ERIE INDEMNITY CO - DEF 14A - 20050318 - PROXY_STATEMENT
ERIE INDEMNITY COMPANY
100 Erie Insurance Place
Erie, Pennsylvania 16530
PROXY STATEMENT
INTRODUCTION
This Proxy Statement, which is first being mailed to the holders of Class A Common Stock and
Class B Common Stock of Erie Indemnity Company (the “Company”) on or about March 18, 2005, is
furnished to such holders to provide information and is also being furnished in connection with the
solicitation of proxies by the Board of Directors of the Company from holders of Class B Common
Stock to be voted at the Annual Meeting of Shareholders and at any adjournment, postponement or
continuation thereof (the “Annual Meeting”). The Annual Meeting will be held at 9:30 a.m., local
time, on Tuesday, April 19, 2005 at the Auditorium of the F.W. Hirt-Perry Square Building, 100 Erie
Insurance Place (Sixth and French Streets), Erie, Pennsylvania 16530. Holders of Class B Common
Stock will also receive a form of proxy in accordance with Securities and Exchange Commission
(“SEC”) rules.
Shares of Class B Common Stock represented by proxies in the accompanying form, if properly
signed and returned, will be voted in accordance with the specifications made thereon by the
holders of Class B Common Stock. Any proxy representing shares of Class B Common Stock not
specifying to the contrary will be voted for the election of the candidates for director named
below who were nominated by the Nominating and Governance Committee (the “Nominating Committee”) of
the Company’s Board of Directors. See “Other Matters” for a discussion of certain discretionary
voting authority. A holder of Class B Common Stock who signs and returns a proxy in the
accompanying form may revoke it at any time before it is voted by giving written notice of
revocation to the Secretary of the Company, by furnishing a duly executed proxy bearing a later
date to the Secretary of the Company or by attending the Annual Meeting and advising the Secretary
of the Company that such holder intends to vote in person.
The cost of solicitation of proxies in the accompanying form will be borne by the Company,
including expenses in connection with preparing and mailing this Proxy Statement. Such
solicitation will be made by mail and may also be made on behalf of the Company in person or by
telephone by the Company’s regular officers and employees, none of whom will receive special
compensation for such services. The Company, upon request therefor, will also reimburse brokers,
nominees, fiduciaries and custodians or persons holding shares of Class A Common Stock and Class B
Common Stock in their names or in the names of nominees for their reasonable expenses in forwarding
the Company’s proxy material to beneficial owners.
Only holders of Class B Common Stock of record at the close of business on February 18, 2005
are entitled to vote at the Annual Meeting. Each share of Class B Common Stock is entitled to one
vote on each matter to be considered at the Annual Meeting. Except as is otherwise provided in
Sections 1756(b)(1) and (2) of the Pennsylvania Business Corporation Law of 1988 (the “BCL”) in the
case of adjourned meetings, a majority of the outstanding shares of Class B Common Stock will
constitute a quorum at the Annual Meeting for the election of directors. Cumulative voting
rights do not exist with respect to the election of directors. The 13 candidates for election as a
director who receive the largest number of votes cast by the holders of Class B Common Stock in
person or by proxy at the Annual Meeting will be elected as directors. Shares of Class B Common
Stock held by brokers or nominees as to which voting instructions have not been received from the
beneficial owner or person otherwise entitled to vote and as to which the broker or nominee does
not have discretionary voting power, i.e., broker nonvotes, will be treated as not present and not
entitled to vote for nominees for election as directors. Abstentions will be treated as the
withholding of authority to vote for nominees for election as directors. Abstentions from voting
and broker nonvotes will have no effect on the election of directors because they will not
represent votes cast at the Annual Meeting and directors are elected by a plurality of the votes
cast.
As of the close of business on February 18, 2005, the Company had 62,952,889 shares of Class A
Common Stock outstanding, which are not entitled to vote on any matters to be acted upon at the
Annual Meeting, and 2,854 shares of Class B Common Stock outstanding, which have the exclusive
right to vote on all matters to be acted upon at the Annual Meeting.
There are two H.O. Hirt Trusts, one for the benefit of F. William Hirt and one for the benefit
of Susan Hirt Hagen. The H.O. Hirt Trusts collectively own 2,340 shares of Class B Common Stock,
which, because such shares represent 81.99% of the outstanding shares of Class B Common Stock
entitled to vote at the Annual Meeting, is sufficient to determine the outcome of any matter
submitted to a vote of the holders of the Class B Common Stock, assuming all of the shares held by
the H.O. Hirt Trusts are voted in the same manner. The individual trustees of the H.O. Hirt Trusts
as of the record date for the Annual Meeting are F. William Hirt (“Mr. Hirt”) and Susan Hirt Hagen
(“Mrs. Hagen”) and the corporate trustee as of the record date is Bankers Trust Company of New
York, which is now known as Deutsche Bank (“Bankers Trust”).
On March 3, 1999, Bankers Trust filed a petition with the Orphans’ Court Division of the Court
of Common Pleas of Erie County, Pennsylvania (the “Court”) requesting that the Court accept the
resignation of Bankers Trust as the corporate trustee of the H.O. Hirt Trusts as a result of
conflicts of interest that Bankers Trust believed existed in 1999 as a result of certain insurance
operations conducted by Bankers Trust’s parent company and affiliates. Also, an affiliate of
Bankers Trust, Deutsche Banc Alex Brown, is a market maker in the Company’s Class A Common Stock.
On May 7, 1999, the Court issued an Order accepting the resignation of Bankers Trust at such time
as the Court appoints a successor corporate trustee. As of the date of this Proxy Statement, two
successor corporate trustee candidates: Wachovia Bank, N.A. which is supported by Mr. Hirt, and
Sentinel Trust Company, which is supported by Mrs. Hagen, have presented testimony to the Court in
this matter. Subsequent to that testimony, Laurel Hirt, a daughter of Mr. Hirt and a contingent
beneficiary of the H.O. Hirt Trusts, filed a petition requesting that the Court also consider a
third successor corporate trustee candidate that is not supported by Mr. Hirt. Mr. Hirt has filed
a petition objecting to Laurel Hirt’s petition. Both Laurel Hirt’s and Mr. Hirt’s petitions are
currently pending.
The Company does not know whom the Court will appoint as successor corporate trustee or when
it will do so, but such appointment will not be effective before the Annual Meeting because the
next hearing in connection with the appointment of a successor corporate trustee has been
scheduled for a date in July 2005.
Under the provisions of the H.O. Hirt Trusts, the shares of Class B Common Stock held by the
H.O. Hirt Trusts are to be voted as directed by a majority of trustees then in office. If at least
a majority of the trustees then in office of both of the H.O. Hirt Trusts vote for the election of
the 13 candidates for director named below, who have been nominated by the Nominating Committee of
the Company’s Board of Directors, such candidates will be elected as directors of the Company even
if all shares of Class B Common Stock other than those held by the H.O. Hirt Trusts do not vote for
such candidates. The Company has not been advised as of the date of this Proxy Statement how the
trustees of the H.O. Hirt Trusts intend to vote at the Annual Meeting.
Reference is made to “Legal Proceedings” in this Proxy Statement for further information
regarding litigation involving the H.O. Hirt Trusts.
The Company operates predominantly as a provider of management services to Erie Insurance
Exchange (the “Exchange”). The Company also operates as a property and casualty insurer through
its subsidiaries. Since 1925, the Company has served as the attorney-in-fact for the policyholders
of the Exchange. The Exchange is a reciprocal insurance exchange, which is an unincorporated
association of individuals, partnerships and corporations that agree to insure one another. Each
applicant for insurance from the Exchange signs a subscriber’s agreement, which contains an
appointment of the Company as the attorney-in-fact for the subscriber. As attorney-in-fact, the
Company is required to perform certain services relating to the sales, underwriting and issuance of
policies on behalf of the Exchange.
The Exchange and its property and casualty insurance subsidiary and the Company’s three
property and casualty insurance subsidiaries (collectively, the “Property and Casualty Group”)
write personal and commercial lines property and casualty insurance coverages exclusively through
approximately 1,750 independent agencies comprised of more than 7,500 licensed representatives and
pool their underwriting results. The financial results of the Company and the Exchange are not
consolidated. As a result of the Exchange’s 94.5% participation in the underwriting results of the
Property and Casualty Group, the underwriting risk of the Property and Casualty Group’s business is
largely borne by the Exchange.
The Company charges the Exchange a management fee calculated as a percentage, limited to 25%,
of the direct written premiums of the Property and Casualty Group. Management fees accounted for
76.3%, 74.4% and 73.7% respectively, of the Company’s revenues for the three years ended December
31, 2002, 2003 and 2004. The management fee rate was 25% in 2002, 24% in 2003, 23.5% from January
1, 2004 through June 30, 2004, and 24% from July 1, 2004 through December 31, 2004. The percentage
shown for 2002 has been recomputed based on the 2003 presentation of the Company’s Consolidated
Statement of Operations, which presentation is net of inter-company management fees and costs.
Beginning January 1, 2005, the rate has been set at 23.75%.
The Company’s property and casualty insurance subsidiaries are Erie Insurance Company (“Erie
Insurance Co.”), Erie Insurance Company of New York (“Erie NY”) and Erie Insurance Property &
Casualty Company (“EI P&C”). In addition, the Company holds investments in both affiliated and
unaffiliated entities, including a 21.63% interest in the common stock (“EFL Common Stock”) of
Erie Family Life Insurance Company (“EFL”), a life insurance company. The Exchange owns 53.50% of
EFL’s Common Stock.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth as of February 18, 2005 the amount of the outstanding Class A
Common Stock and Class B Common Stock of the Company and shares of EFL Common Stock beneficially
owned by (i) each person who is known by the Company to own beneficially more than 5% of the
Company’s Class A Common Stock or Class B Common Stock or EFL Common Stock, (ii) each director and
candidate for director nominated by the Nominating Committee, (iii) each executive officer named in
the Summary Compensation Table and (iv) all executive officers and directors of the Company as a
group.
Shares of EFL
Percent of
Shares of Class A
Percent of
Shares of Class B
Percent of
Common
Outstanding
Common Stock
Outstanding
Common Stock
Outstanding
Stock
EFL
Name of Individual
Beneficially
Class A
Beneficially
Class B
Beneficially
Common
or Identity of Group
Owned(1)(2)
Common Stock(3)
Owned(1)(2)
Common Stock(3)
Owned(1)(2)
Stock(3)
5% or Greater Holders:
Black Interests
Limited Partnership(4)
Erie, Pennsylvania
5,709,240
9.07
%
390
13.67
%
—
—
Samuel P. Black, III(4)(5)
Erie, Pennsylvania
5,864,552
9.32
%
410
14.37
%
107,637
(17)
1.14
%
Hagen Family
Limited Partnership(6)
Erie, Pennsylvania
10,092,900
16.03
%
1
—
154,182
1.63
%
H.O. Hirt Trusts(7)
Erie, Pennsylvania
—
—
2,340
81.99
%
—
—
Susan Hirt Hagen(6)(7)(8)
Erie, Pennsylvania
6,660,496
10.58
%
2,352
82.41
%
300
(18)
—
Hirt Family Limited
Partnership(9)
Erie, Pennsylvania
All Directors, Nominees
for Director and
Executive Officers as a
Group (17 persons)
19,894,853
31.60
%
2,374
83.18
%
172,775
1.83
%
(1)
Information furnished by the named persons.
(2)
Under the rules of the SEC, a person is deemed to be the beneficial owner of securities if
the person has, or shares, “voting power,” which includes the power to vote, or to direct the
voting of, such securities, or “investment power,” which includes the power to dispose, or to
direct the disposition, of such securities. Under these rules, more than one person may be
deemed to be the beneficial owner of the same securities. Securities beneficially owned also
include securities owned jointly, in whole or in part, or individually by the person’s
spouse, minor children or other relatives who share the same home. The information set forth
in the above table includes all shares of Class A Common Stock and Class B Common Stock and
all shares of EFL Common Stock over which the named individuals, individually or together,
share voting power or investment power. The table does not reflect shares of Class A Common
Stock issuable upon conversion of shares of Class B Common Stock, each of which is currently
convertible into 2,400 shares of Class A Common Stock or shares of the Company’s Class A
Common Stock and Class B Common Stock and EFL Common Stock as to which beneficial ownership
is disclaimed.
(3)
Less than 1% unless otherwise indicated.
(4)
Mr. Black is the managing general partner and a limited partner of the Black Interests
Limited Partnership. Mr. Black has the right to vote the shares held by the Black Interests
Limited Partnership. If all of the 390 shares of Class B Common Stock beneficially owned by
the Black Interests Limited Partnership were converted into Class A Common Stock, the maximum
number of shares of Class A Common Stock that the Black Interests Limited Partnership could
be deemed to own beneficially would be 6,645,240 shares of Class A Common Stock, or 10.40% of
the then outstanding shares of Class A Common Stock.
Mr. Black owns 131,312 shares of Class A Common Stock directly and 24,000 shares of Class A
Common Stock indirectly through Samuel P. Black & Associates, Inc., of which Mr. Black is
President and as to which Mr. Black has voting power. Mr. Black also owns 10 shares of Class
B Common Stock directly and 10 shares of Class B Common Stock indirectly as executor of his
father’s estate. Mr. Black’s beneficial ownership also includes 5,709,240 shares of Class A
Common Stock and 390 shares of Class B Common Stock owned by the Black Interests Limited
Partnership as described in footnote (4). The maximum number of shares of Class A Common
Stock that Mr. Black could be deemed to own beneficially, including shares of Class A Common
Stock issuable upon conversion of Class B Common Stock, would be 6,848,552 shares of Class A
Common Stock, or 10.71% of the then outstanding shares of Class A Common Stock.
(6)
Mrs. Hagen and her husband, Thomas B. Hagen, are limited partners of the Hagen Family Limited
Partnership and Thomas B. Hagen is the general partner. As the general partner of the Hagen
Family Limited Partnership, Thomas B. Hagen has sole voting power and investment power over
the shares owned by the partnership. Mrs. Hagen disclaims beneficial ownership of these
shares. If the shares of Class B Common Stock beneficially owned by the Hagen Family Limited
Partnership were converted into Class A Common Stock, the maximum number of shares of Class A
Common Stock that the Hagen Family Limited Partnership could be deemed to own beneficially
would be 10,095,300 shares of Class A Common Stock, or 16.04% of the then outstanding shares
of Class A Common Stock.
(7)
There are two H.O. Hirt Trusts, one for the benefit of Mr. Hirt and one for the benefit of
Mrs. Hagen. Each of the H.O. Hirt Trusts is the record owner of 1,170 shares of Class B
Common Stock, or approximately 41% of the outstanding shares of Class B Common Stock. The
trustees of the H.O. Hirt Trusts as of the date of this Proxy Statement are Mr. Hirt, Mrs.
Hagen and Bankers Trust. Mr. Hirt and Mrs. Hagen, who are brother and sister, are each
deemed the beneficial owner of the 2,340 shares of Class B Common Stock held by the H.O. Hirt
Trusts and, as Co-Trustees, along with Bankers Trust, have shared voting power over the 2,340
shares of Class B Common Stock held by the H.O. Hirt Trusts. If the 2,340 shares of Class B
Common Stock beneficially owned by the H.O. Hirt Trusts were converted into Class A Common
Stock, the maximum number of shares of Class A Common Stock that could be deemed beneficially
owned by the H.O. Hirt Trusts would be 5,616,000 shares of Class A Common Stock, or 8.19% of
the then outstanding shares of Class A Common Stock.
(8)
Mrs. Hagen owns 1,996 shares of Class A Common Stock directly and 6,658,500 shares of Class A
Common Stock indirectly through a revocable trust of which Mrs. Hagen was the grantor and is
the sole trustee and beneficiary. Mrs. Hagen owns 12 shares of Class B Common Stock
directly. Mrs. Hagen’s beneficial ownership also includes 2,340 shares of Class B Common
Stock owned by the H.O. Hirt Trusts as described in footnote (7). Thomas
B. Hagen, Mrs.
Hagen’s husband, disclaims beneficial ownership of the shares of Class A Common Stock and
Class B Common Stock owned by Mrs. Hagen. Mrs. Hagen disclaims beneficial ownership of the
5,100 shares of Class A Common Stock and three shares of Class B Common Stock owned by Thomas
B. Hagen and the 10,092,900 shares of Class A Common Stock and one share of Class B Common
Stock owned by the Hagen Family Limited Partnership as described in footnote (6). The
maximum number of shares of Class A Common Stock that could be deemed beneficially owned by
Mrs. Hagen, Thomas B. Hagen and the Hagen Family Limited Partnership, collectively, including
shares of Class A Common Stock issuable upon conversion of Class B Common Stock, would be
22,412,896 shares of Class A Common Stock, or 32.67% of the then outstanding shares of Class
A Common Stock.
(9)
Mr. Hirt is the general and a limited partner of the Hirt Family Limited Partnership. As the
general partner of the Hirt Family Limited Partnership, Mr. Hirt has the sole right to vote
such shares.
(10)
Mr. Hirt owns 889,956 shares of Class A Common Stock directly. Mr. Hirt also owns 20 shares
of Class B Common Stock directly. Mr. Hirt’s beneficial ownership also includes 11,830,000
shares of Class A Common Stock owned by the Hirt Family Limited Partnership as described in
footnote (9) and 2,340 shares of Class B Common Stock owned by the H.O. Hirt Trusts as
described in footnote (7). Mr. Hirt disclaims beneficial ownership of the 888,260 shares of
Class A Common Stock owned by his wife, Audrey Hirt. The maximum number of shares of Class A
Common Stock that could be deemed beneficially owned by Mr. Hirt, Mrs. Hirt and the Hirt
Family Limited Partnership, including shares of Class A Common Stock issuable upon conversion
of Class B Common Stock, would be 19,272,216 shares of Class A Common Stock, or 28.09% of the
then outstanding shares of Class A Common Stock.
(11)
Excludes Mrs. Hagen and Mr. Hirt, who are listed under “5% or Greater Owners.”
(12)
Jonathan Hirt Hagen is a contingent beneficiary of the H.O. Hirt Trusts; however, he is not a
beneficial owner of the shares indicated in footnote (7).
(13)
Includes 11,547 shares held directly by Mr. Ludrof and 100 shares each held by his three sons.
(14)
Excludes Mr. Ludrof and Mr. Van Gorder, who are listed under “Directors and Nominees for
Director.”
(15)
Includes 16,949 shares held directly by Mr. Brinling, 5,121 shares held in an Individual
Retirement Account (“IRA”) for Mr. Brinling and 57 shares held in an IRA for his wife.
(16)
Includes 45,925 shares held directly by Mr. Garcia and 30,000 shares held by his wife. Does
not include 9,130 shares held by each of two irrevocable trusts (of which neither Mr. Garcia
nor his wife is a trustee) for the benefit of Mr. Garcia’s two daughters.
Mr. Black owns 2,730 shares indirectly through Samuel P. Black & Associates, Inc., of which
Mr. Black is President. The 107,637 shares also include 1,000 shares owned indirectly by Mr.
Black as executor of his father’s estate and 99,428 shares owned indirectly by Mr. Black
through the Black Family Foundation of which Mr. Black is an officer. Mr. Black directly
owns 4,479 shares.
(18)
Mrs. Hagen owns 300 shares of EFL Common Stock directly. Mrs. Hagen disclaims beneficial
ownership of 300 shares held by Thomas B. Hagen, Mrs. Hagen’s husband, and 154,182 shares
held in the Hagen Family Limited Partnership.
(19)
Mr. Hirt owns 100 shares directly and 166,934 shares indirectly through the Hirt Family
Limited Partnership as described in footnote (9).
(20)
Of this total, 30 shares are held directly by Mr. Van Gorder and each of his three sons owns
15 shares.
(21)
Includes 630 shares held directly by Mr. Brinling, 315 shares held in an Individual
Retirement Account for Mr. Brinling and 315 shares held in an Individual Retirement Account
for his wife.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires
that the officers and directors of a corporation, such as the Company, that has a class of equity
securities registered under Section 12 of the Exchange Act, as well as persons who own 10% or more
of a class of equity securities of such a corporation, file reports of their ownership of such
securities, as well as statements of changes in such ownership, with the corporation and the SEC.
Based upon written representations received by the Company from its officers and directors and 10%
or greater shareholders, and the Company’s review of the statements of changes of ownership filed
with the Company by its officers and directors and 10% or greater shareholders during 2004, the
Company believes that all such filings required during 2004 were made on a timely basis, with the
following exceptions. Wilson C. Cooney, a director of the Company, inadvertently filed untimely a
Form 4 Statement of Changes in Beneficial Ownership on September 23, 2004 for 148 shares of Class A
Common Stock acquired on September 20, 2004 through the Company’s deferred stock compensation plan
for its outside directors; Patricia Garrison-Corbin, a director of the Company, inadvertently filed
untimely a Form 4 Statement of Changes in Beneficial Ownership on February 24, 2004 for 200 shares
of Class A Common Stock acquired on January 22, 2004; Patricia A. Rech, Senior Vice President of
the Company, inadvertently filed untimely a Form 4 Statement of Changes in Beneficial Ownership on
March 1, 2004 for 3.1476 shares of Class A Common Stock acquired on February 2, 2004 in her 401(k)
account and John P. Sommerwerck, Senior Vice President of the Company, inadvertently failed to file
a Form 4 Statement of Changes in Beneficial Ownership for 4.5193 shares of Class A Common Stock
acquired on April 21, 2004, 4.7085 shares of Class A Common Stock acquired on July 21, 2004 and
4.57 shares of Class A Common Stock acquired on October 21, 2004, all of which were acquired
through an automatic dividend reinvestment program and were subsequently reported on a Form 5
Annual Statement of Changes in Beneficial Ownership filed on January 28, 2005.
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