this asset from
its Statements of Financial Position in 2002 due to the uncertainty of the
collectibility of these receivables from PLHIGA.

Financial Condition

---

Investments

The Companys investment strategies and 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.

Distribution of Invested Assets
Carrying Value at December 31

In thousands

|                                    |                 |   |           |        |   |  |       |     |   |   |         |        |  |  |       |     | 
|----------------------------------- | --------------- | - | --------- | ------ | - |  | ----- | --- | - | - | ------- | ------ |  |  | ----- | --- | 
|                                    |                 |   | 2002      |        | % |  | 2001  |     | %
|                                   
|Fixed maturities available-for-sale |                 | $ | 1,039,367 |        |   |  | 91.0  |     |   | $ | 730,270 |        |  |  | 84.0  |    
|Equity securities:                  |                 |   |           |        |   |  |       |     |   |   |         |        |  |  |       |    
|                                    | Preferred stock |   |           | 68,749 |   |  |       | 6.0 |   |   |         | 51,003 |  |  |       | 5.9 | 
|                                    | Common stock    |   |           | 0      |   |  |       | 0.0 |   |   |         | 52,672 |  |  |       | 6.0 | 
|Limited partnerships                |                 |   | 16,053    |        |   |  | 1.4   |     |   |   | 18,249  |        |  |  | 2.1   |    
|Other invested assets               |                 |   | 17,901    |        |   |  | 1.6   |     |   |   | 17,529  |        |  |  | 2.0   |    
|                                   
|Total invested assets               |                 | $ | 1,142,070 |        |   |  | 100.0 |     |   | $ | 869,723 |        |  |  | 100.0 |    
|                                   

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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 have declined more than 20
percent 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 market price declines of over 20 percent for a period greater
than six months where the creditworthiness of the issuer or other factors
indicate a decline that is other-than-temporary, are either sold or recognized
as impaired and reflected as a charge to the Companys operations. In 2002,
impairment charges on fixed maturity securities totaled $24.7 million.

At December 31, 2002, the Companys investment in fixed maturities and equity
securities totaled $1.1 billion, or 97.0 percent, of total invested assets.
These resources provide the liquidity the Company requires to meet known and
unforeseen demands on its funds. Limited partnerships, real estate, policy loans
and real estate mortgage loans comprised 3.0 percent of total invested assets.

The Companys performance of its fixed maturities and equity securities compared
to market indices is presented below.

|                                                     |  |                                                              |        |   
|---------------------------------------------------- |  | ------------------------------------------------------------ | ------ | --
|                                                     |  | Two years
endedDecember 31,
2002(Pre-tax annualized returns)
|                                                    
|                                                    
|Fixed maturities                                     |  |                                                              | 10.19  | % 
|Preferred stock                                      |  |                                                              | 12.18  | % 
|Common stock                                         |  |                                                              | (20.91 | %)
|Other indices:                                       |  |                                                              |        |   
|Lehman Brothers Global Aggregate
Bond IndexUnhedged |  |                                                              | 8.79   | % 
|S&P 500 Composite Index                              |  |                                                              | (17.10 | %)

Fixed maturities

The Companys fixed maturities at December 31, 2002, consist of investments in
bonds, redeemable preferred stock and notes. It is the Companys objective that
the fixed maturity portfolio be of very high quality and well-diversified within
each market sector. The Company only purchases investment-grade securities.
Non-investment grade issues held by the Company are the result of downgrades of
securities previously rated investment grade. The portfolio is managed with the
goal of achieving reasonable returns while limiting exposure to risk.

The Companys fixed maturity investments consist 98.3 percent, or $1.0 billion,
of investment-grade bonds. The below-investment-grade category consists of $8.8
million of medium quality bonds, and $9.0 million of bonds rated at low quality
or below. Generally, the fixed maturity securities in the Companys portfolio
are rated by external rating agencies. If not externally rated, they are rated
by the Company on a basis consistent with the basis used by the rating agencies.

Management believes that having all fixed maturities classified as
available-for-sale securities will allow the Company to meet its liquidity needs
and provide greater flexibility for its investment managers to respond to
changes in market conditions or strategic direction. Securities classified as
available-for-sale are carried at market value with unrealized gains and losses
included in shareholders equity. At December 31, 2002 and 2001, net unrealized
gains on fixed maturities available-for-sale amounted to $34.6 million and $7.7
million, respectively, net of deferred taxes.

Equity securities

Equity securities at December 31, 2002, consist of nonredeemable preferred stock
carried on the Statements of Financial Position at market value. The Company
sold all of its common stock holdings in 2002. At December 31, 2002 and 2001,
nonredeemable preferred stock held by the Company had net unrealized gains of
$1.7 million and $0.4 million, respectively, net of deferred taxes. Common stock
held by the Company at December 31, 2001, had net unrealized gains of $10.6
million, net of deferred taxes. As with the fixed maturities portfolio, the
Companys nonredeemable preferred stock portfolio provides a source of highly
predictable current income. These securities are diversified within each market
sector and support the investment return provided to Policyholders. The
nonredeemable preferred stock consist of $68.7 million of highest or high
quality grade positions at December 31, 2002.

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

93



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##### 



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.

Quantitative and Qualitative
Disclosures About Market Risk

---

The Company is exposed to potential loss from various market risks, including
changes in interest rates, equity prices, and credit risk.

Interest rate risk

The Companys exposure to interest rates is concentrated in the fixed maturities
portfolio. The fixed maturities portfolio comprises 91.0 percent and 84.0
percent of invested assets at December 31, 2002 and 2001, respectively. The
Company does not hedge its exposure to interest rate risk since it has the
capacity and intention to hold the fixed maturity positions until maturity. The
Company calculates the duration and convexity of the fixed maturities portfolio
each month to measure the price sensitivity of the portfolio to interest rate
changes. Duration measures the relative sensitivity of the fair value of an
investment to changes in interest rates. Convexity measures the rate of change
of duration with respect to changes in interest rates. These factors are
analyzed monthly to ensure that both the duration and convexity remain in the
targeted ranges established by management.

Principal cash flows and related weighted-average interest rates by expected
maturity dates for financial instruments sensitive to interest rates are as
follows:

|                       |  |            |           |                  |  |  |     |  
|---------------------- |  | ---------- | --------- | ---------------- |  |  | --- | -
|                       |  | Principal  |           | Weighted-average
|December 31, 2002      |  | cash flows |           | interest rate   
|                      
|(dollars in thousands) |  |            |           |                 
|Fixed maturities:      |  |            |           |                  |  |  |     |  
|2003                   |  | $          | 38,890    |                  |  |  | 6.6 | %
|2004                   |  |            | 24,434    |                  |  |  | 6.7 | %
|2005                   |  |            | 50,201    |                  |  |  | 6.2 | %
|2006                   |  |            | 50,190    |                  |  |  | 6.6 | %
|2007                   |  |            | 63,932    |                  |  |  | 5.7 | %
|Thereafter             |  |            | 763,010   |                  |  |  | 6.9 | %
|                      
|Total                  |  | $          | 990,657   |                  |  |  |     |  
|                      
|Market value           |  | $          | 1,039,367 |                  |  |  |     |  
|                      
|                       |  | Principal  |           | Weighted-average
|December 31, 2001      |  | cash flows |           | interest rate   
|                      
|(dollars in thousands) |  |            |           |                 
|Fixed maturities:      |  |            |           |                  |  |  |     |  
|2002                   |  | $          | 27,102    |                  |  |  | 7.0 | %
|2003                   |  |            | 41,615    |                  |  |  | 7.3 | %
|2004                   |  |            | 27,768    |                  |  |  | 7.5 | %
|2005                   |  |            | 43,103    |                  |  |  | 7.1 | %
|2006                   |  |            | 73,723    |                  |  |  | 6.2 | %
|Thereafter             |  |            | 504,249   |                  |  |  | 7.6 | %
|                      
|Total                  |  | $          | 717,560   |                  |  |  |     |  
|                      
|Market value           |  | $          | 730,270   |                  |  |  |     |  
|                      

Actual cash flows may differ from those stated as a result of calls and
overpayments.

A sensitivity analysis is used to measure the potential loss in future earnings,
fair values or cash flows of market sensitive instruments resulting from one or
more selected hypothetical changes in interest rates and other market rates or
prices over a selected period. In the Companys sensitivity analysis model, a
hypothetical change in market rates is selected that is expected to reflect
reasonably possible changes in those rates. The following pro forma information
is presented assuming a 100 basis point increase in interest rates at December
31 of each year, and reflects the estimated effect on the fair value of the
Companys fixed maturity investment portfolio. The Company used the modified
duration of its fixed maturity investment portfolio to model the pro forma
effect of a change in interest rates at December 31, 2002 and 2001.

Fixed maturity interest rate sensitivity analysis

|                           |  |                    |           |      |  |   |         |  
|-------------------------- |  | ------------------ | --------- | ---- |  | - | ------- | -
|                           |  | As of December 31,
|                           |  | 2002               |           | 2001
|                          
|(dollars in thousands)     |  |                    |           |      |  |   |         |  
|Market value               |  | $                  | 1,039,367 |      |  | $ | 730,270 |  
|Change in market value (1) |  |                    | (58,665   | )    |  |   | (40,164 | )
|Pro forma market value     |  | $                  | 980,702   |      |  | $ | 690,106 |  
|Modified duration (2)      |  |                    | 5.6       | %    |  |   | 5.5     | %



|(1) |  | The change in market value is calculated by taking the negative of the
product obtained by multiplying (i) modified duration by (ii) change in
interest rates by (iii) market value of the portfolio.                                  
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Modified duration is a measure of a portfolios sensitivity to changes in
interest rates. It is interpreted as the approximate percentage change in
the market value of a portfolio for a certain basis point change in
interest rates.

Equity price risk

The Companys portfolio of marketable equity securities, which is carried on the
Statements of Financial Position at estimated fair value, has exposure to price
risk, the risk of potential loss in estimated fair value resulting from an
adverse change in prices. The Companys objective is to earn competitive
relative returns by investing in a diverse portfolio

94



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##### 



of liquid securities. At December 31, 2002 and 2001, nonredeemable preferred stocks comprised 100.0
percent and 49.2 percent of the Companys investment in marketable equity
securities. In 2002, the Company sold its remaining common stock portfolio to
increase the overall earnings stream and reduce the impact of equity price risk.

Credit risk

The Companys objective is to earn competitive returns by investing in a
diversified portfolio of securities. The Companys portfolios of fixed maturity
securities, nonredeemable preferred stock, mortgage loans and, to a lesser
extent, short-term investments are subject to credit risk. 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 manages this risk by
performing up front underwriting analysis and ongoing reviews of credit quality
by position and for the fixed maturity portfolio in total. The Company does not
currently hedge credit risk inherent in its fixed maturity investments.

The Company has entered into various reinsurance treaties for the purpose of
ceding life insurance in force that exceeds the Companys desired retention
limits. Failure of reinsurers to honor their obligations could result in losses
to the Company. The Companys most significant reinsurance business is with
Business Mens Assurance Company of America (BMA), which reinsures a portion of
the Companys life and accident and health business. At December 31, 2002, the
amount of life insurance in force ceded to BMA totaled approximately $4.2
billion, which represents 18.1 percent of total life insurance in force at that
date.

Liquidity and Capital Resources

---

General considerations and
analysis

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. The net positive cash flow is used to fund Company commitments and to
build the investment portfolio, thereby increasing future investment returns.
Net cash provided by operating activities in 2002 was $22.8 million compared to
$18.0 million in 2001 and $14.0 million in 2000. The Companys liquidity
position remains strong as invested assets and cash and cash equivalents
increased 26.4 percent to $1.2 billion at December 31, 2002.

Proceeds from the sales, calls and maturities of fixed maturity positions
totaled $267.6 million and $293.0 million in 2002 and 2001, respectively. Each
of these years was much higher than the $63.9 million of sales, calls and
maturities in 2000. Market interest rates declined in 2002 and 2001, causing
greater levels of calls. Also, record numbers of credit quality downgrades and
defaults occurred in the bond markets in 2002 and 2001. The Company sold many of
these issues in order to improve the overall credit quality of the fixed income
portfolio.

Annuity and universal life deposits, which do not appear as revenue on the
financial statements, are a source of funds. Net cash provided by annuity and
universal life deposits in 2002 were $166.8 million and $14.0 million,
respectively. 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.

The Companys commitments for expenditures as of December 31, 2002, are
primarily for policy death benefits, policy surrenders and withdrawals, general
operating expenses, federal income taxes and dividends to shareholders. 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 enable the
Company to meet foreseeable cash requirements. As an added measure of liquidity,
the Company has arranged for a $10.0 million line of credit with a commercial
bank. There were no borrowings under this credit line in 2002, 2001 or 2000.

Regulatory considerations

The Commonwealth of Pennsylvania follows the statutory accounting practices
minimum Risk-Based Capital (RBC) requirements for domestic insurance companies
that were developed by the NAIC. The NAIC standard set for measuring RBC is a
method of calculating the minimum amount of capital appropriate for an insurance
company to support its overall business operations in consideration of its size
and risk profile. The RBC formula is used by the state insurance regulators as
an early warning tool to identify, for the purpose of initiating regulatory
action, insurance companies that potentially are inadequately capitalized. In
addition, the formula defines minimum capital standards that will supplement the
current system of low fixed minimum capital and surplus requirements on a
state-by-state basis. At December 31, 2002, the Company substantially exceeded
the minimum risk-based capital levels that require regulatory action.

95



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##### 



Critical Accounting Estimates

---

The Company makes estimates and assumptions that can have a significant effect
on amounts and disclosures reported in the financial statements. The most
significant estimates relate to valuation of investments, policy acquisition
costs, reserves for policy liabilities and guaranty fund liability accruals.
While management believes its estimates are appropriate, the ultimate amounts
may differ from the estimates provided. The methods for making these estimates
are continually reviewed and any adjustments considered necessary are reflected
in current earnings.

Investment valuation

Management makes estimates concerning the valuation of all investments and the
timely recognition of other-than-temporary declines in value of these
investments. When the decline in value of an investment is considered by
management to be other-than-temporary, the investment is written down to its
market value. For all investments except limited partnerships, the impairment
charge is included as a realized loss on investments in the Statements of
Operations. For limited partnerships, the impairment charge is included as a
component of equity in earnings of limited partnerships. All investments are
individually monitored for other-than-temporary declines in value. Generally, if
an individual security has depreciated in value by more than 20 percent of
original cost, and has been in such unrealized loss position for more than six
months, management assumes there has been an other-than-temporary decline in
value. In addition, the Company may write down other securities in an unrealized
loss position depending on the existence of certain other factors. These other
factors considered include: the significance of the amount fair value is below
cost; financial condition of the issuer; a significant drop in ratings by
Standard & Poors or Moodys; specific events that occurred affecting an
investment; and specific industry or geographic events.

Deferred policy acquisition costs (DAC)

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. The recovery of these deferred
acquisition costs are dependent on the future profitability of the policies
sold. The amount of future profit is dependent principally on investment
returns, mortality, morbidity, persistency, administration expenses and certain
economic variables, such as inflation. These factors enter into managements
estimates of gross margins and profits, which generally are used to amortize the
deferred acquisition costs. Revisions to estimates result in changes to the
amounts expensed in the reporting period in which the revisions are made and
could result in the impairment of the deferred acquisition cost asset and a
charge to income if estimated future gross margins and profits are less than
amounts deferred.

Insurance liabilities

With respect to reserves for policy liabilities, significant components of
estimates include a variety of factors such as anticipated mortality, morbidity,
withdrawals, lapses and investment yields. Liabilities for life insurance and
income-paying annuity future policy benefits are computed primarily by the net
level premium method. Disability income reserves are calculated as two-year
preliminary term mid-terminal reserves plus unearned premium reserves. Deferred
annuity future policy benefit liabilities are established at accumulated values
without reduction for surrender charges. Reserves for universal life and
investment contracts are based on the contract account balance, if future
benefit payments in excess of the account balance are not guaranteed, or the
present value of future benefit payments when such payments are guaranteed.
Variations are inherent in such calculations due to the estimates and
assumptions necessary in the calculations.

Liability for guaranty fund assessments

Estimates are also made by the Company for guaranty fund and other assessments.
The Company is sometimes required to pay assessments to states in which it is
licensed because of insurance company insolvencies. The liability for the
assessments is recorded when the insolvency event has occurred and can be
reasonably estimated. The Company commonly becomes aware of insolvencies that
will affect it prior to obtaining specific assessment amounts from state
guaranty associations to estimate its share of the liability. The Company
estimates its liability based on information received from the National
Organization of Life and Health Insurance Guaranty Associations (NOLHGA). The
information provided by NOLHGA is only an estimate and subject to change as more
accurate assessment amounts are received.

Factors That May Affect Future Results

---

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 recently reduced the credited interest rates to
historically low levels. Certain products are now within 5 basis points of the
minimum interest rates guaranteed under these policies.

If the interest rates on fixed income securities continue to decline, the
interest rates available in the marketplace may be insufficient to produce our
current target profit margins or in extreme situations, could produce negative
profit margins on

96



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##### 



annuity and universal life deposits. In this situation, new
policy issuance and new money received on existing contracts could be
restricted. For instance, new policy sales could be suspended on policies with
guaranteed interest rates above current market rates until new policy forms with
lower guaranteed rates could be filed and approved by the various states in
which the Company operates.

The Company has filed amendments to current deferred annuity products to lower
interest rate guarantees 150 basis points to 3.0 percent. These forms have been
approved in the District of Columbia, Indiana, Ohio, North Carolina,
Pennsylvania, Tennessee, Virginia, West Virginia and Wisconsin. These states
accounted for 92.2 percent of our new deferred annuity deposits in 2002.

The Company has limited ability in its current universal life and annuity policy
contracts to restrict new deposits on existing contracts. New deposits are
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 life 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
December 31, 2002, have an annualized planned premium of $27.3 million.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Flexible premium deferred annuity contracts allow the Company to limit
deposits to a maximum of $25,000 per year. There are currently over 20,000
contracts in force.                                                                                                                                                                                                                   

Additional reserves on universal life and annuity policies would be required for
new deposits or account balances where the guaranteed interest rate on the
policies exceeded the rate the Company could earn on its investments.

The recovery of acquisition costs previously capitalized on annuity and
universal life products is dependent on the future profitability of this
business. Reduced investment margins over an extended period of time could
affect the recoverability of the deferred policy acquisition asset.

During 2002, the average rate credited on flexible premium deferred annuities
and universal life deposits was 5.3 percent and 5.6 percent, respectively. The
current coupon yield on fixed maturities matched against our universal life and
annuity products at December 31, 2002, is 6.7 percent.

Investment market conditions

The Companys deposit-type products compete with a wide variety of investment
options. Among other factors affecting the investment decisions of Policy holders
and potential Policyholders are general investment market conditions,
particularly the market interest rate environment. 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.

Term insurance pricing environment

In response to the intensely competitive environment for term life insurance,
the Company began selling two new competitively priced term products in 2001:
ERIE Target TermSM ERIE Flagship TermSM2. These products are heavily
reinsured and have reduced profit margins resulting in product offerings that
are extremely competitive. ERIE Target TermSM and ERIE Flagship TermSM2 replace higher margin term products the Company
previously marketed. Continued competitive pricing of term products may prompt
the Company to adjust term premiums further, which could have the effect of
lowering the profitability of the Company and could result in the impairment of
the Companys DAC asset.

Financial ratings

The combination of Company growth and the decline in investment returns exposes
the Company to reduced 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
strength and are specifically designed to provide an independent opinion 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 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.

Geographic expansion

The Company continues to seek quality growth by expanding its operating
territories. The expansion into new operating territories offers the opportunity
for growth in premiums. Over the last several years, geographic expansion has
made a contribution to the premium growth rate of the Company. On December 6,
2001, the Erie Insurance Group announced its intention to expand its marketing
territory into Minnesota. Minnesota will be the 11th state served by the
Company, in

97



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##### 



addition to the District of Columbia. The Company intends to write
all lines of life, health and annuity products it currently offers in Minnesota
beginning in the third quarter of 2004. The Company anticipates that such
expansion will continue to contribute positively to its growth and
profitability.

Federal chartering

Congress is considering legislation that would create an optional federal
charter for insurers. The Insurance Industry Modernization Act would establish
an Office of National Insurers within the Treasury Department. The office would
have the power to charter, license and regulate national insurers and its
director would be required to establish a Division of Consumer Affairs within
the office. The proposed legislation would repeal the McCarran-Ferguson Act,
except for the sharing of historical loss data and activities associated with
participation in mandatory residual market and workers compensation mechanisms.

Federal chartering has the potential to create an uneven playing field for
insurers. Federally chartered companies could be subject to different regulatory
requirements than state chartered insurers in the areas of market conduct
oversight, solvency regulation, guaranty fund participation and premium tax
burdens. If this occurs, federally chartered insurers may obtain a competitive
advantage over state licensed carriers. The federal proposal also raises the
specter of a matrix of regulation and costly, duplicative or conflicting federal
and state requirements. The repeal of the McCarran-Ferguson Act and its partial
exemption for the insurance industry from federal antitrust laws would make it
extremely difficult for insurers to compile and share loss data, develop
standard policy forms and manuals and predict future loss costs.

Privacy

The insurance industry continues to address compliance issues required by the
Gramm Leach Bliley Financial Services Modernization Act (GLBA) and the Health
Insurance Portability and Accountability Act (HIPAA). The GLBA places limits on
how insurers may use and disclose consumer information. It also requires all
financial institutions to adopt internal policies and procedures to protect the
privacy and security of consumer information and to deliver an annual privacy
notice to all customers. Following delivery of these notices in July 2001,
consumer groups complained that the notices were legalistic, complex and
generally not consumer friendly. In response, the NAIC organized a task force
to study the adoption of simplified model language for insurer privacy notices.
The NAIC has also proposed model regulation that addresses the security of
consumer information and provides standards for insurance departments to measure
compliance with privacy laws.

In February 2001, the Department of Health and Human Services (HHS) issued
regulations under HIPAA requiring health plans, health care providers and health
care clearinghouses (covered entities) to adopt privacy policies for the
protection of health information. Regulations have also been adopted to set
standards for the electronic transfer of health information. Although the
Companys insurance operations are not directly subject to the regulations, we
will be required to comply if we elect to engage in the electronic transfer of
information to and from covered entities.

Terrorist actions

The Company is exposed to direct losses arising from possible future terrorist
actions. Additionally, current and future proposed federal measures might affect
the way the life insurance industry handles losses from potential future
terrorist actions. These proposals may include the establishment of a federal
reinsurance program for losses from terrorist actions and possible changes to
the tax laws governing insurance companies.

The Companys substantial portfolio of equity and fixed income investments could
also be affected by potential future terrorist actions that may affect the level
of economic activity as well as investor confidence in the U.S. capital markets.



---

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|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 2002 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.

98



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##### 



Market for the Registrants
Common Stock and Related
Shareholder Matters

---

The Companys common stock is traded on the OTC Bulletin Board (OTCBB) under the
symbol ERIF. The Company had 948 shareholders of record of common stock on
December 31, 2002.

|                        |  |                              |       | 
|----------------------- |  | ---------------------------- | ----- | 
|Date dividends declared |  | Dividends declared per share
|                       
|March 5, 2002           |  | $                            | 0.210 | 
|April 30, 2002          |  |                              | 0.210 | 
|June 11, 2002           |  |                              | 0.210 | 
|September 9, 2002       |  |                              | 0.210 | 
|                       
|                        |  | $                            | 0.840 | 
|                       
|February 14, 2001       |  | $                            | 0.195 | 
|April 24, 2001          |  |                              | 0.195 | 
|June 12, 2001           |  |                              | 0.195 | 
|September 11, 2001      |  |                              | 0.195 | 
|                       
|                        |  | $                            | 0.780 | 
|                       

The amount of dividends the Company can pay to its shareholders without the
prior approval of the Pennsylvania Insurance Commissioner is limited by statute
to the greater of: (a) 10 percent of its statutory surplus as regards
Policyholders as shown on its last annual statement on file with the
commissioner, or (b) the net income as reported for the period covered by such
annual statement, but shall not include pro rata distribution of any class of
the insurers own securities. Accordingly, the maximum dividend payout which may
be made in 2003 without prior Pennsylvania Commissioner approval is $9.0
million. This limitation could restrict the amount of dividends the Company can
declare in 2003.

High/low closing price of common stock

|               |  |      |        |      |  |     |        |      |  |   |        |  |  |   |        | 
|-------------- |  | ---- | ------ | ---- |  | --- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|               |  | 2002 |        | 2001
|               |  | Low  |        | High |  | Low |        | High
|              
|First quarter  |  | $    | 20     |      |  | $   | 21 3/4 |      |  | $ | 16     |  |  | $ | 17 1/2 | 
|Second quarter |  |      | 20 1/4 |      |  |     | 22 5/8 |      |  |   | 16 3/4 |  |  |   | 18 3/4 | 
|Third quarter  |  |      | 21 1/4 |      |  |     | 22 1/8 |      |  |   | 17 4/5 |  |  |   | 21     | 
|Fourth quarter |  |      | 21 1/5 |      |  |     | 22 1/2 |      |  |   | 19     |  |  |   | 21 3/4 | 

99



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##### 



MD&A Graph
 

Index to Graphs included in the Investment Section
of The Managements Discussion and Analysis

|         |  |                                                                                   |  |  |       |  |  |  |  | 
|-------- |  | --------------------------------------------------------------------------------- |  |  | ----- |  |  |  |  | 
|Graph #1 |  | LIFE INSURANCE IN FORCE (BILLIONS)                                                |  |  |       | 
|        
|         |  | 2002 Gross                                                                        |  |  | $23.2
|         |  | 2002 Net                                                                          |  |  | $16.2
|         |  | 2001 Gross                                                                        |  |  | $18.9
|         |  | 2001 Net                                                                          |  |  | $14.8
|         |  | 2000 Gross                                                                        |  |  | $16.5
|         |  | 2000 Net                                                                          |  |  | $13.9
|        
|Graph #2 |  | DIVERSIFICATION OF
FIXED MATURITIES
AT DECEMBER 31, 2002  CARRYING/MARKET VALUE  |  |  |       | 
|        
|         |  | U.S. Industrial & Miscellaneous                                                   |  |  | 57%  
|         |  | U.S. Banks, Trusts and Insurance Companies                                        |  |  | 20%  
|         |  | Public Utilities                                                                  |  |  | 10%  
|         |  | Foreign                                                                           |  |  | 10%  
|         |  | U.S. Treasuries                                                                   |  |  | 3%   
|        
|Graph #3 |  | QUALITY* OF
FIXED MATURITY PORTFOLIO
AT DECEMBER 31, 2002  CARRYING/MARKET VALUE |  |  |       | 
|        
|         |  | Highest                                                                           |  |  | 67%  
|         |  | High                                                                              |  |  | 31%  
|         |  | Medium                                                                            |  |  | 1%   
|         |  | Low or below                                                                      |  |  | 1%   
|         |  | * As rated by Standard & Poors or Moodys Investors Service, Inc.               |  |  |       | 
|        
|Graph #4 |  | DIVERSIFICATION OF
EQUITY SECURITIESAT DECEMBER 31, 2002  CARRYING/MARKET VALUE  |  |  |       | 
|        
|         |  | Foreign Banks & Insurance                                                         |  |  | 58%  
|         |  | U.S. Industrial & Miscellaneous                                                   |  |  | 18%  
|         |  | Foreign Industrial & Miscellaneous                                                |  |  | 13%  
|         |  | U.S. Banks & Insurance                                                            |  |  | 11%  



100



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##### 



Report of Management



|The management of Erie Family Life Insurance Company is
responsible for the preparation of information included in
the financial statements in this Annual Report to Shareholders.
The financial statements have been prepared in
conformity with Generally Accepted Accounting Principles.
The balances in the financial statements are developed from
the financial records of the Company and reflect estimates
using judgment where amounts cannot be measured precisely
or for transactions not yet complete.  |  |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|The Companys system of internal control is designed
to safeguard Company assets from unauthorized use or
disposition and to provide for proper authorization, execution
and recording of Company transactions. Company personnel
design, maintain and monitor internal control on an ongoing
basis. In addition, the Companys internal auditors review and
report on the functioning of various aspects of internal control.                                                                                      |  |  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|The Audit Committee of the Board of Directors, composed
of outside directors, meets periodically with the Companys
management, internal auditors and independent auditors to review
the work of each and to inquire as to their assessment of the
performance of Company financial personnel. The independent
auditors and internal auditors have full and free access to the Audit
Committee, without the presence of management, to discuss results of
work performed and communicate other appropriate matters. |  |  | 

/s/ Jeffrey A. Ludrof
President and
Chief Executive Officer
February 7, 2003

/s/ Philip A. Garcia
Executive Vice President and
Chief Financial Officer
February 7, 2003

/s/ Timothy G. NeCastro
Senior Vice President
and Controller
February 7, 2003



101



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##### 



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders
Erie Family Life Insurance Company
Erie, Pennsylvania

We have audited the accompanying Statements of Financial Position of Erie Family
Life Insurance Company as of December 31, 2002 and 2001, and the related
Statements of Operations, Shareholders Equity and Cash Flows for each of the
three years in the period ended December 31, 2002. These financial statements
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Erie Family Life Insurance
Company as of December 31, 2002 and 2001, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.

/s/ Malin, Bergquist & Company, LLP
Malin, Bergquist & Company, LLP
Erie, Pennsylvania
February 7, 2003

102



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ERIE FAMILY LIFE INSURANCE COMPANY

STATEMENTS OF FINANCIAL POSITION
As of December 31, 2002 and 2001
(Dollars in thousands)

|                                       |                                                                                        |                       |         |           |           |  |         |         |           | 
|-------------------------------------- | -------------------------------------------------------------------------------------- | --------------------- | ------- | --------- | --------- |  | ------- | ------- | --------- | 
|ASSETS                                 |                                                                                        | 2002                  |         | 2001     
|                                       |                                                                                        |                       |         |           |           | 
|Invested assets:                       |                                                                                        |                       |         |           |           |  |         |        
|                                       | Fixed maturities at fair value
(amortized cost of $986,137
and $718,500, respectively) |                       | $       | 1,039,367 |           |  | $       | 730,270 |          
|                                       | Equity securities at fair value
(cost of $66,072 and
$86,758, respectively)            |                       |         | 68,749    |           |  |         | 103,675 |          
|                                       | Limited partnerships (cost of $16,352 and
$18,691, respectively)                       |                       |         | 16,053    |           |  |         | 18,249  |          
|                                       | Real estate                                                                            |                       |         | 1,210     |           |  |         | 1,293   |          
|                                       | Policy loans                                                                           |                       |         | 9,516     |           |  |         | 8,879   |          
|                                       | Real estate mortgage loans                                                             |                       |         | 7,175     |           |  |         | 7,357   |          
|                                       |                                                                                        |                       |         |           |           |  |         |        
|                                       |                                                                                        | Total invested assets |         | $         | 1,142,070 |  |         | $       | 869,723   | 
|Cash and cash equivalents              |                                                                                        |                       | 97,022  |           |           |  | 159,462 |        
|Premiums receivable from policyholders |                                                                                        |                       | 6,225   |           |           |  | 5,089   |        
|Reinsurance recoverable                |                                                                                        |                       | 1,713   |           |           |  | 1,775   |        
|Other receivables                      |                                                                                        |                       | 1,486   |           |           |  | 374     |        
|Accrued investment income              |                                                                                        |                       | 13,353  |           |           |  | 11,520  |        
|Deferred policy acquisition costs      |                                                                                        |                       | 104,065 |           |           |  | 92,015  |        
|Reserve credit for reinsurance ceded   |                                                                                        |                       | 14,123  |           |           |  | 12,120  |        
|Prepaid federal income taxes           |                                                                                        |                       | 2,674   |           |           |  | 8,508   |        
|Other assets                           |                                                                                        |                       | 6,888   |           |           |  | 8,856   |        
|                                       |                                                                                        |                       |         |           |           |  |         |        
|                                       |                                                                                        | Total assets          |         | $         | 1,389,619 |  |         | $       | 1,169,442 | 
|                                       |                                                                                        |                       |         |           |           |  |         |        

103



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##### 



|                                     |                                                                                                               |                                                          |                                            |         |         |           |   |         |         |           | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------------ | ------- | ------- | --------- | - | ------- | ------- | --------- | 
|LIABILITIES
AND SHAREHOLDERS EQUITY |                                                                                                               | 2002                                                     |                                            | 2001   
|                                     |                                                                                                               |                                                          |                                            |         |         |           |  
|LIABILITIES                          |                                                                                                               |                                                          |                                            |         |         |           |   |        
|                                     | Policy liabilities and accruals:                                                                              |                                                          |                                            |         |         |           |   |         |        
|                                     |                                                                                                               | Future policy benefits                                   |                                            | $       | 94,243  |           |   | $       | 85,673  |          
|                                     |                                                                                                               | Policy and contract claims                               |                                            |         | 2,362   |           |   |         | 1,950   |          
|                                     |                                                                                                               | Annuity deposits                                         |                                            |         | 803,675 |           |   |         | 636,850 |          
|                                     |                                                                                                               | Universal life deposits                                  |                                            |         | 135,551 |           |   |         | 121,560 |          
|                                     |                                                                                                               | Supplementary contracts not
including life contingencies |                                            |         | 625     |           |   |         | 605     |          
|                                     | Other policyholder funds                                                                                      |                                                          |                                            | 14,335  |         |           |   | 7,974   |        
|                                     | Deferred income taxes                                                                                         |                                                          |                                            | 41,577  |         |           |   | 31,807  |        
|                                     | Reinsurance premium due                                                                                       |                                                          |                                            | 1,591   |         |           |   | 1,741   |        
|                                     | Securities lending collateral                                                                                 |                                                          |                                            | 41,669  |         |           |   | 48,959  |        
|                                     | Accounts payable and accrued expenses                                                                         |                                                          |                                            | 9,673   |         |           |   | 7,412   |        
|                                     | Note payable to Erie Indemnity Company                                                                        |                                                          |                                            | 15,000  |         |           |   | 15,000  |        
|                                     | Due to affiliates                                                                                             |                                                          |                                            | 2,886   |         |           |   | 2,309   |        
|                                     | Dividends payable                                                                                             |                                                          |                                            | 1,985   |         |           |   | 1,843   |        
|                                     |                                                                                                               |                                                          |                                            |         |         |           |   |        
|                                     |                                                                                                               |                                                          | Total liabilities                          |         | $       | 1,165,172 |   |         | $       | 963,683   | 
|                                     |                                                                                                               |                                                          |                                            |         |         |           |   |        
|SHAREHOLDERS EQUITY                 |                                                                                                               |                                                          |                                            |         |         |           |   |        
|                                     | Common stock, $.40 par value per share;
authorized 15,000,000 shares;
9,450,000 shares issued and outstanding |                                                          | $                                          | 3,780   |         |           | $ | 3,780   |        
|                                     | Additional paid-in capital                                                                                    |                                                          |                                            | 630     |         |           |   | 630     |        
|                                     | Accumulated other comprehensive income                                                                        |                                                          |                                            | 36,145  |         |           |   | 18,359  |        
|                                     | Retained earnings                                                                                             |                                                          |                                            | 183,892 |         |           |   | 182,990 |        
|                                     |                                                                                                               |                                                          |                                            |         |         |           |   |        
|                                     |                                                                                                               |                                                          | Total shareholders equity                 |         | $       | 224,447   |   |         | $       | 205,759   | 
|                                     |                                                                                                               |                                                          |                                            |         |         |           |   |        
|                                     |                                                                                                               |                                                          | Total liabilities and shareholders equity |         | $       | 1,389,619 |   |         | $       | 1,169,442 | 
|                                     |                                                                                                               |                                                          |                                            |         |         |           |   |        

See accompanying notes to financial statements.

104



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ERIE FAMILY LIFE INSURANCE COMPANY

STATEMENTS OF OPERATIONS

Years Ended December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)

|                                   |                                                   |                          |                             |        |        |         |       |         |        |        |        |        |        |         | 
|---------------------------------- | ------------------------------------------------- | ------------------------ | --------------------------- | ------ | ------ | ------- | ----- | ------- | ------ | ------ | ------ | ------ | ------ | ------- | 
|                                   |                                                   |                          |                             |        | 2002   |         | 2001  |         | 2000  
|                                   |                                                   |                          |                             |        |        |         |       |         |       
|Revenues                           |                                                   |                          |                             |        |        |         |       |         |        |        |        |       
|                                   | Net policy revenue                                |                          |                             |        |        |         |       |         |        |        |        |        |       
|                                   |                                                   | Life premiums            |                             | $      | 48,070 |         |       | $       | 43,693 |        |        | $      | 41,975 |        
|                                   |                                                   | Group and other premiums |                             |        | 3,059  |         |       |         | 2,798  |        |        |        | 2,562  |        
|                                   |                                                   |                          |                             |        |        |         |       |         |        |        |        |       
|                                   |                                                   |                          | Total net policy revenue    |        | $      | 51,129  |       |         | $      | 46,491 |        |        | $      | 44,537  | 
|                                   | Net investment income                             |                          |                             | 66,286 |        |         |       | 61,181  |        |        |        | 59,476 |       
|                                   | Net realized (losses) gains on investments        |                          |                             | (9,610 | )      |         |       | (19,646 | )      |        |        | 6,960  |       
|                                   | Equity in earnings of limited partnerships        |                          |                             | 3,664  |        |         |       | 736     |        |        |        | 3,437  |       
|                                   | Other income                                      |                          |                             | 815    |        |         |       | 752     |        |        |        | 963    |       
|                                   |                                                   |                          |                             |        |        |         |       |         |        |        |        |       
|                                   |                                                   |                          | Total revenues              |        | $      | 112,284 |       |         | $      | 89,514 |        |        | $      | 115,373 | 
|Benefits and expenses              |                                                   |                          |                             |        |        |         |       |         |        |        |        |       
|                                   | Death benefits                                    |                          | $                           | 15,547 |        |         | $     | 13,338  |        |        | $      | 12,869 |       
|                                   | Interest on annuity deposits                      |                          |                             | 39,720 |        |         |       | 35,284  |        |        |        | 33,686 |       
|                                   | Interest on universal life deposits               |                          |                             | 7,249  |        |         |       | 6,889   |        |        |        | 6,182  |       
|                                   | Surrender and other benefits                      |                          |                             | 1,785  |        |         |       | 2,263   |        |        |        | 835    |       
|                                   | Increase in future life policy benefits           |                          |                             | 6,563  |        |         |       | 5,748   |        |        |        | 4,402  |       
|                                   | Amortization of deferred policy
acquisition costs |                          |                             | 8,427  |        |         |       | 5,818   |        |        |        | 5,145  |       
|                                   | Commissions                                       |                          |                             | 3,806  |        |         |       | 2,425   |        |        |        | 1,969  |       
|                                   | General expenses                                  |                          |                             | 12,494 |        |         |       | 11,417  |        |        |        | 9,194  |       
|                                   | Taxes, licenses and fees                          |                          |                             | 3,156  |        |         |       | 2,145   |        |        |        | 2,268  |       
|                                   |                                                   |                          |                             |        |        |         |       |         |        |        |        |       
|                                   |                                                   |                          | Total benefits and expenses |        | $      | 98,747  |       |         | $      | 85,327 |        |        | $      | 76,550  | 
|                                   |                                                   |                          |                             |        |        |         |       |         |        |        |        |       
|                                   |                                                   |                          | Income before income taxes  |        | $      | 13,537  |       |         | $      | 4,187  |        |        | $      | 38,823  | 
|Provision for federal income taxes |                                                   |                          | 4,697                       |        |        |         | 1,449 |         |        |        | 13,433 |       
|                                   |                                                   |                          |                             |        |        |         |       |         |        |        |        |       
|                                   |                                                   |                          | Net income                  |        | $      | 8,840   |       |         | $      | 2,738  |        |        | $      | 25,390  | 
|                                   |                                                   |                          |                             |        |        |         |       |         |        |        |        |       
|                                   |                                                   |                          | Net income per share        |        | $      | 0.94    |       |         | $      | 0.29   |        |        | $      | 2.69    | 
|                                   |                                                   |                          |                             |        |        |         |       |         |        |        |        |       

See accompanying notes to financial statements.

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ERIE FAMILY LIFE INSURANCE COMPANY

STATEMENTS OF SHAREHOLDERS EQUITY

Years Ended December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)

|                                   |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     |  | 
|---------------------------------- | -------------------------------------------------- | - | ------------- | ------ | ------------- | - | -------- | ------ | ------------- | - | ------------ | ------ | --------------- | - | ----------- | ------ |  | - | ----- |  |  | - | --- |  | 
|                                   |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   | Accumulated |        |  |   |       |  |  |   |    
|                                   |                                                    |   | Total         |        |               |   |          |        |               |   |              |        | Other           |   |             |        |  |   |       |  | 
|                                   |                                                    |   | Shareholders |        | Comprehensive |   | Retained |        | Comprehensive |   |              |        |                 |   | Additional 
|                                   |                                                    |   | Equity        |        | Income        |   | Earnings |        | Income (Loss) |   | Common Stock |        | Paid-in Capital
|                                   |                                                    |   |               |        |               |   |          |        |               |   |              |        |                
|Balance, January 1, 2000           |                                                    | $ | 171,103       |        |               |   |          |        |               | $ | 169,037      |        |                 | $ | (2,344      | )      |  | $ | 3,780 |  |  | $ | 630 | 
|Comprehensive income               |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|                                   | Net income                                         |   |               | 25,390 |               |   | $        | 25,390 |               |   |              | 25,390 |                 |   |             |        |  |   |       |  |  |   |     |  | 
|                                   | Unrealized appreciation of
investments, net of tax |   |               | 6,031  |               |   |          | 6,031  |               |   |              |        |                 |   |             | 6,031  |  |   |       |  |  |   |     |  | 
|                                   |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|Comprehensive income               |                                                    |   |               |        |               | $ | 31,421   |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|                                   |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|Dividends declared,
$.72 per share |                                                    |   | (6,804        | )      |               |   |          |        |               |   | (6,804       | )      |                 |   |             |        |  |   |       |  |  |   |     | 
|                                   |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|Balance, December 31, 2000         |                                                    | $ | 195,720       |        |               |   |          |        |               | $ | 187,623      |        |                 | $ | 3,687       |        |  | $ | 3,780 |  |  | $ | 630 | 
|                                   |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|Comprehensive income               |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|                                   | Net income                                         |   |               | 2,738  |               |   | $        | 2,738  |               |   |              | 2,738  |                 |   |             |        |  |   |       |  |  |   |     |  | 
|                                   | Unrealized appreciation of
investments, net of tax |   |               | 14,672 |               |   |          | 14,672 |               |   |              |        |                 |   |             | 14,672 |  |   |       |  |  |   |     |  | 
|                                   |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|Comprehensive income               |                                                    |   |               |        |               | $ | 17,410   |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|                                   |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|Dividends declared,
$.78 per share |                                                    |   | (7,371        | )      |               |   |          |        |               |   | (7,371       | )      |                 |   |             |        |  |   |       |  |  |   |     | 
|                                   |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|Balance, December 31, 2001         |                                                    | $ | 205,759       |        |               |   |          |        |               | $ | 182,990      |        |                 | $ | 18,359      |        |  | $ | 3,780 |  |  | $ | 630 | 
|                                   |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|Comprehensive income               |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|                                   | Net income                                         |   |               | 8,840  |               |   | $        | 8,840  |               |   |              | 8,840  |                 |   |             |        |  |   |       |  |  |   |     |  | 
|                                   | Unrealized appreciation of
investments, net of tax |   |               | 17,786 |               |   |          | 17,786 |               |   |              |        |                 |   |             | 17,786 |  |   |       |  |  |   |     |  | 
|                                   |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|Comprehensive income               |                                                    |   |               |        |               | $ | 26,626   |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|                                   |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|Dividends declared,
$.84 per share |                                                    |   | (7,938        | )      |               |   |          |        |               |   | (7,938       | )      |                 |   |             |        |  |   |       |  |  |   |     | 
|                                   |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 
|Balance, December 31, 2002         |                                                    | $ | 224,447       |        |               |   |          |        |               | $ | 183,892      |        |                 | $ | 36,145      |        |  | $ | 3,780 |  |  | $ | 630 | 
|                                   |                                                    |   |               |        |               |   |          |        |               |   |              |        |                 |   |             |        |  |   |       |  |  |   |     | 

See accompanying notes to financial statements.

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ERIE FAMILY LIFE INSURANCE COMPANY

STATEMENTS OF CASH FLOWS

Years Ended December 31, 2002, 2001 and 2000
(Dollars in thousands)

|                                                         |                                                                                   |                                                          |                                           |        |        |        |         |        |        |        |         |        |        |        | 
|-------------------------------------------------------- | --------------------------------------------------------------------------------- | -------------------------------------------------------- | ----------------------------------------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | 
|                                                         |                                                                                   |                                                          |                                           |        | 2002   |        | 2001    |        | 2000  
|                                                         |                                                                                   |                                                          |                                           |        |        |        |         |        |       
|CASH FLOWS FROM OPERATING ACTIVITIES                     |                                                                                   |                                                          |                                           |        |        |        |         |        |        |        |         |       
|                                                         | Net income                                                                        |                                                          | $                                         | 8,840  |        |        | $       | 2,738  |        |        | $       | 25,390 |       
|                                                         | Adjustments to reconcile net income to net
cash provided by operating activities: |                                                          |                                           |        |        |        |         |        |        |        |         |        |       
|                                                         |                                                                                   | Net amortization of bond and mortgage
(discount) premium |                                           |        | (21    | )      |         |        | 244    |        |         |        | 214    |       
|                                                         |                                                                                   | Amortization of deferred policy
acquisition costs        |                                           |        | 8,427  |        |         |        | 5,818  |        |         |        | 5,145  |       
|                                                         |                                                                                   | Real estate depreciation                                 |                                           |        | 83     |        |         |        | 83     |        |         |        | 83     |       
|                                                         |                                                                                   | Software amortization                                    |                                           |        | 249    |        |         |        | 249    |        |         |        | 249    |       
|                                                         |                                                                                   | Deferred federal income tax expense                      |                                           |        | 193    |        |         |        | 88     |        |         |        | 2,718  |       
|                                                         |                                                                                   | Realized losses (gains) on investments                   |                                           |        | 9,610  |        |         |        | 19,646 |        |         |        | (6,960 | )     
|                                                         |                                                                                   | Equity in income of limited partnerships                 |                                           |        | (3,664 | )      |         |        | (736   | )      |         |        | (3,437 | )     
|                                                         | Increase in premiums receivable                                                   |                                                          |                                           | (1,135 | )      |        |         | (480   | )      |        |         | (553   | )     
|                                                         | (Increase) decrease in other receivables                                          |                                                          |                                           | (1,114 | )      |        |         | 18     |        |        |         | (221   | )     
|                                                         | (Increase) decrease in accrued
investment income                                  |                                                          |                                           | (1,833 | )      |        |         | 518    |        |        |         | (1,142 | )     
|Increase in policy acquisition costs deferred            |                                                                                   |                                                          | (20,477                                   | )      |        |        | (13,110 | )      |        |        | (12,280 | )     
|Decrease (increase) in other assets                      |                                                                                   |                                                          | 1,719                                     |        |        |        | 597     |        |        |        | (1,098  | )     
|Increase in reinsurance recoverables and
reserve credits |                                                                                   |                                                          | (1,941                                    | )      |        |        | (4,207  | )      |        |        | (2,297  | )     
|                                                         | Increase in future policy benefits and claims                                     |                                                          |                                           | 8,983  |        |        |         | 8,271  |        |        |         | 7,718  |       
|                                                         | Increase (decrease) in other
policyholder funds                                   |                                                          |                                           | 6,361  |        |        |         | 3,359  |        |        |         | (1,008 | )     
|(Decrease) increase in reinsurance premium due           |                                                                                   |                                                          | (150                                      | )      |        |        | 847     |        |        |        | 202     |       
|                                                         | Decrease (increase) in prepaid federal
income taxes                               |                                                          |                                           | 5,834  |        |        |         | (8,341 | )      |        |         | 591    |       
|Increase in accounts payable and due
to affiliates       |                                                                                   |                                                          | 2,839                                     |        |        |        | 2,395   |        |        |        | 697     |       
|                                                         |                                                                                   |                                                          |                                           |        |        |        |         |        |        |        |         |       
|                                                         |                                                                                   |                                                          | Net cash provided by operating activities |        | $      | 22,803 |         |        | $      | 17,997 |         |        | $      | 14,011 | 
|                                                         |                                                                                   |                                                          |                                           |        |        |        |         |        |        |        |         |       

See accompanying notes to financial statements.

107



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

STATEMENTS OF CASH FLOWS  CONTINUED

Years Ended December 31, 2002, 2001 and 2000
(Dollars in thousands)

|                                                     |                                                               |                                      |                                                     |         |          |          |         |         |          |        |        |         |          |         |  
|---------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------ | --------------------------------------------------- | ------- | -------- | -------- | ------- | ------- | -------- | ------ | ------ | ------- | -------- | ------- | -
|                                                     |                                                               |                                      |                                                     |         | 2002     |          | 2001    |         | 2000    
|                                                     |                                                               |                                      |                                                     |         |          |          |         |         |         
|CASH FLOWS FROM INVESTING ACTIVITIES                 |                                                               |                                      |                                                     |         |          |          |         |         |          |        |        |        
|                                                     | Purchase of investments:                                      |                                      |                                                     |         |          |          |         |         |          |        |        |         |         
|                                                     |                                                               | Fixed maturities                     |                                                     | $       | (551,582 | )        |         | $       | (329,244 | )      |        | $       | (101,624 | )      
|                                                     |                                                               | Equity securities                    |                                                     |         | (31,246  | )        |         |         | (23,172  | )      |        |         | (37,253  | )      
|                                                     |                                                               | Limited partnerships                 |                                                     |         | (6,199   | )        |         |         | (9,513   | )      |        |         | (9,104   | )      
|                                                     | Sales/maturities of investments:                              |                                      |                                                     |         |          |          |         |         |          |        |        |         |         
|                                                     |                                                               | Sales of fixed maturities            |                                                     |         | 152,474  |          |         |         | 218,548  |        |        |         | 23,447   |        
|                                                     |                                                               | Calls/maturities of fixed maturities |                                                     |         | 115,099  |          |         |         | 74,480   |        |        |         | 40,442   |        
|                                                     |                                                               | Equity securities                    |                                                     |         | 59,963   |          |         |         | 55,563   |        |        |         | 35,599   |        
|                                                     |                                                               | Limited partnerships                 |                                                     |         | 10,952   |          |         |         | 28,206   |        |        |         | 3,614    |        
|                                                     | (Decrease) increase in collateral from
securities lending     |                                      |                                                     | (7,290  | )        |          |         | 48,959  |          |        |        | 0       |         
|                                                     | Principal payments received on mortgage loans                 |                                      |                                                     | 182     |          |          |         | 927     |          |        |        | 1,691   |         
|                                                     | Loans made to policyholders                                   |                                      |                                                     | (2,010  | )        |          |         | (2,185  | )        |        |        | (2,140  | )       
|                                                     | Payments received on policy loans                             |                                      |                                                     | 1,373   |          |          |         | 1,072   |          |        |        | 1,098   |         
|                                                     |                                                               |                                      |                                                     |         |          |          |         |         |          |        |        |        
|                                                     |                                                               |                                      | Net cash (used in) provided by investing
activities |         | $        | (258,284 | )       |         | $        | 63,641 |        |         | $        | (44,230 | )
|                                                     |                                                               |                                      |                                                     |         |          |          |         |         |          |        |        |        
|CASH FLOWS FROM FINANCING ACTIVITIES                 |                                                               |                                      |                                                     |         |          |          |         |         |          |        |        |        
|                                                     | Annuity and supplementary contract deposits
and interest      |                                      | $                                                   | 215,255 |          |          | $       | 105,138 |          |        | $      | 84,757  |         
|                                                     | Annuity and supplementary contract surrenders
and withdrawals |                                      |                                                     | (48,410 | )        |          |         | (52,408 | )        |        |        | (69,831 | )       
|                                                     | Universal life deposits and interest                          |                                      |                                                     | 19,426  |          |          |         | 19,127  |          |        |        | 17,380  |         
|                                                     | Universal life surrenders                                     |                                      |                                                     | (5,434  | )        |          |         | (4,759  | )        |        |        | (4,828  | )       
|                                                     | Dividends paid to shareholders                                |                                      |                                                     | (7,796  | )        |          |         | (7,229  | )        |        |        | (6,662  | )       
|                                                     |                                                               |                                      |                                                     |         |          |          |         |         |          |        |        |        
|                                                     |                                                               |                                      | Net cash provided by financing activities           |         | $        | 173,041  |         |         | $        | 59,869 |        |         | $        | 20,816  |  
|                                                     |                                                               |                                      |                                                     |         |          |          |         |         |          |        |        |        
|Net (decrease) increase in cash and cash
equivalents |                                                               | $                                    | (62,440                                             | )       |          | $        | 141,507 |         |          | $      | (9,403 | )      
|Cash and cash equivalents at beginning of year       |                                                               |                                      | 159,462                                             |         |          |          | 17,955  |         |          |        | 27,358 |        
|                                                     |                                                               |                                      |                                                     |         |          |          |         |         |          |        |        |        
|Cash and cash equivalents at end of year             |                                                               | $                                    | 97,022                                              |         |          | $        | 159,462 |         |          | $      | 17,955 |        
|                                                     |                                                               |                                      |                                                     |         |          |          |         |         |          |        |        |        
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION    |                                                               |                                      |                                                     |         |          |          |         |         |          |        |        |        
|                                                     | Cash paid (refunded) during the year for:                     |                                      |                                                     |         |          |          |         |         |          |        |        |         |         
|                                                     |                                                               | Interest                             |                                                     | $       | 1,175    |          |         | $       | 1,175    |        |        | $       | 1,192    |        
|                                                     |                                                               | Income taxes                         |                                                     |         | (1,329   | )        |         |         | 9,701    |        |        |         | 10,124   |        

See accompanying notes to financial statements.

108



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

All dollar amounts are in thousands, except per share data.

NOTE 1. NATURE OF BUSINESS



| |  |  | Erie Family Life Insurance Company (the Company), a
Pennsylvania-domiciled life insurer, is engaged in the business of
underwriting and selling nonparticipating individual and group life
insurance policies, including universal life, annuity products and
disability income products. The Company markets its products through
independent agents in 10 states and the District of Columbia and is
subject to supervision and regulations of the states in which it
operates. A majority of the Companys business is written in
Pennsylvania, Ohio, Maryland and Virginia. See also Note 12.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company is owned 21.6% by the Erie Indemnity Company (EIC), 53.5%
by the Erie Insurance Exchange (Exchange) and the remaining 24.9% by
public shareholders. EIC is a Pennsylvania business corporation formed
in 1925 to be the attorney-in-fact for Erie Insurance Exchange, a
Pennsylvania-domiciled reciprocal insurance exchange. As
attorney-in-fact for the Exchange, EIC has a fiduciary duty to protect
the policyholders of the Exchange in addition to its fiduciary duty to
protect the interests of its shareholders. EIC operates predominantly
as a provider of certain management services to the Exchange. EIC also
is engaged in the property/casualty insurance business through its
wholly-owned subsidiaries, Erie Insurance Company, Erie Insurance
Property & Casualty Company, and Erie Insurance Company of New York and
through a subsidiary of the Exchange, Flagship City Insurance Company
(Flagship). The Company, EIC, the Exchange and their subsidiaries and
affiliates operate collectively under the name Erie Insurance Group.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES



| |  | Basis of presentation
| |  | ---------------------



| |  |  | The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP) that
differ from statutory accounting practices (SAP) prescribed or
permitted for insurance companies by state regulatory authorities.
For differences between GAAP and SAP, see Note 13.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Use of estimates
| |  | ----------------



| |  |  | The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.                                                                      
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The development of liabilities for future policy benefits for the
Companys products requires management to make estimates and
assumptions regarding mortality, morbidity, lapse, expense and
investment experience. Such estimates are primarily based on
historical experience and future expectations. Actual results could
differ materially from those estimates. Management monitors actual
experience, and where circumstances warrant, revises its assumptions
and the related future policy benefit estimates.

109



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



| |  | Investments
| |  | -----------



| |  |  | Fixed maturities and marketable equity securities are classified as
available-for-sale. At December 31, 2002, equity securities
consist of nonredeemable preferred stock while fixed maturities
consist of bonds, notes and redeemable preferred stock. During 2002,
the Company sold its common stock portfolio. Available-for-sale
securities are stated at fair value, with the unrealized gains and
losses, net of tax, reported as a separate component of
comprehensive income and shareholders equity. There are no
securities classified as trading securities or held-to-maturity
securities.                                                                                                                                                                    
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Interest and dividend income is recorded as earned. Realized gains
and losses on sales of investments are recognized in income on the
specific identification method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | 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 have declined more than 20% 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 market price decline of over 20% for a
period greater than six months, where the creditworthiness of the
issuer or other factors indicate a decline that is
other-than-temporary, are either sold or recognized as impaired, and
reflected as a charge to the Companys operations.
|
| |  |  | Impairment charges made on securities are considered a realized loss
in the Statements of Operations. Impairment charges on limited
partnerships are recorded as a loss in equity in earnings of limited
partnerships in the Statements of Operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | Mortgage loans on commercial real estate are recorded at unpaid
balances, adjusted for amortization of premium or discount.
Valuation allowances, if needed, are provided for impairment in net
realizable value based on periodic valuations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | Limited partnerships include U.S. and foreign real estate and fixed
income investments. These partnerships are recorded using the equity
method, which approximates the Companys share of the carrying value
of the partnership. The Company has not guaranteed any of the
partnership liabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | 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 in return. 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                                                                                                                                                                                                                                     

110



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



| |  |  | 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 on these short-term investments with the borrower. Revenue
received for the years ended December 31, 2002 and 2001, related to
this program totaled $97 and $85, respectively.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company had loaned securities with a market value of $40,732 and
$46,949 and secured collateral of $41,669 and $48,959 at December
31, 2002 and 2001, respectively. The Company maintains 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.                                                                                                                                                                                                                        



| |  | Cash equivalents
| |  | ----------------



| |  |  | The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash
equivalents. Cash equivalents total $58,190 and $112,809 at December
31, 2002 and 2001, respectively, and are comprised of investments in
bank money market funds.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Deferred policy acquisition costs (DAC)
| |  | ---------------------------------------



| |  |  | The Company incurs significant costs in connection with acquiring
new insurance business. These costs, which vary with and are
primarily related to the production of new business, are deferred.
The recovery of such costs is dependent on the future profitability
of the related business. The amount of future profit is dependent
principally on investment returns, mortality, morbidity,
persistency, expenses to administer the business and certain
economic variables, such as inflation. These factors enter into
managements estimates of gross margins and profits which generally
are used to amortize the costs. Revisions to estimates result in
changes to the amounts expensed in the reporting period in which the
revisions are made and could result in the impairment of the asset
and a charge to income if estimated future gross margins and profits
are less than amounts deferred.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | At each balance sheet date, the Company evaluates the historical and
expected future gross profits. Any adjustment in estimated profit
requires that the amortization rate be revised retroactively to the
date of policy issuance. The cumulative difference related to prior
periods is recognized as a component of the current periods
amortization, along with amortization associated with the actual
gross profits of the period. Lower actual gross profits in a period
would typically result in less amortization expense in that period.
The converse would also be true. However, if lower gross profits
were to continue into the future, additional amortization of the
existing DAC asset may occur.                                                                                                                                                                                           
|
| |  |  | The Company periodically reviews the DAC asset to determine if it is
recoverable from future income. If DAC is determined to be
unrecoverable, such costs are expensed at the time of determination.
The amount of DAC considered realizable would be reduced in the near
term if the estimate of ultimate or future gross profits is reduced.
The amount of DAC amortization would be revised if any of the
estimates discussed above are revised. In 2002, the Company
determined that the gross premiums on its term products                                                                                                                                                                                                                                                                                                                                                                               

111



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



| |  | are insufficient to cover actual acquisition costs. Thus, an
adjustment to increase amortization approximately $2,000, or $.14
per share, after taxes was made in the fourth quarter of 2002 to
adjust the DAC asset accordingly.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Deferred policy acquisition costs are summarized as follows:                                                                                                                                                                     

|                             |                          |   |         |        |      |   |        |       |  |   |        |       | 
|---------------------------- | ------------------------ | - | ------- | ------ | ---- | - | ------ | ----- |  | - | ------ | ----- | 
|                             |                          |   | 2002    |        | 2001 |   | 2000  
|                             |                          |   |         |        |      |   |       
|Balance at beginning of year |                          | $ | 92,015  |        |      | $ | 84,723 |       |  | $ | 77,588 |      
|Additions:                   |                          |   |         |        |      |   |        |       |  |   |        |      
|                             | Commissions              |   |         | 10,894 |      |   |        | 5,543 |  |   |        | 4,738 | 
|                             | General expenses         |   |         | 9,365  |      |   |        | 7,364 |  |   |        | 7,373 | 
|                             | Taxes, licenses and fees |   |         | 218    |      |   |        | 203   |  |   |        | 169   | 
|                             |                          |   |         |        |      |   |        |       |  |   |        |      
|                             |                          |   | 20,477  |        |      |   | 13,110 |       |  |   | 12,280 |      
|Amortization                 |                          |   | (8,427  | )      |      |   | (5,818 | )     |  |   | (5,145 | )    
|                             |                          |   |         |        |      |   |        |       |  |   |        |      
|Balance at end of year       |                          | $ | 104,065 |        |      | $ | 92,015 |       |  | $ | 84,723 |      
|                             |                          |   |         |        |      |   |        |       |  |   |        |      



| |  |  | In 2002, annuity deposits increased significantly, thus resulting in
an increase in amounts capitalized in DAC. Additions to DAC relating
to annuities were $6,932, $1,880 and $910 in 2002, 2001 and 2000,
respectively.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Insurance liabilities
| |  | ---------------------



| |  |  | Liabilities for life insurance and income-paying annuity future
policy benefits are computed primarily by the net level premium
method with assumptions as to anticipated mortality, withdrawals,
lapses and investment yields. Disability income reserves are
calculated as two-year preliminary term mid-terminal reserves plus
unearned premium reserves. Deferred annuity future policy benefit
liabilities are established at accumulated values without reduction
for surrender charges. Reserves for universal life and investment
contracts are based on the contract account balance, if future
benefit payments in excess of the account balance are not
guaranteed, or the present value of future benefit payments when
such payments are guaranteed. Variations are inherent in such
calculations due to the estimates and assumptions necessary in the
calculations. Interest rate assumptions for noninterest-sensitive
life insurance range from 3.5% to 4% on policies issued in 1980 and
prior years and 6% to 7.25% on policies issued in 1981 and
subsequent years. Mortality and withdrawal assumptions are based on
tables typically used in the industry, modified to reflect actual
experience where appropriate.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Universal life and annuity deposits are credited with varying
interest rates determined at the discretion of the Company subject
to certain minimums. During 2002, interest rates credited ranged
from 5.25% to 6.75% on universal life deposits and 4.0% to 6.0% on
annuity deposits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



| |  | Liability for guaranty fund assessments
| |  | ---------------------------------------



| |  |  | The Company may be required, under the solvency or guaranty laws of
the various states in which it is licensed, to pay assessments up to
prescribed limits to fund policyholder losses or liabilities of
insolvent life insurance companies. Certain states
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

112



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



| |  |  | permit these assessments, or a portion thereof, to be recovered as
an offset to future premium taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Assessments are recognized as incurred when an event obligating the
Company has occurred and the amount can be reasonably estimated. The
Company commonly becomes aware of insolvencies that will affect it
prior to obtaining specific assessment amounts from state guaranty
associations to estimate its share of the liability. The Company
estimates its liability based on information received from the
National Organization of Life and Health Insurance Guaranty
Associations (NOLHGA). The information provided by NOLHGA is
obtained from a variety of sources and is only an estimate. When the
assessment is subject to credit against future premium taxes, and
such credits are likely to be recoverable, an asset is established.
The asset is reduced when the credits are realized under applicable
state law.
|
| |  |  | The Companys estimated liability for guaranty fund and other
assessments was $645 and $614 at December 31, 2002, and 2001,
respectively. The estimated asset for credit against future premium
taxes was $506 and $486 at December 31, 2002, and 2001,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



| |  | Recognition of premium revenues and losses
| |  | ------------------------------------------



| |  |  | Premiums on traditional life insurance contracts are reported as
earned revenue when due. Reserves for future policy benefits are
established as premiums are earned. For universal life and annuity
contracts, deposits are recorded in the policyholder account, which
is classified as a liability. Revenue is recognized as amounts are
assessed against the policyholder account for mortality coverage and
contract expenses. Disability income premiums are recognized as
revenue pro rata over the terms of the contracts.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Reinsurance
| |  | -----------



| |  |  | Reinsurance premiums, commissions and expense reimbursements on
reinsurance ceded are accounted for on a basis consistent with those
used in accounting for the original policies issued. Premiums and
benefits to policyholders ceded to other companies have been
reported as a reduction of policy revenue and increase in future
policy benefits.                                                                                 
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Expense reimbursements received in connection with reinsurance ceded
have been accounted for as a reduction of the related policy
acquisition costs. Amounts recoverable from reinsurers for future
policy benefits are estimated in a manner consistent with the
assumptions used for the underlying policy benefits and are recorded
as an asset under reserve credit for reinsurance ceded on the
Statements of Financial Position.



| |  | Income taxes
| |  | ------------



| |  |  | Provisions for income taxes include deferred taxes resulting from
changes in cumulative temporary differences between the tax bases
and financial statement bases of assets and liabilities. Deferred
taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences.
Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

113



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



| |  | Software development costs
| |  | --------------------------



| |  |  | Software development costs have been capitalized and included in
other assets. Total software development costs are being amortized
on a straight-line basis over the expected useful life of the asset.
The carrying value of this asset at December 31, 2002 and 2001, was
$1,684 and $1,933, respectively.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Earnings per share
| |  | ------------------



| |  |  | Earnings per share amounts are based on the weighted average number
of common shares outstanding during each of the respective years.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------

NOTE 3. INVESTMENTS



| |  | The following tables summarize the cost and market value of securities
at December 31, 2002 and 2001.
| |  | -----------------------------------------------------------------------------------------------------

|                               |                                             |                                     |       |           |           |            |     |            |        |            |   |       |       |  |       |         |           | 
|------------------------------ | ------------------------------------------- | ----------------------------------- | ----- | --------- | --------- | ---------- | --- | ---------- | ------ | ---------- | - | ----- | ----- |  | ----- | ------- | --------- | 
|                               |                                             |                                     |       |           |           |            |     | Gross      |        | Gross      |   |       |       | 
|                               |                                             |                                     |       | Amortized |           | Unrealized |     | Unrealized |        | Estimated 
|                               |                                             |                                     |       | Cost      |           | Gains      |     | Losses     |        | Fair Value
|                               |                                             |                                     |       |           |           |            |     |            |        |           
|December 31, 2002              |                                             |                                     |       |           |           |            |     |            |        |            |   |       |       |  |       |        
|Fixed Maturities:              |                                             |                                     |       |           |           |            |     |            |        |            |   |       |       |  |       |        
|Bonds:                         |                                             |                                     |       |           |           |            |     |            |        |            |   |       |       |  |       |        
|                               | U. S. treasuries and
government agencies    |                                     | $     | 29,351    |           |            | $   | 1,568      |        |            | $ | 0     |       |  | $     | 30,919  |          
|                               | Public utilities                            |                                     |       | 100,718   |           |            |     | 5,226      |        |            |   | 1,421 |       |  |       | 104,523 |          
|                               | U. S. banks, trusts
and insurance companies |                                     |       | 190,216   |           |            |     | 12,663     |        |            |   | 334   |       |  |       | 202,545 |          
|                               | U. S. industrial
and miscellaneous          |                                     |       | 557,397   |           |            |     | 36,149     |        |            |   | 4,479 |       |  |       | 589,067 |          
|                               | Foreign                                     |                                     |       | 99,624    |           |            |     | 5,947      |        |            |   | 2,393 |       |  |       | 103,178 |          
|                               |                                             |                                     |       |           |           |            |     |            |        |            |   |       |       |  |       |        
|                               |                                             | Total bonds                         |       |           | 977,306   |            |     |            | 61,553 |            |   |       | 8,627 |  |       |         | 1,030,232 | 
|Redeemable preferred stock     |                                             |                                     | 8,831 |           |           |            | 304 |            |        |            | 0 |       |       |  | 9,135 |        
|                               |                                             |                                     |       |           |           |            |     |            |        |            |   |       |       |  |       |        
|                               |                                             | Total fixed maturities              |       | $         | 986,137   |            |     | $          | 61,857 |            |   | $     | 8,627 |  |       | $       | 1,039,367 | 
|                               |                                             |                                     |       |           |           |            |     |            |        |            |   |       |       |  |       |        
|Equity Securities:             |                                             |                                     |       |           |           |            |     |            |        |            |   |       |       |  |       |        
|Nonredeemable preferred stock: |                                             |                                     |       |           |           |            |     |            |        |            |   |       |       |  |       |        
|                               | U. S. Banks, trusts
and insurance companies |                                     | $     | 7,016     |           |            | $   | 211        |        |            | $ | 0     |       |  | $     | 7,227   |          
|                               | U. S. industrial and miscellaneous          |                                     |       | 11,872    |           |            |     | 773        |        |            |   | 0     |       |  |       | 12,645  |          
|                               | Foreign                                     |                                     |       | 47,184    |           |            |     | 2,496      |        |            |   | 803   |       |  |       | 48,877  |          
|                               |                                             |                                     |       |           |           |            |     |            |        |            |   |       |       |  |       |        
|                               |                                             | Total equity securities             |       | $         | 66,072    |            |     | $          | 3,480  |            |   | $     | 803   |  |       | $       | 68,749    | 
|                               |                                             |                                     |       |           |           |            |     |            |        |            |   |       |       |  |       |        
|                               |                                             | Total available-for-sale securities |       | $         | 1,052,209 |            |     | $          | 65,337 |            |   | $     | 9,430 |  |       | $       | 1,108,116 | 
|                               |                                             |                                     |       |           |           |            |     |            |        |            |   |       |       |  |       |        

114



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 3. INVESTMENTS (CONTINUED)

|                               |                                             |                                     |   |           |         |            |   |            |        |            |   |       |       |  |   |         |         | 
|------------------------------ | ------------------------------------------- | ----------------------------------- | - | --------- | ------- | ---------- | - | ---------- | ------ | ---------- | - | ----- | ----- |  | - | ------- | ------- | 
|                               |                                             |                                     |   |           |         |            |   | Gross      |        | Gross      |   |       |       | 
|                               |                                             |                                     |   | Amortized |         | Unrealized |   | Unrealized |        | Estimated 
|                               |                                             |                                     |   | Cost      |         | Gains      |   | Losses     |        | Fair Value
|                               |                                             |                                     |   |           |         |            |   |            |        |           
|December 31, 2001              |                                             |                                     |   |           |         |            |   |            |        |            |   |       |       |  |   |        
|Fixed Maturities:              |                                             |                                     |   |           |         |            |   |            |        |            |   |       |       |  |   |        
|Bonds:                         |                                             |                                     |   |           |         |            |   |            |        |            |   |       |       |  |   |        
|                               | U. S. treasuries and
government agencies    |                                     | $ | 26,239    |         |            | $ | 423        |        |            | $ | 139   |       |  | $ | 26,523  |        
|                               | Special revenue                             |                                     |   | 8,028     |         |            |   | 352        |        |            |   | 0     |       |  |   | 8,380   |        
|                               | Public utilities                            |                                     |   | 71,906    |         |            |   | 1,803      |        |            |   | 925   |       |  |   | 72,784  |        
|                               | U. S. banks, trusts
and insurance companies |                                     |   | 136,259   |         |            |   | 3,425      |        |            |   | 583   |       |  |   | 139,101 |        
|                               | U. S. industrial
and miscellaneous          |                                     |   | 419,325   |         |            |   | 9,354      |        |            |   | 3,500 |       |  |   | 425,179 |        
|                               | Foreign                                     |                                     |   | 56,743    |         |            |   | 1,794      |        |            |   | 234   |       |  |   | 58,303  |        
|                               |                                             |                                     |   |           |         |            |   |            |        |            |   |       |       |  |   |        
|                               |                                             | Total fixed maturities              |   | $         | 718,500 |            |   | $          | 17,151 |            |   | $     | 5,381 |  |   | $       | 730,270 | 
|                               |                                             |                                     |   |           |         |            |   |            |        |            |   |       |       |  |   |        
|Equity Securities:             |                                             |                                     |   |           |         |            |   |            |        |            |   |       |       |  |   |        
|Common stock:                  |                                             |                                     |   |           |         |            |   |            |        |            |   |       |       |  |   |        
|                               | U. S. banks, trusts
and insurance companies |                                     | $ | 5,332     |         |            | $ | 809        |        |            | $ | 17    |       |  | $ | 6,124   |        
|                               | U. S. industrial and miscellaneous          |                                     |   | 30,605    |         |            |   | 15,996     |        |            |   | 413   |       |  |   | 46,188  |        
|                               | Public utilities                            |                                     |   | 417       |         |            |   | 0          |        |            |   | 57    |       |  |   | 360     |        
|Nonredeemable preferred stock: |                                             |                                     |   |           |         |            |   |            |        |            |   |       |       |  |   |        
|                               | U. S. industrial and miscellaneous          |                                     |   | 8,603     |         |            |   | 712        |        |            |   | 0     |       |  |   | 9,315   |        
|                               | Foreign                                     |                                     |   | 41,801    |         |            |   | 1,306      |        |            |   | 1,419 |       |  |   | 41,688  |        
|                               |                                             |                                     |   |           |         |            |   |            |        |            |   |       |       |  |   |        
|                               |                                             | Total equity securities             |   | $         | 86,758  |            |   | $          | 18,823 |            |   | $     | 1,906 |  |   | $       | 103,675 | 
|                               |                                             |                                     |   |           |         |            |   |            |        |            |   |       |       |  |   |        
|                               |                                             | Total available-for-sale securities |   | $         | 805,258 |            |   | $          | 35,974 |            |   | $     | 7,287 |  |   | $       | 833,945 | 
|                               |                                             |                                     |   |           |         |            |   |            |        |            |   |       |       |  |   |        

Components of net investment income follow for the years ended December 31:

|                        |  |      |        |      |  |      |        |  |  |   |        | 
|----------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                        |  | 2002 |        | 2001 |  | 2000
|                        |  |      |        |      |  |     
|Fixed maturities        |  | $    | 58,933 |      |  | $    | 53,172 |  |  | $ | 51,440 | 
|Equity securities       |  |      | 5,999  |      |  |      | 6,815  |  |  |   | 7,496  | 
|Other                   |  |      | 3,296  |      |  |      | 3,109  |  |  |   | 2,391  | 
|                        |  |      |        |      |  |      |        |  |  |   |        | 
|Total investment income |  | $    | 68,228 |      |  | $    | 63,096 |  |  | $ | 61,327 | 
|Investment expense      |  |      | 1,942  |      |  |      | 1,915  |  |  |   | 1,851  | 
|                        |  |      |        |      |  |      |        |  |  |   |        | 
|Net investment income   |  | $    | 66,286 |      |  | $    | 61,181 |  |  | $ | 59,476 | 
|                        |  |      |        |      |  |      |        |  |  |   |        | 

115



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 3. INVESTMENTS (CONTINUED)



| |  | Components of realized gains and losses on investments reflected in
operations for the years ended December 31 are included below. Included
in 2002 gross realized losses of fixed maturity and equity securities
are impairment charges totaling $25,806. These charges relate primarily
to investments in the communications, energy and finance segments. In
2001, an equity securities impairment charge totaling $27 related to
one position in the computer and office equipment segment.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |                                            |                             |   |         |         |      |   |         |         |   |   |        |       | 
|--------------------- | ------------------------------------------ | --------------------------- | - | ------- | ------- | ---- | - | ------- | ------- | - | - | ------ | ----- | 
|                      |                                            |                             |   | 2002    |         | 2001 |   | 2000   
|                      |                                            |                             |   |         |         |      |   |        
|Fixed maturities:     |                                            |                             |   |         |         |      |   |         |         |   |   |       
|                      | Gross realized gains                       |                             | $ | 10,008  |         |      | $ | 8,616   |         |   | $ | 671    |      
|                      | Gross realized losses                      |                             |   | (26,400 | )       |      |   | (13,502 | )       |   |   | (436   | )    
|                      |                                            |                             |   |         |         |      |   |         |         |   |   |       
|                      |                                            | Net realized (losses) gains |   | $       | (16,392 | )    |   | $       | (4,886  | ) |   | $      | 235   | 
|                      |                                            |                             |   |         |         |      |   |         |         |   |   |       
|Equity securities:    |                                            |                             |   |         |         |      |   |         |         |   |   |       
|                      | Gross realized gains                       |                             | $ | 13,308  |         |      | $ | 1,657   |         |   | $ | 11,514 |      
|                      | Gross realized losses                      |                             |   | (5,276  | )       |      |   | (17,561 | )       |   |   | (4,789 | )    
|                      |                                            |                             |   |         |         |      |   |         |         |   |   |       
|                      |                                            | Net realized gains (losses) |   | $       | 8,032   |      |   | $       | (15,904 | ) |   | $      | 6,725 | 
|                      |                                            |                             |   |         |         |      |   |         |         |   |   |       
|Limited partnerships: |                                            |                             |   |         |         |      |   |         |         |   |   |       
|                      | Gross realized gains                       |                             | $ | 452     |         |      | $ | 4,715   |         |   | $ | 0      |      
|                      | Gross realized losses                      |                             |   | (1,702  | )       |      |   | (3,571  | )       |   |   | 0      |      
|                      |                                            |                             |   |         |         |      |   |         |         |   |   |       
|                      |                                            | Net realized (losses) gains |   | $       | (1,250  | )    |   | $       | 1,144   |   |   | $      | 0     | 
|                      |                                            |                             |   |         |         |      |   |         |         |   |   |       
|                      | Net realized (losses) gains on investments |                             | $ | (9,610  | )       |      | $ | (19,646 | )       |   | $ | 6,960  |      
|                      |                                            |                             |   |         |         |      |   |         |         |   |   |       



| |  | During the fourth quarter of 2001, the Company sold its private equity
limited partnerships to the Exchange, recognizing a gain of $1,144 at
the time of sale based on the September 30, 2001, financial statements
provided by the limited partnerships. During the second quarter of
2002, actual valuation data was received from these partnerships and
the sale price of the partnerships was adjusted to the value of the
partnerships at the date of sale (December 31, 2001). This resulted in
the recognition of $1,250 of net realized losses during 2002.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The components of equity in earnings of limited partnerships reported
for the years ended December 31 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                               

|               |                                            |   |       |       |      |   |        |     |  |   |       |       | 
|-------------- | ------------------------------------------ | - | ----- | ----- | ---- | - | ------ | --- |  | - | ----- | ----- | 
|               |                                            |   | 2002  |       | 2001 |   | 2000  
|               |                                            |   |       |       |      |   |       
|Private equity |                                            | $ | 0     |       |      | $ | (1,093 | )   |  | $ | 515   |      
|Real estate    |                                            |   | 4,136 |       |      |   | 1,390  |     |  |   | 1,926 |      
|Fixed income   |                                            |   | (472  | )     |      |   | 439    |     |  |   | 996   |      
|               |                                            |   |       |       |      |   |        |     |  |   |       |      
|               | Equity in earnings of limited partnerships |   | $     | 3,664 |      |   | $      | 736 |  |   |       | 3,437 | 
|               |                                            |   |       |       |      |   |        |     |  |   |       |      

116



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 3. INVESTMENTS (CONTINUED)



| |  | The following is a summary of fixed maturities at December 31, 2002, by
remaining term to contractual maturity:
| |  | ---------------------------------------------------------------------------------------------------------------

|                                      |  |           |         |            |  |   |           | 
|------------------------------------- |  | --------- | ------- | ---------- |  | - | --------- | 
|                                      |  | Amortized |         | Estimated 
|                                      |  | Cost      |         | Fair Value
|                                      |  |           |         |           
|Due in one year or less               |  | $         | 39,880  |            |  | $ | 40,045    | 
|Due after one year through five years |  |           | 184,582 |            |  |   | 191,830   | 
|Due after five years through 10 years |  |           | 427,941 |            |  |   | 457,874   | 
|Due after 10 years through 20 years   |  |           | 124,374 |            |  |   | 130,669   | 
|Due after 20 years                    |  |           | 206,990 |            |  |   | 216,579   | 
|Bonds in default                      |  |           | 2,370   |            |  |   | 2,370     | 
|                                      |  |           |         |            |  |   |           | 
|                                      |  | $         | 986,137 |            |  | $ | 1,039,367 | 
|                                      |  |           |         |            |  |   |           | 



| |  | Bonds having a fair value of $1,993 at December 31, 2002, were on
deposit with various regulatory authorities as required by law. Bonds
having a fair value of $15,517 are pledged as collateral on a $10,000
line of credit with a bank. There were no borrowings on the line during
2002 and 2001.                
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Net unrealized gains and losses on investments are credited or charged
directly to accumulated other comprehensive income. At December 31,
2002, net unrealized gains on investments of $36,145 consisted of
$65,337 in gross unrealized gains less $9,730 in gross unrealized
losses and deferred taxes of $19,462.
|
| |  | Changes in unrealized gains include the following for the years ended
December 31:                                                                                                                                                                                                                                  

|                                    |  |      |         |      |  |      |        |   |  |   |        |  
|----------------------------------- |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                    |  | 2002 |         | 2001 |  | 2000
|                                    |  |      |         |      |  |     
|Equity securities                   |  | $    | (14,240 | )    |  | $    | 6,388  |   |  | $ | (6,892 | )
|Fixed maturities                    |  |      | 41,460  |      |  |      | 23,197 |   |  |   | 11,355 |  
|Limited partnerships                |  |      | 143     |      |  |      | (7,013 | ) |  |   | 4,816  |  
|Deferred federal income tax expense |  |      | (9,577  | )    |  |      | (7,900 | ) |  |   | (3,248 | )
|                                    |  |      |         |      |  |      |        |   |  |   |        |  
|Increase in unrealized gains        |  | $    | 17,786  |      |  | $    | 14,672 |   |  | $ | 6,031  |  
|                                    |  |      |         |      |  |      |        |   |  |   |        |  

NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS



| |  | Estimated fair value amounts of financial instruments have been
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is required in developing
the estimates of fair value. Accordingly, these estimates are not
necessarily indicative of the amounts that could be realized in a
current market exchange. Certain financial instruments, including
insurance contracts other than financial guarantees and investment
contracts, are exempt from fair value disclosure requirements. The
following methods and assumptions were used by the Company in
estimating the fair value of each class of financial instrument for
which it is practicable to estimate that value:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Cash and cash equivalents: The carrying amounts approximate their fair
value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Fixed maturities and equity
securities: Fair values were based on
quoted market prices, where available, or dealer quotations. See Note 3
for fair value disclosures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

117



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 4. FAIR VALUE OF FINANCIAL
INSTRUMENTS (CONTINUED)



| |  | Limited partnerships: Fair values of the fixed income limited
partnerships were provided to the Company by the partnership. Real
estate limited partnership fair values approximate carrying value.                                                                                                                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Policy loans and real estate mortgage loans: For policy loans and real
estate mortgage loans, carrying value is representative of estimated
fair value.                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Trading assets and trading liabilities: The carrying value of these
assets and liabilities arising in the ordinary course of business
approximates their fair values.                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Annuity deposits: Included in this category are annuity deposit
contracts. The Company retains the right to change interest rates
subject to a one year guaranteed interest rate and a minimum interest
rate provided in the policy. As a result, the carrying value of these
contracts approximates their fair value. These annuity deposits totaled
$643,941 at December 31, 2002.                                                                                                                                                                                  
|
| |  | Annuity deposits include structured settlements, contracts that the
policyholder cannot surrender at any time and for which the
policyholder is locked into an interest rate for the duration of the
contract. Fair values of these contracts were estimated using
discounted projected cash flows based upon interest rates currently
being offered for similar contracts with the same remaining maturities.
At December 31, 2002, the carrying value of structured settlements
totaled $159,734 while the estimated fair value of these contracts
totaled $178,609.
|
| |  | Universal life deposits: The Company retains the right to change
interest rates on its universal life deposits subject to a minimum
interest rate provided in the policy. As a result, the carrying value
of these contracts approximates their fair value.                                                                                                                                                                                                                                                                                                           

NOTE 5. COMPREHENSIVE INCOME



| |  | Comprehensive income is defined as any change in equity from
transactions and other events originating from nonowner sources. The
components of other comprehensive income follow for the years ended
December 31:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                   |  |      |        |      |  |      |        |   |  |   |        |  
|-------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                   |  | 2002 |        | 2001 |  | 2000
|                                                   |  |      |        |      |  |     
|Unrealized holding gains arising
during period     |  | $    | 17,753 |      |  | $    | 2,926  |   |  | $ | 16,239 |  
|Less: losses (gains) included in net income        |  |      | 9,610  |      |  |      | 19,646 |   |  |   | (6,960 | )
|                                                   |  |      |        |      |  |      |        |   |  |   |        |  
|Net unrealized holding gains arising
during period |  | $    | 27,363 |      |  | $    | 22,572 |   |  | $ | 9,279  |  
|Income tax expense related to unrealized
gains     |  |      | (9,577 | )    |  |      | (7,900 | ) |  |   | (3,248 | )
|                                                   |  |      |        |      |  |      |        |   |  |   |        |  
|Other comprehensive income, net of tax             |  | $    | 17,786 |      |  | $    | 14,672 |   |  | $ | 6,031  |  
|                                                   |  |      |        |      |  |      |        |   |  |   |        |  

118



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 6. LIABILITY FOR UNPAID POLICY AND CONTRACT CLAIMS



| |  | Activity in the liability for unpaid policy and contract claims is as
follows:
| |  | ------------------------------------------------------------------------------

|                                                       |  |      |        |      |  |      |        |   |  |   |        |  
|------------------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                       |  | 2002 |        | 2001 |  | 2000
|                                                       |  |      |        |      |  |     
|Balance at January 1                                   |  | $    | 1,950  |      |  | $    | 2,473  |   |  | $ | 1,305  |  
|Less reinsurance recoverables                          |  |      | (1,022 | )    |  |      | (168   | ) |  |   | (184   | )
|                                                       |  |      |        |      |  |      |        |   |  |   |        |  
|Net balance at January 1                               |  | $    | 928    |      |  | $    | 2,305  |   |  | $ | 1,121  |  
|Total death claims incurred                            |  |      | 15,547 |      |  |      | 13,338 |   |  |   | 12,869 |  
|Total death claims paid,
net of reinsurance recoveries |  |      | 15,027 |      |  |      | 14,715 |   |  |   | 11,685 |  
|                                                       |  |      |        |      |  |      |        |   |  |   |        |  
|Net balance at December 31                             |  | $    | 1,448  |      |  | $    | 928    |   |  | $ | 2,305  |  
|Plus reinsurance recoverables                          |  |      | 914    |      |  |      | 1,022  |   |  |   | 168    |  
|                                                       |  |      |        |      |  |      |        |   |  |   |        |  
|Balance at December 31                                 |  | $    | 2,362  |      |  | $    | 1,950  |   |  | $ | 2,473  |  
|                                                       |  |      |        |      |  |      |        |   |  |   |        |  



| |  | Included in the 2002 total death claims paid is payment of a claim
related to a former president and CEO of the Company totaling $739, net
of reinsurance recoveries.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 7. ANNUITY & UNIVERSAL LIFE DEPOSITS



| |  | The Company offers, among other products, annuity and universal life
insurance. The amount received as deposits for each of the years ended
December 31 are as follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|          |                |       |   |         |         |      |   |        |        |  |   |        |        | 
|--------- | -------------- | ----- | - | ------- | ------- | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|          |                |       |   | 2002    |         | 2001 |   | 2000  
|          |                |       |   |         |         |      |   |       
|Deposits: |                |       |   |         |         |      |   |        |        |  |   |       
|          | Universal life |       | $ | 12,176  |         |      | $ | 12,238 |        |  | $ | 11,198 |       
|          | Annuity        |       |   | 175,509 |         |      |   | 69,754 |        |  |   | 51,060 |       
|          |                |       |   |         |         |      |   |        |        |  |   |       
|          |                | Total |   | $       | 187,685 |      |   | $      | 81,992 |  |   | $      | 62,258 | 
|          |                |       |   |         |         |      |   |        |        |  |   |       



| |  | The Erie Insurance Group Retirement Plan for Employees purchases from
the Company individual annuities for some terminated vested Employees
or beneficiaries receiving benefits. These are nonparticipating annuity
contracts under which the Company has unconditionally contracted to
provide specified benefits to beneficiaries in return for a fixed
premium from the plan. Annuity deposits in 2002, 2001 and 2000 included
$149, $4,513 and $5,627, respectively, of deposits on annuity contracts
purchased by the Erie Insurance Group Retirement Plan for Employees.
Due to the current interest rate environment, the Erie Insurance Group
Retirement Plan for Employees reduced the annuities purchased from the
Company in 2002. Annuity deposit balances outstanding relating to
pension annuities sold to the Erie Insurance Group Retirement Plan are
$47,331 and $48,797 at December 31, 2002 and 2001, respectively.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

119



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 7. ANNUITY & UNIVERSAL LIFE DEPOSITS (CONTINUED)



| |  | The Erie Insurance Group 401(k) plan for Employees includes an
investment option in a Company annuity. Annuity deposits in 2002, 2001
and 2000, included $2,182, $1,912 and $1,144, respectively, of deposits
on annuity contracts purchased by Erie Insurance Group employees
through the 401(k) plan. Annuity deposit balances outstanding relating
to 401(k) annuities sold to employees are $25,081 and $22,686 at
December 31, 2002 and 2001, respectively.                                                                                                                                                                                                         
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Erie Insurance Group affiliated property and casualty insurance
companies periodically purchase annuities from the Company in
connection with the structured settlement of claims. Considerations
recorded in annuity deposits in the Statements of Financial Position
from structured settlement annuities sold to affiliated property and
casualty companies of the Erie Insurance Group totaled $18,564, $12,879
and $16,168 in 2002, 2001 and 2000, respectively. The reserves held for
structured settlement annuities sold to the affiliated property and
casualty insurance companies equal $186,180 and $171,006 at December
31, 2002 and 2001, respectively.

NOTE 8. FEDERAL INCOME TAXES



| |  | The provision for federal income taxes consists of the following for
the years ended December 31:
| |  | -------------------------------------------------------------------------------------------------

|              |       |   |       |       |      |   |       |       |  |   |        |        | 
|------------- | ----- | - | ----- | ----- | ---- | - | ----- | ----- |  | - | ------ | ------ | 
|              |       |   | 2002  |       | 2001 |   | 2000 
|              |       |   |       |       |      |   |      
|Currently due |       | $ | 4,504 |       |      | $ | 1,361 |       |  | $ | 10,715 |       
|Deferred      |       |   | 193   |       |      |   | 88    |       |  |   | 2,718  |       
|              |       |   |       |       |      |   |       |       |  |   |        |       
|              | Total |   | $     | 4,697 |      |   | $     | 1,449 |  |   | $      | 13,433 | 
|              |       |   |       |       |      |   |       |       |  |   |        |       



| |  | A reconciliation of the provision for income taxes with amounts
determined by applying the statutory federal income tax rates to pretax
income is as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                     |  |      |       |      |  |      |       |   |  |   |        |  
|---------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ------ | -
|                                                     |  | 2002 |       | 2001 |  | 2000
|                                                     |  |      |       |      |  |     
|Federal income taxes at statutory rates              |  | $    | 4,738 |      |  | $    | 1,465 |   |  | $ | 13,588 |  
|Dividends received deduction and
tax-exempt interest |  |      | (18   | )    |  |      | (33   | ) |  |   | (47    | )
|Other                                                |  |      | (23   | )    |  |      | 17    |   |  |   | (108   | )
|                                                     |  |      |       |      |  |      |       |   |  |   |        |  
|Provision for federal income taxes                   |  | $    | 4,697 |      |  | $    | 1,449 |   |  | $ | 13,433 |  
|                                                     |  |      |       |      |  |      |       |   |  |   |        |  

120



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 8. FEDERAL INCOME TAXES (CONTINUED)



| |  | Temporary differences between the financial statement carrying amounts
and tax bases of assets and liabilities that give rise to deferred
income tax liabilities are as follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                      |                               |   |              |        |      |   |        |        | 
|----------------------------------------------------- | ----------------------------- | - | ------------ | ------ | ---- | - | ------ | ------ | 
|                                                      |                               |   | December 31,
|                                                      |                               |   | 2002         |        | 2001
|                                                      |                               |   |              |        |     
|Deferred policy acquisition costs                     |                               | $ | 31,399       |        |      | $ | 28,030 |       
|Liability for future life and annuity policy benefits |                               |   | (4,405       | )      |      |   | (5,146 | )     
|Unrealized gains                                      |                               |   | 19,462       |        |      |   | 9,885  |       
|Write-down of securities                              |                               |   | (1,736       | )      |      |   | (9     | )     
|Deferred compensation                                 |                               |   | (962         | )      |      |   | (800   | )     
|Other                                                 |                               |   | (2,181       | )      |      |   | (153   | )     
|                                                      |                               |   |              |        |      |   |        |       
|                                                      | Deferred income tax liability |   | $            | 41,577 |      |   | $      | 31,807 | 
|                                                      |                               |   |              |        |      |   |        |       

NOTE 9. RELATED PARTY TRANSACTIONS



| |  | Expense allocations
| |  | -------------------



| |  |  | Allocations from EIC for operating expenses paid on behalf of the
Company are made on a monthly basis. The Company reimburses EIC when
the expenses are paid. The amount of these cash settlements for the
Company totaled $23,784, $18,545 and $18,631 in 2002, 2001 and 2000,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Employees of the Company participate in the pension and other
Employee benefit plans of EIC. The pension benefits are based on
years of service and salary. Pension costs are funded by EIC in
amounts sufficient to at least meet ERISA minimum funding
requirements. The Company, through EIC, also participates in certain
deferred compensation and supplemental pension plans for certain
executive and senior officers. The amounts recorded by the Company
for the deferred compensation and supplemental pension plan totaled
$748, $553 and $711 at December 31, 2002, 2001 and 2000,
respectively, which will be settled in cash to EIC as payments are
made under these plans. The pension and related benefit costs
allocated to the Company from EIC equaled $120, ($96) and ($72) in
2002, 2001 and 2000, respectively.



| |  | Note payable to EIC
| |  | -------------------



| |  |  | The $15,000 surplus note payable to EIC bears an annual interest
rate of 6.45% and all payments of interest and principal of the note
may be repaid only out of unassigned surplus of the Company, subject
to prior approval of the Pennsylvania Insurance Commissioner.
Interest on the surplus note is scheduled to be paid semiannually.
The note will be payable on demand on or after December 31, 2005.
During 2002, 2001 and 2000, the Company paid interest to EIC
totaling $968 in each year.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

121



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED)



| |  | Real estate
| |  | -----------



| |  |  | The Company owns certain real estate it leases to EIC. The real
estate is recorded net of accumulated depreciation of $1,611 and
$1,528 at December 31, 2002, and 2001, respectively. Rentals paid by
EIC to the Company totaled $318, $312 and $309 in 2002, 2001 and
2000, respectively. Future minimum rentals under this agreement are
as follows:
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|           |  |   |       | 
|---------- |  | - | ----- | 
|2003       |  | $ | 321   | 
|2004       |  |   | 328   | 
|2005       |  |   | 331   | 
|2006       |  |   | 337   | 
|2007       |  |   | 341   | 
|Thereafter |  |   | 113   | 
|           |  |   |       | 
|Total      |  | $ | 1,771 | 
|           |  |   |       | 



| |  | Software and equipment
| |  | ----------------------



| |  |  | EIC purchased certain software and equipment for use by the Company.
Depreciation and applicable interest are charged to the Company
throughout the estimated useful life of the asset and is included in
general expenses. Depreciation and interest charged the Company in
2002, 2001 and 2000 amounted to $672, $701 and $717, respectively.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 10. REINSURANCE



| |  | The Company has entered into various reinsurance treaties for the
purpose of ceding the excess of life insurance over the 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 disability income product, the Company has
a 50% coinsurance agreement with its reinsurer. As of December 31,
2002, and 2001, $7.0 billion and $4.1 billion, respectively, of life
insurance in force was ceded to other companies. The Companys most
significant reinsurance business is with Business Mens Assurance
Company of America (BMA), which reinsures a portion of the Companys
life and accident and health business. At December 31, 2002, the amount
of in-force life insurance ceded to BMA totaled approximately $4.2
billion.
|
| |  | In 2001, the Company introduced two new products, ERIE Flagship Term2
and ERIE Target Term. These products are reinsured 50% and 90%,
respectively, with nonaffiliated reinsurers. Sales of ERIE Flagship
Term, ERIE Flagship Term2 and the ERIE Target Term in 2002 resulted in
increased ceded reinsurance balances in 2002. Policy revenue ceded to
BMA totaled $5,816, $3,956 and $1,469 for the years ended December 31,
2002, 2001 and 2000, respectively.                                                                                                                                                                            

122



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 10. REINSURANCE (CONTINUED)



| |  | The effect of ceded reinsurance in the Statement of Operations is as
follows:
| |  | -----------------------------------------------------------------------------

|                       |                                                      |                             |   |        |         |      |   |         |        |  |   |        |         | 
|---------------------- | ---------------------------------------------------- | --------------------------- | - | ------ | ------- | ---- | - | ------- | ------ |  | - | ------ | ------- | 
|                       |                                                      |                             |   | 2002   |         | 2001 |   | 2000   
|                       |                                                      |                             |   |        |         |      |   |        
|Revenues:              |                                                      |                             |   |        |         |      |   |         |        |  |   |       
|                       | Direct policy revenue                                |                             | $ | 63,426 |         |      | $ | 54,549  |        |  | $ | 49,249 |        
|                       | Policy revenue ceded                                 |                             |   | 12,297 |         |      |   | 8,058   |        |  |   | 4,712  |        
|                       |                                                      |                             |   |        |         |      |   |         |        |  |   |       
|                       | Net policy revenue                                   |                             |   | 51,129 |         |      |   | 46,491  |        |  |   | 44,537 |        
|                       | Net investment income                                |                             |   | 66,286 |         |      |   | 61,181  |        |  |   | 59,476 |        
|                       | Net realized (losses) gains on
investments           |                             |   | (9,610 | )       |      |   | (19,646 | )      |  |   | 6,960  |        
|                       | Equity in earnings of limited
partnerships           |                             |   | 3,664  |         |      |   | 736     |        |  |   | 3,437  |        
|                       | Other income                                         |                             |   | 815    |         |      |   | 752     |        |  |   | 963    |        
|                       |                                                      |                             |   |        |         |      |   |         |        |  |   |       
|                       |                                                      | Total revenues              |   | $      | 112,284 |      |   | $       | 89,514 |  |   | $      | 115,373 | 
|Benefits
and expenses: |                                                      |                             |   |        |         |      |   |         |        |  |   |       
|                       | Death benefits                                       |                             | $ | 18,462 |         |      | $ | 15,833  |        |  | $ | 15,190 |        
|                       | Reinsurance recoveries                               |                             |   | 2,915  |         |      |   | 2,495   |        |  |   | 2,321  |        
|                       |                                                      |                             |   |        |         |      |   |         |        |  |   |       
|                       | Net death benefits                                   |                             |   | 15,547 |         |      |   | 13,338  |        |  |   | 12,869 |        
|                       | Interest on deposits and other
policyholder benefits |                             |   | 48,754 |         |      |   | 44,436  |        |  |   | 40,703 |        
|                       | Increase in future life policy benefits              |                             |   | 8,566  |         |      |   | 8,792   |        |  |   | 6,551  |        
|                       | Reinsurance reserve credits                          |                             |   | 2,003  |         |      |   | 3,044   |        |  |   | 2,149  |        
|                       |                                                      |                             |   |        |         |      |   |         |        |  |   |       
|                       | Net increase in future life policy
benefits          |                             |   | 6,563  |         |      |   | 5,748   |        |  |   | 4,402  |        
|                       | Amortization of deferred policy
acquisition costs    |                             |   | 8,427  |         |      |   | 5,818   |        |  |   | 5,145  |        
|                       | Commissions                                          |                             |   | 10,839 |         |      |   | 6,311   |        |  |   | 4,313  |        
|                       | Reinsurance commission allowance                     |                             |   | 7,033  |         |      |   | 3,886   |        |  |   | 2,344  |        
|                       |                                                      |                             |   |        |         |      |   |         |        |  |   |       
|                       | Net commissions                                      |                             |   | 3,806  |         |      |   | 2,425   |        |  |   | 1,969  |        
|                       | General expenses, taxes, licenses
and fees           |                             |   | 15,650 |         |      |   | 13,562  |        |  |   | 11,462 |        
|                       |                                                      |                             |   |        |         |      |   |         |        |  |   |       
|                       |                                                      | Total benefits and expenses |   | $      | 98,747  |      |   | $       | 85,327 |  |   | $      | 76,550  | 
|                       |                                                      |                             |   |        |         |      |   |         |        |  |   |       
|                       |                                                      | Income before income taxes  |   | $      | 13,537  |      |   | $       | 4,187  |  |   | $      | 38,823  | 
|                       |                                                      |                             |   |        |         |      |   |         |        |  |   |       

123



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 11. COMMITMENTS



| |  | The Company has outstanding commitments to invest up to $4.0 million in
limited partnerships at December 31, 2002. These commitments will be
funded as required through the end of the respective investment
periods, which typically span 3 to 5 years.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 12. 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 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 common stock, limited partnership and remaining
fixed maturity investments support the Corporate Account. Because the
Company sold its entire common stock portfolio at the end of 2002,
relatively more of the fixed maturity portfolio will support the
Corporate Account in future periods.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The loss recorded in the Fixed Annuities line for the year ended
December 31, 2002, is a direct result of the impairment charges
recognized on fixed maturity investments during 2002 of $24,697. The
2002 increase in investment-related and other income in the Corporate
Account is a result of $8,683 in net realized gains on the sale of
common stock in 2002. The 2001 results in the Corporate Account
investment-related income were due to realized losses on common stock
totaling $16,356.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

124



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 12. SEGMENT INFORMATION (CONTINUED)

|                                             |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       |       |       |   |         |         |         |   |         |        |         | 
|-------------------------------------------- | --------------------------------- | -------------- | ------ | ----------- | ------ | --------- | ------ | --------- | ------ | ------ | ------- | --------- | ------ | ----- | ----- | ----- | ----- | - | ------- | ------- | ------- | - | ------- | ------ | ------- | 
|                                             |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       | Group |       |   |         |         |         |   |         |       
|                                             |                                   |                |        | Traditional |        | Universal |        | Fixed     |        | Life & |         | Corporate |        |       |       |      
|                                             |                                   |                |        | Life        |        | Life      |        | Annuities |        | Other  |         | Account   |        | Total
|                                             |                                   |                |        |             |        |           |        |           |        |        |         |           |        |      
|2002                                         |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       |       |       |   |         |         |         |   |         |       
|Total policy revenue, net of
reinsurance     |                                   | $              | 35,860 |             |        | $         | 12,209 |           |        | $      | 3       |           |        | $     | 3,057 |       |       | $ | 0       |         |         | $ | 51,129  |       
|Total net investment income
and other income |                                   |                | 6,381  |             |        |           | 8,227  |           |        |        | 46,294  |           |        |       | 157   |       |       |   | 9,706   |         |         |   | 70,765  |       
|Net realized capital (losses)
gains          |                                   |                | (1,547 | )           |        |           | (1,819 | )         |        |        | (11,198 | )         |        |       | (38   | )     |       |   | 4,992   |         |         |   | (9,610  | )     
|                                             |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       |       |       |   |         |         |         |   |         |       
|                                             |                                   | Total revenues |        | $           | 40,694 |           |        | $         | 18,617 |        |         | $         | 35,099 |       |       | $     | 3,176 |   |         | $       | 14,698  |   |         | $      | 112,284 | 
|                                             |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       |       |       |   |         |         |         |   |         |       
|Less: Total benefits and
expenses            |                                   |                | 35,106 |             |        |           | 17,246 |           |        |        | 44,115  |           |        |       | 2,280 |       |       |   | 0       |         |         |   | 98,747  |       
|                                             |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       |       |       |   |         |         |         |   |         |       
|                                             | Income (loss) before
income taxes |                | $      | 5,588       |        |           | $      | 1,371     |        |        |         | ($9,016   | )      |       | $     | 896   |       |   | $       | 14,698  |         |   | $       | 13,537 |        
|                                             |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       |       |       |   |         |         |         |   |         |       
|2001                                         |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       |       |       |   |         |         |         |   |         |       
|Total policy revenue, net of
reinsurance     |                                   | $              | 32,685 |             |        | $         | 11,008 |           |        | $      | 3       |           |        | $     | 2,795 |       |       | $ | 0       |         |         | $ | 46,491  |       
|Total net investment income
and other income |                                   |                | 6,446  |             |        |           | 7,899  |           |        |        | 42,914  |           |        |       | 164   |       |       |   | 5,246   |         |         |   | 62,669  |       
|Net realized capital losses                  |                                   |                | (471   | )           |        |           | (527   | )         |        |        | (3,128  | )         |        |       | (12   | )     |       |   | (15,508 | )       |         |   | (19,646 | )     
|                                             |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       |       |       |   |         |         |         |   |         |       
|                                             |                                   | Total revenues |        | $           | 38,660 |           |        | $         | 18,380 |        |         | $         | 39,789 |       |       | $     | 2,947 |   |         | $       | (10,262 | ) |         | $      | 89,514  | 
|                                             |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       |       |       |   |         |         |         |   |         |       
|Less: Total benefits and
expenses            |                                   |                | 28,764 |             |        |           | 15,040 |           |        |        | 38,009  |           |        |       | 3,514 |       |       |   | 0       |         |         |   | 85,327  |       
|                                             |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       |       |       |   |         |         |         |   |         |       
|                                             | Income (loss) before
income taxes |                | $      | 9,896       |        |           | $      | 3,340     |        |        | $       | 1,780     |        |       | $     | (567  | )     |   | $       | (10,262 | )       |   | $       | 4,187  |        
|                                             |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       |       |       |   |         |         |         |   |         |       
|2000                                         |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       |       |       |   |         |         |         |   |         |       
|Total policy revenue, net of
reinsurance     |                                   | $              | 31,789 |             |        | $         | 10,186 |           |        | $      | 2       |           |        | $     | 2,560 |       |       | $ | 0       |         |         | $ | 44,537  |       
|Total net investment income
and other income |                                   |                | 6,348  |             |        |           | 7,463  |           |        |        | 42,744  |           |        |       | 150   |       |       |   | 7,171   |         |         |   | 63,876  |       
|Net realized capital gains                   |                                   |                | 7      |             |        |           | 8      |           |        |        | 50      |           |        |       | 0     |       |       |   | 6,895   |         |         |   | 6,960   |       
|                                             |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       |       |       |   |         |         |         |   |         |       
|                                             |                                   | Total revenues |        | $           | 38,144 |           |        | $         | 17,657 |        |         | $         | 42,796 |       |       | $     | 2,710 |   |         | $       | 14,066  |   |         | $      | 115,373 | 
|                                             |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       |       |       |   |         |         |         |   |         |       
|Less: Total benefits and
expenses            |                                   |                | 24,420 |             |        |           | 14,011 |           |        |        | 36,903  |           |        |       | 1,216 |       |       |   | 0       |         |         |   | 76,550  |       
|                                             |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       |       |       |   |         |         |         |   |         |       
|                                             | Income before income
taxes        |                | $      | 13,724      |        |           | $      | 3,646     |        |        | $       | 5,893     |        |       | $     | 1,494 |       |   | $       | 14,066  |         |   | $       | 38,823 |        
|                                             |                                   |                |        |             |        |           |        |           |        |        |         |           |        |       |       |       |       |   |         |         |         |   |         |       

NOTE 13. STATUTORY INFORMATION



| |  | The Company prepares its statutory financial statements in accordance
with accounting practices prescribed by the Pennsylvania Insurance
Department. Prescribed Statutory Accounting Practices (SAP) include
state laws, regulations and general administrative rules, as well as a
variety of publications from the National Association of Insurance
Commissioners (NAIC). Accounting principles used to prepare statutory
financial statements differ from financial statements prepared on the
basis of generally accepted accounting principles.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

125



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##### 



ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 13. STATUTORY INFORMATION (CONTINUED)



| |  | A reconciliation of net income as filed with regulatory authorities to
net income reported in the accompanying financial statements for the
years ended December 31, 2002, 2001 and 2000, follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                            |                                                        |   |        |        |      |   |        |        |   |   |        |        |  
|--------------------------- | ------------------------------------------------------ | - | ------ | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|                            |                                                        |   | 2002   |        | 2001 |   | 2000  
|                            |                                                        |   |        |        |      |   |       
|Statutory net (loss) income |                                                        | $ | (8,625 | )      |      | $ | (5,065 | )      |   | $ | 19,058 |       
|Reconciling items:          |                                                        |   |        |        |      |   |        |        |   |   |        |       
|                            | Policy liabilities and accruals                        |   |        | 3,568  |      |   |        | 831    |   |   |        | 3,035  |  
|                            | Deferred policy acquisition costs,
net of amortization |   |        | 12,050 |      |   |        | 7,292  |   |   |        | 7,135  |  
|                            | Investment valuation differences                       |   |        | 3,372  |      |   |        | 2,084  |   |   |        | (686   | )
|                            | GAAP deferred taxes                                    |   |        | (193   | )    |   |        | (88    | ) |   |        | (2,718 | )
|                            | Cost of collection                                     |   |        | 0      |      |   |        | 0      |   |   |        | 1,232  |  
|                            | Deferred and uncollected premiums                      |   |        | (2,034 | )    |   |        | (1,557 | ) |   |        | (1,884 | )
|                            | Limited partnership income                             |   |        | 950    |      |   |        | (500   | ) |   |        | 459    |  
|                            | Other                                                  |   |        | (248   | )    |   |        | (259   | ) |   |        | (241   | )
|                            |                                                        |   |        |        |      |   |        |        |   |   |        |       
|GAAP net income             |                                                        | $ | 8,840  |        |      | $ | 2,738  |        |   | $ | 25,390 |       
|                            |                                                        |   |        |        |      |   |        |        |   |   |        |       



| |  | A reconciliation of shareholders equity as filed with regulatory
authorities to shareholders equity reported in the accompanying
financial statements as of December 31, 2002 and 2001, follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               |                                                        |   |         |         |      |   |         |         |  
|------------------------------ | ------------------------------------------------------ | - | ------- | ------- | ---- | - | ------- | ------- | -
|                               |                                                        |   | 2002    |         | 2001
|                               |                                                        |   |         |         |     
|Statutory shareholders equity |                                                        | $ | 93,319  |         |      | $ | 109,870 |        
|Reconciling items:             |                                                        |   |         |         |      |   |         |        
|                               | Asset valuation and interest
maintenance reserves      |   |         | 21,990  |      |   |         | 33,324  |  
|                               | Investment valuation differences                       |   |         | 56,010  |      |   |         | 12,034  |  
|                               | Deferred policy acquisition costs                      |   |         | 104,065 |      |   |         | 92,015  |  
|                               | Surplus note                                           |   |         | (15,000 | )    |   |         | (15,000 | )
|                               | Policy liabilities and accruals                        |   |         | 17,624  |      |   |         | 14,056  |  
|                               | Difference between statutory
and GAAP deferred taxes   |   |         | (44,312 | )    |   |         | (33,574 | )
|                               | Deferred and uncollected premiums                      |   |         | (10,933 | )    |   |         | (8,899  | )
|                               | Capitalized salaries and benefits, net of amortization |   |         | 1,684   |      |   |         | 1,933   |  
|                               |                                                        |   |         |         |      |   |         |        
|GAAP shareholders equity      |                                                        | $ | 224,447 |         |      | $ | 205,759 |        
|                               |                                                        |   |         |         |      |   |         |        



| |  | The minimum statutory capital and
surplus requirements under Pennsylvania law for stock life insurance companies (Section 386 of the
PA Insurance Code) amounts to $1,650. The Companys total statutory
capital and surplus well exceeded these minimum requirements.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 13. STATUTORY INFORMATION (CONTINUED)



| |  | The amount of dividends the Company can pay to its shareholders without
the prior approval of the Pennsylvania Insurance Commissioner is
limited by statute to the greater of: (a) 10% of its statutory surplus
as regards policyholders as shown on its last annual statement on file
with the commissioner, or (b) the net income as reported for the period
covered by such annual statement, but shall not include pro rata
distribution of any class of the insurers own securities. Accordingly,
the maximum dividend payout which may be made in 2003 without prior
Pennsylvania Commissioner approval is $8,954. Dividends declared to
shareholders totaled $7,938 in 2002 and $7,371 in 2001.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Bonds having a carrying value of $1,993 at December 31, 2002, 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 Statements of Financial Position and are included with
fixed maturities.                                                                                                                                                                                                                                                                                                                                                                                             



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ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)



| |  | The following results are unaudited. In the opinion of the Companys
management, all adjustments  consisting only of normal recurring
accruals  necessary for a fair presentation of the interim periods
presented have been included.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                    |                             |   |         |        |         |   |         |        |         |   |        |        |  |   |         |        |  
|--------------------------------------------------- | --------------------------- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | - | ------ | ------ |  | - | ------- | ------ | -
|                                                    |                             |   | First   |        | Second  |   | Third   |        | Fourth 
|                                                    |                             |   | Quarter |        | Quarter |   | Quarter |        | Quarter
|                                                    |                             |   |         |        |         |   |         |        |        
|2002                                                |                             |   |         |        |         |   |         |        |         |   |        |        |  |   |         |       
|Total net policy revenue                            |                             | $ | 12,329  |        |         | $ | 13,518  |        |         | $ | 12,311 |        |  | $ | 12,971  |       
|Net investment income                               |                             |   | 14,510  |        |         |   | 16,998  |        |         |   | 16,517 |        |  |   | 18,261  |       
|Net realized gains (losses) on investments          |                             |   | 2,054   |        |         |   | (7,698  | )      |         |   | (5,235 | )      |  |   | 1,269   |       
|Equity in earnings (losses) of limited
partnerships |                             |   | 1,069   |        |         |   | 2,513   |        |         |   | 151    |        |  |   | (69     | )     
|Other income                                        |                             |   | 244     |        |         |   | 177     |        |         |   | 139    |        |  |   | 255     |       
|                                                    |                             |   |         |        |         |   |         |        |         |   |        |        |  |   |         |       
|                                                    | Total revenues              |   | $       | 30,206 |         |   | $       | 25,508 |         |   | $      | 23,883 |  |   | $       | 32,687 |  
|                                                    |                             |   |         |        |         |   |         |        |         |   |        |        |  |   |         |       
|Income before income taxes                          |                             | $ | 6,706   |        |         | $ | 1,538   |        |         | $ | 750    |        |  | $ | 4,543   |       
|Provision for federal income tax
expense            |                             |   | (2,320  | )      |         |   | (532    | )      |         |   | (260   | )      |  |   | (1,585  | )     
|                                                    |                             |   |         |        |         |   |         |        |         |   |        |        |  |   |         |       
|                                                    | Net income                  |   | $       | 4,386  |         |   | $       | 1,006  |         |   | $      | 490    |  |   | $       | 2,958  |  
|                                                    |                             |   |         |        |         |   |         |        |         |   |        |        |  |   |         |       
|                                                    | Net income per share        |   | $       | 0.46   |         |   | $       | 0.11   |         |   | $      | 0.05   |  |   | $       | 0.32   |  
|                                                    |                             |   |         |        |         |   |         |        |         |   |        |        |  |   |         |       
|Comprehensive (loss) income                         |                             | $ | (5,973  | )      |         | $ | 7,964   |        |         | $ | 16,683 |        |  | $ | 7,952   |       
|                                                    |                             |   |         |        |         |   |         |        |         |   |        |        |  |   |         |       
|2001                                                |                             |   |         |        |         |   |         |        |         |   |        |        |  |   |         |       
|Total net policy revenue                            |                             | $ | 10,997  |        |         | $ | 11,861  |        |         | $ | 11,295 |        |  | $ | 12,338  |       
|Net investment income                               |                             |   | 14,709  |        |         |   | 15,865  |        |         |   | 14,744 |        |  |   | 15,863  |       
|Net realized gains (losses) on investments          |                             |   | 594     |        |         |   | (1,067  | )      |         |   | (2,034 | )      |  |   | (17,139 | )     
|Equity in (losses) earnings of limited
partnerships |                             |   | (965    | )      |         |   | 1,767   |        |         |   | 614    |        |  |   | (680    | )     
|Other income                                        |                             |   | 191     |        |         |   | 178     |        |         |   | 317    |        |  |   | 66      |       
|                                                    |                             |   |         |        |         |   |         |        |         |   |        |        |  |   |         |       
|                                                    | Total revenues              |   | $       | 25,526 |         |   | $       | 28,604 |         |   | $      | 24,936 |  |   | $       | 10,448 |  
|                                                    |                             |   |         |        |         |   |         |        |         |   |        |        |  |   |         |       
|Income (loss) before income taxes                   |                             | $ | 5,261   |        |         | $ | 8,642   |        |         | $ | 3,861  |        |  | $ | (13,577 | )     
|Provision for federal income tax
(expense) benefit  |                             |   | (1,820  | )      |         |   | (2,985  | )      |         |   | (1,342 | )      |  |   | 4,698   |       
|                                                    |                             |   |         |        |         |   |         |        |         |   |        |        |  |   |         |       
|                                                    | Net income (loss)           |   | $       | 3,441  |         |   | $       | 5,657  |         |   | $      | 2,519  |  |   | $       | (8,879 | )
|                                                    |                             |   |         |        |         |   |         |        |         |   |        |        |  |   |         |       
|                                                    | Net income (loss) per share |   | $       | 0.36   |         |   | $       | 0.60   |         |   | $      | 0.27   |  |   | $       | (0.94  | )
|                                                    |                             |   |         |        |         |   |         |        |         |   |        |        |  |   |         |       
|Comprehensive income (loss)                         |                             | $ | 9,136   |        |         | $ | 7,295   |        |         | $ | 5,854  |        |  | $ | (4,875  | )     
|                                                    |                             |   |         |        |         |   |         |        |         |   |        |        |  |   |         |       



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ERIE FAMILY LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS

NOTE 14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)

|                                                    |                      |   |         |        |         |   |         |        |         |   |        |        |  |   |        |        | 
|--------------------------------------------------- | -------------------- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                    |                      |   | First   |        | Second  |   | Third   |        | Fourth 
|                                                    |                      |   | Quarter |        | Quarter |   | Quarter |        | Quarter
|                                                    |                      |   |         |        |         |   |         |        |        
|2000                                                |                      |   |         |        |         |   |         |        |         |   |        |        |  |   |        |       
|Total net policy revenue                            |                      | $ | 10,472  |        |         | $ | 11,643  |        |         | $ | 11,373 |        |  | $ | 11,049 |       
|Net investment income                               |                      |   | 14,764  |        |         |   | 14,965  |        |         |   | 14,259 |        |  |   | 15,488 |       
|Net realized gains on investments                   |                      |   | 2,249   |        |         |   | 1,603   |        |         |   | 1,628  |        |  |   | 1,480  |       
|Equity in earnings (losses) of limited
partnerships |                      |   | 970     |        |         |   | 1,400   |        |         |   | 1,122  |        |  |   | (55    | )     
|Other income                                        |                      |   | 305     |        |         |   | 211     |        |         |   | 244    |        |  |   | 203    |       
|                                                    |                      |   |         |        |         |   |         |        |         |   |        |        |  |   |        |       
|                                                    | Total revenues       |   | $       | 28,760 |         |   | $       | 29,822 |         |   | $      | 28,626 |  |   | $      | 28,165 | 
|                                                    |                      |   |         |        |         |   |         |        |         |   |        |        |  |   |        |       
|Income before income taxes                          |                      | $ | 9,948   |        |         | $ | 8,991   |        |         | $ | 9,214  |        |  | $ | 10,670 |       
|Provision for federal income tax expense            |                      |   | (3,442  | )      |         |   | (3,111  | )      |         |   | (3,188 | )      |  |   | (3,692 | )     
|                                                    |                      |   |         |        |         |   |         |        |         |   |        |        |  |   |        |       
|                                                    | Net income           |   | $       | 6,506  |         |   | $       | 5,880  |         |   | $      | 6,026  |  |   | $      | 6,978  | 
|                                                    |                      |   |         |        |         |   |         |        |         |   |        |        |  |   |        |       
|                                                    | Net income per share |   | $       | 0.69   |         |   | $       | 0.62   |         |   | $      | 0.64   |  |   | $      | 0.74   | 
|                                                    |                      |   |         |        |         |   |         |        |         |   |        |        |  |   |        |       
|Comprehensive income                                |                      | $ | 19,605  |        |         | $ | 139     |        |         | $ | 8,886  |        |  | $ | 2,791  |       
|                                                    |                      |   |         |        |         |   |         |        |         |   |        |        |  |   |        |       

The Company sold its common stock portfolio in the fourth quarter of 2002. For
the quarter, net realized gains on common stocks totaled $6,580. During the
fourth quarter of 2002, an adjustment of approximately $2,000 was made to
increase the DAC amortization. See alsoNote 2.

Net realized losses on investments in the fourth quarter of 2001 resulted
primarily from sales of fixed maturities and common stock as part of a proactive
year end tax planning strategy.

129