##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number
2-39458 ERIE FAMILY LIFE INSURANCE COMPANY   Pennsylvania
    
    25-1186315(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 100 Erie Insurance Place, Erie, Pennsylvania
    
    16530(Address of principal executive offices)
    
    (Zip code)
 Registrants telephone
number, including area code (814) 870-2000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.40 par value 
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes þ               No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of
the Securities Exchange Act of 1934). Yes
o
               No
þ Indicate the number of shares outstanding of each of the Registrant s classes of common stock, as
of the latest practicable date: 9,450,000 shares of Common Stock outstanding on February 15, 2005. DOCUMENTS INCORPORATED BY REFERENCE:  1.
    Portions of the Registrants Proxy Statement relating to the Annual Meeting of Shareholders to
be held April 19, 2005 are incorporated by reference into Parts I and III of this Form 10-K
Report.   1




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INDEX ITEM NUMBER AND CAPTION PAGEPart IItem 1. Business
    
    
    3Item 2. Properties
    
    
    7Item 3. Legal Proceedings
    
    
    7Item 4. Submission of Matters to a Vote of Security Holders
    
    
    8Part IIItem 5. Market for the Registrants Common Equity, Related Shareholder Matters
and Issuer Repurchases of Equity Securities
    
    
    9Item 6. Selected Financial Data
    
    
    10Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    11Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 8. Financial Statements and Supplementary Data
    
    
    27Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
    
    
    60Item 9A. Controls and Procedures
    
    
    60Item 9B. Other Information
    
    
    60Part IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    61Item 11. Executive Compensation
    
    
    63Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    63Item 13. Certain Relationships and Related Transactions
    
    
    63Item 14. Principal Accountant Fees and Services
    
    
    63Part IVItem 15. Exhibits and Financial Statement Schedules
    
    
    64EX-10.48EX-10.49EX-23EX-31.1EX-31.2EX-32
  2




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PART I 
 ITEM 1. BUSINESS Erie Family Life Insurance Company (hereinafter referred to as the Company or Erie Family
Life) is incorporated in the Commonwealth of Pennsylvania and is primarily engaged in the
business of underwriting and selling nonparticipating individual and group life insurance
policies, annuities and disability income products. 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, who are predominantly
directors, agents and employees of EIC. EIC is a Pennsylvania business corporation formed in
1925 to be the attorney-in-fact for the policyholders of the Exchange, a
Pennsylvania-domiciled reciprocal insurance exchange. EIC, as attorney-in-fact, has a
fiduciary duty to act in this capacity on behalf of the policyholders of the Exchange in
addition to a fiduciary duty to its own shareholders. EIC operates predominantly as a provider
of sales, underwriting and policy issuance services to the Exchange. EIC also is engaged in
the property/casualty insurance business through its wholly owned subsidiaries, Erie Insurance
Company, Erie Insurance Company of New York and Erie Insurance Property & Casualty Company and
through a subsidiary of the Exchange, Flagship City Insurance Company. The Company, EIC, the
Exchange and its subsidiary and affiliates operate collectively under the name Erie Insurance
Group. Members of the Erie Family Life Board of Directors are the same as those of EIC. Products The Companys portfolio of life insurance includes permanent life, endowment and term
policies, including whole life, mortgage and decreasing term, group, and universal life
insurance. In terms of face value, new life business issued in 2004, 2003 and 2002 had a ratio
of 14:1, 9:1 and 11:1, respectively, of term insurance to whole life insurance coverage.
Contributing to this ratio of term insurance issued to whole life insurance issued has been
the introduction of a new generation of insurance products in recent years. In late 2001, the
Company rolled out its two newest products  ERIE Target Term and ERIE Flagship Term2. The
ERIE Target Term product has a minimum face amount of $100,000 and offers rate guarantees for
10 years on all plans. The ERIE Flagship Term2, now Erie Family Lifes most comprehensive term
insurance plan for individuals desiring substantial coverage, offers a minimum face amount of
$100,000. These plans combined accounted for 84.6%, 86.0%, and 76.0% of the total new direct
premiums on ordinary life insurance for 2004, 2003, and 2002, respectively. Life insurance premiums and annuity deposits have been the primary sources of cash inflows for
the Company. Net life insurance premiums by class, as a percentage of total sales, are as
follows: For the year ended December 31,Class
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Ordinary Life (including Term and
Whole Life) and Universal Life
    
    
    94.1
    %
    
    
    93.1
    %
    
    
    94.0
    %
    
    
    94.0
    %
    
    
    94.2
    %Group Life and Other
    
    
    5.9
    
    
    
    6.9
    
    
    
    6.0
    
    
    
    6.0
    
    
    
    5.8100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 The Company reinsures a portion of its business under a number of different reinsurance
agreements. The purpose of this reinsurance is to enable the Company to write a policy in an
amount larger than the Company is willing to assume for itself. The Company currently
reinsures with other insurance companies the portion of the insurance coverage above desired
retentions. The retention limit on an acceptable risk is $300,000 per life for individual
coverage. For its disability income product, the Company has a 50% coinsurance agreement with
a nonaffiliated reinsurer. The 3




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Company has a 50% coinsurance agreement, with a maximum retention of $300,000, with
nonaffiliated reinsurers for its ERIE Flagship Term and ERIE Flagship Term2 products. For its
Erie Target Term product, the Company has a 90% coinsurance agreement, with a maximum
retention of $300,000, with nonaffiliated reinsurers. Direct life insurance in-force totaled $30.1 billion, $27.1 billion and $23.2 billion at
December 31, 2004, 2003 and 2002, respectively. As of December 31, 2004, 2003 and 2002, $12.5
billion, $9.8 billion and $7.0 billion, respectively, of life insurance in-force was ceded to
other companies. The Companys most significant reinsurance relationship is with Generali USA
Reassurance Company (Generali), which reinsures a portion of the Companys life and accident
and health business. At December 31, 2004, 2003 and 2002, the amount of in-force life
insurance ceded to Generali totaled approximately $6.7 billion, $5.6 billion and $4.2 billion,
respectively. Certain elements of revenue and expense reflect the requirements of Financial Accounting
Standard (FAS) 97, Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. FAS
97 prescribes a uniform method by which life insurance companies account for certain long-term
insurance contracts, specifically annuities, universal life, and other interest-sensitive
products. This method involves separating the premium income into the premium portion (shown
in revenue), which represents insurance protection purchased, and the deposit portion, which
represents funds to be held at interest for future uses. Under this standard, the deposit
portion of the premium received is accounted for using methods applicable to comparable
interest bearing obligations of other types of financial institutions. Annuity product offerings compete with other available investment products including, but not
limited to, common and preferred stocks, bonds, mutual funds and other instruments. The
Companys ability to attract policyholders depends in large part on the relative
attractiveness of its products compared to other investment alternatives available. Factors
such as the interest rate environment and the performance of the stock market influence this
ability. 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 as annuity deposits in the Companys Statements of Financial Position
from structured settlement annuities sold to affiliated property/casualty companies totaled
$20.5 million, $20.9 million and $18.6 million in 2004, 2003 and 2002, respectively. Also
included in the annuity deposits are 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 did not purchase any annuities from the Company
in 2004 or 2003. Deposits by class are as follows: For the year ended December 31,(in thousands)Class
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Universal Life Deposits
    
    $
    12,374
    
    
    $
    13,326
    
    
    $
    12,176
    
    
    $
    12,238
    
    
    $
    11,198Annuity Deposits
    
    
    78,572
    
    
    
    144,202
    
    
    
    175,509
    
    
    
    69,754
    
    
    
    51,060$
    90,946
    
    
    $
    157,528
    
    
    $
    187,685
    
    
    $

    81,992
    
    
    $
    62,258
 Marketing The Company markets its products through independent agents in eleven jurisdictions. The 2004
statutory direct premiums and annuity considerations for those jurisdictions is made up of:
Pennsylvania (59.9%), Virginia (7.9%), Maryland (7.6%), Ohio (7.4%) and North Carolina (4.8%). 4




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West Virginia, Indiana, Tennessee, Illinois, Wisconsin and the District of Columbia
collectively accounted for 10.4% of direct premiums and annuity considerations. The policies
sold are evaluated by the Companys underwriting department which accepts or declines
applicants for insurance. Premium on policies which are accepted may be standard or rated,
depending on the nature of the risk. Competition The Company operates in a highly competitive industry which consists of numerous stock and
mutual life insurance companies. A large number of established insurance companies compete in
states in which the Company transacts business and many of these companies offer more
diversified lines of insurance coverage and have substantially greater financial resources
than does the Company. Competition is based primarily on price, product features, availability
of insurance products and the financial strength of the Company. Insurance Liabilities The Company establishes and maintains actuarial reserves to meet its obligations on life
insurance, disability income and annuity policies. These reserves are amounts which, with
additions from premiums to be received on outstanding policies and with interest on such
reserves compounded annually at certain assumed rates, are calculated to be sufficient to meet
policy obligations at death, disability or maturity in accordance with the mortality and
morbidity assumptions employed when the policies are issued. Reserves for life insurance and income-paying annuity future policy benefits have been
computed primarily by the net level premium method with assumptions as to anticipated
mortality, withdrawals, lapses and investment yields. Disability income reserves are
calculated as two-year preliminary term mid-terminal reserves plus unearned premium reserves
plus claim reserves. Deferred annuity future policy benefit liabilities have been established
at accumulated values without reduction for surrender charges. Reserves for universal life and
deposit contracts are based on the contract account balance. Variations are inherent in such
calculations due to the estimates and assumptions necessary in the calculations. Interest rate
assumptions for non-interest sensitive life insurance range from 3.50% to 4.00% on policies
issued in 1980 and prior years and 5.00% 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 contractual minimums. During 2004, interest rates
credited ranged from 4.25% to 5.00% on universal life deposits and 3.00% to 4.70% on annuity
deposits. Government Regulation The Company is subject to the corporate governance standards set forth in the recently enacted
Sarbanes-Oxley Act of 2002 (the Act) and other recent changes to the federal securities laws,
as well as any rules or regulations that may be promulgated by the Securities and Exchange
Commission and the Commonwealth of Pennsylvania. Compliance with these standards, rules and
regulations, that have recently been enacted, impose additional administrative costs and
burdens on the Company. The Company is considered a non-accelerated filer by definition, and is not subject to the
Section 404 requirements of the Act until 2005. The Company is expecting to incur
approximately $1 million of external costs to ensure compliance with this section of the Act. U.S. federal and state laws and regulations require financial institutions, including
insurance companies, to protect the security and confidentiality of consumer financial
information and to notify consumers about their policies and practices relating to their
collection and disclosure of consumer 5




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information and their policies relating to protecting the security and confidentiality of that
information. Similarly, federal and state laws and regulations also govern the disclosure and
security of consumer health information. In particular, regulations promulgated by the U.S.
Department of Health and Human Services regulate the disclosure and use of protected health
information by health insurers and others, the physical and procedural safeguards employed to
protect the security of that information, and the electronic transmission of such information.
Congress and state legislatures are expected to consider additional legislation relating to
privacy and other aspects of consumer information. The Company is also subject to supervision and regulation by the insurance departments of the
states in which it does business. Although the extent of the regulation varies from state to
state, generally the supervisory agencies are vested with broad regulatory powers relating to
the granting and revocation of licenses to transact business, regulation of trade practices,
licensing of agents, approval of policy forms, deposits of securities as for the benefits of
policy owners, and investments and maintenance of specified reserves and capital, all designed
primarily for the protection of policy owners. In accordance with the rules of the National
Association of Insurance Commissioners (NAIC), the Company is examined periodically by one or
more of the state supervisory agencies. The last completed examination of the Company was
conducted by the Pennsylvania Insurance Department and covered the five years ended December
31, 2000. The Commonwealth of Pennsylvania follows the statutory accounting practices minimum risk-based
capital requirements on domestic insurance companies that were developed by the NAIC.
Companies below specific trigger points or ratios are classified within certain levels, each
of which requires specified corrective action. The formulas for determining the amount of
risk-based capital specify various weighting factors that are applied to financial balances or
various levels of activity based on the perceived degree of risk. These formulas determine a
ratio of the Companys regulatory total adjusted capital to its authorized control level
risk-based capital, as defined by the NAIC. The NAIC levels and ratios are as follows: Ratio of Total Adjusted Capital toNAIC Required
    
    Authorized Control Level Risk-BasedRegulatory Event
    
    Capital (Less Than or Equal to)Company action level
    
    2.0 (or 2.5 with negative trends)Regulatory action level
    
    1.5Authorized control level
    
    1.0Mandatory control level
    
    0.7
 Erie Family Life has regulatory total adjusted capital of almost $141.3 million and a ratio of
total adjusted capital to authorized control level risk-based capital of more than 9:1 at
December 31, 2004. The Companys ratios significantly exceed the minimum NAIC risk-based
capital requirements. Employees Services of 148 full-time employees are provided through EIC. Six of the employees are
officers. Employee expenses along with other operating expenses are paid by EIC and reimbursed
by the Company on a monthly basis. None of the employees are covered by collective bargaining
agreements and the Company believes its employee relations are good. Website Access to Company Reports The Companys annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to those reports are available free of charge on the Companys 6




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website at
http://www.erieinsurance.com as soon as reasonably practicable after such
material is electronically filed with or furnished to the Securities and Exchange Commission.
The Companys Code of Conduct is available on the Companys website and in printed form upon
written request. Also copies of the Companys annual report will be made available, free of charge, upon
written request. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Certain
forward-looking statements contained herein involve risks and uncertainties. These statements
include certain discussions relating to underwriting, premium and investment income volume,
business strategies, profitability and business relationships and the Companys other business
activities during 2004 and beyond. In some cases, you can identify forward-looking statements by
terms such as may, will, should, could, would, expect, plan, intend, anticipate,
believe, estimate, project, predict, potential and similar expressions. These
forward-looking statements reflect the Companys current views about future events, are based on
assumptions and are subject to known and unknown risks and uncertainties that may cause results to
differ materially from those anticipated in those statements. Many of the factors that will
determine future events or achievements are beyond our ability to control or predict. 
 ITEM 2. PROPERTIES The Company owns real property for investment purposes as provided in Schedule I Summary of
Investments Other Than Investments in Related Parties. This investment property, located in
Allentown, Pennsylvania, is leased to EIC and a nonaffiliated business. Rental income for 2004 was
$0.4 million. The executive and administrative offices of the Company are located in the
headquarters office of Erie Insurance Group in Erie, Pennsylvania. The Company pays other members
of the Erie Insurance Group an amount determined by an agreement for office space and for the use
of facilities, equipment and services. 
 ITEM 3. LEGAL PROCEEDINGS A civil class action lawsuit was filed in April of 2003 in the Court of Common Pleas of
Philadelphia County, Pennsylvania. Erie Family Life Insurance Company (Company) is the named
defendant in the lawsuit. The Company issued a life insurance policy to the plaintiff. The class
action Complaint alleges that the Company charged and collected annual premium for the first year,
but did not provide 365 days of insurance coverage. The Complaint alleges that the policy forms
and applications used by the Company do not disclose that a portion of the first premium will
cover a period of time during which the Company does not provide insurance coverage. The Complaint contains four counts. In Count I, Plaintiff alleges that the conduct of the Company
violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law. Count II of the
Complaint alleges a cause of action for breach of contract. Count III alleges that the Company
breached its duty of good faith and fair dealing. In Count IV of the Complaint, Plaintiff asserts
a cause of action for unjust enrichment and/or restitution. The Company answered the Complaint and
denied liability on all counts. In early 2004, the parties reached an agreement to settle this lawsuit. Under the Settlement
Agreement, the Company agreed to provide supplemental life insurance coverage to qualifying class
members in an amount equal to 4.62% of the face value of the underlying policy for a period of 180
days. On April 30, 2004, Plaintiff filed a Motion for Preliminary Approval of Settlement
Agreement. After the filing of the Motion for Preliminary Approval, Plaintiff and the Company
agreed the Company would pay attorneys fees in an amount up to $150,000, and to reimburse certain
litigation costs and expenses in an amount up to $15,000. The Court preliminarily reviewed the proposed settlement. As a result of conferences with the
Court, 7




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the parties have engaged in further settlement negotiations. A new Settlement Agreement has not
been finalized or executed. If and when a new Settlement Agreement is finalized, it will be
submitted to the Court for approval. It is too early to assess the probable outcome or the purported amount of damages of this civil
class action lawsuit. The Company believes it has meritorious, legal and factual defenses to the
lawsuit and these defenses will be vigorously pursued if a settlement is not finalized. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted for a vote to shareholders during the fourth quarter of 2004. 8




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PART II 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
REPURCHASES OF EQUITY SECURITIES The Companys common stock is traded on the OTC Bulletin Board (OTCBB) under the symbol ERIF. The
Company had 895 shareholders of record of common stock on December 31, 2004. The following table sets forth the cash dividends per common share and the high and low prices of
the Companys common stock for each quarter of 2004 and 2003. First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter2004High
    
    $
    33.50
    
    
    $
    36.00
    
    
    $
    35.00
    
    
    $
    32.00Low
    
    
    29.00
    
    
    
    31.00
    
    
    
    31.35
    
    
    
    31.35Dividends declared
    
    $
    0.22
    
    
    $
    0.22
    
    
    $
    0.44
    
    
    $
    0.002003High
    
    $
    22.00
    
    
    $
    22.50
    
    
    $
    23.50
    
    
    $
    29.75Low
    
    
    18.50
    
    
    
    19.25
    
    
    
    22.00
    
    
    
    22.65Dividends declared
    
    $
    0.21
    
    
    $
    0.42
    
    
    $
    0.21
    
    
    $
    0.00
 For restrictions on dividends, see Note 16 to the financial statements filed herein as Item 8. 9




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ITEM 6. SELECTED FINANCIAL DATA Years ended December 312004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(amounts in thousands, except per share data)Operating dataTotal net policy revenue
    
    $
    56,548
    
    
    $
    55,932
    
    
    $
    51,129
    
    
    $
    46,491
    
    
    $
    44,537Net investment and other income
    
    
    83,881
    
    
    
    80,865
    
    
    
    71,940
    
    
    
    63,844
    
    
    
    65,067Net realized gains (losses) on
investments
    
    
    9,404
    
    
    
    13,176
    
    
    
    (9,610
    )
    
    
    (19,646
    )
    
    
    6,960Total revenues
    
    
    149,833
    
    
    
    149,973
    
    
    
    113,459
    
    
    
    90,689
    
    
    
    116,564Total benefits and expenses
    
    
    104,541
    
    
    
    102,668
    
    
    
    97,238
    
    
    
    85,789
    
    
    
    79,266Income before income taxes
    
    
    45,292
    
    
    
    47,305
    
    
    
    16,221
    
    
    
    4,900
    
    
    
    37,298Provision for federal income taxes
    
    
    15,660
    
    
    
    14,818
    
    
    
    5,636
    
    
    
    1,698
    
    
    
    12,899Net income
    
    $
    29,632
    
    
    $
    32,487
    
    
    $
    10,585
    
    
    $
    3,202
    
    
    $
    24,399Net income per share
    
    $
    3.14
    
    
    $
    3.44
    
    
    $
    1.12
    
    
    $
    0.34
    
    
    $
    2.58Financial positionTotal assets
    
    $
    1,661,440
    
    
    $
    1,629,563
    
    
    $
    1,378,451
    
    
    $
    1,161,846
    
    
    $
    1,015,845Notes payable to affiliate
    
    
    40,000
    
    
    
    40,000
    
    
    
    15,000
    
    
    
    15,000
    
    
    
    15,000Shareholders equity
    
    
    271,528
    
    
    
    255,563
    
    
    
    217,188
    
    
    
    200,822
    
    
    
    192,796Book value per share
    
    
    28.73
    
    
    
    27.04
    
    
    
    22.98
    
    
    
    21.25
    
    
    
    20.40Dividends declared per share
    
    
    0.88
    
    
    
    0.84
    
    
    
    0.84
    
    
    
    0.78
    
    
    
    0.72Average number of shares outstanding
    
    
    9,450
    
    
    
    9,450
    
    
    
    9,450
    
    
    
    9,450
    
    
    
    9,450
 10




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the financial statements
and related notes found on pages 27-59, as they contain important information that is helpful in
evaluating the Companys operating results and financial condition. Overview General Erie Family Life Insurance Company (the Company) is a Pennsylvania life insurance company operating
as one reportable segment, offering a range of products and services. These products include
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 10 states and the District of Columbia.
The Company is owned 21.6% by Erie Indemnity Company (EIC), 53.5% by Erie Insurance Exchange
(Exchange) and the remaining 24.9% by public shareholders. The Company, EIC and the Exchange and
its subsidiaries and affiliates operate collectively under the name Erie Insurance Group. Revenues and expenses The Company earns premiums principally from the sale of individual life, group life and disability
income insurance products. The Company also generates a significant amount of investment income
from investing deposits received on fixed annuity contracts. Operating expenses principally consist
of insurance benefits provided, interest credited on annuity and universal life deposits, general
business expenses, premium taxes and commissions and other costs of selling and servicing the
Companys various products. Financial stability The Companys profitability depends principally on the ability to price and manage risk on
insurance products, the ability to attract and retain deposit funds and the ability to manage
expenses. Specific drivers of the Companys profitability include:  
    Developing and distributing competitive products;
    Pricing insurance products at a competitive level while enabling the Company to earn a margin over the cost of providing
benefits;
    Controlling expenses of acquiring policyholders and administering insurance products;
    Mortality and morbidity experience on individual and group life insurance, annuity and disability income products;
    Persistency experience, which affects the recovery of the costs of acquiring new business over the lives of the contracts;
    Returns on investments, including maintaining interest rate spreads over the amounts credited to deposit funds. In addition, external factors such as regulation, competition, interest rates, taxes, securities
market conditions and general economic conditions affect profitability. 11




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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 operating
expenses, including salary and benefit costs. Operating expenses of the Company paid by EIC are
reimbursed on a monthly basis. The amount of these reimbursements totaled $28.9 million, $26.1
million and $23.8 million for 2004, 2003 and 2002, respectively. No interest is charged or received
on these 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 costs are incurred under these plans.
Amounts allocated to the Company from EIC for these pension and other employee benefit plans, and
included in the total reimbursements noted above, totaled $1.7 million, $1.3 million and $0.7
million for 2004, 2003 and 2002, respectively. The Erie Insurance Group affiliated property/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/casualty insurance
companies totaled $213.7 million and $201.9 million at December 31, 2004 and 2003, 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 $43.0 million and $45.0 million at December 31, 2004 and 2003, respectively. The Erie Insurance Group 401(k) plan for employees includes an investment option in a Company group
annuity. Annuity deposit balances outstanding relating to 401(k) contributions from employees are
$30.2 million and $28.0 million at December 31, 2004 and 2003, respectively. The Company has $40 million due to EIC in the form of two surplus notes. Interest and principal
payments are subject to prior approval by the Pennsylvania Insurance Commissioner. The first note
amounting to $15 million bears an annual interest rate of 6.45%. Interest on the surplus note is
scheduled to be paid semi-annually. The note is payable on demand on or after December 31, 2005.
Interest paid on this note totaled $1.0 million in 2004, 2003, and 2002. In 2003, the Company issued the second note for $25 million bearing an annual interest rate of
6.70%, scheduled to be paid semi-annually. The surplus note is payable on demand on or after
December 31, 2018. Interest paid on this note totaled $1.7 million and $0.6 million in 2004 and
2003, respectively. 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, deferred policy acquisition costs and reserves for policy liabilities.
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. 12




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##### Table of Contents



Investment valuation Management makes estimates concerning the valuation of all investments. Fixed maturity and
preferred stock investments are recorded at fair value under generally accepted accounting
principles. Fair values are estimated using quoted market prices where available. For securities
not actively traded, fair values are obtained from independent pricing services, from broker
dealers, or from models that take into consideration such factors, among others, as the credit
rating of the issuer, duration of the security, yields on comparably rated publicly-traded
securities and risk-free yield curves. Investment in limited partnerships include real estate and
mezzanine debt securities. Investments in limited partnerships are valued using the equity method,
which approximates the Companys proportionate share of reported net equity. These valuations are
determined by the general partner of the limited partnership and reviewed by the Company for
reasonableness. Such investments are illiquid and market values are subjectively determined due to
a lack of quoted market prices. For every investment, a decline in fair value below cost is evaluated monthly for
other-than-temporary impairment loss. Some factors considered in evaluating whether or not a
decline in fair value is other-than-temporary include: 1) the extent and duration to which fair
value is less than cost, 2) historical operating performance and financial condition of the issuer,
3) near term prospects of the issuer and its industry, 4) specific events that occurred affecting
the issuer, including a ratings downgrade, and 5) the Companys ability and intent to retain the
investment for a period of time sufficient to allow for a recovery in value. An investment deemed
impaired is written down to its estimated net realizable value. For all investments except limited
partnerships, the impairment charge is included as a realized loss in the Statements of Operations.
For limited partnerships, the impairment charge is included as a component of equity in earnings
of limited partnerships in the Statements of Operations. Deferred policy acquisition costs (DAC) asset The Company incurs significant costs in connection with acquiring new business, principally
commissions and policy issue and underwriting expenses. Acquisition costs, which vary with and are
primarily related to the production of new business, are deferred as an asset and amortized over a
period of time. At each balance sheet date, the Company evaluates the value of this asset in light
of historical and expected results. The DAC related to traditional life insurance products is amortized in proportion to premiums over
the premium-paying period of related policies using assumptions consistent with those used in
computing policy liability reserves. Assumptions used for a specific issue year are locked-in;
therefore, amortization in subsequent years is not adjusted for changing assumptions. The DAC related to universal life products and deferred annuities is amortized in relation to the
expected gross profits from projected investment, mortality and expense margins and surrender
charges of the policies over a specified period of time. This period is 30 years for universal
life and 20 years for deferred annuities. Both historical and anticipated investment returns,
including realized gains and losses, are considered in determining the amortization of DAC. GAAP
requires that changes in expected future gross profits on the annuity and universal life products
cause the DAC amortization rate be revised retroactively, or unlocked, to the date of policy
issuance. The cumulative change in DAC related to prior periods is recognized as a component of the
current periods DAC amortization, along with DAC amortization associated with the actual gross
profits of the current period. Lower actual gross profits in a period would typically result in
less DAC amortization in that period, whereas higher actual gross profits would result in more
amortization in the period. However, if lower gross profits were expected to continue into the
future, additional amortization of the existing DAC asset may occur. See the Analysis of
policy-related benefit and expenses section that follows for a discussion on the 2004
retrospective adjustment. 13




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##### Table of Contents



The Company periodically reviews the DAC asset to determine if it continues to be recoverable from
future premiums or profits. If less than the full amount of DAC is determined to be recoverable, a
portion of such costs are expensed at the time of determination. The amount of DAC considered
recoverable may be reduced in the near term if the estimate of future gross premiums or profits
were to be reduced. The amount of DAC amortization may be revised if any of the estimates discussed
above are revised. Insurance liabilities Significant assumptions underlying estimates of reserves for policy liabilities 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 plus claim reserves. Deferred
annuity future policy benefit liabilities are established at accumulated values without reduction
for surrender charges. Reserves for universal life plans are based on the contract account balance. Results of Operations Financial overview Net income decreased 8.8% to $29.6 million, or $3.14 per share, in 2004, from $32.5 million, or
$3.44 per share, in 2003. Although amortization expense decreased to $0.8 million from $7.5 million
in 2003 as a result of unlocking of projected profit assumptions on interest sensitive products in
the amount of $7.2 million, the Company also took a charge of $2.0 million to write-off an asset
related to the PEGLI pool. In addition, income from realized gains on investments was lower in
2004. Revenues Analysis of policy revenue The components of net policy revenue are reflected below for the years ended December 31: 2004
    
    
    2003
    
    
    2002(dollars in thousands)Direct premiums
    
    $
    79,035
    
    
    $
    72,947
    
    
    $
    63,426Ceded premiums
    
    
    22,487
    
    
    
    17,015
    
    
    
    12,297Net premiums
    
    $
    56,548
    
    
    $
    55,932
    
    
    $
    51,129
 Total individual policies in force grew 4.1% to 302,115 at December 31, 2004, from 290,290 at
December 31, 2003. Net premiums collected on traditional life insurance policies increased to
$38.6 million in 2004, from $37.8 million in 2003. Renewal premiums accounted for the increase in
direct premiums in 2004 as the Companys independent agents focused more heavily on property and
casualty underwriting profitability as opposed to new business production. Net renewal premiums
collected increased 5.6% to $1.8 million in 2004. Policies in force on traditional products
increased 5.3% to 212,102 in 2004, from 201,492 in 2003. Direct life insurance in force continues
to grow, totaling $30.1 billion at December 31, 2004, an increase of $3.0 billion, or 11.1%, over
2003. Life insurance in force after consideration of reinsurance ceded increased 1.8% to $17.6
billion at December 31, 2004. The Companys new generation of products are heavily reinsured, which allows the Company to price
the products more competitively and reduces underwriting volatility. Under the reinsurance treaty
for the ERIE 14




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##### Table of Contents



Target Term product, the reinsurer assumes 90% of mortality risk up to $3.0 million (the Companys
retention limit is $300,000) and assumes all mortality risk above that amount. The reinsurance
treaty for the ERIE Flagship Term2 product provides that the reinsurer assumes 50% of mortality
risk up to $600,000 (the Companys retention limit is $300,000) and assumes all mortality risk
above that amount. Ceded reinsurance premiums increased in 2004 due in part to the continued growth in sales of the
Erie Target Term and Erie Flagship Term2 products. The reinsurance premiums ceded on the Flagship
and Target Term life insurance products alone amounted to $18.1 million, $12.8 million and $8.7
million in 2004, 2003 and 2002, respectively. During 2004, the Company recorded corrections to its
ceded reinsurance and reinsurance allowance accounts as a result of reinsurance administration and
accounting errors. Some of the corrections pertained to years prior to 2004. The total net amount
of the correction was a charge of $0.5 million, and approximately $0.3 million, or $0.02 per share
after taxes, pertained to prior periods. Universal life products generated premium, net of reinsurance, of $14.2 million, $13.4 million and
$12.2 million in 2004, 2003 and 2002, respectively. Reinsurance premiums ceded on universal life
policies totaled $1.3 million, $1.2 million and $1.1 million in 2004, 2003 and 2002, respectively.
Reinsurance arrangements for universal life products did not change in 2003 or 2004. Total annuity and universal life deposits, which do not appear as revenue on the Statements of
Operations, were $90.9 million, $157.5 million and $187.7 million in 2004, 2003 and 2002,
respectively. First-year and single premium annuity deposits, excluding deposits for structured
settlements and deposits for the Erie Insurance Group Retirement Plan, decreased $68.9 million to
$31.8 million in 2004, from $100.7 million in 2003. The Companys ability to attract deposits
depends in large part on the relative attractiveness of its products compared to other investment
alternatives. Annuity deposits have declined over the past 18 months due to lower credited
interest rates and an improved equity market. Analysis of investment-related income Net investment income increased $1.9 million, or 2.4%, in 2004 and $11.3 million, or 16.7%, in
2003. The rate at which investment income grew was lower in 2004 due to lower yields in 2004 and a
decline in annuity deposits. The Company recognized net realized gains on investments of $9.4 million and $13.2 million in 2004
and 2003, respectively, and net realized losses of $9.6 million in 2002. The Company recorded no
impairments on fixed maturity and equity security investments in 2004 and $3.4 million and $25.8
million in 2003 and 2002, respectively. The Companys equity in earnings of limited partnerships increased to $2.1 million in 2004, from
$1.3 million in 2003. The Company recognized no impairment charges on limited partnerships in 2004
and $2.0 million and $1.0 million relating to mezzanine debt partnerships in 2003 and 2002,
respectively. Benefits and expenses Analysis of policy-related benefits and expenses Net death benefits on life insurance policies increased $2.4 million, or 15.5%, to $17.6 million in
2004, compared to $15.2 million in 2003 and $15.5 million in 2002. These benefits are net of
reinsurance recoveries of $6.2 million, $4.7 million and $2.9 million in 2004, 2003 and 2002,
respectively. As noted previously in the Analysis of Policy Revenue section, the Companys
primary term products are substantially reinsured. As the Companys life insurance in force
continues to grow, death benefits can be expected to increase. Net life insurance in force has
grown from $17.3 billion at December 31, 2003 to $17.6 billion at December 31, 2004. 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 15




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##### Table of Contents



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 $2.5 million, or 5.1% in 2004 and $2.2 million, or
4.6%, in 2003. This increase can be attributed to the growth of annuities on deposit. At December
31, 2004, the balance of annuity deposits totaled $984.9 million, compared to $932.6 million at
December 31, 2003, an increase of 5.6%. Interest was credited on annuity and universal life
deposits in 2004 and 2003 at the following rates: Annuity
    
    Universal lifedeposits
    
    depositsJanuary 1, 2003February 24, 2003
    
    4.00% 4.80%
    
    5.25% 6.00%February 25, 2003March 10, 2003
    
    3.75 4.70
    
    5.25 6.00March 11, 2003May 14, 2003
    
    3.75 4.70
    
    5.00 5.75May 15, 2003June 1, 2003
    
    3.50 4.70
    
    5.00 5.75June 2, 2003July 9, 2003
    
    3.50 4.70
    
    4.75 5.50July 10, 2003July 31, 2004
    
    3.00 4.70
    
    4.25 5.00August 1, 2004December 31, 2004
    
    3.50  4.70
    
    4.25  5.00
 Surrender and other benefits increased by $2.0 million to $3.3 million in 2004 and decreased by
$0.5 million to $1.3 million in 2003. Surrender and other benefits include life surrender benefits,
matured endowments, disability benefits and interest on death benefits. The increase in surrender
and other benefits in 2004 resulted from charges related to 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 was a participant in this pool for a number of years. Beginning July 1, 2001, the Company
stopped receiving new business from the PEGLI pool. The Company continued carrying a balance on the
Statements of Financial Position for its share of the assets and liabilities of the PEGLI pool.
However, the Companys inability to obtain reliable information for the appropriate balance of
these assets and liabilities raised the concern of the recoverability of the net asset. During the
fourth quarter of 2004, it was determined that it was unlikely the net asset would be recovered.
The Company made the decision to write-off the net asset, which totaled $2.0 million. The amortization of deferred policy acquisition costs decreased to $0.8 million in 2004 compared to
$7.5 million in 2003 and $7.3 million in 2002. For traditional life products, the amortization of
DAC was $4.9 million for 2004, $3.8 million for 2003 and $3.3 million for 2002. The decrease in
total amortization from 2003 to 2004 is principally attributable to changes in the amortization
related to the Companys universal life products. The DAC on these products is amortized in
relation to estimated gross profits in accordance with Statement of Financial Accounting Standard
No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and
for Realized Gains and Losses from the Sale of Investments (FAS 97). The Company regularly
evaluates the appropriateness of certain assumptions related to the interest sensitive products as
provided under FAS 97 and modifies (unlocks) assumptions as appropriate. As a result of unlocking
assumptions, the amortization of DAC decreased by $7.2 million in 2004. Approximately $4.8 million
of this amount resulted from updating universal life mortality assumptions to best estimates in
light of substantially more favorable claims expectations than originally reflected in the DAC
amortization models. Another $1.9 million resulted from increasing the interest spread assumption
on universal life policies to reflect anticipated investment earnings rates and actual crediting
practices in recent years. Analysis of other expenses 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 16




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##### Table of Contents



primarily to the production of new business, are deferrable as DAC. Most first-year and incentive
commissions and some renewal commissions qualify for deferral as DAC. Commission expense, net of
DAC, decreased $1.5 million or 54.4% to $1.2 million in 2004, and decreased 29.6% to $2.7 million
in 2003. These decreases are partially attributable to the decline in annuity sales and a decrease
in the annuity commission rates in 2004. Commissions and bonuses on annuity premiums, net of DAC,
were $0.7 million, $2.4 million and $3.0 million for 2004, 2003 and 2002, respectively. In
addition, the 2004 commission expense was reduced by a $0.7 million adjustment to the reinsurance
expense allowance reimbursements due to reinsurance administration system corrections, as discussed
previously in the Analysis of policy revenue section. General expenses include wages and salaries, employee benefits, data processing expenses, occupancy
expenses and other office and general administrative expenses of the Company. General expenses
related to the acquisition and underwriting of new policies are deferrable as DAC. These expenses
include medical inspection and exam fees related to new business production and wages, salaries and
employee benefits of underwriting and new policy processing personnel. General expenses, net of
DAC additions, increased $1.4 million to $16.3 million in 2004, compared to $14.9 million in 2003
and $11.0 million in 2002. Part of this increase can be attributed to: (1) the costs of
professional fees associated with refining the processes used to determine the recorded amount of
DAC and related DAC amortization and subsequent restatement of prior period financial statements,
(2) costs associated with the upgrading of the Companys policy administration systems for new
products and (3) costs for implementing a new life valuation system. Financial Condition Investments The Companys investment strategies provide that portfolios are structured to match the features of
the life insurance and annuity products sold by the Company. Annuities and life insurance policies
are long-term products; therefore, the Companys investment strategy takes a long-term perspective
emphasizing investment quality, diversification and superior investment returns. The Companys
investments are managed on a total return approach that focuses on current income and capital
appreciation. At December 31, 2004, the Companys investment in fixed maturities totaled $1.4 billion, or 93.2%,
of total investments. These resources provide the liquidity the Company requires to meet known and
unforeseen demands on its funds. Nonredeemable preferred stock, limited partnerships, real estate,
policy loans and real estate mortgage loans comprised the remaining 6.8% of total investments. The Companys performance of its fixed maturities and equity securities compared to market indices
is presented below. Two years endedDecember 31, 2004(Pre-tax annualized returns)
    (1)Erie Family Life Insurance Company indices:Fixed maturities
    
    7.22%Preferred stock
    
    10.92%Other indices:Lehman Brothers U.S. Aggregate
    
    4.22%
   (1)
    
    Includes investment income, realized and unrealized gains and losses. 17




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##### Table of Contents



Fixed maturities The Companys fixed maturities at December 31, 2004, 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 include 97.4%, or $1.3 billion, of high-quality,
marketable bonds and redeemable preferred stock, all of which were rated at investment-grade levels
(above Ba1/BB+) at December 31, 2004. The below-investment-grade category consists of $29.4 million
of bonds rated Ba1/BB+ and $6.8 million of bonds rated below Ba1/BB+. 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 net of deferred taxes and offsetting adjustments to DAC. At
December 31, 2004 and 2003, net unrealized gains on fixed maturities available-for-sale amounted to
$44.8 million and $49.9 million, respectively, net of deferred taxes. Equity securities Equity securities at December 31, 2004, consist of nonredeemable preferred stock carried on the
Statements of Financial Position at market value. At December 31, 2004 and 2003, nonredeemable
preferred stock held by the Company had net unrealized gains of $4.5 million and $4.1 million,
respectively, 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 entirely of high quality
positions rated investment-grade level (above Ba1/BB+) at December 31, 2004. Reserve liabilities The Companys primary commitment is its obligation to pay future policy benefits under the terms of
its life insurance and annuity contracts. To meet these future obligations, the Company establishes
life insurance reserves based upon the type of policy, the age, gender and risk class of the
insured and the number of years the policy has been in force. The Company also establishes annuity
and universal life reserves based on the amount of policyholder deposits (less applicable insurance
and expense charges) plus interest earned on those deposits. Life insurance and annuity reserves
are supported primarily by the Companys long-term, fixed income investments as the underlying
policy reserves are generally also of a long-term nature. Liquidity and Capital Resources 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. 18




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##### Table of Contents



Major cash outflows from operations are for benefits to policyholders, commissions to agents and
salaries, wages and operating expenses. The net positive cash flow from operations is used to fund
Company commitments and to build the investment portfolio, thereby increasing future investment
returns. Net cash provided by operating activities in 2004 was $17.1 million compared to $11.4
million in 2003 and $22.8 million in 2002. Cash flow sources from investing activities includes proceeds from the sales, calls and maturities
of fixed maturity positions. These proceeds totaled $223.5 million, $340.0 million and $267.6
million in 2004, 2003 and 2002, respectively. Market interest rates declined in 2003 and 2002
causing greater levels of calls. Also, record numbers of credit quality downgrades and defaults
occurred in the bond markets in 2002. 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 from financing activities. Net cash provided by annuity and universal life
deposits in 2004 were $52.4 million and $13.1 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. Cash outflow requirements are primarily for policy death benefits, policy surrenders and
withdrawals, commissions, general operating expenses, federal income taxes, dividends to
shareholders and purchases of investments. Interest rate fluctuations can affect the timing of cash flows associated with the insurance and
annuity liabilities as well as the value of the assets supporting these obligations. Changes in
interest rates and other market conditions can also expose the Company to the risk of accelerated
surrenders as policyholders and contract holders are attracted to alternative products. The Company
seeks to maintain an appropriate match between assets and liabilities to satisfy the changing cash
flow requirements associated with interest rate fluctuations. In response to interest rate changes,
the Company adjusts credited interest rates to the extent permitted by contracts. The Company uses surrender charges to mitigate the extent, timing and profitability impact of
withdrawals of funds from annuity contracts and universal life policies. The following table sets forth withdrawal characteristics of annuity reserves and deposit
liabilities as of December 31: 2004
    
    
    2003Amount
    
    
    % of Total
    
    
    Amount
    
    
    % of Total(dollars in thousands)Not subject to discretionary
withdrawal provisions
    
    $
    280,243
    
    
    
    28.5
    %
    
    $
    269,156
    
    
    
    28.9
    %Subject to discretionary withdrawal,
with adjustment:With market value adjustment
    
    
    30,226
    
    
    
    3.1
    
    
    
    28,034
    
    
    
    3.0At contract value, less surrender
charge of 5% or more
    
    
    108,567
    
    
    
    11.0
    
    
    
    224,776
    
    
    
    24.1Subtotal
    
    
    419,036
    
    
    
    42.6
    
    
    
    521,966
    
    
    
    56.0Subject to discretionary withdrawal
at contract value with surrender
charges of less than 5%
    
    
    565,834
    
    
    
    57.4
    
    
    
    410,587
    
    
    
    44.0Total annuity reserves and
deposit liabilities
    
    $
    984,870
    
    
    
    100.0
    %
    
    $
    932,553
    
    
    
    100.0
    %
 19




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##### Table of Contents



The Companys liquidity position remains strong as investments and cash and cash equivalents
increased by $24.5 million during 2004 to $1.5 billion at December 31, 2004. As an added measure of
liquidity, the Company has arranged for a $10 million line of credit with a commercial bank. The
Company may use extensions of credit from the bank to fund working capital needs of the Company and
for other general corporate purposes. There were no borrowings under this credit line in 2004,
2003 or 2002. Management believes its cash flow from operations and its liquid assets and
marketable securities will enable the Company to meet foreseeable cash requirements. The continued
adequacy of the liquidity depends upon factors including future securities market conditions,
changes in interest rate levels and policyholder perceptions of the Companys strength, which could
lead to reduced cash inflows or increased cash outflows. Contractual obligations The following table presents the Companys contractual cash flow commitments on surplus notes,
limited partnerships and policyholder obligations. Payments Due By Period(dollars in thousands)Total
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    ThereafterFixed obligations:Limited partnership commitments
    
    $
    11,605
    
    
    $
    0
    
    
    $
    8,755
    
    
    $
    2,850
    
    
    $
    0Principal and interest on surplus notes (1)
    
    
    64,419
    
    
    
    1,322
    
    
    
    18,834
    
    
    
    3,350
    
    
    
    40,913Total fixed contractual obligations
    
    
    76,024
    
    
    

    1,322
    
    
    
    27,589
    
    
    
    6,200
    
    
    
    40,913Other long-term liabilities (2)
    
    
    3,095,323
    
    
    
    160,473
    
    
    
    317,300
    
    
    
    300,527
    
    
    
    2,317,023Total contractual obligations
    
    $
    3,171,347
    
    
    $
    161,795
    
    
    $
    344,889
    
    
    $
    306,727
    
    
    $
    2,357,936
   (1)
    
    EIC has the option to demand payment on a $15 million surplus note on or after December 31,
2005. However, it is probable that EIC will allow the Company to renew this note with a later
maturity date.(2)
    
    Contractual obligations on other long-term liabilities represent estimated benefit payments
from insurance policies and annuity contracts less amounts the Company expects to recover
under reinsurance agreements. Actual obligations in any single year will vary based on actual
mortality, morbidity, lapse, and withdrawal experience. The sum of these obligations exceeds
the liability on the balance sheet of $1,246,810 (net of the Reserve Credit for Reinsurance
Ceded) due to expected future premiums and investment income that, along with invested assets
backing the liabilities, will be used to fund these obligations. Regulatory considerations The Commonwealth of Pennsylvania follows the statutory accounting practices related to 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, 2004, the Company substantially
exceeded the minimum RBC levels that require regulatory action. 20




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##### Table of Contents



Factors That May Affect Future Results Products with interest rate guarantees The Companys annuity and universal life contracts contain provisions that guarantee interest rates
will not decrease below certain levels. If the interest rates on fixed income securities decline
further, the interest earned on the Companys investment portfolio may be insufficient to produce
target profit margins or, in extreme situations, could produce negative profit margins on
annuity and universal life deposits. Effective July 10, 2003, the Company revised its current deferred annuity products to lower
interest rate guarantees on newly issued policies to 1.5% in all policy years. This change has
been approved in all states in which the Company operates. Annuity contracts issued between February 25, 2003 and July 9, 2003 have a guaranteed interest
rate of 3.0%. Contract forms issued before February 2003 have a stepped-down guaranteed interest
rate structure. The guaranteed interest rates and approximate current deposit liabilities for deferred annuity
products with credited interest rates subject to change by the Company are as follows: Initial
    
    CurrentPolicy
    
    Guaranteed
    
    Guaranteed
    
    DepositYears
    
    Interest Rate
    
    Interest Rate
    
    Liabilities(in thousands)1-5
    
    4.5%
    
    4.5%
    
    $254,7896-10
    
    4.5
    
    4.0
    
    114,289Over 10
    
    4.5
    
    3.5
    
    182,896All Years
    
    3.0
    
    3.0
    
    32,205All Years
    
    1.5
    
    1.5
    
    33,904
 The Company has some ability to restrict new deposits on its universal life and annuity contracts.
New deposits can be limited under the terms of the Companys universal life and annuity contracts
as follows:  
    Universal life products provide for planned premium amounts. Additional unplanned
premium payments may be made at any time during the insureds lifetime and before the
end of the payment period. The amounts of such payments must be acceptable to the
Company and be within IRS guidelines. Policies in force at December 31, 2004 have an
annualized planned premium of $30.5 million.
    Flexible premium deferred annuity (FPDA) contracts allow the Company to limit
deposits to a maximum of $25,000 per year. The Company began limiting deposits to the
contractual maximum effective July 10, 2003 on products with interest rate guarantees
exceeding 3.0% to insure that overall product interest spreads are maintained.
Currently, there are 24,016 FPDA contracts in force, of which 19,763 have guarantees in
excess of 3.0%. No additional payments are permitted on single premium deferred
annuity contracts. During 2004, the average rates credited on flexible premium deferred annuity and universal life
account values were 4.2% and 4.6%, respectively. The current coupon yield on fixed maturities
matched against universal life and annuity products at December 31, 2004, is 5.9%. Market conditions for competing products The Companys deposit-type products compete with a wide variety of investment options. Among other 21




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factors affecting the investment decisions of policyholders and potential policyholders are general
investment market conditions, particularly the market interest rate environment and the performance
of the equity markets. Changes in interest rates affect pricing and the relative attractiveness of
interest-sensitive investment options, which bears directly on the ability of the Company to
attract new policyholders and retain existing holders of annuity, universal life and certain
permanent life insurance products. Reinsurance The Company put in place a new ceding arrangement for new issues under certain of its Target Term
plans as of January 1, 2005. Allowances under this new arrangement are not as favorable as those
under the arrangement in place through 2004. While increased reinsurance costs (reduced expense
allowances) on this product will reduce the profitability of the Companys traditional life line of
business, this line of business is expected to remain profitable. Changes in the price or features
of new Target Term policies may be necessary in 2005 in order to return the profitability of this
product to desired levels. Financial ratings The combination of Company growth and declines in investment returns exposes the Company to reduced
statutory surplus levels. Surplus levels are an important element of the rating process used by
such agencies as A.M. Best and Standard & Poors, which are industry-accepted measures of an
insurance companys financial health and ability to meet ongoing obligations to policyholders.
These ratings are a factor in establishing the competitive position of insurance companies. The Companys rating from A.M. Best is A (Excellent). The A (Excellent) rating continues to affirm
the Companys strong financial position indicating that the Company has an excellent ability to
meet its ongoing obligations to policyholders. The Company is also rated by Standard & Poors, but
this rating is based solely on public information. Standard & Poors rates the Companys Api,
strong. The Company also has a rating of B (Good) from Weiss Ratings, Inc. According to Weiss
Ratings, the B rating indicates that the Company offers good financial security and has the
resources necessary to deal with a variety of adverse conditions. If the Company were to incur reductions in statutory surplus for an extended period of time, the
ratings of the Company may be downgraded. Future downgrades in these or other ratings would reduce
the competitive position of the Company by making it more difficult to attract business in the
highly competitive life insurance industry. In such circumstances, the Company may need to take
measures to increase surplus levels in order to maintain adequate ratings. The Company may increase
surplus through a variety of means, including the issuance of additional surplus notes. Implementation of new valuation system In 2004, the Company implemented a new valuation system for its statutory and tax reserves on
traditional products. As a result, adjustments were made to conform reserve estimates of the old
system to the estimates from the new system. The Company expects to implement the new valuation
system for GAAP reserving on traditional products in the first half of 2005. In implementing the new valuation system for GAAP, the Company will consider numerous variables concerning reserves and may revise some of the assumptions as
accommodated by the new system. The impact of the revised reserving assumptions on the recorded reserves cannot be estimated until such considerations are evaluated and modeled as part of the implementation in 2005. Introduction of
ErieConnection® In 2001, the Erie Insurance Group began a comprehensive program of eCommerce initiatives in support
of the Erie Insurance Groups agency force and back office policy underwriting, issuance and
administration. The eCommerce program is intended to improve service and efficiency, as well as
result in increased sales. 22




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##### Table of Contents



The program will produce an enduring benefit to the Company as the system avails the Erie Insurance
Group of infrastructure and processing capability that is progressive, expandable and capable of
supporting the Groups strategic direction. The first major component of the eCommerce program (network and desktop hardware deployment) was
completed during 2002. Also in 2002, the Erie Insurance Group completed a pilot of the new Web
interface to a limited number of agents and employees. In August 2002, the Erie Insurance Group
began working with a well-known provider of information technology services and solutions to be the
chief integrator and co-manager of the eCommerce program and to co-develop software applications
that meet the Groups needs. Target delivery dates established in 2002 have generally not been met as management has devoted
increased effort to quality assurance efforts to ensure that the rollout creates only minimal
business disruption. In February 2005, the Group reached a contractual milestone relative to
contractual acceptance of the base
ERIEConnection® system with the co-developer and chief
integrator of the software. The timeline and costs for further deployment of ERIEConnection
® are
currently under development. The implementation of this new system will require a significant investment in training and
orientation for the independent agency force. During implementation, as agency resources are
dedicated to learning the new system, new business sales are expected to slow over the short term.
The amount of lost sales will relate to the timing and duration of the rollout effort as well as
the number and types of issues encountered. The precise impact on sales cannot be estimated. Producer compensation practices In October 2004, the New York Attorney General filed various lawsuits against Marsh and McLennan as
a result of an investigation of insurance brokers and producer compensation practices. The
investigation and subsequent lawsuits, contained allegations of bid rigging and other
inappropriate solicitation practices by such insurance brokers and others who were sued by the New
York Attorney General. After the New York lawsuits were filed, several states commenced general
inquiries or investigations on the subject of producer compensation. Some member companies of the
Erie Insurance Group, including the Company, received inquiries from the North Carolina Department
of Insurance and the Pennsylvania Insurance Department as did most or all other insurance
companies. North Carolina- In November 2004, the Company, Exchange, and Erie Insurance Company received a
Demand to Produce Information (Demand) from the North Carolina Department of Insurance. The Demand
requested any and all documents and other information related to bid rigging of any person,
insurer, or insurance producer concerning any North Carolina insured or any North Carolina
business. The Company, Exchange and Erie Insurance Company filed a response certifying that they
do not have any information related to or knowledge of bid rigging, as defined in the Demand since
the companies have not engaged in such practices. Pennsylvania- In November 2004, the Company, Exchange, Erie Insurance Company and Erie Insurance
Property and Casualty Company each received an Inquiry Letter concerning Inappropriate
Solicitation Practices from the Insurance Commissioner of the Commonwealth of Pennsylvania. The
Inquiry Letters were sent to all insurers domiciled in Pennsylvania and requested a detailed
explanation of the types of compensation arrangements existing between the members of the Erie
Insurance Group and its independent insurance agents. The Inquiry Letters also demanded information
concerning the existence or knowledge of any Inappropriate Solicitation Practices, as that term is
defined in the Inquiry Letters. The Erie Insurance Group filed a response indicating that it has
no knowledge of, or reason to believe, that any of its agents or employees have engaged in
Inappropriate Solicitation Practices. The Erie Insurance Group also advised the Pennsylvania
Insurance Department that it has not received any complaints from policyholders, potential
customers or regulators alleging Inappropriate Solicitation Practices by any Erie Insurance Group
agent or employee. 23




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Sarbanes-Oxley Act of
2002Section 404 Internal Control Reporting The Sarbanes-Oxley Act of 2002 established numerous compliance requirements for public companies
which include an annual evaluation of internal controls (Section 404). The Company is considered a
non-accelerated filer by definition, and is not subject to the Section 404 reporting requirements
until 2005. The Company is expected to
incur between $0.5 million and $1.0 million in external costs to comply with Section 404 in 2005. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995:Certain
forward-looking statements contained herein involve risks and uncertainties. These statements
include certain discussions relating to underwriting, premium and investment income volume,
business strategies, profitability and business relationships and the Companys other business
activities during 2004 and beyond. In some cases, you can identify forward-looking statements by
terms such as may, will, should, could, would, expect, plan, intend, anticipate,
believe, estimate, project, predict, potential and similar expressions. These
forward-looking statements reflect the Companys current views about future events, are based on
assumptions and are subject to known and unknown risks and uncertainties that may cause results to
differ materially from those anticipated in those statements. Many of the factors that will
determine future events or achievements are beyond our ability to control or predict. 24




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to potential loss from various market risks, including changes in interest
rates, credit risk and, to a lesser extent, equity prices. Interest rate risk The Companys exposure to interest rates is concentrated in the fixed maturities portfolio. The
fixed maturities portfolio comprises 93.2% and 93.3% of invested assets at December 31, 2004 and
2003, 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: December 31, 2004(dollars in thousands)Principal
    
    
    Weighted-averagecash flows
    
    
    interest rateFixed maturities:2005
    
    $
    32,200
    
    
    5.8%2006
    
    
    32,917
    
    
    5.02007
    
    
    56,000
    
    
    5.22008
    
    
    46,081
    
    
    5.42009
    
    
    43,900
    
    
    5.8Thereafter
    
    
    1,090,527
    
    
    6.0Total
    
    $
    1,301,625Market value
    
    $
    1,366,898
 December 31, 2003(dollars in thousands)Principal
    
    
    Weighted-averagecash flows
    
    
    interest rateFixed maturities:2004
    
    $
    22,984
    
    
    5.2%2005
    
    
    30,200
    
    
    5.92006
    
    
    42,089
    
    
    5.22007
    
    
    57,000
    
    
    5.52008
    
    
    57,201
    
    
    5.3Thereafter
    
    
    1,001,955
    
    
    6.3Total
    
    $
    1,211,429Market value
    
    $
    1,280,327
 Actual cash flows may differ from those stated as a result of calls, prepayments and defaults. A sensitivity analysis is used to measure the potential loss in future earnings, fair values or
cash flows of 25




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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, 2004 and 2003. Fixed maturity interest rate sensitivity analysis As of December 31(dollars in thousands)2004
    
    
    2003Current market value
    
    $
    1,366,898
    
    
    $
    1,280,327Change in market value (1)
    
    
    (75,587
    )
    
    
    (75,266
    )Pro forma market value
    
    
    1,291,311
    
    
    
    1,205,061Modified duration (2)
    
    
    5.7
    
    
    
    6.0
   (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
100 basis point change in interest rates. The risks associated with interest rate guarantees on the Companys universal life and annuity
products are discussed in the Factors That May Affect Future Results section of this report. Credit risk 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 underwriting analysis prior
to purchase 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
relationship is with Generali USA Reassurance Company (Generali), which reinsures a portion of the
Companys life and accident and health business. At December 31, 2004, the amount of life insurance
in force ceded to Generali totaled approximately $6.7 billion, which represents 22.4% of EFLs
total life insurance in force at that date. 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. Price risk is 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 of liquid
securities. The Companys equity securities at December 31, 2004 and 2003, were made up entirely of
nonredeemable preferred stocks. 26




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT The management of Erie Family Life Insurance Company is responsible for the preparation of
information included in this Form 10-K. 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.
The Companys report on its evaluation of internal controls is provided in Item 9A of this Annual
Report on Form 10-K. 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 registered public accounting firm
to review the work of each and to inquire as to their assessment of the performance of Company
financial personnel. The independent registered public accounting firm 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. LudrofJeffrey A. LudrofPresident and Chief Executive OfficerFebruary 14, 2005/s/
    
    Philip A. GarciaPhilip A. GarciaExecutive Vice President and Chief Financial OfficerFebruary 14, 2005/s/
    
    Timothy G. NeCastroTimothy G. NeCastroSenior Vice President and ControllerFebruary 14, 2005
 27




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders
    of 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, 2004 and 2003, and the related Statements of Operations, Shareholders
Equity, and Cash Flows for each of the two years in the period ended December 31, 2004. Our audits
also included the 2004 and 2003 financial statement schedules listed in the Index at Item 15(a).
These financial statements and schedules are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and schedules based on our
audits. The financial statements and schedules of Erie Family Life Insurance Company for the year
ended December 31, 2002 were audited by other auditors, whose report dated February 7, 2003 (except
for Note 2 as to which the date is August 12, 2004) expressed an unqualified opinion on those
statements. We conducted our audits in accordance with standards of the Public Company Accounting Oversight
Board (United States). 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 consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and 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 at December 31, 2004 and
2003, and the results of its operations and its cash flows for each of the two years in the period
ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also,
in our opinion the 2004 and 2003 related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all material respects the
information set forth therein. /s/ Ernst & Young LLP Cleveland, Ohio
February 14, 2005 28




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Board of Directors and Shareholders
Erie Family Life Insurance Company
Erie, Pennsylvania We have audited the Statements of Operations, Shareholders Equity and Cash Flows for Erie Family
Life Insurance Company (Company) for the year ended December 31, 2002. In connection with our audit
of the financial statements, we also have audited the 2002 financial statement schedules. These
financial statements and financial statement schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements and financial
statement schedules based on our audit. We conducted our audit in accordance with standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial statement schedules 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 audit provides a reasonable basis for
our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the results of operations and cash flows of Erie Family Life Insurance Company for the
year ended December 31, 2002 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the related 2002 financial statement schedules, when
considered in relation to the basic financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein. /s/ Malin, Bergquist & Company, LLP Erie, Pennsylvania
February 7, 2003, except for Note 2 as to which the date is August 12, 2004 29




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ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS(dollars in thousands, except per share data) Years ended December 312004
    
    
    2003
    
    
    2002RevenuesNet policy revenue:Life premiums
    
    $
    53,184
    
    
    $
    52,045
    
    
    $
    48,070Group life and other premiums
    
    
    3,364
    
    
    
    3,887
    
    
    
    3,059Total net policy revenue
    
    
    56,548
    
    
    
    55,932
    
    
    
    51,129Net investment income
    
    
    80,624
    
    
    
    78,725
    
    
    
    67,461Net realized gains (losses) on investments
    
    
    9,404
    
    
    
    13,176
    
    
    
    (9,610
    )Equity in earnings of limited partnerships
    
    
    2,116
    
    
    
    1,296
    
    
    
    3,664Other income
    
    
    1,141
    
    
    
    844
    
    
    
    815Total revenues
    
    
    149,833
    
    
    
    149,973
    
    
    
    113,459Benefits and expensesDeath benefits
    
    
    17,558
    
    
    
    15,197
    
    
    
    15,547Interest on annuity deposits
    
    
    44,276
    
    
    
    42,178
    
    
    
    39,720Interest on universal life deposits
    
    
    7,355
    
    
    
    6,959
    
    
    
    7,249Interest on surplus notes and other affiliate interest
    
    
    2,855
    
    
    
    1,759
    
    
    
    1,175Surrender and other benefits
    
    
    3,267
    
    
    
    1,263
    
    
    
    1,785Increase in future life policy benefits
    
    
    7,265
    
    
    
    7,211
    
    
    
    6,563Amortization of deferred policy acquisition costs
    
    
    813
    
    
    
    7,477
    
    
    
    7,287Commissions
    
    
    1,221
    
    
    
    2,679
    
    
    
    3,806General expenses
    
    
    16,311
    
    
    
    14,881
    
    
    
    10,950Taxes, licenses and fees
    
    
    3,620
    
    
    
    3,064
    
    
    
    3,156Total benefits and expenses
    
    
    104,541
    
    
    
    102,668
    
    
    
    97,238Income before income taxes
    
    
    45,292
    
    
    
    47,305
    
    
    
    16,221Provision for federal income taxes
    
    
    15,660
    
    
    
    14,818
    
    
    
    5,636Net income
    
    $
    29,632
    
    
    $
    32,487
    
    
    $
    10,585Net income per share
    
    $
    3.14
    
    
    $
    3.44
    
    
    $
    1.12
 See accompanying notes to financial statements. 30




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ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION(dollars in thousands) As of December 312004
    
    
    2003AssetsInvestmentsFixed maturities at fair value (amortized cost of $1,297,913
and $1,203,607, respectively)
    
    $
    1,366,898
    
    
    $
    1,280,327Equity securities at fair value (cost of $59,426 and
$56,608, respectively)
    
    
    66,375
    
    
    
    62,948Limited partnerships (cost of $15,234 and
$12,203, respectively)
    
    
    15,467
    
    
    
    12,241Real estate mortgage loans
    
    
    6,124
    
    
    
    6,305Real estate
    
    
    1,044
    
    
    
    1,127Policy loans
    
    
    10,671
    
    
    
    9,951Total investments
    
    
    1,466,579
    
    
    
    1,372,899Cash and cash equivalents
    
    
    22,446
    
    
    
    91,667Premiums receivable from policyholders
    
    
    7,876
    
    
    
    7,344Reinsurance recoverable
    
    
    2,527
    
    
    
    2,960Other receivables
    
    
    319
    
    
    
    137Accrued investment income
    
    
    16,031
    
    
    
    15,088Deferred policy acquisition costs
    
    
    111,409
    
    
    
    98,207Reserve credit for reinsurance ceded
    
    
    29,420
    
    
    
    20,758Prepaid federal income taxes
    
    
    789
    
    
    
    1,983Other assets
    
    
    4,044
    
    
    
    18,520Total assets
    
    $
    1,661,440
    
    
    $
    1,629,563
 See accompanying notes to financial statements. 31




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ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF FINANCIAL POSITION(dollars in thousands) As of December 312004
    
    
    2003Liabilities and shareholders equityLiabilitiesPolicy liabilities and accruals:Future life and accident and health policy benefits
    
    $
    124,016
    
    
    $
    108,089Policy and contract claims
    
    
    3,153
    
    
    
    3,653Annuity deposits
    
    
    984,870
    
    
    
    932,553Universal life deposits
    
    
    163,489
    
    
    
    150,421Supplementary contracts not including life contingencies
    
    
    702
    
    
    
    579Other policyholder funds
    
    
    6,048
    
    
    
    9,856Deferred income taxes
    
    
    48,066
    
    
    
    46,813Reinsurance premium due
    
    
    2,581
    
    
    
    1,875Securities lending collateral
    
    
    0
    
    
    
    65,495Accounts payable and accrued expenses
    
    
    10,581
    
    
    
    9,239Notes payable to Erie Indemnity Company
    
    
    40,000
    
    
    
    40,000Due to affiliates
    
    
    4,327
    
    
    
    3,442Dividends payable
    
    
    2,079
    
    
    
    1,985Total liabilities
    
    
    1,389,912
    
    
    
    1,374,000Shareholders equityCommon stock, $.40 par value per share; authorized 15,000,000 shares;
9,450,000 shares issued and outstanding
    
    
    3,780
    
    
    
    3,780Additional paid-in capital
    
    
    630
    
    
    
    630Accumulated other comprehensive income
    
    
    39,252
    
    
    
    44,603Retained earnings
    
    
    227,866
    
    
    
    206,550Total shareholders equity
    
    
    271,528
    
    
    
    255,563Total liabilities and shareholders equity
    
    $
    1,661,440
    
    
    $
    1,629,563
 See accompanying notes to financial statements. 32




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ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS(dollars in thousands) Years ended December 312004
    
    
    2003
    
    
    2002Cash flows from operating activitiesPremiums collected
    
    $
    52,721
    
    
    $
    51,942
    
    
    $
    55,077Net investment income received
    
    
    83,792
    
    
    
    78,295
    
    
    
    68,096Miscellaneous income
    
    
    1,141
    
    
    
    844
    
    
    
    814Benefits to policyholders
    
    
    (72,991
    )
    
    
    (65,485
    )
    
    
    (63,548
    )Commissions paid to agents
    
    
    (6,013
    )
    
    
    (14,300
    )
    
    
    (12,398
    )Salaries and wages paid
    
    
    (12,663
    )
    
    
    (11,408
    )
    
    
    (11,485
    )General operating expenses paid
    
    
    (12,223
    )
    
    
    (11,358
    )
    
    
    (10,607
    )Taxes, licenses and fees paid
    
    
    (3,455
    )
    
    
    (2,934
    )
    
    
    (3,300
    )Interest paid
    
    
    (2,850
    )
    
    
    (1,757
    )
    
    
    (1,175
    )Income taxes (paid) recovered
    
    
    (10,332
    )
    
    
    (12,426
    )
    
    
    1,329Net cash provided by operating activities
    
    
    17,127
    
    
    
    11,413
    
    
    
    22,803Cash flows from investing activitiesPurchase of investments:Fixed maturities
    
    
    (297,259
    )
    
    
    (554,355
    )
    
    
    (551,582
    )Equity securities
    
    
    (9,444
    )
    
    
    (13,675
    )
    
    
    (31,246
    )Limited partnerships
    
    
    (5,913
    )
    
    
    (2,560
    )
    
    
    (6,199
    )Sales/maturities of investments:Sales of fixed maturities
    
    
    179,894
    
    
    
    228,277
    
    
    
    152,474Calls/maturities of fixed maturities
    
    
    43,624
    
    
    
    111,713
    
    
    
    115,099Equity securities
    
    
    6,650
    
    
    
    20,841
    
    
    
    59,963Limited partnerships
    
    
    5,036
    
    
    
    7,965
    
    
    
    10,952(Decrease) increase in collateral from securities lending
    
    
    (65,495
    )
    
    
    23,826
    
    
    
    (7,290
    )Purchase of computer software
    
    
    (188
    )
    
    
    0
    
    
    
    0Net mortgage loans
    
    
    181
    
    
    
    871
    
    
    
    182Net policy loans
    
    
    (720
    )
    
    
    (435
    )
    
    
    (637
    )Net cash used in investing activities
    
    
    (143,634
    )
    
    
    (177,532
    )
    
    
    (258,284
    )Cash flows from financing activitiesAnnuity and supplementary contract deposits and interest
    
    
    123,019
    
    
    
    186,379
    
    
    
    215,255Annuity and supplementary contract surrenders and
withdrawals
    
    
    (70,579
    )
    
    
    (57,547
    )
    
    
    (48,410
    )Universal life deposits and interest
    
    
    19,729
    
    
    
    20,285
    
    
    
    19,426Universal life surrenders
    
    
    (6,661
    )
    
    
    (5,415
    )
    
    
    (5,434
    )Proceeds from issuance of long-term debt
    
    
    0
    
    
    
    25,000
    
    
    
    0Dividends paid to shareholders
    
    
    (8,222
    )
    
    
    (7,938
    )
    
    
    (7,796
    )Net cash provided by financing activities
    
    
    57,286
    
    
    
    160,764
    
    
    
    173,041Net decrease in cash and cash equivalents
    
    
    (69,221
    )
    
    
    (5,355
    )
    
    
    (62,440
    )Cash and cash equivalents at beginning of year
    
    
    91,667
    
    
    
    97,022
    
    
    
    159,462Cash and cash equivalents at end of year
    
    $
    22,446
    
    
    $
    91,667
    
    
    $
    97,022
 See accompanying notes to financial statements. 33




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
STATEMENTS OF SHAREHOLDERS EQUITY
Years ended December 31, 2004, 2003, and 2002(dollars in thousands, except per share data) AccumulatedTotal
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    AdditionalShareholders
    
    
    Comprehensive
    
    
    Retained
    
    
    Comprehensive
    
    
    Common
    
    
    Paid-inEquity
    
    
    Income
    
    
    Earnings
    
    
    Income
    
    
    Stock
    
    
    CapitalBalance, December 31, 2001
    
    $
    200,822
    
    
    
    
    
    
    $
    179,354
    
    
    $
    17,058
    
    
    $
    3,780
    
    
    $
    630Comprehensive income:Net income
    
    
    10,585
    
    
    $
    10,585
    
    
    
    10,585Unrealized appreciation
of investments, net of tax
and adjustments to deferred
acquisition costs
    
    
    13,719
    
    
    
    13,719
    
    
    
    
    
    
    
    13,719Comprehensive income
    
    
    
    
    
    $
    24,304Dividends declared, $0.84 per
share
    
    
    (7,938
    )
    
    
    
    
    
    
    (7,938
    )Balance, December 31, 2002
    
    
    217,188
    
    
    
    
    
    
    
    182,001
    
    
    
    30,777
    
    
    
    3,780
    
    
    
    630Comprehensive income:Net income
    
    
    32,487
    
    
    $
    32,487
    
    
    
    32,487Unrealized appreciation
of investments, net of tax
and adjustments to deferred
acquisition costs
    
    
    13,826
    
    
    
    13,826
    
    
    
    
    
    
    
    13,826Comprehensive income
    
    
    
    
    
    $
    46,313Dividends declared, $0.84 per
share
    
    
    (7,938
    )
    
    
    
    
    
    
    (7,938
    )Balance, December 31, 2003
    
    
    255,563
    
    
    
    
    
    
    
    206,550
    
    
    
    44,603
    
    
    
    3,780
    
    
    
    630Comprehensive income:Net income
    
    
    29,632
    
    
    $
    29,632
    
    
    
    29,632Unrealized depreciation
of investments, net of tax
and adjustments to deferred
acquisition costs
    
    
    (5,351
    )
    
    
    (5,351
    )
    
    
    
    
    
    
    (5,351
    )Comprehensive income
    
    
    
    
    
    $
    24,281Dividends declared, $0.88 per
share
    
    
    (8,316
    )
    
    
    
    
    
    
    (8,316
    )Balance, December 31, 2004
    
    $
    271,528
    
    
    
    
    
    
    $
    227,866
    
    
    $
    39,252
    
    
    $
    3,780
    
    
    $
    630
 See accompanying notes to financial statements. 34




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS 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, annuities 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 15. 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 policyholders of 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 and
Casualty Company, and Erie Insurance Company of New York and through a subsidiary of the Exchange,
Flagship City Insurance Company. The Company, EIC, the Exchange and their subsidiaries and
affiliates operate collectively under the name Erie Insurance Group. NOTE 2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS During the second quarter of 2004, the Company completed a comprehensive analysis of its deferred
acquisition costs asset. In completing the analysis, the Company determined that amounts previously
reported for deferred acquisition costs and related amortization were incorrectly determined due to
errors in the underlying computations. In order to correct these errors, prior to the filing of the
Companys second quarter 2004 Form 10-Q, the Company restated the first quarter Form 10-Q and the
2003 Form 10-K. The impact of the restatement to net income and net income per share for the years
ended December 31, 2003 and 2002, and deferred policy acquisition costs and shareholders equity as
of December 31, 2003 and 2002 follows: 2003
    
    
    
    
    
    
    2002(dollars in thousands, except per share data)As originally reported:Net income
    
    $
    34,346
    
    
    
    
    
    
    $
    8,840Net income per share
    
    $
    3.63
    
    
    
    
    
    
    $
    0.94As restated:Net income
    
    $
    32,487
    
    
    
    
    
    
    $
    10,585Net income per share
    
    $
    3.44
    
    
    
    
    
    
    $
    1.12
 35




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS December 31,
    
    
    December 31,2003
    
    
    2002(dollars in thousands)As originally reported:Deferred policy acquisition costs
    
    $
    103,874
    
    
    $
    104,065Shareholders equity
    
    $
    259,247
    
    
    $
    224,447As restated:Deferred policy acquisition costs
    
    $
    98,207
    
    
    $
    92,897Shareholders equity
    
    $
    255,563
    
    
    $
    217,188
 NOTE 3. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The accompanying financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (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 16. Reclassifications Certain amounts previously reported in the 2003 financial statements have been reclassified to
conform to the current periods presentation. Such reclassifications did not impact earnings or
total shareholders equity. Use of estimates The preparation of financial statements in conformity with U.S. 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. The most
significant estimates relate to valuation of investments, policy acquisition costs and reserves for
policy liabilities. 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. Investments Fixed maturities and marketable equity securities are classified as available-for-sale. Equity
securities consist of nonredeemable preferred stock while fixed maturities consist of bonds, notes
and redeemable preferred stock. Available-for-sale securities are stated at fair value, with the
unrealized gains and losses, net of deferred tax, reflected in shareholders equity in accumulated
other comprehensive income. Realized gains and losses on sales of investments are recognized in
income on the specific identification method. There are no securities classified as trading
securities or held-to-maturity securities. Limited partnerships include U.S. and foreign real estate and mezzanine debt investments. These
partnerships are recorded using the equity method, which is the Companys share of the carrying
value of the partnership. Unrealized gains and losses on limited partnerships are reflected in
shareholders equity in accumulated other comprehensive income, net of deferred taxes. The Company
has not guaranteed any of
the partnership liabilities. 36




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS 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. Policy loans are recorded at unpaid balances. Interest and dividend income is recorded as earned. Bond premiums and discounts are amortized and
accreted. These adjustments are included in investment income. For the mortgage-backed bond portion of the fixed maturity securities portfolio, the Company
recognizes income using a constant effective yield method based on anticipated prepayments and the
estimated economic life of the securities. If actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and
anticipated future payments. The net investment in the security is adjusted to the amount that
would have existed had the new effective yield been applied since the acquisition of the security,
with the corresponding adjustment included as part of investment income. All investments are evaluated monthly for other-than-temporary impairment loss. Some factors
considered in evaluating whether or not a decline in fair value is other-than-temporary include: 1)
the extent and duration to which fair value is less than cost, 2) historical operating performance
and financial condition of the issuer, 3) near term prospects of the issuer and its industry, 4)
specific events that occurred affecting the issuer, including a ratings downgrade, and 5) the
Companys ability and intent to retain the investment for a period of time sufficient to allow for
a recovery in value. An investment which is deemed impaired is written down to its estimated net
realizable value. For all investments except limited partnerships, the impairment charge is
included as a realized loss in the Statements of Operations. For limited partnerships, the
impairment charge is included as a component of equity in earnings of limited partnerships in the
Statements of Operations. Cash equivalents are comprised of investments in bank money market funds and short-term bonds,
which mature in 90 days or less at the date of acquisition, and approximate fair value. The Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board released Issue
03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,
in 2003 with disclosure requirements ratified the same year. In March 2004, the remaining guidance
was ratified to be effective for annual periods ending after June 15, 2004. In October 2004, the
effective date of certain application paragraphs was delayed pending further discussion by the Task
Force. EITF 03-1 provides guidance to determine when an investment is considered impaired, whether
that impairment is other-than-temporary, and the measurement of an impairment loss. The guidance
also includes accounting considerations subsequent to the recognition of an other-than-temporary
impairment and requires certain disclosures about unrealized losses that have not been recognized
as other-than-temporary impairments. The Company meets the disclosure requirements of EITF 03-1.
The impact of the application guidance of EITF 03-1 on the Companys operations and financial
position will not be known until the final issue is adopted. Deferred policy acquisition costs (DAC) asset The Company incurs significant costs in connection with acquiring new business, principally
commissions and policy issue and underwriting expenses. Acquisition costs, which vary with and are
primarily related to the production of new business, are deferred as an asset and amortized over
the estimated lives of the policies. At each balance sheet date, the Company evaluates the value of
this asset in light of historical and expected future gross premiums and profits on its insurance
and annuity products. 37




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS In accordance with Financial Accounting Standard (FAS) 60, Accounting and Reporting by Insurance
Enterprises, the DAC related to traditional life insurance products is amortized in proportion to
premium revenues over the premium-paying period of related policies using assumptions consistent
with those used in computing policy liability reserves. Assumptions used for a specific issue year
are locked-in; therefore, amortization in subsequent years is not adjusted for changing
assumptions. In accordance with FAS 97, Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, the DAC
related to universal life products and deferred annuities is amortized in relation to the expected
gross profits from projected investment, mortality and expense margins and surrender charges of the
policies over a specified period. This specified period is 30 years for universal life and 20
years for deferred annuities. Both historical and anticipated investment returns, including
realized gains and losses, from the investment of policyholder funds are considered in determining
the amortization of deferred policy acquisition costs. GAAP requires that changes in expected
future gross profits on the annuity and universal life products cause the DAC amortization rate to
be revised retroactively, or unlocked, to the date of policy issuance. The cumulative change in
DAC related to prior periods is recognized as a component of the current periods DAC amortization,
along with DAC amortization associated with the actual gross profits of the current period. Lower
actual gross profits in a period would typically result in less DAC amortization in that period,
whereas higher actual gross profits would result in more amortization in the period. However, if
lower gross profits were expected to continue into the future, additional amortization of the
existing DAC asset may occur. See Note 5 for a discussion on the retrospective adjustment made in
2004 to the DAC amortization. The Company periodically reviews the DAC asset to determine if it continues to be recoverable from
future premiums or profits. If less than the full amount of DAC is determined to be recoverable, a
portion of such costs are expensed at the time of determination. The amount of DAC considered
recoverable would be reduced in the near term if the estimate of future gross premiums or profits
were to be reduced. The amount of DAC amortization may be revised if any of the estimates discussed
above are revised. In accordance with FAS 97, DAC is adjusted for the impact of unrealized gains or losses on
investments as if these gains or losses had been realized, with corresponding credits or charges
included in accumulated other comprehensive income. 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 plus claim reserves. Deferred
annuity future policy benefit liabilities are established at accumulated values without reduction
for surrender charges. Reserves for universal life plans are based on the contract account balance.
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 3.50%
to 4.00% on policies issued in 1980 and prior years and 5.00% 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. The liability for policy and contract claims represents the amount needed to provide for the
estimated ultimate cost of settling claims relating to insured events that have occurred on or
before the end of the respective reporting period. The estimated liability includes requirements
for future payments of (a) claims that have been reported to the insurer and (b) claims related to
insured events that have occurred but that have not yet been reported to the insurer as of the date
the liability is estimated. 38




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS Universal life and annuity deposits are credited with varying interest rates determined at the
discretion of the Company subject to certain minimums. Interest rates credited on deposits during
the year were as follows: 2004
    
    
    2003
    
    
    2002Annuity
    
    
    3.00%4.70
    %
    
    
    3.00%4.80
    %
    
    
    4.00%6.00
    %Universal Life
    
    
    4.25%5.00
    %
    
    
    4.25%6.00
    %
    
    
    5.25%6.75
    %
 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 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 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 $0.7 million at both
December 31, 2004 and 2003. The estimated asset for credit against future premium taxes was $0.5
million at December 31, 2004 and 2003. Recognition of premium revenues and losses Premiums on traditional life insurance products are recognized as earned when due. Reserves for
future policy benefits are established as premiums are earned. Premiums received for annuity and
universal life products are not reported as revenue, but as deposits, and included in liabilities
for annuity and universal life deposits in accordance with FAS 97. For universal life products,
revenue is recognized as amounts are assessed against the policyholders account for mortality
coverage and contract expenses. The primary source of revenue on annuity deposits is derived from
the interest earned by the Company, which is reflected in net investment income and interest on
annuity deposits. Disability income premiums are recognized as revenue pro rata over the terms of
the contracts. Reinsurance Reinsurance transactions are recorded on a basis consistent with FAS 113, Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts. Reinsurance premiums and
commissions and expense reimbursements on reinsurance ceded are accounted for on a basis consistent
with those used in accounting for the underlying reinsured policies. Premiums, commissions and
expense reimbursements, and benefits to policyholders ceded to other companies have been reported
as a reduction of Net Policy Revenue, Death Benefits, Increase in Future Life Policy
Benefits, and Commissions on the Statements of Operations. 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 39




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS 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. Amounts recoverable for incurred claims and expense
reimbursements are included as an asset under Reinsurance Recoverable in 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. 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, 2004 and 2003, was $1.2 million and $1.4
million, 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. 40




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS NOTE 4. INVESTMENTS The following tables summarize the cost and market value of available-for-sale securities at
December 31, 2004 and 2003: Gross
    
    
    Gross(in thousands)
    
    Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedDecember 31, 2004
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed maturitiesBonds:U.S. treasuries and government agencies
    
    $
    60,126
    
    
    $
    1,048
    
    
    $
    98
    
    
    $
    61,076Public utilities
    
    
    160,516
    
    
    
    11,313
    
    
    
    219
    
    
    
    171,610U.S. banks, trusts and insurance companies
    
    
    193,461
    
    
    
    9,148
    
    
    
    709
    
    
    
    201,900U.S. industrial and miscellaneous
    
    
    566,633
    
    
    
    34,721
    
    
    
    976
    
    
    
    600,378Mortgage-backed securities
    
    
    157,289
    
    
    
    3,713
    
    
    
    609
    
    
    
    160,393Asset-backed securities
    
    
    10,946
    
    
    
    348
    
    
    
    77
    
    
    
    11,217Foreign
    
    
    141,926
    
    
    
    12,080
    
    
    
    686
    
    
    
    153,320Total bonds
    
    
    1,290,897
    
    
    
    72,371
    
    
    
    3,374
    
    
    
    1,359,894Redeemable preferred stock
    
    
    7,016
    
    
    
    94
    
    
    
    106
    
    
    
    7,004Total fixed maturities
    
    
    1,297,913
    
    
    
    72,465
    
    
    
    3,480
    
    
    
    1,366,898Equity securitiesNonredeemable preferred stock:U.S. banks, trusts and insurance companies
    
    
    19,909
    
    
    
    2,078
    
    
    
    2
    
    
    
    21,985U.S. industrial and miscellaneous
    
    
    18,801
    
    
    
    1,873
    
    
    
    0
    
    
    
    20,674Foreign
    
    
    20,716
    
    
    
    3,000
    
    
    
    0
    
    
    
    23,716Total equity securities
    
    
    59,426
    
    
    
    6,951
    
    
    
    2
    
    
    
    66,375Total fixed maturities and equity securities
    
    $
    1,357,339
    
    
    $
    79,416
    
    
    $
    3,482
    
    
    $
    1,433,273
 41




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS Gross
    
    
    Gross(in thousands)
    
    Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedDecember 31, 2003
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed maturitiesBonds:U.S. treasuries and government agencies
    
    $
    61,176
    
    
    $
    1,543
    
    
    $
    37
    
    
    $
    62,682Public utilities
    
    
    141,154
    
    
    
    10,377
    
    
    
    528
    
    
    
    151,003U.S. banks, trusts and insurance companies
    
    
    158,731
    
    
    
    9,358
    
    
    
    836
    
    
    
    167,253U.S. industrial and miscellaneous
    
    
    547,363
    
    
    
    41,077
    
    
    
    776
    
    
    
    587,664Mortgage-backed securities
    
    
    145,394
    
    
    
    3,622
    
    
    
    182
    
    
    
    148,834Asset-backed securities
    
    
    5,032
    
    
    
    330
    
    
    
    0
    
    
    
    5,362Foreign
    
    
    137,741
    
    
    
    13,314
    
    
    
    933
    
    
    
    150,122Total bonds
    
    
    1,196,591
    
    
    
    79,621
    
    
    
    3,292
    
    
    
    1,272,920Redeemable preferred stock
    
    
    7,016
    
    
    
    391
    
    
    
    0
    
    
    
    7,407Total fixed maturities
    
    
    1,203,607
    
    
    
    80,012
    
    
    
    3,292
    
    
    
    1,280,327Equity securitiesNonredeemable preferred stock:Public utilities
    
    
    1,864
    
    
    
    136
    
    
    
    0
    
    
    
    2,000U.S. banks, trusts and insurance companies
    
    
    13,909
    
    
    
    1,921
    
    
    
    0
    
    
    
    15,830U.S. industrial and miscellaneous
    
    
    17,119
    
    
    
    1,775
    
    
    
    20
    
    
    
    18,874Foreign
    
    
    23,716
    
    
    
    2,528
    
    
    
    0
    
    
    
    26,244Total equity securities
    
    
    56,608
    
    
    
    6,360
    
    
    
    20
    
    
    
    62,948Total fixed maturities and equity securities
    
    $
    1,260,215
    
    
    $
    86,372
    
    
    $
    3,312
    
    
    $
    1,343,275
 Components of net investment income follow for the years ended December 31: (in thousands)
    
    2004
    
    
    2003
    
    
    2002Fixed maturities
    
    $
    75,078
    
    
    $
    72,139
    
    
    $
    58,933Equity securities
    
    
    4,539
    
    
    
    5,323
    
    
    
    5,999Cash equivalents and other
    
    
    1,847
    
    
    
    2,051
    
    
    
    3,296Total investment income
    
    
    81,464
    
    
    
    79,513
    
    
    
    68,228Less: Investment expense
    
    
    840
    
    
    
    788
    
    
    
    767Net investment income
    
    $
    80,624
    
    
    $
    78,725
    
    
    $
    67,461
 Components of realized gains and losses on investments reflected in operations for the years ended
December 31 are included below. There were no impairment charges in 2004. Included in 2003 gross 42




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS realized losses of fixed maturities are impairment charges totaling $3.4 million. These charges
related primarily to investments in the communications, energy and finance sectors. Included in
2002 gross realized losses of fixed maturities and equity securities are impairment charges
totaling $25.8 million. These charges related primarily to investments in the communications,
energy and finance sectors. (in thousands)
    
    2004
    
    
    2003
    
    
    2002Fixed maturities:Gross realized gains
    
    $
    10,200
    
    
    $
    19,411
    
    
    $
    10,008Gross realized losses
    
    
    (855
    )
    
    
    (6,081
    )
    
    
    (26,400
    )Net realized gains (losses)
    
    
    9,345
    
    
    
    13,330
    
    
    
    (16,392
    )Equity securities:Gross realized gains
    
    
    176
    
    
    
    379
    
    
    
    13,308Gross realized losses
    
    
    (117
    )
    
    
    (533
    )
    
    
    (5,276
    )Net realized gains (losses)
    
    
    59
    
    
    
    (154
    )
    
    
    8,032Limited partnerships:Gross realized gains
    
    
    0
    
    
    
    0
    
    
    
    452Gross realized losses
    
    
    0
    
    
    
    0
    
    
    
    (1,702
    )Net realized losses
    
    
    0
    
    
    
    0
    
    
    
    (1,250
    )Net realized gains (losses) on investments
    
    $
    9,404
    
    
    $
    13,176
    
    
    ($
    9,610
    )
 Investments at carrying value in limited partnerships consisted of the following at December 31: (in thousands)
    
    2004
    
    
    2003Real estate
    
    $
    14,346
    
    
    $
    11,250Mezzanine debt
    
    
    1,121
    
    
    
    991Total limited partnerships
    
    $
    15,467
    
    
    $
    12,241
 The components of equity in earnings of limited partnerships reported for the years ended December
31
are reflected below. Impairment charges on mezzanine debt partnerships of $2.0 million and $1.0
million in 2003 and 2002, respectively, are included in equity in earnings of limited partnerships
in the Statements of Operations. There were no impairment charges in 2004. (in thousands)
    
    2004
    
    
    2003
    
    
    2002Real estate
    
    $
    2,012
    
    
    $
    2,790
    
    
    $
    4,136Mezzanine debt
    
    
    104
    
    
    
    (1,494
    )
    
    
    (472
    )Equity in earnings of limited partnerships
    
    $
    2,116
    
    
    $
    1,296
    
    
    $
    3,664
 43




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS The amortized cost and estimated fair value of fixed maturities at December 31, 2004 by remaining
contractual term to maturity are shown below. Mortgage-backed securities are allocated based on
their stated maturity dates. Actual cash flows may differ from those stated as a result of calls,
prepayments or defaults. Amortized
    
    
    Estimated(in thousands)
    
    Cost
    
    
    Fair ValueDue in one year or less
    
    $
    30,259
    
    
    $
    30,452Due after one year through five years
    
    
    180,380
    
    
    
    187,126Due after five years through 10 years
    
    
    631,685
    
    
    
    667,218Due after 10 years through 20 years
    
    
    242,995
    
    
    
    254,047Due after 20 years
    
    
    212,594
    
    
    
    228,055Total fixed maturities
    
    $
    1,297,913
    
    
    $
    1,366,898
 Fixed maturities and equity securities in a gross unrealized loss position at December 31, 2004 are
as follows. Data is provided by length of time securities were in a gross unrealized loss
position. Unrealized
    
    
    Amortized
    
    
    Estimated
    
    
    Number of(dollars in thousands)
    
    Loss
    
    
    Cost
    
    
    Fair Value
    
    
    HoldingsSix months or less
    
    ($
    962
    )
    
    $
    133,012
    
    
    $
    132,050
    
    
    
    47Six to 12 months
    
    
    (1,515
    )
    
    
    86,470
    
    
    
    84,955
    
    
    
    3012 to 18 months
    
    
    (997
    )
    
    
    29,638
    
    
    
    28,641
    
    
    
    13Greater than 18 months
    
    
    (8
    )
    
    
    1,820
    
    
    
    1,812
    
    
    
    1($
    3,482
    )
    
    $
    250,940
    
    
    $
    247,458
    
    
    
    91
 No investments in an unrealized loss position at December 31, 2004, had experienced a decline in
market value that was considered by management to be significant and other-than-temporary, based on
Company policy. There were no market conditions, industry characteristics or fundamental operating
results of a specific issuer that suggested other-than-temporary impairment of any of the
investments held at December 31, 2004. At December 31, 2004, net unrealized gains on investments of $39.2 million consisted of $79.6
million in gross unrealized gains, less $3.5 million in gross unrealized losses, less $15.8 million
in other related offsets and deferred taxes of $21.1 million. 44




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS Changes in net unrealized gains include the following for the years ended December 31: (in thousands)
    
    2004
    
    
    2003
    
    
    2002Fixed maturities
    
    ($
    7,735
    )
    
    $
    3,663
    
    
    ($
    14,240
    )Equity securities
    
    
    609
    
    
    
    23,490
    
    
    
    41,460Limited partnerships
    
    
    194
    
    
    
    338
    
    
    
    143Deferred policy acquisition costs
    
    
    (1,300
    )
    
    
    (6,219
    )
    
    
    (6,256
    )Deferred federal income tax
    
    
    2,881
    
    
    
    (7,446
    )
    
    
    (7,388
    )(Decrease) increase in net unrealized gains
    
    ($
    5,351
    )
    
    $
    13,826
    
    
    $
    13,719
 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 an indemnification agreement with the lending agent in the
event a borrower becomes insolvent or fails to return securities. Securities lending collateral is
recorded by the Company as a liability. The proceeds from the collateral are invested in cash and
short-term investments and are reported on the Statements of Financial Position as cash and cash
equivalents. The Company shares a portion of the interest received on these short-term investments
with the lending agent. Revenue received for the years ended December 31, 2004 and 2003, related to
this program, totaled $0.1 million for each year. The Company had no loaned securities at December
31, 2004 and loaned securities with a market value of $64.1 million and secured collateral of $65.5
million at December 31, 2003. The Company has incurred no losses on the loan program since the
programs inception. Bonds having a fair value of $2.1 million at December 31, 2004, were on deposit with various
regulatory authorities as required by law. Bonds having a fair value of $15.4 million are pledged
as collateral on a $10 million line of credit with a bank. There were no borrowings on the line
during 2004 and 2003. See Note 6 for fair value basis of investments. 45




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS NOTE 5. DEFERRED POLICY ACQUISITION COSTS Deferred policy acquisition costs are summarized as follows: (in thousands)
    
    2004
    
    
    2003
    
    
    2002Balance at beginning of year
    
    $
    98,207
    
    
    $
    92,897
    
    
    $
    84,419Additions:Commissions
    
    
    5,935
    
    
    
    9,448
    
    
    
    10,894General expenses
    
    
    9,308
    
    
    
    9,503
    
    
    
    10,909Taxes, licenses and fees
    
    
    72
    
    
    
    55
    
    
    
    21815,315
    
    
    
    19,006
    
    
    
    22,021Amortization
    
    
    (813
    )
    
    
    (7,477
    )
    
    
    (7,287
    )Effect of unrealized investment
gains
    
    
    (1,300
    )
    
    
    (6,219
    )
    
    
    (6,256
    )Balance at end of year
    
    $
    111,409
    
    
    $
    98,207
    
    
    $
    92,897
 Annuity considerations collected in 2004 were significantly lower than in 2003 and 2002, resulting
in a decrease in commission amounts capitalized in DAC. Additions to DAC relating to annuities were
$1.4 million, $4.4 million and $6.9 million in 2004, 2003 and 2002, respectively. During 2004, the Company unlocked certain assumptions used to determine DAC for its universal life
and fixed annuity products. As a result of unlocking these assumptions in 2004, the DAC asset was
increased and the amortization of DAC was decreased by $7.2 million. Approximately $4.8 million of
this amount resulted from updating universal life mortality assumptions to best estimates in light
of substantially more favorable claims expectations than originally reflected in the DAC
amortization models. Another $1.9 million resulted from increasing the interest spread assumption
on universal life policies to reflect anticipated investment earnings rates and actual crediting
practices in recent years. NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS Estimated fair value for financial instruments were determined from market information and if
necessary from quotations provided by broker-dealers. Certain financial instruments, including
insurance contracts other than financial guarantees and investment contracts, are exempt from fair
value disclosure requirements. The following methods were used in estimating fair value. Cash and cash equivalents:The carrying amounts approximate their fair value. Fixed maturities and equity securities:For equity securities, fair values were based on quoted
market prices. For fixed maturities, fair values were obtained from independent pricing services.
For the few securities where an independent service provides no price, broker-dealer quotations are
used. Limited partnerships:Estimated fair market values of the limited partnerships are provided to the
Company by the general partner of that partnership. 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. 46




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS Annuity deposits:Included in this category are deferred annuity 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 contract. To the extent that current market rates are below the
guaranteed minimum interest rate, the fair value of these contracts may exceed the carrying value. To the extent that surrender charges
apply to account balances, the fair value of these contracts may be below the carrying value. The
carrying value of these contracts totaled $688.5 million and $648.8 million as of December 31, 2004
and 2003, respectively, while the estimated fair value of these contracts totaled $698.0 million
and $677.7 million, respectively. Annuity payouts:Included in this category are annuity contracts that the policyholder cannot
surrender at any time and for which the policyholder is locked into a benefit payment schedule for
the duration of the contract. These contracts provide benefits that are either guaranteed or
contingent upon the survival of the annuitant. Fair values of these contracts were estimated using
discounted project cash flows based upon U.S. Treasury spot rates. At December 31, 2004 and 2003,
the carrying value of these contracts totaled $296.4 million and $283.7 million, respectively,
while the estimated fair value of these contracts totaled $334.5 million and $328.3 million,
respectively. Universal life deposits:The Company retains the right to change interest rates on its universal
life deposits subject to minimum interest rates provided in the policy. The Company also retains
the right to change the expense and cost of insurance charges that are deducted from universal life
deposits, subject to maximum amounts provided in the policy. As a result, the carrying value of
these policies approximates their fair value. NOTE 7. COMPREHENSIVE INCOME Comprehensive income is comprised of net income and other comprehensive (loss) income, which
includes unrealized (depreciation) appreciation of investments, net of tax and deferred acquisition
costs. The components of other changes to comprehensive income for the years ended December 31 are as
follows: (in thousands)
    
    2004
    
    
    2003
    
    
    2002Unrealized holding gains arising
during period, net of offsets to
shadow deferred acquisition costs
    
    $
    1,172
    
    
    $
    34,448
    
    
    $
    11,497Less: (gains) losses included in net income
    
    
    (9,404
    )
    
    
    (13,176
    )
    
    
    9,610Net unrealized holding (losses) gains
arising during period, net of offsets to
shadow deferred acquisition costs
    
    
    (8,232
    )
    
    
    21,272
    
    
    
    21,107Income tax benefit (expense) related to
unrealized (losses) gains
    
    
    2,881
    
    
    
    (7,446
    )
    
    
    (7,388
    )Changes in other comprehensive income, net of tax
    
    ($
    5,351
    )
    
    $
    13,826
    
    
    $
    13,719
 The Accumulated Other Comprehensive Income balances of $39.3 million and $44.6 million as of
December 31, 2004 and 2003, respectively, in the Statements of Financial Position relate entirely
to the unrealized appreciation of investments, net of tax and deferred acquisition costs. 47




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS NOTE 8. LIABILITY FOR UNPAID POLICY AND CONTRACT CLAIMS Activity in the liability for unpaid policy and contract claims is as follows: (in thousands)
    
    2004
    
    
    2003
    
    
    2002Balance at January 1
    
    $
    3,653
    
    
    $
    2,362
    
    
    $
    1,950Less reinsurance recoverables
    
    
    (2,106
    )
    
    
    (915
    )
    
    
    (1,022
    )Net balance at January 1
    
    
    1,547
    
    
    
    1,447
    
    
    
    928Total death claims incurred
    
    
    17,558
    
    
    
    15,197
    
    
    
    15,547Total death claims paid, net of reinsurance recoveries
    
    
    17,449
    
    
    
    15,097
    
    
    
    15,027Net balance at December 31
    
    
    1,656
    
    
    
    1,547
    
    
    
    1,448Plus reinsurance recoverables
    
    
    1,497
    
    
    
    2,106
    
    
    
    914Balance at December 31
    
    $
    3,153
    
    
    $
    3,653
    
    
    $
    2,362
 NOTE 9. ANNUITY AND 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: (in thousands)
    
    2004
    
    
    2003
    
    
    2002Universal life
    
    $
    12,374
    
    
    $
    13,326
    
    
    $
    12,176Annuity
    
    
    78,572
    
    
    
    144,202
    
    
    
    175,509Total
    
    $
    90,946
    
    
    $
    157,528
    
    
    $
    187,685
 See Note 11 for sales of annuity products to affiliates. NOTE 10. FEDERAL INCOME TAXES The provision for federal income taxes consists of the following for the years ended December 31: (in thousands)
    
    2004
    
    
    2003
    
    
    2002Currently due
    
    $
    11,526
    
    
    $
    13,118
    
    
    $
    4,504Deferred
    
    
    4,134
    
    
    
    1,700
    
    
    
    1,132Total
    
    $
    15,660
    
    
    $
    14,818
    
    
    $
    5,636
 48




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS 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: (in thousands)
    
    2004
    
    
    2003
    
    
    2002Federal income taxes at statutory rates
    
    $
    15,852
    
    
    $
    16,557
    
    
    $
    5,677Dividends received deduction and tax-exempt interest
    
    
    (1
    )
    
    
    (3
    )
    
    
    (18
    )Other
    
    
    (191
    )
    
    
    (1,736
    )
    
    
    (23
    )Provision for federal income taxes
    
    $
    15,660
    
    
    $
    14,818
    
    
    $
    5,636
 The Company recorded an adjustment to deferred income taxes during the fourth quarter of 2003.
Deferred tax liabilities established in previous years to reflect potential income tax exposures
were determined to be unnecessary and the amounts provided were reversed during the fourth quarter.
The one-time non-cash reduction in deferred taxes of $1.3 million, increased fourth quarter
earnings by $0.14 per share. Temporary differences between the financial statement carrying amounts and tax bases of assets and
liabilities that give rise to deferred income tax assets and liabilities for the years ended
December 31 are as follows: (in thousands)
    
    2004
    
    
    2003Deferred tax assets:Liabillity for future life and annuity policy benefits
    
    ($
    9,464
    )
    
    ($
    9,656
    )Write-down of investments
    
    
    (509
    )
    
    
    (2,242
    )Deferred compensation
    
    
    (1,462
    )
    
    
    (1,245
    )IRS audit adjustments of prior years
    
    
    (1,252
    )
    
    
    (0
    )Total deferred tax assets
    
    
    (12,687
    )
    
    
    (13,143
    )Deferred tax liabilities:Deferred policy acquisition costs
    
    
    38,284
    
    
    
    33,717Unrealized gains on investments
    
    
    21,136
    
    
    
    23,982Other
    
    
    1,333
    
    
    
    2,257Total deferred tax liabilities
    
    
    60,753
    

    
    
    59,956Net deferred income tax liability
    
    $
    48,066
    
    
    $
    46,813
 NOTE 11. 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 $28.9 million, $26.1 million and $23.8 million in 2004, 2003 and 2002,
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 49




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS 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 $1.1 million, $1.1 million and $0.7 million at December 31, 2004, 2003 and
2002, respectively, which are 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 $0.6 million, $0.2
million and $0 in 2004, 2003 and 2002, respectively. In 2004 the Company established an agent bonus program. The bonus is calculated based on various
factors including levels of life commissions paid to an agency and an agencys property/casualty
insurance production levels. The amount recorded by the Company for this bonus program in 2004
totaled $2.0 million. This amount will be settled in cash to EIC when the bonuses are paid in the
first quarter of 2005. Notes payable to EIC The Company has $40 million due to EIC in the form of two surplus notes. The notes may be repaid
only out of unassigned surplus of EFL. The first note, in the amount of $15 million, bears an
annual interest rate of 6.45%. Interest on the note is scheduled to be paid semi-annually. The note
is payable on demand on or after December 31, 2005. Both principal and interest payments are
subject to prior approval by the Pennsylvania Insurance Commissioner. Interest paid on this note
totaled $1.0 million in 2004, 2003 and 2002. The second note was issued in 2003 for an additional $25 million. This surplus note bears an annual
interest rate of 6.70% and is scheduled to be paid semi-annually. The surplus note is payable on
demand on or after December 31, 2018. Both principal and interest payments are subject to prior
approval by the Pennsylvania Insurance Commissioner. Interest paid on this note totaled $1.7
million and $0.6 million in 2004 and 2003, respectively. Real estate The Company owns certain real estate it leases to EIC. The real estate is recorded net of
accumulated depreciation of $1.8 million and $1.7 million at December 31, 2004 and 2003,
respectively. Rentals paid by EIC to the Company totaled $0.3 million each year in 2004, 2003 and
2002, respectively. Future minimum rentals under this agreement are as follows: Year endingDecember 31
    
    (in thousands)2005
    
    $
    3312006
    
    
    3372007
    
    
    3412008
    
    
    114Total
    
    $
    1,123
 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 2004, 2003 and 2002
amounted to $0.7 million in each of the three years. 50




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##### Table of Contents



ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS Annuities sold to affiliates 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. Due to the current
interest rate environment, the Erie Insurance Group Retirement Plan for employees did not purchase
any annuities from the Company in 2004 or 2003. Annuity deposits in 2002 included $0.1 million of
deposits on annuity contracts purchased by the Erie Insurance Group Retirement Plan for employees.
Annuity deposit balances outstanding relating to pension annuities sold to the Erie Insurance Group
Retirement Plan are $43.0 million and $45.0 million at December 31, 2004 and 2003, respectively. The Erie Insurance Group 401(k) plan for employees includes an investment option in a Company
annuity. Annuity deposits in 2004, 2003 and 2002 included $2.3 million, $2.6 million and $2.2
million, 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 $30.2 million and $28.0 million at December 31, 2004 and 2003, respectively. The Erie Insurance Group affiliated property/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/casualty companies of the Erie Insurance Group totaled $20.5
million, $20.9 million and $18.6 million in 2004, 2003 and 2002, respectively. The reserves held
for structured settlement annuities sold to the affiliated property/casualty insurance companies
equal $213.7 million and $201.9 million at December 31, 2004 and 2003, respectively. NOTE 12. REINSURANCE The Company has entered into various reinsurance treaties for the purpose of ceding the excess of
life insurance over the Companys 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. In 2004, the Company evaluated the net asset balance due from 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 was a participant in this pool for a number of years. Beginning July 1, 2001, the Company
discontinued accepting new business from the PEGLI pool. The Company continued carrying a balance
on the Statement of Financial Position for its share of the assets and liabilities of the PEGLI
pool prior to July 1, 2001, however, the Companys inability to obtain reliable accounting
information as to the Companys share of the pool assets and liabilities during 2004 raised concern
over the recoverability of the net asset. During the fourth quarter of 2004, management made the
decision to write off the value of the PEGLI net asset and a charge of $2.0 million, or $0.14 per
share after taxes, was made to earnings. Included in the reinsurance treaties are provisions for expense allowances to be provided to the
Company by the reinsurer. These allowances are intended to help offset policy acquisition and
maintenance costs incurred by the Company. The rate of reimbursement varies from reinsurer to
reinsurer. The Company put in place a new ceded arrangement for new issues under certain of its
Target Term plans as of January 1, 2005. This change is not expected to have a material impact on
the Companys financial statements in future periods. 51




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS Net life insurance in force as of December 31 is summarized as follows: (in thousands)
    
    2004
    
    
    2003
    
    
    2002Direct life insurance in force
    
    $
    30,086,967
    
    
    $
    27,077,945
    
    
    $
    23,198,178Amounts ceded to other companies
    
    
    (12,478,433
    )
    
    
    (9,788,882
    )
    
    
    (7,043,035
    )Net in force
    
    $
    17,608,534
    
    
    $
    17,289,063
    
    
    $
    16,155,143
 The Companys retention limit is $300,000 per life for individual coverage. For its disability
income product, the Company has a 50% coinsurance agreement with its reinsurer. The Companys most
significant reinsurance relationship is with Generali USA Reassurance Company (Generali), which
reinsures a portion of the Companys life and accident and health business. Policy revenue ceded to
Generali totaled $10.3 million, $8.2 million and $5.8 million for the years ended December 31,
2004, 2003 and 2002, respectively. At December 31, 2004 and 2003, the amount of in-force life
insurance ceded to Generali totaled approximately $6.7 billion and $5.6 billion, respectively. The Companys most popular insurance products, ERIE Flagship Term2 and ERIE Target Term are
reinsured 50% and 90%, respectively, with nonaffiliated reinsurers. Sales of ERIE Flagship Term,
ERIE Flagship Term2 and the ERIE Target Term continue to result in increased ceded reinsurance
balances. Total direct life insurance in force on these products was $17.4 billion, $13.9 billion,
and $9.5 billion in 2004, 2003, and 2002, respectively. Reinsurance ceded on these products totaled
$11.6 billion, $8.9 billion, and $6.1 billion in 2004, 2003, and 2002, respectively. 52




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS The effect of ceded reinsurance in the Statements of Operations is as follows: (in thousands)
    
    2004
    
    
    2003
    
    
    2002RevenuesDirect policy revenue
    
    $
    79,035
    
    
    $
    72,947
    
    
    $
    63,426Policy revenue ceded
    
    
    (22,487
    )
    
    
    (17,015
    )
    
    
    (12,297
    )Net policy revenue
    
    
    56,548
    
    
    
    55,932
    
    
    
    51,129Net investment income
    
    
    80,624
    
    
    
    78,725
    
    
    
    67,461Net realized gains (losses) on investments
    
    
    9,404
    
    
    
    13,176
    
    
    
    (9,610
    )Equity in earnings of limited partnerships
    
    
    2,116
    
    
    
    1,296
    
    
    
    3,664Other income
    
    
    1,141
    
    
    
    844
    
    
    
    815Total revenues
    
    
    149,833
    
    
    
    149,973
    
    
    
    113,459Benefits and ExpensesDeath benefits
    
    
    23,731
    
    
    
    19,933
    
    
    
    18,462Reinsurance recoveries
    
    
    (6,173
    )
    
    
    (4,736
    )
    
    
    (2,915
    )Net death benefits
    
    
    17,558
    
    
    
    15,197
    
    
    
    15,547Interest on deposits and other policyholder benefits
    
    
    54,898
    
    
    
    50,400
    
    
    
    48,754Other interest
    
    
    2,855
    
    
    
    1,759
    
    
    
    1,175Increase in future life policy benefits
    
    
    15,927
    
    
    
    13,846
    
    
    
    8,566Reinsurance reserve credits
    
    
    (8,662
    )
    
    
    (6,635
    )
    
    
    (2,003
    )Net increase in future life policy benefits
    
    
    7,265
    
    
    
    7,211
    
    
    
    6,563Amortization of deferred policy acquistion costs
    
    
    813
    
    
    
    7,477
    
    
    
    7,287Commissions
    
    
    10,035
    
    
    
    10,316
    
    
    
    10,839Reinsurance commission allowance
    
    
    (8,814
    )
    
    
    (7,637
    )
    
    
    (7,033
    )Net commissions
    
    
    1,221
    
    
    
    2,679
    
    
    
    3,806General expenses, taxes, licenses, and fees
    
    
    19,931
    
    
    
    17,945
    
    
    
    14,106Total benefits and expenses
    
    
    104,541
    
    
    
    102,668
    
    
    
    97,238Income before income tax
    
    $
    45,292
    
    
    $
    47,305
    
    
    $
    16,221
 53




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS NOTE 13. SUPPLEMENTARY DATA ON CASH FLOWS A reconciliation of net income to net cash provided by operating activities as presented in the
Statements of Cash Flows for the years ended December 31 is as follows: (in thousands)
    
    2004
    
    
    2003
    
    
    2002Cash flows from operating activitiesNet income
    
    $
    29,632
    
    
    $
    32,487
    
    
    $
    10,585Adjustments to reconcile net income to net cash
provided by operating activities:Amortization of deferred policy acquisition costs
    
    
    813
    
    
    
    7,477
    
    
    
    7,287Other amortization
    
    
    984
    
    
    
    790
    
    
    
    311Deferred federal income tax expense
    
    
    4,134
    
    
    
    1,700
    
    
    
    1,132Realized (gains) losses on investments
    
    
    (9,404
    )
    
    
    (13,176
    )
    
    
    9,610Equity in earnings of limited partnerships
    
    
    (2,116
    )
    
    
    (1,296
    )
    
    
    (3,664
    )Increase in premiums receivable
    
    
    (532
    )
    
    
    (1,120
    )
    
    
    (1,135
    )(Increase) decrease in other receivables
    
    
    (182
    )
    
    
    1,351
    
    
    
    (1,114
    )Increase in accrued investment income
    
    
    (943
    )
    
    
    (1,735
    )
    
    
    (1,833
    )Policy acquisition costs deferred
    
    
    (15,315
    )
    
    
    (19,006
    )
    
    
    (22,021
    )Decrease in other assets
    
    
    2,538
    
    
    
    69
    
    
    
    1,719Decrease in prepaid federal income taxes
    
    
    1,194
    
    
    
    692
    
    
    
    5,834Increase in reinsurance recoverables and reserve
credits
    
    
    (8,229
    )
    
    
    (8,041
    )
    
    
    (1,941
    )Increase in future policy benefits and claims
    
    
    15,427
    
    
    
    15,296
    
    
    
    8,983(Decrease) increase in other policyholder funds
    
    
    (3,807
    )
    
    
    (4,479
    )
    
    
    6,361Increase (decrease) in reinsurance premium due
    
    
    706
    
    
    
    283
    
    
    
    (150
    )Increase in accounts payable and due to affiliates
    
    
    2,227
    
    
    
    121
    
    
    
    2,839Net cash provided by operating activities
    
    $
    17,127
    
    
    $
    11,413
    
    
    $
    22,803
 NOTE 14. COMMITMENTS AND CONTINGENCIES Commitments The Company has outstanding commitments to invest up to $11.6 million in limited partnerships at
December 31, 2004. These commitments will be funded as required through the end of the respective
investment periods, which typically span 3 to 5 years. Contingencies The Company is involved in litigation arising in the ordinary course of business. In the opinion of management, the effects, if any, of such litigation are not expected to be material to the
Companys financial condition, cash flows or operations. 54




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS NOTE 15. 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. The loss recorded in the Fixed Annuities line for the year ended December 31, 2002, is a direct
result of the $24.7 million of impairment charges recognized on fixed maturity investments during
2002. The decrease in total expenses and benefits in 2004 for the Universal Life line was primarily due
to a decrease in amortization of deferred policy acquisition costs. This decrease was the result
of the unlocking of certain assumptions under FAS 97 as explained in Notes 3 and 5. The total
amount of the unlocking adjustment made in 2004 for universal life products decreased the
amortization by $7.7 million. The increase in Group Life and Other total expenses in 2004 was due to the $2.0 million charge
related to the write off of the PEGLI net assets as discussed previously in Note 12. Traditional
    
    
    Universal
    
    
    Fixed
    
    
    Group Life
    
    
    Corporate(in thousands)
    
    Life
    
    
    Life
    
    
    Annuities
    
    
    & Other
    
    
    Account
    
    
    Total2004Total policy revenue, net of
reinsurance
    
    $
    39,003
    
    
    $
    14,181
    
    
    $
    2
    
    
    $
    3,362
    
    
    $
    0
    
    
    $
    56,548Total net investment income
and other income
    
    
    6,922
    
    
    
    9,432
    
    
    
    56,460
    
    
    
    205
    
    
    
    10,862
    
    
    
    83,881Net realized capital gains
    
    
    810
    
    
    
    995
    
    
    
    6,583
    
    
    
    25
    
    
    
    991
    
    
    
    9,404Total revenues
    
    
    46,735
    
    
    
    24,608
    
    
    
    63,045
    
    
    
    3,592
    
    
    
    11,853
    
    
    
    149,833Less: Total benefits and
expenses
    
    
    37,767
    
    
    
    8,630
    
    
    
    52,595
    
    
    
    5,239
    
    
    
    310
    
    
    
    104,541Income (loss) before income
taxes
    
    $
    8,968
    
    
    $
    15,978
    
    
    $
    10,450
    
    
    
    ($1,647
    )
    
    $
    11,543
    
    
    $
    45,292
 55




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS Traditional
    
    
    Universal
    
    
    Fixed
    
    
    Group Life
    
    
    Corporate(in thousands)
    
    Life
    
    
    Life
    
    
    Annuities
    
    
    & Other
    
    
    Account
    
    
    Total2003Total policy revenue, net of
reinsurance
    
    $
    38,695
    
    
    $
    13,350
    
    
    $
    5
    
    
    $
    3,882
    
    
    $
    0
    
    
    $
    55,932Total net investment income
and other income
    
    
    7,014
    
    
    
    9,084
    
    
    
    55,568
    
    
    
    171
    
    
    
    9,028
    
    
    
    80,865Net realized capital gains
    
    
    1,191
    
    
    
    1,421
    
    
    
    9,417
    
    
    
    29
    
    
    
    1,118
    
    
    
    13,176Total revenues
    
    
    46,900
    
    
    
    23,855
    
    
    
    64,990
    
    
    
    4,082
    
    
    
    10,146
    
    
    
    149,973Less: Total benefits and
expenses
    
    
    34,488
    
    
    
    16,090
    
    
    
    48,670
    
    
    
    3,247
    
    
    
    173
    
    
    
    102,668Income before income taxes
    
    $
    12,412
    
    
    $
    7,765
    
    
    $
    16,320
    
    
    $
    835
    
    
    $
    9,973
    
    
    $
    47,3052002Total policy revenue, net of
reinsurance
    
    $
    35,860
    
    
    $
    12,209
    
    
    $
    3
    
    
    $
    3,057
    
    
    $
    0
    
    
    $
    51,129Total net investment income
and other income
    
    
    6,495
    
    
    
    8,361
    
    
    
    47,120
    
    
    
    159
    
    
    
    9,805
    
    
    
    71,940Net realized capital (losses)
gains
    
    
    (1,547
    )
    
    
    (1,819
    )
    
    
    (11,198
    )
    
    
    (38
    )
    
    
    4,992
    
    
    
    (9,610
    )Total revenues
    
    
    40,808
    
    
    
    18,751
    
    
    
    35,925
    
    
    
    3,178
    
    
    
    14,797
    
    
    
    113,459Less: Total benefits and
expenses
    
    
    33,574
    
    
    
    16,998
    
    
    
    44,285
    
    
    
    2,282
    
    
    
    99
    
    
    
    97,238Income (loss) before income
taxes
    
    $
    7,234
    
    
    $
    1,753
    
    
    
    ($8,360
    )
    
    $
    896
    
    
    $
    14,698
    
    
    $
    16,221
 NOTE 16. 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. 56




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS A reconciliation of net income (loss) as filed with regulatory authorities to net income reported
in the accompanying financial statements for the years ended December 31, 2004, 2003 and 2002,
follows: (in thousands)
    
    2004
    
    
    2003
    
    
    2002Statutory net income (loss)
    
    $
    20,524
    
    
    $
    15,404
    
    
    
    ($8,625
    )Reconciling items:Policy liabilities and accruals
    
    
    1,435
    
    
    
    1,224
    
    
    
    3,568Deferred policy acquisition costs,
net of amortization
    
    
    14,502
    
    
    
    11,529
    
    
    
    14,734Investment valuation differences
    
    
    1,494
    
    
    
    6,747
    
    
    
    3,372GAAP deferred taxes
    
    
    (4,134
    )
    
    
    (1,700
    )
    
    
    (1,132
    )Deferred and uncollected premiums
    
    
    (4,793
    )
    
    
    (1,764
    )
    
    
    (2,034
    )Limited partnership income
    
    
    856
    
    
    
    1,295
    
    
    
    950Other
    
    
    (252
    )
    
    
    (248
    )
    
    
    (248
    )GAAP net income
    
    $
    29,632
    
    
    $
    32,487
    
    
    $
    10,585
 A reconciliation of shareholders equity as filed with regulatory authorities to shareholders
equity reported in the accompanying financial statements as of December 31 follows: (in thousands)
    
    2004
    
    
    2003Statutory shareholders equity
    
    $
    136,021
    
    
    $
    124,633Reconciling items:Asset valuation and interest maintenance reserves
    
    
    34,277
    
    
    
    30,836Investment valuation differences
    
    
    75,932
    
    
    
    83,060Deferred policy acquisition costs
    
    
    111,409
    
    
    
    98,207Surplus notes
    
    
    (40,000
    )
    
    
    (40,000
    )Policy liabilities and accruals
    
    
    20,283
    
    
    
    18,848Difference between statutory and GAAP deferred taxes
    
    
    (50,276
    )
    
    
    (48,759
    )Deferred and uncollected premiums
    
    
    (17,490
    )
    
    
    (12,697
    )Capitalized computer software, net of amortization
    
    
    1,372
    
    
    
    1,435GAAP shareholders equity
    
    $
    271,528
    
    
    $
    255,563
 The minimum statutory capital and surplus requirements under Pennsylvania law for stock life
insurance
companies (Section 386 of the PA Insurance Code) amounts to $1.6 million. The Companys total
statutory capital and surplus well exceeded these minimum requirements. 57




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS 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 2004 without prior Pennsylvania
Commissioner approval is $20.5 million. Dividends declared to shareholders totaled $8.3 million and
$7.9 million in 2004 and 2003, respectively. Bonds having a carrying value of $2.1 million at December 31, 2004, were on deposit with various
regulatory authorities as required by law. The carrying value of these bonds are not material for
separate disclosure on the Companys Statements of Financial Position and are included with fixed
maturities. NOTE 17. 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(in thousands, except per share data)
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter2004Total net policy revenue
    
    $
    13,979
    
    
    $
    14,625
    
    
    $
    14,277
    
    
    $
    13,667Net investment income
    
    
    19,472
    
    
    
    20,464
    
    
    
    19,705
    
    
    
    20,983Net realized gains (losses) on investments
    
    
    2,848
    
    
    
    5,556
    
    
    
    1,103
    
    
    
    (104
    )Equity in earnings of limited partnerships
    
    
    155
    
    
    
    712
    
    
    
    203
    
    
    
    1,047Other income
    
    
    318
    
    
    
    238
    
    
    
    203
    
    
    
    382Total revenues
    
    
    36,772
    
    
    
    41,595
    
    
    
    35,491
    
    
    
    35,975Total benefits and expenses
    
    
    26,316
    
    
    
    21,728
    
    
    
    27,874
    
    
    
    28,624Income before income taxes
    
    
    10,456
    
    
    
    19,867
    
    
    
    7,617
    
    
    
    7,351Provision for federal income taxes
    
    
    3,940
    
    
    
    6,620
    
    
    
    2,618
    
    
    
    2,481Net income
    
    $
    6,516
    
    
    $
    13,247
    
    
    $
    4,999
    
    
    $
    4,870Net income per share
    
    $
    0.69
    
    
    $
    1.40
    
    
    $
    0.53
    
    
    $
    0.52Comprehensive income (loss)
    
    $
    21,482
    
    
    ($
    27,619
    )
    
    $
    25,454
    
    
    $
    4,964
 58




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ERIE FAMILY LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS First
    
    
    Second
    
    
    Third
    
    
    Fourth(in thousands, except per share data)
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter2003Total net policy revenue
    
    $
    13,089
    
    
    $
    14,334
    
    
    $
    13,598
    
    
    $
    14,911Net investment income
    
    
    18,878
    
    
    
    20,136
    
    
    
    19,391
    
    
    
    20,320Net realized gains on investments
    
    
    2,162
    
    
    
    2,099
    
    
    
    4,908
    
    
    
    4,007Equity in earnings (losses) of limited partnerships
    
    
    280
    
    
    
    120
    
    
    
    1,394
    
    
    
    (498
    )Other income
    
    
    177
    
    
    
    217
    
    
    
    264
    
    
    
    186Total revenues
    
    
    34,586
    
    
    
    36,906
    
    
    
    39,555
    
    
    
    38,926Total benefits and expenses
    
    
    26,534
    
    
    
    24,933
    
    
    
    24,738
    
    
    
    26,463Income before income taxes
    
    
    8,052
    
    
    
    11,973
    
    
    
    14,817
    
    
    
    12,463Provision for federal income taxes
    
    
    2,793
    
    
    
    4,155
    
    
    
    5,140
    
    
    
    2,730Net income
    
    $
    5,259
    
    
    $
    7,818
    
    
    $
    9,677
    
    
    $
    9,733Net income per share
    
    $
    0.56
    
    
    $
    0.83
    
    
    $
    1.02
    
    
    $
    1.03Comprehensive income (loss)
    
    $
    12,533
    
    
    $
    33,296
    
    
    ($
    4,379
    )
    
    $
    4,8622002Total net policy revenue
    
    $
    12,329
    
    
    $
    13,518
    
    
    $
    12,311
    
    
    $
    12,971Net investment income
    
    
    14,804
    
    
    
    17,292
    
    
    
    16,811
    
    
    
    18,555Net realized gains (losses) on investments
    
    
    2,054
    
    
    
    (7,698
    )
    
    
    (5,235
    )
    
    
    1,269Equity in
earnings (losses) of limited partnerships
    
    
    1,069
    
    
    
    2,513
    
    
    
    151
    
    
    
    (69
    )Other income
    
    
    244
    
    
    
    177
    
    
    
    139
    
    
    
    255Total revenues
    
    
    30,500
    
    
    
    25,802
    
    
    
    24,177
    
    
    
    32,981Total benefits and expenses
    
    
    24,007
    
    
    
    23,181
    
    
    
    22,573
    
    
    
    27,478Income before income taxes
    
    
    6,493
    
    
    
    2,621
    
    
    
    1,604
    
    
    
    5,503Provision for federal income taxes
    
    
    2,245
    
    
    
    912
    
    
    
    558
    
    
    
    1,921Net income
    
    $
    4,248
    
    
    $
    1,709
    
    
    $
    1,046
    
    
    $
    3,582Net income per share
    
    $
    0.45
    
    
    $
    0.18
    
    
    $
    0.11
    
    
    $
    0.38Comprehensive income (loss)
    
    ($
    4,637
    )
    
    $
    7,037
    
    
    ($
    14,319
    )
    
    $
    7,585
  2004:
    During the second quarter, the Company unlocked certain assumptions related to
determination of DAC for its universal life and fixed annuities. As a result of unlocking
these assumptions, amortization of DAC was decreased by $6.5 million in the second quarter.
See Note 12 for a discussion on the charge against income during the fourth quarter of 2004
relating to the PEGLI pool.  2003:
    The Company recorded an adjustment to deferred income taxes during the fourth quarter of
2003. Deferred tax liabilities established in previous years to reflect potential income tax
exposures were determined to be unnecessary and the amounts provided were reversed during the
fourth quarter. The one-time non-cash reduction in deferred taxes increased fourth quarter earnings
by $0.14 per share. 59




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##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE As previously reported in the Registrants Form 10-K annual report for the year ended December 31,
2003 that was filed with the Commission on March 27, 2003, the Company appointed Ernst & Young LLP
to be the Companys independent accountants for the Companys 2003 Financial Statements. On March
27, 2003, Malin, Bergquist & Company, LLP was dismissed as the Companys independent auditors. The
Audit Committee of the Company annually considers the selection of the Companys independent
auditors. The Audit Committee has the sole authority to engage the Companys independent auditors. 
 ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of December 31, 2004, the Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including its Chief Executive Officer and Chief
Financial Officer, the effectiveness of the design and operation of the Companys disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based
on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded
that, except as described in the following paragraph, the Companys disclosure controls and
procedures as of December 31, 2004 are effective for gathering, analyzing and disclosing the
information the Company is required to disclose in reports it files under the Securities Exchange
Act of 1934, within the time periods specified in the Securities and Exchange Commissions rules
and forms. The Company has identified a weakness in internal control over the information systems and processes used to
determine the recorded amount of actuarially determined amounts and disclosures in the financial
statements. The Company has also concluded it does not have sufficient qualified actuarial
resources to assure timely review and detection of errors in actuarially determined information. In
the audit of the financial statements, the Companys Independent
Registered Public Accounting Firm, Ernst & Young LLP, have
characterized this weakness as a material weakness, as defined under standards established by the
Public Company Accounting Oversight Board (United States), which they have communicated to Company
management and the Audit Committee of the Board. Company management, under the direction of the
Chief Executive Officer and Chief Financial Officer, and in collaboration with the Companys Audit
Committee, has developed a plan to correct this weakness in internal control in 2005. The plan
entails implementation of improved procedures and controls over actuarial systems and procedures
underlying actuarial computations and balances. The plan also entails an enhanced oversight
structure over actuarial functions supporting financial reporting. The plan has been reviewed with
Ernst & Young LLP and progress will be monitored by Ernst & Young LLP, the Audit Committee of the Board,
and Company management including the Chief Executive Officer and Chief Financial Officer. Changes in Internal Control Over Financial Reporting There have been no significant changes in the Companys internal controls or in other factors that
could significantly affect disclosure controls subsequent to the date of this evaluation. 
 ITEM 9B. OTHER INFORMATION There was no information required to be disclosed in a report on Form 8-K during the fourth quarter
of the year that has not been reported. 60




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##### Table of Contents



PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to directors, audit committee, and audit committee financial experts
of the Company and Section 16(a) beneficial ownership reporting compliance, is incorporated herein
by reference to the Companys definitive Proxy Statement relating to the Companys Annual Meeting
of Shareholders to be held on April 19, 2005 to be filed with the Securities and Exchange
Commission within 120 days of December 31, 2004 in response to this item. The Company has adopted a Code of Conduct that applies to all of its directors, officers (including
its Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer and any person
performing similar functions) and employees. The Company has filed a copy of this Code of Conduct
as Exhibit 14 to Form 10K, filed March 8, 2004. The Company has also made the Code of Conduct
available on its website at http://www.erieinsurance.com. Ageas of
    
    Principal Occupation for Past Five Years andName
    
    12/31/04
    
    Positions with Erie Insurance GroupPresident and Chief
Executive OfficerJeffrey A. Ludrof
    
    
    45
    
    
    President and Chief Executive Officer of the Company, Erie Insurance Company, Erie
Indemnity Company, Flagship City Insurance Company, Erie Insurance Property & Casualty
Company, and Erie Insurance Company of New York since May 8, 2002; Executive Vice
PresidentInsurance Operations of the Company 1999May 8, 2002; Senior Vice President
of the Company 19941999.Executive
Vice PresidentsJan R. Van Gorder, Esq.
    
    
    57
    
    
    Senior Executive Vice President, Secretary and General Counsel of the Company, Erie
Indemnity Company, and Erie Insurance Company since 1990 and of Flagship City Insurance
Company and Erie Insurance Property & Casualty Company since 1992 and 1993,
respectively, and of Erie Insurance Company of New York since 1994. Senior Vice
President, Secretary and General Counsel of the Company, Erie Indemnity Company and
Erie Insurance Company for more than five years prior thereto; Directorthe Company,
Erie Insurance Company, Flagship City Insurance Company, Erie Insurance Property &
Casualty Company, Erie Insurance Company of New York and Erie Indemnity Company.
 61




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##### Table of Contents



Ageas of
    
    Principal Occupation for Past Five Years andName
    
    12/31/04
    
    Positions with Erie Insurance GroupJohn J. Brinling, Jr.
    
    
    57
    
    
    Executive Vice President of the Company since December 1990. Division Officer 1984present.
Director-Erie Insurance Company of New York.Philip A. Garcia
    
    
    48
    
    
    Executive Vice President and Chief
Financial Officer since 1997; Senior Vice President and
Controller 19931997. Director-Flagship City Insurance Company, Erie Insurance Property &
Casualty Company and Erie Insurance Company of New York.Michael J. Krahe
    
    
    51
    
    
    Executive Vice PresidentHuman Development and Leadership since January 2003; Senior Vice
President 1999December 2002; Vice President 19941999.Senior
Vice PresidentsDouglas F. Ziegler
    
    
    54
    
    
    Senior Vice President, Treasurer and Chief Investment Officer of the Company since 1993.Timothy G. NeCastro
    
    
    44
    
    
    Senior Vice President and Controller of the Company, Erie Insurance Company, Erie Indemnity
Company, Flagship City Insurance Company,
Erie Insurance Property & Casualty Company and Erie Insurance Company of New York since
1997. Department Manager  Internal Audit 1996  1997.
 62




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##### Table of Contents



ITEM 11. EXECUTIVE COMPENSATION The answer to this item is incorporated by reference to the Companys definitive Proxy Statement
relating to the Annual Meeting of Shareholders to be held on April 19, 2005 to be filed with the
Securities and Exchange Commission within 120 days of December 31, 2004. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information with respect to security ownership of certain beneficial owners and management, is
incorporated by reference to the Companys definitive Proxy Statement relating to the Annual
Meeting of Shareholders to be held on April 19, 2005 to be filed with the Securities and Exchange
Commission within 120 days of December 31, 2004. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to certain relationships with Company directors is incorporated by
reference to the Companys definitive Proxy Statement relating to the Annual Meeting of
Shareholders to be held on April 19, 2005 to be filed with the Securities and Exchange Commission
within 120 days of December 31, 2004. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated by reference to the Companys definitive
Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 19, 2005 to be
filed with the Securities and Exchange Commission within 120 days of December 31, 2004. 63




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Part IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  (1)
    The following financial statements of the Company and the reports of independent
certified public accountants are incorporated herein by reference to Item 8 of this Form
10-K.  Reports of Independent Registered Public Accounting Firms
Statements of Financial Position  December 31, 2004 and 2003
Statements of Operations for the years ended December 31, 2004, 2003 and 2002
Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
Statements of Shareholders Equity for the years ended December 31, 2004, 2003 and 2002
Notes to Financial Statements  (2)
    The following financial statement schedules are included herein: PageSchedule I  Summary of Investments Other Than
Investments in Related Parties
    
    
    66Schedule III  Supplementary Insurance Information
    
    
    67Schedule IV  Reinsurance
    
    
    69
  All other schedules for which provision is made in the applicable accounting regulation of
the Securities and Exchange Commission are not required under the related instructions or
are inapplicable, and therefore, have been omitted.(3)
    ExhibitsSee Exhibit Index on Page 70 hereof.All exhibits for which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the related instructions or are
inapplicable, and therefore, have been omitted. 64




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. February 22, 2005
    
    ERIE FAMILY LIFE INSURANCE COMPANY
(Registrant)
 /s/ Jeffrey A. Ludrof 
 
 /s/ Jan R. Van Gorder 
  /s/ Philip A. Garcia 
 
 /s/ Timothy G. NeCastro 
 
 Board of Directors /s/ C. Scott HartzKaj Ahlmann
    
    C. Scott Hartz/s/ F. William HirtJohn T. Baily
    
    F. William Hirt/s/ J. Ralph Borneman, Jr.
    
    /s/ Claude C. Lilly, IIIJ. Ralph Borneman, Jr.
    
    Claude C. Lilly, III/s/ Wilson C. Cooney
    
    /s/ Jeffrey A. LudrofWilson C. Cooney
    
    Jeffrey A. Ludrof/s/ Patricia Garrison-Corbin
    
    /s/ Jan R. Van GorderPatricia Garrison-Corbin
    
    Jan R. Van Gorder/s/ John R. Graham
    
    /s/ Robert C. WilburnJohn R. Graham
    
    Robert C. WilburnSusan Hirt Hagen
 65




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SCHEDULE I  SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2004Amount atCost or
    
    
    
    
    
    
    whichAmortized
    
    
    Market
    
    
    Shown in theType of Investment
    
    Cost
    
    
    Value
    
    
    Balance Sheet(in thousands)Fixed Maturities Available-for-SaleU.S. Treasuries and Government Agencies
    
    $
    60,126
    
    
    $
    61,076
    
    
    $
    61,076Public Utilities
    
    
    160,516
    
    
    
    171,610
    
    
    
    171,610U.S. Banks, Trusts, and Insurance Companies
    
    
    193,461
    
    
    
    201,900
    
    
    
    201,900U.S. Industrial and Miscellaneous
    
    
    573,649
    
    
    
    607,382
    
    
    
    607,382Mortgage-Backed Securities
    
    
    157,289
    
    
    
    160,393
    
    
    
    160,393Asset-Backed Securities
    
    
    10,946
    
    
    
    11,217
    
    
    
    11,217Foreign Governments
    
    
    7,966
    
    
    
    8,131
    
    
    
    8,131Foreign Banks, Trusts, and Insurance Companies
    
    
    32,192
    
    
    
    32,542
    
    
    
    32,542Foreign Industrial and Miscellaneous
    
    
    100,913
    
    
    
    111,007
    
    
    
    111,007Foreign Public Utilities
    
    
    855
    
    
    
    1,640
    
    
    
    1,640Total Fixed Maturities Available-for-Sale
    
    $
    1,297,913
    
    
    $
    1,366,898
    
    
    $
    1,366,898Equity SecuritiesNonredeemable Preferred Stocks:U.S. Banks, Trusts, and Insurance Companies
    
    $
    19,909
    
    
    $
    21,985
    
    
    $
    21,985U.S. Industrial and Miscellaneous
    
    
    18,801
    
    
    
    20,674
    
    
    
    20,674Foreign Banks, Trusts and Insurance Companies
    
    
    17,716
    
    
    
    19,771
    
    
    
    19,771Foreign Industrial and Miscellaneous
    
    
    3,000
    
    
    
    3,945
    
    
    
    3,945Total Equity Securities
    
    $
    59,426
    
    
    $
    66,375
    
    
    $
    66,375Limited Partnerships
    
    $
    15,234
    
    
    $
    15,467
    
    
    $
    15,467Mortgage Loans
    
    
    6,124
    
    
    
    6,124
    
    
    
    6,124Real Estate Investment Property
    
    
    1,044
    
    
    
    1,044
    
    
    
    1,044Policy Loans
    
    
    10,671
    
    
    
    10,671
    
    
    
    10,671Total Investments
    
    $
    1,390,412
    
    
    $
    1,466,579
    
    
    $
    1,466,579
 66




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SCHEDULE III  SUPPLEMENTARY INSURANCE INFORMATION At December 31,Deferred
    
    
    FuturePolicy
    
    
    Policy
    
    
    
    
    
    
    OtherAcquisition
    
    
    Benefits &
    
    
    Unearned
    
    
    PolicySegment
    
    Costs
    
    
    Deposits
    
    
    Premium
    
    
    Claims(in thousands)2004Ordinary Life Insurance
    
    $
    107,821
    
    
    $
    283,861
    
    
    $
    310
    
    
    $
    2,866Accident & Health
    
    
    0
    
    
    
    766
    
    
    
    0
    
    
    
    0Group Life & Other
    
    
    0
    
    
    
    3,580
    
    
    
    6
    
    
    
    287Annuities
    
    
    3,588
    
    
    
    984,870
    
    
    
    0
    
    
    
    0Corporate
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    111,409
    
    
    $
    1,273,077
    
    
    $
    316
    
    
    $
    3,1532003Ordinary Life Insurance
    
    $
    91,328
    
    
    $
    255,843
    
    
    $
    251
    
    
    $
    3,406Accident & Health
    
    
    0
    
    
    
    338
    
    
    
    0
    
    
    
    0Group Life & Other
    
    
    0
    
    
    
    2,908
    
    
    
    5
    
    
    
    247Annuities
    
    
    6,879
    
    
    
    932,553
    
    
    
    0
    
    
    
    0Corporate
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    98,207
    
    
    $
    1,191,642
    
    
    $
    256
    
    
    $
    3,6532002Ordinary Life Insurance
    
    $
    83,263
    
    
    $
    228,032
    
    
    $
    202
    
    
    $
    2,111Accident & Health
    
    
    0
    
    
    
    148
    
    
    
    0
    
    
    
    0Group Life & Other
    
    
    0
    
    
    
    2,239
    
    
    
    2
    
    
    
    251Annuities
    
    
    9,634
    
    
    
    803,675
    
    
    
    0
    
    
    
    0Corporate
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Total
    
    $
    92,897
    
    
    $
    1,034,094
    
    
    $
    204
    
    
    $
    2,362
 67




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##### Table of Contents



SCHEDULE III  SUPPLEMENTARY INSURANCE INFORMATION For the Years Ended December 31,AmortizationNet
    
    
    Benefits,
    
    
    of DeferredPolicy
    
    
    Investment
    
    
    Claims
    
    
    Acquisition
    
    
    OperatingSegment
    
    Revenues (a)
    
    
    Income (b)
    
    

& Losses
    
    
    Costs
    
    
    Expenses(in thousands)2004Ordinary Life Insurance
    
    $
    53,184
    
    
    $
    15,017
    
    
    $
    30,964
    
    (
    $
    2,026
    )
    
    $
    17,459Accident & Health
    
    
    299
    
    
    
    16
    
    
    
    274
    
    
    
    0
    
    
    
    297Group Life & Other
    
    
    3,063
    
    
    
    185
    
    
    
    4,275
    
    
    
    0
    
    
    
    393Annuities
    
    
    2
    
    
    
    54,774
    
    
    
    44,209
    
    
    
    2,839
    
    
    
    5,547Corporate
    
    
    0
    
    
    
    10,632
    
    
    
    0
    
    
    
    0
    
    
    
    310Total
    
    $
    56,548
    
    
    $
    80,624
    
    
    $
    79,722
    
    
    $
    813
    
    
    $
    24,0062003Ordinary Life Insurance
    
    $
    52,045
    
    
    $
    15,128
    
    
    $
    27,906
    
    
    $
    5,597
    
    
    $
    17,075Accident & Health
    
    
    254
    
    
    
    8
    
    
    
    123
    
    
    
    0
    
    
    
    150Group Life & Other
    
    
    3,628
    
    
    
    161
    
    
    
    2,670
    
    
    
    0
    
    
    
    304Annuities
    
    
    5
    
    
    
    54,528
    
    
    
    42,109
    
    
    
    1,880
    
    
    
    4,681Corporate
    
    
    0
    
    
    
    8,900
    
    
    
    0
    
    
    
    0
    
    
    
    173Total
    
    $
    55,932
    
    
    $
    78,725
    
    
    $
    72,808
    
    
    $
    7,477
    
    
    $
    22,3832002Ordinary Life Insurance
    
    $
    48,070
    
    
    $
    13,359
    
    
    $
    29,265
    
    
    $
    6,336
    
    
    $
    14,971Accident & Health
    
    
    167
    
    
    
    3
    
    
    
    62
    
    
    
    0
    
    
    
    87Group Life & Other
    
    
    2,889
    
    
    
    147
    
    
    
    1,852
    
    
    
    0
    
    
    
    281Annuities
    
    
    3
    
    
    
    44,453
    
    
    
    39,684
    
    
    
    951
    
    
    
    3,650Corporate
    
    
    0
    
    
    
    9,499
    
    
    
    0
    
    
    
    0
    
    
    
    99Total
    
    $
    51,129
    
    
    $
    67,461
    
    
    $
    70,863
    
    
    $
    7,287
    
    
    $
    19,088
   (a)
    
    Net of reinsurance ceded(b)
    
    Net investment income is allocated based on average reserves 68




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##### Table of Contents



SCHEDULE IV  REINSURANCE Ceded toGross
    
    
    Other
    
    
    NetAmount
    
    
    Companies
    
    
    Amount(in thousands)December 31, 2004Life insurance in force
    
    $
    30,086,966
    
    
    $
    12,478,433
    
    
    $
    17,608,533Premiums for the year:Life Insurance
    
    
    75,367
    
    
    
    22,184
    
    
    
    53,183Annuities
    
    
    2
    
    
    
    0
    
    
    
    2Accident & Health
    
    
    602
    
    
    
    303
    
    
    
    299Group Life & Other
    
    
    3,064
    
    
    
    0
    
    
    
    3,064Total Premiums
    
    $
    79,035
    
    
    $
    22,487
    
    
    $
    56,548December 31, 2003Life insurance in force
    
    $
    27,077,945
    
    
    $
    9,788,882
    
    
    $
    17,289,063Premiums for the year:Life Insurance
    
    
    68,777
    
    
    
    16,732
    
    
    
    52,045Annuities
    
    
    5
    
    
    
    0
    
    
    
    5Accident & Health
    
    
    537
    
    
    
    283
    
    
    
    254Group Life & Other
    
    
    3,628
    
    
    
    0
    
    
    
    3,628Total Premiums
    
    $
    72,947
    
    
    $
    17,015
    
    
    $
    55,932December 31, 2002Life insurance in force
    
    $
    23,198,178
    
    
    $
    7,043,035
    
    
    $
    16,155,143Premiums for the year:Life Insurance
    
    
    60,132
    
    
    
    12,063
    
    
    
    48,069Annuities
    
    
    3
    
    
    
    0
    
    
    
    3Accident & Health
    
    
    402
    
    
    
    234
    
    
    
    168Group Life & Other
    
    
    2,889
    
    
    
    0
    
    
    
    2,889Total Premiums
    
    $
    63,426
    
    
    $
    12,297
    
    
    $
    51,129
 The Company has no assumed reinsurance. 69




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EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K) SequentiallyExhibit
    
    
    
    NumberedNumber
    
    Description of Exhibit
    
    Page3.1*
    
    Amended and Restated By-laws of Registrant10.1**
    
    1997 Annual Incentive Plan of Erie Indemnity Company10.2**
    
    Erie Indemnity Company Long-Term Incentive Plan10.3**
    
    Employment Agreement effective December 16, 1997 by and
between Erie Indemnity Company and Stephen A. Milne10.4**
    
    Employment Agreement effective December 16, 1997 by and
between Erie Indemnity Company and Jan R. Van Gorder10.5**
    
    Employment Agreement effective December 16, 1997 by and
between Erie Indemnity Company and Philip A. Garcia10.6**
    
    Employment Agreement effective December 16, 1997 by and
between Erie Indemnity Company and John J. Brinling, Jr.10.7***
    
    Employment Agreement effective June 30, 1999 by and
between Erie Indemnity Company and Jeffrey A. Ludrof10.8***
    
    Employment Agreement effective December 15, 1999 by and
between Erie Indemnity Company and Douglas F. Ziegler10.9***
    
    Addendum to Employment Agreement effective December 15, 1999
by and between Erie Indemnity Company and Stephen A. Milne10.10***
    
    Addendum to Employment Agreement effective December 15, 1999
by and between Erie Indemnity Company and Jan R. Van Gorder10.11***
    
    Addendum to Employment Agreement effective December 15, 1999
by and between Erie Indemnity Company and Philip A. Garcia10.12***
    
    Addendum to Employment Agreement effective December 15, 1999
by and between Erie Indemnity Company and John J. Brinling, Jr.10.13***
    
    Addendum to Employment Agreement effective December 15, 1999
by and between Erie Indemnity Company and Jeffrey A. Ludrof10.14****
    
    Addendum to Employment Agreement effective December 15, 2000
by and between Erie Indemnity Company and Stephen A. Milne10.15****
    
    Addendum to Employment Agreement effective December 15, 2000
by and between Erie Indemnity Company and Jan R. Van Gorder10.16****
    
    Addendum to Employment Agreement effective December 15, 2000
by and between Erie Indemnity Company and Philip A. Garcia
 70




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##### Table of Contents



EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K) SequentiallyExhibit
    
    
    
    NumberedNumber
    
    Description of Exhibit
    
    Page10.17****
    
    Addendum to Employment Agreement effective December 15, 2000
by and between Erie Indemnity Company and John J. Brinling, Jr.10.18****
    
    Addendum to Employment Agreement effective December 15, 2000
by and between Erie Indemnity Company and Jeffrey A. Ludrof10.19****
    
    Addendum to Employment Agreement effective December 15, 2000
by and between Erie Indemnity Company and Douglas F. Ziegler10.20*****
    
    Addendum to Employment Agreement effective December 12, 2001
by and between Erie Indemnity Company and Stephen A. Milne10.21*****
    
    Addendum to Employment Agreement effective December 12, 2001
by and between Erie Indemnity Company and Jan R. Van Gorder10.22*****
    
    Addendum to Employment Agreement effective December 12, 2001
by and between Erie Indemnity Company and Philip A. Garcia10.23*****
    
    Addendum to Employment Agreement effective December 12, 2001
by and between Erie Indemnity Company and John J. Brinling, Jr.10.24*****
    
    Addendum to Employment Agreement effective December 12, 2001
by and between Erie Indemnity Company and Jeffrey A. Ludrof10.25*****
    
    Addendum to Employment Agreement effective December 12, 2001
by and between Erie Indemnity Company and Douglas F. Ziegler10.26*****
    
    Summary of termination benefits provided Stephen A. Milne upon
voluntary termination from active employment on January 18, 200210.27#
    
    Employment Agreement effective May 9, 2002 by and between
Erie Indemnity Company and Jeffrey A. Ludrof10.28#
    
    Addendum to Employment Agreement effective December 12, 2002
by and between Erie Indemnity Company and Jan R. Van Gorder10.29#
    
    Addendum to Employment Agreement effective December 12, 2002
by and between Erie Indemnity Company and Philip A. Garcia10.30#
    
    Addendum to Employment Agreement effective December 12, 2002
by and between Erie Indemnity Company and John J. Brinling, Jr.10.31#
    
    Addendum to Employment Agreement effective December 12, 2002
by and between Erie Indemnity Company and Douglas F. Ziegler10.32#
    
    Employment Agreement effective December 15, 2002 by and
between Erie Indemnity Company and Michael J. Krahe
 71




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##### Table of Contents



EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K) SequentiallyExhibit
    
    
    
    NumberedNumber
    
    Description of Exhibit
    
    Page10.33#
    
    Employment Agreement effective December 15, 2002 by and
between Erie Indemnity Company and Thomas B. Morgan10.34##
    
    Addendum to Employment Agreement effective December 12, 2003
by and between Erie Indemnity Company and Jeffrey A. Ludrof10.35##
    
    Addendum to Employment Agreement effective December 12, 2003
by and between Erie Indemnity Company and Jan R. Van Gorder10.36##
    
    Addendum to Employment Agreement effective December 12, 2003
by and between Erie Indemnity Company and Philip A. Garcia10.37##
    
    Addendum to Employment Agreement effective December 12, 2003
by and between Erie Indemnity Company and John J. Brinling, Jr.10.38##
    
    Addendum to Employment Agreement effective December 12, 2003
by and between Erie Indemnity Company and Douglas F. Ziegler10.39##
    
    Addendum to Employment Agreement effective December 12, 2003
by and between Erie Indemnity Company and Michael J. Krahe10.40##
    
    Addendum to Employment Agreement effective December 12, 2003
by and between Erie Indemnity Company and Thomas B. Morgan10.41##
    
    Insurance bonus agreement effective December 23, 2003 by
and between Erie Indemnity Company and Jeffrey A. Ludrof10.42##
    
    Insurance bonus agreement effective December 23, 2003 by
and between Erie Indemnity Company and Jeffrey A. Ludrof10.43##
    
    Insurance bonus agreement effective December 23, 2003 by
and between Erie Indemnity Company and Jan R. Van Gorder10.44##
    
    Insurance bonus agreement effective December 23, 2003 by
and between Erie Indemnity Company and Philip A. Garcia10.45##
    
    Insurance bonus agreement effective December 23, 2003 by
and between Erie Indemnity Company and John J. Brinling, Jr.10.46##
    
    Insurance bonus agreement effective December 23, 2003 by
and between Erie Indemnity Company and Michael J. Krahe10.47##
    
    Insurance bonus agreement effective December 23, 2003 by
and between Erie Indemnity Company and Thomas B. Morgan10.48
    
    Annual Incentive Plan effective March 2, 2004
    
    
    7410.49
    
    Long-Term Incentive Plan effective March 2, 2004
    
    
    82
 72




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##### Table of Contents



EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K) SequentiallyExhibit
    
    
    
    NumberedNumber
    
    Description of Exhibit
    
    Page14##
    
    Code of Conduct16#
    
    Letter Regarding Change in Certifying Accountant23
    
    Consent of Independent Registered
Public Accounting Firm
    
    
    9131.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    9231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    9332
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes  Oxley Act of 2002
    
    
    9499.1****
    
    Audit Committee Charter
 *
    
    Such exhibit is incorporated by reference to the like titled exhibit in the Registrants Form
10-K Annual Report for the year ended December 31, 1998 that was filed with the Commission on
March 9, 1999.**
    
    Such exhibit is incorporated by reference to the like titled exhibit in the Registrants Form
10-K Annual Report for the year ended December 31, 1997 that was filed with the Commission on
March 11, 1998.***
    
    Such exhibit is incorporated by reference to the like titled exhibit in the Registrants Form
10-K Annual Report for the year ended December 31, 1999 that was filed with the Commission on
March 28, 2000.****
    
    Such exhibit is incorporated by reference to the like titled exhibit in the Registrants Form
10-K Annual Report for the year ended December 31, 2000 that was filed with the Commission on
March 19, 2001.*****
    
    Such exhibit is incorporated by reference to the like titled exhibit in the Registrants
Form 10-K Annual Report for the year ended December 31, 2001 that was filed with the
Commission on March 15, 2002.#
    
    Such exhibit is incorporated by reference to the like titled exhibit
in the Registrants Form 10-K Annual Report for the year ended
December 31, 2002 that was filed with the Commission on March 27,
2003.##
    
    Such exhibit is incorporated by reference to the like titled exhibit
in the Registrants Original Form 10-K Annual Report for the year
ended December 31, 2003 that was filed with the Commission on March 8,
2004.
 73